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“KEEP AN EMERGENCY fund equal to six months of living expenses,” advise many financial experts. Seem reasonable? It’s a popular rule of thumb. But it’s also a boatload of money to leave sitting in conservative investments, like a money market fund or a savings account, where it’ll likely lose purchasing power after inflation and taxes take their toll.
Could you hold less than six months of living expenses? For many families, the answer is “yes”:
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I suggest another bullet point to your excellent list, Jonathan, pensions. My wife and I don’t really have an “emergency fund” because we have defined-benefit pensions that have COLA’s and more than cover our monthly expenses. Excess $ goes to our vacation account, home/auto maintenance account, and a couple others, each of which is a high yield savings account — I guess that makes those accounts our “emergency funds”.
This is some good advice. Unfortunately, too many people get “cookie cutter” advice from cookie cutter advisors, with no imagination.
My personal recommendation includes consideration of your age, because there is ageism running rampant in our beloved country, and people over 50 will experience longer period of unemployment, as they search for new jobs. In my opinion, for over 50 folks, 6-12 months is more likely the “right number.”
As to emergency funds for retirees, that requires a different solution. As the author pointed out, retirees doing not have the primary need for emergency funds that working people have, namely protection from job loss. However retirees do have the issue of “down markets” combined with sequence of returns risk. By holding 12-18 months of cash/cash equivalents in CDs, Money Market Funds, various Treasuries, etc., they will be shielded from having to sell investments to cover living expenses during “down markets.” Now if they have guaranteed income, in the form of Social Security, or pensions, or other investments providing guaranteed streams of income, holding that much cash will not be necessary, but many retirees will opt for it anyway.
I certainly know I have. My “emergency funds” are in a Reverse Mortgage Line of Credit as well as in some CDs and Treasuries, all of which mature within 18 months.
Thanks for the comment. I think it’s important to distinguish between unexpected spending — surprisingly large medical bills, sudden need to replace the car, losing your job — and expected spending, such as the need to cover living costs in retirement. The latter isn’t a financial emergency. Rather, it’s fully expected and should be baked into your retirement portfolio, rather than paid for using a separate emergency fund.
Potential problem with your advice for retirees. Conservative investments are down also, so if one has no emergency fund, they would have to sell for a loss. Even short term bond funds are down. Cash or money markets are not
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