Retirees: Rainy Day / Emergency Fund?

In My Humble Opinion
1

tl;dr version up top:

    For a comfortable retiree relying on 401K / IRA / non-qual investments for all income plus some drip-drip consumption of principal, how much immediately available liquid bank funds / cash is prudent? Measured in months of routine expenses or dollars as you prefer.



Long-winded fully fleshed-out version down below:
There have been a couple of threads on basic financial stuff in the last few days. Specifically:

and

And today I got an mass email from my employer’s 401K provider which included a very basic intro article on “emergency funds”. Written for a target audience of young or mid-life employees struggling to save, not someone like me nearing retirement much less those who’re already retired.

These three partly-overlapping items put me in a mind to ask a question for the gray-haired masses in general, and the comfier members of that group in particular.

Background:
For years I have kept about 10 months of my barebones expenses or 6 months normal expenses in a major national bank alongside my regular-use checking account. Mostly in mid-duration CDs for quick 2-day access and the rest in passbook savings for truly instant tap-on-your-phone access. The CDs have generally kept up with inflation over the years, though not recently. The savings account proper has always paid substantially zero nominal, so has been shrinking at the rate of inflation. I see that financial non-performance as a) simply a cost of doing business, and/or b) the price of instant liquidity. No biggee.

The rest of my money is invested and (usually) earns a good return. And as I near retirement those assets are being gradually redeployed for increased income at the expense of less growth. I’ve already got a bond ladder to ride out 24+ months of adverse returns in the stock market and we’re slowly adding long-dated maturities as those move closer and into higher interest rates. Holy Inverted Yield Curve, Batman!

Since it was first sequestered umpteen years ago the emergency money has never been needed. I’ve not been laid off since back in 2001, I’ve not had catastrophic disasters like my house being eaten by a flood or tornado, etc. Life has not been trouble-free by any stretch but I’ve been lucky on the dollars side; my crises have been cheap, or at least just a drip-drip-drip of expense rather than a mongo lump sum cash call.

Long-winded intro over, here’s the question upon which I seek opinions:

    For a comfortable retiree relying on 401K / IRA / non-qual investments for all income plus some drip-drip consumption of principal, how much immediately available liquid bank funds / cash is prudent? Measured in months of routine expenses or dollars as you prefer.



My own tentative answer:
In one sense, since I can’t lose my W2 job anymore there’s no potential break in income to need to bridge. Maybe I need zero ready cash beyond a comfortable balance in the checking account.

If I was still a homeowner I could see keeping enough ready cash to pay for emergency repairs following a casualty loss. But a) I now rent my living quarters, and b) that’s what high limit unused credit cards are for. Maybe I need zero ready cash beyond a comfortable balance in the checking account.

Maybe it should be 2 month’s expenses so if some IT disaster befalls my brokerage and my monthly stipend from them is temporarily interrupted? Enough to smooth over an extra stupid-expensive month of travel or other splurging?

Thoughts? Obviously this question is aimed more at the comfier members of our almost- or fully-retired community. I recognize some of us can’t imagine having the opportunity to ask these questions much less answer them. I’m sorry that life is that uneven for all of us. Sadly it just is. Or is at least beyond my power to fix except by voting for Progressive polices at every turn.

2

I’m still a long way from retirement, but I’d tend to think that similar rules to the ones for non-retired people would apply - maybe a few months of expenses in cash/checking/savings, and the rest in your usual retirement investments. How many “a few” is, I don’t know. I feel like two sounds like too little, and six sounds like too much for a comfortably retired person though.

The good news I suppose, is that there’s not as much of that opportunity cost of keeping a lot in savings vs. well invested over time, like there is when you’re say… 35. (meaning that if you kept a year’s worth of expenses in savings, that’s a year’s worth of investment returns that you wouldn’t see every year)

3

I keep about a year’s worth of spending in a fund, but that was from back when we lived off our IRAs more. When I hit 70 and took full Social Security about 80% of our normal expenses come from there, or more after the increase, so we haven’t been drawing it down. We paid off the mortgage so our cash flow is better.
It gets used for expensive repairs and stuff like putting in AC.
I’m at the age now where taking reasonable amounts of money from my IRA before I get forced to is good, and I stocked the cash fund with money from that for a few years. Last time I moved it to a Roth.
Fortunately a year’s worth of living expenses is not a big chunk of my savings. We could have easily gotten by with less, but I’m more comfortable this way. So I’m not recommending this strategy necessarily, just saying what we do.

4

Based on a quick back of the napkin calculation, I have about 2 years of emergency funds available.

5

The usual advice I grew up with was three months. But that was in the days of secure employment and relative economic stability: more might be wiser, but even less possible for even more people.

For myself, I’m lucky enough to live well within my means, so I have about a year’s worth to hand, and a more substantial nest egg with a fund management company against the day when the prospect of “the home” beckons.

6

FTR: We’re retired and were mostly IRA funded, but reaching SS milestones changed this ratio.

We keep 1 to 2 months income in simple, instantly available savings. It varies because it’s used for annual state tax. We keep ~3 months in another fund that might take a day or two, but outside the IRAs. Then 2 years “cash” in the IRAs for down markets, large emergencies, etc.

I should point out that household emergencies rarely require “instant” cash. We’ve had 3 such events recently, due to storms and auto accidents. In every case we had plenty of time (weeks or months) to gather the funds needed to handle it.

Building and keeping some cash outside tax-deferred funds is mostly valuable in the situations where you need an emergency repair, but want to avoid an unplanned tax hit. Remember, you also have to account for the 2-year look-ahead in Medicare rates as well. You can trigger an unplanned, year-long increase in rates by “pulling” from IRAs in an emergency. (IIRC, Medicare rates are based on AGI two years prior.)

tldr; We do keep sizable emergency funds outside of tax-deferred investments, but more to buffer tax and Medicare rates than to have instantly available.

7

I’m not yet retired, but that’s an interesting question. I feel like my mutual funds are fairly liquid, the issue there is that they are subject to market fluctuations.

8

Yes to the latter. A comfy spot for sure. Agree that preloading IRA withdrawals to minimize RMDs later is smart. See below for more on that.

I am confused about your comment about “moving it to a Roth.” I was under the impression that only earned = W2/1099-Misc income could be stuck in a Roth. If one had a side job or consulting gigs in retirement obviously one could deposit 100% of that income (up to the paltry limit) into the Roth while living on one’s IRA withdrawals. Money is fungible.

I recall you did something akin to consulting post-retirement from your primary gig. Is that what you meant, or is there something else I’m missing? In my case I expect to have zero W2/1099-Misc income ever again once I retire from my career job this fall.


Agreed that was the standard back in the day. With 6 months the more common advice now. Albeit as you say, a hard goal for many workers to reach.

But implicit in that number is being employed and having a paycheck at risk of sudden interruption. My question was strictly about retirees with no such paycheck at risk. The ordinary income can’t stop coming, at least abarring WW-III or a major meteor strike. How much “emergency” cushion is necessary when that biggest emergency can’t happen?


Both of these points are excellent info. Especially the latter. Thanks.

It’s also the case that getting money out of an e.g. bond or stock fund at a brokerage used to take 2+ weeks and now 4 business days is more like it: three days to settle the trade and one to transfer the proceeds to an ordinary bank from where it’s spendable. So the multiple layers of graded accessibility / liquidity are less necessary than before.

I suspect what I ought to do is cut my near-cash immediate availability cushion down to a couple months, and move the rest into my brokerage growth or income investments. No point in pissing away that potential gain year after year for insurance I no longer need.

To your / @Voyager’s other points …Starting next year when we have zero W2 we plan to be aggressively draining the taxable side of the IRA/401Ks into ordinary NQ accounts while the rest of our taxable income is low and therefore the marginal tax rates are as low as possible. Once SS kicks in, we’ll have to cut that back to avoid catapulting into a too-high bracket, plus IRMAA as you say. Facing a ridiculous tax bite once mongo RMDs eventually turn on is a good problem to have, but can be managed downwards by eating that elephant in big bites between age 65 and 70, then smaller bites until age 73 (or whatever age RMD commencement will be by then).



Speaking to everyone I must say I’m surprised folks are talking about holding quite that much cash. Although as always, who responds to a thread is a self-selecting crowd that may differ greatly from the general norm.

Not that I mean to suggest I’m surprised people have that much in assets. Just that they’d choose to hold quite so much in essentially non-performing vehicles. I was feeling pretty stupid holding almost a year’s worth in a nil-return quick-access form and there are others out there with multiple years stored like that?

Color me surprised, but it takes all kinds.

Thanks for the insights all, and keep 'em coming.

9

Though I announced that I was planning to retire 6 months ahead, no one did any succession planning. I had designed, architected and wrote about 90% of a complex and essential piece of software, so they panicked when I said I was leaving. I did document it well. I said I’d be willing to work one day a week during the transition. My company (big and dumb) didn’t allow that, so they decided it was easier to pay me as if I were still full time but I only had to show up for a day a week. Nice work if you can get it.

I have another difference from most people, in that I had received a big payout when I left AT&T during the Trivestiture. Since I got another job right away this all went into investments, so I have a reasonably big pool of post-tax income to draw from. That means I could limit taking money out of my IRAs until it made sense for tax purposes.

10

I’m sort of the same way, although for different reasons. Of my gross assets, they’re about 1/3rd Roth IRA/401K, 1/3rd Traditional IRA/401K, and 1/3rd plain old non-qualified fully taxable investment assets. My CFA tells me that’s a very odd mix among his customer base.

The good news is I can pick and choose which bucket to eat from in what order, and they’re all big enough to feed me adequately.

The bad news is I have to choose. Lots of different and interconnected knobs to turn and levers to pull with different tax, income, and growth impacts to each. The “how much emergency cash?” lever is one of the least impactful ones. But is also one of the earliest I can fiddle with.

Decisions, decisions …