How Much EF Heading in to Retirement?

[scfr]

Has anyone thought about how much of an emergency fund they will need heading in to retirement? In retirement planning, we think about current expenses, expected expenses after retirement (allowing for things such as increased medical), how many times we'll need to make major purchases in retirement (such as new vehicles), and how we'll cover normal wear and tear and the need to eventually replace things on our homes.

But what about covering truly unexpected and catastrophic events? We may need to pay insurance deductibles (homeowner's probably being the highest, but also auto) and we may need to pay those multiple times if we live long enough. We may need to make last minute trips due to family emergencies.

How much of a "life happens" fund will we need heading in to retirement when we won't have the opportunity to rebuild it and will need it to be enough to last for the rest of our lives?

[Nutria]

Does the concept of "emergency fund" have any relevance when you're in the "spend your accumulated wealth" phase of your life?

Only, ISTM, in the sense that a retired person should always have a conservative asset allocation strategy (which means some in cash), and that anyone (no matter the age), when they see a major purchase on the horizon, should move the required assets from more risky/volatile assets to more conservative and stable ones.

[scfr]

Does the concept of "emergency fund" have any relevance when you're in the "spend your accumulated wealth" phase of your life?

I would think that, yes, it does. Let's say someone has calculated their "safe withdrawal rate" and plans to spend down $40K (in current dollars) of their assets in a given year. If they are hit with a $10K unexpected and extraordinary expense, that would mean having to make some really serious cutbacks that year.

Wouldn't it be better to have a retirement EF that would cover the $10K?

[Nutria]

I would think that, yes, it does. Let's say someone has calculated their "safe withdrawal rate" and plans to spend down $40K (in current dollars) of their assets in a given year. If they are hit with a $10K unexpected and extraordinary expense, that would mean having to make some really serious cutbacks that year.

Wouldn't it be better to have a retirement EF that would cover the $10K?

Since my vision of "conservative retirement asset allocation strategy" includes about 10% cash, that's where I'd take the unexpected and extraordinary expense from, and then rebalance my portfolio to my desired allocation percentages.

So I guess that 10% would do double duty as EF.

[scfr]

Since my vision of "conservative retirement asset allocation strategy" includes about 10% cash, that's where I'd take the unexpected and extraordinary expense from, and then rebalance my portfolio to my desired allocation percentages.

So I guess that 10% would do double duty as EF.

Do you plan to base your withdrawal rate in retirement on the non-cash portion of your portfolio only?

[Nutria]

Do you plan to base your withdrawal rate in retirement on the non-cash portion of your portfolio only?

(I thought I posted an answer to this earlier. Guess not.)

Probably, since that would automatically make my investments more conservative over time.

But the best laid plans usually get shot to hell, so I'm really more worried about accumulating wealth and getting the kids through school...

[disneysteve]

I'm just thinking "out loud" but I'm not sure retirement is really any different with regard to your EF. Let's say you currently live on $4,000/month or $48,000/year. You maintain a 6-month EF of $24,000. In retirement, you will draw $4,000/month from your portfolio to maintain your current standard of living and continue to maintain a $24,000 EF.

If, in a given year, you have to spend a big chunk of your EF, you may need to trim spending in order to replenish it. Either that or, if possible, pull extra from your portfolio over the following year to replenish it.

How does that differ from what happens during your working years? If we spend money from our EF now, we need to trim spending somewhere to replenish the EF. Either that or we need to find a way to earn some extra money (overtime, 2nd job, etc.).

Those scenarios seem pretty comparable to me unless I'm missing something.

[Nutria]

Either that or, if possible, pull extra from your portfolio over the following year to replenish it.

...

Those scenarios seem pretty comparable to me unless I'm missing something.

But how will your portfolio be balanced during your retirement years? Mine will (probably) have about 10% in cash, and so that will effectively be an EF, even if I won't call it an EF.

[disneysteve]

But how will your portfolio be balanced during your retirement years? Mine will (probably) have about 10% in cash, and so that will effectively be an EF, even if I won't call it an EF.

I understand that, but still, if your budget has you spending 48K/year and one year, due to some unforeseen event, you end up spending 58K, that needs to be balanced somehow going forward. Either that or your portfolio is going to run dry sooner than expected - which might just be the answer to the question.

[Nutria]

I understand that, but still, if your budget has you spending 48K/year and one year, due to some unforeseen event, you end up spending 58K, that needs to be balanced somehow going forward. Either that or your portfolio is going to run dry sooner than expected - which might just be the answer to the question.

Well, being prudent with your finances should be a given...

But, you'll be old and breaking down. (40 is not the new 30, despite what "they" all say.) So, who knows what kind of expenses you and your spouse will really have?

And if you wind up having to raise grandchildren (very common down here) or even a great-grandchild (we know of one case of an 85yo raising a 10yo girl because both the mother and grandmother are deadbeats; don't even ask about the fathers)?

So, I say to accumulate as much as possible now, and invest conservatively when it's time live off of your accumulated pile of acorns.

[scfr]

Currently we're on track to be able to retire at 57 or 58, but we've always thrown out 60 years as our target retirement age. Perhaps what would make sense for us is to use those last 2-3 years of "extra" work building up a "retirement EF" that would be available for extraordinary expenses in our golden years. If we don't need it, we could leave it to family or charity when we die.

But then, these are just the rambling thoughts of a decrepit, falling apart 50-something . . .

[rennigade]

I asked a similar question over at bogleheads the other day. They gave a couple suggestions but the most obvious one is simply pulling money from your roth ira if you have one. Before or after 59.5...you can just pull out the money you put in. Of course this is a terrible idea early in life but as you near retirement the amount you pull out will be a blip on the big picture...not to mention you should be in safer investments that will not produce huge swings if the market goes crazy. This could be part of your EF.

[corn18]

Interesting question. As DS stated, an EF would be useful for insulating your withdrawals from emergencies. Since the asset pool in retirement is fixed, you have to cut something to refill the EF, just like when you are working.

I consider refilling the EF an annual expense and just plan on doing that every year. Last year I didn't spend it all, so I refilled it pretty quick. Not sure how this year will end up, but it's still full right now, so the EF is getting bigger. If I get to the end of the year and still have extra, I put it into a a taxable investment account and start the whole process over again.

You could do the same in retirement and just build the EF expense into the annual expenses as you plan for how much you will need in retirement. I call it a contingency factor and right now it's about 5% of my annual retirement expenses. No purpose identified for that money, so I guess you could call it an EF. That increases the amount I need to retire so we'll see if I keep that in there.

Tom

[tripods68]

I think if you built enough taxable investments (lets say combined balance of $100K) to use for any type of life emergency event or a trip to Spain for instance could be is afforded without hesitation where the money would come from or how it would be paid for. The hard part is building enough savings balance and not use it for any type of purpose except for life changing events.

[scfr]

I think if you built enough taxable investments (lets say combined balance of $100K) to use for any type of life emergency event or a trip to Spain for instance could be is afforded without hesitation where the money would come from or how it would be paid for. The hard part is building enough savings balance and not use it for any type of purpose except for life changing events.

I agree. I think this will be our primary focus for the last 2-3 years of our working careers, after we have hit our "retirement number."