How much emergency fund would have if you were us?

[jenn_jenn]

Our financial advisor is suggesting we reduce our emergency fund to $50-75k. This feels low to me but maybe I’m being too conservative, especially at this point in our lives. Would love this group’s perspective.

For background: We are dual income and have no children. 35YO & 32YO. We both have stable jobs. If we were to be laid off, we could conservatively expect 3-6 months severance. No major health issues.

Household income: $715-$765k/yr
Husband’s annual taxable W2 income: $450-$500k
Husband’s non-taxable VA disability benefits: $30k
My annual taxable W2 income: $230k
Rental income (after expenses): $5k
Not including portfolio earnings or losses

“Keep the Lights On” monthly expenses: $11,580/mo
Mortgage / Insurance / Property Taxes : $6,500
Utilities: $600
Internet: $80
Phones: $100
Rental: $2,200
Food / Grocery: $1000
Health Insurance / Medical: $400
Car Insurance / Gas: $500
Dog: $200

Our “Break Glass” plan:
Sell the house (we have ~$300k/equity), live in the rental, and figure it out. Husband’s VA benefits more than cover the condo expenses which gives us a nice security blanket.

Other Notes:
We have no debt other than our mortgages.
Husband has 100% VA healthcare
We rent the condo for $2,750/mo as a furnished medium term rental to low risk tenants (travel nurses and military). We are in a desirable location and have an extremely high occupancy rate. Delta in rental income is due to personal use ~3 weeks per year.
This is truly an emergency fund. Known upcoming expenses are saved for and accounted for separately.
No change in savings rate, we’d just shift everything above the $50-$75k to investments.

Knowing these details, what size emergency fund would you recommend?

[disneysteve]

So $11,580 are your bare bones monthly expenses. What is your actual monthly spending? Let's say it's another couple thousand, so $14,000 total. A 6-month EF would be $84,000. Just using the bare bones number it would be $69,480.

Are the numbers you give for mortgage and utilities for both properties? Does your $11,580 include covering both properties if you had no renter?

[jenn_jenn]

So $11,580 are your bare bones monthly expenses. What is your actual monthly spending? Let's say it's another couple thousand, so $14,000 total. A 6-month EF would be $84,000. Just using the bare bones number it would be $69,480.

Are the numbers you give for mortgage and utilities for both properties? Does your $11,580 include covering both properties if you had no renter?

Actual monthly spending is an additional ~$4k/mo inclusive of annual travel, dining out, house cleaners, etc. If we were in an emergency, we wouldn’t need those things and this spending would easily be cut. So I don’t know if we should really be counting this. Our FA didn’t think we needed to.

The mortgage and utilities listed is for our personal home. The $2,200 listed for the rental covers all related expenses of mortgage, insurance, HOA, taxes, utilities, internet, and regular maintenance. Yes, the $11,580 includes both properties if we had no renter.

Another nuanced question, should we be accounting for the VA income ($2,500/mo) somehow when deciding what level of emergency fund? Is there a suggested “rule of thumb” about this kind of thing? This is guaranteed (zero risk) monthly income. We currently don’t account for it in our emergency fund. I guess it’s a matter how to think of the emergency fund and if the purpose is to cover expenses if we lost income or to pay for high unexpected expenses. I tend to think of it more of the former since realistically most unexpected expenses we’re able to adjust slush spending or other savings to cover.

ETA: A $75k emergency fund basically covers all necessary expenses for 6 months with a small ($5k) slush.

[disneysteve]

I think 75K is plenty.

What happens to the VA money if your husband were to die? On a related note are you both adequately insured? You didn’t list life insurance.

Keep in mind that in a catastrophe you can dip into your investments if you burn through your EF. It’s not like that money is gone.

[jenn_jenn]

I think 75K is plenty.

What happens to the VA money if your husband were to die? On a related note are you both adequately insured? You didn’t list life insurance.

Keep in mind that in a catastrophe you can dip into your investments if you burn through your EF. It’s not like that money is gone.

If my husband were to die then the VA benefits stop. They are solely his benefits. We currently have life insurance covered through our employers at 1-1.5x our individual income. If I were to die, my husband would have no problem covering expenses. If he were to die, I’d sell the house and move to the condo.

However, you raise a good point that we will be adding personal liability insurance. I need to get that done in the next week. Will include in the monthly expenses once I know how much that is.

ETA: Corrected employer covered life insurance amount.

[disneysteve]

If my husband were to die then the VA benefits stop. They are solely his benefits. We currently have life insurance covered through our employers at 1.5-2x our individual income. If I were to die, my husband would have no problem covering expenses. If he were to die, I’d sell the house and move to the condo.

However, you raise a good point that we will be adding personal liability insurance. I need to get that done in the next week. Will include in the monthly expenses once I know how much that is.

I realize you both have good incomes and you have no children, but I'd still consider at least some life insurance outside of your employer coverage. Term life is dirt cheap at your age. A policy on your husband would give you the flexibility to keep the house if you wanted to, or at least not need to sell it quickly after his passing. Probably no need for insurance on you.

[jenn_jenn]

I realize you both have good incomes and you have no children, but I'd still consider at least some life insurance outside of your employer coverage. Term life is dirt cheap at your age. A policy on your husband would give you the flexibility to keep the house if you wanted to, or at least not need to sell it quickly after his passing. Probably no need for insurance on you.

It’s a great point to raise. We did consider it but since I don’t actually want to live where this house is (we are here for my husband’s job), I’d actually prefer to move to the condo where my family and support system is. My job would easily transfer to the office there as well. His existing life insurance should be fine to cover the house for a while and I could just pay off the condo. We decided to wait to get supplemental life insurance when/if we have kids or if circumstances change.

[disneysteve]

It’s a great point to raise. We did consider it but since I don’t actually want to live where this house is (we are here for my husband’s job), I’d actually prefer to move to the condo where my family and support system is. My job would easily transfer to the office there as well. His existing life insurance should be fine to cover the house for a while and I could just pay off the condo. We decided to wait to get supplemental life insurance when/if we have kids or if circumstances change.

I think that all makes sense. At least you've thought it through and made an informed decision. Far too many people refuse to even think about insurance because they don't want to think about what could happen.

[jenn_jenn]

Now I’m reconsidering this decision. We didn’t look into how much life insurance would cost, just ran the numbers of how much runway we’d have and decided that was enough. Since we’ll likely need life insurance in a few years anyway, I’ll ask about rates when we get the liability policy. If it really is as cheap as I see on Google, I think it makes sense to give just a little extra protection. Thanks for raising.

[jenn_jenn]

I think that all makes sense. At least you've thought it through and made an informed decision. Far too many people refuse to even think about insurance because they don't want to think about what could happen.

Unfortunately, we’ve had close friends die young and seen first hand how quickly life can change so we have always thought about this what-if. But apparently we didn’t think it through enough to actually look at policy rates. Just discussed what we would do and ran the numbers. Even though we do have a plan in place to be fine, it might not be a bad thing to just have extra coverage.

[Jluke]

Maybe I missed it but what is your current emergency fund?

the FA motivation to reduce it very well may be to increase the amount invested with him/her so they can make more money off of you (assuming AUM or some other fee structure).

if there is a chance of kids you may want to get a 20-year term (or 30-year) before getting pregnant.

[jenn_jenn]

Maybe I missed it but what is your current emergency fund?

the FA motivation to reduce it very well may be to increase the amount invested with him/her so they can make more money off of you (assuming AUM or some other fee structure)

Oh definitely that is a consideration and that is why I’m seeking outside perspective. Fees are based on AUM. I like our financial advisors but at the end of the day, their goal is to make the most money for their firm.

I’d prefer to keep about $100-150k as our emergency fund kept between HYSA and I bonds. I don’t really have any rationale other than that would float us a year if we both lost our jobs and we were really stuck. I recognize we’re potentially losing out on portfolio growth though.

We have more than that currently because of a bonus payout last month that hasn’t been invested yet while we’re consolidating and moving accounts. It’s not really emergency fund but hasn’t been allocated yet either.

ETA: I’ll look into policy for me as well when I get the other quotes. When we discussed with the FA, he said it was fine to wait until we got pregnant but I see differing opinions about this now that you bring it up.

[Like2Plan]

I agree with the outside life insurance. It’s most likely pretty cheap now to buy term life insurance. I know sometimes life insurance through work is convertible when leaving— but it could prove to be pretty expensive (like whole life expensive).

How about disability insurance?

The emergency fund is for your own peace of mind. So, you should go with what lets you sleep at night.

[jenn_jenn]

I agree with the outside life insurance. It’s most likely pretty cheap now to buy term life insurance. I know sometimes life insurance through work is convertible when leaving— but it could prove to be pretty expensive (like whole life expensive).

How about disability insurance?

The emergency fund is for your own peace of mind. So, you should go with what lets you sleep at night.

Ack to be honest, we’ve never considered disability insurance. We’ll look into it.

[kork13]

You've already had alot of good advice, so I won't belabor anything. Personally, if I were in your shoes, I'd say the $75k is plenty for an EF, especially given your husband's VA pension (which will extend how long the EF lasts ... making $60k pretty reasonable for a 6mo EF) & any life insurance that you tack on to get you through grieving & end of life costs in the event of either of your deaths.

That said, as L2P said, an EF is basically there to help you sleep at night without worry about "what happens if ....?". If keeping $100k in cash vs. invested is what it costs for you to have that level of comfort, then so be it. With your income ($750k/yr) & normal expenses ($180k/yr), I expect that $100k is a pittance compared to what you currently have invested, and compared to what you're adding to investments every year (~$200k-$300k/yr?). Keeping any figure below $200k in cash will have zero impact on your financial success.