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Six Months of Cash?

“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”:

  • If your job is secure—think tenured professor or unionized worker—you might hold just three months of living expenses.
  • If you have a substantial sum in a regular taxable account that’s earmarked for other purposes, you might hold a smaller emergency fund, knowing you could always raid this other money if you had a large financial emergency.
  • If you’ve funded a Roth IRA, you might keep less emergency money. The reason: You can withdraw your regular annual contributions to a Roth IRA at any time for any reason, with no taxes or penalties owed—provided you don’t touch the account’s investment earnings.
  • You might keep a smaller emergency fund if you have easy access to borrowed money through, say, a home-equity line of credit.
  • If you’re retired, you could hold a far smaller emergency reserve—and perhaps none at all. Remember, the big financial emergency is losing your job, something you don’t have to worry about once you’re retired. Moveover, most retirees will already have substantial holdings of conservative investments, so keeping a separate emergency fund is arguably unnecessary.

Next: What Withdrawal Rate?

Previous: Term or Cash Value?

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