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I’m early retired and rely on my investments pay my bills. I get a “paycheck” each month from my investment account – selling index funds when my net worth is within 90% of it’s all time high and pulling cash when my net worth is below the 90% threshold.
I keep about six years of spending in cash and CD’s so I can make it through a six year downturn without having to sell stock. These cash holdings allow me to be aggressive with my other investments and still sleep at night.
In a different interest rate environment, I’d be in bonds rather than cash and CD’s but I’m not willing to take the rate risk in bonds. I keep less than a year’s expenses in each CD so I won’t have to pay much of a penalty in the event of early withdrawal.
For many years, I didn’t make enough or had enough to keep an emergency fund. I was fortunate to make a good living and finally accumulated 6 months. As I’ve gotten older (51), I carry way too much cash but it seems to make me sleep better.
I also used an untaped HELOC as my emergency reserves.
I understand and agree with the conventional financial planning guidance of holding 3 to 6 months of expenses in liquid savings. I can’t say my wife and I always met this. There were definitely times when we scrambled to make ends meet. It’s important to understand your personal situation, how secure your employment is, and what your risk are. Do you have short term disability insurance – that helps. Where I worked you were allowed to accumulate up to 400 hours of vacation in a bank. Lots of employees considered that an emergency fund against a layoff.
A tiny amount.
But, we have a HELOC.
And, cash sitting in retirement funds.
I heard about that on a podcast. Seems to make sense as long as people have the self discipline to not run up the credit line with things other than the emergency. Also, during the 2008 financial crisis, did banks close or reduce HELOCs on people? That’s certainly a risk.
Caution on using stocks as a store for emergency fund money. There have been rare occasions such as 9/11 when the stock market has been closed. It could also potentially be closed for weeks. I used to hold emergency money as US Savings Bonds which paid a 4 per cent minimum interest that compounded tax free until maturity and was state tax exempt (those were the days!).
These best place today is probably a high yield (like .50 per cent per year – ha!) account at Citibank, American Express or some local credit unions.
Jonathan, that strikes me as a clever method and maybe I should re-think this subject. But I’m older than you and on Medicare, so there’s another factor in play. If our MAGI (modified adjusted gross income) exceeds a certain level, I have to pay IRMAA surcharges on Medicare, which can be pretty expensive. So if I needed a big chunk of cash, and got it by selling stock which resulted in a significant long term capital gain, it could trigger the IRMAA problem.
Am I missing something here?
I don’t think you’re missing anything. In the good old days, when bonds had a yield that you didn’t need a microscope to see, the standard advice was to keep bonds in a retirement, while favoring tax-efficient stock strategies in a taxable account. But at today’s tiny yields, high-quality bonds aren’t nearly as tax-inefficient as they once were, so there’s less reason to avoid them in a taxable account.
I’m not claiming this is smart, but I’ve never had what people think of as an emergency fund—three or six months of living expenses sitting in cash investments and held in a regular taxable account. In my 20s, when I was married to a graduate student and raising two children on a junior reporter’s salary, I simply didn’t have much money to spare, and what I could spare I preferred to stash in my 401(k) or use to buy stock funds in my regular taxable account. Over the years, that taxable account grew, so I always knew I could dip into it if I suddenly needed cash. To be sure, my taxable account is mostly in stocks, so I run the risk of having to sell stocks during a bear market. But if that happened, I’d simply make an offsetting move from bonds to stocks within my retirement account, thereby maintaining my portfolio’s overall stock exposure and effectively avoiding selling at a market low.