After we talked about the appropriate size of an emergency fund I saw some thoughts on the topic in the Spring 2010 issue of Charles Schwab's On Investing magazine. Here are their thoughts on the right level of emergency funds for retirees:
- Set aside enough cash to cover your spending needs for one year -- minus what you expect to get from non-portfolio sources such as Social Security.
- Save an additional two-to-four years' worth of living expenses in longer-term CDs, a deferred fixed annuity or high-quality short-term bonds.
This makes sense to me. The less cash flow you have, and most retirees have less in-flow than they did when they were working, the bigger your emergency fund needs to be. But as we've discussed, most people aren't prepared for retirement in the first place, so I doubt if very many at all have emergency funds even close to what Schwab recommends.
Hey FMF,
A good idea for a post on the bible and money: scripture calling Christians to have an emergency fund.
Posted by: Seth | March 27, 2010 at 09:17 AM
I agree with your response. Most Americans are not properly prepared for retirement much less an emergency fun WHILE retired. On year's worth of spending cash is a lot of money to set aside, even if you are retired.
Posted by: myfinancialobjectives | March 27, 2010 at 07:27 PM
Somehow I'm not clear on this concept. why would retirees need an emergency fund? they are not going to lose their jobs. They presumably have enough income to supplant a salary and it should be fixed. If you mean funds for broken cars, or plumbing or other house repairs, then that makes sense. But that is oh say 10k. What am I missing?
Posted by: BillV | March 27, 2010 at 11:53 PM
I am always surprised by the number of people who think that a 10K emergency fund is sufficient for any and all emergencies. For many people, 10K may be more than enough. But for many other people, a 10K emergency fund won't be at all sufficient.
Retirees might need a larger emergency fund for many reasons. If you need to put a new roof on a house, that can run you more like 12k - 20K easily. And, if you have more than one emergency like that in a year...how exactly are you going to fund it?
A real emergency fund protects a person/family from more than just 1 event. It also is large enough that you can weather an emergency and be able to replenish the fund before another emergency hits...like increased taxes, needing a new roof, having a dental issue, needing a new car and not wanting to go into debt for it....if all of those things happened in a 12 month span - it wold be pretty much impossible to weather it with only 10K and be able to replenish before the next shoe dropped.
Posted by: sashie | March 28, 2010 at 10:58 AM
I think the real reason for this large emergency fund is that it is also part of your mix of funds at retirement. When you retire, you should have a much larger portion invested safely so that when the market dives, you are protected, especially with 4 years of living expenses safely tucked away in a CD.
Posted by: ddan7 | March 29, 2010 at 08:59 AM
Emergency funds are like shoe sizes. One size does not fit all. And like emergency funds, short of the right fit, I prefer something that may be too big than something that may be too small. :D
Posted by: Eugene Krabs | March 29, 2010 at 11:25 AM
I'd want a large emergency fund in retirement simply so I wouldn't need to make withdrawals if my investments tanked or something...backup is always nice.
Posted by: Budgeting in the Fun Stuff | March 29, 2010 at 02:19 PM