I have always thought of emergency funds as a vital part of one’s finances. You want to be able to pay the bills in the event of a loss of income or revenue stream, when your expenses exceed whatever you have. One thing you don’t want to do is lose money, as it’s harder to make up losses than might meet the eye.
Having said that, I always thought about emergency funds in the context of a person or family relying on income from current employment – not someone who is in the retirement phase of life. An article at Yahoo! Finance brought up this topic, and it piqued my interest in considering why one would need emergency funds when retired.
The key reasons given were:
- Unanticipated expenses
- Market Fluctuation
Now, after reading this article, I have revisited my thinking on emergency funds at different times of life. For me, an emergency fund for a working person is to make sure that person and his or her family would be covered in the event of job loss or other disruption in income stream. Even if such people have money specifically allocated for retirement, it can be kept separate from funds designated as for emergencies. In terms of amount, I think that 12 months is a good number, rather than the six month figure mentioned in the article. People out of work can remain out of work for a long time these days.
For those truly retired, there is no reason to worry about job loss. They are retired! To my way of thinking, retired means that you are done working; if you do work, it’s not for income that you are actually counting on. If that were the case, you would not be retired. Additionally, in terms of income streams in retirement, one probably doesn’t want to take on risk in terms of potential variability anyway. Social Security or Pensions don’t necessarily add a variable component.
In terms of the unanticipated expenses, inflation, and market fluctuation – shouldn’t these be taken into account when planning for retirement anyway? Sure, a larger percentage of assets for retirees will likely be in lower risk vehicles such as cash. So why should additional cash or liquid cash equivalents be deemed to be part of an “emergency fund”?
Again, I think it’s just a matter of asset allocation in a retirement portfolio, which should ideally be set up to provide for retirement needs while taking into account such circumstances as noted in the article.
Bottom line: I think that “emergency funds” are necessary for people who haven’t yet reached retirement, but are not a specific, stand-alone entity in retirement.
I realize than many people may see it differently. What do you think?