The All Important Emergency Fund

Greetings! I hope and trust that this finds you well and enjoying life.

Often overlooked in our retirement plans (and our working years, for that matter) is what I like to call a “rainy day fund” for emergencies.

Most people don’t have one. That can be a problem for many Gen Xers and Millennials, but it can have major consequences for Baby Boomers.

How bad is the problem? According to a recent Associated Press-NORC Center for Public Affairs Research poll, two-thirds of Americans would have trouble coming up with the money to cover a $1,000 emergency. What may be surprising to some is that it was a big problem for all income groups. According to the survey:

Three-quarters of households earning less than $50,000 a year and two-thirds of those making $50,000 to $100,000 would have trouble coming up with $1,000 to cover an unexpected bill.

Among the nation’s wealthiest 20 percent of households, those earning more than $100,000 a year, 38 percent said they would have at least some trouble coming up with $1,000.

What that means is people would have serious trouble paying for an unexpected roof repair, a major car repair or even fixing or replacing a home’s heating or air conditioning system.

Perhaps more importantly especially in this day and age, if you lose your job, you’ll have no cushion.

It can be significant for retirees because without that “rainy day fund,” they would be forced to take money out of their retirement accounts (IRA, 401 (k) or 403 (b)). That could trigger both taxes and penalties, not to mention the problems of possibly having to withdraw money in a down market.

Most financial planners recommend that clients have six to 12 months of expenses in reserves. That fund would be for true unexpected expenses, not things like a vacation, or an insurance payment.

It may be more difficult for retirees on a fixed income to build an emergency savings fund, but there are things they can do to build a fund quickly. They should first look at how much they are paying in taxes as there may well be things they can do to minimize taxes. Reducing bank fees and shopping home and auto insurance are also ways to reduce cash flow.

Also, consider dropping land lines and cutting cable and using video services such as Roku or Apple TV. That could mean a savings of $100 or more a month that can go into an emergency fund.

Saving can be difficult, especially when you are on a fixed income, but once you’ve hit your emergency fund savings goal, you can go back to living life the way you were. However, if you don’t mind the temporary lifestyle change, make it permanent and continue saving money for the many years ahead.

Best regards,

Jeff Christian CFP, CRPC

Excellence is to do a common thing in an uncommon way.

 Booker T. Washington

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