Ok, that’s a great plan for the “known expenses,” but what about the “unknown expenses?” In retirement, things ALWAYS come up. We just don’t know what they will be, and how much they will set us back.
This is why I advocate for an emergency fund OUTSIDE of the retirement portfolio. With high-yield savings accounts offering north of 3% interest, cash can at least earn something while sitting idle. Of course, stick within FDIC limits, but anywhere from 1-2 years worth of FIXED expenses is appropriate for a retiree’s emergency fund. Unlike an investor who is still working and has time to get a new job or allow the portfolio to recover, retirees don’t have those luxuries. Sure, you could beg for your old job back, but that might not be what you WANT to do. Instead, if you have 1-2 years of fixed expenses, this will help preserve your investment portfolio from a larger-than-anticipated withdrawal.
For some, you may not want so much cash sitting around for that “what-if” scenarios, so here are a couple of compliments to a cash reserve fund:
- Home Equity Line of Credit
- Life Insurance Cash Values
Home Equity Lines of Credit, or HELOCs, are a great way to limit how much you keep in cash. Most people use these for home improvements, but having a HELOC can also help with your emergency fund. Let’s say 1 year of fixed expenses is $100,000. Instead of having $100k-$200k in high-yield savings, you might keep $50,000 in cash, and have a $150k HELOC for the JUST-in-case scenario. That way, your savings account can be your first line of defense. And only if needed, the HELOC can come in as a backup.
Cash Value Life Insurance is probably my favorite emergency fund vehicle in retirement. Unlike term insurance, it can act as a pool of funds available when you really need it.
And unlike a bond which can decline in value based on interest rates, cash values have a minimum guaranteed rate, so the cash can never go down. Think about the power of this tool in the market we are in now where bond prices are down over 15%!
And I’m not talking about Indexed Universal Life policies or Variable Life Policies, I’m talking about a traditional fixed product. If you build up enough cash value over time, you may only need 3-6 months of fixed expenses in cash given the rest of your cash buffer is inside of your life insurance policy. I’m going to write another article on Cash Value Life Insurance later, but it’s a great tool for the right person. But for the wrong person, it’s one of the worst products you can buy!
For what it’s worth, our firm does not sell any insurance products and we have no skin in the game. These products should also be gone over with a fine-tooth comb as they can be extremely complex.