If you have retired from full-time work, or will soon, it’s important to have enough liquid assets to keep you from drawing down your portfolio in times of market turbulence.
Consider it the money that keeps you safe.
“It keeps you calm and steady in times of market volatility,” says Daniel Lee, director of financial planning and advice at BrightPlan, a financial wellness benefit provider based in San Jose, Calif. “The cash protects your investment portfolio from having to sell something at an unfavorable time.”
The funds should be liquid, easy to access, and enough so you are “able to sleep at night and not have to worry about how the stock market is doing,” Lee says.
There are actually two types of funds to help you stay financially secure: a rainy-day fund and an emergency fund, the first smaller than the second. Some experts recommend having as much as one to two years’ of expenses in cash while others suggest three months. “If you’re nearing retirement, look at increasing that,” Lee says. For example, if you have retired but not yet claimed your Social Security retirement benefits, consider having more cash available.
Yet, more than half of Americans — 51% — have less than three months’ worth of expenses in an emergency fund, according to Bankrate’s most recent 2021 Emergency Savings Survey. Further, that total includes 1 in 4 (25%) Americans who said they have no emergency fund at all, up from 21% in 2020.
During the early days of the pandemic, in March 2020, for example, when the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -2.53% plummeted, emergency funds would have been especially valuable.
“With an emergency fund the whole point is if you need money, it’s there,” says certified financial planner Andrew Feldman, who is based in the Chicago area. “If unforeseen things happen in your world, we’ve got some place to go. If you are on a fixed income, you don’t necessarily anticipate one-off items.”
And you don’t necessarily want to spend down money from equities. If you are not yet 59-1/2, taking funds from retirement accounts can trigger a costly penalty. Further, if you do, you not only spend the money for your retirement but even if you replace some of it, you have lost the benefit of compounding.
Having an emergency fund or both a rainy-day and an emergency fund can make a big difference.
Where is the best place to keep your emergency fund? High-yield savings account? Online savings account? CD? Money market? To make sure your fund is easily accessible yet reaps a decent yield, what are your best options? Yield is important, and so is security.
“Make sure that you’re getting reasonable rate,” yet remember: This part of your money is meant for security, Lee says.
Experts agree that liquidity is important. “When thinking about saving for an emergency, be as liquid as possible,” says David Sieminski, senior policy adviser in the office of community affairs at the Consumer Financial Protection Bureau. Having to sell off your investments if you need cash can mean taking a loss if the investments are down,” he says. “If you have liquid cash, you don’t have to draw down from those investments.”
He and others recommend having two separate funds in place: