Whether you’re headed into retirement, or just want to save for a rainy day, an emergency cash fund is a good first step to make sure that you have liquidity in your investments.
How much is enough for a cash fund?
A good rule of thumb, per Chatterton & Associates financial advisor Eric Oh, is to have 6-12 months’ worth of savings while you are still working and have income flow available. Does the same amount apply for a cash fund in retirement? That depends highly on your debt-to-income ratio.
Why would retirees need that much in savings?
There are many instances where having an emergency cash fund in retirement would become useful. When you’re working and income is continually flowing in, one can assume that – if you need to dip into savings – you can replenish it over time. Once you’re retired and your roof starts leaking, those savings aren’t so easy to build back up.
In retirement, you also have to consider the expenses that occur with aging, such as healthcare or medication needs which have typically outpaced the rate of regular inflation.
Even if you had $100,000 in savings and you were relying on the income earned from that savings account, by today’s standards, you wouldn’t receive much due to low interest rates. Those interest rates would only earn you about $100/year, which is definitely not enough to keep up with the cost of living.
Sources of saving in retirement
Going into retirement, your savings may come from different sources. For example, you might have:
- A retirement portfolio
- Stocks and/or bonds
- Pension funds
No matter where your income comes from, you need to consider your debt-to-income ratio.
If your debt-to-income ratio is high, the higher your annual expenses will be in retirement. Your current fixed income may not cover that and would necessitate a higher level of fixed income assets. Liquidity (around 6 months’ worth) should help to cover those expenses. You may have other assets, but if the market is down, you don’t want to make it a habit of pulling from your assets to cover your debt.
Or let’s say you don’t have much debt going into retirement. If your cash is sitting in a savings account it may not be earning much at all. That creates the opposite problem: you want your savings to be productive so that you can continue creating wealth and income. A low debt-to-income ratio would allow longer term investing with less emphasis on capital preservation and more on appreciation.
Save for retirement with Chatterton & Associates
If you are getting ready to retire or want to build out a cash fund for another purpose, our advisors are here to help. By looking over your investments, debts, and assets we can project your cashflow 3-5 years out to make sure that your financial needs are met in retirement. Contact us today.
The Team at Chatterton & Associates