Often overlooked in our retirement plans (and our work lives, for that matter) is what I like to call a “slush fund” for emergencies.
Most people don’t have one. That can be a problem for many Gen Xers and Millennials, but it can have some 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’s especially significant for retirees because without that “emergency slush 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 withdrawing your money in a down market.
John Piershale, at Piershale Financial group in Crystal Lake, Ill., recommends that clients save six to 12 months in expenses. That fund would be for true emergencies, not things like a vacation, a wedding or an insurance payment, he says.
How do you save six to 12 months in expenses?
“It can be done,” he says. “Initially, it’s more likely they will build up a month to three months (in savings). Start out and set the goal at 12 months. Maybe you save for a year and get a month or three months. Take another year to build on that. It is a process.”
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, says Michael Foguth, founder of Foguth Financial in Brighton, Mich.
They should first look at how much they are paying in taxes, he says.
“Many retirees don’t even realize they’re paying extra in 401(k), IRA or Social Security taxes,” Foguth says. “If you are a retiree aged 70 ½ or older, you have to take the required minimum distributions (RMDs), so consider taking this money and putting it into a non-taxable, emergency fund account.”
Also, consider dropping land lines and using a pay-as-you-go phone and cutting cable and using video services such as Hulu or Netflix. 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,” he says, “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.”
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Question of the week
Do you have three to six months of expenses tucked away for emergencies? If not, how do you handle those big, unexpected financial emergencies? Send comments to firstname.lastname@example.org. Please include your name, city and state. In the subject line put “Emergency Savings.”
Last week’s question of the week
Are there things you wish you had done earlier, like travel, start a business, new career or volunteer, that you now feel you can do once you retire?
Dick Wiscott of Centennial, Colo.:
Having spent my college years dating, socializing and having fun…instead of soaking up knowledge…I now have spent the last 20 years in retirement and was fortunate to find OLLI (the Osher Lifelong Learning Institute at Denver University…there are 119 similar OLLI programs around the country). I not only have taken dozens of non-credit classes taught by fellow volunteer retirees, but I have taught over 15 classes myself on topics like geopolitics, foreign policy, the economy, senior issues and am now focused on the presidential election. I can’t believe that I had a second chance to make up for those early years of ignorance. And I actually had a successful career as Senior VP with ING, then the largest banking, insurance and financial service organization worldwide.
Laura McAfee of Catonsville, Md.:
I was struck by your discussion of Americans using retirement as a “do-over” for decisions they regretted. The thing that I kick myself for is not being sufficiently adventurous; I always wanted to be one of those people who just went to a foreign country, found a job tending bar (or whatever), and trusted things would work out.
But the reality is that I grew up with no money, and my #1 goal at 10 and 15 and 22 and 25 was to not be poor ever again. Setting off to Europe with nothing but a backpack and a smile would have made me miserable — I was in a hurry get settled and figure out who I was and what my place in the world would be. I chose security over adventure because that was who I was then. Retroactively criticizing that choice with 20/20 hindsight is disrespectful to my younger self, who did exactly what she needed to do to achieve her goal.
The benefit of our “extra” thirty years, though, is this: I am 50. Goal #1 is met (huzzah!), and I still have (I hope) another 1/3+ of my life in front of me. We’ve been able to enjoy some travel and fun with the kids before they go off on their own. And God willing and the creek don’t rise, when the kids finish school, my husband and I can retire and still have another 20 years to play and travel and do all of those adventurous things I still want to do.
My most recent retirement column: After you’ve saved for retirement, annuities can help put your nest egg to work
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