Value of Emergency Fund with high Taxable account?
Value of Emergency Fund with high Taxable account?
Hello,
About 9 months or so ago, we opted against another real estate transaction and have just recently taken that large chunk of cash plus additional earnings/bonuses/etc and put it all into our taxable account. Some was put across the few stock mutual funds in taxable, somewhat per our AA (70/30 to now 75/25) but we still have about $70k in the settlement fund...TBD.
Question is, with a taxable amount of about $300k, along with all tax deferred/roth at around $600k; what is the need for an EF sitting in a HYSA? We have stable careers and save a few $k post-tax each month aside from good (but not maxed due to HCE) contributions into 401ks...etc. We're in late 30s with 2 little ones. HCOL area.
Should the HYSA (which wasn't near $70k anyways) be nixed completely, reduced, other?
And in the unlikely event of two unemployed parents (although this state has good unemployment benies), 3 rental properties all vacant, and stock market plummeting -what if at least the EF or a significant portion was inside the taxable in a safer fund like treasury, muni or other bond? And if so, how to choose duration?
I also get that it's kind of moot now with HYSA yielding an impressive ~5%, but at some point if we get back to lower rates, should I keep an EF sitting at those old sub 1% rates? Does that change the math/logic of the above questions?
Thanks!
About 9 months or so ago, we opted against another real estate transaction and have just recently taken that large chunk of cash plus additional earnings/bonuses/etc and put it all into our taxable account. Some was put across the few stock mutual funds in taxable, somewhat per our AA (70/30 to now 75/25) but we still have about $70k in the settlement fund...TBD.
Question is, with a taxable amount of about $300k, along with all tax deferred/roth at around $600k; what is the need for an EF sitting in a HYSA? We have stable careers and save a few $k post-tax each month aside from good (but not maxed due to HCE) contributions into 401ks...etc. We're in late 30s with 2 little ones. HCOL area.
Should the HYSA (which wasn't near $70k anyways) be nixed completely, reduced, other?
And in the unlikely event of two unemployed parents (although this state has good unemployment benies), 3 rental properties all vacant, and stock market plummeting -what if at least the EF or a significant portion was inside the taxable in a safer fund like treasury, muni or other bond? And if so, how to choose duration?
I also get that it's kind of moot now with HYSA yielding an impressive ~5%, but at some point if we get back to lower rates, should I keep an EF sitting at those old sub 1% rates? Does that change the math/logic of the above questions?
Thanks!
Re: Value of Emergency Fund with high Taxable account?
It boils down to whether you'd be able to stomach selling stocks "when they're down". Others here don't keep much spare cash for this reason.OSUperu wrote: ↑Wed Jun 07, 2023 11:26 pm Hello,
About 9 months or so ago, we opted against another real estate transaction and have just recently taken that large chunk of cash plus additional earnings/bonuses/etc and put it all into our taxable account. Some was put across the few stock mutual funds in taxable, somewhat per our AA (70/30 to now 75/25) but we still have about $70k in the settlement fund...TBD.
Question is, with a taxable amount of about $300k, along with all tax deferred/roth at around $600k; what is the need for an EF sitting in a HYSA? We have stable careers and save a few $k post-tax each month aside from good (but not maxed due to HCE) contributions into 401ks...etc. We're in late 30s with 2 little ones. HCOL area.
Should the HYSA (which wasn't near $70k anyways) be nixed completely, reduced, other?
And in the unlikely event of two unemployed parents (although this state has good unemployment benies), 3 rental properties all vacant, and stock market plummeting -what if at least the EF or a significant portion was inside the taxable in a safer fund like treasury, muni or other bond? And if so, how to choose duration?
I also get that it's kind of moot now with HYSA yielding an impressive ~5%, but at some point if we get back to lower rates, should I keep an EF sitting at those old sub 1% rates? Does that change the math/logic of the above questions?
Thanks!
I keep more than I want because unemployment benefits are terrible in NH. The maximum you can earn is about $425/week, even if you lost a job paying $250,000/year. If you lived a $250k lifestyle, you're in rough shape with unemployment.
Re: Value of Emergency Fund with high Taxable account?
You can keep funds in a money market fund at your brokerage. Money market funds and HYSA are kind of at the whims of the Fed. A couple of years ago HYSA was doing better than money market funds but now the reverse is true. Who knows what will happen in a couple of years. Personally, I would keep the emergency fund because you never know what will happen. I wouldn't want to sell in a down market.
This is correct and it doesn't change anything for me:
"I also get that it's kind of moot now with HYSA yielding an impressive ~5%, but at some point if we get back to lower rates, should I keep an EF sitting at those old sub 1% rates? Does that change the math/logic of the above questions?"
This is correct and it doesn't change anything for me:
"I also get that it's kind of moot now with HYSA yielding an impressive ~5%, but at some point if we get back to lower rates, should I keep an EF sitting at those old sub 1% rates? Does that change the math/logic of the above questions?"
-
- Posts: 321
- Joined: Wed Jan 02, 2019 4:11 pm
Re: Value of Emergency Fund with high Taxable account?
Keeping cash to avoid selling in a down market doesn't make sense because generally the market goes up. So until you have an emergency, you're losing money as your cash is on the sidelines. Even if the stock market went down when you needed the money, it may not still be down to the value it was when you first started saving for your emergency fund. And as you've mentioned, there's quite a few things that need to go wrong before you need to tap your e-fund. And if you need it, you need it, it just needs to be liquid, which a taxable account is.
Re: Value of Emergency Fund with high Taxable account?
While this is true, I found out during the first weeks/months of the pandemic that I slept a lot better if I had *some* cash. During those times when we had no idea what was going to happen, if I was going to keep my job or not, and if we were at the beginning of a very long financial / economic crisis or not, I found it very hard to accept the idea of selling when the stocks were down, mostly because it would have felt like going backwards on my goals (in my head, my invested funds are for retirement)Young Boglehead wrote: ↑Thu Jun 08, 2023 3:22 am Keeping cash to avoid selling in a down market doesn't make sense because generally the market goes up. So until you have an emergency, you're losing money as your cash is on the sidelines.
So... I did lol. Lost some money in the process -not much because by the time I did it the market was starting its recovery-, but I slept better. I know it doesn't make sense from a mathematical point of view. I don't care.
I did reduce it from the usual 6 months of expenses to 4 months, though.
- dogagility
- Posts: 3237
- Joined: Fri Feb 24, 2017 5:41 am
Re: Value of Emergency Fund with high Taxable account?
People with significant accessible net worth may not need an EF.
Couples with stable jobs that can live on one of those incomes alone may not need an EF.
My wife and I never had or needed an EF in the last 30 years.
If you really feel you need some money in an EF, I'd suggest purchasing I-bonds and consider these as your EF. Should you never need the I-bonds, you will have these useful, inflation-protected assets for your retirement.
(It seems in your financial situation you should be maxing out your tax-advantaged retirement accounts.)
Couples with stable jobs that can live on one of those incomes alone may not need an EF.
My wife and I never had or needed an EF in the last 30 years.
If you really feel you need some money in an EF, I'd suggest purchasing I-bonds and consider these as your EF. Should you never need the I-bonds, you will have these useful, inflation-protected assets for your retirement.
(It seems in your financial situation you should be maxing out your tax-advantaged retirement accounts.)
Make sure you check out my list of certifications. The list is short, and there aren't any. - Eric 0. from SMA
Re: Value of Emergency Fund with high Taxable account?
In your worst case, how much money do you need to survive one year? Please note that bond funds dropped 7% in March 2020 too. What is the cost of selling your rental property at a big loss if you have a cash flow problem? You need a bigger emergency fund due to the rental properties.OSUperu wrote: ↑Wed Jun 07, 2023 11:26 pm Hello,
About 9 months or so ago, we opted against another real estate transaction and have just recently taken that large chunk of cash plus additional earnings/bonuses/etc and put it all into our taxable account. Some was put across the few stock mutual funds in taxable, somewhat per our AA (70/30 to now 75/25) but we still have about $70k in the settlement fund...TBD.
Question is, with a taxable amount of about $300k, along with all tax deferred/roth at around $600k; what is the need for an EF sitting in a HYSA? We have stable careers and save a few $k post-tax each month aside from good (but not maxed due to HCE) contributions into 401ks...etc. We're in late 30s with 2 little ones. HCOL area.
Should the HYSA (which wasn't near $70k anyways) be nixed completely, reduced, other?
And in the unlikely event of two unemployed parents (although this state has good unemployment benies), 3 rental properties all vacant, and stock market plummeting -what if at least the EF or a significant portion was inside the taxable in a safer fund like treasury, muni or other bond? And if so, how to choose duration?
I also get that it's kind of moot now with HYSA yielding an impressive ~5%, but at some point if we get back to lower rates, should I keep an EF sitting at those old sub 1% rates? Does that change the math/logic of the above questions?
Thanks!
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
-
- Posts: 3509
- Joined: Sun Jan 07, 2018 11:52 am
Re: Value of Emergency Fund with high Taxable account?
The need is because in case of a market meltdown, which many times coincides with other bad things happening - job loss etc. you need funds that have not plummeted with the market.OSUperu wrote: ↑Wed Jun 07, 2023 11:26 pm Question is, with a taxable amount of about $300k, along with all tax deferred/roth at around $600k; what is the need for an EF sitting in a HYSA? We have stable careers and save a few $k post-tax each month aside from good (but not maxed due to HCE) contributions into 401ks...etc. We're in late 30s with 2 little ones. HCOL area.
With kids and mortgage I would have 1 year expenses in cash accessible, but that is just my personal preference to be able to sleep at night.
Re: Value of Emergency Fund with high Taxable account?
Thanks. Figured I'd get a response from you re/EFs!KlangFool wrote: ↑Thu Jun 08, 2023 5:44 am
In your worst case, how much money do you need to survive one year? Please note that bond funds dropped 7% in March 2020 too. What is the cost of selling your rental property at a big loss if you have a cash flow problem? You need a bigger emergency fund due to the rental properties.
KlangFool
Why would I look to a rental property to sell 100% of it, when I would sell some out of taxable at a 10%, 25% or 50% loss? I can sell 200 shares out of a taxable. I can't sell a partial lot from a rental property. I don't think anyone here would off load a rental property -unless pricing soars when stocks plummet- just to pay X months of expenses.
"Survive" is a good term which I have used to build previous EF. I have assumed and will continue to assume that in a worst of worst of worst case scenarios, there are other options aside from building a HUGE EF: I.e. career change for either of us (heck I'll be a janitor or a pot-a-potty tech for some income and family health insurance if it's been 6 straight months of unemployment), we could look to our extended family for help, we could drastically cut down 50+% of current monthly expenses (travel is spread across monthly too considering family distances) and live very modestly since we have little debt save for our primary (2 of 3 rentals has no mortgage).
And if there's still more what ifs and even worse events, and all family is worse off, well I could get hit by a bus tomorrow too.
Re: Value of Emergency Fund with high Taxable account?
The question about the HYSA can only be answered as part of a more comprehensive financial plan.OSUperu wrote: ↑Wed Jun 07, 2023 11:26 pm Should the HYSA (which wasn't near $70k anyways) be nixed completely, reduced, other?
And in the unlikely event of two unemployed parents (although this state has good unemployment benies), 3 rental properties all vacant, and stock market plummeting -what if at least the EF or a significant portion was inside the taxable in a safer fund like treasury, muni or other bond? And if so, how to choose duration?
I'm in a similar situation to you. I decided to roll my EF into my bond allocation. The basic principle is to match the duration of your bonds to your time horizon. An emergency is by definition short term, or else it's not an emergency because you can plan for it. From my bond allocation, I have about one years expenses in short duration instruments such as IBonds, HYSA, TBills, and money market. This suballocation is effectively my emergency fund and gets spent first.
-
- Posts: 2455
- Joined: Tue Mar 07, 2017 3:25 pm
Re: Value of Emergency Fund with high Taxable account?
The answer to the OP is to recall Oct 2007-March 2009. Would you be ok watching (your current level of assets) stocks decline 50% over 18 months with everyone in sight saying we're heading another 50% lower and possibly great depression levels, job losses all around, major financial firms failing, and recent real estate buyers badly under water? Are you able to contextualize this market (probably not) at your current asset level?
Being 24 and getting canned and watching your 25k in your 401k get halved, being single and moving in your parent's basement for 6 months is quite different than the situation now. And the 34% Covid pullback is no proxy for 2007-2009, that was child's play for diversified BH's. If you can stomach the risk and play that game (and many on here can successfully) then that's fine, just know the arena you're in.
Being 24 and getting canned and watching your 25k in your 401k get halved, being single and moving in your parent's basement for 6 months is quite different than the situation now. And the 34% Covid pullback is no proxy for 2007-2009, that was child's play for diversified BH's. If you can stomach the risk and play that game (and many on here can successfully) then that's fine, just know the arena you're in.
Last edited by deltaneutral83 on Thu Jun 08, 2023 9:19 am, edited 1 time in total.
Re: Value of Emergency Fund with high Taxable account?
Are those expenses same as last month? An aside, but I think in stages for an EF; personally I do 1m zero change to lifestyle, next 2m modest monthly expense cuts, and then next 3m very modest living. Past that I look to being able to adapt/alternatives mentioned just above.stocknoob4111 wrote: ↑Thu Jun 08, 2023 8:32 amThe need is because in case of a market meltdown, which many times coincides with other bad things happening - job loss etc. you need funds that have not plummeted with the market.OSUperu wrote: ↑Wed Jun 07, 2023 11:26 pm Question is, with a taxable amount of about $300k, along with all tax deferred/roth at around $600k; what is the need for an EF sitting in a HYSA? We have stable careers and save a few $k post-tax each month aside from good (but not maxed due to HCE) contributions into 401ks...etc. We're in late 30s with 2 little ones. HCOL area.
With kids and mortgage I would have 1 year expenses in cash accessible, but that is just my personal preference to be able to sleep at night.
What % of your 1 yr of expenses is your current taxable account value?
Brings up, what % of many folk's EF is their current taxable value?
Re: Value of Emergency Fund with high Taxable account?
Those are good points for a very bad scenario. What % of your taxable value is your EF?deltaneutral83 wrote: ↑Thu Jun 08, 2023 9:18 am The answer to the OP is to recall Oct 2007-March 2009. Would you be ok watching (your current level of assets) stocks decline 50% over 18 months with everyone in sight saying we're heading another 50% lower and possibly great depression levels, job losses all around, major financial firms failing, and recent real estate buyers badly under water? Are you able to contextualize this market (probably not) at your current asset level?
Being 24 and getting canned and watching your 25k in your 401k get halved, being single and moving in your parent's basement for 6 months is quite different than the situation now. And the 34% Covid pullback is no proxy for 2007-2009, that was child's play for diversified BH's. If you can stomach the risk and play that game (and many on here can successfully) then that's fine, just know the arena you're in.
Re: Value of Emergency Fund with high Taxable account?
OSUperu,OSUperu wrote: ↑Thu Jun 08, 2023 9:11 amThanks. Figured I'd get a response from you re/EFs!KlangFool wrote: ↑Thu Jun 08, 2023 5:44 am
In your worst case, how much money do you need to survive one year? Please note that bond funds dropped 7% in March 2020 too. What is the cost of selling your rental property at a big loss if you have a cash flow problem? You need a bigger emergency fund due to the rental properties.
KlangFool
Why would I look to a rental property to sell 100% of it, when I would sell some out of taxable at a 10%, 25% or 50% loss? I can sell 200 shares out of a taxable. I can't sell a partial lot from a rental property. I don't think anyone here would off load a rental property -unless pricing soars when stocks plummet- just to pay X months of expenses.
"Survive" is a good term which I have used to build previous EF. I have assumed and will continue to assume that in a worst of worst of worst case scenarios, there are other options aside from building a HUGE EF: I.e. career change for either of us (heck I'll be a janitor or a pot-a-potty tech for some income and family health insurance if it's been 6 straight months of unemployment), we could look to our extended family for help, we could drastically cut down 50+% of current monthly expenses (travel is spread across monthly too considering family distances) and live very modestly since we have little debt save for our primary (2 of 3 rentals has no mortgage).
And if there's still more what ifs and even worse events, and all family is worse off, well I could get hit by a bus tomorrow too.
1) What is your annual expense?
2) How much is the mortgage payment of your one rental property? Even without mortgage, you still have to pay property tax and insurance for the other two rental properties.
3) How much is the mortgage payment of your primary residence?
<<"Survive" is a good term which I have used to build previous EF. I have assumed and will continue to assume that in a worst of worst of worst case scenarios,>>
<<career change for either of us (heck I'll be a janitor or a pot-a-potty tech for some income and family health insurance if it's been 6 straight months of unemployment)>>
4) In a recession. those jobs do not exists.
"we could look to our extended family for help, "
5) In a recession, your extended family could be looking to you for help. It goes both way. I assume.
"And if there's still more what ifs and even worse events, and all family is worse off, well I could get hit by a bus tomorrow too."
6) You are a parent. You should make sure that your family is taking care off no matter what.
7) Please note that you did not answer my question. It is a very simple and straight forward. In the worst case, unemployment, no renters, no income, how much money do you need for your family to survive 1 year?
8) Why is it necessary to take that much risk? Why not keep at least 1 year of the EF to take that risk out?
9) FYI. I keep 120K of cash in addition to 300K of investment in my taxable account. I have no debt.
In summary, risk versus reward. You have to survive in order to succeed. Please make sure that you are prepared for the coming recession.
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Re: Value of Emergency Fund with high Taxable account?
Thanks for #9. Ok I'll do #7: No unemployment for 1 year (both of us), no renters, no extended family, not even nice max state unemployment benefits for 26 weeks, not even the monthly distributions on a atm funds, but NOT living like we did before your doomsday scenario: ~$90k.KlangFool wrote: ↑Thu Jun 08, 2023 9:27 amOSUperu,OSUperu wrote: ↑Thu Jun 08, 2023 9:11 amThanks. Figured I'd get a response from you re/EFs!KlangFool wrote: ↑Thu Jun 08, 2023 5:44 am
In your worst case, how much money do you need to survive one year? Please note that bond funds dropped 7% in March 2020 too. What is the cost of selling your rental property at a big loss if you have a cash flow problem? You need a bigger emergency fund due to the rental properties.
KlangFool
Why would I look to a rental property to sell 100% of it, when I would sell some out of taxable at a 10%, 25% or 50% loss? I can sell 200 shares out of a taxable. I can't sell a partial lot from a rental property. I don't think anyone here would off load a rental property -unless pricing soars when stocks plummet- just to pay X months of expenses.
"Survive" is a good term which I have used to build previous EF. I have assumed and will continue to assume that in a worst of worst of worst case scenarios, there are other options aside from building a HUGE EF: I.e. career change for either of us (heck I'll be a janitor or a pot-a-potty tech for some income and family health insurance if it's been 6 straight months of unemployment), we could look to our extended family for help, we could drastically cut down 50+% of current monthly expenses (travel is spread across monthly too considering family distances) and live very modestly since we have little debt save for our primary (2 of 3 rentals has no mortgage).
And if there's still more what ifs and even worse events, and all family is worse off, well I could get hit by a bus tomorrow too.
1) What is your annual expense?
2) How much is the mortgage payment of your one rental property? Even without mortgage, you still have to pay property tax and insurance for the other two rental properties.
3) How much is the mortgage payment of your primary residence?
<<"Survive" is a good term which I have used to build previous EF. I have assumed and will continue to assume that in a worst of worst of worst case scenarios,>>
<<career change for either of us (heck I'll be a janitor or a pot-a-potty tech for some income and family health insurance if it's been 6 straight months of unemployment)>>
4) In a recession. those jobs do not exists.
"we could look to our extended family for help, "
5) In a recession, your extended family could be looking to you for help. It goes both way. I assume.
"And if there's still more what ifs and even worse events, and all family is worse off, well I could get hit by a bus tomorrow too."
6) You are a parent. You should make sure that your family is taking care off no matter what.
7) Please note that you did not answer my question. It is a very simple and straight forward. In the worst case, unemployment, no renters, no income, how much money do you need for your family to survive 1 year?
8) Why is it necessary to take that much risk? Why not keep at least 1 year of the EF to take that risk out?
9) FYI. I keep 120K of cash in addition to 300K of investment in my taxable account. I have no debt.
In summary, risk versus reward. You have to survive in order to succeed. Please make sure that you are prepared for the coming recession.
KlangFool
Also, the sh*tter business was strong in 2007-2009. Ag industry still grows crops in good or tough times and mine is heavy in labor. Vineyards need to have the service per OSHA . Being a service provider in agriculture is pretty stable. Zero changes in my career earnings during covid too.
Re: Value of Emergency Fund with high Taxable account?
OP,
it sounds like a lot of things would have to go wrong for everything to fall apart (2 jobs, rentals, stock market, ...). The key is how correlated are the events.
I think you could be fine without an EF. If you want to hold an EF, you should hold the tax inefficient funds in a tax deferred account. Only hold tax efficient funds in your taxable accounts.
it sounds like a lot of things would have to go wrong for everything to fall apart (2 jobs, rentals, stock market, ...). The key is how correlated are the events.
I think you could be fine without an EF. If you want to hold an EF, you should hold the tax inefficient funds in a tax deferred account. Only hold tax efficient funds in your taxable accounts.
52% TSM, 23% TISM, 24.5% TBM, 0.5% cash
-
- Posts: 18502
- Joined: Tue Dec 31, 2013 6:05 am
- Location: 26 miles, 385 yards west of Copley Square
Re: Value of Emergency Fund with high Taxable account?
The reason for cash in an emergency fund is to be able to access it immediately and to use it when bad things happen.
Let's say that the next crash is caused by something in your industry. So not only does your company stock drop but that causes you to be let go. Stocks and bonds in the market can both drop. And multiple things can go wrong. So your company and real estate, for example. In 2000, you'd think dot com crash. As a hardware guy, telecom comes to mind first as all those startups went down the tubes and even the big guys took a nose dive never to come back.
In my opinion, an emergency fund of at least a year should be a CD, money market, high yield account or iBonds with backup cash until the iBonds hit a year. I'm even leery of iBonds held electronically because I can't cash them TODAY like I know I can with my old paper bonds at DCU where I've cashed as much as a stack of $50k worth and had the money immediately available. So now, I'd only take the federal refund $5k in paper bonds.
Let's say that the next crash is caused by something in your industry. So not only does your company stock drop but that causes you to be let go. Stocks and bonds in the market can both drop. And multiple things can go wrong. So your company and real estate, for example. In 2000, you'd think dot com crash. As a hardware guy, telecom comes to mind first as all those startups went down the tubes and even the big guys took a nose dive never to come back.
In my opinion, an emergency fund of at least a year should be a CD, money market, high yield account or iBonds with backup cash until the iBonds hit a year. I'm even leery of iBonds held electronically because I can't cash them TODAY like I know I can with my old paper bonds at DCU where I've cashed as much as a stack of $50k worth and had the money immediately available. So now, I'd only take the federal refund $5k in paper bonds.
Bogle: Smart Beta is stupid
Re: Value of Emergency Fund with high Taxable account?
There are a million stories of people who though their career could never go belly up.
The worst case scenario of having too much in your savings is you miss out on some stock gains. The worst case scenario of not having enough in cash savings is having to sell assets at their lowest value or going bankrupt. The latter seems like a much riskier bet.
Obviously you want to hold your cash in the most advantageous way. Nobody says it has to be at a local bank making 0.2% interest.
-
- Posts: 5704
- Joined: Wed Oct 08, 2014 7:27 pm
Re: Value of Emergency Fund with high Taxable account?
I think it comes down to assets, flexibility and comfort level. The OP has significant assets and flexibility and seems comfortable with not having an EF. I would just roll that $70k into my portfolio, not worry about an incredible unfortunate perfect storm of events and move on with life.
Re: Value of Emergency Fund with high Taxable account?
That is true. The risk reward ratio favors holding cash. Also while the specific crop industry I manage could implode, there are lots of other growing systems I could work in. I'm not that specialized -thankfully.the_wiki wrote: ↑Thu Jun 08, 2023 10:09 amThere are a million stories of people who though their career could never go belly up.
The worst case scenario of having too much in your savings is you miss out on some stock gains. The worst case scenario of not having enough in cash savings is having to sell assets at their lowest value or going bankrupt. The latter seems like a much riskier bet.
Obviously you want to hold your cash in the most advantageous way. Nobody says it has to be at a local bank making 0.2% interest.
Let's say rates were pretty low, and that HYSA at 5% is at 0.2%. What of the other options to hold cash? Or 'close to cash'? What about an assumption of inter term or maybe even long term treasuries? We've seen that duration get's hit hard during inflationary times, but in those/these times rental rates and especially values went up. In these near doomsday scenarios of above, I would say those are deflationary and treasuries would hold/be safe?
Re: Value of Emergency Fund with high Taxable account?
Thanks. How big is your EF relative to your taxable value?Jack FFR1846 wrote: ↑Thu Jun 08, 2023 10:06 am The reason for cash in an emergency fund is to be able to access it immediately and to use it when bad things happen.
Let's say that the next crash is caused by something in your industry. So not only does your company stock drop but that causes you to be let go. Stocks and bonds in the market can both drop. And multiple things can go wrong. So your company and real estate, for example. In 2000, you'd think dot com crash. As a hardware guy, telecom comes to mind first as all those startups went down the tubes and even the big guys took a nose dive never to come back.
In my opinion, an emergency fund of at least a year should be a CD, money market, high yield account or iBonds with backup cash until the iBonds hit a year. I'm even leery of iBonds held electronically because I can't cash them TODAY like I know I can with my old paper bonds at DCU where I've cashed as much as a stack of $50k worth and had the money immediately available. So now, I'd only take the federal refund $5k in paper bonds.
Re: Value of Emergency Fund with high Taxable account?
OP -- I'm on the side of keeping little in cash collecting interest and the bulk in an investment account.
Set up an EF fund pot (account) and invest in the SP500. In simplistic terms, the SP500 returns 10%+ on the average. The dividend tax drag is likely minimal as they will mainly be Qualified Dividends. Think of account in terms of starting value to current value, not the individual equity gains/losses. At the end of year 5, at 10% a yr, you will have 1.6x the starting value. At that point, a 40% market decline takes you back to .96 of your starting value. You need to liquidate some of that EF pot to cover for 2 job losses. You are only taking some of what you started with. So what the big deal? Don't pain yourself by only thinking/comparing this to a peak level sometime in the past.
OK, I understand the SP500 return is all over the place when looked at by the year. This simplified ignores example that, beside who can predict the actual future.
I retired 6 years ago. What had be my EF money during those last years of work got totally eaten by a roof replacement. With a quite substantial pot of Tax Differed, I came to the conclusion to not have a dedicated EF fund, I would just withdraw more if needed. What's most satisfying to me, that even with monthly withdrawals for spending, my IRA's and our Roth's combined are worth 25% more than what we started with. If I need to sell to withdraw extra, I don't care what the individual gain/loss will be, as I look at how it overall, not by the minutiae detail given by the brokerage statement.
In a taxable account, that detail is only useful to report for taxes, which may be a loss to generate credit against other income, depending on which tax lots have been sold.
-
- Posts: 2455
- Joined: Tue Mar 07, 2017 3:25 pm
Re: Value of Emergency Fund with high Taxable account?
I'm not sure I understand the question(?), let me take a guess, you mean the pot of non retirement, non illiquid assets (RE) and within that pot (the denominator), the numerator is my EF which is in Cash/MM/Fixed income instrument(s)? If so, I haven't bothered to calculate, to me it's apples to oranges to compare a taxable account to cash for my IQ level (which isn't high). I know I keep 12 months of expenses in cash and estimate we'd go Greece mode cutting costs hoping it lasts 15-16 months during the next 50% bear market. Also keep in mind, your Roth contributions are always able to be withdrawn with no repercussions from IRS, and after 5 years all Roth conversion amounts are as well. Contribution amounts, not earnings FYI. HSA stuff too after a few years (if you've been investing for a decade and keeping receipts) adds up. It might not be ideal to tap your taxable if you have gains even after a 40-50% market downturn, because you're selling at a gain, and will get a tax bill, so maybe the retirement accounts with no penalty or taxes can help if you're going down this path.OSUperu wrote: ↑Thu Jun 08, 2023 9:22 amThose are good points for a very bad scenario. What % of your taxable value is your EF?deltaneutral83 wrote: ↑Thu Jun 08, 2023 9:18 am The answer to the OP is to recall Oct 2007-March 2009. Would you be ok watching (your current level of assets) stocks decline 50% over 18 months with everyone in sight saying we're heading another 50% lower and possibly great depression levels, job losses all around, major financial firms failing, and recent real estate buyers badly under water? Are you able to contextualize this market (probably not) at your current asset level?
Being 24 and getting canned and watching your 25k in your 401k get halved, being single and moving in your parent's basement for 6 months is quite different than the situation now. And the 34% Covid pullback is no proxy for 2007-2009, that was child's play for diversified BH's. If you can stomach the risk and play that game (and many on here can successfully) then that's fine, just know the arena you're in.
Emotionally speaking, I view the delta on the ROI of cash in an emergency fund vs non retirement investing as the insurance premiums on a market schlacking. Just the same as I view my life insurance, car insurance, umbrella, etc. etc. I hope not have to make a claim but will be grateful when it's there. From May 2000-March 2009, i.e. the lost decade, that Delta was extremely positive for those with an EF. One has to ask, can I go 10 years with not only no real gain, but no nominal gain and a gutshot worth of losses and still hang tough and not capitulate? Read teh threads from 2009 on here, man they are wild!
There are a lot of keyboard warriors on various sites that might not be as steady as they think. Many, many, entrepreneurs and high earners on this site can actually do it, they have the stomach, and know which end of the pool they're stepping in and can swim just fine. Having to sell equities after a 30+% pullback and fund the day to day for 6 months would likely leave a permanent black eye to many folks' situation.
Re: Value of Emergency Fund with high Taxable account?
KlangFool - I enjoy your posts/contributions to the message board. . .with your summarizing comments - are your thoughts that we will be entering a recession soon? Or just suggesting that "whenever" the next recession comes to be prepared?
"I would rather die with money, than live without it...." - Bogleheads member Ron |
|
A time to EVALUATE your jitters https://www.bogleheads.org/forum/viewtopic.php?p=1139732#p1139732
Re: Value of Emergency Fund with high Taxable account?
To EF or Not to EF after attaining a certain level of resources is one of those questions that puts the "Personal" in "Personal Finance"...
Many of the previous replies have outlined various factors that make people more or less comfortable with forgoing the EF. It seems to me that there are two main drivers to the decision:
1. The SWAN (Sleep Well at Night) piece: What makes people confident that they and their family will be financially secure during a severe and prolonged episode of adversity, and/or meet known future liabilities (e.g. if part of your taxable account is earmarked for education expenses, your next car purchase, covering upcoming unpaid family/medical leave, or retirement)?
2. The FOMO (Fear of Missing Out) piece: What degree of annoyance/resentment about the opportunity cost of idle cash can people tolerate?
Once you have a large enough pile of resources, it seems to me that the decision about whether or not to maintain a cash/cash equivalent EF is basically a dance between these two behavioral finance drivers.
Many of the previous replies have outlined various factors that make people more or less comfortable with forgoing the EF. It seems to me that there are two main drivers to the decision:
1. The SWAN (Sleep Well at Night) piece: What makes people confident that they and their family will be financially secure during a severe and prolonged episode of adversity, and/or meet known future liabilities (e.g. if part of your taxable account is earmarked for education expenses, your next car purchase, covering upcoming unpaid family/medical leave, or retirement)?
2. The FOMO (Fear of Missing Out) piece: What degree of annoyance/resentment about the opportunity cost of idle cash can people tolerate?
Once you have a large enough pile of resources, it seems to me that the decision about whether or not to maintain a cash/cash equivalent EF is basically a dance between these two behavioral finance drivers.
Tell me, what is it you plan to do with your one wild and precious life? |
~Mary Oliver
Re: Value of Emergency Fund with high Taxable account?
I know that I cannot predict the future. And, the recession happened regularly. Hence, I am always prepared.
On the other hand, my spider sense is tingling.
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
- ruralavalon
- Posts: 26351
- Joined: Sat Feb 02, 2008 9:29 am
- Location: Illinois
Re: Value of Emergency Fund with high Taxable account?
Once we had a large taxable brokerage account, invested in very tax-efficient stock index funds, we stopped using a dedicated emergency fund.OSUperu wrote: ↑Wed Jun 07, 2023 11:26 pm Hello,
About 9 months or so ago, we opted against another real estate transaction and have just recently taken that large chunk of cash plus additional earnings/bonuses/etc and put it all into our taxable account. Some was put across the few stock mutual funds in taxable, somewhat per our AA (70/30 to now 75/25) but we still have about $70k in the settlement fund...TBD.
Question is, with a taxable amount of about $300k, along with all tax deferred/roth at around $600k; what is the need for an EF sitting in a HYSA? We have stable careers and save a few $k post-tax each month aside from good (but not maxed due to HCE) contributions into 401ks...etc. We're in late 30s with 2 little ones. HCOL area.
Should the HYSA (which wasn't near $70k anyways) be nixed completely, reduced, other?
And in the unlikely event of two unemployed parents (although this state has good unemployment benies), 3 rental properties all vacant, and stock market plummeting -what if at least the EF or a significant portion was inside the taxable in a safer fund like treasury, muni or other bond? And if so, how to choose duration?
I also get that it's kind of moot now with HYSA yielding an impressive ~5%, but at some point if we get back to lower rates, should I keep an EF sitting at those old sub 1% rates? Does that change the math/logic of the above questions?
Thanks!
High limit credit cards could cover almost all possible emergencies.
Shares of our stock index funds could become cash in our joint checking account within two business days, so we felt no need to keep a big cash hoard for any extra-large emergencies.
I did not assume that an emergency for us would necessarily occur during a down stock market. In any event, I would rebalance inside the tax-advantaged accounts to maintain the desired asset allocation, so net would not be selling stocks in a down market.
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy
Re: Value of Emergency Fund with high Taxable account?
We have always held cash. Call it operating money plus a contingency amount for unexpected events. Before we retired, we held almost three years expenses in cash. Some designated for Roth conversations. We don’t expect our cash to return the same as equities. We like holding cash because it gives us more options when times are hard. When the market was down 30% and we were stuck at home, we did larger than budgeted Roth conversions and paid the taxes from cash. Just one example where cash helped us.
"I started with nothing and I still have most of it left."
Re: Value of Emergency Fund with high Taxable account?
There is no need to have cash needs (including emergency fund) in a taxable account because of this: https://www.bogleheads.org/wiki/Placing ... ed_account
-
- Posts: 205
- Joined: Tue Jun 07, 2016 5:33 pm
Re: Value of Emergency Fund with high Taxable account?
Didn't read all responses, but why not park your investments with a company that gives you a portfolio loan.
M1 automatically gives you approval for a portfolio line of credit that is about 40% of your investments.
You can use the money as you wish and is available immediately.
That is what I use for my emergency fund, if I ever needed.
M1 automatically gives you approval for a portfolio line of credit that is about 40% of your investments.
You can use the money as you wish and is available immediately.
That is what I use for my emergency fund, if I ever needed.
Re: Value of Emergency Fund with high Taxable account?
We have always held significant ready cash positions (cash/MMFs/HYSAs/T-bills) even though we have steady reliable employment. We consider the cash position part of our fixed-income allocation. We are less concerned with stock market gyrations when we have enough cash to cover expenses (or emergencies) for 2 or 3 years. Having holdings that readily convert to cash without tax consequence provides comfort, we tend to be self-sufficient and place no reliance on the actions of others for us to get through things.
The closest helping hand is at the end of your own arm.
-
- Posts: 3509
- Joined: Sun Jan 07, 2018 11:52 am
Re: Value of Emergency Fund with high Taxable account?
I have 10% of my taxable in cash, which currently represents around 2.5 years of expenses. When I retire next year I expect to have about 15% in cash or around 4+ years in expenses. Since I am retiring my personal circumstances are way different than yours. Also, I don't have a mortgage or any other debt, nor do I have any kids or other dependents and my budget has a lot of built in flex to it in case I need to make cuts.
I remember this period vividly. What a truly awful period with people just losing hope because day in and day out it was meltdown in all sectors - everything was going down the tubes. This is when cash truly shines. There was a lot of deflation. I scored a ticket to Japan from LAX roundtrip in Fall 2009 for $450 and stayed in Shinjuku in a really nice hotel - heart of Tokyo for $60/night because nobody had any money to do anything.deltaneutral83 wrote: ↑Thu Jun 08, 2023 9:18 am The answer to the OP is to recall Oct 2007-March 2009. Would you be ok watching (your current level of assets) stocks decline 50% over 18 months
Re: Value of Emergency Fund with high Taxable account?
I'd say it depends on the emergency. Totaled car? Yes. Dead dishwasher? Yes. Getting fired because you messed up? Yes.texas lawdog wrote: ↑Thu Jun 08, 2023 2:34 pm Didn't read all responses, but why not park your investments with a company that gives you a portfolio loan.
M1 automatically gives you approval for a portfolio line of credit that is about 40% of your investments.
You can use the money as you wish and is available immediately.
That is what I use for my emergency fund, if I ever needed.
But in case of a sudden and deep market crash / economic depression, like in 2007-2008, those sources of cash can dry up faster than you can turn around. First, you lose your job, like a million other people. Then your portfolio takes a dive, so your LOC is much smaller than it used to be. Then, the custodian cuts the benefit, like banks did HELOCs in 2008-2011, and you're back to having to sell depressed stocks.
Re: Value of Emergency Fund with high Taxable account?
You wouldn't need to sell stocks when they are down. If you need to sell stocks, you could sell stocks in your taxable account, and move an equal amount from bonds to stocks in your IRA/401(k). You would keep your stock market exposure, and thus get the same dollar benefit from any recovery.