Question for the Money Doctors
Question submitted on Mar 24, 2012.
QuestionI''m 54, employed fulltime,same firm for the last 14 years and the firm appears stable. My salary is $ 125,000, with monthly expenses at $ 6,200. At my age recent recommendations are to have at least 12 months living expenses in cash. This site had other inputs on a savings calculator which rasied my emergency fund needs to $ 79,000. I feel good with $ 65,000 saved, and will need about 4 years to achieve the target. All funds are in a credit union paying 1%. I want to take the cash over 3 months and invest elsewhere for a higher return. My annual 401k contributions and company match total $ 22,700 though the balance is only $ 315,000. Should I take any additional risk with the emergency fund? Thank you.
Given your age, income, and current savings, including retirement funds, you are on a good path to a financially healthy retirement as well as having a source of emergency savings. While your two pools of liquidity have different objectives, I would consider them as one in looking at your total asset allocation.
Certainly the emergency fund could be invested to attempt to achieve better returns than cash/money market given that we are being told interest rates will continue to be low until late 2014. How much risk you take with these funds will be determined by your risk profile. You should take a risk profile questionnaire to determine your risk tolerance and include both the emergency fund and the 401k as part of the process. Once you've done that, you can consider your emergency fund to be your "set aside reserves" for the more conservative assets, albeit perhaps with more risk than with cash. Your 401k funds can be considered your "longer term assets."
Also, keep in mind that with longer term assets, such as the 401k funds, your time horizon should be your whole life. Your time horizon is not just the time from the present until retirement because when you retire, your funds are withdrawn periodically and used for multiple purposes. The amount will be determined by whatever annual income you need, so while your asset allocation may change at that time, it would be unlikely you would "set aside" the entire portfolio in cash.
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