Squirrel Away Extra Cash Now So You Can Live Easy Later

One of the most frequently ignored parts of retirement planning is emergency funding – the unexpected things: a new roof, major car repairs, a major appliance.

In fact, 47% of households can’t cover a $400 emergency expense without using credit.

And as we all know, credit can be expensive, especially if it has to go on a Visa or MasterCard. Someone forgot to tell the credit card companies we are in a near-zero interest rate environment.

[ad#Google Adsense 336×280-IA]The rule of thumb has always been six months of living expenses to cover the unexpected.

But that rule falls short in many ways.

If you assume two Social Security Administration checks a month of about $1,300, that’s the average, and if you’re like most retired folks and you either have a small pension, have some income from your investments or work part time, and you’re staying under the taxable threshold for your Social Security benefits, you’re in the $35,000 to $50,000 income range.

That means you should have $17,500 to $25,000 in cash in a contingency fund. And it looks like a lot of money until you take a look at the list of potential cash emergencies on your screen now.

If, in just one year, your heating and air conditioning go out and you need a new roof, virtually all your cash is gone.

Then what?

And we haven’t touched on the big one: unexpected healthcare costs.

During the 20 to 30 years we can expect in retirement, the roof, the car, the heating and air conditioning, the big-ticket items – appliances, too – could very well need to be replaced more than once.

The point is, just having six months of cash on hand isn’t enough. You need to have an ongoing plan for recurring emergencies, not just one or two big-ticket items once.

Depending on how old your roof is when you retire – I know it sounds nuts – you may have to replace it twice after you retire. That’s a big ticket!

To keep your emergency fund liquid, allocate an additional monthly amount for your cash fund that is based on your estimated annual costs of replacement.

If you get lucky, and things go better than you planned, you’ll have some extra cash on hand for some fun.

I personally never bank on luck, so plan for the unavoidable major expenses we all will have – and very likely more than once. It will make your golden years a lot nicer.

Good investing,

Steve

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Source: Wealthy Retirement