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 an emergency of $1,000. What may be surprising to some is that it was a big problem for all income groups. According to the survey, they found the following:
— Three-quarters of households earning less than $50,000 per 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 per 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, 401k or 403b. That could trigger 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, Illinois, recommends clients save six to 12 months in expenses. That fund would be for true emergencies, not things like such as 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, said Michael Foguth, founder of Foguth Financial in Brighton, Michigan.
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 401k, IRA or Social Security taxes,” Foguth says. “If you are a retiree aged 70½ 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 per month that can go into an emergency fund.
“Saving can be difficult, especially when you are on a fixed income,” he said, “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.”