Tips for a Successful Retirement, Part 1: Emergency Savings

In a previous blog, we discussed how Retirement Calculators are misleading since they only offer a simplistic solution to a much more complex topic. Planning for retirement takes a disciplined long-term approach, and requires you to ask hard questions, such as “Am I willing to alter my savings habits in order to achieve success throughout retirement?”

By this, we don’t just mean increasing contributions to your 401k plan. While this is an obvious step in the right direction, you need to evaluate your emergency savings first. Without having enough cash savings readily available, you can compromise a lot that you’ve been working towards. We advise our clients to keep at least 3-6 months of living expenses sitting in cash in an after-tax account (i.e. Savings or Money Market), ready to be used if times ever get tough. You never know when you might find yourself with unexpected house repairs, medical emergencies, or even unemployment. The alternative to using this cash reserve is to prematurely tap into your retirement accounts, which can quickly derail your plan. Using retirement funds (401k, IRA, SEP, etc.) requires paying ordinary income tax on the distribution, a 10% penalty if you’re under age 59 ½, and possibly having to sell your investments at an inopportune time! This is the perfect storm for causing financial stress. To view an estimate of your retirement funds, use this estimator.

If you don’t yet have the 3-6-month cash reserve, it’s time to start budgeting accordingly. Cut out unnecessary expenses and think long term! If you have any questions about where you can scale back your expenses, please contact us to help you create a strategy. Once you have your cash reserve in place, it’s time to start thinking about that 401k! Stay tuned for Tips for a Successful Retirement, Part 2: Tax-Deferred Accounts.