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September 09, 2010 at 08:00 PM
Laura Scharr-Bykowsky, CFP, MBA; Ascend Financial Planning LLC; Columbia, S.C.
Normally I recommend that my clients have six to nine months emergency reserves. But as my clients approach retirement I like them to build three to five years net cash flow reserves.
These reserves should cover their “gap” of income minus living expenses in the first few years of retirement. This should also include money allotted for large purchases such as vehicles or trips.
Matt Buckwalter, CFP; MJB Financial Planning; Lincoln, Neb.
Here are my top five ways to cover unexpected expenses, starting with least preferred:
#5 – Home Equity. Although not preferred, it may be time to downsize. Downsizing can reduce expenses in the long-term and may resupply a cash reserve. Downsizing might mean renting. This may be preferred to a 10 percent penalty on a 401(k) withdrawal.
#4 – Tap life insurance cash value. Either cash it in (if not needed) or take a loan.
#3 – IRA (traditional or Roth). Withdrawals from IRAs to cover medical expenses that exceed 7.5 percent of adjusted gross income can be made penalty-free. If unemployed, the 7.5% limit doesn’t apply when used to pay insurance premiums.
#2 – Taxable investments. This one assumes the investments aren’t cash but available. Sometimes you need to bite the bullet if you weren’t prepared for the unexpected. It may be painful as we know when markets are down but alternatives may not exist.
#1 – Roth IRA contributions. This is most preferred and if structured right can provide a good way to have short-term reserves available for emergencies and keep the income from showing up on a tax return.
Constance (Connie) A. Stone, CFP, ATP; Stepping Stone Financial Inc.; Chagrin Falls, Ohio
