There are all kinds of schemes to have some money on hand just in case in retirement. They range from 5 years of cash on hand to “just use credit cards and leave the emergency money invested. I think in retirement the “just use credit cards” ploy is stupid. When you have a W2 it’s might be an OK plan. Enjoining leverage at 19% is the last thing I would want to do in an emergency, penny wise pound foolish. You incur the full market risk of your portfolio and add a 19% loan on top. But then a big wad of cash is a slow drag on your net worth because of inflation. $1000 @ -2% is worth $800 in 10 years. So whats a mother to do? How about employ the efficient frontier? The tangent portfolio on efficient frontier is the portfolio that provided the most return for the least risk.
This is the efficient frontier of total US stocks v short term treasury. It has an expected return of 7.11% over a 40 year period with only a 3.97% risk. Why would you choose this for your safe emergency money? Most FIRE types are way over risked. They’re all running 80/20 portfolios. In an 80/20 portfolio if stocks drop in half that 80% goes to 40% and you go from rich to poor as you are down to 60% of what you were. In a 20/80 portfolio if the stock market drops 50% you go down 10% and therefore are at 90% of your previous glory. Numerically say you have $500K in a rainy day fund $400K in short term treasury and $100K in total stocks. If the market drops in half like in 2008, you have $400K in treasuries and $50K in stocks, barely a dent. The value of your emergency is effectively maintained.
Let’s say you don’t use your emergency money for 10 years.
Your emergency money grows to close to 1M on the average. Yea but what about inflation you say.
Even with lousy 10% SOR you’re still money ahead inflation adjusted. Just from inflation you would expect your $500K to be worth $400K if you were in cash. This analysis assumes re-balancing to keep the fund at 20/80. If you recall the 1973 recession it looked something like this:
You’ve all seen this picture, it’s from FIREcalc. This is the SOR if you retired in 1973 (red), 1974 (blue) or 1975 (green). In a 73 retirement you were out of money in 20 years. In a 75 retirement you were worth double. 2 years mattered. If you had the emergency fund you could easily live off the emergency fund for 2 (or 5) years while the market recovered effectively indexing your retirement from a 1973 loser to a 1975 winner. Can’t do that with a credit card. It turns out in my analysis you would only need to use this money once to save your portfolio. The graph also informs you a bad SOR still lasted 20 years, one year of indexing to a 74 retirement lasted all 30 but lost some and a 2 year indexing lasted all 30 and doubled, so the risk is early and takes a while to manifest but the manifestation is relentless. 10 years into your retirement you can probably begin small withdrawals from your “emergency money” to supplement your income if you don’t need it to save your bacon, and still keep a nice pot around “just in case”.
I was alive and kicking in 73 and my first year of investing was 75. I remember it. Retired people were freaked out. People talk a big game about their risk tolerance. I’ve lived through and remember 1960, 65, 73, 80, 87, 93, 2000 and so on and so on. One thing is for sure if you whip it out someone is going to cut it off. A little cash in an emergency fund tangent portfolio is just the ticket against the castration of too much bravado.