Emergency fund

Google / Eng
sergey

Google Eng

BIO
Top Contributor or GTFO
sergeymore
Aug 30, 2018 23 Comments

So, I know that the overall recomendation is to keep an emergency fund with enough money to cover your expenses for at least 3/6 months.

I did this for a while but, considering my situation, I evaluated that the risk of me needing this emergency fund is very low and would not be worth not having this money invested.
So, I'm not keeping an emergency fund anymore and I'm investing as much as I can save.

In particular, I'm saving 55k on my 401k (18.5k pre-tax + 9.25k match + 27.75k after-tax), $5.5k after-tax on Roth IRA and 30k on two 529 accounts for my kids.

The reasoning is that in the case of an emergency I can first withdrawn the principal from my after-tax 401k tax and penalty free and if this is not enough, raid other accounts paying the corresponding penalty/tax.

My risk mitigation factors are:
- Google is doing quite fine: low risk of layoffs
- I'm doing quite fine at Google: low risk of being fired
- I have a very good health coverage, with considerable small out-of-pocket limits: low risk of a healthcare bankrupcy.
- The market had a great bull run over the last years. Even with a strong correction a good part of my portfolio would still be net-positve: low risk of principal loss.
- I don't have any debts. In case of an emergency I can scale-down my expenses considerably.

Please, critique my strategy.

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TOP 23 Comments
  • Salesforce 2438ez
    The main critique would be that you are essentially saying I am unlikely to encounter an emergency. But that’s why they call it an emergency, it’s something completely unplanned and probably involves a sharp market correction and your job loss and medical problems at the same time as losing a family member.

    Otherwise I think what you are saying is more or less sound. Many people consider their Roth IRA as a potential emergency fund, for the reason you described. But if it’s fully invested in the market, there is certainly added risk to this approach. Are you sure you could make a withdrawal from your after tax 401k penalty free? I thought you had to wait five years after a conversion to Roth IRA before you could withdraw.

    I guess it ultimately comes down to how you’d feel if the market was down 50%, and you needed to pull out 30k and pay tax on it. Something that would be closer to 100k today and you have to pull it out at the worst moment. Would you say “Oh well, I never thought this would happen, and I still feel I made the right decision because I thought this was impossible, so I’m okay with realizing a large loss”? If so, seems like a reasonable plan to me.

    For me the peace of mind and convenience of a cash buffer outweighs the benefits of being invested. I’m 97% invested, but the 3% cash helps me sleep at night. It also makes other transactions easier (making other investments, or purchasing a car, or moving funds around and even opening savings accounts to acquire sign up bonuses.) But you may not need the same help to sleep or feel comfortable with a cash buffer, and that’s your call I suppose.

    Just the friendly critique you asked for! 🙂
    Aug 30, 2018 1
    • Google / Eng
      sergey

      Google Eng

      BIO
      Top Contributor or GTFO
      sergeymore
      OP
      Thanks.

      Yes, I'm sure you can roll Roth 401k to Roth IRA at any moment and withdraw the principal tax and penalty free.

      I think that the main risk factor to justify keeping an emergency fund is losing your job and not being able to quickly finding a new one. I believe that the risk of this happening to me is negligible on the short term (6 to 12 months at least).

      I keep constantly evaluating this risk and if it changes I can start an emergency fund before I actually need the money.
      Aug 30, 2018
  • Facebook LNnM77
    You have one fact wrong. You cant withdraw roth without penalties "just the principal" as you put it. Once your account grows your tax/penalty on withdrawal is prorated.
    Aug 30, 2018 7
    • Google / Eng
      sergey

      Google Eng

      BIO
      Top Contributor or GTFO
      sergeymore
      OP
      Aug 30, 2018
    • Google / Eng
      sergey

      Google Eng

      BIO
      Top Contributor or GTFO
      sergeymore
      OP
      TL; DR: You can roll from Roth 401k to Roth IRA at any moment. Withdraws from Roth IRA are not prorated.
      Aug 30, 2018
    • Facebook LNnM77
      Ah didnt know there was a differwnce btw roth 401k and ira
      Aug 30, 2018
    • LinkedIn / Eng -👁👁-
      @sergey is right. The 5 year rule only applies to the earnings, not the principal.
      Aug 30, 2018
    • Salesforce 2438ez
      What about conversions though? There are two five year rules for Roth IRA. One relates to direct contributions and one relates to conversions. The other five year rule says you have to wait five years after each conversion before you can withdraw that conversion without penalty. So I was wondering how an after tax 401k conversion to Roth 401k and then rolled to a Roth IRA would work. And for that matter, would it be different if you converted after tax 401k directly to Roth IRA with an in service withdrawal? Are these not tracked as conversions for the purposes of the five year rule for conversions?
      Aug 30, 2018
  • My emergency fund is in Bitcoins
    Aug 30, 2018 1
    • MuleSoft kapok
      So smart!
      Aug 30, 2018
  • Intel !GPTW
    I advocate for a 3-4 month e-fund mattered in CD. Just to match inflation. You can obviously afford it
    Aug 30, 2018 0
  • Amazon / Other
    Sisko

    Amazon Other

    BIO
    I am in HR
    Siskomore
    I think it’s a good strategy... the 3-6 month thing is just a lazy guideline. Some people need more, some people need less
    Aug 30, 2018 0
  • Sonder / Mgmt Axe77
    Why not just invest an emergency fund in 80%+ stocks? Save an amount 30% higher than your target in case you lose your job right as the market tanks. Then you get the benefit of an emergency fund and the benefit of investing over the long run.
    Aug 30, 2018 0
  • Uber / Eng
    meowimacat

    Uber Eng

    BIO
    Im a cat 🐈! Meowww...
    meowimacatmore
    I have 4+ months of rent in a high yield savings account. Just a peace of mind thing.
    Aug 30, 2018 5
    • Google / Eng
      sergey

      Google Eng

      BIO
      Top Contributor or GTFO
      sergeymore
      OP
      Do you maximize your after-tax 401k? How is this better than putting the money there and withdrawing the principal tax-free in case you need it?
      Aug 30, 2018
    • Oracle / Other nogo
      Are you sure mega backdoor rollover to Roth IRA is not considered as conversion? Can you withdraw the mega backdoor principal amount anytime?
      Aug 30, 2018
    • Google / Eng
      sergey

      Google Eng

      BIO
      Top Contributor or GTFO
      sergeymore
      OP
      Yes, I checked this with Vanguard. I can roll Roth 410k to Roth IRA at any time and then withdraw the principal from Roth IRA tax and penalty free.
      Aug 30, 2018
    • Oracle / Other nogo
      You mean Roth 401k which is after tax?
      Aug 30, 2018
    • Google / Eng
      sergey

      Google Eng

      BIO
      Top Contributor or GTFO
      sergeymore
      OP
      Yes.
      Aug 30, 2018
  • Adobe adobe_17
    You got the right idea, invest your emergency fund, maybe keep 1 months in cash if you want to feel better. Also, if you have a home open up a HELOC which you can then use as a substitute for an emergency fund - presuming you are an employable person given your current low risk situation.
    Aug 30, 2018 1
    • Broadcom Ltd. rFkd21
      Relying on a HELOC for an emergency is a profoundly bad idea. Those of us who lived through ‘08 remember lines of credit being closed at a moments notice when the economy went south.
      Emergency funds need to be easily liquified assets.
      Aug 30, 2018