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The reasoning is that in the case of an emergency I can first withdrawn the principal from my after-tax 401k tax and penalty free and if this is not enough, raid other accounts paying the corresponding penalty/tax.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