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  • Writer's pictureMark Fonville, CFP®

Where to Invest Emergency Funds in Retirement

Updated: Nov 29, 2023


Where to Invest Emergency Funds in Retirement

In retirement planning, it is essential to have an emergency fund to prepare for unexpected events such as sudden medical expenses or job loss.


However, simply saving money in a traditional savings account may not be the best option for maximizing your returns.


In this blog post, we will explore various investment options for emergency funds. You'll also learn their pros and cons to help you make an informed decision on where to invest and keep your emergency fund leading up to and through retirement.


What is an Emergency Fund?


An emergency fund is a pool of money set aside to cover unexpected expenses that may arise at any time.


These expenses could include things like job loss, medical emergencies, unexpected home repairs, or car repairs. The idea behind an emergency fund is to have a buffer that can cover these unforeseen expenses without disrupting your financial plan or leaving you in debt.


When it comes to emergency funds, there is no one-size-fits-all approach.


The amount you should save for your emergency fund will depend on your personal situation, such as your income, expenses, and lifestyle.


As a general rule, we recommend saving three to six months' worth of living expenses in your emergency savings during your working years. You may consider having three months of worth of expenses if you have a duel income household, but default to six months in a single income household.


Having emergency savings is especially important when planning for retirement. During retirement, your income will likely decrease, and you may have limited options for generating additional income if an unexpected expense arises. Therefore, having an emergency fund can provide a safety net and help you avoid tapping into your retirement savings prematurely.


When you retire, we typically recommend that you maintain 1-2 years of living expenses not covered by other guaranteed sources, such as social security or a pension.


Overall, an emergency fund is an essential part of any financial plan, providing a sense of security and financial stability during times of uncertainty. It's important to understand the purpose and benefits of an emergency fund when making decisions about where to invest your money for retirement.


Keep reading to learn about the characteristics of a good emergency fund investment and explore different investment options to consider.


Where to Invest Emergency Funds


When investing your emergency fund, it's important to look for investments that meet certain criteria. A good emergency fund investment should be low-risk, easily accessible, and offer a reasonable rate of return. Additionally, it's important to consider the liquidity of the investment, meaning how quickly you can access your funds without penalty.


Savings Account


Savings accounts offer FDIC insurance up to $250,000 per account and bank accounts are generally considered low-risk. However, the interest rates on savings accounts are typically low and may not keep up with inflation.


High Yield Savings Account


High-yield savings accounts are another option for investing your emergency fund. These online savings accounts offer higher interest rates than traditional savings accounts but may also have higher minimum balances and transaction limits.


Examples of High High Yield Savings Accounts:

Certificates of Deposit (CDs) and CD Ladders


Certificates of Deposit (CDs) and CD Ladders can also be a good option for emergency funds. CDs offer higher interest rates than savings accounts and money market accounts but require you to lock up your money for a set period of time, typically ranging from three months to five years.


CD Ladders involve investing in a series of CDs with varying maturity dates to help balance liquidity and higher interest rates.


Examples of CD Ladders:

Money Market Mutual Funds


Money market mutual funds are an alternative option to high yield savings account, but they may offer higher interest rates. Money market mutual funds do not offer FDIC insurance but are considered extremely low-risk.


However, some of these cash alternative options may require a higher minimum balance or limit the number of transactions allowed.


Examples of Money Market Funds:

Treasury Bills and Bonds


Building an emergency fund using treasury bills and bonds can be a good option for investors who are looking for low-risk investments that provide a reliable source of income. Treasury bills and bonds are backed by the full faith and credit of the U.S. government, making them one of the safest investments available.


To build an emergency fund using treasury bills and bonds, you may consider working with your financial advisor or purchasing them through a broker such as Fidelity or Schwab.


Treasury bills, also known as T-bills, are short-term securities that mature in one year or less. Treasury bonds, on the other hand, are long-term securities that have a maturity of 10 to 30 years.


One strategy for building an emergency fund using treasury bills and bonds is to create a laddered portfolio. This involves purchasing securities with varying maturity dates, so that a portion of your portfolio will mature each year. For example, you might purchase a one-year T-bill, a two-year T-bond, and a three-year T-note. This will provide you with a steady stream of income each year and ensure that your emergency fund is always accessible.


Short-Term Bond Funds and Short-Term Municipal Bond Funds


Finally, short-term bond funds and short-term municipal bond funds can provide a higher rate of return than traditional savings accounts or money market accounts, while still being relatively low-risk.


These investments invest in short-term debt securities and can provide a good balance between risk and reward. However, it's important to note that these investments are not FDIC-insured and may fluctuate in value.


Examples of Low Cost Short-Term Bond Funds:

Ultimately, the best investment for your emergency fund will depend on your individual needs and goals. Consider factors such as liquidity, risk tolerance, and return when choosing where to invest your emergency fund money or funds for retirement.


What are the Pros and Cons of Different Emergency Funds?


As you can imagine, when it comes to investing your emergency fund, there are several options to consider, each with its own set of pros and cons.


Here are some of the key advantages and disadvantages of each type of investment:


Savings Accounts


Pros: Savings accounts are generally considered low-risk and offer FDIC insurance up to $250,000 per account. They also offer easy access to your funds, typically with no penalties for withdrawals.


Cons: The interest rates on online savings account or accounts are typically lower than other types of investments, which means your money may not keep up with inflation. Some savings accounts may also have minimum balance requirements or limit the number of transactions allowed.


High-Yield Savings Accounts


Pros: High-yield savings accounts offer higher interest rates than traditional savings accounts, which can help your money grow faster. They also offer FDIC insurance and are considered low-risk.


Cons: Some high-yield savings accounts may require a higher minimum balance or limit the number of transactions allowed. The interest rates on high-yield savings accounts may also fluctuate, which means your returns may not be as predictable as other types of investments.


Certificates of Deposit (CDs) and CD Ladders


Pros: CDs offer higher interest rates than savings accounts and money market accounts, and your rate is fixed for the term of the CD. This can provide a predictable source of income for your emergency fund. CDs also offer FDIC insurance.


Cons: CDs require you to lock up your money for a set period of time, which means you may not be able to access your funds in an emergency without paying a penalty. Additionally, the interest rates on CDs may not keep up with inflation, which means your money may lose value over time.


Money Market Mutual Funds


Pros: Money market mutual funds are typically a higher yield alternative to high-yield savings accounts. They are extremely liquid and typically provide access to your money within one to three days.


Cons: Some money market mutual funds may require a higher minimum balance or limit the number of transactions allowed. The interest rates on some money market funds and accounts may also be lower than other types of investments. Money market mutual funds are not FDIC insured.


Treasury Bills and Bonds


Pros: Treasury bills and bonds are considered one of the safest investments available and are backed by the full faith and credit of the U.S. government. They offer a reliable source of income and can provide a predictable stream of cash flow. They also have relatively low risk and are considered a safe haven during times of economic uncertainty.


Cons: Treasury bills and bonds can fluctuate in value based on changes in interest rates, and they may not offer as high of a return as other types of investments. Additionally, they may not be as accessible as other types of investments, which means you may need to sell them before maturity to access your funds.


Short-Term Bond Funds and Short-Term Municipal Bond Funds


Pros: Bond funds offer diversification and professional management, which can help reduce risk. Short-term bond funds and short-term municipal bond funds can provide a higher rate of return than traditional savings accounts or money market accounts, while still being relatively low-risk.


Cons: Bond funds are not FDIC-insured, and the value of your investment can fluctuate based on changes in interest rates. Additionally, short-term bond funds and short-term municipal bond funds may not be as accessible as savings accounts or money market accounts.


Each type of investment for an emergency fund has its own set of advantages and disadvantages. When choosing where to invest your emergency funds, it's important to consider your individual needs and goals, as well as your risk tolerance and liquidity needs.


By weighing the pros and cons of each investment type, you can make an informed decision that is right for you.


Conclusion


In conclusion, an emergency fund is an essential part of any financial plan, especially in retirement planning.


It provides a sense of security and financial stability during times of uncertainty, such as unexpected medical expenses or job loss.

While traditional savings accounts are a popular option for emergency funds, they may not offer the best returns. Therefore, investors should look for investments that are low-risk, easily accessible, and offer a reasonable rate of return.


The investment options discussed in this blog post, including high yield savings accounts, CDs, money market funds, treasury bills and bonds, and short-term bond funds, all have their pros and cons.


It's important to consider the liquidity of the investment, meaning how quickly you can access your funds without penalty, and work with a financial advisor to determine the best investment strategy for your personal situation. By investing your emergency fund wisely, you can prepare for unexpected events while also maximizing your returns.


At Covenant Wealth Advisors, we help individuals who have over $1 million implement personalized investment portfolio that help you enjoy life without the stress of money.


 

Author: Mark Fonville, CFP®


Mark is a fiduciary, fee-only financial advisor at Covenant Wealth Advisors specializing in helping individuals aged 50 plus plan, invest, and enjoy retirement without the stress of money.


Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine.


 

Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.


Registration of an investment advisor does not imply a certain level of skill or training.


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