Do you sometimes wonder whether you have too much or enough in reserve?
Having too little in reserve may require a retiree to use debt to fund an unexpected expense. Having too much in reserve presents an opportunity cost on the funds that could be better utilized elsewhere.
So how much is enough? Is there a right amount?
You’ve probably heard the rule of thumb of 3 to 6 months worth of expenses for emergencies. That is a good starting spot. In addition to pure emergencies, you want to consider short-term goals that are coming up within the next 24 months. It might involve a roof replacement, vehicle purchase, or upcoming trip. You’ll want those funds out of the markets to ensure that hundred percent is available will at the time needed.
There is a final nuance when you enter the stage of retirement that is important. How do we replenish our reserves systematically during our retirement years while we use them up for purchases and emergencies, since we aren’t working any more to add to our savings?
What works ideally is to create a retirement plan that produces enough regular income to meet retirement expenses plus a little bit more. The little bit more should be put into savings as the replenishment of your reserves on an ongoing basis. I would suggest a minimum of $5,000 per year as the “extra”. This should be built into the plan of how you get your regular or predictable income.
Having the right amount in reserve and a way to consistently replenish it year by year will provide ongoing peace of mind in retirement.
What do you use as a rule of thumb for how much to keep in savings?