Sometimes when we plan ahead, it can be easy to overlook the basics. It reminds us of the opening scene in the movie “Christmas Vacation”: the family has made a frigid hike into the back country – part of a carefully planned day-long trek to find the ultimate Christmas tree – only to realize too late that Dad (played by Chevy Chase) has forgotten to bring the saw! 

That idea came to mind as we read this recent article from NextAvenue, written by financial writer and coach C.D. Moriarty. She makes a compelling case that, as we plan ahead for just about every possible financial contingency in retirement, let’s not overlook the most basic and most likely contingency of all: from time to time, we’re going to need to get our hands on ready cash. Financial surprises, both bad and good, will happen, and when they do we don’t want to be left scrambling – or, worse, borrowing. 

We think this is a good (if basic) reminder to remember the fundamentals. Let’s look into Moriarty’s article to see what she recommends. Then we’ll ask Rajiv to weigh in. 

Sometimes There’s No Substitute for “a Stash of Cash” 

In her article, Moriarty calls them safety accounts: “essential cushions” against the unexpected for both retirees and non-retirees alike. “Whether married, single or partnered, we all need a stash of cash to carry us through financial surprises — a car accident, medical emergency, home repair or condominium assessments — even if we have a steady retirement income,” she writes.  

Unexpected events and natural disasters can happen at any stage of life, so if you don’t have a safety account yet, there’s no time like the present to get one started.  

Part of a Financial Strategy Involves Funds Readily Available 

While anyone can benefit from having a safety account, Moriarity suggests that retirees in particular should pay attention to where their emergency cash can come from when that sudden need arises.  

“Retirement is not a time to coast on your finances, but to continue to execute a solid investment strategy,” she writes. “Part of that strategy is to have cash available — in a local bank, with easy access — to handle life’s ups and downs.” 

Readily available cash is the key phrase here, she says, because the value of money does not change – regardless of whether you put it in a savings account, money market, or certificate of deposit. “With FDIC insurance, you can put cash away and forget about it, confident that it will always be there,” Moriarty writes. “Since your safety account is an emergency cushion, you should keep it separate from saving for your next car, big trip or celebration.” 

There is No “Magic Number” That’s Fits Everyone 

The logical next question is, of course: how much should you set aside? But the answer really does depend on a variety of factors.  

“Your target should be based on your spending history and responsibilities,” Moriarty explains. “A good place to start is three times your monthly living expenses. If you own a home with a mortgage, you may want a fund closer to six months’ expenses.” 

Beware of Relying on More Debt to Meet Emergency Needs 

The goal, she says, is to avoid creating more debt. Credit cards, personal loans, or tapping your home’s equit. all should be a last resort for retirees, since these often come with costly interest payments. It does no good to solve one problem only to create a more severe one. 

“Some people rely on home equity lines of credit (HELOCs) as a safety account, but they should be considered a backup at best because you must repay cash you withdraw from a HELOC, with interest,” Moriarty explains. “Any money you owe, even if it is secured by your home equity or other assets, is a debt. Paying back over time will cost you interest and saddle you with the emotional weight of debt.” 

The same logic applies to borrowing against your investment portfolio. “Locking yourself into more debt when you are not creating any income will be stressful, and repaying these loans when you are retired can be difficult, if not impossible,” she writes.  

Additionally, if the value of your stocks, bonds, and assets decline, the brokerage could sell some of those assets into a falling market to cover the margin of risk.  

Cash Holdings Are Available and Predictable 

The real value of cash is predictability, Moriarty says, as well as a level of flexibility. “Sure, you can raise cash by selling other assets — say, your home, car or jewelry — but doing so takes time and may require you to sell at a steep discount,” she writes. “Plus, if you sell investment assets like stock and bonds, you could be subject to capital gain taxes.” 

Bottom line: cash holds the same price and value no matter when you need it. Investments do not, and that’s why cash is ideal for a safety account. “Having a cash cushion to fall back on in a crisis can buy you time to think clearly about your finances and avoid reacting quickly and foolishly out of fear,” Moriarty adds.  

Tapping a Retirement Account Requires Meticulous Planning 

Pulling money from investment accounts like a 403(b), 401(k), or IRA can work in certain circumstances, Moriarty says, but such withdrawals require a good plan. “Without one, you risk financial havoc,” she writes.  

For example, Moriarty tells us about retiree Marcia, who was building her dream home and ran over budget. “She withdrew $10,000 from her traditional IRA to make the final payment to the contractor, which included the upgrade of the build-ins for the closet she wanted. However, though she was retired, she was only age 59 — just shy of the minimum age to withdraw money from an IRA without a penalty,” Moriarty recounts.  

Not only did Marcia have to pay a 10 percent penalty on the withdrawal, but also income tax on the $10,000 withdrawal – a costly lesson.  

Keeping a Consistent Source of Cash Through Decades of Retirement 

Retirement is a season that lasts many years (“decades, if you are lucky,” says Moriarty), so having a predictable and consistent cushion of cash can smooth out the bumps as you go. “You have worked hard and saved conscientiously to have a solid retirement,” Moriarty writes. “Here are tips on how to continue your good financial behavior for the long haul.”  

(We’ve called these tips Setting it Up, Keeping it Up, and Making it Available.) 

Setting it Up: Calculate your basic monthly spending. Multiply by three. (Or six.) Then find cash to set aside at least three times your monthly spending. 

Keeping it Up: For good measure, plan to automatically deposit a small amount into the account each month. That way, if you need to use the cash cushion, there will be a process for replacing it already in place. Keep replenishing your cash reserve. 

Making it Available: Establish a separate local bank account to keep your liquid, FDIC insured cash easily accessible.  

The Most Important Place to Start: A Financial Dashboard 

When we asked Rajiv to comment on this article, he quickly agreed that every retiree’s situation is unique. Still, he told us, there are certain planning tools everyone needs.  

“There’s no one-size-fits-all answer to planning for a secure financial future,” Rajiv Nagaich said recently. “Everybody’s situation is different. But I would start with a bigger question: do you have a financial roadmap to guide you?” Rajiv calls this roadmap a financial dashboard.  

“A financial dashboard gives you the ability to make smart decisions no matter what happens,” he continues. “That includes unexpected hiccups that are an inevitable part of retirement. You’ll face a sudden tax liability. Your spouse will fall ill. Your adult child will need your financial support. You’ll have to retire years before you had planned to. The list of speedbumps is endless.” 

With a Financial Dashboard, You Won’t Make Decisions in a Vacuum 

With a financial dashboard, however, you’ll have the tools to evaluate the impact of your situation and allocate your resources to meet the need. “The sooner you meet with a qualified planner and create a [financial] dashboard, the better-equipped you’ll be for whatever life throws your way,” Rajiv emphasizes.  

“But you need the right professional planner to help you. I urge you – give us a call and let us put you in contact with the right adviser. Then,” he adds, “you can face your financial future with true confidence and peace of mind.” 

You can deal with the inevitable twists and turns of retirement by starting at the planning level. That way you can truly face the future with a sense of security. Let us show you how.  

Rajiv Nagaich – Your Retirement Planning Coach and Guide 

The long-awaited book by Rajiv Nagaich, called Your Retirement: Dream or Disaster, has been released and is now available to the public. Retirement: Dream or Disaster joins Rajiv’s ground-breaking DVD series and workbook, Master Your Future, as a powerful planning tool in your retirement toolbox. As a friend of AgingOptions, we know you’ll want to get your copy and spread the word.  

You’ve heard Rajiv say it repeatedly: 70 percent of retirement plans will fail. If you know someone whose retirement turned into a nightmare when they were forced into a nursing home, went broke paying for care, or became a burden to their families – and you want to make sure it doesn’t happen to you – then this book is must-read. 

Through stories, examples, and personal insights, Rajiv takes us along on his journey of expanding awareness about a problem that few are willing to talk about, yet it’s one that results in millions of Americans sleepwalking their way into their worst nightmares about aging. Rajiv lays bare the shortcomings of traditional retirement planning advice, exposes the biases many professionals have about what is best for older adults, and much more. 

Rajiv then offers a solution: LifePlanning, his groundbreaking approach to retirement planning. Rajiv explains the essential planning steps and, most importantly, how to develop the framework for these elements to work in concert toward your most deeply held retirement goals.  

Your retirement can be the exciting and fulfilling life you’ve always wanted it to be. Start by reading and sharing Rajiv’s important message. And remember, Age On, everyone! 

(originally reported at www.nextavenue.org)