| Harold Wilson, former British Prime Minister joked, | | | | long time horizon. That works out to $5,833 per |
| "I am an optimist, but I'm an optimist who carries | | | | month, before compounding. |
| a raincoat." | | | | In normal times, you would withdraw $4,000 a |
| You probably already have some cash stored | | | | month from your portfolio, leaving the remaining |
| away for the inevitable rainy day. Indeed, you | | | | $1,833 per month in earnings in the portfolio. The |
| should have savings for those one-time, | | | | reinvested dollars create the growth you need to |
| non-recurring expenses that come up-a water | | | | keep up with inflation. |
| heater replacement, a roof repair, the auto | | | | Now imagine that the economy and the stock |
| insurance deductible-but this savings should actually | | | | market take a tumble. Your investment returns, |
| be separate from your emergency funds. | | | | for some period of time, drop to $2,000 per |
| It is critical, especially when preparing for | | | | month. What do you do? You do not sell off the |
| retirement, to have an additional pot of funds for | | | | assets at a loss. This is called eating your principal |
| the financial storms that could potentially wreak | | | | and it results in a very bad situation for retirees |
| havoc on your lifestyle. | | | | called reverse compounding. |
| Your emergency fund is a key component to the | | | | Instead, you pull the $2,000 in earnings from your |
| strong foundation of your financial plan. Having this | | | | investment portfolio. You make up the difference, |
| money prevents you from otherwise racking up | | | | between the $4,000 per month you need and the |
| credit card debt, tapping into your retirement | | | | $2,000 a month the portfolio is currently |
| accounts, or selling off assets to pay your bills. | | | | producing, using your emergency funds. That is |
| You should have twelve months of living | | | | what you have set them aside for. Being savvy |
| expenses set aside in a safe, liquid savings | | | | and thoughtful about your money, you know that |
| account. Remember, the purpose of this money is | | | | this sort of variance will, at times, occur. |
| not to earn money but to be there for you in a | | | | After some period of time, the market begins to |
| true emergency. Don't take risk or give away | | | | improve somewhat and your portfolio returns |
| liquidity for a little bit of profit. A savings account | | | | increase to $3,000 per month. Now you are |
| is your best bet, just remember to stay under | | | | supplementing your portfolio returns with only |
| the FDIC insurance limits at each bank. | | | | $1,000 per month from your emergency funds. |
| It is important to calculate how much you will | | | | Eventually, because we do assume stock markets |
| need in your emergency fund using your actual | | | | are mean reverting - meaning that they cannot |
| monthly expenses, not your monthly income. | | | | exist indefinitely in a state of extreme- your |
| Different people earning the exact same salary | | | | portfolio returns come back in line with the |
| may have vastly different monthly obligations. | | | | expected rate of return for the portfolio. At that |
| For example, if you have no debt, no dependents, | | | | time, you are no longer supplementing your |
| and live pretty frugally, you can probably allocate | | | | portfolio returns with your emergency funds. |
| less toward this "bucket" and invest more of your | | | | The nature of mean reversion is that the |
| money. On the other hand, if you have three | | | | pendulum swings both ways. So, just as we had a |
| children to support, along with a sizeable mortgage | | | | period of underperformance, we expect there will |
| and credit card bills to cover, your emergency | | | | also be periods when the portfolio over-performs. |
| fund would be a bit more padded. | | | | What do you do during these periods of boom? |
| You can use the free, online financial planning tool, | | | | Do you spend the extra money on new cars and |
| My Financial Plan, available from Snider Advisors, | | | | fancy vacations? No. You use those periods of |
| to help you determine the right number. | | | | time to replace what you took from your |
| An emergency fund should only be used in the | | | | emergency funds so that when the next |
| event of paycheck disruption or variances in | | | | economic downturn occurs, you have sufficient |
| portfolio income. When you are employed, this | | | | reserves to smooth your portfolio income. |
| means that you should not draw your emergency | | | | This system of managing portfolio variability in |
| funds unless you have suffered a job loss, an | | | | retirement is very easy and very effective. |
| illness or disability that prevents you from | | | | Likewise, you can more easily weather a |
| working, the death of a spouse, leave of absence | | | | temporary disruption in your salary during your |
| to care for an aging or sick family member, or | | | | working years with emergency funds as a buffer. |
| any other circumstance that gravely affects your | | | | Planning, in almost any endeavor, is the key to |
| income. | | | | success. It's great that you have your raincoat |
| Once you retire and begin living off your | | | | and umbrella for the rainy day, but in the event |
| investments, the natural fluctuations in the | | | | of a flood, your emergency savings will be your |
| economy and financial markets will create | | | | ark. |
| variations in your retirement income. Your | | | | This is not financial, legal or tax advice. Our goal is |
| emergency fund will make those fluctuations | | | | your financial success, but all investments involve |
| manageable. Cash is your most effective tool for | | | | risk including the possible loss of principal and |
| smoothing out the effect of market volatility on | | | | results will vary. If you are interested in the |
| your retirement income. | | | | Snider Investment Method, please read the |
| Let's say you need $4,000 a month from your | | | | Owner's Manual for a complete discussion of risks |
| portfolio to cover your living expenses in | | | | and benefits. More information can be found on |
| retirement. You have a $1 million portfolio that | | | | our website or by calling 1-888-6SNIDER. Past |
| produces an average annual return of 7% over a | | | | performance is not indicative of future results. |