A while back, I had people coming unglued on me when I suggested retirees should have three to five years of savings in a money-market fund or CDs. Suze Orman said a “just-in-case” fund should not be tied to the market, so you won’t have to sell investments if things go sideways.
Orman, on her podcast, spoke about accessing money during retirement. “What if the market has crashed at the time that you want to do that? Because it’s not always that stocks go down and bonds go up or bonds go down and, therefore, stocks go up.”
She said it can take three to five years for the stock market to drop and return to its previous level after a significant downturn. “So if you really want to be on the safe side, it’s five years,” she said. “If you want to just play it so that you have at least three years, OK, you can do that as well.”
Apparently, I’m in good alignment with experts. What do you think?
MarketWatch Reader
Dear Reader,
If life has taught me anything, it’s that anything can happen. Anything. It’s pretty scary, if you care to think about it too much. If we were constantly living in a three-to-five-year emergency-fund frame of mind, for example, we’d probably never get out of bed. Of course, that does not mean we can’t plan for worst-case scenarios, and it would be nice to have a cushion with that much support.
Some readers might have built up three to five years of savings through sheer hard work, low-cost living and, perhaps, a spell of high earning. It’s nice when it happens (if it happens) but along comes a need to have a new car, a down payment on a home, or an elderly relative who needs long-term care and doesn’t have a house to sell, and the money seems to go as quickly as it arrives.
I listened to part of the podcast you referenced in your letter. Suze Orman was speaking about taking money from lower-performing investments in order to build up those cash reserves and/or a little from higher-performing investments, so you’re not going to get stuck having to withdraw large amounts of money from your investments in a down market.
There’s a slightly furtive element of robbing Peter to pay Paul if you are taking money investments to put aside for a rainy day.
There’s a slightly furtive element of robbing Peter to pay Paul if you are taking money from lower- and higher-performing investments to put aside for a rainy day — to have a three-to-five-year fund to see you through a market crash and an unexpected spike in your day-to-day expenses. You would lose out on the compounding before such a crash, assuming one actually happened.
In other words, these financial milestones are all great in theory, but most people live in the real world where it’s just not as easy as it might sound. A lot of black stars would have to align for the cataclysmic combination of events to force you to live off that three to five years’ worth of savings. And it would take some kind of market timing and/or reverse engineering to come out ahead.
Yes, it’s smart to have financial plans and have goals, but they are two separate things. Whether you’re planning to take 4% of your retirement savings when you stop working or 3%, or you have a one-year emergency fund or a five-year emergency fund, or whether you’re the kind of person who brings a packed lunch to work and a flask of coffee and tips less than 20% when you eat out. Everyone has their own rules.
These financial milestones are all great in theory, but most people live in the real world where it’s just not as easy as it might sound.
Here’s a prime example: A few years ago, MarketWatch retirement reporter Alessandra Malito wrote a story about how much money you should have saved by the time you’re 30. “Ideally, your account would look like a year’s worth of salary,” she wrote, according to Boston-based investment firm Fidelity Investments. By 35? Fidelity said you should have twice your salary saved. Twitter, as it was then, flipped out.
The drama went on for weeks: TV shows picked it up, in addition to other news outlets. What was lost on the Twittersphere was that these are ideals — good ones, sure — and that such goals are obviously out of reach for most Americans in their 30s. Just as a three-to-five-year emergency fund might be out of reach for millions of retirees at a time when many are flirting with the idea of a part-time job.
Updated financial milestones make good copy, but it’s important to treat them as you would a friendly neighbor who’s trying to get you to cut your hedge according to its measure rather than a frenemy who is trying to scare the pants off you or a military leader who says it’s this way or the highway. Accept the good intentions with gratitude and run your own race. If you could downsize to save for that emergency? Go for it.
You, like the rest of us, are doing the best we can.
You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on X, the platform formerly known as Twitter.
More columns from Quentin Fottrell:
I’m 5 years from retiring and moved my money into non-U.S. stocks. Was that a big mistake?
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