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My mother just informed me she is retiring next year. She asked what I thought she should do with her pension (factory worker at Honda). Her options are 1784/mo (and some other options for a beneficiary) for lifetime or 285K payout. Is there a clear winner in this situation? What else needs to be considered? What are the tax implications for each scenario?

She will be 65 and is in good health. Her mother is 86.

They have no debt and decent savings.

For a 65 yr old female, an annuity payment of $285K will generate $1550 or so on the free market. The annuity option generates about 15% more cash flow, seems like an obvious choice to me given that she is in good health.

While I think I agree with you, is this a fair way to compare? Isn't the $1550 interest only (no principal drawdown)?

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Need to keep in mind that with the annuity, you also lose to inflation over time.

That's a pretty decent lump sum if rolled over and invested into a balanced group of securities. I personally would take the lump sum, death ends or significantly reduces an annuity (death benefit).

I think I agree with this. If she were younger, say in her 40s, I'd take the annuity. Why no COLA?

pensions with COLA are rare. No one gets to take a pension in their 40s. Any advice on lump sum vs annuity without analysis should probably be discarded. There is a fairly efficient annuity market to use as a benchmark. Figure out what it costs to buy a similar annuity, compare it to the lump sum. If the lump sum is greater, go with that, less, go with annuity. If within 5% make a personal choice. Use health as a tiebreaker if you need one

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My mother just informed me she is retiring next year. She asked what I thought she should do with her pension (factory worker at Honda). Her options are 1784/mo (and some other options for a beneficiary) for lifetime or 285K payout. Is there a clear winner in this situation? What else needs to be considered? What are the tax implications for each scenario?

She will be 65 and is in good health. Her mother is 86.

They have no debt and decent savings.

For a 65 yr old female, an annuity payment of $285K will generate $1550 or so on the free market. The annuity option generates about 15% more cash flow, seems like an obvious choice to me given that she is in good health.

While I think I agree with you, is this a fair way to compare? Isn't the $1550 interest only (no principal drawdown)?

No, it is not interest only. Basically you can call an insurer up today, tell them you want to be paid $1784 per month until you die (ie you wish to buy an annuity), and ask them what it costs. They will give you a quote (will be on the order of $300K), and you can then compare that against the 'lump sum'. It has nothing to do with interest or principal drawdown

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My mother just informed me she is retiring next year. She asked what I thought she should do with her pension (factory worker at Honda). Her options are 1784/mo (and some other options for a beneficiary) for lifetime or 285K payout. Is there a clear winner in this situation? What else needs to be considered? What are the tax implications for each scenario?

She will be 65 and is in good health. Her mother is 86.

They have no debt and decent savings.

For a 65 yr old female, an annuity payment of $285K will generate $1550 or so on the free market. The annuity option generates about 15% more cash flow, seems like an obvious choice to me given that she is in good health.

While I think I agree with you, is this a fair way to compare? Isn't the $1550 interest only (no principal drawdown)?

No, it is not interest only. Basically you can call an insurer up today, tell them you want to be paid $1784 per month until you die (ie you wish to buy an annuity), and ask them what it costs. They will give you a quote (will be on the order of $300K), and you can then compare that against the 'lump sum'. It has nothing to do with interest or principal drawdown

Ok, but given this scenario, would she be taxed on the $285 lump sum?

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My mother just informed me she is retiring next year. She asked what I thought she should do with her pension (factory worker at Honda). Her options are 1784/mo (and some other options for a beneficiary) for lifetime or 285K payout. Is there a clear winner in this situation? What else needs to be considered? What are the tax implications for each scenario?

She will be 65 and is in good health. Her mother is 86.

They have no debt and decent savings.

For a 65 yr old female, an annuity payment of $285K will generate $1550 or so on the free market. The annuity option generates about 15% more cash flow, seems like an obvious choice to me given that she is in good health.

While I think I agree with you, is this a fair way to compare? Isn't the $1550 interest only (no principal drawdown)?

No, it is not interest only. Basically you can call an insurer up today, tell them you want to be paid $1784 per month until you die (ie you wish to buy an annuity), and ask them what it costs. They will give you a quote (will be on the order of $300K), and you can then compare that against the 'lump sum'. It has nothing to do with interest or principal drawdown

Ok, but given this scenario, would she be taxed on the $285 lump sum?

Not if you did a rollover into the annuity. It would be taxed just as if she took the monthly payout from the plan.

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Need to keep in mind that with the annuity, you also lose to inflation over time.

That's a pretty decent lump sum if rolled over and invested into a balanced group of securities. I personally would take the lump sum, death ends or significantly reduces an annuity (death benefit).

I think I agree with this. If she were younger, say in her 40s, I'd take the annuity. Why no COLA?

pensions with COLA are rare. No one gets to take a pension in their 40s. Any advice on lump sum vs annuity without analysis should probably be discarded. There is a fairly efficient annuity market to use as a benchmark. Figure out what it costs to buy a similar annuity, compare it to the lump sum. If the lump sum is greater, go with that, less, go with annuity. If within 5% make a personal choice. Use health as a tiebreaker if you need one

X

sorry, but that's just plain false. Still, my point is there's a breaking point where the annuity makes sense, all else being equal. Using your process makes sense.

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Wilked said: There is a fairly efficient annuity market to use as a benchmark. Figure out what it costs to buy a similar annuity, compare it to the lump sum. If the lump sum is greater, go with that, less, go with annuity. If within 5% make a personal choice. Use health as a tiebreaker if you need one

:goodposting:

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Need to keep in mind that with the annuity, you also lose to inflation over time.

That's a pretty decent lump sum if rolled over and invested into a balanced group of securities. I personally would take the lump sum, death ends or significantly reduces an annuity (death benefit).

I think I agree with this. If she were younger, say in her 40s, I'd take the annuity. Why no COLA?

pensions with COLA are rare. No one gets to take a pension in their 40s. Any advice on lump sum vs annuity without analysis should probably be discarded. There is a fairly efficient annuity market to use as a benchmark. Figure out what it costs to buy a similar annuity, compare it to the lump sum. If the lump sum is greater, go with that, less, go with annuity. If within 5% make a personal choice. Use health as a tiebreaker if you need one

X

sorry, but that's just plain false. Still, my point is there's a breaking point where the annuity makes sense, all else being equal. Using your process makes sense.

MILITARY

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I've been trying to figure out if there's a formula or more accurate method to figure out how to divide up my retirement contributions as follows:

Work for a Fortune 500 company X, I believe the company has a bright future and is currently attractively priced in the market.

Company match half up to 6%, and if you buy company stock you get it at a 10% discount.

Currently I am doing a 6% contribution to get max match, and also a 3% into company stock.

There has to be some threshold to where the guaranteed initial gain of 10% is not worth being over concentrated on one stock? I'm a believer in diversification, but locking in 10% off the bat on a company I would be investing in even if I didn't work there isn't worth just tossing out without thinking either. Is there some sort of efficient frontier or set of formula's to help guide this decision, or is it just a SWAG at how concentrated you feel like become as an individual?

Some methodology would be great in that as I am able to contribute more, which pile to I put it into as well.

After you buy the stock at a discount, how long must you hold onto it?

great question. If less than a year, it's a no brainer. If for whatever reason you couldn't sell it while you worked for the company, it's not worth it.

I'd take the guaranteed 10% and sell off a bunch at earliest opportunity.

Appreciate you and wilked weighing in, to add clarity, no holding time restrictions (can dump shares the day after bought). It seems like though you get an auto 10% gain more or less you'd have to weight this against the tax hit of selling immediately. Seems like it's a better idea to invest in either/or the 401k vs company shares and not sell them?

Is there some logic I'm missing between finding exact optimal distribution between choices? Or just pick your favorite flavor and go with it? I could easily be putting that 3% into 401k to get diversification, or have it going to company to get 10% bump.

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It's a little tough to follow you...

Do you buy the discounted stock within the 401K or outside? If inside, max it out, trade as soon as you can into a diversified low-fee index. If outside, I would still max it, sell immediately. A 'taxed gain' is still a gain.

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Somewhat on the current topic, my wife received notice today of a "Limited Time Pension Benefit Opportunity" that would allow her to take a lump sum now at age 47. For some background, my wife worked for a major air carrier back in the early to mid 90s, long enough to become vested. As I recall, she worked for them just over 6 years. To be honest, we have not added her projected pension from this in any of our planning as we didn't think 6-years of service would amount to much. The mailer we received states we will be receiving a package of information that will include the amount, soon. Playing with this calculator https://www.pensionbenefits.com/calculators/cal_main.jsp?sub_item=lumpsum_calI was rather surprised to see what the lump sum could possibly amount to (or more likely I screwed up the entries). This article https://www.fidelity.com/viewpoints/retirement/lump-sum-or-monthly-pension seemed to answer a lot of the questions I have initially. Between now and when the package is received, what should we be researching an thinking about? My knee jerk thought I shared with my wife is that the airline has been through one bankruptcy and, even though the pension is fully funded, I say we take the $ now as we never know what might happen. Our initial intent would be to just roll it into her current 401K or Roth (if this is possible). But, would it be possible to partition part into both of the kids educational IRAs? If not, I assume we could tax free borrow from the 401K or IRA for education if need be, correct?

I apologize in advance if this has been covered in this thread prior. I tried the search function and it lead me to the current conversation. Thanks in advance for any info!!

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Airline and previous BK, I would take lump sum unless it was < maybe 65% of true value.

You would want to roll it into 401K / IRA to avoid taxes. I don't see a good way of earmarking it for education, but I am no expert on it either so don't take it for gospel.

If it were me, take lump sum assuming it is a reasonable offer, roll into 401K, reallocate (new) dollars into Coverdell if you want later

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Airline and previous BK, I would take lump sum unless it was < maybe 65% of true value.

You would want to roll it into 401K / IRA to avoid taxes. I don't see a good way of earmarking it for education, but I am no expert on it either so don't take it for gospel.

If it were me, take lump sum assuming it is a reasonable offer, roll into 401K, reallocate (new) dollars into Coverdell if you want later

Thank you for both the quick and incredibly in depth reply. I appreciate it!!

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Somewhat on the current topic, my wife received notice today of a "Limited Time Pension Benefit Opportunity" that would allow her to take a lump sum now at age 47. For some background, my wife worked for a major air carrier back in the early to mid 90s, long enough to become vested. As I recall, she worked for them just over 6 years. To be honest, we have not added her projected pension from this in any of our planning as we didn't think 6-years of service would amount to much. The mailer we received states we will be receiving a package of information that will include the amount, soon. Playing with this calculator https://www.pensionbenefits.com/calculators/cal_main.jsp?sub_item=lumpsum_calI was rather surprised to see what the lump sum could possibly amount to (or more likely I screwed up the entries). This article https://www.fidelity.com/viewpoints/retirement/lump-sum-or-monthly-pension seemed to answer a lot of the questions I have initially. Between now and when the package is received, what should we be researching an thinking about? My knee jerk thought I shared with my wife is that the airline has been through one bankruptcy and, even though the pension is fully funded, I say we take the $ now as we never know what might happen. Our initial intent would be to just roll it into her current 401K or Roth (if this is possible). But, would it be possible to partition part into both of the kids educational IRAs? If not, I assume we could tax free borrow from the 401K or IRA for education if need be, correct?

I apologize in advance if this has been covered in this thread prior. I tried the search function and it lead me to the current conversation. Thanks in advance for any info!!

Post the numbers you're using to make the decision.

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Somewhat on the current topic, my wife received notice today of a "Limited Time Pension Benefit Opportunity" that would allow her to take a lump sum now at age 47. For some background, my wife worked for a major air carrier back in the early to mid 90s, long enough to become vested. As I recall, she worked for them just over 6 years. To be honest, we have not added her projected pension from this in any of our planning as we didn't think 6-years of service would amount to much. The mailer we received states we will be receiving a package of information that will include the amount, soon. Playing with this calculator https://www.pensionbenefits.com/calculators/cal_main.jsp?sub_item=lumpsum_calI was rather surprised to see what the lump sum could possibly amount to (or more likely I screwed up the entries). This article https://www.fidelity.com/viewpoints/retirement/lump-sum-or-monthly-pension seemed to answer a lot of the questions I have initially. Between now and when the package is received, what should we be researching an thinking about? My knee jerk thought I shared with my wife is that the airline has been through one bankruptcy and, even though the pension is fully funded, I say we take the $ now as we never know what might happen. Our initial intent would be to just roll it into her current 401K or Roth (if this is possible). But, would it be possible to partition part into both of the kids educational IRAs? If not, I assume we could tax free borrow from the 401K or IRA for education if need be, correct?

I apologize in advance if this has been covered in this thread prior. I tried the search function and it lead me to the current conversation. Thanks in advance for any info!!

Post the numbers you're using to make the decision.

Could I ask for help with the math instead? I fully admit to guessing at what I put in the calculator and would rather use a relevant figure than embarrass myself showing my guess work. Here are the particulars as best as I can recall. She was hired in March of 1990, was vested after 5-years and to the best of my recollection it was a full vesting and not subject to step vesting. She left the company around November of 2006 when her maternity leave time ran out. He final full year of income in 1995 was probably around $21,000 to $22,000 as getting past 5-years put her in a different pay scale for a good part of '95. The distrbution date of a lump sum payout appears to be around 1/1/2016. Is this enough info to calculate a potential ballpark estimate?

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Somewhat on the current topic, my wife received notice today of a "Limited Time Pension Benefit Opportunity" that would allow her to take a lump sum now at age 47. For some background, my wife worked for a major air carrier back in the early to mid 90s, long enough to become vested. As I recall, she worked for them just over 6 years. To be honest, we have not added her projected pension from this in any of our planning as we didn't think 6-years of service would amount to much. The mailer we received states we will be receiving a package of information that will include the amount, soon. Playing with this calculator https://www.pensionbenefits.com/calculators/cal_main.jsp?sub_item=lumpsum_calI was rather surprised to see what the lump sum could possibly amount to (or more likely I screwed up the entries). This article https://www.fidelity.com/viewpoints/retirement/lump-sum-or-monthly-pension seemed to answer a lot of the questions I have initially. Between now and when the package is received, what should we be researching an thinking about? My knee jerk thought I shared with my wife is that the airline has been through one bankruptcy and, even though the pension is fully funded, I say we take the $ now as we never know what might happen. Our initial intent would be to just roll it into her current 401K or Roth (if this is possible). But, would it be possible to partition part into both of the kids educational IRAs? If not, I assume we could tax free borrow from the 401K or IRA for education if need be, correct?

I apologize in advance if this has been covered in this thread prior. I tried the search function and it lead me to the current conversation. Thanks in advance for any info!!

Post the numbers you're using to make the decision.

Could I ask for help with the math instead? I fully admit to guessing at what I put in the calculator and would rather use a relevant figure than embarrass myself showing my guess work. Here are the particulars as best as I can recall. She was hired in March of 1990, was vested after 5-years and to the best of my recollection it was a full vesting and not subject to step vesting. She left the company around November of 2006 when her maternity leave time ran out. He final full year of income in 1995 was probably around $21,000 to $22,000 as getting past 5-years put her in a different pay scale for a good part of '95. The distrbution date of a lump sum payout appears to be around 1/1/2016. Is this enough info to calculate a potential ballpark estimate?

I am by no means an expert on pensions. I was going to have a look at the numbers and see if they made sense based on common sense and basic math.

I assume they will tell you the lump sum they're offering.

You have to choose between accepting the lump sum or some annual distribution (also known) which will continue until your wife's demise. The difference between your wife's age now and her expected age at death is the term of the annuity used for the calculation.

So with that info, you can figure out the discount rate they're offering and decide what to do.

Again, I've never done this before so I could be way off but if the discount rate comes out to:

-5% or lower, no brainer, take the lump sum but I HIGHLY doubt it will be even close to this;

-between 5-10%, lean to taking the lump sum;

-10-15% lean to payments;

-above 15% take the payments.

For your perspective, think about it like the reverse of a mortgage. If you take the lump sum, you have to beat the discount rate if you invest it. If you take the payments, they are paying you an implied interest rate that you calculated above. I assume most people will take the lump sum so they will err on the side of a higher discount rate but again, I don't have any experience in this area so I am making an educated guess.

The above doesn't take into account the credit rating of the pension.

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Thanks and man do I suck at this. Both the lump sum and projected pension monthly figure will be provided in the package we receive "soon". I Googled up the credit rating of the pension. The most recent info I can find is from June 12th of this year in a article that contains the following statement: Both companies and their subsidiaries were boosted from B+ to BB-. They’ve got to pass through BB and BB+ before they would reach BBB-, the bottom rung of investment grade.

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Thanks and man do I suck at this. Both the lump sum and projected pension monthly figure will be provided in the package we receive "soon". I Googled up the credit rating of the pension. The most recent info I can find is from June 12th of this year in a article that contains the following statement: Both companies and their subsidiaries were boosted from B+ to BB-. They’ve got to pass through BB and BB+ before they would reach BBB-, the bottom rung of investment grade.

There's no way to make an informed decision without the lump sum or monthly payments.

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Looking for some info about 529s.

Live in Texas with a newborn (2 months). We won't be old enough at the time he's college age to withdraw from our retirement accounts.

Me: state employee with vested pension, 403b and small amounts to roth IRA (403 and IRA are not maxed out).

Wife: oil and gas field, pension, 401k contributing to max company match. No IRA yet.

We are both about 28 years old. Any 529 advice? We have some gifts from grandparents and family members that would start off the 529.

Tia

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Looking for some info about 529s.

Live in Texas with a newborn (2 months). We won't be old enough at the time he's college age to withdraw from our retirement accounts.

Me: state employee with vested pension, 403b and small amounts to roth IRA (403 and IRA are not maxed out).

Wife: oil and gas field, pension, 401k contributing to max company match. No IRA yet.

We are both about 28 years old. Any 529 advice? We have some gifts from grandparents and family members that would start off the 529.

Tia

Generally speaking, get your retirement plans in order first, then kids college. Worst case scenario, you can always take loans out for college, can't do so for retirement.

Without knowing anything else, I would do the following:

1. Make sure you're taking full advantage of available matches (looks like you are)

2. Max Roth

3. At that point, weigh the risk/reward of funding the 529 vs the 401k

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Some states give tax breaks (ie free money) for 529

Unfortunately Texas is not one of them (no income tax and all)

http://www.savingforcollege.com/compare_529_plans/?plan_question_ids%5B%5D=437&page=compare_plan_questions

Based on that, def look into other states if you want to Perdue a 529 (Utah, NY, and Nevada are popular due to their low fees).

Beyond that, TF has good advice above

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  • 2 weeks later...

401k balance at prior company

Post tax (roth) - 35K

pre-tax (company contribution) - 5K

I just rolled both of these to a roth IRA and a traditional IRA, respectively.

Would it make more sense for me to pay the taxes on the pre-tax money and combine it with the roth? Is that even an option?

If I were to leave the traditional and roth separate, I'm trying to do some type of "three fund portfolio" investing I read about online, where you do a % allocation between only 3 funds - 1) total US stock market 2) international stock market 3) total bond market. would it make more sense to have the traditional IRA be the bond portion of the investments for tax purposes? I'm 28 and single if that effects anything

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  • 1 month later...

Not sure if this has been discussed or not, but everywhere I see any financial advice it mentions an emergency fund, then talks about an amount anywhere from a couple months to 6 or more months of living expenses.

In my current situation I have a good size emergency fund, but the money is just sitting in my bank account doing nothing. I have a stable job, so would it make sense for me to basically use just about all of that emergency fund and put it towards my mortgage?

I have just been wondering lately if that emergency fund is a very overrated thing to have, and is it costing me a lot of money in the long run? I mean, I KNOW it is definitely costing me money in the long run on the amount of interest I am paying on my mortgage, although I do understand how it could come in handy if some sort of emergency does come up.

Is the shark move to put it towards the house? Just wondering the philosophy on this. Situations are different, I get that. Depending on your line of work you might HAVE to keep an emergency fund because you go through stretches of down time. In my case, my income is a stable amount with annual raises, and I would rate my job security as high.

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Not sure if this has been discussed or not, but everywhere I see any financial advice it mentions an emergency fund, then talks about an amount anywhere from a couple months to 6 or more months of living expenses.

In my current situation I have a good size emergency fund, but the money is just sitting in my bank account doing nothing. I have a stable job, so would it make sense for me to basically use just about all of that emergency fund and put it towards my mortgage?

I have just been wondering lately if that emergency fund is a very overrated thing to have, and is it costing me a lot of money in the long run? I mean, I KNOW it is definitely costing me money in the long run on the amount of interest I am paying on my mortgage, although I do understand how it could come in handy if some sort of emergency does come up.

Is the shark move to put it towards the house? Just wondering the philosophy on this. Situations are different, I get that. Depending on your line of work you might HAVE to keep an emergency fund because you go through stretches of down time. In my case, my income is a stable amount with annual raises, and I would rate my job security as high.

No. Your emergency fund is for emergency. It needs to be liquid. What if you lose your job tomorrow? Or a huge expense comes up? Or you get sick and cant work any longer? Get hit by a car, or hit someone and get sued? I mean there are countless things that can happen. Keep your emergency fund, and everything else on top of that throw at your mortgage.

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Not sure if this has been discussed or not, but everywhere I see any financial advice it mentions an emergency fund, then talks about an amount anywhere from a couple months to 6 or more months of living expenses.

In my current situation I have a good size emergency fund, but the money is just sitting in my bank account doing nothing. I have a stable job, so would it make sense for me to basically use just about all of that emergency fund and put it towards my mortgage?

I have just been wondering lately if that emergency fund is a very overrated thing to have, and is it costing me a lot of money in the long run? I mean, I KNOW it is definitely costing me money in the long run on the amount of interest I am paying on my mortgage, although I do understand how it could come in handy if some sort of emergency does come up.

Is the shark move to put it towards the house? Just wondering the philosophy on this. Situations are different, I get that. Depending on your line of work you might HAVE to keep an emergency fund because you go through stretches of down time. In my case, my income is a stable amount with annual raises, and I would rate my job security as high.

I use(d) mine to pay down my rentals. And it is 100% accessible via HELOC. I cant imagine keeping a substantial amount of money in a savings/checking account.

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The shark move is to grow brass balls and invest your "emergency fund" in a dividend paying stock that rarely wavers in value (I am looking at you AT&T) and reap some gains from your idle cash. If you have some equity in your house you can open a line of credit to draw from in a true emergency but otherwise just sits there open. Minimal cost HELOC let's you invest that emergency money with less risk of disaster. Note: I am not a professional and you'd have to be crazy to move thousands of dollars on the word of a random FBGS poster.

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Not sure if this has been discussed or not, but everywhere I see any financial advice it mentions an emergency fund, then talks about an amount anywhere from a couple months to 6 or more months of living expenses.

In my current situation I have a good size emergency fund, but the money is just sitting in my bank account doing nothing. I have a stable job, so would it make sense for me to basically use just about all of that emergency fund and put it towards my mortgage?

I have just been wondering lately if that emergency fund is a very overrated thing to have, and is it costing me a lot of money in the long run? I mean, I KNOW it is definitely costing me money in the long run on the amount of interest I am paying on my mortgage, although I do understand how it could come in handy if some sort of emergency does come up.

Is the shark move to put it towards the house? Just wondering the philosophy on this. Situations are different, I get that. Depending on your line of work you might HAVE to keep an emergency fund because you go through stretches of down time. In my case, my income is a stable amount with annual raises, and I would rate my job security as high.

First off- having a stable job does not preclude you from being in an emergency situation where you need access to liquid funds. A stable job today does not mean a job tomorrow. I don't care if you work for a big company, a family run company or your own company. Something that looks ironclad today could be gone tomorrow. You really never know and that is the purpose of the emergency fund to get you through something you do not plan.

That said it does not mean that in particular situation you can not be more aggressive than someone else. You first have to start with your emotional/mental position. Are you the type that can sleep at night knowing your margin of error is very thin? If so, then you need to look at your financial situation- how much expenses do you have and how easily could you cut down on those if need be? Do you carry a lot of debt? Do you have income sources other than your job? And so forth. If in the big picture things seem to favor being more aggressive then I would say it would not be the worst thing in the world for you to cut down the emergency fund (I would not eliminate it in any scenario though) and use the funds to pay down your mortgage. However, if you do that, you need to have financing in place to allow for the unplanned events of life. Ideally a HELOC. If you do not have enough equity in your home to set one up then I would be very reluctant to drain an emergency fund because then you are left typically with credit cards to fund unexpected costs and that can be very costly.

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The problems with counting on a HELOC are:

- There can be fees (such as annual fees)

- You're paying interest when you use it. And it's probably a variable rate that will be going up.

- Home values could go down again. Your bank could slash your line. And, if your "emergencies" got worse and worse, you could have difficulty selling your home and downsizing.

I'm not necessary saying not to use them but just understand there's more risk than in a traditional emergency fund.

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Here's what I posted a few months back in the Retirement Thread - there's some good discussion around emergency funds starting around this page: https://forums.footballguys.com/forum/index.php?/topic/681010-pbs-frontline-the-retirement-gamble-sorta-must-see/page-36

IMO, the "Emergency Fund" needs to be risked based. Here's roughly how I do it:

Look at monthly expenses and strip out everything that isn't absolutely necessary. I look at this as if the absolute worst case scenario happened (wife and I both simultaneously lose our jobs). This is what we'd need to live on for 6 months. I make sure I have this on hand, accessible to me right away.

Now having said this, I'd like to bring up two points:

This is where the envelope method of saving is so important. Depending on what your monthly expenses are, and if you build up your envelopes appropriately (i.e. have the complete balance in the envelope prior to spending) - you can theoretically have enough money in your "discretionary spending" envelopes to cover your necessities in the worst case scenario. - this is what I do.

Every situation is different. My wife and I are in completely different industries with completely different skill sets; so I think the chance that we'd both lose our jobs and be w/o employment for 6 months is extremely slim. Also, given our education, skill set, networks, etc - I'm confident we would have some way to create income in the meantime until permanent employment was available.

Also, you need to understand your medical benefits, disability coverage, etc. This all factors in to how much "emergency savings" you need.

Edited by Tiger Fan
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Not sure if this has been discussed or not, but everywhere I see any financial advice it mentions an emergency fund, then talks about an amount anywhere from a couple months to 6 or more months of living expenses.

In my current situation I have a good size emergency fund, but the money is just sitting in my bank account doing nothing. I have a stable job, so would it make sense for me to basically use just about all of that emergency fund and put it towards my mortgage?

I have just been wondering lately if that emergency fund is a very overrated thing to have, and is it costing me a lot of money in the long run? I mean, I KNOW it is definitely costing me money in the long run on the amount of interest I am paying on my mortgage, although I do understand how it could come in handy if some sort of emergency does come up.

Is the shark move to put it towards the house? Just wondering the philosophy on this. Situations are different, I get that. Depending on your line of work you might HAVE to keep an emergency fund because you go through stretches of down time. In my case, my income is a stable amount with annual raises, and I would rate my job security as high.

First off- having a stable job does not preclude you from being in an emergency situation where you need access to liquid funds. A stable job today does not mean a job tomorrow. I don't care if you work for a big company, a family run company or your own company. Something that looks ironclad today could be gone tomorrow. You really never know and that is the purpose of the emergency fund to get you through something you do not plan.

That said it does not mean that in particular situation you can not be more aggressive than someone else. You first have to start with your emotional/mental position. Are you the type that can sleep at night knowing your margin of error is very thin? If so, then you need to look at your financial situation- how much expenses do you have and how easily could you cut down on those if need be? Do you carry a lot of debt? Do you have income sources other than your job? And so forth. If in the big picture things seem to favor being more aggressive then I would say it would not be the worst thing in the world for you to cut down the emergency fund (I would not eliminate it in any scenario though) and use the funds to pay down your mortgage. However, if you do that, you need to have financing in place to allow for the unplanned events of life. Ideally a HELOC. If you do not have enough equity in your home to set one up then I would be very reluctant to drain an emergency fund because then you are left typically with credit cards to fund unexpected costs and that can be very costly.

sums up my thoughts very well.

our emergency fund is just over $6,000. Enough to pay for any car repairs above insurance, washer/dryer if they went out, and a couple other emergency events. There's literally zero chance of losing my job within a year as long as I don't get a DUI or cheat on my wife (in which case she'd kill me and the life insurance would go to my kids). You just have to honestly assess your risk.

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The shark move is to grow brass balls and invest your "emergency fund" in a dividend paying stock that rarely wavers in value (I am looking at you AT&T) and reap some gains from your idle cash. If you have some equity in your house you can open a line of credit to draw from in a true emergency but otherwise just sits there open. Minimal cost HELOC let's you invest that emergency money with less risk of disaster. Note: I am not a professional and you'd have to be crazy to move thousands of dollars on the word of a random FBGS poster.

:thumbup:

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our emergency fund is just over $6,000.

I won't say this is too little but it goes to show how personal comfort varies from person to person. I have no kids, a paid off mortgage and a job that I'd have significant warning before I'd be in danger of losing it. However, I would be stressed out having less than $30K in my emergency fund.

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our emergency fund is just over $6,000.

I won't say this is too little but it goes to show how personal comfort varies from person to person. I have no kids, a paid off mortgage and a job that I'd have significant warning before I'd be in danger of losing it. However, I would be stressed out having less than $30K in my emergency fund.

That is why I started off with the emotional/mental part of the equation. If you can't sleep at night because you don't have X amount in a liquid account- then the answer is keep X amount in an account.

Another solution that is somewhat of a split is to take a portion of your emergency fund and put them in a ladder of CD's. For those that are not familiar with the concept of a CD ladder- it is pretty simple. Let's say you take $10K. You split it up to 5 $2K CD's. 6/12/18/24/30 months. As the 6 month matures- you turn it into a 30 month CD- and the same with the next, etc. So eventually they are all 30 month CD's getting a better return for you than a liquid savings/money market account and having funds available every 6 months. Now, the exact amounts and terms are all up to you for your situation. This could be a solution to someone who is frustrated with getting near nothing return to getting a little better return but still being somewhat 'liquid' as well.

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our emergency fund is just over $6,000.

I won't say this is too little but it goes to show how personal comfort varies from person to person. I have no kids, a paid off mortgage and a job that I'd have significant warning before I'd be in danger of losing it. However, I would be stressed out having less than $30K in my emergency fund.

That is why I started off with the emotional/mental part of the equation. If you can't sleep at night because you don't have X amount in a liquid account- then the answer is keep X amount in an account.

Another solution that is somewhat of a split is to take a portion of your emergency fund and put them in a ladder of CD's. For those that are not familiar with the concept of a CD ladder- it is pretty simple. Let's say you take $10K. You split it up to 5 $2K CD's. 6/12/18/24/30 months. As the 6 month matures- you turn it into a 30 month CD- and the same with the next, etc. So eventually they are all 30 month CD's getting a better return for you than a liquid savings/money market account and having funds available every 6 months. Now, the exact amounts and terms are all up to you for your situation. This could be a solution to someone who is frustrated with getting near nothing return to getting a little better return but still being somewhat 'liquid' as well.

I prefer I-Bonds to CDs, at least for now. It's better protection against inflation/rising rates than locking in CD rates. Interest is tax deferred. Penalties for early withdraw are also less than most CDs (just 3 months interest if withdrawn before 5 years, nothing after that). Also less hassle than shopping CD rates every 6 months.

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The shark move is to grow brass balls and invest your "emergency fund" in a dividend paying stock that rarely wavers in value (I am looking at you AT&T) and reap some gains from your idle cash. If you have some equity in your house you can open a line of credit to draw from in a true emergency but otherwise just sits there open. Minimal cost HELOC let's you invest that emergency money with less risk of disaster. Note: I am not a professional and you'd have to be crazy to move thousands of dollars on the word of a random FBGS poster.

Honestly this is some of the worst advice I've ever seen in this thread.

A dividend ETF that holds hundreds of stocks... maybe. One or even a handful of single stocks? Potential suicide.

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Not sure if this has been discussed or not, but everywhere I see any financial advice it mentions an emergency fund, then talks about an amount anywhere from a couple months to 6 or more months of living expenses.

In my current situation I have a good size emergency fund, but the money is just sitting in my bank account doing nothing. I have a stable job, so would it make sense for me to basically use just about all of that emergency fund and put it towards my mortgage?

I have just been wondering lately if that emergency fund is a very overrated thing to have, and is it costing me a lot of money in the long run? I mean, I KNOW it is definitely costing me money in the long run on the amount of interest I am paying on my mortgage, although I do understand how it could come in handy if some sort of emergency does come up.

Is the shark move to put it towards the house? Just wondering the philosophy on this. Situations are different, I get that. Depending on your line of work you might HAVE to keep an emergency fund because you go through stretches of down time. In my case, my income is a stable amount with annual raises, and I would rate my job security as high.

What are you going to do if you wreck your car and need another one tomorrow?

What if an AMAZING opportunity comes to buy something at pennies on the dollar because of someone else's misfortune and you need 25-30K TOMORROW?

What are you going to do if a massive foundation problem arises and you need 20K to fix it tomorrow?

What if you child gets kidnapped and you need 50k for ransom?

What if all that happens simultaneously while you are sick, in the hospital, and just got a pink slip?

I like 18 mo. 9 months ultra liquid meaning i have it TODAY or tomorrow. 9 mo. invested in income generating low volatity assets like baby bonds (exchange traded debt) or bond ETFs.

If you've got under 100K ready and available you're probably going to miss out on an opportunity in life... and that's not worth risking a few interest points on a loan, or invested in some individual stock.

Edited by Dentist
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How are you calculating your emergency funds? Do you factor in house payment? Car payment?

The wife also has steady income. We are both nurses. Those jobs arent going anywhere.

Yes. The typical emergency fund rule of thumb is suppose to be 6 months worth of living expenses. So, pretty much what it costs you to live right now. All your bills (house, car, utilities, etc), grocery, gas, etc. You can leave out things like entertainment or the amount you put into savings etc.

The purpose of an emergency fund it to have access to money right away for anything that may come up. Losing a job is just one possibility.

There is no set $X amount to have. Some people will have more than 6 months of living expenses and some less. Some people should have more e.g. someone with a commission only job, someone who deals with real estate or otherwise buys/sells large ticket items, someone who freaks out if they don't have a ton of cash in the bank and more. Some could go with less and be fine e.g. stable jobs, no debt, and more.

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How are you calculating your emergency funds? Do you factor in house payment? Car payment?

The wife also has steady income. We are both nurses. Those jobs arent going anywhere.

EVERYTHING. Now, if you want to calculate what you would live on if the country really got weird... like you could get rid of cable, eating out, netflix, other BS... that's fine.

But house, car, all bills, etc.

I don't care if you're both nurses.

I can't get fired at my job... but all it would take is one crazy person to write a yelp review or make an accusation to the dental board that I diddled kids or something insane and my income could drop off precipitously even if it were 100% false.

Regardless of how safe you think you are... you aren't. And you should act like it.

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our emergency fund is just over $6,000.

I won't say this is too little but it goes to show how personal comfort varies from person to person. I have no kids, a paid off mortgage and a job that I'd have significant warning before I'd be in danger of losing it. However, I would be stressed out having less than $30K in my emergency fund.

That is why I started off with the emotional/mental part of the equation. If you can't sleep at night because you don't have X amount in a liquid account- then the answer is keep X amount in an account.

Another solution that is somewhat of a split is to take a portion of your emergency fund and put them in a ladder of CD's. For those that are not familiar with the concept of a CD ladder- it is pretty simple. Let's say you take $10K. You split it up to 5 $2K CD's. 6/12/18/24/30 months. As the 6 month matures- you turn it into a 30 month CD- and the same with the next, etc. So eventually they are all 30 month CD's getting a better return for you than a liquid savings/money market account and having funds available every 6 months. Now, the exact amounts and terms are all up to you for your situation. This could be a solution to someone who is frustrated with getting near nothing return to getting a little better return but still being somewhat 'liquid' as well.

I prefer I-Bonds to CDs, at least for now. It's better protection against inflation/rising rates than locking in CD rates. Interest is tax deferred. Penalties for early withdraw are also less than most CDs (just 3 months interest if withdrawn before 5 years, nothing after that). Also less hassle than shopping CD rates every 6 months.

I didn't include bonds in the emergency fund but if we were to have a true, completely #### hits the fan emergency, we could cash out another $15k in bonds without tax issues. Just really don't see that happening.

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The shark move is to grow brass balls and invest your "emergency fund" in a dividend paying stock that rarely wavers in value (I am looking at you AT&T) and reap some gains from your idle cash. If you have some equity in your house you can open a line of credit to draw from in a true emergency but otherwise just sits there open. Minimal cost HELOC let's you invest that emergency money with less risk of disaster. Note: I am not a professional and you'd have to be crazy to move thousands of dollars on the word of a random FBGS poster.

Honestly this is some of the worst advice I've ever seen in this thread.

A dividend ETF that holds hundreds of stocks... maybe. One or even a handful of single stocks? Potential suicide.

Back in the day, these were 3 excellent dividend stocks

Enron, WorldCom and Lehman Brothers

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The shark move is to grow brass balls and invest your "emergency fund" in a dividend paying stock that rarely wavers in value (I am looking at you AT&T) and reap some gains from your idle cash. If you have some equity in your house you can open a line of credit to draw from in a true emergency but otherwise just sits there open. Minimal cost HELOC let's you invest that emergency money with less risk of disaster. Note: I am not a professional and you'd have to be crazy to move thousands of dollars on the word of a random FBGS poster.

Honestly this is some of the worst advice I've ever seen in this thread.

A dividend ETF that holds hundreds of stocks... maybe. One or even a handful of single stocks? Potential suicide.

Back in the day, these were 3 excellent dividend stocks

Enron, WorldCom and Lehman Brothers

Add in WM (Washington Mutual). Lost a crap load of money on that. :(

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How are you calculating your emergency funds? Do you factor in house payment? Car payment?

The wife also has steady income. We are both nurses. Those jobs arent going anywhere.

EVERYTHING. Now, if you want to calculate what you would live on if the country really got weird... like you could get rid of cable, eating out, netflix, other BS... that's fine.

But house, car, all bills, etc.

I don't care if you're both nurses.

I can't get fired at my job... but all it would take is one crazy person to write a yelp review or make an accusation to the dental board that I diddled kids or something insane and my income could drop off precipitously even if it were 100% false.

Regardless of how safe you think you are... you aren't. And you should act like it.

I have a spreadsheet setup that I like to think of as the "mquinnjr Monthly P&L & Statement of Net Worth" that tracks my salary, home rental net income, and any other income to get to total top line income. I then track all outflows to get to net income for each month. This allows me to track total outflows on average over a rolling 6 month period that takes 12 months worth of my personal expense data into account so I don't obscure the analysis with any seasonal spend. I compare that 6 month rolling average outflow to my cash Capital One 360 online savings account balance set up exclusively to cover 6 months worth of $0 income, and I know the "true funded status" of my 6 months worth of emergency cash.

I also track within this spreadsheet all net assets and credit scores (I get these for free from credit cards that provide them) to basically give a statement of net assets/worth and a P&L for budgeting/spend planning purposes throughout the month to get to my "net income" numbers. I know where I like to be from a net income or staying in the green perspective to keep things comfortable after putting money into 401k, cash investments, etc. The hard part is setting it up initially, after that it's pretty simple to maintain and update.

Might not work for everyone, but when I review how I'm spending my money in total along with my investments every few weeks, it makes conservative, boring Boglehead style saving "sexy" which keeps me pushing on it and just works for me personally.

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our emergency fund is just over $6,000.

I won't say this is too little but it goes to show how personal comfort varies from person to person. I have no kids, a paid off mortgage and a job that I'd have significant warning before I'd be in danger of losing it. However, I would be stressed out having less than $30K in my emergency fund.

That is why I started off with the emotional/mental part of the equation. If you can't sleep at night because you don't have X amount in a liquid account- then the answer is keep X amount in an account.

Another solution that is somewhat of a split is to take a portion of your emergency fund and put them in a ladder of CD's. For those that are not familiar with the concept of a CD ladder- it is pretty simple. Let's say you take $10K. You split it up to 5 $2K CD's. 6/12/18/24/30 months. As the 6 month matures- you turn it into a 30 month CD- and the same with the next, etc. So eventually they are all 30 month CD's getting a better return for you than a liquid savings/money market account and having funds available every 6 months. Now, the exact amounts and terms are all up to you for your situation. This could be a solution to someone who is frustrated with getting near nothing return to getting a little better return but still being somewhat 'liquid' as well.

I prefer I-Bonds to CDs, at least for now. It's better protection against inflation/rising rates than locking in CD rates. Interest is tax deferred. Penalties for early withdraw are also less than most CDs (just 3 months interest if withdrawn before 5 years, nothing after that). Also less hassle than shopping CD rates every 6 months.

IMO I prefer muni ETFs. Tax free income better than most fixed rate investments right now and they are pretty stable. There are ones out there that concentrate on short time to maturity, as well, for minimizing interest rate effects.

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Dentist, I think if me and my wife both lost and could not get other nursing jobs, i think a few months of emergency funds (or lack of) would be a fraction of the problems we would face.

If we hit a true double emeryency like that i wouldnt be able to keep my house or new car anyway.

I guess something to mention is I also have a good size network of close family and friends that would gladly help in true emergencies. That is definitely a factor.

Risk/reward i guess. Say i have 20 grand available and i put it all towards the house. That would be a guaranteed decent amount of interest savings.

If I did that and emergency hit, i could take 20 grand out of my 403b. Obviously there are fees for that which would suck, but the guaranteed reward of less interest paid over time seems like it might outweigh the risk of catastrophe.

Lots to think about.

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Thanks, yes I agree a dividend ETF makes better sense than a particular stock. All in all, the in vogue massive emergency fund is just a bunch of fear mongering, IMO. With rates so low and HELOCs easy to set up, more than a couple months is overkill but all I hear is 6 months+. Just think it is ridiculously conservative.

The shark move is to grow brass balls and invest your "emergency fund" in a dividend paying stock that rarely wavers in value (I am looking at you AT&T) and reap some gains from your idle cash. If you have some equity in your house you can open a line of credit to draw from in a true emergency but otherwise just sits there open. Minimal cost HELOC let's you invest that emergency money with less risk of disaster. Note: I am not a professional and you'd have to be crazy to move thousands of dollars on the word of a random FBGS poster.

Honestly this is some of the worst advice I've ever seen in this thread.

A dividend ETF that holds hundreds of stocks... maybe. One or even a handful of single stocks? Potential suicide.

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