Discuss Latest POF Blog Post: The Emergency Fund: It’s Still Useless!

[Tim]

Well that is exactly what would happen to a retired person who stopped working.

I assume that is the perspective that CM is approaching this from.

My first retirement was in January 2000.
The dream house wasn’t completed until September 2000.
Retired, cash drain for a custom house and no income with college for 2 coming up.
Many choices I would have made differently. Live and learn. Three to four things can happen at once. Deal with it. You will one way or another.

[Turf Doc]

dude, you are a broke medical student, and he is a doc with millions near retirement.

Like comparing a rhinoceros and a bumblebee, both have a pointy part but that’s about where the similarities end.

1. Never compared myself to CM
2. Didn’t answer my questions
3. Ad hominems are unhelpful

More questions:

What percentage of Japanese investors never invested after 1989? Do Japanese even invest and/or rely on the stock market for their retirement plans?

For those who retired in 1989, how short was their nest egg accumulation thanks to the run up if they chose a 4% withdrawal rate?

If a Japanese investor saved a reasonable amount of their money for a full 30 year career and retired in 1989 how more money did they have pre-1989 that made future returns bearable?

The answers to these questions might elucidate how bad this scenario that we love to discuss really was for our unfortunate Japanese retiree, if that person was even likely to exist.

[Tangler]

1. Never compared myself to CM
2. Didn’t answer my questions
3. Ad hominems are unhelpful

More questions:

What percentage of Japanese investors never invested after 1989? Do Japanese even invest and/or rely on the stock market for their retirement plans?

For those who retired in 1989, how short was their nest egg accumulation thanks to the run up if they chose a 4% withdrawal rate?

If a Japanese investor saved a reasonable amount of their money for a full 30 year career and retired in 1989 how more money did they have pre-1989 that made future returns bearable?

The answers to these questions might elucidate how bad this scenario that we love to discuss really was for our unfortunate Japanese retiree, if that person was even likely to exist.

I wasn’t attacking you brother, just pointing out your perspective. Calling you a broke medical student is not intended as an insult. Everyone on this forum was broke as a medical student. Sorry man. Honestly, not intended to injure.

Nothing wrong with being broke. Very cool to be young, and have human capital and ready to take on the world.

Broke young folks should be 100% stocks.

Older rich docs nearing retirement need some cash, and probably have more than they can easily spend before death.

Once people get more than they will be able to spend growth is less attractive than safety.

The Japan stuff.......my wife is Japanese and my mother-in-law lived in Japan her whole life (until 2012, now she lives with me), she is 81 years old and saw it happen and .......yeah.......it was bad. Hope we never understand how bad.

[Tim]

1. Never compared myself to CM
2. Didn’t answer my questions
3. Ad hominems are unhelpful

More questions:

What percentage of Japanese investors never invested after 1989? Do Japanese even invest and/or rely on the stock market for their retirement plans?

For those who retired in 1989, how short was their nest egg accumulation thanks to the run up if they chose a 4% withdrawal rate?

If a Japanese investor saved a reasonable amount of their money for a full 30 year career and retired in 1989 how more money did they have pre-1989 that made future returns bearable?

The answers to these questions might elucidate how bad this scenario that we love to discuss really was for our unfortunate Japanese retiree, if that person was even likely to exist.

I used to have a number of business contacts and responsibilities in Japan. I do have a long time friend of Japanese descent that is Hawaiian. I would not ever ask the questions. What I do know is that the property bubble in Japan had a huge impact on the financial well being of folks in Tokyo. I do know that the career paths and retirement strategies were substantially different for those that chose a path within Japanese business vs US (or Western) firms.
It would be "impolite" to inquire.

[Tangler]

I used to have a number of business contacts and responsibilities in Japan. I do have a long time friend of Japanese descent that is Hawaiian. I would not ever ask the questions. What I do know is that the property bubble in Japan had a huge impact on the financial well being of folks in Tokyo. I do know that the career paths and retirement strategies were substantially different for those that chose a path within Japanese business vs US (or Western) firms.
It would be "impolite" to inquire.

My wife is Japanese. Her mom lived in Japan until 2012. Agree, it was not an easy time. They still have not recovered and it has been decades.

[CM]

Is that nikkei calculator assuming i invested once and never did again? If so that would be a pretty dumb way of investing. Where's a calculator that shows the return of periodic investing, even if you started at the top in 89?

Where is the data that 0 to negative real returns are more likely than 6-7? Not that it hasn't happened in the past, but that it's more likely.

Your prospective return depends on how much you pay for the earnings, dividends, and cash flows that your investment generates. When you pay a high valuation you earn a lower return, ceteris paribus. Zero to negative 10- to 20-year returns are more likely than 6-7% total real returns because the latter have been generated from average historical valuations, but the current valuation is in the top 2% or so of history.



I found the chart above with a google search. You can find many more, but Meb Faber is a reputable source. The current PE10 (CAPE) is about 37.38: https://www.multpl.com/shiller-pe

There aren't a lot of data points at the current lofty levels (nothing outside of the late 90s internet bubble), but the best fit line appears to fall < zero. In any event, some very low return appears much more likely than 6-7%.

As AR mentioned, if you retire when valuations are high, you're unlikely to fare well, and you won't have cash flows to invest when the market retreats (i.e., there is no periodic investing).

Under today's conditions, cash may well offer better returns than bonds. The entire TIPS curve is negative now: https://www.treasury.gov/resource-ce...data=realyield

That is, nominal bonds are expected to provide negative real returns, and TIPS guarantee it. Nominal treasurys will do better than that if there is prolonged deflation (as in Great Depression), and I hold some LT nominal treasurys for that reason.

However, cash will be better if there is greater-than-expected inflation, partly because longer duration bonds will be murdered as rates rise, and partly because the Fed will have to raise short-term rates in that scenario. Something similar happened during the 1970s when stocks provided a 15-year, total, real, annualized return of -0.5% from January 1966, when the PE10 peaked at only 24.1. (Robert Shiller's Irrational Exuberance, first edition, page 10).

[CM]

1. Never compared myself to CM
2. Didn’t answer my questions
3. Ad hominems are unhelpful

More questions:

What percentage of Japanese investors never invested after 1989? Do Japanese even invest and/or rely on the stock market for their retirement plans?

For those who retired in 1989, how short was their nest egg accumulation thanks to the run up if they chose a 4% withdrawal rate?

If a Japanese investor saved a reasonable amount of their money for a full 30 year career and retired in 1989 how more money did they have pre-1989 that made future returns bearable?

The answers to these questions might elucidate how bad this scenario that we love to discuss really was for our unfortunate Japanese retiree, if that person was even likely to exist.

The Nikkei bear market is just a useful example of what can happen, because it actually has happened. It is precedent. As shown above, the US market has had negative total real returns for 20 years. I think that's bad enough.

If I retired in 2000 and drew down for 9 years with annualized total real returns of -7.524%, that would have been extremely painful.

All of these awful outcomes occurred when starting valuations were high. That isn't coincidence, it's arithmetic.

If the current PE10 was 6.6, as it was at the bottom of the 15-year bear market in the early 80s, then I wouldn't be holding much cash, or much of anything but stocks. That valuation implied high returns with low risk. Unfortunately, our current circumstances aren't so good.

[Turf Doc]

The Nikkei bear market is just a useful example of what can happen, because it actually has happened. It is precedent. As shown above, the US market has had negative total real returns for 20 years. I think that's bad enough.

If I retired in 2000 and drew down for 9 years with annualized total real returns of -7.524%, that would have been extremely painful.

All of these awful outcomes occurred when starting valuations were high. That isn't coincidence, it's arithmetic.

If the current PE10 was 6.6, as it was at the bottom of the 15-year bear market in the early 80s, then I wouldn't be holding much cash, or much of anything but stocks. That valuation implied high returns with low risk. Unfortunately, our current circumstances aren't so good.

Do you change your asset allocation depending on PE10?

[Tangler]

Reading this thread has been amusing. A couple of years ago it was emphasized in this site that EF is an important pillar of finance. Now that the market has been going gangbusters for the past 10+ years every one feels that every penny should be invested in that market. Search for those under the mattresses and invest it. That 20K will be >$1M by the time you retire. Don't miss this opportunity and if calamity occurs, you can cash flow it.

Maybe some can really do many things during a crisis when there is <5K in your bank but when true emergencies occur and cash is needed, trying to attend to the emergencies and also trying to liquidate some stocks/ bonds / munis/ T-bills etc takes time and effort. A family member can suddenly die and you my have to travel right away. Or a family member gets cancer and requires major intervention and many physicians want some payment up front. Or a major house calamity. And when you try and pay with CC, you suddenly find that two have been unexpectedly declined and the one that still works has only a 9K limit. All these have happened to me and I found that having 100K in the bank made me worry less about finances and more about how to deal with those emergencies.

I think one should have a small EF early in life and when you have fat FI you can afford to have a larger EF. So what if the EF is earning pitiable interest and not the runaway 16% return. You are anyway going to die and leave that money to your children or to Uncle Sam. Why not keep it to have some peace of mind.

It is easy to say cash flow it but is difficult to do when major events occur in your life. If you choose to do it, your choice. But don't turn up your noses at those who like to have a sizable EF.

Just delete all my posts and read this one!

[billy]

VentAlarm it is neither market timing nor chasing returns, it is no different than the basic investing that is key to financial independence.

I am still hearing crickets in response to this question: "Those above posting that you find it useful to keep a segregated cash fund, can you give me some real life examples of when you've needed to use it that could not have been covered by my trifecta?"



StateOfMyHead the only tax implications of selling shares that would have otherwise been in cash are paying taxes on gains you wouldn't otherwise have had

2017- still with an only slightly positive net worth (I think I had just crossed over from neg to pos), wife caught meningitis a year after a cancer diagnosis- sudden loss of two incomes, possibly loss of 2 jobs (my boss at the time was less than understanding), still had rent and student loans due each month, medical bills, was looking into possibly traveling the country for clinical trials. I had to take a 1 month leave from work to care for my wife. I was looking at the real chance of losing my job permanently, which wouldve required another few months to find a new one, get credentialed etc. Extreme example to be sure, highly unlikely to happen to anyone else, but it happened to me. The float/interest on credit cards after a month would've made any gains from having the money invested instead disappear. If that had coincided with a drop in the market....

Now my Efund is more my "Mini fu fund" or insurance policy, in that if I ever need to take time off for my wife to get into a trial somewhere outside my city, I can write a check to my landlord, take a leave from or flat out quit my job (no income) and rent a new place in cash.

That being said, as my taxable account grows, and I have paid off my student loans, my efund has decreased in size. Still enough to say FU for a few months, but not as much as I once held since my required expenses/month are less.

Personal finance is personal. Just like taking out a 5 million umbrella policy vs going bare on insurance, keep enough of an Efund that you are comfortable with. Math/stats don't single out individuals.

[billy]

Sell stocks from taxable while simultaneously exchanging bonds for stocks in a tax-advantaged account. Now, you effectively haven't sold low, and you can rebalance when the market recovers.

This assumes that you own bonds in a tax-advantaged account and that the market eventually recovers.

Cant do that if you are 100% invested in stocks... which if you are all about optimizing returns long term...

[Shant]

I agree personal finance is personal. If you can't sleep at night without a cash cushion, then keep it.

If you would regret needing to sell stocks in a downturn even though you ended wealthier as a result then I think your problem is different than what you thought it was. Self-defeating loss aversion is not your friend in investing.

If you take a cash advance on a credit card pay it off asap, don't carry it indefinitely. It's one extra 5 minute step while sitting in the john.

If you are choosing to keep a percentage-wise large cash fund on hand while young then at least calculate the price you are paying for it before deciding if that price is worth it. And remember to risk adjust it for the likelihood of an emergency being triggered at any point in time.

When I did that calculation for myself 30 years ago it didn't make sense to me and it still doesn't after 30 years of bear markets, job losses, unexpected deaths and serious illnesses. My calculations showed a 3-4 year delay in reaching financial independence with a 12 month emergency fund. Which was about the worst effect if I had to pull funds from my investment capital and trigger taxes on it.

[billy]

hard to pay off the credit card cash advance ASAP when you have no money coming in AND unexepcted bills at the same time (my situation in 2017)- rent , medical bills, insurance payments (cobra means paying the employers side also) etc. Again to most 30 year old's it wont happen, but it happened to me.

Shant did you ever keep money in bonds also? Similar argument by the 100% equities crowd- why use bonds when in the accumulation phase, it delays reaching financial independence.

I wont fault anyone for an EFund, nor for going bare on it- just know what your risk tolerance is. My efund helped me also leave my terrible job, which mentally I dont know if I couldve if I was back in a huge debt after that month.

[VentAlarm]

To those who advocate no EF, do you also advocate no insurance?

[Tangler]

To those who advocate no EF, do you also advocate no insurance?

I kinda wonder about something here.

I wonder if anesthesiologists (minus POF of course) are less likely to forgo insurance and an EF than some other types of docs?

We are constantly preparing for unlikely but catastrophic events like anaphylaxis, MH, local anesthetic systemic toxicity, lost airways, fat emboli, amniotic fluid emboli, massive blood loss, venous air embolism, coronary thrombosis, tension pneumothorax, high spinals etc. in patients who show up for "elective" procedures.

Just an observation, but I wonder how many anesthesia docs have emergency drugs and airway equiptment ready and similarly have an EF and insurance for unlikely catastrophic events?

Sometimes you need an EF and insurance at the same time (Billy in 2017) and you don't need the extra stress of dealing with a loan officer.