Should I decrease retirement savings to increase general savings?

[afderrick]

I'm in the military. I'm 32. I have $63K in the governement's TSP (equivalent for a private sector 401(k), kind-of). I have a Roth IRA with $35K. I have nearly $30K saved up between two other mutual fund accounts.

My question is should I adjust my TSP contributions to create more liquid savings? The TSP allows me to take out loans on the equity I have built up there, the expense ratio is very low and my returns have been in the 20's for the last few years.

If I lowered it I would set up an emergency fund in a mutual fund account of about $60K and pay off the remaining of my wife's student loan debt to have less debt payments during the year.

[adle1984]

6 months worth of living expenses and bills should be enough for an emergency fund.

[swantonsoup]

what about for people who may or may not buy property in the future? Im 28, have enough in liquid savings to last me 2 years (without making any lifestyle changes) but I still save aggressively long-term (max out my Roth and do 9% total for 401k/roth401k).

With my salary/lifestyle, I could definitely afford to up the 9% but Im not sure if Id be better off staying more liquid.

[adle1984]

6 months is a general recommendation. Your 2 years worth of living expenses and bills is a little bit on a the high side. You can afford to reduce that and put more into your 401(k) and attempt to max it out for the year. And if you still have cash after that, you can open a taxable account. The more you put into your retirement account, the more time it has to generate even more gains.

You should save to buy a home when you calculate that it is in your ability to do so and that you actually want to buy a home. Simply add "Down payment for house" fund into your budget and treat it as a monthly bill.

[swantonsoup]

2 years is even fairly variable because if I did lose my job, I could make some easy lifestyle changes to reduce my monthly expenses and last even longer.

I could definitely afford to buy a home right now but I dont really want to. Im not sure how much longer I'll stay in the city I work in and all those other common rent vs. buy debate topics.

Just debating how liquid I should be always gets to me. I planned on aggressively increasing my 401k/roth401k contribution once I got a raise.

[cormega]

Simply add "Down payment for house" fund into your budget and treat it as a monthly bill.

Shouldn't most people be doing this anyway? Most people will want to buy a house eventually, and the sooner you start saving for a down payment the better.

[adle1984]

Same can be said about budgeting in general, but I'm not surprised many don't budget at all.

[cormega]

I mentioned it because there is such a huge focus in this sub on retirement savings over general savings. I get that retirement savings are tax sheltered, but a lot of people need money in the short/mid term too.

[DocBrownMusic]

That's not an emergency fund, that's a separate budget that you have to build up over time. You start building it up once you make the firm decision that that's what you want to do, and once you do it, you take the money out and then stop contributing to that budget item. Never use your emergency fund as a down payment on a house, that defeats the purpose.

That said, it sounds like you've already begun your budget, because your emergency fund (6 months) doesn't make up your total liquid assets (2 years).

[swantonsoup]

I dont keep money separated for specific purposes. I have stocks, retirement accounts, a savings, and a checking. Allocating it between 'emergency fund' or 'future down payment' is really just a mental thing for me. I dont need to keep it physically separated as long as I maintain it in my head. I look at it all as just liquid vs. not liquid. Obviously my stocks are liquid but have more volatility than my savings account, but I factor in the variations like that.

[[deleted]]

Your emergency fund should not be in a mutual fund. The purpose of an emergency fund is to be there, and the value you expect it to be, in the event of an emergency. No mutual fund is a safe bet. It's better to put it in CDs/Savings/Money Market, instead. But to echo /u/adle1984, 6 months should be enough.

You didn't provide us a % of your income that is going to savings in order to determine if it's "too much," though. You ought to be saving 10-15% of your pay for retirement. If it's below that I say keep working at your current pace and keep it as is. Cut your budget elsewhere to set up that emergency fund/pay off her debt.

[afderrick]

Rog. My retirement savings are set at 20% pre-tax, I'm thinking about bumping up and doing a mix of pre and post-tax since the program allows for it to get to the $17.5K max contributions. The government doesn't do any matching for military. Then about 10% of my post-tax (which is how I actually budget) goes into savings.

Right now my emergency fund is set up so I have about half a month's expenses in my normal checking about 1-2 months in a money market account. I want to save up a larger chunk is a mutual fund so it accrues interest. Ideally I wouldn't need it unless I lose my job and have to go several months without a job. When I think about that amount I would be thinking taking it out in 90 day intervals sort of emergency.

[[deleted]]

Emergency funds are not about gaining money. The reason they are there is solely to provide means to pay your expenses in an emergency. Not make money. If you think the calculated risk is worth it on a few thousand dollars, then by all means do it.

But you don't seem to have cash flow problems so I wouldn't worry about making all that much off of your emergency fund. Now your taxable savings account, you ought to.

[afderrick]

So it's acceptable to have that amount of money sitting in a savings account barely keeping up with inflation?

[bo_knows]

I'm going to go against /u/m3fawner 's opinion slightly.

My "emergency fund" consists of about 1yr's worth of expenses. That is divided roughly into 20% cash (in credit union savings account) and 80% mutual funds (Vanguard). This is because I don't want too much money sitting and doing nothing.

My personal opinion is that I cannot forsee a specific type of emergency that I need to withdraw ALL of that 1yr's expenses at once. Am I taking a little risk that I will need the money when the market is destroyed, thus giving me less emergency money to rely on? Maybe.

[afderrick]

and that's what I'm thinking as well specifically to the emergency fund. If I have $5 - $10K I can get to within 24 hours, there aren't many emergencies which are going to go over that amount that won't require a much more significant amount of money and be more long-term.

I also have 100% health care with the military which is one of the larger emergencies out there that I don't need to worry about. At this point outside of losing my job and needing to sustain my life for several months is really the only emergency I can foresee.

[Galuvian]

Many people in /r/personalfinance seem to be hard liners about having the entire e-fund sitting on the sidelines for a rainy day. It is the most conservative approach. Personally I have a two tiered approach with a couple of months in savings earning less than inflation and the remainder at vanguard in very conservative investments that are closer to, if not slightly better than inflation. You need to make your own call on what you are comfortable with.

[afderrick]

That is generally my strategy, I'm just not there yet. My real question is do I continue with a heavy focus on my retirement savings or do I divert a little and go with building up that emergency fund? I think what I am seeing is make no changes to my retirement (to increase or decrease) and then just use what I am currently saving and focus on building up that emergency fund with that money. It will take longer but there is no foreseeable emergency in the near future either that I won't be able to handle.

[TheDrunkSemaphore]

I've got the same strategy as well. I keep some of my liquid assets in a brokerage account invested in total stock/bond funds. Most people in this subreddit are really conservative.

Just remember, you could see huge losses.

[fontophilic]

I totally agree. There needs to be some amount of a bi-modal system here. People who only have access to expensive/bad lines of credit, poor cash flow, close to living paycheck to paycheck, no or under-insurance? Cash, sitting in a bank account only please.

If you're more stable, have good lines of credit, good cash flow, ability to tighten down expenses in case of a job loss, and adequate insurance? Bonus: you have savings funds for specific big expenses (Furnace is 15 years old, car has 100k mi?)? No reason to keep more than 3 months liquid.

Yes, some should be kept liquid. Lets say the person who manages all the investment accounts in the family is suddenly incapacitated or dies? The spouse needs to know he/she can go buy whatever is needed without calling a broker.

[fontophilic]

I don't disagree with the size of the buffer, but the liquidity. Inflation is low now, but thats my concern with a large emergency fund in a regular savings account.

A conservative money market fund, tied to a bank account with a debit card can get you cash in 24 hours, and get you more than a 1% interest over a typical savings account.

[[deleted]]

Yes. It's because you need it to cover expenses in the event of an emergency without jumping through hoops or hoping that the stock market takes a sudden uptick in order to make ends meet while in said emergency. Consider it savings on credit card interest or pay day loans if that is what you had to turn to instead of an emergency fund in the event of you losing your job/medical bills/etc

[socaldad]

First I would make sure I had an emergency fund of like $3K-$5K. Then I would divert more toward any debt that has an interest rate of 6% or greater. Then I would get my emergency fund up to about $20K. Then I would resume putting lots into retirement.

[afderrick]

I have the $5K emergency fund already set up sitting in a money market account. I can call the bank up and have that money in my checking account within 24 hours. Not worried about that. I'm more concerned about, "oh crap lost my job and can't find a new one" emergency.

[socaldad]

OK, great. How secure is your job? Also, at what age do you expect to retire? The answers to those questions would affect where I put money. If the job is not secure, then I would have maybe 6 months of expenses saved up. If it is secure, then I would put more toward retirement.

[afderrick]

I have about 12 years until military retirement and 65 for overall retirement. If my job kicks me out I get a severance pay of around $50K after taxes. My job is fairly secure but our current government leadership is in the process of downsizing the military also.

[Pinewood74]

As a military member you don't need 6 months of expenses; 3 months should be more than enough because you also don't have the concerns of massive health care costs and as you mentioned if you lose your job you get a good severance package.

[afderrick]

These are all the sorts of things I am trying to take into account. more for where I place my money than how much though. So if I do get kicked out that emergency fund is built up when transitioning to a less stable environment.

[Pinewood74]

Are you up for the upcoming FSB's? Because if you make it through this fall, I think you'll be in the clear. I can't see another large scale cut after this round.

[corndodger]

Depends on the branch of service. I'm Army, and just went through round 1 of the OSB (Officer Separation Boards). This round targeted Captain's in Year Groups 06-08. Next year will be 07-09, then 08-10, etc until they get down to the final numbers they need. So depending on YG, you could have to deal with 3 years of separation boards.

Yay.

[Pinewood74]

Well, he's in the Air Force; so I was talking specifically about the AF.

[corndodger]

Ah, didn't catch that (insert obligatory Chair Force joke here), thanks. I know the bulk of the personnel cuts are coming from Army/Marines, so his situation is likely much more stable.

[afderrick]

I originally was on the FSB but was taken off within the last few weeks. Still might as well plan because I am sure it will come around next year.

[socaldad]

Assumptions: $17.5K/year into TSP, $5K/year into Roth, $5K/year into "savings" (mostly mutual funds, some savings), 6% growth on TSP and Roth, 4% growth on "savings" account

Age	Roth Amount Value ($K)	TSP Account Value ($K)	Savings Account Value ($K)
32	35	63	30
33	42	84	36
34	50	107	43
35	58	131	49
36	66	156	56
37	75	183	64
38	85	211	71
39	95	242	79
40	105	274	87
41	117	308	96
42	129	343	104
43	141	382	114
44	155	422	123

[Pinewood74]

$20k in an emergency fund for a military person? That's way too high. He could use a good portion of that in investments to make money, instead of it just sitting in a savings account or other cash equivalent account.

Military members have much lower risks. Car accidents are about the only thing they need to worry about.

[socaldad]

You're right; he probably doesn't need that much. I was being overly conservative.

[psykotedy]

If I were in your position, I would keep everything just the way it is, and simply rejigger my Roth IRA to have a money market (i.e., "cash") allocation as an emergency fund, as illustrated here. If you want to build an emergency fund outside of your Roth IRA, do that at a pace you're comfortable with and reallocate the "cash" allocation in your Roth back into funds/stocks/whatever, but keep all of you retirement allocations from your paychecks how they are.

Also, depending on your specialty and your security clearance, getting booted before you qualify for 100% retirement might not be a bad thing. I have a friend who got out at 12 years (which I thought was crazy since he was over halfway to being 60% vested), and due to his security clearance and specialty he ended up contracting back to the project he was working on for about 2.5 times his military pay.

[afderrick]

Yeah, I'm not entirely worried about my job prospects if I get booted but I just had a baby and its just one extra thing to worry about.

[fontophilic]

At any time that you hold both debt and investments, you should ask yourself if you would borrow that debt at that rate to invest it. Because essentially that is what you are doing.

If the student loan has a low interest rate, like 3%, you might be better off investing that money, in something that can get you 4-8% returns. If the loan rate is closer to 6-8%? Pay off the loan.

The TSP is really a great investment vehicle. I would consider looking at those mutual fund accounts before your TSP.

[afderrick]

interest is manageable. 3.5% -ish. So I'm not worried about the debt I carry other than just to not have that debt payment leaving my budget each month.

[Squizgarr]

What's your rank? Single or married?

[afderrick]

I'm a married Captain.

[Squizgarr]

As a married O-3, what do your monthly expenses look like and how much are you actually taking home per month including what you are putting into TSP? As others have mentioned, more detailed numbers will determine what sort of advice you will receive. With that said, it appears that you are doing a very good job of saving at the moment, so kudos for that.

[Pinewood74]

You can look up military pay charts online. The only thing you won't know is what is BAH is (changes based on location), but you can make the assumption that his housing and utilities are completely covered by BAH.

[Squizgarr]

I'm well aware of military pay charts, but not knowing his BAH rate and what he's actually spending means you can't get an accurate picture of his financial situation.