(note: this is part 2 to the previous post “Cost of Getting Old”)
Up to this point of my career, my emergency fund had one simple focus; to mitigate the risk of income loss. I kept 2 months’ worth of expenses in cash and the rest I poured into the stock market in the hopes that a combination of unemployment benefits, severance pay, emergency cash, and dividend income I could cover 6 months of expenses until I found a new job.
However, this changed after I turned 50 and retirement was suddenly in view. I am not naïve to believe ageism or age discrimination does not exist. I knew going forward if I lose income from my job the odds of bouncing back and finding new employment were stacked against me. At this point, prior to collecting social security, my only source of income would come from dividends so I would need to mitigate for a market crash and high inflation. My current emergency fund was not setup for this and needed to be reevaluated.
I analyzed my portfolio against different market conditions for crashes and time periods for inflation. In a quick summary, I discovered my portfolio could suffer a 30% cut in income and it could take up to 4 years to recover. At the end of the day, for my portfolio to weather that period I determined I would need the equivalent of 9 months of expenses in cash and developed a plan on how to fund it. Of course life is not just about stock market performance, there are also unplanned expenses like a new roof or furnace so I decided that I would also need a $10K rainy-day fund for these instances. This was cash I already on hand so I dismissed thinking about it any further. But this rainy-day fund is where I was wrong.
In determining my rainy-day fund, I was lazy and gave it little thought and I did not realize it until my recent experience with my father-in-law going into a nursing home leaving his children to make life altering financial and life decisions on his behalf. It was at this point I realized s $10K rainy-day fund was not even close to handle a situation like this. At a minimum I needed at least $45K (3 months of nursing home expenses). While I had concerns of how to fund this, I was more worried about the doubt creeping in if I was planning correctly.
As I was pondering my predicament I came across a video episode of Two Sides of FI where one of the vloggers (Jason) mentioned that for major repairs he amortizes the cost into his monthly expenses. His statement was like a concrete block being dropped on my head! With all my years looking at financial statements its not like I did not know what depreciation cycles were. I felt like a complete idiot for not viewing it this way. I need to reanalyze this and its not that hard.
Most of the major purchases we make have a defined or expected life before they need to be replaced and there is no reason to treat emergency care in the same fashion and amortize that cost assuming I will need the funds around age 75. Taking all of this into account here is the additional monthly expenses I need to account for:
|Item||Useful Life (Yrs.)||Remaining Life (Yrs.)||Replacement Cost||Monthly amortized cost|
|Furnace or HVAC||20||19||$8,000||$35|
|Hot Water Tank||12||10||$800||$7|
|Washer and Dryer||11||6||$1,600||$22|
|Sub-Total Monthly Expense||$621|
|Minus Existing Cash||-$10,000||-$38|
|Total Monthly Expense||$583|
There we have it, an additional $583 in monthly expenses or approximately $7K a year. Now I will need to revisit what my planned expenses were in retirement and add these figures. In theory it should increase my targeted dividend income I need for retirement. Though not good news I think it is better to find this out now rather than later and plan accordingly.
There is a quote from Alan Lakein that inspires me at times like this:
“Planning is bringing the future into the present so that you can do something about it today“
In other words I have the means to do something about it today while I will not have the means to fix it in the future,