A Cash Cushion Will Help Rebuild Your Finances
An Emergency Cash Fund is a First Step Toward Retirement Security
Feb 22, 2009
Both those who are already retired and those over 50 looking to retire soon have to focus on rebuilding their retirement security. Some have lost up to 40% of the value of their retirement portfolios. Retirees had to pull back, withdraw less from their portfolios, and rely on their cash savings. The result is that the cash emergency funds of retirees and pre-retirees are depleted
Retirees Should Take Control of Their Financial Lives
It's time for retirees to focus on rebuilding their retirement security in this new economy. Most economists expect this recession to last for several years. Retirees and pre-retirees can't wait this out. They have to move on with their financial lives.
The plunge in the financial markets has shown people how they feel about risk. Since many experts feel that the markets may fall even farther, perhaps as much as 20% more, one of the retiree's first steps in rebuilding retirement security should be to move some investments into cash. Something like certificates of deposit would be an appropriate investment in a 401(k) or IRA. In this particular economy, the safer the better is the best mantra.
Retirees Should Rebuild Their Cash Cushions
If you have had to raid your cash emergency fund in order to keep from taking withdrawals from your 401(k) or IRA, it's time to start trying to build it up again. Those who are over 50 and looking to retire need 3 - 6 months of living expenses tucked away in case of layoffs, illness, or other events. Retirees actually need a year's worth of living expenses saved in an account they can easily access.
Don't sell investments to increase your cash cushion. Liquidating investments in a 401(k) or IRA that may never regain their value and converting them to safer investments such as certificates of deposits is a good strategy but keep that money in investment accounts. Keep cash for emergency living expenses in a separate account that can be accessed without penalty.
Strategies for Rebuilding a Cash Cushion
The best strategy for rebuilding a cash cushion is cutting spending. Most retirees and those over 50 have already had to cut spending due to the decline in their retirement savings. A good strategy to find out if spending can be cut any further is to track spending for a month. Chances are, expenses will pop up that can be cut. Any excess cash should be put in the cash emergency fund. The Consumer Reports National Research Center surveyed more than 19,000 online subscribers between the ages of 55-75 and found that about half have already made strides to cut spending significantly.
If you expect a large tax refund this spring, put it in your cash emergency fund. You may want to change your withholding allowances to give you more money from your retirement or pay check and park that extra money in your cash cushion until you build it up into the amount you need.
It's important to rebuild your retirement security. A first step is to try, even though it will be hard, to put your cash emergency fund back into place and go from there.
See also the article on Stop the Losses in Your 401(k).
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