 Some
thoughts on emergency funds
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 Dear
Dr. Don,
I'm 51 years old and have about $400,000 socked away in 403(b) and
Roth IRA accounts. Right now I have about four months' salary as
an emergency fund. I read in a lot of places that a six-to-nine
months "buffer" is better. Can I tap into my Roth account
principal (contributions net of earnings) just in case?
-- Kuko Cache
 Dear
Kuko,
I'm in the three-to-six month camp when it comes
to sizing an emergency fund, and I base that on monthly expenses,
not monthly salary. After all, it's having the liquidity to meet
your current expenses that's the goal here.
People whose income varies a lot from month-to-month
or year-to-year should have a larger fund than people with a steady
income. Other factors would include your health, job security, equity
in your home and the size and composition of your investment portfolio
-- including your retirement accounts.
Having a home equity line of credit (HELOC) in place
can reduce your need for an emergency fund; so can the ability to
borrow against the cash value of your life insurance policy, access
to 403(b) plan assets or original contributions to your Roth IRA
accounts.
Withdrawals of your original contributions to
a Roth IRA aren't taxable, but withdrawing investment earnings may
be both taxable and subject to a 10 percent penalty tax if the distributions
are made prior to age 59½ and aren't used for a qualified
purpose such as a first-time home purchase, higher education expenses,
qualified medical expenses, health insurance expenses during a period
of unemployment, disability or death. The tax issues surrounding
withdrawal of earnings from a Roth IRA are such that you should
consult a tax professional prior to taking those distributions.
Over time most people gain a measure of financial
flexibility that allows them more than one alternative in meeting
a financial challenge. The more flexibility you have with your finances,
the less important it is to have a large emergency fund. For readers
who don't have an emergency fund in place, a CCH
calculator will help you size your fund.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "Financing
a home," "Saving & investing" or "Money."
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