Author Topic: Portion of Emergency Fund in Roth IRA  (Read 16531 times)

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: Portion of Emergency Fund in Roth IRA
« Reply #50 on: January 23, 2014, 03:56:59 PM »
I use the word 'planning' in reference to 'financial planning' if you don't plan in the EF in the manner I suggested, which I might add is hardly revolutionary in terms of financial planning then you will be forced to sell low.

Therefore if the event happens that you sold low, it was due to poor planning, whereas good planning would have baked in the EF buffer and protected your assets.  I am talking about planning concepts being poor or good, not you personally, so it shouldn't be insulting.

And yes, you can make your whopping returns in the market, but if that is the case do you intend to be 100% allocated into stocks, or do you diversify for risk management?

An EF is a risk management tool, that has some opportunity costs - I would say about 5-6% per year for the amount of the fund (which should be rather small in comparison, to your assets).  If you don't have the assets to protect, or feel the need to protect them then don't do it - it really is no different from insurance.

Again, like emergency fund, I have a different definition for poor financial planning.  To me, poor planning would be just applying some blanket rule to my situation whether or not it actually made sense.  I've questioned the common rule of the 6 month emergency fund and decided that it's poor advice for me.  I don't need to insure my insured insurance in order to sleep at night.  And yes, since I'm still in my accumulation phase, I'm almost 100% stocks.

Saverocity

  • Stubble
  • **
  • Posts: 151
Re: Portion of Emergency Fund in Roth IRA
« Reply #51 on: January 23, 2014, 04:46:42 PM »
I use the word 'planning' in reference to 'financial planning' if you don't plan in the EF in the manner I suggested, which I might add is hardly revolutionary in terms of financial planning then you will be forced to sell low.

Therefore if the event happens that you sold low, it was due to poor planning, whereas good planning would have baked in the EF buffer and protected your assets.  I am talking about planning concepts being poor or good, not you personally, so it shouldn't be insulting.

And yes, you can make your whopping returns in the market, but if that is the case do you intend to be 100% allocated into stocks, or do you diversify for risk management?

An EF is a risk management tool, that has some opportunity costs - I would say about 5-6% per year for the amount of the fund (which should be rather small in comparison, to your assets).  If you don't have the assets to protect, or feel the need to protect them then don't do it - it really is no different from insurance.

Again, like emergency fund, I have a different definition for poor financial planning.  To me, poor planning would be just applying some blanket rule to my situation whether or not it actually made sense.  I've questioned the common rule of the 6 month emergency fund and decided that it's poor advice for me.  I don't need to insure my insured insurance in order to sleep at night.  And yes, since I'm still in my accumulation phase, I'm almost 100% stocks.

Cool, good luck!

I'm not here to tell you what to do, but I think it is worth bringing up the things that I did for factoring into a risk assessment of asset allocation.

I hope we all retire rich, however we get there.

mpbaker22

  • Handlebar Stache
  • *****
  • Posts: 1095
Re: Portion of Emergency Fund in Roth IRA
« Reply #52 on: January 23, 2014, 09:26:55 PM »
I use the word 'planning' in reference to 'financial planning' if you don't plan in the EF in the manner I suggested, which I might add is hardly revolutionary in terms of financial planning then you will be forced to sell low.

Therefore if the event happens that you sold low, it was due to poor planning, whereas good planning would have baked in the EF buffer and protected your assets.  I am talking about planning concepts being poor or good, not you personally, so it shouldn't be insulting.

And yes, you can make your whopping returns in the market, but if that is the case do you intend to be 100% allocated into stocks, or do you diversify for risk management?

An EF is a risk management tool, that has some opportunity costs - I would say about 5-6% per year for the amount of the fund (which should be rather small in comparison, to your assets).  If you don't have the assets to protect, or feel the need to protect them then don't do it - it really is no different from insurance.

Again, like emergency fund, I have a different definition for poor financial planning.  To me, poor planning would be just applying some blanket rule to my situation whether or not it actually made sense.  I've questioned the common rule of the 6 month emergency fund and decided that it's poor advice for me.  I don't need to insure my insured insurance in order to sleep at night.  And yes, since I'm still in my accumulation phase, I'm almost 100% stocks.

Cool, good luck!

I'm not here to tell you what to do, but I think it is worth bringing up the things that I did for factoring into a risk assessment of asset allocation.

I hope we all retire rich, however we get there.

Dude, you're totally ignoring what everyone else is saying.  Everyone on here realizes that there are risks.  We all recognize those risks, and realize a 6 month EF is not the optimal strategy to hedge against that risk.

For an example, assume the markets go up 10% 8 out of 10 years, and down 20% the other 2.  Further, assume that an event happens during that time period with probability 1/20 that results in loss of 10,000.

Now, I have chosen to invest the 10,000.  95% of the time, I end up ahead by 37% (just assuming 1.1^8*.8^2).  Depending on how exactly the 10% gains and 20% losses are moved around in the 10 year period, I could come out ahead even during the other 5% of occasions.  Just realize that the worst case scenario is I need the money in exactly 2 years and those 2 years happen to be the down years.  I could calculate the odds, but since this is just a made-up scenario, the exact number wouldn't mean anything anyway.
 In that case, I would have needed to invest 15,625 to cover the 10,000 loss.  So, you know what ... I'm willing to take the risk of a .05*.2^2*.8^8 = .03355% chance of coming out behind by $5,625.  Again, I'm not going to calculate the rest, but this isn't the whole story.  There are odds of losing after having one year of gains, 2 years of gains, etc.  The big picture is that in the VAST majority of cases, I"ll come out ahead over your plan.  And in the cases where I come out behind, it'll be by a couple thousand dollars at most.

Obviously I just made these numbers up out of thin air.  However, they are relatively close to what we actually experience.

Out of curiosity, what is your profession?

Saverocity

  • Stubble
  • **
  • Posts: 151
Re: Portion of Emergency Fund in Roth IRA
« Reply #53 on: January 24, 2014, 05:51:49 AM »
I use the word 'planning' in reference to 'financial planning' if you don't plan in the EF in the manner I suggested, which I might add is hardly revolutionary in terms of financial planning then you will be forced to sell low.

Therefore if the event happens that you sold low, it was due to poor planning, whereas good planning would have baked in the EF buffer and protected your assets.  I am talking about planning concepts being poor or good, not you personally, so it shouldn't be insulting.

And yes, you can make your whopping returns in the market, but if that is the case do you intend to be 100% allocated into stocks, or do you diversify for risk management?

An EF is a risk management tool, that has some opportunity costs - I would say about 5-6% per year for the amount of the fund (which should be rather small in comparison, to your assets).  If you don't have the assets to protect, or feel the need to protect them then don't do it - it really is no different from insurance.

Again, like emergency fund, I have a different definition for poor financial planning.  To me, poor planning would be just applying some blanket rule to my situation whether or not it actually made sense.  I've questioned the common rule of the 6 month emergency fund and decided that it's poor advice for me.  I don't need to insure my insured insurance in order to sleep at night.  And yes, since I'm still in my accumulation phase, I'm almost 100% stocks.

Cool, good luck!

I'm not here to tell you what to do, but I think it is worth bringing up the things that I did for factoring into a risk assessment of asset allocation.

I hope we all retire rich, however we get there.

Dude, you're totally ignoring what everyone else is saying.  Everyone on here realizes that there are risks.  We all recognize those risks, and realize a 6 month EF is not the optimal strategy to hedge against that risk.

For an example, assume the markets go up 10% 8 out of 10 years, and down 20% the other 2.  Further, assume that an event happens during that time period with probability 1/20 that results in loss of 10,000.

Now, I have chosen to invest the 10,000.  95% of the time, I end up ahead by 37% (just assuming 1.1^8*.8^2).  Depending on how exactly the 10% gains and 20% losses are moved around in the 10 year period, I could come out ahead even during the other 5% of occasions.  Just realize that the worst case scenario is I need the money in exactly 2 years and those 2 years happen to be the down years.  I could calculate the odds, but since this is just a made-up scenario, the exact number wouldn't mean anything anyway.
 In that case, I would have needed to invest 15,625 to cover the 10,000 loss.  So, you know what ... I'm willing to take the risk of a .05*.2^2*.8^8 = .03355% chance of coming out behind by $5,625.  Again, I'm not going to calculate the rest, but this isn't the whole story.  There are odds of losing after having one year of gains, 2 years of gains, etc.  The big picture is that in the VAST majority of cases, I"ll come out ahead over your plan.  And in the cases where I come out behind, it'll be by a couple thousand dollars at most.

Obviously I just made these numbers up out of thin air.  However, they are relatively close to what we actually experience.

Out of curiosity, what is your profession?

It is clear that your position is simply that you care less about the risk than the upside, that is fine.  I think it is unfair to say everyone here knows about the risk though, since there are a lot of people who don't understand risk at all.

Also, you only need to get 4.6% APR to achieve a 10 year gain of $5,678, which is higher than the numbers you cite - which isn't impossible, and even if you can only get 2-3% APR you are only losing the difference between 2-3 and 4.6% not the difference between 'earning nothing' and 'making big money'.

I don't have a profession, I am currently in School learning Financial Planning and I got this view on the EF after arguing your position with my Professor and losing to the logic I am putting forward here. How about yourself?
« Last Edit: January 24, 2014, 06:08:40 AM by Saverocity »

mpbaker22

  • Handlebar Stache
  • *****
  • Posts: 1095
Re: Portion of Emergency Fund in Roth IRA
« Reply #54 on: January 24, 2014, 08:01:57 AM »
It is clear that your position is simply that you care less about the risk than the upside, that is fine.  I think it is unfair to say everyone here knows about the risk though, since there are a lot of people who don't understand risk at all.

Also, you only need to get 4.6% APR to achieve a 10 year gain of $5,678, which is higher than the numbers you cite - which isn't impossible, and even if you can only get 2-3% APR you are only losing the difference between 2-3 and 4.6% not the difference between 'earning nothing' and 'making big money'.

I don't have a profession, I am currently in School learning Financial Planning and I got this view on the EF after arguing your position with my Professor and losing to the logic I am putting forward here. How about yourself?

Where do you plan on getting 4.6% APR?  I guess you're saying that it's more likely that you'll be able to get 2-3% APR, so you're only missing out on the difference?  Where did the $5,678 come from?

I disagree about most people not understanding the risk.  I think people who post on here understand the risk.  I'm tired of the financial industry selling risk.  I.E.  They don't actually sell useful products, they sell fear and make money on that fear.  That's the primary reason why I don't work in a personal finance/financial planning job.  I'm currently working as a financial analyst, but am making a transition to actuarial science.

Saverocity

  • Stubble
  • **
  • Posts: 151
Re: Portion of Emergency Fund in Roth IRA
« Reply #55 on: January 24, 2014, 08:30:49 AM »
It is clear that your position is simply that you care less about the risk than the upside, that is fine.  I think it is unfair to say everyone here knows about the risk though, since there are a lot of people who don't understand risk at all.

Also, you only need to get 4.6% APR to achieve a 10 year gain of $5,678, which is higher than the numbers you cite - which isn't impossible, and even if you can only get 2-3% APR you are only losing the difference between 2-3 and 4.6% not the difference between 'earning nothing' and 'making big money'.

I don't have a profession, I am currently in School learning Financial Planning and I got this view on the EF after arguing your position with my Professor and losing to the logic I am putting forward here. How about yourself?

Where do you plan on getting 4.6% APR?  I guess you're saying that it's more likely that you'll be able to get 2-3% APR, so you're only missing out on the difference?  Where did the $5,678 come from?

I disagree about most people not understanding the risk.  I think people who post on here understand the risk.  I'm tired of the financial industry selling risk.  I.E.  They don't actually sell useful products, they sell fear and make money on that fear.  That's the primary reason why I don't work in a personal finance/financial planning job.  I'm currently working as a financial analyst, but am making a transition to actuarial science.

I would hunt around for it, there are several solutions that can be found offering 5% (typically capped for $5K and for a year) savings accounts and CDs from smaller Credit Unions, or side offerings for weird things like the Paypal debit card.  I think I could put together close to 5% with a bit of effort, which I am willing to do for my money.  And yes, if that failed due to seasonality of the offerings my certainty of getting 2-3% is very high, so yes, worst case I was looking at the spread between 2-3% and 4.6% being the opportunity cost for not being in the market.

The $5,678 was a number I picked that was close to your ballpark numbers for stock market investing, I was showing how a stable 4.6% compounded over the same 10 year period would provide more income than your example of large gains due to the losses that you factored in.  If you are happy with making $5625 then why not instead seek out a way to earn that without being 'all in' the market, you can get there or very close to it without the risk.

For me that sounds like a win/win?

FastStache

  • Bristles
  • ***
  • Posts: 257
Re: Portion of Emergency Fund in Roth IRA
« Reply #56 on: February 10, 2014, 09:11:27 PM »
Looking for some safe suggestions on where to put my Roth IRA contribution for 2013 since this is still part of my emergency fund. If nothing goes wrong for me this year, my future contributions will certainly be more aggressive. I might even be willing to move my safe contribution of other options in the future.

Bonds or CDs at Vanguard for the time being?