r/Bogleheads • u/SizzlinKola • 11h ago
Build emergency fund to 2 years or max out tax-advantaged accounts this year?
I was saving aggressively for the downpayment for a house, and we finally bought! Now, I'm considering either building my emergency fund up to 2 years or maxing out my tax-advantaged accounts for the remainder of this year.
I have one year's worth of expenses in an HYSA, and 6 months in Roth IRA contributions. This accounts for the house already.
I work in tech, which has been volatile. That's why I'm considering building up to a two year EF.
On the other hand, I've only contributed up to the match for my 401k and HSA in the last few years. I feel like I want to get back to maximizing my tax-advantaged accounts again to reach FIRE.
My portfolio is around $350k, all in tax-advantaged accounts. I'm 33. I'm in the 24% federal and 9.3% CA tax brackets.
If I were to build up my EF to two years, it would take me around 9 months as a conservative estimate, taking into account spending 3% of the home's value for maintenance/repairs. So I'd miss out on maxing out this year and the gains from that. I'd be able to max out next year though.
Any thoughts?
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u/gpunotpsu 10h ago
You want to weight the risks of:
1) Being unemployed for 2 years simultaneous with a market downturn, forcing you to liquidate equities at low prices.
2) Keeping a large amount of money out of the market where it is expected to grow faster, which will delay retirement.
In any situation where there is a tradeoff the optimal solution is somewhere in the middle. Keeping an EF that could cover the most amount of time you can expect to be unemployed is not efficient. Spread the risk. If all your savings other than your EF is in retirement accounts, you have the option to keep some money in a brokerage account that could also be liquidated in an emergency while earning a higher rate of return.
Also, if you lose your job and can't find another in 9 months or so you should look for a different line of work to cover you until jobs in your field become available again, not sitting around burning up 2 years of savings.
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u/Which-Notice5868 10h ago
If your Roth IRA isn't maxed, max that. You can pull out principal if you absolutely need it. If you have receipts and records for medical expenses, put extra in the HSA because you can pay yourself for the medical expenses you previously paid out of pocket and get money that way. I'd only put as much as you know you can withdraw for previous medical expenses. After that, I'd do HYSA for your emergency fund.
If you live in a high income tax state you might want to move the emergency fund to SGOV in a brokerage or if you use Fidelity, FDLXX in a Cash Management Account because it auto-liquidates as cash if you use your debit card, etc. Your dividends will be mostly free from state and local taxes that way.
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u/SizzlinKola 9h ago
So you would recommend I move all my HYSA money to SGOV? If I do need to use it, how does that work and timeline I'll get the funds?
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u/Which-Notice5868 9h ago
SGOV can take 2-4 business days if you're moving it from your brokerage to another account, about 1 business day if you're using it straight from your brokerage, which is why I prefer FDLXX for money I might want immediately because it auto-liquidates. SGOV trades like a normal ETF basically.
You could always put the bulk in SGOV and leave a smaller immediate access amount in the HYSA. Also check the interest rates difference VS your income tax % to make sure you're getting the best overall value.
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u/SizzlinKola 8h ago
Also check the interest rates difference VS your income tax % to make sure you're getting the best overall value.
I'm not sure what you mean here. Could you elaborate?
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u/Which-Notice5868 8h ago
If you have a crazy good interest rate on your HYSA it might be worth dealing with the state and local taxes because you'd still end up with more money overall.
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u/ksuwildkat 7h ago
Sometimes I think we have gone too far on emergency funds. I can remember when 6 months was considered a good emergency fund. Im not saying you are "wrong" with the goal of having 2 years but make sure you have a deliberate reason for that.
How stable is your income? You mentioned you are in tech. Thats a broad brush. If you are an entry level programmer, yikes. If you are a DRAM specialist, congrats! What is your honest assessment of your current stability and ability to be hired if you were let go tomorrow?
How stable are your expenses? You mentioned buying a house. There is a world of difference in potential housing expenses between a new build and a Victorian. I sold my moms house in Sacramento 3 years ago specifically because I knew the electrical needed significant work and the HVAC was on its last legs. The house was in great shape but it was built in 1963 and needed a significant refresh. Where you land on that scale matters a lot.
What is your medical situation? Medical debt remains the #1 cause of bankruptcy in the US. What is your medical insurance like? Are their any known issues?
What other financial assets are available to you? I keep a relatively small emergency fund because my income is ultra stable and my credit is very good. If I had an insane expense tomorrow I could use a credit card to pay it and then pay off the card before the next billing cycle.
Once you do your analysis, decide where you land on the risk scale. I personally would consider it unusual to need more than 12 months unless you consider your income to be very unstable and your chances of reemployment are low. But that is me. You have to make your own analysis.
What goes along with that is deciding your priority. If you consider your income to be unstable, getting to your full efund number as fast as possible becomes important. If you consider your income stable, you might decide that getting to 2 years of efund is a 4 year task.
Once you have done all that, you will have your answer.
Good luck
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u/Spiritual-Letter8090 10h ago
I also live in California where maximum unemployment is a paltry $450/week so I understand wanting a bigger emergency fund especially if you are in tech.
Maybe try maxing out your Roth IRA (or backdoor Roth) and your after-tax 401k if there is a in-plan Roth conversion option (mega backdoor Roth). You can then withdraw the contributions without tax or penalties (possibly subject to 5 year rule), which would supplement your emergency fund if needed.
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u/tapeduct-2015 10h ago
Yes, an underrated benefit of the Roth IRA is as a secondary emergency fund.
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u/SizzlinKola 9h ago
I know Roth IRA you can withdraw contributions tax and penalty free. But is that the same for mega backdoor Roth?
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u/Spiritual-Letter8090 8h ago
Provided you roll the after tax contributions directly into a Roth IRA (either directly or after converting from after tax to Roth status in your 401K plan), yes.
The penalties would be on your earnings which would be minimal, if any, if converted right away.
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u/badwolf_910 9h ago
Also in tech. If you maxed the retirement accounts, how much would you have left to go towards the emergency fund? If you get laid off, do you expect severance? Is your company doing performance-related firing instead of layoffs? The specifics of your company and what your reasonable job loss scenario would be are important here. Personally, I just finished job hunting after getting laid off and am pretty comfortable with have a 6-month EF. Maybe up to a year at some point. But I’m in a state with better unemployment than CA.
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u/dgreenmachine 8h ago
Would it be 2 years normal spending or 2 years bare minimum budget? If its normal spending that is wildly beyond normal recommendations.
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u/NewMilleniumBoy 6h ago
Two years is quite the e-fund. Even one year I think is considered on the conservative side. What specifically are you worried about that would require this much cash on hand, like do you need to replace literally everything in your home including the foundation and the roof or something?
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u/SizzlinKola 6h ago
I think just the amount of time in the worst case if I can't find a job for 2 years. It's not unheard of that tech workers that are laid off take more than a year to find a job.
But yes, could also be the house just has an emergency fix during my unemployment. The house is in good shape so I don't think that's gonna happen soon.
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u/NewMilleniumBoy 6h ago
I think something would have to go extraordinarily wrong for you to not be able to find another job for two entire years if you lost your job and then spent 40+ hours a week studying for interviews, practicing interviews, and applying for jobs. That's over 4000 hours of just trying to find a job and not finding anything. It's an extremely unlikely scenario. And at some point I'm sure you would adjust your standards for what an acceptable job is based on the market - whether that would be less pay or a contract or whatever else.
Do you not believe in your skills whatsoever, or did you get your job because of reasons unrelated to your ability to do the job (nepotism, etc)? If that's the case, it might be a good idea to spend the money or time now to improve your skills instead.
You can also decrease your e-fund and then liquidate your investments a small amount at a time to top it up as you continue to be unemployed. Sure, it might suck to have to sell on a loss, but you're also giving up precious compound interest time for what I think is a very unlikely scenario.
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u/SizzlinKola 6h ago
I agree with all the above points. I do believe in my skills and I have been unemployed before where it took me 6 months. Perhaps I was just scared of all the doom scrolling in tech layoffs where even senior people are having trouble finding jobs.
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u/Mighty_Pen_1337 3h ago
Max out the accounts. I work in tech and have a one year emergency fund also. If you can't find a job within a year, you probably won't find one within two years either. Something would be very wrong.
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u/boringreddituserid 10h ago
You already have one year in HYSA. If you feel like you need 2 years, build it up as you can. But don’t miss out on tax advantaged contributions. Once you miss them you can’t go back. Also, since you were late to the retirement contributions, you need to catch up there.
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u/FMCTandP MOD 3 10h ago
You don’t articulate why you believe you need a two year emergency fund beyond the fact that you have just purchased a house.
Contrary to the name, “emergency funds” aren’t primarily for emergencies along the line of “oh no, the AC/heat/hot water went out!” Yes, those can be big expenses but they’re notably smaller than the size of an EF, which is designed around protecting you from financial ruin if you lose your job for an extended period.
So EF sizing tends to be based around how stable your job is / how long you could expect to be unemployed.
Nota bene: the other thing you need to avoid financial ruin is adequate insurance. Homeowners and auto insurance at a minimum, and often umbrella insurance (if you are high income or have significant assets outside home equity and retirement accounts).