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Another Reason for an Emergency Fund

It is funny how some folks are never satisfied and at the same time never look or plan ahead to anticipate what might happen and how they might address it. As more and more folks retire without a pension, they seek a replacement source of income during retirement. Sensing an opportunity for business and profit growth, companies oblige – hence the wave of new annuity products with various income guarantees, for example.

Investors in many annuity products face prolonged periods with substantial surrender charges, limiting flexibility and tying them to the product. What happens to these investors when there is an unexpected need for funds and the annuity payment and other flows, such as Social Security, are not enough?

I digress for a moment – please bear with me – but since when is an unexpected need for funds truly unexpected? Nearly all of us, at one time or another, are faced with a significant “out of budget” need that must be addressed. The furnace or AC bugs out, the car stops running or is wrecked, an injury or bad medical diagnosis occurs, a family member needs money for just about anything. These things happen all the time; to everyone.  Just because we don’t exactly know the timing or amount does not mean that the need is going to be unexpected. That is why we are encouraged by our advisers to put aside money for emergency expenses.
 
Returning to our main discussion, when that emergency arises and we do not have the money, what happens? A not uncommon approach is to obtain a lump sum to deal with the problem by exchanging some portion of our current stream of income – such as pension or annuity payments. Of course, once the lump sum is spent, we still do not have those payments that were given up in the exchange. This is akin to the ads on TV encouraging beneficiaries of settlements to trade that flow of payments for a lump sum now. They do not talk about what happens later, when the person receiving that lump sum needs the money that was there before but is now gone. All too often, the money is spent on current wants instead of needs and so the settlement does not achieve its object.

It is even worse, potentially, with exchanging an annuity for a lump sum given the high costs associated with their acquisition and then giving up more money to make the exchange. This sort of friction wreaks havoc with one’s investments and really does not make sense. So before you spend all your free cash on a stream of income, make sure you have something set aside for the inevitable emergency. 

1 Comment to Another Reason for an Emergency Fund:

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Advisory Company In Indore on Tuesday, December 13, 2016 5:46 AM
The content included in this great post is really informative, thanks for sharing the useful and great post.
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