Emergency savings should be your first line of defense — but there’s a ranking of fallback options if expenses go beyond that. CHUYKO SERGEY/Shutterstock
What if unanticipated expenses exceed your emergency reserves? You have options, and I’ve ranked them from most palatable to least.
1. Your Own Emergency Fund/Short-Term Securities
Emergency funds should be held outside of tax-sheltered wrappers and include highly liquid investments like bank savings accounts, money market accounts, and so on. If you’re working, your emergency fund would ideally hold a minimum of three to six months’ worth of living expenses; retirees should target one to two years’ worth of anticipated portfolio withdrawals.
2. Low-Risk Assets in Taxable Account
Your next source of cash is other taxable holdings: investments in brokerage accounts, outside tax-sheltered vehicles. When identifying securities you could sell, focus on liquidity, tax consequences, and transaction fees.
In a best-case scenario, you’d have a short- or intermediate-term bond fund to sell. It’s reasonably liquid, and you’d already have paid taxes on most of your gains.
3. Roth IRA Contributions
You can withdraw any Roth IRA contributions (the amount you put in, not investment earnings) at any time, without penalties or tax. The big downside, of course, is that you’ll have fewer retirement funds working for you.
4. Life Insurance Cash Values
You can withdraw money outright from your whole life insurance or variable universal life insurance policy and have it deducted from the face value. Those withdrawals are tax-free, assuming they don’t exceed the amount you’ve put in.
