Emergency fund

So these are all great questions that I've seen in this thread so I'll try to hit on the major highlights (probably going to be a tad long but will hit the points quickly) ...

Before getting to a "what's a good amount to have as part of an emergency fund" question, the first that I think you have to realistically ask yourself are what are your financial goals? Is it to buy a home? A 2nd home? Kids college? Retirement? Retire earlier than 65+? The answer to many of these types of questions will help inform what you're objectives should be. Additionally, how much time you have to reach these goals also matters.

My general rule of thumb would lead toward having the "rainy day fund" to cover a full year of salary. In reality, you can probably get away with 12 months of expenses. When thinking about the expenses it's important to factor in everything ... mortgage, car payments, monthly recurring expenses, any anticipated 1-time expenses to come, etc.

@Doog_de_Jour makes a really good point about having the ability to adjust your spend downward in trying times. I think that's generally good advice to always have in your mind what spend is must have's vs like to have's in spend.

That said, if you ever find yourself in a situation that requires dipping into the savings, your stress levels are already going to be high. Cutting expenses and living effectively bare bones can just add to the stress you're already feeling. Then add to it the stress that you're going to experience trying to go through the job search (which becomes more difficult and niche as you advance in your career), the interviews, and ultimately some rejection, and stress is going to be at a super high level. This is why planning comes into play and making sure that you have enough to cover a rainy day as comfortably as possible.

This is an exact situation that I went through in my career when I left a company due to downsizing after a divestiture with a decent sized severance package. I was expecting that the amount of time to find a new position would be relatively quick, took a month plus from the search to take a vacation and enjoy the summer, and then found that as I entered into the Holiday season, I was finding it really hard to find the right niche. The stress is very real and in the grand scheme of things I had a relatively low stress situation given my personal circumstance. But there's stress. There's doubt. There's pressure. So to the extent that you can eliminate any of that, my recommendation is to do so.

Other elements that really matter in terms of what you're goals and objectives are include what your 401k looks like (how much is one contributing), are there any stock or ownership rights tied into your current job? Vesting horizons? How liquid are those interests? Where the mortgage is at on the horizon? Is the real estate if sold today at a profit or under water? Are you planning on retiring where you currently live or in a different location with a lower cost of living? All of these things you'll want to consider.

One of the other things that you'll want to consider within the rainy day fund is how much are you willing to draw down on it? In other words, what % of that are you willing to consider to be dry powder to use as opportunities arise whether it's through the market dropping substantially (like it did 12 months ago), a great real estate opportunity, etc. One of the benefits of being conservative in the RDF is that it increases liquidity and ability to act when you can. That said, if you draw down it probably makes sense to prioritize the ability to rebuild back to desired levels. Think of this fund really as your own insurance policy to cover you in a disaster environment.

Finally, what I think everybody should think about are retirement goals. Everybody should be thinking about what kind of number and/or annual expenses that they want to spend as they move into retirement. And let's be really honest, retiring is really the reward for all of the hard work that you've put in in life. It's the time to enjoy the fruits of your labor. So to the extent that you can retire early and enjoy life, that's a goal that at least to me is worth pursuing. Not only that, but having a goal of what you want gives you the ending point of what you need to be comfortable with that retirement. Taking where you are today and comparing it to where you want to be effectively lays out the blueprint for what you need to get there.

Just as a simple example, let's say that you determine that you need roughly $100K a year in income to cover expenses, travel, etc. A really simple path forward is to assume that all of your liquid assets going forward is invested in tax free muni bonds. Over a long term horizon, it's not uncommon for high quality tax free muni bonds will pay out between 3-5% per year. So even at 3%, if your liquid asset base at retirement is $3M, you'll really have no problem not only covering your spending goals, but maintaining that $3M principal going forward. That overall lump sum really should be viewed as your rainy day fund at that point because your ability to add to that going forward isn't super clear without adding risk. If it goes to $0 then ???

The last thing that I'd add is that as you approach retirement, I think it also really makes sense to think about what alternative things you could do to create income other than what you do. What happens if you get shown the door and for a lot of "wink wink" illegal reasons tied to age bias, etc. that you can't realistically find a new role. What can you do either as your own consultant or business owner, another skill set that you have that you can monetize, etc. to make sure that you stay on track for retirement. Really important to keep that in mind.

A lot of the above is pretty high level stuff but hopefully it makes some sense about all the different considerations that you need to think about when it comes to retirement planning. It's something that I'd recommend everybody taking a look at every 12-24 months about where they are and how they're proceeding in relation to their goals and objectives.