100 – How to ensure that your emergency fund grows

by | Oct 15, 2024 | Financial Planning, Investment

Question

I retired five years ago and have around R1 million in my bank account that I use as an emergency fund to pay for any unexpected expenses. Since I retired, I have withdrawn about R100 000. 

Is there a better way for me to invest this money in order to get a better return.  I will need to have access to the funds.

Answer

I help a lot of retired people with their personal finances.  Managing their emergency funds properly is one of the biggest challenges.  People are living a lot longer after they retire so we need to plan on having both the pension and the emergency fund lasting till the age of 100.

 

A factor that further complicates life for retired people is that inflation for pensioners is usually higher than that of the general public.  Their biggest expense items are usually medical costs and electricity which have been increasing at rates that far exceed any pension increases.

 

Pensioners cannot afford to lose their capital and often make the mistake of keeping all their funds in a conservative investment.  The returns here are lower than pensioner inflation so their buying power will decrease over the years.  This can cause problems in years to come.

 

A way around this is to use my 3-pot approach where I split the lump sum into three pots:

  • Short term for money you are likely to spend in the next two years
  • Medium term for money that you may spend over the next 5 years
  • Long term for money that you probably only need after 5 years

 

The aim here is to ensure that the money you will need over the next year or two will be readily available.  This will free you to expose the rest of your funds to growth investments and make them work for you.

 

The 3-pot approach for pensioners

 

Time frame

Targeted return

Short

Less than 2 years

Money Market

Medium

2 to 5 years

Inflation + 2%

Long

More than 5 years

Inflation + 4%

 

So, in your situation, you could invest your money as follows:

 

Time frame

Amount

Short

Less than 2 years

R200 000

Medium

2 to 5 years

R500 000

Long

More than 5 years

R300 000

 

At the end of each year, you can look at the balances in each pot and see if it is necessary to top up the money in the short-term investment.

 

By following this approach, you will make your money work a lot harder for you and ensure that your emergency fund will be able to support you in years to come.

KENNY MEIRING IS AN INDEPENDENT FINANCIAL ADVISER

Contact him via phone, email or via contact phone on the financialwellnesscoach.co.za website

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