How to balance retirement and emergency savings in a shaky economy

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It’s not easy to prioritize financial goals, especially when you’re choosing between two essentials in a volatile economy: saving for retirement or building your emergency fund.

Although there are higher 401(k) contribution limits for 2023, you shouldn’t skip saving for a rainy day to get the most out of your retirement plan, experts say.

Indeed, more than half of savers prioritize short-term financial goals in 2023, including emergency savings, according to a recent study by Fidelity Investments. And recent personal capital research found that building an emergency fund is a top priority for 2023.

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“It’s always a balance,” said certified financial planner Kathryn Vallega, founder of Green Bee Advisors in Boston. While maxing out your 401(k) should be the goal, your emergency savings are also important, she said.

Leslie Beck, a Rutherford, New Jersey-based CFP and owner of Compass Wealth Management, said she has a “rule of thumb” for deciding between retirement and emergency savings.

She always recommends contributing enough money to your 401(k) to get the full company. Then, if your emergency savings are short after that, you should “definitely” shift the funds, she said.

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If you’re single, Beck suggests keeping “about a year’s worth of basic expenses” to cover necessities like housing, food and utilities.

“You should be a year old [of essential expenses] in case there’s a downturn in the labor market, which we may or may not go into,” she said, noting that it often takes longer than expected to find work after a layoff, especially for higher-compensated employees.

However, her recommendation changes for dual-earner couples. “I cut it down to six months, maybe even three months, depending on what industry you’re in,” she said.

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And there may be some flexibility if you have access to a home equity line of credit, which can be another source of cash for emergency expenses, Beck said. But you have to be “very judicious” when using equity because borrowing after losing your job can put your home at risk, she said.

Vallega suggests an emergency fund of 12 to 18 months of expenses, admitting she’s “more conservative than most,” but says the exact number depends on your career sector and personal preferences. For example, it can encourage technology clients to allocate more than healthcare providers.

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