If there is anything that the coronavirus pandemic has taught us, it’s that you should always have an emergency fund. But how big it should be might be surprising.
financial advisers have insisted that their clients always have an emergency fund that is fairly quickly available to take account of the unexpected, from having to replace your stove to being out of a job.But in the wake of Covid-19 and the loss of value of the rand, John Anderson, head of research at the country’s biggest pension fund administrator, Alexander Forbes, says this amount is not big enough. He suggests that it should be at least equal to six months of income.
Then there is also the issue of government allowing employers to hold back contributions to funds under Covid-19. Many employers are taking this up, which means that when those people reach retirement, they will have less saved, unless they find other ways of making it up. This means that the sooner even pre-retirement people build up an emergency fund for when they are in retirement the better it will be for them.
If you are invested in an investment-linked living annuity you will probably be affected by any ongoing fall in investment market prices. Covid-19 itself has hidden costs. This means a big jump up for pensioners as they need computers or smartphones to stay in touch with their children and grandchildren; and/or wi-fi and a cable network. All of this costs extra money.
The best move would be for the government to create an emergency fund for people with tax allowances to encourage savings and structures that limit when money may be withdrawn from them. Anderson says Alexander Forbes already offers a side-car scheme to employers, a few of which have taken it up.What is the best method of setting a target for emergency savings?
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