Managing emergency fund for retirement

[clutch]

I am now managing my parents' TFSA account, which will mainly be used as a emergency fund during their retirement. They are both about 5 years away from retirement. We agreed that I will be doing passive indexing, so by "managing" I really mean deciding on the optimal allocation between equities, bonds, and cash. Since it will be an emergency fund, they won't make regular withdrawals.

 

What would be the optimal asset allocation for this type of account? Currently, it stands at 50% US equities and 50% cash.

[KCLarkin]

I am now managing my parents' TFSA account, which will mainly be used as a emergency fund during their retirement. They are both about 5 years away from retirement. We agreed that I will be doing passive indexing, so by "managing" I really mean deciding on the optimal allocation between equities, bonds, and cash. Since it will be an emergency fund, they won't make regular withdrawals.

 

What would be the optimal asset allocation for this type of account? Currently, it stands at 50% US equities and 50% cash.

 

I'm not sure that TFSA is ideally suited for an emergency fund. The tax shelter is so strong that it should be a core part of their retirement planning. Specifically, an emergency fund should be in cash. It would be a shame to waste a TFSA on cash (though that is what most people do because of the unfortunate name). It is really a tax free investing account. I'd actually look at the TFSA as the opposite of an emergency fund. It's where I would invest for the longest term. I consider my TFSA to be longevity insurance or my estate plan. It will be the last thing I tap into (before my home equity).

 

I think I would be more conservative with my RRSPs 5 years before retirement because you are forced to make withdrawals.

 

The investment horizon is still very long if you are 5 years from retirement. Assume they are 60. There is a very good chance that one of them will live until 85. So they actually have 25 years to invest, so I would tilt more heavily towards equities than traditionally advised (though you need to account for risk tolerance and current valuations).

[rb]

Just like everything related to investing and retirement planning context matters a lot. The decision would be different if your parents have 200k saved up instead of 800k or 5M for example.

 

I agree with KCLarkin that since the TFSA is ideally suited for equities (especially in retirement) it's not an ideal place for an emergency fund.