Worst Case Scenario – How Long Will Your Savings Last?

An interesting financial exercise is to calculate how long your savings would last if you were to lose your job or other main sources of income.  Basically, how much of an emergency fund (cash or line of credit) would you need?  In this “worst case scenario”, proper planning needs to be in place to be prepared for the worst and/or peace of mind.

So what do we do in the case of losing main sources of income?  First, we need to look at household expenses and cut back where possible.  Next, we’ll need to evaluate what types of incomes are available with no salary.  Following that, existing savings/investments will need to be examined to see what can be liquidated to provide cash flow.  As a last resort, new debt or liquidation of retirement savings can be used.

Some assets to consider,

  • Employment Insurance – This usually kicks in after about 4 weeks and lasts for about a year.  The maximum EI benefit is around $1500/month after taxes/deductions.
  • Cash Savings – Some people don’t like to have cash hanging around, but we usually have cash in our accounts as it gives us a sense of safety.  As well, it allows us to take advantage of opportunities that require cash as they come up.
  • Tax Free Savings Account – The TFSA can be withdrawn from completely tax free and is a tax efficient way to keep your emergency funds.
  • Non Registered Investments – We have a leveraged non-registered investment account that produces dividends, but could be liquidated if need be.
  • Home Equity Line of Credit – If you have home equity, then a home equity line of credit can provide instant cash at a fair rate.  However, the higher the balance grows, the higher the required interest payments will be.
  • Retirement Funds – In my opinion, retirement accounts should be the last resort in terms of providing cash flow due to the high taxation along with losing the contribution room forever.  However, with the low amount of income that year anyways, it may be an opportunity to withdraw from an RRSP at a lower tax rate.

In our family, both spouses have professional jobs which would qualify us for employment insurance.  In addition, we have a healthy savings, non registered portfolios, some borrowing room on our line of credit, and fairly healthy retirement accounts..

If we were to both lose our jobs simultaneously, this is the order that I would use our funds until new work is found.

  1. Savings Accounts/Cash on Hand: $12,000 (most of our cash was recently used to pay down mortgage)
  2. Tax Free Savings Account: $0 (not funded yet)
  3. Non Registered Investments: $60,000 ($45,000 leveraged, $15,000 regular)
  4. Line of Credit (s): $95,000 available (HELOC and PLC)
  5. Retirement Funds: $63,000

How long could we pay our expenses without going into debt or touching our retirement funds?  With no salary (assume no online income or severance), the only source of income left is via dividends in my leveraged investment account and employment insurance (EI).  As of right now, dividends provide around $1,800/year or $150/month.  However, the dividend income would decrease if we liquidated the portfolio for cash flow.

Our expenses are around $4,300/month.  Without jobs, I estimate that we could reduce our expenses to around $3,800/month.  This means that we would need at least $3,800 cash to cover our expenses while waiting for EI (assume $3k/month total EI income for both spouses).

Accounting for the initial cash requirement of $3,800 (waiting for EI), it would leave us with $8,200 in savings to cover the $650 monthly shortfall (counting dividends).  This cash would last around 12.5 months which is approximately when employment insurance would run out.

Hopefully by this point, we would have employment lined up, but if not, we would need to dip into our portfolios or line of credit.  If rates were to remain low like today (2.25%), it would be a toss up on whether to use the line of credit or liquidate our portfolio.  The largest downside of the line of credit is that it would create an additional monthly expense, unless we were to capitalize the interest.

Liquidating a taxable portfolio has it’s downfalls as well.  You could be forced to sell low, or even if you sell high you’ll face capital gains tax.  If choosing to liquidate, it may be best to liquidate positions as you need the cash instead of liquidating everything at the same time.

If we were to liquidate the portfolio completely (to keep things simple) and deposit into a high interest savings account that keeps up with inflation, it would eliminate my $150/month cash flow and would mean that the $60,000 cash would last 15.7 months (accounting for inflation).  At today’s market price point, there would be no capital gains tax payable on this amount.

So it looks like without going into debt, or dipping into our retirement savings, our expenses would be covered for up to about 28 months (assuming no big ticket expenses during that time.

So back to you, how long could you cover your expenses if you lost your main source(s) of income?

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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CJS
11 years ago

does anybody know if dividend end payments from stocks will reduce the amount of EI you are eligible for?

thatdaveguy
12 years ago

I could live using just using EI in the first year, barely dipping into my savings at all.

I live in a small city, so I’d dump my car and minimize all my other costs. I could last about 41 months including my retirement assets.

If I counted the buyout my company is currently offering to get rid of employees, I could last 66 months.

WP
12 years ago

I believe it was in one of Robert Kiyosaki’s books that I first came across this subject. The way that he proposed it, was that a persons wealth can be measured by how long they can survive financially without working. At this point, my savings won’t last nearly long enough.

Debt Consolidation Regina
12 years ago

This is a great article with very helpful insight on how important it is to do an emergency fund analysis such as the one you have provided. Thanks for sharing!

mp
12 years ago

Oops. And I also forgot to mention, if you are self-employed, or got laid-off from your job last year and got conned into “going into business for yourself”, you are totally out of luck with respect to EI. I know of many people who lost their jobs last year (after years of paying into EI), tried their hands at consulting or going into business for themselves, didn’t make it and have tried to apply for EI and of course cannot qualify at all now.

mp
12 years ago

Good luck getting EI after 4 weeks – budget for minimum 8 weeks wait. Stephen Harper’s government has failed to recognize the severity of this recession so consequentially has failed to staff up the department responsible for processing claims. Then factor in you’ll be required to exhaust any severance before you can even begin to receive EI.

Other factors to consider – if your employer convinced you to scale back your hours of work to prevent layoffs in your workplace, and your employer didn’t apply for the EI workshare program, then your employer has just screwed you out of full EI benefits (up to just under $450 a week). That’s because your EI benefit will be calculated on the number of hours you work, based on your last weeks of employment, not your best weeks.

Finally, if you live in an area of previously low unemployment, the duration of your benefits will be a lot lower than if you live in an area of high unemployment – because it takes a while for the rate to recalculate and improve benefits in your area. The duration of benefits depends on the unemployment rate where you live. Thus if you lose your job in Calgary, you’re likely to get only 19 weeks of unemployment benefits but if you lose your job in Acadie New Brunswick, you will get about 50 weeks of benefits.

Thank your conservative government for not changing this unfair regional disparity.

Tero
12 years ago

I do this kind of calculations about once a month to be “on top of things”. Current estimate is that if i loose my job and start to live through my savings, it will take approximately 6-8 years before they run out. My monthly living costs are less than $1000 a month so that is easy to cover. Unemployment insurance lasts for 2-3 years in Finland and it will be in my case almost $2000 so I can easily keep on saving money for first couple of years. And I have zero debt so I really don’t need to worry about anything related that.

TheRoadtoMeaning
12 years ago

First off, I have been browsing this website for months without ever commenting but have decided to today. Frugal Trader, your articles are excellent and have been a great educational tool for me.

28 months is a very impressive time frame to be without work and not dipping into retirement funds or gaining any extra debt. I am now aggressively building an emergency fund in case an event like this would ever happen to me in the future.

Four Pillars
12 years ago

TMW – thanks for the info – very interesting.

So I was wrong about the clawback, although in my defence the last two times I was on EI I didn’t get clawed back because I was part of the “exception” group (receiving parental benefits).

However, it also says “you received less than 1 week of regular or fishing benefits in the preceding 10 taxation years;” as an exception. This would imply that someone who hasn’t collected EI in 10 years wouldn’t face the clawback.