How to protect emergency savings

Set aside three years’ worth of retirement income to provide clients with a buffer during market crashes. These funds are separate from what resides in their investment portfolios (normally comprised of stocks, bonds or mutual funds).

Here’s where to stash the cash:

• Place one year’s worth of income in a money-market account. That will serve as the first year’s income.
• Put the second year’s income in a one-year bond or GIC. This money goes untouched, unless there is a major market downturn.
• Put a third year’s income in a two-year bond or GIC. This money likewise remains untouched.

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Your client spends the money-market account the first year it’s needed. In year two, she lives on gains from her investment portfolio—provided there is no downturn. If the stock markets are weak, however, the maturing GIC replenishes the money-market fund.

If the first GIC isn’t needed, reinvest it for two years. And after year two, reinvest the second GIC for two years. This ensures there is always a one-year lump sum to cover expenses if the markets don’t provide sufficient return.

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The key to making the strategy work is ensuring the client doesn’t access income from any part of the portfolio that is declining in value.

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