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| The bottom line: it's okay to stash a lot of money away for retirement in investments you can't touch for a long time. But giving your regular savings some liquidity can keep you afloat when times get tough.
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In financial terms, keeping your money "liquid" is the opposite of keeping it "frozen." When your money's "frozen," you can't get to it very easily. When it's liquid, you can get to it and use it right away.
So what's liquid?
Your checking account is liquid, because you can cash a check. Money market investments are liquid because they can be sold quickly without incurring a penalty or major loss.
What's not liquid?
A house isn't, because it takes time to sell it, and it costs a lot of money in real estate commissions. Sources of money that you can't get to easily are not considered liquid.
Why worry about liquidity?
- Most financial experts would tell you to keep some liquidity in your general savings, just in case you need some money quickly.
- Your house or retirement nest egg might be your biggest investments – but you probably won't be able to sell either quickly if there's an emergency.
- Most retirement savings are not liquid, because you have to pay penalties and taxes (about 30 percent) to get access to that money before age 59 1/2 (or age 55, depending on the type of account and how you take payments). This includes the FRS Investment Plan, 457 plans (deferred compensation plans), 403(b) plans (tax-deferred annuities or accounts) and IRA accounts.
- It's a better idea to keep 3 to 6 months of pay in savings that you can get to in an emergency. These savings will help keep you from dipping into your retirement money to pay bills or buy boats or cars.
- Remember, your retirement savings should be your absolute last source of emergency money, because you'll have to pay big penalties or taxes on most of this money. Plus, you want to keep retirement money for just that purpose: retirement!
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