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Professor Payout: Emergency
Bucket Strategy
Finding the Silver Lining in Life’s Emergencies
Protect you and your
family from unexpected
expenses
No matter how carefully we budget for all that could happen spending rarely goes exactly as
planned. Inevitably, budget busters: like leaky roofs, the need for new tires, and countless
other unforeseen expenses arise. Allocating funds to cover unexpected expenses is a useful
tool to protect you and your family from the emotional trauma of needing to quickly borrow or
sell off assets.
Emergency spending causes us to suffer in two distinct ways. First, the headache of the
problem itself and second, the emotional impact of unexpectedly losing hard earned savings.
While there isn’t much that can be done to resolve the headache, reducing the emotional
impact of losing money is well within reach.
If you find losing particularly painful, you are not alone. Loss aversion suggests the pain of
losing is psychologically twice as powerful as the pleasure we have from gaining. Thus, the
thought of losing $100 hurts twice as much as the pleasure of gaining $100.
As we age the magnitude of pain we suffer with each loss becomes even more extreme as
the opportunity to recoup losses diminishes. It is also important to recognize that unlike
our working years, we tend to live on a relatively strict budget in retirement. The net result
is when retirees face losses; the emotional impact can be overwhelming.
PLEASURE
The pain of losing $100 feels five times worse than the pleasure of gaining $100.
GAIN
The typical person
weighs a loss twice
as much as a gain,
but retirees tend
to weigh losses five
times more.
PAIN
LOSS FOR
AVG PERSON
LOSS FOR
RETIREE
5x WORSE
Source: Now What: How Retirees Manage Money to Make it Last Through Retirement
AARP and American Council of Life Insurers (ACLI), December, 2007
Professor Payout: Silver Lining in Life’s Emergencies
A simple strategy to reduce the pain of loss
Relying on investments
to cover emergency
spending could trigger
tax consequences
A simple proactive strategy can help enable you to have the financial resources to fix the
problem at hand and reduce the emotional impact of losing. As you will quickly see, in a few
steps you too can harness the silver linings in life’s emergencies.
In the same way you have a mental bucket for life’s necessities (housing, food, taxes, etc.)
create a mental bucket labeled “emergencies”. When you fund that bucket, think of it as a
donation. While many financial products are available to fund this bucket, one attribute is key,
the funds should be liquid and readily available.
At the beginning of each year select a charity or university that is important to you and
fully fund your emergency bucket. For many people this enables them to generate positive
feelings about their generosity. See Income Insights: Mental Accounting in Retirement for a
full analysis on how to design your buckets to maximize happiness.
Now, each time one of life’s emergencies arises, you can simply pay for it out of that
emergencies bucket. This way it feels less like you are losing the money and more like
the charity is receiving a smaller contribution.
Allocate funds to
a charity, pay for
emergencies as they arise,
then donate the balance
DONATION
1
2
3
Necessities
Healthcare
Emergencies
3
At the end of the year, when all emergency expenses have been paid, donate the remaining
funds to the charity or university of your choice. Start the new year off right by funding your
“emergencies” bucket again. This simple strategy allows you to avoid the painful feeling
of losing with each unexpected expense, while supporting the organizations that make a
difference and matter the most to you.
This material is for informational or educational purposes only and does not constitute any of the following: a recommendation or investment advice; a solicitation to buy or sell securities
or other investment property; or a solicitation to pursue an investment strategy. This material does not take into account the specific objectives or circumstances of any particular investor, or
suggest any specific course of action. Investment decisions should be made in consultation with an investor’s personal advisor based on the investor’s own objectives and circumstances.
Any opinions expressed herein are those of Diane Garnick and Kari Pinkernell and do not necessarily represent the views of the TIAA group of companies.
The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate.
The TIAA group of companies does not provide legal or tax advice. Please consult your legal or tax advisor.
Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a
condition to any banking service or activity, and may lose value.
TIAA-CREF Individual & Institutional Services, LLC, Teachers Personal Investors Services, Inc., and Nuveen Securities, LLC, Members FINRA and SIPC, distribute securities products.
©2017 Teachers Insurance and Annuity Association of America-College Retirement Equities Fund, 730 Third Avenue, New York, NYNY 10017
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