With interest rates incredibly low and the stock market doing so well, how much should I keep in liquid assets?

Your question is a common one from people of all ages. Even with interest rates low, safety accounts – I don’t like to call them emergency funds — are essential. Whether married, single or partnered in any way, you need a fallback to cover basic needs. 

What that amount should be is personal and is based on your spending and responsibilities. The basic rule of thumb is three times basic living expenses, but if you own a home, make it closer to six months. This money should be kept in an account separate from your everyday funds and any savings for your next car, big trip or celebration. Savings is separate from whatever mix of stocks, bonds and cash you have in your investment accounts.

If you are retired, you still need a safety account. Even if you have a steady monthly retirement income or withdrawal strategy for your 401(k) account, there may be financial surprises: think a new furnace or air conditioner, storm damage, condo assessments, car repairs, medical and dental bills.

Income from the stock market is not guaranteed. Ask retirees who saw the value of their investments fall in the dot-com crash of 2000 or in the 2008 financial crisis or in March 2020. Perhaps they even sold in fear, leaving their net worth permanently reduced when prices recovered. Once retired, replenishing those assets is difficult. Having cash buys you time and clearer thinking, and it lets you keep your long-term investing strategy in place.

Liquid assets are assets you can access quickly and predictably. That is why we start with cash, whether in a savings account, a money-market fund, or a certificate of deposit. Check if the account is insured by the FDIC (money-market accounts are not.) Don’t be swayed by better interest rates, as they are only one part of the story.

Of course you can sell other assets — from your home to car to jewelry, even stocks and bonds — for cash, turning them liquid. But the dollar value isn’t predictable. Nor in some cases is the time involved. And don’t forget the added cost of capital-gains taxes on investments and, in some cases, your home.

Read: Here’s how you can save money on capital-gains taxes when you sell your home

No matter when you need it, cash holds the same price; investments do not.

A home equity line of credit, or HELOC, is not a safety account, despite what some claim. That is a backup option that may be good to have, but once tapped, it is a loan that must be paid back with interest. No matter how tempting the option, you are taking a risk. Paying off debt is not easy in retirement, even more so when faced with inflation. And locking yourself into more debt when you are no longer working creates stress.

Withdrawing money from an investment account – whether a 403(b), 401(k) or IRA – is smart with a plan. But without one, the implications create financial havoc. A retired woman was building her dream home and ran over budget. She withdrew $10,000 from her IRA to make the final payment to the contractor and to get built-ins she wanted in a closet. However, she was only 59. She had to pay a 10% penalty for early withdrawal — $1,000 — on top of the income tax due (withdrawal from traditional retirement accounts are taxed as ordinary income). Deciding and acting on the fly cost her extra money.

Adding an additional monthly payment, paying a penalty for an early withdrawal or selling assets in a rush may not create a problem today, but retirement lasts many years, hopefully decades. Having a consistent cash fund can help you with those bumps along the way and gives you a fun, more relaxing retirement.

CD Moriarty is a certified financial planner, a columnist for MarketWatch and a personal-finance speaker. She blogs at MoneyPeace.

More from CD Moriarty: I’m getting a $450 car allowance with my new job and want to lease a luxury car. My wife says buy a used car — who’s right?

Also: Should I do an online will? Avoid these pitfalls