Total returns are conservative annual return estimates based on historical returns over the past 50 years. Assuming you are properly insured, disability insurance should eventually cover most of any income shortfall due to a disability. On the other hand, a loss of income may occur that is not covered by disability insurance for instance, a cutback or firing. If this were to occur, you would need enough income to offset expenses over the time you are out of work. The best way to determine this liquidity need is to estimate your monthly living expenses and assume that those expenses need to be covered for some time six months to one year.
Retirees have somewhat different emergency and spending needs.
While the financial emergency that threatens workers is the loss of income, a retiree receiving income from Social Security, pension plans, and personal investments has little to fear from an interruption in income. Of course, savings will fluctuate based on the volatility of the markets, but the proper protection against this risk is a diversified asset allocation plan. On the other hand, retirees who are living off of investments do need relatively larger cash accounts from which to withdraw spending money. The size of the cash reserve would depend in part on the frequency with which you rebalance your investment portfolio and add to your spending account. Less frequent rebalancing may be more convenient and less time-consuming at tax time but it will cause the spending account to fluctuate more.