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A first question (many more coming I'm sure!)
Old 01-23-2014, 10:55 PM   #1
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A first question (many more coming I'm sure!)

Hi everyone! I'm glad I found this site and look forward to learning a lot. I'm 51.5 and hoping to have the option to retire in my 56th year. Or at least be able to work just part-time (I like my work, but more time to do other things would be great!). House, little vacation house, cars, and everything else is paid for, and I've got $880,000 in retirement savings (partly subject to stock market fluctuations). I'm maxing out my 401k and living on about 1/4 of my take home pay. Health care is a nagging question of course, but we'll see how that pans out.

A first question that comes to mind is this: Is there a recommended percentage of one's portfolio to keep in cash? I currently have about 10% in cash and project about 12% cash in four years. I'm thinking about using some of it to live on, plus other investments, from age 56 to 59.5 when I can access other retirement accounts. Should I be investing more of that cash now? Should I keep a certain minimum percentage in cash after retirement?

Thanks for reading,

-O2Bfree
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Old 01-23-2014, 11:51 PM   #2
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Before retiring i kept very little cash as I had dependable and steady income that I could rely on. After retiring I now try to raise my cash to about 6% when I rebalance (usually annually). My WR is about 3% so my cash would represent about 2 years of living expenses/withdrawals.

One think to keep in mind is having sources of funds available that can be used without penalty from 56 to 59.5. I have taxable funds or my 401k allowed penalty free withdrawals if you terminated service after age 55 (but not all 402ks offer that benefit).
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Old 01-23-2014, 11:59 PM   #3
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Love your handle! I keep cash in my day-to-day checking account (enough to cover the monthly 'usual' such as mortgage, food, gas, car maintenance, credit card, etc). I keep my second stash of cash in a longer-term emergency fund, which will tide me thru at least a year, preferably two or three, during the next stock market crash so I'm not forced to cash out stocks in a down market when they have less value. If I didn't need it to ride out a bad market I could us it to pay for my next car or new roof and later replenish it when the market had a good year. The emergency pot is kept in CDs, government I-bonds, and a conservative mutual fund. I don't keep any cash within my 401k accounts, just stocks/bonds
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Old 01-24-2014, 08:15 AM   #4
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Also used to keep no cash when had dependable income. Over last year got frustrated with declining bond prices and performance, so moved a good bit out of that portion of assets to cash. Actually have about 3 years of income needs in cash now. Yes, I know at 0.85% I'm losing to inflation, but it's better than what it was doing in my mid term bond funds. I'll watch yield and if things change so will I. I have a pension and our withdrawal rate is ~2.5% so this isn't a large portion of our assets.
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Old 01-24-2014, 08:22 AM   #5
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Hi O2B,
Generally I see recommendations to keep 6-12 months of cash for emergency needs.

You plan to use the cash to live on 5 years in the future. I personally would put it in CDs, to be sure it's still there.
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Old 01-24-2014, 08:24 AM   #6
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Thanks folks. Two or three years' worth of cash, based on my WR (hey, I already learned a new acronym!) seems like a smart percentage to shoot for. I'm estimating a 3% to 4% WR, so that suggests a slight reduction in my planned cash stash.
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Old 01-24-2014, 09:12 AM   #7
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Welcome to the forum. I love your username !!!
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Old 01-24-2014, 09:43 AM   #8
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While working, I kept almost nothing in cash. My employment felt very stable - and indeed it was until the company went under - but I had plenty of warning about that.

In ESR, I'm keeping around 2 year's worth of living expenses in cash in a savings account. Dividends are paid directly into that account too and cover almost half of my living expenses, so am torn between allowing the living expenses to go down to a year's worth, or keeping them as they are.
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Old 01-24-2014, 09:53 AM   #9
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Welcome to the forum.

The term "cash" has different meanings to different people, so I think it helps to clarify what you are referring to. Some people consider cash to be only the money in their local checking account. Others include money invested in long term CDs as cash.

Many of us on the forum have recently sold a portion of our bond holdings and transferred them to PenFed when they began to offer 3% on a 5 or 7 year CD. Since there would be a penalty for early withdrawal, it may not be appropriate to think of this as liquid cash, in the same manner as the cash in your local bank account that pays very little interest.

For me personally, I keep less than $10K in cash in local bank accounts that don't pay much interest. However, I have a substantial portion of my fixed income portfolio in 5 year CDs, with varying maturity dates. About 10 years worth of living expenses.

If I was not working, I would simply not reinvest the next CD that will be maturing, and would keep it in the local bank. As it becomes depleted, I would then plan to spend the next CD that matures. My worst case scenario is I run out of cash in my local account and have to cash out a CD early and pay the interest penalty for doing so.
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Old 01-24-2014, 10:50 AM   #10
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Quote:
Originally Posted by O2Bfree View Post
Thanks folks. Two or three years' worth of cash, based on my WR (hey, I already learned a new acronym!) seems like a smart percentage to shoot for. I'm estimating a 3% to 4% WR, so that suggests a slight reduction in my planned cash stash.
I read somewhere recently (I believe it was "Boglehead's Guide to Retirement") that the common 4 percent rule assumed a person would retire at 65 and that if you were 55 your withdrawals should be more along the lines of 3-3.5 percent. Anyone recall hearing similar?
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Old 01-24-2014, 10:59 AM   #11
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I would always consider CD's to be cash since their principal is protected and early withdrawal simply means you give up some interest, the actual value of your CD doesn't do go down. (At least I think that it is correct, although I seem to recall hearing that brokered CD's cashed out early can lose principal)
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Old 01-24-2014, 11:05 AM   #12
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Originally Posted by Sanbenito1 View Post
I read somewhere recently (I believe it was "Boglehead's Guide to Retirement") that the common 4 percent rule assumed a person would retire at 65 and that if you were 55 your withdrawals should be more along the lines of 3-3.5 percent. Anyone recall hearing similar?
Those are the generally accepted rules of thumb. More conservative folk go for even lower WR's. Some of us are pretty uptight
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Old 01-24-2014, 11:09 AM   #13
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Quote:
Originally Posted by Alan View Post
(At least I think that it is correct, although I seem to recall hearing that brokered CD's cashed out early can lose principal)
That's what I understand as well. A brokered CD, unlike a CD purchased at bank or CU, behaves much like a bond. If interest rates go up and you want to take advantage of the better rates you cannot withdraw your funds early from a brokered CD. The only way to get your funds prior to the maturity date is to sell at what will be a value less than the purchase price - at least that's my understanding.

I suspect this is why the 3% CD at PenFed created such a stir on the forum while no one with a basic understanding of finance and investing wants to touch brokered CD's in this environment.
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Old 01-24-2014, 09:32 PM   #14
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Many of us on the forum have recently sold a portion of our bond holdings and transferred them to PenFed when they began to offer 3% on a 5 or 7 year CD. Since there would be a penalty for early withdrawal, it may not be appropriate to think of this as liquid cash, in the same manner as the cash in your local bank account that pays very little interest.
Very interesting! I have 65K in a bank account, which is the cash fund I'm growing partly to use when I first retire. Since that's about 4 years away (I hope), I feel good about locking up at least half of it in a CD like that. Thanks for the tip!
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Old 01-25-2014, 05:45 PM   #15
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For # of years living expenses I count checking/savings accounts, CDs and short term bonds as "cash". As "real" cash I count checking/savings accounts and CDs. Don't ask me why because I don't know !
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