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Cash for the Downturns
Old 12-23-2014, 10:17 AM   #1
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Cash for the Downturns

Hey all,

First, a Happy and Healthy Holiday season to you all.

Quick question, I think. DW and I are 50 with plans on ER in 4-6 years. We are maxing 401K's, and now have the ability and are focusing like a laser, to sock away as much after-tax savings as possible. This will help fund our "gap" before 401k's are available.

We are putting this into to various Fidelity funds, ETF's, etc..., and that's all good. But, I know I need and want to have 1-2 years in expenses saved in case of a market down-turn. The question is, how do I apportion this other savings bucket? Do I do it concurrently with the other dollars I am already investing with Fidelity? For instance, every month do I set aside 50% for cash and and 50% to investments? Or, because my time horizon is not VERY short-term, should I keep as much as possible with equity exposure and then harvest profits bit by bit to put in money markets, CD's etc...

I know the idea of cash is to NOT have it exposed to the market but I am trying to enact the most efficient method of saving for this as possible and leave as little on the table as possible.

Oops, maybe not such a quick question. Thanks much for any insight.
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Old 12-23-2014, 10:58 AM   #2
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Originally Posted by mbnj77 View Post
Hey all,

First, a Happy and Healthy Holiday season to you all.

Quick question, I think. DW and I are 50 with plans on ER in 4-6 years. We are maxing 401K's, and now have the ability and are focusing like a laser, to sock away as much after-tax savings as possible. This will help fund our "gap" before 401k's are available.

We are putting this into to various Fidelity funds, ETF's, etc..., and that's all good. But, I know I need and want to have 1-2 years in expenses saved in case of a market down-turn. The question is, how do I apportion this other savings bucket? Do I do it concurrently with the other dollars I am already investing with Fidelity? For instance, every month do I set aside 50% for cash and and 50% to investments? Or, because my time horizon is not VERY short-term, should I keep as much as possible with equity exposure and then harvest profits bit by bit to put in money markets, CD's etc...

I know the idea of cash is to NOT have it exposed to the market but I am trying to enact the most efficient method of saving for this as possible and leave as little on the table as possible.

Oops, maybe not such a quick question. Thanks much for any insight.
An interesting idea (albeit somewhat risky) could be to keep your cash in gold or gold derived stock. In the event of a bad market, gold is normally going to take off, just at the right time when you need to tap it and want to avoid selling your long stock.

Some would say I-bonds - but I worry that in a high inflation environment you would still be behind the curve as you drawdown and try to spend. But maybe that is because I don't know much about them.

Middle of the road for me would be a total US bond fund (if you are US) so you make something, but could take a hit too.
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Old 12-23-2014, 11:01 AM   #3
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As a 50 year old with 1.5 years into ER, I'd recommend a simplified 50/50 equity/bond allocation. Simple is good and a 3 Fund indexed portfolio would be appropriate. Then at the time you ER, you can move 2 years of expenses to an interest paying savings account such as Ally @ .95%. From there you can automatically withdrawal a monthly paycheck for living expenses. This is essentially how I'm executing my ER.
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Old 12-23-2014, 11:55 AM   #4
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As a 50 year old with 1.5 years into ER, I'd recommend a simplified 50/50 equity/bond allocation. Simple is good and a 3 Fund indexed portfolio would be appropriate. Then at the time you ER, you can move 2 years of expenses to an interest paying savings account such as Ally @ .95%. From there you can automatically withdrawal a monthly paycheck for living expenses. This is essentially how I'm executing my ER.
+1 We retired 5 years ago (59/57) and did this exact same scenario. Still keep 2 years of cash expenses in reserves for those inevitable downturns (recently moved it to an Ally savings account). We also have about a third of our retirement funds in taxable investments.
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Old 12-23-2014, 12:25 PM   #5
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...DW and I are 50 with plans on ER in 4-6 years....The question is, how do I apportion this other savings bucket? Do I do it concurrently with the other dollars I am already investing with Fidelity?...
I'm sure there are plenty of right answers to your question.

I view the cash reserves as a way to avoid selling when stocks are down. You don't need that until you stop working since you are living off current income.

I personally wouldn't be piling up 2-3 years cash while you're still 4-6 years away from planned ER. Beyond having a good emergency fund that is.

I ER's at 49, I'm now in early 50's, DW is in early 60's. And we currently have 72% in taxable financial assets. We live off the interest/dividends/capital gains of these assets and will for some time since we'd like to keep the tax advantaged accounts compounding as long as possible.

We switched to our "retirement allocation" during the 6-9 months running up to me quitting my job. During the final count down, we moved about 2 years worth of cash into CDs. We also changed other allocations to move from "accumulation" to "living off investments". This cash reserve is enough, along with dividends and interest, to ride out a severe downturn for 3-4 years and not have to sell any stocks.

This allows us to have a heavy weighting in stocks (mostly stocks - others have pointed out that with those CDs we're not "100% in stocks", but pretty close) which we favor because our investing horizon is pretty long term.

Anyway, that's how we did it.
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Old 12-23-2014, 12:36 PM   #6
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Then at the time you ER, you can move 2 years of expenses to an interest paying savings account such as Ally @ .95%. From there you can automatically withdrawal a monthly paycheck for living expenses..
And yes, we basically do this too.

We have a saving account at Capital One (née ING) that transfers a fixed amount into our checking account each month for normal bill paying.

We don't keep 2 years of cash in there - usually 3-6 months. We transfer dividends into it as they come in. We top it off by selling stock if needed.

This is separate from our "bad times" CD ladder, which is rolled over as the CDs come up for renewal.
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Old 12-23-2014, 01:10 PM   #7
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"4-6 years" suggests you are flexible on this. If you don't mind working though a downturn, I'd leave it all equities and move to cash and early retirement AA less than a year from when you retire. I did raise a lot of cash when I retired in 2007.


If you have a firm date in mind, then you might get conservative much earlier if everything is going well.
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Old 12-23-2014, 01:22 PM   #8
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+1 We retired 5 years ago (59/57) and did this exact same scenario. Still keep 2 years of cash expenses in reserves for those inevitable downturns (recently moved it to an Ally savings account). We also have about a third of our retirement funds in taxable investments.
+2
Will be my strategy.

And "cash for the downturns" is tantamount to attempting to time the market. Bad idea.
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Old 12-23-2014, 02:36 PM   #9
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An interesting idea (albeit somewhat risky) could be to keep your cash in gold or gold derived stock. In the event of a bad market, gold is normally going to take off, just at the right time when you need to tap it and want to avoid selling your long stock.
Take a look at history. Gold did miserably in 2008. It didn't protect investors facing a systemic meltdown and resulting bear market. Investors were dumping gold too. Too many speculators play in gold, and sometimes they are forced to dump gold to cover their other bad investments.
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Cash for the Downturns
Old 12-23-2014, 07:57 PM   #10
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Cash for the Downturns

hence, normally. And you ignore the alltime highs in the years following. Tsk, tsk.


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Old 12-23-2014, 08:54 PM   #11
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There are some very well-regarded articles/studies that suggest that cash is not really desirable nor needed. I have no problem funding expenses with bond funds in a stock downturn. Also I have no problem rebalancing from bond funds to stocks funds in a downturn.

I also have no problem selling stocks in one account (say a taxable account) to fund expenses in a downturn and turning around and buying stocks in another account (say a traditional IRA) by exchanging from bonds.

I realize that many folks have problems with not keeping some cash for downturns, but that's what I think bond funds are for.
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Old 12-23-2014, 09:24 PM   #12
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Depends on your definition of cash. Normal AA suggest X% stocks, Y% bonds. DW and I have 0% bonds but use CDs as a surrogate for bonds since they pay about the same (here in the frozen north). We have several years expenses in cash/bonds/CD amounting to ~30% of investments. Rebalance occasionally.
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Old 12-24-2014, 10:05 AM   #13
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+1 We retired 5 years ago (59/57) and did this exact same scenario. Still keep 2 years of cash expenses in reserves for those inevitable downturns (recently moved it to an Ally savings account). We also have about a third of our retirement funds in taxable investments.
Everyone's idea of cash reserves for covering living expenses in case of a market downturn varies greatly. For us - no mortgage on our home, and carry no other types of debt. Two years of cash for living expenses in reserves is just dividend payouts we get from our taxable accounts. We have just under 1/3rd of our retirement investments in taxable accounts. Taxable account dividends cover the shortfall of my SS (no pensions) of our base living expenses (base = no extras like travel, etc.). We also utilize that cash reserve for unexpected and/or planned expenses to avoid any untimely tapping of investments. This year, we had some unexpected medical expenses (maxed our out of pocket costs), and our youngest daughter's wedding.

Taxable account capital gains get reinvested, but can be used to replenish reserves (will be using them this year to replenish for the mentioned expenses). We haven't sold any (taxable) investments since retiring (5 years now), and bought a new car along the way. Our IRAs are not tapped to limit our income (ACA subsidy play). The 2 year cash reserve for living expenses has been a nice go-to cash source which allows us to still manipulate income for a steady predictable stream (we run 52/48 stock/bond allocation all investments).
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Old 12-24-2014, 10:52 AM   #14
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I realize that many folks have problems with not keeping some cash for downturns, but that's what I think bond funds are for.
My rational for favoring CDs right now over bonds is this:



Since the early 80's we've been in secular bull market for bonds. They've been a great place for "cash" since their yields were pretty good and as interest rates generally fell for the last 30 years there has been appreciate in NAV.

But I think that has taught people that bonds don't lose "much" value since they haven't really for 30 years.

I don't see much upside in bonds going forward. Best case scenario is a continuation of near zero interest rates. And CD yields are pretty close to bonds in that case (both near zero, alas) but with zero risk of loosing principal.

So I'm happy to keep my cash in CDs for the immediate future. Just my thinking...
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Old 12-24-2014, 11:01 AM   #15
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My personal strategy is to just invest it in stocks. You gotta figure with ok-ish stock returns, your "cash reserve" in stock is normally going to balloon after 10-15 years, then in a downturn of 50% loss, that stock will still be near or better than a cash-type vehicle would have been that was just keeping with inflation.

In short, I don't let money languish, long-term. I want it in a place with growth. For me, that's because my death is very far away, i hope. If you are in a place where you have some certainty about your remaining years, locking in a cash value may make more sense.
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Old 12-24-2014, 11:02 AM   #16
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Since I have a stable value fund at my disposal I am using this for the biggest portion of my fixed income allocation. When I ER in the next year I plan to roll it over into an IRA with laddered CD's. This will fund the first 5-7 years with my bond funds sitting on the sidelines, hopefully absorbing any rate increases while not taking distributions.
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Old 12-24-2014, 11:32 AM   #17
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Like many folks, we have a cash buffer, so we hold about 2 years expenses in cash and cash equivalents. This helps us ignore the day-to-day market gyrations and the resultant volatility in our retirement fund.

We also hold cash as part of our asset allocation in our retirement fund. Cash as an asset class is uncorrelated to stocks and bonds, so holding it increases portfolio diversification. That cash is available for rebalancing if equities and bonds suffer in a given year. And there are times that bonds and stocks both suffer in the same year - particularly during periods of rising interest rates. But it can also occur during periods of extreme financial crisis/instability as occurred in 2008. You can avoid the latter case by only holding very high quality bonds such as US treasuries, but if you have more diversified bond holdings, you may occasionally have events where credit concerns hit your bond funds, not just rising interest rates.

We do all this in full understanding that holding some cash lowers your long-term returns, as does holding bonds, or really anything that doesn't have the max possible long-term returns such as small-cap stocks. As retirees we are specifically trading less short-term volatility off for slightly lower long-term returns. We don't really care if we maximize the long-term return of our retirement portfolio. We just want a reasonable degree of portfolio survival over a long time period and annual volatility we can live with.
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