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Cash Reserve - Creating and Maintaining?
Old 02-08-2018, 06:23 PM   #1
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Cash Reserve - Creating and Maintaining?

I'm sure this is a dumb question, but what should be a simple idea has me a bit confused lately.

I often hear we should have 2-3 years of cash reserves on hand once we retire to "ride out" downturns in the market. If I understand this correctly, if our annual spending is 40K and a pension and SS covers 30K of that, we should have 30K in cash reserves (10K balance * 3 years). Is that right?

So what is the best way to establish that reserve in the first place? Would I simply withdraw that 30K chunk from my IRA at the start of retirement and transfer it to a savings account? With only five years till retirement, all of our savings is going into my IRA, and we don't have any extra to set aside for a separate "reserve" cash account.

Once the reserve is set up, how do you maintain it? Do you set it up and never touch it until disaster strikes? Or do you take your daily expenses from the reserve and top it off annually from the IRA? If it's the latter, how is topping off the reserve any different than just making regular periodic withdrawals from the IRA? For example, if I needed to add 10K to my reserve right now, do I wait till the market comes back up, or withdraw now before it drops lower. I have no way of knowing which way the market is going to go, so I don't know how I would decide the "right" time to top off the cash reserve.

Just as I make regular contributions to my IRA regardless of what the market is doing, it seems like regular withdrawals from the IRA regardless of the market trend would offer a similar result.

I'm probably over thinking this and making it more difficult than it needs to be.
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Old 02-08-2018, 06:26 PM   #2
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Simply keep 3-5 years or whatever in a cash like (most people use bonds) assets so if the market crashes you have more than very depreciated stock to sell so you can get by
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Old 02-08-2018, 06:47 PM   #3
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People do things differently and you'll find variations on themes. The simplest and most elegant way to do it IMHO:

1. Establish an AA. Mine is 90/10.
2. Establish a WR. Mine is 3%.
3. Every January 1st:
A. Withdraw one year of expenses from your nest egg, then
B. Rebalance to your AA.

Personally I keep my 10% of bonds in my IRA so my rebalancing can be done without any tax consequences.

Some people like the idea of buckets, which is what your fourth paragraph is sort of headed towards. As you have discovered, again IMHO, this creates more questions than it answers.

As an aside, I do not look at my 10% bonds as something I can use to "ride out" market downturns. I look at it as ballast which puts me at the efficient frontier for survivability over my chosen planning horizon. In other words, I look at what AA had the highest 100% safe WR based on historical data and target that AA for the future.
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Old 02-08-2018, 06:47 PM   #4
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There is no reason that the "cash" can't still be in your IRA (or other tax deferred account). That is, the bucket holding the asset (IRA, regular account, ...) has nothing to do with how the assets are allocated.

As Pj.mask indicates, it doesn't have to be in cash cash. However, I wouldn't consider bonds the same as cash as they are also subject to market and issuer risk. For me, my cash and cash equivalent has to be in short term (e.g. money market/savings) , FDIC/NCUA insured CD's (whose early termination fee's are understood). This was painfully enshrined in my brain when I had a Schwab short term "like a money market" fund which encountered a significant loss.
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Old 02-08-2018, 08:02 PM   #5
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Having a cash reserve was not a concern when I was working and had a steady paycheck. Since our retirement coinsided with downsizing our house, I put a portion of the sale proceeds in a taxable online savings account... however if we hadn't had that situation I could have just as easily done it when rebalancing.

My target AA while working was 60/40/0.... once I was retired I changed it to 60/34/6 (and later to 60/35/5). I just replenish that online savings account when I rebalance and our monthly "paycheck" is an automatic transfer from that online savings account to the local bank checking account that I use to pay oru bills.
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Old 02-08-2018, 08:17 PM   #6
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Our portfolio is about 55/45 (stocks/bonds) but outside of that we have a healthy cash reserve laddered in CDís. This is for unplanned splurges, emergencies, taxes on Roth conversions, and buying opportunities and gifting. Weíve been retired several years and havenít touched it yet, but that may change this year.
Just another approach
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Old 02-08-2018, 08:25 PM   #7
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I use CD's in an IRA account. Whenever the credit union has specials I buy into a CD ladder that goes out 5 years. I consider the shorter term ones part of my cash allocation and use what I need for expenses each year and roll the excess over. The longer term (e.g >24 months) make up a portion of my bond allocation as I am not too comfortable with bonds or bond funds right now. It's working out pretty well so far (2.5 yrs into ER) and lets me feel comfortable with all the recent volatility.
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Old 02-08-2018, 08:43 PM   #8
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I call cash I-bonds, stable value fund in 401k, real cash, and CDs.

The real cash is scattered in my accounts, and comes from selling stocks or rebalancing, and is not yet redeployed. I prefer to keep more in I-bonds and stable value fund as they earn at least enough interest to cancel out inflation. I have no CD currently.

Because my cash is scattered, I need Quicken to see in a glance what percentage that is, without using paper and pencil to add it all up.

At 2.5% WR, my cash would last me more than 10 years. If I draw SS early, that would make it 20+ years.
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Old 02-08-2018, 08:58 PM   #9
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I have enough for 2 years worth of cash spending. Having a couple of annuities for times like this softens the worry about meeting my cash requirements.
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Old 02-08-2018, 10:51 PM   #10
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Hmm... It sounds like I was already planning for a "cash" reserve without realizing it. Somehow I saw the "cash" recommendation and was thinking it had to be a standalone standard savings account.

As retirement gets closer I sometimes worry that I have overlooked something simple. So I appreciate the feedback from fresh minds.
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Old 02-08-2018, 11:06 PM   #11
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For my own planning, I define "cash" as cash. I keep some of it in a taxable Vanguard money market account, and some in my local bricks and mortar bank. So, it's pretty easy to save it in the normal way, and tends to pile up. It is also pretty easy to access it for spending right away when needed, and the interest rate is low. I'm not pushing you to do things my way, but just expressing that it is perfectly OK to do things this way too if you want to.
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