Counting the cash.

[Moneygrubber]

How should i count my cash reserves? I would like 5 years of cash to cover expenses as a buffer against market volatility. My pension is 34,500 non inflation adjusted 100% joint survivor for my wife. My taxable divvys are 42k per year, my divvys in 401k are another 30k per year. 60k essential expenses 90k with discretionary. Current cash 290k plus 1.3 in taxable 1.7 mil in retirement. Should i count the taxable divvys as part of cash or no?


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[David1961]

Dividends are not guaranteed, so I would not count them. I would rather get them and not need them than plan on them and not get them. But it looks like you have plenty of cash now.
Am I reading this correct that you have over 1.5 mil in cash now?

 

[Moneygrubber]

No about 290k cash


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[braumeister]

I would like 5 years of cash to cover expenses as a buffer against market volatility. ...
Should i count the taxable divvys as part of cash or no?

IMHO, 5 years is overkill. Personally, I maintain 1.5 to 2 years essential expenses in cash as a buffer to market volatility, but others have told me that's excessive. I think it would be best to have a definite reason for maintaining more than I do.

And no, I don't think you should count divs as part of cash. That's portfolio action and ought to be thought of separately. It's your decision, of course, but I don't believe there is any real rule.

 

[OrcasIslandBound]

I have almost no cash in my investments as I feel that using an AA of 45% stocks and 55% bonds is conservative enough.

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[W2R]

If I subtract my SS and pension from my spending, I can get the amount that I need to get from elsewhere. Up to now, that has come from dividends.

However, dividends are not written in stone, so when determining how much I need for a safety net, I do not count dividends.

I have enough cash to cover what SS and my pension don't cover, for 4.5 years. That's also my emergency money if needed. As others have said, this much cash is a rather conservative approach. This cash is helpful for rebalancing in my taxable accounts, and it could even provide me with some "dry powder" to buy low if the market plummets.

 

[audreyh1]

I don't see any problem with several years of expenses in cash, if it means you can leave your main portfolio invested during trying market times, and rebalance to your target AA by buying more stocks during bear markets.

You have to think carefully about what gives you the fortitude to do this. It's quite difficult psychologically.

Discovering your risk tolerance is lower than you thought is not a good thing to learn when markets drop precipitously, because that may result in selling and stepping away from long-term investments after the damage has already been done, but then you aren't in a position to participate in any recovery. You have to figure out what investment strategy will help you stay invested.

Personally I think having a few years of expenses covered and isolated from the portfolio is a good way to do it. Especially if it helps you grit your teeth and rebalance the portfolio in the face of a bear market.

 

[Running_Man]

For my long term plan, I include dividends and expected dividend increases equal to inflation(less aggressive in my plan than in my individual analysis) in my cash flows. So for determining how many years my cash reserves will last yes I would include the dividends. I also use 3% inflation in my projections for now for expense which when I plug your figures in shows a need of $82,3338 of cash over the next 5 years, to that I add one years expenses in cash in this case 90K as the base balance, a full years cash for the coming year in MM and utilize that as a running gauge of how well the plan is going and allowing for time to adapt. This means a total of $172,338 of cash for 5 years in how I plan

 

[pb4uski]

I count dividends but as a reduction of the denominator. So if I had $100k in cash, needed $75k a year for living expenses and received $25k a year in dividends, I would figure that I have two years of living expenses in cash.

How should i count my cash reserves? I would like 5 years of cash to cover expenses as a buffer against market volatility. My pension is 34,500 non inflation adjusted 100% joint survivor for my wife. My taxable divvys are 42k per year, my divvys in 401k are another 30k per year. 60k essential expenses 90k with discretionary. Current cash 290k plus 1.3 in taxable 1.7 mil in retirement. Should i count the taxable divvys as part of cash or no?....

So by my reckoning you want $90k for living expenses but are receiving $34.5k of pension and $42k of taxable account dividends... so if you had $68k of cash you would have enough to provide for 5 years of expenses since your gap (what you need in withdrawals above dividends) is only $13.5k a year. While it is true that dividends might get reduced if the SHTF, you also have some latitude in your expenses to tighten your belt if the SHTF. I don't really provide for inflation as my withdrawals/living costs have not seemed to noticeably increase over time.

 

[Options]

I have almost no cash in my investments as I feel that using an AA of 45% stocks and 55% bonds is conservative enough.

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+1
With a very conservative AA of 40/60, I distribute expenses for the year each January to a MM account, and then distribute that monthly to checking from which all bills are paid.

 

[Moneygrubber]

Thanks All!


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[Gone4Good]

Hmm, no cash?

Cash is currently yielding a riskless 1% (Ally Bank.) I'd have to go out to [-]2[/-] 3 years treasuries for the same yield and default risk. Going out to 5 years gets me an additional [-]70bp[/-] 30bp, but I can still do much better than that with CDs. 10 yrs gets me another [-]50bp[/-] 60bp, but that's still lower than 5-year CDs.

Why do I want to own a big chunk of bonds right now?

5-yr cash position doesn't sound unreasonable to me.

Edited to fix treasury yields.

 

[Moneygrubber]

Hmm, no cash?

Cash is currently yielding a riskless 1% (Ally Bank.) I'd have to go out to 2 year treasuries for the same return and default risk. Going out to 5 years gets me an additional 70bp, but I can still do better than that with CDs. 10 yrs gets me another 50bp.

Why do I want to own a big chunk of bonds right now?

5-yr cash position doesn't sound unreasonable to me.

Agreed!


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[OrcasIslandBound]

At the risk of having this thread deteriorate back into an endless discussion of short term bonds vs long bonds vs stocks, I'll just say that I am planning to do a sort of bucket of investments for different time intervals (or stages) of my retirement. The first stage is from 58 - 67 and the 2nd is 67 to death.

The first stage I'll have two "pots" of investments, a Fido account and a 401k. The Fido will yield about 2.7% in pure dividends, no selling or buying of any investments. This will generate ~ 40k of income per year. It is composed of 45-48% stocks and the rest bonds. The bonds are about 2/3 5 year duration things like "BND" and the remaining 1/3 are long bonds, mostly BLV. These bonds are high quality investment grade, whose dividends are expected to remain fairly constant, regardless of interest rates. The values will go up and down, but dividends remain constant. Similar with stocks, VYM is a staple investment here with others thrown in. Stock dividends are expected to increase gradually over the years (decades) of retirement.

The 2nd bucket, a 401K, is a similar AA mix, but no long bonds, worth about 250k in the beginning of retirement. We'll burn through this entire bucket of money and then turn on my SS. Hopefully at about age 67. If really good conditions happen, this will be closer to 70. If things go bad, closer to 62. By bad, I mean that the first bucket actually decreases dividends. I would expect this decrease to only occur in a severe downturn.

The total take during 1st stage is around 40K from Fido, 6K from pension, and about 40K per year from 401k. When DW is 62, the 40K from 401k will be reduced as her SS is about 17K. 2nd stage is similar except 401k is replaced by my own SS.

That is my recipe. Everyone has an opinion, I'll let you know if mine worked in about 20 years.

 

[audreyh1]

Hmm, no cash?

Cash is currently yielding a riskless 1% (Ally Bank.) I'd have to go out to 2 year treasuries for the same return and default risk. Going out to 5 years gets me an additional 70bp, but I can still do better than that with CDs. 10 yrs gets me another 50bp.

Why do I want to own a big chunk of bonds right now?

5-yr cash position doesn't sound unreasonable to me.

Definitely!

And if you have some to park for a little while - 1.5% riskless for 15 months compared to 5yr treasuries @ 1.33%.

 

[Sunset]

I count dividends but as a reduction of the denominator. So if I had $100k in cash, needed $75k a year for living expenses and received $25k a year in dividends, I would figure that I have two years of living expenses in cash.

.......

So by my reckoning you want $90k for living expenses but are receiving $34.5k of pension and $42k of taxable account dividends... so if you had $68k of cash you would have enough to provide for 5 years of expenses since your gap (what you need in withdrawals above dividends) is only $13.5k a year. While it is true that dividends might get reduced if the SHTF, you also have some latitude in your expenses to tighten your belt if the SHTF. I don't really provide for inflation as my withdrawals/living costs have not seemed to noticeably increase over time.

For some reason I'm not seeing a percentage in your first example, but maybe that's not what you are saying.

My view is count the dividends as cash but only at some percentage value of them say for arguements sake 80%.

So for OP:
Pension is 34,500
Regular divs (80% of 42k) = 33.6K
401k divs (80% 30k) = 24K assuming you can withdraw without penalty.

Income total = 92.1K
Spending is 60k essential expenses 90k with discretionary.

So OP doesn't need to keep any cash, but since that sounds so weird to say, I'd say keep 50K in cds as cash, and invest the rest.