Getting close - switch to saving cash?

[ERD50]

Originally Posted by papadad111 View Post
I'm a new retiree. As I get the hang of it, I'll likely move toward 90-95 percent equities philosophy and reduce cash longer term.

Kudos to you. I don't think I'll have the fortitude to go that aggressive unless I've got at least $10 million.

90% is really not so scary. Make a FIRECalc 'investigate' run for a 40 year period (ER) and 3.5% WR. In terms of portfolio survival, a 35/65 AA has less chance of historical survival than a 90, 95 or 100% equities portfolio.

Yet, many would describe the 35/65 AA as 'safer'.

-ERD50

 

[RobbieB]

I like cash, always have. Even when I was young I had 6 months. Good thing too I was fired from 4 jobs in my career. Cash makes me feel good, cash makes me feel "flush"

It don't matter what anyone else thinks, it only matters what makes you feel "comfy"

 

[walkinwood]

Decide on your AA for post retirement and work towards achieving that. If that AA includes a cash position - and you haven't reached it yet - then, by all means, leave your savings in cash.

Like some others, I have at most a few months of cash on hand. I do however have a short term bond fund as part of my AA.

 

[audreyh1]

Yes, I think it's an excellent time to let the cash build and fund those first couple of years. That way you can leave the rest of your investments alone and not be preoccupied with their volatility as you make this huge transition.

We also socked away "extra" cash for splurging on travel the first couple of years.

 

[Fedup]

I'm going to splurge on traveling this year because of all the extra cash. No worries, since the stock market is back up from its low.


Sent from my iPad using Early Retirement Forum

 

[audreyh1]

After several typical newbie screw-ups in my early investing years, I realized that investing was 80% psychology for me. I had to find a plan I could live with day in and day out, otherwise every other investing goal/tactic was moot.

 

[hnzw_rui]

90% is really not so scary. Make a FIRECalc 'investigate' run for a 40 year period (ER) and 3.5% WR. In terms of portfolio survival, a 35/65 AA has less chance of historical survival than a 90, 95 or 100% equities portfolio.

Yet, many would describe the 35/65 AA as 'safer'.

-ERD50

I am actually aware of that. However, there's always this niggling thought in the back of my head "What if we get returns like Japan?".

 

[jkern]

I was laid off (age 51) in mid 2009 about 2 to 3 years before my planned exit. I had a significant amount of cash (CD ladders) yielding around 5% per year. As I look back, I'm very glad I had a lot of cash. It also allowed me to invest $300k into Real Estate during the crash (5 year old condo's that sold new for $750K). One of the best investments I ever made in my life.

Currently my cash portion is about 15%, but I've always liked cash and have done fairly well in CD ladders over time.

 

[jollystomper]

We currently have enough cash to cover the gap between my pension+investment income for the number of years (currently 7) before the earliest date we plan to withdraw social security. That way we are not forced to sell equities during market downturn times. This also gives us flexibility to invest if things seem opportunistic, or splurge if our equities do better than expected.

It is not a "brilliant" strategy, but a "sleep comfortably at night" strategy.

 

[ERD50]

RE: High equity levels of AA -

I am actually aware of that. However, there's always this niggling thought in the back of my head "What if we get returns like Japan?".

Yes. And I always have this niggling thought in the back of my head "What if we get inflation like the 80's?"


There's risk to everything. I don't mean to imply that holding some cash is a bad thing. Many here say it helps them sleep at night, so that's probably the right thing for them to do.

But I just think it's best if we all realize that there are costs (opportunity costs in the case of cash) associated with our decisions. And I do think many overstate the 'selling in a down market' fear. As I said, between divs and rebalancing, it probably won't be a big deal at all. And the opportunity cost of a few years cash probably won't be a big deal either. But we should see it for what it is.

-ERD50

 

[audreyh1]

Opportunity cost = a higher terminal amount - leaving behind the most for heirs. But most investors don't go 100% small cap stocks even though that's most likely to give them the highest terminal amount. They might like a gentler roller coaster to be able to sleep at night while alive. Cash is an asset class - it outperforms during some periods, beating both stocks and bonds. It can be rebalanced with the other asset classes to help smooth the ride. And having some extra cash set aside might make all the difference far a successful investment strategy if it means someone is able ignore market noise and stick to their investment plan even when things get scary.

 

[RobLJ]

A lot of good responses. Longterm, cash seems a problem in these days of .001% interest.
However,
1) as several have noted, cash is its own entity, as an asset class. I hold 15%, although my allocation calls for 10%
2) in a world where corporate bonds are yielding less than 3%, 0% for cash is bad, but comparatively, not that bad
3) personally, I reaped cash in 2014-2015 as the market continued to run up and anticipating early retirement, also putting the DW's bonuses largely into taxable accounts, largely in cash. We had two houses, one in Houston and a Colorado cabin and I couldn't predict when or if they would sell or for how much. Also when or whether DW would find a job in the new location out West.
Cash in a taxable account gives enormous flexibility for the change to early retirement. It certainly reduced the level of our headaches in buying a 3rd house while we were selling two (20% down and then using equity to reamortize, along with moving expenses, etc.)
4) After settling, you can redeploy cash in a taxable account as an investment, which is pretty much what we will do, to take advantage of tax loss investing and as yield. I will probably build cash in 401k/403b account as this shift takes place.
5) "Excess" cash in tax advantaged accounts can be deployed to take advantage of market slumps--if you have the courage to do so, which isn't common. I did some of that in early February--and then the market went up rapidly. (I had assumed a somewhat longer slump, and I was wrong.)

Opportunity cost = a higher terminal amount - leaving behind the most for heirs. But most investors don't go 100% small cap stocks even though that's most likely to give them the highest terminal amount. They might like a gentler roller coaster to be able to sleep at night while alive. Cash is an asset class - it outperforms during some periods, beating both stocks and bonds. It can be rebalanced with the other asset classes to help smooth the ride. And having some extra cash set aside might make all the difference far a successful investment strategy if it means someone is able ignore market noise and stick to their investment plan even when things get scary.

 

[audreyh1]

A lot of good responses. Longterm, cash seems a problem in these days of .001% interest.
However,
1) as several have noted, cash is its own entity, as an asset class. I hold 15%, although my allocation calls for 10%
2) in a world where corporate bonds are yielding less than 3%, 0% for cash is bad, but comparatively, not that bad
3) personally, I reaped cash in 2014-2015 as the market continued to run up and anticipating early retirement, also putting the DW's bonuses largely into taxable accounts, largely in cash. We had two houses, one in Houston and a Colorado cabin and I couldn't predict when or if they would sell or for how much. Also when or whether DW would find a job in the new location out West.
Cash in a taxable account gives enormous flexibility for the change to early retirement. It certainly reduced the level of our headaches in buying a 3rd house while we were selling two (20% down and then using equity to reamortize, along with moving expenses, etc.)
4) After settling, you can redeploy cash in a taxable account as an investment, which is pretty much what we will do, to take advantage of tax loss investing and as yield. I will probably build cash in 401k/403b account as this shift takes place.
5) "Excess" cash in tax advantaged accounts can be deployed to take advantage of market slumps--if you have the courage to do so, which isn't common. I did some of that in early February--and then the market went up rapidly. (I had assumed a somewhat longer slump, and I was wrong.)

It's important for people to know that cash is doing a lot better than 0.001%. You can get around 1% on your cash in a high yield FDIC insured savings account - super liquid. If you are willing to park some cash short-term, you can earn 1.25 to 1.3% with a one year CD, and 1.45-1.5% for a two year CD. I recently scooped up a 15 month PenFed CD paying 1.5% (this was a temporary offer that didn't last long).

Comparing cash to short-term bonds, you have to look long and hard to put money in a short-term bond fund when cash is actually paying a competitive rate. You take on interest rate and credit risk unless you are investing in a treasury bond fund (still has interest rate risk). For example, VFISX is yielding 0.69% (0.85% distribution yield) and with a 2.3 year average maturity which indicates your interest rate risk exposure. There are higher yielding short-term bond funds out there (short-term corporate bond index has SEC yield of 2.18% and average maturity of 2.9 years), but they are also exposing you to credit risk interest rate risk that the savings accounts and CDs aren't.

Good points otherwise.

 

[Lucantes]

My wife and I (both 49 year old employed expats who will return to the USA for ER) are currently 1 year out from ER and have plans to retain a large cash position immediately before we retire in April 2017 based upon the following:
We were previously at 27% cash in August 2015, which we reduced to 7% by the end of January 2016 by moving it to a Vanguard taxable account using Admiral funds.
We will build up a new cash position during 2016/2017 which will come from our normal salary/bonus inputs as well as separation payments which should put us back up to a 16% cash position.
A large portion of that 16% cash position (about 60% of it) will be consumed immediately when we return to the USA (new vehicles, home furnishings, home upgrades/remodeling and some fun) which I expect to leave us with a remaining cash position, after the dust clears, of 7.5% in mid-2017.
That remaining cash position will cover our Emergency Funds, Fun Bucket and 2 years worth of expenses which I will allow to drop down to 5% during retirement. Once we are retired I will have all taxable dividends and gains etc. paid out in cash and not automatically reinvested.
Short/Mid-term I expect us to end up at about a 80/15/5 asset allocation of stocks/bonds/cash and I may eventually slowly move more to a 60/35/5 allocation over the Mid/Long-term.