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How do you calculate cash reserves?
Old 05-07-2010, 03:04 PM   #1
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How do you calculate cash reserves?

This question is for those of you who specifically allocate a "cash bucket" in your AA to cover a specified number of years. Do you factor in expected dividends and interest each year? For example, if you need 25K per year and want a 3-year cash bucket, would you keep 75K in cash? Or, would you consider that you expect to receive, for example, 10K in divs and interest and keep 45K in your cash bucket to cover the difference?
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Old 05-07-2010, 03:09 PM   #2
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I would do the first option, keep 75K in cash. Straight forward and simple to do.
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Old 05-07-2010, 03:11 PM   #3
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Originally Posted by ksr View Post
This question is for those of you who specifically allocate a "cash bucket" in your AA to cover a specified number of years. Do you factor in expected dividends and interest each year? For example, if you need 25K per year and want a 3-year cash bucket, would you keep 75K in cash? Or, would you consider that you expect to receive, for example, 10K in divs and interest and keep 45K in your cash bucket to cover the difference?
Don't count your chickens before they've hatched!

I'd put away the full three years expenses, in your example, and use any dividends or interest earned during the year to help with rebalancing.

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$ in cash
Old 05-07-2010, 03:17 PM   #4
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$ in cash

I keep 5 years worth of my budget. $250k. Each January a $50k+CD matures and I either roll it over or use it. It's ~ 20% of my portfolio. Which is a 50stocks/30bonds/20cash reserves.

It helps me sleep @ night know that I have that much of a buffer from the market.
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Old 05-07-2010, 03:18 PM   #5
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Quote:
Originally Posted by ksr View Post
This question is for those of you who specifically allocate a "cash bucket" in your AA to cover a specified number of years. Do you factor in expected dividends and interest each year? For example, if you need 25K per year and want a 3-year cash bucket, would you keep 75K in cash?
If I thought I needed 25k per year, I would bump that amount up 25% for unforeseen expenses and figure in 3% inflation.
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Or, would you consider that you expect to receive, for example, 10K in divs and interest and keep 45K in your cash bucket to cover the difference?
No. Counting on something that might happen is dangerous, IMO.
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Old 05-07-2010, 03:21 PM   #6
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I actually take it two steps further. I don't count my cash emergency reserve portion in my asset allocation. Also, I have a separate (easier to keep track of) money market fund soley for this purpose.


That way I'm ready if something funny happens (like the market drops 1000 pts in 15 minutes).
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Old 05-07-2010, 03:42 PM   #7
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Originally Posted by ksr View Post
This question is for those of you who specifically allocate a "cash bucket" in your AA to cover a specified number of years. Do you factor in expected dividends and interest each year? For example, if you need 25K per year and want a 3-year cash bucket, would you keep 75K in cash? Or, would you consider that you expect to receive, for example, 10K in divs and interest and keep 45K in your cash bucket to cover the difference?
No. I simply assume that the dividends/interest take care of inflation over those years. It's not perfectly accurate, but close enough.

And I actually have my cash bucket for near term living expenses out of my portfolio. My long-term portfolio still has a certain % cash - but that is for diversification and rebalancing purposes.

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my cash allocation and how I handle it in retirement
Old 05-07-2010, 04:19 PM   #8
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my cash allocation and how I handle it in retirement

Like the others, I only count cash (money market funds or bank accounts) as cash. My cash reserves are in Vanguard's Prime Money Market VMMXX and my cash for the current year's expenses (2010 expenses) are in my bank account.

My dividends and LTCG go straight to VMMXX. Since I am a new retiree, and want to keep things simple right now, I do things a little oddly just to keep my mental accounting straight. The first week in January I move cash from VMMXX to my bank account for the entire year's living expenses. I move just part of my dividends - - enough so that my bank account balance equals the previous year's dividends (but not LTCG).

Then, I rebalance. In the process of rebalancing I restore my cash allocation to what I think it should be. During the year I do not routinely use any of the cash in VMMXX and just restrict myself to what is in my bank account. This is just for mental accounting until I am more confident about managing my money in retirement.

I am still not sure how much cash I should be keeping in Vanguard! Right now I have enough cash to last me until 2015, but that is probably way too much since I am used to living on less. On the other hand, we might move and it would be convenient to have plenty of cash for that, but we have pushed back the date on that... it's hard to know how much cash I should have.
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Old 05-07-2010, 06:34 PM   #9
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Our cash reserves are in a money market fund and laddered CD's; we have enough for one year expenses. Our income flow comes from rental properties, and the extra gets re-invested.

We are thinking of building up our cash reserves to cover 3 years. Great topic!
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Old 05-08-2010, 07:34 AM   #10
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Originally Posted by W2R View Post
My cash reserves are in Vanguard's Prime Money Market VMMXX and my cash for the current year's expenses (2010 expenses) are in my bank account.

My dividends and LTCG go straight to VMMXX. Since I am a new retiree, and want to keep things simple right now, I do things a little oddly just to keep my mental accounting straight. The first week in January I move cash from VMMXX to my bank account for the entire year's living expenses. I move just part of my dividends - - enough so that my bank account balance equals the previous year's dividends (but not LTCG).

Then, I rebalance. In the process of rebalancing I restore my cash allocation to what I think it should be.
I am following almost the same process. Although, after reading some others' thoughts around here I moved some about $200K MM to my Thrift G fund since that is better than cash. The only thing I struggle with is when to start hitting equities for annual expenses on the way up. Do most folks pull from the cash bucket until the markets recover a previous high? Do they start pulling from equities when markets are substantially up from a low (e.g. like 2009)? I pulled cash in January figuring I would let the recovery progress a bit more before tapping equities. My gut tells me to tap some equities if we are up 10% or so this year. I am not planning to deplete cash waiting for a 14K DOW. But just where to draw the line is pretty subjective.
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Old 05-08-2010, 07:44 AM   #11
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I do not include any interest or divident income when calculating my cash allocation, but I do include my pension. That is to say, if we spent $50k a year and my pension were $10k per year, then I would figure that our cash needs are $40k per year.

All out cash is in money markets and iBonds. I figure iBonds are the perfect cash reserve. Lock'em away and forget about them. No tax, and no inflation worries. I just wish we could have purchased more.
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Old 05-08-2010, 09:22 AM   #12
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Our allocation is 40-40-20 stock-bond-cash. The 20% cash could be looked at as 5 years of 4% withdrawals. It does not include dividends and interest which we "take" rather than invest, but it also constitutes our emergency reserves.

Cash usually has two attributes; stability of principal and liquidity. We shade away from pure liquidity as some others do by including some CDs and Treasury Bills. 10% of current balance is 10+ year old IBonds.
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Old 05-08-2010, 09:40 AM   #13
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I am following almost the same process. Although, after reading some others' thoughts around here I moved some about $200K MM to my Thrift G fund since that is better than cash. The only thing I struggle with is when to start hitting equities for annual expenses on the way up. Do most folks pull from the cash bucket until the markets recover a previous high? Do they start pulling from equities when markets are substantially up from a low (e.g. like 2009)? I pulled cash in January figuring I would let the recovery progress a bit more before tapping equities. My gut tells me to tap some equities if we are up 10% or so this year. I am not planning to deplete cash waiting for a 14K DOW. But just where to draw the line is pretty subjective.

I have the very same question. That is, when equities rise, during rebalancing, the cash reserve automatically gets replenished. But when equities decline during the year, what's the best approach?
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Old 05-08-2010, 09:56 AM   #14
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I do not include any interest or divident income when calculating my cash allocation, but I do include my pension. That is to say, if we spent $50k a year and my pension were $10k per year, then I would figure that our cash needs are $40k per year.

All out cash is in money markets and iBonds. I figure iBonds are the perfect cash reserve. Lock'em away and forget about them. No tax, and no inflation worries. I just wish we could have purchased more.
Same here.

I also have CD's in addition to I-bonds and money market funds.
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Old 05-08-2010, 10:02 AM   #15
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It's interesting to see that some of you are including I-Bonds in your cash allocation. I have lumped mine in with TIPs, and calculated that as part of my bond allocation.

Interesting perspective - you all always give me something to think about!
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Old 05-08-2010, 10:12 AM   #16
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It's interesting to see that some of you are including I-Bonds in your cash allocation. I have lumped mine in with TIPs, and calculated that as part of my bond allocation.

Interesting perspective - you all always give me something to think about!
They behave similar to a 5 year CD, principal secure, 3 month interest penalty if you withdraw early, but interest is variable and tax deferred. I used to count them as bonds as well but changed my mind 2 or 3 years back.
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Old 05-08-2010, 10:14 AM   #17
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It's interesting to see that some of you are including I-Bonds in your cash allocation. I have lumped mine in with TIPs, and calculated that as part of my bond allocation.

Interesting perspective - you all always give me something to think about!
I used to lump Ibonds with TIPs like you do, but somebody on this board or Bogleheads pointed out the cash-like features of Ibonds that set them apart from TIPs, mainly that they are always redeemable at full value, unlike TIPs which vary with the market. They are also very close to being perfectly liquid. That said, our Ibonds would be the very last source of cash that I would spend.
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Old 05-08-2010, 10:24 AM   #18
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I am following almost the same process. Although, after reading some others' thoughts around here I moved some about $200K MM to my Thrift G fund since that is better than cash. The only thing I struggle with is when to start hitting equities for annual expenses on the way up. Do most folks pull from the cash bucket until the markets recover a previous high? Do they start pulling from equities when markets are substantially up from a low (e.g. like 2009)? I pulled cash in January figuring I would let the recovery progress a bit more before tapping equities. My gut tells me to tap some equities if we are up 10% or so this year. I am not planning to deplete cash waiting for a 14K DOW. But just where to draw the line is pretty subjective.
I have a lot in G Fund too, considerably more than in cash, actually. I don't count that as cash because it isn't sufficiently liquid to suit me due to withdrawal rules (like, right now I am doing equal monthly payments so that specifies what I can withdraw until next year). I count the G Fund as part of my bond allocation.

I don't worry about when to start hitting equities. Rebalancing in January (and at other times as needed) will take care of that and provide me with the planned asset allocation. January's rebalancing meant that I sold some equities at that time. I haven't rebalanced since then because I haven't needed to do so. If my AA got considerably out of balance, I would rebalance and sell equities if necessary at that time even if it wasn't January yet.
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Old 05-08-2010, 10:34 AM   #19
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I have the very same question. That is, when equities rise, during rebalancing, the cash reserve automatically gets replenished. But when equities decline during the year, what's the best approach?
How many times during the year do you plan on re-balancing?

What threshold would you use to signal re-balancing and which assets are out of balance?

Check the FAQ here for book references that can help with your definition.

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Old 05-08-2010, 10:47 AM   #20
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I have the very same question. That is, when equities rise, during rebalancing, the cash reserve automatically gets replenished. But when equities decline during the year, what's the best approach?
Frank Armstrong suggested taking from FI until the equity portion "recovers" - but I don't remember what the definition of "recover" was.

But he did recommend having cash plus fixed income part of your portfolio be at least 7 years so that you could wait up to 7 years for equities to recover from a crash.

Audrey
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