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How Many Month/Years of Living Expenses do You Keep in Cash?
Old 09-12-2013, 07:09 PM   #1
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How Many Month/Years of Living Expenses do You Keep in Cash?

Hi. I was just wondering, for those of you in FIRE, and those of you approaching FIRE, how many months/years of living expenses do you keep as cash or cash-equivalent. I imagine you would do that so that you have the certainty of having the money needed to pay your monthly fixed expenses.

Also, do you keep a separate amount in cash to deal with unexpected emergencies. If so, how do you determine how much to keep in the unexpected emergencies account?
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Old 09-12-2013, 07:19 PM   #2
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Approximately 4 years, but it is mostly in GIC (CD) ladders, so some of it will mature up to 5 years from the date of investment. The reason I have so much is because the first 5 years are those at risk for sequence of returns, so I want to have a secure income without having to eat into my equity/fixed income in the event of another 2008. I have already invested some cash in the markets and will continue to do so to the extent that I feel comfortable. By Year 5 of RE, I expect to have no more than 2 years' expenses allocated to cash. I also have a HELOC that I have negotiated to a rate of prime +0.5%, and I would tap into that as my emergency fund if necessary.

If it makes any difference, I will never have a pension, other than partial CPP. Other reasons to hold cash are the possibility of special assessments or payment of principal on my investment real estate. Also, I do not plan to keep this much cash longterm. I am well aware of the research suggesting that it is a drag on one's portfolio. However, right now, risk management is my #1 objective.
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Old 09-12-2013, 07:28 PM   #3
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About 0.5 month of expenses in cash.

I prefer to be fully invested. I have about 3 years of expenses in short-term bond funds and even more in an intermediate-term bond fund.

I figure that bond funds can only drop at most 10% in the short term, so it's not a big deal to me what happens if the market fluctuates.

Here is an article about cash reserve strategies don't work: http://www.kitces.com/blog/research-...-market-timer/

Quote:
Cash reserve strategies that hold aside several years of spending to avoid liquidations during bear markets are a popular way to manage withdrawals for retirees. In theory, the strategy is presumed to enhance risk-adjusted returns by allowing retirees to spend down their cash during market declines and then replenish it after the recovery. Yet recent research in the Journal of Financial Planning reveals that the strategy actually results in more harm than good; while in some scenarios the cash reserves effectively allow the retiree to "time" the market by avoiding an untimely liquidation, more often the retiree simply ends out with less money due to the ongoing return drag of a significant portfolio position in cash.
And no, I don't have an emergency fund. I just sell something if I need extra money.
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Old 09-12-2013, 07:41 PM   #4
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I am enjoying my fourth year of retirement.

I generally maintain about 4 years' expenses in cash. These are divided between two accounts:

1) Dividends and capital gains are directed towards a Vanguard money market and replenish the money withdrawn for living expenses. I use this cash at Vanguard when rebalancing as needed.

2) My bricks 'n' mortar bank account contains money for the rest of the current year's living expenses, which I withdraw from Vanguard each January and use for the year. It also contains $8,000 emergency money.

Adding the cash in these two accounts gives me the 4 years' expenses.
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Old 09-12-2013, 07:44 PM   #5
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Like LOL!, I like to be fully invested. I have about one month of expenses in cash, and that is mainly to meet minimum checking account balances to avoid fees along with a small cushion (around $750) to cover any small, unforeseen expenses.

I have set up my portfolio to provide me with a monthly bond fund dividend which covers my monthly expenses, allowing for some expenses which are larger but less frequent such as estimated income taxes and auto insurance.

I do not like having any significant amount of money in an account which is paying zilch or nearly zilch. I want as much as possible in some fund earning a dividend or having some growth potential (i.e. stock fund).

I do not use all of bond fund holdings to generate the dividends I need to cover my expenses. Those accounts are my second-tier emergency funds (I like to refer to them as my "slush funds") I can tap into for larger expenses I can't cover with my routine, monthly stuff or the cushion in my checking account. I am willing to risk a loss of principal if I am forced to sell something in there at a loss in return for the monthly dividends which get reinvested every month.
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Old 09-12-2013, 09:16 PM   #6
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Quote:
Originally Posted by LOL! View Post
About 0.5 month of expenses in cash.

I prefer to be fully invested. I have about 3 years of expenses in short-term bond funds and even more in an intermediate-term bond fund.

I figure that bond funds can only drop at most 10% in the short term, so it's not a big deal to me what happens if the market fluctuates.

Here is an article about cash reserve strategies don't work: http://www.kitces.com/blog/research-...-market-timer/

And no, I don't have an emergency fund. I just sell something if I need extra money.
That study has been discussed here and the conclusions are based on very conservative and I would say too too low assumptions of return on emergency cash funds. The study rate of return on cash is a fourth of what one can currently get from credit unions and some online banks and CD's in ladders.
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Old 09-12-2013, 09:23 PM   #7
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About 6 months of expenses. If I needed more than that for some protracted situation, I could tap a HELOC for several years worth, or if that was frozen, start liquidating fixed investments. Returns on cash are so low, I prefer not to keep too much.
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Old 09-12-2013, 09:27 PM   #8
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I'm not anywhere close to FIRE, but I generally keep somewhere between zero to one year's worth of living expenses in cash.

It depends on how paranoid and/or ticked off I am at the time, in regards to my job.
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Old 09-12-2013, 09:31 PM   #9
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I have been holding a few years expenses in cash but I am rethinking this. My portfolio throws off 2/3 of my annual needs in dividends. Yes the dividends could be cut, but it is not likely and it wouldn't be by much based on the 2008 crisis. Plus I have some interest income on top of that. So mow I am of the mind that instead of holding 3 years worth of expenses in cash it probably makes more sense to make up the difference between my dividend income and expenses - the 1/3 remainder of you will. That will free up more cash to invest without risking cash flow needs.
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Old 09-12-2013, 10:16 PM   #10
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I target 6% cash, which is 18-24 months. Not sure I really need to carry so much cash, but I'm relatively new at this withdrawal thing (only about 20 months RE).
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Old 09-12-2013, 10:46 PM   #11
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I have about 8 months worth of cash on hand. I retired (3) years ago and my DH is still working...for the insurance for a couple of more years. I am 53 and he is 55.
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Old 09-13-2013, 12:08 AM   #12
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Currently we have about 4-5 years of survival level cash, or 3-3.5 years of survival plus a little bit of hobby and travel money, or 2.25 years of full budget (lots of travel, pretty generous personal hobby cash. I have some difficult to forecast tax stuff coming up in December, so I'm staying a little cash heavy for the moment. After that tax event is cleared, we will reduce the cash stockpile to 1 year of full budget or 2-2.5 years of survival level cash. (The tax event is related to my previous expat assignment in Japan, due to carryover income). For us, survival level means property taxes, insurances, basic maintenance, food and survival level fuel/energy are covered. Big ticket maintenance accruals are put on hold, travel is essentially put on hold, hobbies and "play" are minimized if not eliminated, the little eating out we do is eliminated.

Our WR is about 2.75%, and our cash position is about 5.8%.

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Old 09-13-2013, 12:11 AM   #13
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Quote:
Originally Posted by LOL! View Post
About 0.5 month of expenses in cash.

I prefer to be fully invested. I have about 3 years of expenses in short-term bond funds and even more in an intermediate-term bond fund.

I figure that bond funds can only drop at most 10% in the short term, so it's not a big deal to me what happens if the market fluctuates.

Here is an article about cash reserve strategies don't work: Research Reveals Cash Reserve Strategies Don't Work... Unless You're A Good Market Timer? | Kitces.com



And no, I don't have an emergency fund. I just sell something if I need extra money.
+1 on the "fully invested" - but I typically funnel most new money to equities.

I have quite a bit of credit available on credit cards that carry 30-40 days of float. If I wound up unemployed, my I-bonds would be my fail-safe emergency fund and could last me 3-4 years at a very modest lifestyle (but still enjoyable). However, before I reached that point, I would likely stop the DRIPing in my portfolio and let the dividends runneth into my checking account.
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Old 09-13-2013, 12:47 AM   #14
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I'm not yet retired, but with my goal of June 2014 I'm currently keeping about 10 years worth of my estimated annual withdrawals that with supplement my pension to meet our target expenses. My thought is that this would keep me form being forced to liquidate equities during a down year. It would also keep me from tapping into my 401k and our IRAs for a few years, which would help towards qualifying for the ACA subsidy.

Part of my assumptions was health insurance premiums being 20% of our expenses. However, once things solidify with the ACA our premiums will likely be lower, and if so I will move more of that cash into equities and keep 5 years of withdrawals.

This also covers emergency money which is built into the expenses. I've got 15 years of Quicken data so I can anticipate what the big expenses are likely to be (of course you can't plan for everything but we plan for as much as possible).
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Old 09-13-2013, 01:48 AM   #15
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Early on WRT retirement for me so maybe we'll decide to adjust one day, but we target 1-2 years in cash. An emergency of more than 3-4 months spending equivalent seems unlikely, and 20% of our annual spending budget is for unexpected emergency expenses, so we don't keep additional cash for emergencies. If we have to sell holdings, I am sure we can find something in need of rebalancing. YMMV
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Old 09-13-2013, 05:33 AM   #16
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I have 10 years of estimated annual withdrawals in multiple CD ladders, coming due at 3 month intervals.
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Old 09-13-2013, 05:57 AM   #17
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I have a year of my "high end" budget in cash (savings account). I have a CD ladder that is currently maturing over 2 years but my goal is to stretch this to 5 years when the Fed gets out of the bond buying business that will cover over 10 years of the "high end" budget and about 30 years of my "basic" budget.
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Old 09-13-2013, 06:56 AM   #18
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I have about 10 years in cash right now. Mostly because I think the market is way overvalued, but also to be ready for some real estate transactions.
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Old 09-13-2013, 07:30 AM   #19
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We have our current year budget in cash, one year budget in a short term bond fund, one half year budget emergency fund also in a short term bond fund, together with large outlays we know are going to happen in the next few years.
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Old 09-13-2013, 07:38 AM   #20
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I have about 6 months expenses in a MMF. That amount varies from a month or two to up to a year depending on when and how I withdraw funds from equities for annual expenses. I try to liquidate at times the market is up at recent highs (mini timing). But I have about 4 years worth in the Federal TSP G fund as part of my bond allocation. The G Fund principle is guaranteed so it serves as a pseudo cash backup in case of a protracted downturn.
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