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How many years living expenses do you have?
Old 09-29-2009, 09:32 AM   #1
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How many years living expenses do you have?

Fire'd in July at 51 and am still receiving a paycheck for the next 9 months that basically covers my monthly expenses. As the paychecks start to run out I am trying to determine exactly how many years living expenses I should set aside in cash.

My current thinking is one year's worth of expenses in tax free MMF and another two years in short/intermediate term tax free bond fund. Current asset allocation is roughly 60/40 equities to bonds. I'm still in the top marginal tax bracket so try and keep the portion of my fixed income investments that are outside of the IRA and 401k in tax free vehicles.

Any thoughts would be appreciated!
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Old 09-29-2009, 09:36 AM   #2
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Are you specifically directing the question at those who are already retired?
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Old 09-29-2009, 09:45 AM   #3
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I don't keep any of my cash nor any fixed income outside of IRA or 401(k) tax-sheltered vehicles. It doesn't make sense to do that even if one is retired early. See, for example, this neat trick to keep your taxes low: Placing Cash Needs in a Tax-Advantaged Account - Bogleheads

In essence, if you have ANY stocks or equities in your tax-sheltered accounts, then there is virtually NO reason to have any tax-exempt funds in a taxable account.
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Old 09-29-2009, 09:46 AM   #4
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Yes, I guess those that are retired already makes the most sense. Although if there is someone about to retire that has already begun to make their plans on the number of years of living expenses to put aside that works for me as well.
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Old 09-29-2009, 09:53 AM   #5
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Yes, I guess those that are retired already makes the most sense. Although if there is someone about to retire that has already begun to make their plans on the number of years of living expenses to put aside that works for me as well.
That rules me out, but I ask because there are quite a few people who look at the role of a cash position differently in retirement than before it. For those of us many years from retirement, the "cash position" is likely an emergency fund, whereas for a retiree, the cash position may represent the ability to draw income from a portfolio for a certain amount of time without needing to sell equities at a low point. Indeed, many retirees don't even have a separate "emergency fund" but account for things like a leaky roof, a dead furnace or a blown engine within their budgets and would just draw from the cash position to pay for it.
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"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

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Old 09-29-2009, 10:07 AM   #6
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That rules me out, but I ask because there are quite a few people who look at the role of a cash position differently in retirement than before it. For those of us many years from retirement, the "cash position" is likely an emergency fund, whereas for a retiree, the cash position may represent the ability to draw income from a portfolio for a certain amount of time without needing to sell equities at a low point. Indeed, many retirees don't even have a separate "emergency fund" but account for things like a leaky roof, a dead furnace or a blown engine within their budgets and would just draw from the cash position to pay for it.
thanks Ziggy. You are correct, this is not an emergency fund (although I do still plan to maintain one for the leaky roofs of life).

This will for all intents and purposes be my "salary" going forward which I will draw upon on a monthly basis.
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Old 09-29-2009, 10:12 AM   #7
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I don't keep any of my cash nor any fixed income outside of IRA or 401(k) tax-sheltered vehicles. It doesn't make sense to do that even if one is retired early. See, for example, this neat trick to keep your taxes low: Placing Cash Needs in a Tax-Advantaged Account - Bogleheads

In essence, if you have ANY stocks or equities in your tax-sheltered accounts, then there is virtually NO reason to have any tax-exempt funds in a taxable account.
I have zero equities in my tax advantaged accounts. 100% Pimco Total Return.

And with all due respect to the "Bogleheads" of the world dumping my living expenses into an index fund would unduly expose me to the ups and downs of the market and knock my asset allocation way out of whack.

Thanks for the thoughts though. Interesting article but not quite appropriate for my situation after reading the "fine points" section.
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Old 09-29-2009, 10:24 AM   #8
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Right now I am keeping two years of expenses in my Money Market . I was keeping only one but last year frightened me into two years .
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Old 09-29-2009, 10:25 AM   #9
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Quote:
Originally Posted by RockyMtn View Post
Fire'd in July at 51 and am still receiving a paycheck for the next 9 months that basically covers my monthly expenses. As the paychecks start to run out I am trying to determine exactly how many years living expenses I should set aside in cash.

My current thinking is one year's worth of expenses in tax free MMF and another two years in short/intermediate term tax free bond fund. Current asset allocation is roughly 60/40 equities to bonds. I'm still in the top marginal tax bracket so try and keep the portion of my fixed income investments that are outside of the IRA and 401k in tax free vehicles.

Any thoughts would be appreciated!
Once you are retired - i.e. no longer drawing a salary - is there really a tax advantage using the tax-free MMFs and bond funds? Usually you only do better if you are in the highest tax brackets.

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Old 09-29-2009, 10:46 AM   #10
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Once you are retired - i.e. no longer drawing a salary - is there really a tax advantage using the tax-free MMFs and bond funds? Usually you only do better if you are in the highest tax brackets.

Audrey
Unfortunately, or fortunately I have an investment that throws off significant short term capital gains. That along with vesting stock options for the next several years will keep me in the top tax bracket for the foreseeable future.

Generally, I agree with you that there is no reason for the tax free approach after retirement.
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Old 09-29-2009, 10:53 AM   #11
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Originally Posted by RockyMtn View Post
I have zero equities in my tax advantaged accounts. 100% Pimco Total Return.

And with all due respect to the "Bogleheads" of the world dumping my living expenses into an index fund would unduly expose me to the ups and downs of the market and knock my asset allocation way out of whack.

Thanks for the thoughts though. Interesting article but not quite appropriate for my situation after reading the "fine points" section.
No due respect needed. If you don't have room in your tax-sheltered, then you don't have room.

I was working on my 2008 tax return yesterday and have only $29 in taxable interest from a checking account. This is because our IRAs and 401(k)s are large enough to hold all our fixed income assets.

I am already exposed to the ups and downs of the market because of my equity allocation. I like to deduct my realized capital losses from my taxes, so I don't like to put cash in taxable if I have room in tax-sheltered for it. Putting cash in tax-sheltered frees up space in taxable for equities. It's an odd way to think of it, but it really works for me.
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Old 09-29-2009, 11:15 AM   #12
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Interesting topic.

The original question was how much to keep so you can draw on it during the year.

I keep one year in money market and a second year's expenses in two year CD's. In addition, because I won't be drawing on Social Security for several years, there is an additional five years in short-term bond funds.

This is my first year of retirement. The plan for next year is to draw a year's expenses in January from available cash (dividends, interest) and create two year CD's, using the maturing CD's as living expenses.

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Old 09-29-2009, 11:50 AM   #13
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Normally I like to be 100% equities. I kept out about 3 years cash (including college expenses for one kid, so it was a hefty amount) when I started retirement in 2007. My plan was to leave equities alone for 3 years or so to avoid any risk of a big downturn, which looked like a possibility at the time. Being "heavy" in cash at the start and spending it down before touching equities doesn't cut into the return too much if the market goes up and provides a nice buffer if the market goes down.

Whatever your normal allocation is, you might consider a little extra cash as insurance against a market downturn at the start of retirement.

When the market did go down, I moved chunks of the cash back into equities, including some at the bottom. So I cheated a little.

Not sure I would do the same at this point. I wouldn't be surprised to see the market head lower in 2010, or not go anywhere. So a little extra cash/fixed income would probably be nice as you start out, but maybe not 3 years. I just don't like the drag on a portfolio a permanent allocation creates.
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Old 09-29-2009, 12:21 PM   #14
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Originally Posted by RockyMtn View Post
Fire'd in July at 51 and am still receiving a paycheck for the next 9 months that basically covers my monthly expenses. As the paychecks start to run out I am trying to determine exactly how many years living expenses I should set aside in cash.

My current thinking is one year's worth of expenses in tax free MMF and another two years in short/intermediate term tax free bond fund. Current asset allocation is roughly 60/40 equities to bonds. I'm still in the top marginal tax bracket so try and keep the portion of my fixed income investments that are outside of the IRA and 401k in tax free vehicles.

Any thoughts would be appreciated!
If you're actively managing your investments, I wouldn't put more than one year's expenses, or so, in true cash. However, I do have a CD ladder and a short term bond fund available to replinish the cash supply if necessary. They're part of my AA, not a separate "cash stash." If I choose to tap them, it does change my AA but by very small amounts vs. the value of the FIRE portfolio. That is, dipping into the CD ladder for a year of expenses would be an unplanned change in my AA, but not enough to loose sleep over.

Keeping several years expenses as true cash is, IMHO, highly overrated.

Also, I think your replinishment plan is at least as important as your decision as to how much cash to keep available.

Congratulations on your early retirement! I admire your "problem" of being in the highest tax bracket! That's a great problem to have!
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Old 09-29-2009, 01:11 PM   #15
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Otar says 2 years in cash, 3 more in short term bonds, and makes a sensible case for that. But the best solution depends to some extent on what your plan is for the rest of your assets. If you are a Lucia "buckets" type, you might have 7 years in cash and another 7 in fixed. If you are an Armstrong follower, maybe 5 - 10 in cash.

I think the common ground is whether you wish to keep only expense money in cash or whether you want to keep enough that you would not have to sell equities in a dowon market, which can last quite a while as we know all too well.
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Old 09-29-2009, 01:53 PM   #16
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I RE'd with a nice pension. I have since taken SS (at 62 as did my wife). Finding that we could get by quite nicely on those income streams (and even bank a good portion of the SS most months), we have not hit our portfolio very often. However, I have stuck with my original plan at the time I retired: 5 years of what I anticipated we would need over and above my pension in laddered CD's/Treasuries. Every time a CD or a bond matures, I dutifully search for the best available interest rates (not very good these days) and buy an instrument that will mature 5 years down the road. (See footnote.) I kept this up because the stats say I will predecease my wife. At that point she will get the survivor benefit on my pension that I signed up for when I retired, considerably less than I get while I am among the living. Although she will get SS and my higher rate, I want her to have the cash available each year from the ladder. (The original plan, which I hope she will consider, was that if/when we used the maturing CD's/bonds each year, we would buy a similar amount for the far end of the ladder from proceeds of redeemed stock mutual funds which, as everyone back then knew, could go nowhere but up forever.)

Footnote: This summer two CDs matured and, according to my ladder plan, I should have put the proceeds in something that would mature in late 2013/early 2014 to fund 2014 expenses. But I couldn't bring myself to commit to 5 years at the current low rates available. I found a 2.25% APY 18 month Share Certificate (CD) at Navy Federal Credit Union, so I stashed that money there and will revisit how to fund 2014 a year and a half from now.
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Old 09-29-2009, 02:30 PM   #17
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I think the common ground is whether you wish to keep only expense money in cash or whether you want to keep enough that you would not have to sell equities in a dowon market, which can last quite a while as we know all too well.
Although this down market seems to have gone on forever, it's really only been a couple of years between reasonable times to sell off small portions of your portfolio to meet living expenses. In fact, given the current partial rebound we're experiencing, I'm sitting here this afternoon looking at some situations where I will probably do some trimming and rebalancing which would free up cash if I needed it.

Despite never having nearly the mountains of cash some of the pundits recommend, I've avoided any liquidity problems and, in fact, have more issues finding reasonable returns on the cash I do hold than I do having enough cash to meet expenses.

Perhaps I'll be sorry later when and if the market takes a prolonged dump (say a decade or so) where all asset classes are drastically down and there's no place to go except sell at reduced prices. But so far, it just seems unlikely that I'd have nowhere to go inside a diverse portfolio for many consecutive years. I sure hope not!!
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Old 09-29-2009, 03:13 PM   #18
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Although this down market seems to have gone on forever, it's really only been a couple of years between reasonable times to sell off small portions of your portfolio to meet living expenses. In fact, given the current partial rebound we're experiencing, I'm sitting here this afternoon looking at some situations where I will probably do some trimming and rebalancing which would free up cash if I needed it.

Despite never having nearly the mountains of cash some of the pundits recommend, I've avoided any liquidity problems and, in fact, have more issues finding reasonable returns on the cash I do hold than I do having enough cash to meet expenses.

Perhaps I'll be sorry later when and if the market takes a prolonged dump (say a decade or so) where all asset classes are drastically down and there's no place to go except sell at reduced prices. But so far, it just seems unlikely that I'd have nowhere to go inside a diverse portfolio for many consecutive years. I sure hope not!!
I agree. Actually, a long sideways market worries me more than a wild volatile one (maybe another reason I like ample cash and fixed assets on hand).
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Old 09-29-2009, 05:24 PM   #19
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My current thinking is one year's worth of expenses in tax free MMF and another two years in short/intermediate term tax free bond fund. Current asset allocation is roughly 60/40 equities to bonds.
Any thoughts would be appreciated!
That's exactly what I'm doing with my MMF. I have about 32% of my portfolio in the Vanguard Short Term Corp fund, so that ends up being a lot more than 2 years.

I'll probably fall in the 10% bracket this year since I haven't liquidated anything yet, so in taxable MMFs. Besides, what interest is there to tax these days?
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Old 09-29-2009, 07:56 PM   #20
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Unfortunately, or fortunately I have an investment that throws off significant short term capital gains. That along with vesting stock options for the next several years will keep me in the top tax bracket for the foreseeable future.
I'd call that fortunate.
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