How many years of expenses in cash at retirement?

[Rich_by_the_Bay]

Among the few convincing defenses against a stubborn bear market right after retirement (or any time thereafter to some extent) is having a lot of cash and near-cash on hand (let's say nothing more volatile than short term bonds). Another tactic is an annuity but let's not go there.

Commonly you hear a couple of years. Bucketeers believe in as much as 7 or more years.

So, how much cash (in terms of annual expenses) did you have when you FIREd? How bout farther down the road? How much cash is in your stash? I'm leaning toward a lot but feel uneasy about this issue.

 

[martyb]

I'm not retired yet, but I'm going to try to have 2 yrs in cash &/or easily accessible funds prior to then. Hope that's enough, but since I'll be a pensioner, it oughta be. More for just extra peace of mind, I guess.

 

[Achiever51]

Only FIREd since December, but have cash/cash equivalents set aside to cover 34 months expected budget needs not covered by pension.

 

[Mwsinron]

Edit. Missed the part about being already fire'd

Carry on

 

[Khan]

About four years.

I was working a plan to retire Feb 2008 (30 years work), but retired rather suddenly when an early out was offered. My CD ladder was not complete, and maybe never will be.

 

[allen76]

I retired end of December 2006 at age 55 and went right to a contract position. Left 3 years of living expense in my 401k qualified plan in stable value fund and rollover the balance to VG. 2007 expense is covered by the contract gig and the monies left in my 401k will carry me to 59 1/2 at Jan 2011 for tapping IRA. By 2011, should have about 2 years in stable value at VG from dividends diverted there. That 2 years worth of cash will cover (along with additional dividends for the two year period) until I am almost 62 and cash take SS (personal choice).

I am comfortable with 3 years but it would be sweet to have 5 years of living expenses in cash. I also have about 1.5 yr living expense in taxable equity accounts for major stuff like weddings (have 3 daughters) or if my asset management plan doesn't cooperate.

Easy

ps - working after retirement as I actually like what I do, plus want to help support my daughter in law school and the extra cash also allows my youngest to start university this fall and me not have to use my retirement funds for tuition or her borrow money so she can graduate in 2011 debt free.

 

[youbet]

I retired end of December 2006 at age 55 and went right to a contract position.

No problem with what you're doing. Makes perfect sense. But are you retired other than in the sense that you left your long term employer by going onto to their retirement status, but went right back to work?

 

[SteveR]

Will retire in a couple of months. We have set up a couple of "cash ladder". One rung of the ladder is in MM and will carry us for 12-18 months. The next rung will be available in mid 2008 and should carry us for another 18 months. So, worse case 24 months; best case 36 months before we start selling off some shares of after tax stock or use stock options if they are not snorkeling anymore.

Short answer....24-36 months in cash. Another 2 years in other near-liquid assets.

 

[LOL!]

Standard & Poor's has a suggested asset allocation listed on the front page of their weekly The Outlook. They have had 15% cash-reserves ever since I can remember, 25% bonds, and 60% equities. That 15% cash-reserves is almost 4 years of expenses assuming a 4% annual withdrawal rate. That's even for folks who are not retired yet.

So if one has 3 to 5 years of cash reserves, that seems to fall within the bell curve of a typical asset allocation.

 

[Rich_by_the_Bay]

One of my concerns about Buckets is that it calls for about 28% of assets in cash under typical circumstances, destined to be self-annuitized. Oddly, that's also one of the things that appeals to me about it.

More than a quarter of your assets in cash is mighty reassuring, but it forces you to accept a decidedly lower growth rate than more traditional allocations.

I guess I'd rather be thanking my lucky stars that I have a bloated cash reserve than wishing I had one, as a 4 or 5 year bear clenches its teeth around us. Historically, 7 years is about as long as a net bear market has lasted, BTW per Lucia and others.

 

[Spanky]

We plan on 2 years of expenses from money market funds.

 

[FIRE'd@51]

More than a quarter of your assets in cash is mighty reassuring, but it forces you to accept a decidedly lower growth rate than more traditional allocations.

Does it really have to? You could lower (or eliminate) your intermediate and log-term bond exposure and up your equities, e.g, 28% cash 72% equities. Isn't that along the lines of what Jonathan Clements suggests?

 

[Bikerdude]

I retired in March 2000 at age 52. I decided to defer my pension until age 55 because the numbers worked out well. I had basically two "buckets" one my "bridge" was comprised of cash (MM), near cash (ultra short term bond, laddered CD's), intermediate (E-bonds, I-bonds @3% real, TIPS @3.5 real and GNMA's @ 7%) to get me until age 59.5 and my IRA.

The other "bucket" was my 401 which I rolled over in Jan 2000 and put all in MM on Brinker's market call. IRA remained in cash until March 2003 when I went 50/50 on Brinker's market call.

I'm almost 59.5 and still have 2+years of bridge left so should make it until nearly age 62 and SS before I start WD"s on the IRA. Looking back it was a great strategy (and good calls by Brinker ) considering the market/fixed income performance over the period.

 

[CyclingInvestor]

I retired last year at 48. I keep about 2% in cash, 98% stocks. I do not feel I
need a large cash reserve since I am living on dividends.

 

[Rich_by_the_Bay]

Does it really have to? You could lower (or eliminate) your intermediate and log-term bond exposure and up your equities, e.g, 28% cash 72% equities. Isn't that along the lines of what Jonathan Clements suggests?

Well, yes, you have a point. By allocating that much to cash, you generally keep the remainder of fixed income investments in at least intermediate or even Wellesly type investments. Since you have by definition bought a 7 year horizon for them to grow this all but "assures" (historically) that the intermediate investments will not lose money.

It fits with the philosophy of Frank Armstrong that the small premium benefit of long term and less than investment grade bonds (compared to CDs, short term bonds) is just not worth the volatility -- keep your bonds short and reliable and if you want returns just invest in traditional equities.

 

[samclem]

Right now we've got only a small amount in cash--maybe 2 months of expenses. I plan to build up to about 8% in cash over the next couple of years. (I'm still working part time)

I think in case of a big crash downturn correction in equities, we would tighten our belts and try cover almost all our expenses with our monthly pension check. We'd use the saved cash and the dividends for expenses above that, and possibly to rebalance ("buy low") in the most beaten-down equity sectors. We might not entirely avoid selling stocks when they are down with this approach, but I think we could delay such sales for at least 3-4 years. Maybe that will be long enough.

 

[Bikerdude]

I retired last year at 48. I keep about 2% in cash, 98% stocks. I do not feel I
need a large cash reserve since I am living on dividends.

Bingo! That's the "gold standard" everyone should shoot for. At age 62 with SS and pension I will be in that position. If I have a great year I'll indulge myself and spend some (or a lot) cap gain.

Being able to live on what your portfolio kicks off in interest and dividends is the best scenario but if I was sick of work I would still use the FC SWD model. and RE.

 

[FIRE'd@51]

Well, yes, you have a point. By allocating that much to cash, you generally keep the remainder of fixed income investments in at least intermediate or even Wellesly type investments. Since you have by definition bought a 7 year horizon for them to grow this all but "assures" (historically) that the intermediate investments will not lose money.

It fits with the philosophy of Frank Armstrong that the small premium benefit of long term and less than investment grade bonds (compared to CDs, short term bonds) is just not worth the volatility -- keep your bonds short and reliable and if you want returns just invest in traditional equities.

Exactly, and since your 28% cash and near-term cash bucket will cover you for 7 years, this will give your equities a longer period within which to (hopefully) achieve a real return closer to their long-term historical average of about 6%. With a portfolio of 70% in equities you would expect to capture .7 x 6 = 4.2% of that return which is above your SWR threshold of 4%. Also, the equities will throw off a stream of dividends which will likely grow faster than inflation, and this will help your cashflow. Even with a lower equity real return, such as some of the more bearish folks here are forecasting (say 5%), you would still capture a 3.5% SWR from the equities alone. Meanwhile your "cash bucket" is throwing off 5% or so interest.

 

[REWahoo]

Doc, when I retired I had about 3 years expenses in cash. I plan on keeping 2-3 years cash cushion until I start drawing SS, then I may back off to 1-2 years.

 

[FIRE'd@51]

Bingo! That's the "gold standard" everyone should shoot for. At age 62 with SS and pension I will be in that position. If I have a great year I'll indulge myself and spend some (or a lot) cap gain.

Being able to live on what your portfolio kicks off in interest and dividends is the best scenario but if I was sick of work I would still use the FC SWD model. and RE.

I agree. And even though it's not popular around here among the immortals, taking SS at 62 (and another half for your spouse) really helps you get to that goal. And once you are receiving a large portion (maybe most or even all) of your needed cashflow from dividends which tend to grow faster than inflation, you are in a very strong position.

 

[chinaco]

This is a good question. I have been trying to figure it out for myself. I read a rule of thumb that indicated that one should have 3 - 5 years of cash. That seems like a bit too much to me.

I am working on a plan that partitions our money into 10 year (mini portfolios) for the decades of retirement. Whether they are actually seperate or not, I do not know yet... It may be just managed in a spreadsheet.

Plus, one other note on our approach is that we do not care about leaving a large estate behind. We plan to spend it.


When we reach 55 and FIRE, I will have alotted money for the decade of 55 - 65. We will manage that money to last during that period of time. I will start with a small pension that cover 10% of our needs. DW will begin SS @ 62... another income stream. That pool of money for 55 - 65 will be invested probably @ a higher amount of Bonds and a low amount of stock to reduce volitility. The cash account will hold probably 2 years of money to achieve our desired lifestyle, and 3 years of a minimum acceptable lifestyle. Those 10 years will probably consume 40 or 50% of the total portfolio.

The rest of the portfolio will be invested more aggressively for the subsequent decades. With a division of the total allocated to each decade. We are fairly sure that we will reduce our discretionary spending as we age, but we know that health care expenses could increase. We believe our spending will reduce dramatically after 75.

The way I look at it. I do not want to go broke, but I do not want to ride the volitility of the market to the degree that it interrupts our plans in retirement. That said, extreme things could occur where we might need to make adjustments.

As we age, if interest rates increase and an annuity looks attractive, we will consider purchasing one for the income stream. This purchase would only represent a small amount of our net worth, but it creates a bit of a safety net incase certain things go wrong... However, it is not a contingency plan that mitigates all problems that we may encounter.

All of the income streams that we pick up as we age will reduce the actual amount needed in the cash bucket needs to cover the income gap for that 2 year period. We may be able to allocate more assets to equity in the portfolio that is being consumed and not affect our lifestyle (i.e., capture a bit more growth).

In short... The amount of money in cash depends on the overall plan and how much belt tightening one is willing to do if the seas get choppy.

 

[OAG]

0 Cash (current main checking account has about $2 in it today). Live off of Retired Pay and SS (next year have to also include the first of small RMD on IRA) -- currently save about half of that. But then EVERYTHING we have in savings (guess we cannot call them "investments") in CD's and/or a very small portion in MMA waiting for good CD rates.

OAG

 

[Linney]

I retired end of December 2006 at age 55 and went right to a contract position. Left 3 years of living expense in my 401k qualified plan in stable value fund and rollover the balance to VG. 2007 expense is covered by the contract gig and the monies left in my 401k will carry me to 59 1/2 at Jan 2011 for tapping IRA....[snip]

This is interesting, I hadn't thought of leaving some money in my 401k in order to withdraw it between ages 55-60 without penalty.

Does this only work if you leave the company at age 55 or later? Or does this also work if you quit at, say, 52 but wait until age 55 with withdraw from the small balance left in the 401k? Anyone know?

 

[SecondCor521]

This is interesting, I hadn't thought of leaving some money in my 401k in order to withdraw it between ages 55-60 without penalty.

Does this only work if you leave the company at age 55 or later? Or does this also work if you quit at, say, 52 but wait until age 55 with withdraw from the small balance left in the 401k? Anyone know?

I believe the rule is that you have to separate from service to your employer in the year you turn 55.

My answer to the original question is that I expect to be at an 80/20 allocation at retirement and plan on a 4% withdrawal rate, so I will have 5 years in cash/cash equivalents.

2Cor521

 

[Coach]

I believe the rule is that you have to separate from service to your employer in the year you turn 55.
2Cor521

It's separation in or after the year you turn 55.

Coach