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How much cash to set aside if interest/dividend more than cover annual expenses?
Old 10-12-2018, 09:36 AM   #1
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How much cash to set aside if interest/dividend more than cover annual expenses?

Our plan is to set aside cash for three year worth of expenses to avoid selling stocks in a downturn market. We figure probability wise, three year would be sufficient in general. Our total annual expenses are about 100K but our current investments in our taxable accounts generate about 110K per year, mostly come in the form of monthly or quarterly dividend/interest. So does that mean we only need to set aside two years worth of cash to meet our goal of three year or we do not need any cash set aside since the income stream comes in on a regular basis? Knowing that in a downturn market, dividend could be cut, but our 100K/yr expense includes discretionary spending which I assume that we could cut back if needed.

I am curious how everyone does this as for most ERs, we would be relying on passive income stream to cover our expenses. Having worked our whole lives and most of our effort is spent on saving and now has more questions on spending as we plan for our retirement.
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Old 10-12-2018, 09:41 AM   #2
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We ditched our emergency fund decades ago - well before early retirement. My cash balance normally is < 1 month of expenses.
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Old 10-12-2018, 09:42 AM   #3
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We have 3 years in MM.
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Old 10-12-2018, 09:47 AM   #4
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Our plan is to set aside cash for three year worth of expenses to avoid selling stocks in a downturn market. We figure probability wise, three year would be sufficient in general. Our total annual expenses are about 100K but our current investments in our taxable accounts generate about 110K per year, mostly come in the form of monthly or quarterly dividend/interest. So does that mean we only need to set aside two years worth of cash to meet our goal of three year or we do not need any cash set aside since the income stream comes in on a regular basis? Knowing that in a downturn market, dividend could be cut, but our 100K/yr expense includes discretionary spending which I assume that we could cut back if needed.

I am curious how everyone does this as for most ERs, we would be relying on passive income stream to cover our expenses. Having worked our whole lives and most of our effort is spent on saving and now has more questions on spending as we plan for our retirement.
I use monthly and quarterly dividends to supply me with regular income streams to cover my expenses in ER. I keep very little cash in my local bank's checking account, just enough to meet minimum balance requirements (and avoid monthly fees) along with a small buffer or cushion to cover any smaller, unforeseen expenses. The checking account earns aero interest, so I don't want to keep any large amounts of money in there earning zilch. I have some other bond funds earning interest I can use as a second-tier emergency fund should a larger, unforeseen expense arise.

Most of the dividend income are monthly bond fund dividends. But some of it are quarterly dividends from a stock fund. Those are a little more volatile, but I don't count on the full amount to pay my bills. It's more of a supplement whose arrival roughly coincides with similar spikes in my expenses such as auto insurance and income taxes.

I have never had to sell the underlying stocks just to meet my expenses. The only time I have sold stocks other than for rebalancing was when I bought a new car 11 years ago (I was still working at the time, and in 2007 the market was high).
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Old 10-12-2018, 09:52 AM   #5
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Originally Posted by jebmke View Post
We ditched our emergency fund decades ago - well before early retirement. My cash balance normally is < 1 month of expenses.
I am curious how you would handle the situation if an unexpected expense or larger than normal expense comes up when you keep that little in cash. Do you just wait till you need to dip into selling?
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Old 10-12-2018, 09:58 AM   #6
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@scrabbler1 - Thank you for the detailed reply! I think our situation would be the same to use monthly/quarterly dividend/interest to cover our expenses. It sounds that you never had to "dip" into selling to cover unexpected expenses except one time. Would that just be careful planning that you are doing? I guess part of our uncertainty is that I think our life styles will be different during ER years compared to the working years and it would be rather strange not coming paychecks coming in twice a month and just the passive income which we in the past just plowing back into savings/investments.
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Old 10-12-2018, 10:06 AM   #7
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@scrabbler1 - Thank you for the detailed reply! I think our situation would be the same to use monthly/quarterly dividend/interest to cover our expenses. It sounds that you never had to "dip" into selling to cover unexpected expenses except one time. Would that just be careful planning that you are doing? I guess part of our uncertainty is that I think our life styles will be different during ER years compared to the working years and it would be rather strange not coming paychecks coming in twice a month and just the passive income which we in the past just plowing back into savings/investments.
To answer your question I put in bold, I had plenty of money in the muni bond funds to pay for the car, as I kept more in them while I was working and in a bigger tax bracket. I chose to sell some shares of stock instead because it enabled me to capture some cap gains. The car purchase was somewhat unexpected because my aging car was in decent shape until some things quickly went wrong and I had to replace it a little sooner than expected.

If you expect your ER lifestyle to be quite different from when you were working (unlike me), then you might want to keep a bigger buffer or cushion in your checking account. Not sure how much bigger that would be, only you can figure that out. But keeping 2-3 years of expenses tied up along with having the steady income stream(s) might be a little extreme.
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Old 10-12-2018, 10:10 AM   #8
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Old 10-12-2018, 10:24 AM   #9
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I am laddering out bonds for the first 4 years of retirement, starting in January of 2021. When I started this process a year or so ago, the yields were pretty small, but now things are getting interesting. The yields on 2 and 3 year muni's are even looking good.
I have a bunch coming to maturity between now and year end that I will hunt for the best deals on. Maturities of 2023 or early seem to be the sweet spot right now.
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Old 10-12-2018, 10:27 AM   #10
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i like to have 6-12 mo. expenses in cash. My COL isn’t too bad and some stocks will still kick off dividends in a downturn. I think it’s important to remember that you won’t have NO income in a bad economy. And buying opportunities will show up. A year’s money will cover unexpected expenses along with the money that will still come in.
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Old 10-12-2018, 10:29 AM   #11
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I am laddering out bonds for the first 4 years of retirement, starting in January of 2021. When I started this process a year or so ago, the yields were pretty small, but now things are getting interesting. The yields on 2 and 3 year muni's are even looking good.
I have a bunch coming to maturity between now and year end that I will hunt for the best deals on. Maturities of 2023 or early seem to be the sweet spot right now.
What kind of yields are you getting? Iíve been avoiding bonds for a long time.
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Old 10-12-2018, 10:33 AM   #12
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We have about 4 yrs in MM/short term CD's, but that mainly is for ACA income management, not really as a sub for equities in a down market.
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Old 10-12-2018, 10:36 AM   #13
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I pull one year's worth of cash in December. But my AA includes a decade or more of spending in a stable value fund. I don't think 3 years is enough. It remains to be seen how aggressively I'll rebalance, but there is no way I'm selling equities in the downturn.
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Old 10-12-2018, 10:44 AM   #14
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Most of you play it very safe,,,I keep 4-12 months in cash. As I accumulate to the 12 month amount, I start deciding what my next stock purchase will be. I make my purchase, go back to 4 months expenses, and repeat.
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Old 10-12-2018, 11:00 AM   #15
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For me, that's 3months living expenses in cash. But I am not FIREd yet. Even when I am, I will only keep 3months of cash in a stable value/MM account.

Of course I would re-evaluate this as needed or annually. I am not as conservative as most around here though. My DW fights me on this, I am constantly having to discuss the lost opportunities of being out of the market with her.



There are situations where I would increase my cash, like if I wanted 20% down for a rental property. I would probably try and put less down if possible though. I'm not in the business of all cash offers right now so wouldn't need too much maybe 30k total. I don't know why anyone would hold too much cash, as you are losing out to inflation in the long run.
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Old 10-12-2018, 12:01 PM   #16
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... Our total annual expenses are about 100K but our current investments in our taxable accounts generate about 110K per year, mostly come in the form of monthly or quarterly dividend/interest. ...
Based on that, I really see no reason for you to hold nay more cash than what you might need in your checking account for cash flow purposes, to meet your bills. I like to keep enough buffer so that an unexpected bill doesn't require action, and that I don't need to worry about an overdraft. I'm comfortable with ~ 2~3 months worth. I hold no other cash.


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... I am curious how everyone does this as for most ERs, we would be relying on passive income stream to cover our expenses. Having worked our whole lives and most of our effort is spent on saving and now has more questions on spending as we plan for our retirement.
Be careful about asking what "everyone does". They may not be in the same situation as you, and they might not be making a great choice either.

As I said, with an income stream greater than expenses, you just really have no need for much cash. If you did have a big expense, selling something is fine. You can worry about selling on a dip, but most of the time the market is up. There is no reason to let the fear of the chance of selling on a dip keep you from keeping your money working for you. Some discussion here:

Djia -800

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A conservative investor who would hold cash would also likely have a conservative WR and a conservative AA. Say an ~ 3.5% WR and an ~ 50/50 AA portfolio likely to be kicking off ~ 2.5% in divs. So if the market tanks, the investor only needs to draw ~ 1% from the portfolio. That 1% would be from fixed income in order to maintain their AA. This could obviously go on for many, many years before you would touch equities. By that time, they've probably recovered.

Nope, history says that cash doesn't provide a safety net, it is a drag and reduces your long term safety. I sleep better knowing I have my money working for me.

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Old 10-12-2018, 12:22 PM   #17
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What kind of yields are you getting? I’ve been avoiding bonds for a long time.
I have been buying muni's in the 3.8% to 4.4% range, 2-4 year duration. 5% ish coupon. In my tax bracket that equates to 5%+ equivalent for high investment grade bonds. A bunch are state specific as well so double tax free.
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Old 10-12-2018, 12:33 PM   #18
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Cash dividends or stock dividends? If you're cashing out stock dividends and the stock value has decreased, you're essentially spending 'principal'. For stock dividends, additional stocks are added, and the unit price goes down. Best not to sell proceeds from stock dividends in a down market.

When ETFs and mutual funds issue dividends, do the stock issuers issue more shares, or actual cash?
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Old 10-12-2018, 01:03 PM   #19
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Most of you play it very safe,,,I keep 4-12 months in cash. As I accumulate to the 12 month amount, I start deciding what my next stock purchase will be. I make my purchase, go back to 4 months expenses, and repeat.
I think you are still accumulating, like me, and not retired like many who are espousing keeping 3+ years. For us, something on the order of 4-6-12 months makes sense. For "them", having more makes more sense so they don't have to sell into a downturn.
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Old 10-12-2018, 02:30 PM   #20
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Cash dividends or stock dividends? If you're cashing out stock dividends and the stock value has decreased, you're essentially spending 'principal'. For stock dividends, additional stocks are added, and the unit price goes down. Best not to sell proceeds from stock dividends in a down market.

When ETFs and mutual funds issue dividends, do the stock issuers issue more shares, or actual cash?
Dividends are issued in the form of cash.
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