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If you were/are age 54-59...
Old 06-05-2010, 10:04 AM   #1
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If you were/are age 54-59...

We are getting ready to ER next April at age 55 and 54 respectively. Knowing that we will need to live off savings and taxable accounts, along with a small pension until 59.5, how much of your portfolio would you have invested in cash/CD's etc....?

We are currently 45/45/10 stocks/bonds/short term. Non tax deferred accounts will be pretty close to exhaused at 59 most likely. No debt. No children left at home.

We've run all the calcs including Firecalc and appear to be good to go. Would like some input as to amount we might keep in cash reserves.

Thanks!
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Old 06-05-2010, 10:09 AM   #2
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Personally we have a cash (in MM) bucket that covers expenses until SS. Returns on mutual funds get reinvested into the funds for now; we will have them paid into the MM when we start collecting SS.

This is just what we decided to do for no particular financially-savvy reason; others probably have better systems .
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Old 06-05-2010, 10:16 AM   #3
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We use 2 years' expenses in cash, 3 yrs expenses in short-term bonds, 40-45% in equities and the remainder in intermediate bonds, more or less.

When you start collecting your pension or early SS, that reduces your amount needed in cash. Check the archives for more discussion, and look at Firecalc to help you model this.
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Old 06-05-2010, 10:52 AM   #4
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DH retired last year at 55. At that time we had 5 years expenses in a MM account (he gets a pension as well). Along with the cash reserves we have some bonds and stocks outside of our retirement accounts that throw off interest and dividends.

We also have 5 years living expenses in an IRA mm account along with other IRA buckets consisting of stocks and bonds.
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Old 06-05-2010, 11:00 AM   #5
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I like your 45:45:10 asset allocation for retirement (mine is almost identical right now). To me, the question is how you are going to "pay yourself SS", so to speak, until you are eligible for it.

I have a lot of my bond allocation in the TSP "G Fund", a bond fund which is guaranteed not to decrease in share price. So, in that sense it is similar to cash. I am taking equal monthly payments from it that are higher now than they will be after I claim SS.

Similarly (assuming you do not have a TSP account), I would suggest multiplying your anticipated SS monthly payments by the number of months before you plan to claim it. For example, if you are expecting to net $1500/mo from SS, beginning in 84 months, then probably 84x$1500 = $126,000 needs to be set aside for this. So, set aside this much cash to cover the lack of SS during this gap.

Remember that most bond funds can lose share price. So, if it was me, I'd set this money aside in cash, instead of bonds. I'd sell enough bonds to do it, even though you'd miss out on the dividends from those bonds and even though this may temporarily distort your asset allocation.
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Old 06-05-2010, 11:25 AM   #6
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Quote:
Originally Posted by bizlady View Post
We are getting ready to ER next April at age 55 and 54 respectively. Knowing that we will need to live off savings and taxable accounts, along with a small pension until 59.5, how much of your portfolio would you have invested in cash/CD's etc....?
We are currently 45/45/10 stocks/bonds/short term. Non tax deferred accounts will be pretty close to exhaused at 59 most likely. No debt. No children left at home.
We've run all the calcs including Firecalc and appear to be good to go. Would like some input as to amount we might keep in cash reserves.
Two years' expenses for us.

Considering you're five years away from a higher cash flow, you might be tempted to liquidate your taxable accounts and stash them in CDs. I guess the issue would be whether you think you'll pay less taxes in 2010 (when cap gains rates are at what may be their lowest ever) or less taxes in 2011-2015 (when you're ER'd and in a lower income-tax bracket).
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Old 06-05-2010, 12:12 PM   #7
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Two years' expenses for us.

Considering you're five years away from a higher cash flow, you might be tempted to liquidate your taxable accounts and stash them in CDs. I guess the issue would be whether you think you'll pay less taxes in 2010 (when cap gains rates are at what may be their lowest ever) or less taxes in 2011-2015 (when you're ER'd and in a lower income-tax bracket).
Two years expenses after retirement at 55 is about what we have stashed in cash/CD's. The remaining that we will spend prior to 59.5 is primarily in nonretirement (taxable mutual funds) which we think we will cash out of as needed to maintain the 2 year expenses. We will most definately be in the lowest tax bracket from 55-59 in 2012 foward, and more than likely also for 2011.

It seems we are on track, but so hard to know how many years cash type investments to have on hand- and yet still get what growth we can...
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Old 06-05-2010, 12:56 PM   #8
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It seems we are on track, but so hard to know how many years cash type investments to have on hand- and yet still get what growth we can...
That's what asset allocation plans are for.

Give yourself a cash asset allocation of 8-10% and rebalance to keep it that way whenever you can. In good years you could replenish the cash stash to 8-10% or even higher, and in bad years you could consume the cash stash in the hopes that the market will recover during your 2-3 years of cash consumption.

Our ER portfolio is 92% equities & 8% cash. Each of our four types of equities has an allocation of 23% +/- 5%. When an asset gets down to 18% then we buy more of it, and when it gets to 28% then we sell some of it off. The amount we buy/sell is somewhat constrained by keeping the cash stash topped off. The broad bands give us the flexibility to only need to rebalance every couple of years.

Our system may be overcomplicated, but any good rebalancing system will help automate the decision-making process while removing some of the angst over the market. We can't predict the stock market's behavior, let alone affect it, but we can control our AA and our reaction to the market's behavior.

Most recessions have been 2-3 years or shorter. And even if you ended up with a three-year cash stash during a five-year recession, by the third year you wouldn't blindly keep spending it down at the same rate. You'd make it stretch as long as you can and then you'd start selling the equities which had performed the best during that recession.
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Old 06-05-2010, 01:41 PM   #9
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We keep current year plus one year of budget in cash. Additional funds to cover planned or likely large expenses (weddings, new car, major appliance) we keep in short term bond funds. The rest of our fixed income is in bonds (laddered to our budget) and intermediate term bond funds, enough to cover around 7-8 years of budget plus other large expense.

Funds for expenses more than 2 years out can be in bonds with maturities around your required dates, intermediate term bond funds or, if you can take some risk, conservative allocation funds (per M* definition).

Fixed income returns, especially those with short term horizons, are being held low by central bank policy. The additional risk being taken when looking for higher returns needs to be carefully considered, especially with budget money.
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Old 06-05-2010, 02:49 PM   #10
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I have non-COLA pensions but we need to draw $30k/year to meet our target annual income. This is our first year of ER.

My mix is 35/55/10 and I have 5 years of expenses in cash (I-Bonds & CD's) in case of bad turns in the market. Most of the additional income needed will be from dividends from our balanced fund in our taxable accounts.

I also have set aside, not included in the retirement account for SWR, a cash account for discretionary / emergency funds. In fact I've just had to draw that down $2k today for a emergency. I also have a seperate LTC account into which I have been putting $200/month for some years now, and again this is excluded from the SWR calculation.
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Old 06-05-2010, 04:20 PM   #11
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I'd opt for virtually no cash, but would use a short-term bond fund instead. Presently, we have around 8 years expenses in bond funds with about 3 years in short-term bond funds. We have about a month's worth of cash in our checking account.

Suppose our short-term bond funds drop by 10% in value. That would mean instead of 36 months of expenses, we would have 32 months of expenses. That's not a big deal to me and will not change how well I sleep at night based on past experience in 2008-2009.

Of course, if I could get a CD at 6%, then I might have some cash. The return of the Vanguard Short-term investment grade bond fund for the last 3 years has been: 5% and for the Vanguard GNMA fund: 7.5% annually.
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Old 06-05-2010, 06:56 PM   #12
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I'd opt for virtually no cash, but would use a short-term bond fund instead. Presently, we have around 8 years expenses in bond funds with about 3 years in short-term bond funds. We have about a month's worth of cash in our checking account.

Suppose our short-term bond funds drop by 10% in value. That would mean instead of 36 months of expenses, we would have 32 months of expenses. That's not a big deal to me and will not change how well I sleep at night based on past experience in 2008-2009.

Of course, if I could get a CD at 6%, then I might have some cash. The return of the Vanguard Short-term investment grade bond fund for the last 3 years has been: 5% and for the Vanguard GNMA fund: 7.5% annually.
The highest price variation I've been able to find in a short term bond fund is about 18 % for the Vanguard Short Term Investment Grade Bond Fund. The low was in 1984 at $9.50 and the high in 1992 at $11.19. Currently at $10.69 so somewhat above its midrange.

Although past history has very little predictive value (particularly in regards to the future) I tend to combine my short term funds with my MM balances in figuring out my minimum of 4 years worth of expenses in cash/near cash thinking that I can absorb an 18% swing over several years. Time will tell whether this was reasonable or not.
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Old 06-05-2010, 09:00 PM   #13
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I'd opt for virtually no cash, but would use a short-term bond fund instead. ...

Suppose our short-term bond funds drop by 10% in value. That would mean instead of 36 months of expenses, we would have 32 months of expenses. That's not a big deal to me and will not change how well I sleep at night.
Excellent point, IMO. I do believe in having enough cash for emergencies, but I think people get too mesmerized about holding years of funds that are 'dollar certain'. It's a matter of degrees, and if you plan ahead the need for a big withdraw is minimal (stuff happens though), and what are the odds that when you need it, that bond fund is down? People forget the opportunity cost of the majority of time it is just sitting there, waiting. Sure, keep some of it liquid and reasonably stable, but don't go nuts trying to reduce risk - there is a cost.

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Old 06-06-2010, 01:33 PM   #14
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To the OP:

Take some of the advice you get here with a grain of salt...

The poster Nords - with the 92% equity allocation, also has substantial pension income he forgot to mention. Your situation may be totally different and a very high equity allocation such as he proposes would (in my opinion) be totally inappropriate.

What's significant about age 59.5 ? If you are concerned about penalty-free IRA withdrawals, then learn about and consider 72-t (tax free) IRA withdrawals. That just may be an attractive option for you.
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Old 06-08-2010, 01:17 AM   #15
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I would do a 50:50 allocation. You retire early and send the wife back to work.
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Old 06-08-2010, 08:02 AM   #16
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I would do a 50:50 allocation. You retire early and send the wife back to work.

I AM the wife - the main breadwinner, and the financially inclined half! My husbands philosophy for a long time was I can't take it with me so why not spend it now. He now sees the light!
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Old 06-08-2010, 08:10 AM   #17
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I AM the wife - the main breadwinner, and the financially inclined half! My husbands philosophy for a long time was I can't take it with me so why not spend it now. He now sees the light!
It helps to see the light when you hit him over the head with a lamp...
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Old 06-08-2010, 09:24 AM   #18
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Originally Posted by bizlady View Post
We are getting ready to ER next April at age 55 and 54 respectively. Knowing that we will need to live off savings and taxable accounts, along with a small pension until 59.5, how much of your portfolio would you have invested in cash/CD's etc....?
I would keep 62-55=7 years in cash, CDs, short term bonds to be absolutely
safe. Or if you're more aggressive, 3 years in cash/CDs and 4 years in a
balance fund that is designed for income (Wellesley, etc).
TJ
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Old 06-08-2010, 12:54 PM   #19
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Have you thought about setting up a CD ladder with each CD maturing at the beginning of the year in which you will need the funds? (Or you could have two mature each year - one in early January and the other in late June.) You won't get great interest rates, but you know the money will be there when you need it and unless things change dramatically, you will be getting a better overall interest rate than you will from a MM fund.
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Old 06-08-2010, 07:46 PM   #20
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I like your 45:45:10 asset allocation for retirement (mine is almost identical right now). To me, the question is how you are going to "pay yourself SS", so to speak, until you are eligible for it.

I have a lot of my bond allocation in the TSP "G Fund", a bond fund which is guaranteed not to decrease in share price. So, in that sense it is similar to cash. I am taking equal monthly payments from it that are higher now than they will be after I claim SS.

Similarly (assuming you do not have a TSP account), I would suggest multiplying your anticipated SS monthly payments by the number of months before you plan to claim it. For example, if you are expecting to net $1500/mo from SS, beginning in 84 months, then probably 84x$1500 = $126,000 needs to be set aside for this. So, set aside this much cash to cover the lack of SS during this gap.

Remember that most bond funds can lose share price. So, if it was me, I'd set this money aside in cash, instead of bonds. I'd sell enough bonds to do it, even though you'd miss out on the dividends from those bonds and even though this may temporarily distort your asset allocation.
We did this calculation and put the money in CDs and I-Bonds.

I don't know how much "emergency" cash we'll keep when we start SS.
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