Originally Posted by Huston55
Do you keep 2 yrs of total expenses in cash or, 2 yrs of remaining (after accounting for guaranteed income like pensions) expenses?
We just keep two years of cash on hand to cover the gap between our income (pension, dividends, net rental income, selling call/put options) and our spending.
We keep one year of that cash in a money market account, and we keep the second year of it in a five-year CD ladder. At the end of the first year, we sell off some equities to replenish the money market. If the market is down and there's no equity gains to support the replenishment, then we grit our teeth and start spending out of the five-year CD ladder. When the market comes back, then we replenish the money market and rebuild the CD ladder.
We picked two years of cash because that's the length of most (most
) bear markets. We picked a five-year ladder because we figure we'll only be breaking into it a couple times a decade.
When we started this system, PenFed only had a six-month early-redemption penalty on five-year CDs. They've since raised it to 12 months, so we might cut back from a five-year ladder to three. Considering today's interest rates, the dollar difference hasn't been enough to get excited about.