Is it part of AA or not?

[bigla]

I have about 5 years of money that is used to supplement our pensions in a MM. This money will not be reinvested in stocks or bonds. Should this amount of cash be figured in to our AA or not. I have read somethings that say yes, others that say no. I have even read that pensions should be considered part of the AA as it is like a fixed income fund.
What do you guys think? If there is a thread already discussing this, I couldn't find it.
Thanks and a Healthy, happy and better new years to all.
Larry

 

[REWahoo]

I have about 5 years of money that is used to supplement our pensions in a MM. This money will not be reinvested in stocks or bonds. Should this amount of cash be figured in to our AA or not

Yes, it should definitely be included. It is part of your nest egg, it is certainly an asset and you've allocated it to cash as part of your AA.

 

[ziggy29]

If it's a long-term cash holding above and beyond your emergency fund for near-term unexpected expenses, I'd say yes -- it is part of your AA. If this cash will function as the emergency fund I'd say no.

 

[REWahoo]

If it's a long-term cash holding above and beyond your emergency fund for near-term unexpected expenses, I'd say yes -- it is part of your AA. If this cash will function as the emergency fund I'd say no.

Zig, does someone who is retired and has cash in their allocation need to designate a portion of it as an emergency fund? Maybe I need another cup of coffee, but I don't see the logic behind this.

 

[ziggy29]

Zig, does someone who is retired and has cash in their allocation need to designate a portion of it as an emergency fund? Maybe I need another cup of coffee, but I don't see the logic behind this.

I personallly think so, but probably not as large as someone who has to guard against job losses. Cars and furnaces still break down, roofs still spring leaks, catastrophic medical events still occur, and if you don't want to have to crank up your withdrawals (especially if it means selling stocks in a bad year), you still need a "cushion" to absorb these large and unexpected costs.

 

[bigla]

This cash is used for post retirement good things like big trips as well as unexpected "emergencies" like roof replacement, medical, or new grandbabies. I created this fund by harvesting gain because I did not want to make withdrawals during downturns (like the one we are in). I took the money out of our equities and rebalanced to get the AA I wanted. Without including it in the AA, I have the 50/50 split I want. With it included, it becomes a 38/62, which is too low on the equity side. Right now, we are treating it more like an emergency fund and using it only when absolutely necessary because of the market woes.
Our pensions and my DW's SS are like cash, so, if your argument holds Rewahoo, then should that be part of the AA? I am not trying to be stubborn or argumentative, I am just not understanding the logic of including it in my AA. Please help me understand. I want all of our money to last, we are only 60 and hope to have many more years and a few more grandbabies.
Thanks, Larry

 

[REWahoo]

I personallly think so, but probably not as large as someone who has to guard against job losses. Cars and furnaces still break down, roofs still spring leaks, catastrophic medical events still occur, and if you don't want to have to crank up your withdrawals (especially if it means selling stocks in a bad year), you still need a "cushion" to absorb these large and unexpected costs.

I agree the need for an emergency fund is essential for someone who is still working. But unless a retiree has no resources other than SS/pension income or no cash 'bucket' in their AA, I don't see a reason to carve out an emergency fund. But maybe that's just me...

 

[ziggy29]

I agree the need for an emergency fund is essential for someone who is still working. But unless a retiree has no resources other than SS/pension income or no cash 'bucket' in their AA, I don't see a reason to carve out an emergency fund. But maybe that's just me...

If someone reduces their SWR by a reasonable amount to account for these occasional emergencies -- and then withdraws from the retirement savings as needed -- then I'd agree.

For example, if someone would normally take 3.5% a year from their portfolio but they have no "emergency fund" -- and if they reduce their "normal" withdrawal rate to 3% or 3.25% to account for an occasional need to withdraw more for sudden, large and unexpected expenses, that probably works, too.

But really, that's two different accounting methods for the same purpose. Either way, you have to account for these sudden large expenses occurring, and manage your finances accordingly.

What doesn't work is using an aggressive withdrawal rate together with NO cash reserves for emergencies. Try that with a retirement starting in 1966 or 2000 and you're likely busted.

 

[ziggy29]

By the way, I'd also add that if you're under 59 1/2 years old and most of your retirement savings are in retirement accounts, I think you definitely want the cash as a standalone emergency fund -- you don't want to have to pay a 10% penalty on IRA/401K withdrawals just to raise the money you need to meet sudden and large expenses because you don't have a "conventional" emergency fund.

If you're old enough to withdraw without penalty, then cash in the IRA functions just as well as cash in a taxable bank account -- assuming it doesn't kick you into a higher tax bracket when you withdraw it for emergencies.

 

[REWahoo]

This cash is used for post retirement good things like big trips as well as unexpected "emergencies" like roof replacement, medical, or new grandbabies. I created this fund by harvesting gain because I did not want to make withdrawals during downturns (like the one we are in). I took the money out of our equities and rebalanced to get the AA I wanted. Without including it in the AA, I have the 50/50 split I want. With it included, it becomes a 38/62, which is too low on the equity side. Right now, we are treating it more like an emergency fund and using it only when absolutely necessary because of the market woes.
Our pensions and my DW's SS are like cash, so, if your argument holds Rewahoo, then should that be part of the AA? I am not trying to be stubborn or argumentative, I am just not understanding the logic of including it in my AA. Please help me understand. I want all of our money to last, we are only 60 and hope to have many more years and a few more grandbabies.
Thanks, Larry

Larry,

I think all of us retired folks look at our 'stash' a little differently. I happen to be from the school that says my nest egg is one big (OK, not as big as it was a year or so ago...) pool of money I've got to depend on from now to the end. When I input my numbers in FIRECalc I input all my nest egg, I don't hold out any funds I've set aside for emergencies or travel or whatever. Since I'm looking for the most accurate prediction I can get from FIRECalc, I see no reason to not include all my savings - and if I do include them I have to show how those savings are allocated. This is why I gave the 'include it in your AA' answer above.

I don't see a major problem with what you are doing (carving out your cash fund and ignoring it in your AA), it just seems to me to be denying reality and an unnecessary complication to your financial planning. But that's just me - if it works for you that's great, don't sweat it.

As to the question of including SS and pensions in your AA, I include them (SS only, I have no pension) in FIRECalc computations but not in my AA. But like paying off the mortgage early and buying immediate annuties, opinions on this vary - widely.

 

[Nords]

... as well as unexpected "emergencies" like roof replacement, medical, or new grandbabies.

I can see using some emergency cash for a medevac from overseas or for paying a big hospital bill that you expect to have reimbursed by an insurance company. But trip insurance and many healthcare insurance plans can cover this as well as a cash fund.

But roof replacements & grandbabies? Don't you get a little more warning for these situations?

We use our HELOC as an "emergency fund". So far it's been a "I want to buy this Prius now but the CD doesn't mature until next month" fund. We don't count it as part of our AA any more than we'd count our credit cards.

 

[jIMOh]

It is part of AA when retired
It is NOT part of AA when working

Logic:

When working, you would not liquidate EF if market tanked (I am guessing) therefore it is not part of AA for rebalancing, so not part of AA at all.

When retired most calculators have a cash allocation and the 4-6 year EF provides that portion of AA.

 

[bigla]

"But roof replacements & grandbabies? Don't you get a little more warning for these situations?"

Nords, I was using roof replacement as a symbol for any major unexpected home expense that might come up. My house is 35 years old and always has surprises for me. Our daughter just announced she was pregnant (2nd one). We had already commited our usual and customary extra cash for 2009 for a big trip. We are now faced with some unexpected major expenses for later this year - ie trips to OR where they live, another college fund etc.. Yes, even grandbabies can be unexpected when you're not the one planning for them.
I understand we all have to make choices about how we spend our money. I think my DW and I make pretty good choices. We have no major debt except for our mortgage (1st home owned was post retirement). But sometimes, s@%t happens.
REWahoo, I am beginning to understand the logic of including it from your last post about FIREcalc.
Thanks all
Larry

 

[Moemg]

I do include my cash when figuring out my yearly budget but what I am wondering is in the next few years I'll need a new car . I usually have money left over at the end of the year from my budget but not enough for a new car so how do I figure that in the equation . I do a straight 4% withdrawal .

 

[Meadbh]

I do include my cash when figuring out my yearly budget but what I am wondering is in the next few years I'll need a new car . I usually have money left over at the end of the year from my budget but not enough for a new car so how do I figure that in the equation . I do a straight 4% withdrawal .

You and me both....I've been socking away some spare money in a high interest savings account specifically for this. I've labelled it "car money" and won't touch it for anything else.

 

[REWahoo]

I do include my cash when figuring out my yearly budget but what I am wondering is in the next few years I'll need a new car . I usually have money left over at the end of the year from my budget but not enough for a new car so how do I figure that in the equation . I do a straight 4% withdrawal .

I think many of us, myself included, spend way too much time attempting to get this SWR 'thing' down to three decimal place accuracy. Reality for me has been "measure with a micrometer, mark with a grease pencil and cut with an axe."

By the time I find out if I should have done it differently I'll be dead... or broke.

 

[Moemg]

You and me both....I've been socking away some spare money in a high interest savings account specifically for this. I've labelled it "car money" and won't touch it for anything else.

Thankd Meadbh , I'm going to do the same so by the end of the year I should have saved almost the purchase price .

 

[audreyh1]

I don't.

I maintain an asset allocation in my retirement portfolio purely for rebalancing purposes. As a consequence, any monies in other accounts aren't included in my AA. I specifically isolate my short-term cash account (holding 1 to 3 years expense needs) from the AA. That way, when we go through crazy market gyrations and I need to rebalance by "shriek" buying equities when my portfolio has been slaughtered, I know I have time before need to withdrawal from the portfolio. This helps me go ahead and do the rebalancing when I should rather than wanting to avoid equities in deep bear markets.

This means in reality that I have a lower equity position than my portfolio AA represents, but since my portfolio alone supports my desired withdrawal rate, that's good enough for me.

All the extra "padding" really helps me with the sleep at night factor.

Audrey

 

[REWahoo]

I think all of us retired folks look at our 'stash' a little differently.

One more example of the above...

I maintain an asset allocation in my retirement portfolio purely for rebalancing purposes. As a consequence, any monies in other accounts aren't included in my AA. I specifically isolate my short-term cash account (holding 1 to 3 years expense needs) from the AA. That way, when we go through crazy market gyrations and I need to rebalance by "shriek" buying equities when my portfolio has been slaughtered, I know I have time before need to withdrawal from the portfolio. This helps me go ahead and do the rebalancing when I should rather than wanting to avoid equities in deep bear markets.

This means in reality that I have a lower equity position than my portfolio AA represents, but since my portfolio alone supports my desired withdrawal rate, that's good enough for me.

All the extra "padding" really helps me with the sleep at night factor.

Audrey