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Nitty Gritty of Cash Management for Retirees
Old 10-07-2008, 02:42 PM   #1
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Nitty Gritty of Cash Management for Retirees

A steep and relentless downturn like we have been experiencing really puts cash management techniques to the test. I have always carried a pretty good sized cash balance, but I tended to look at it as "dry powder", rather than something that had to be maintained at whatever level needed to sustain consumption for a long time.

So I have been going along merrily buying stocks in this crash, and suddenly I realize that if I experienced a few big dividend cuts, or an unusual need for cash in my life it might be a little tight.

So I am thinking that for my personality anyway, I might need to keep whatever cash cushion I think I might need- likely no more than one tight year's worth-in an account entirely separate from my brokerage accounts.

Do many people here do that?

Ha
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Old 10-07-2008, 02:47 PM   #2
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I do, but not really for the reasons you mention. It's just convenient to have my cash/CDs in a local bank. We have a good relationship with the branch, and they help us when we need something. But I do maintain it at a certain level, pretty much for my peace of mind.

I think it's a good idea for us, and for you, based on your post. It's like keeping a few months supply of rice and canned goods. Probably won't need them, but they're there if we do.
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Old 10-07-2008, 02:51 PM   #3
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Not really. I keep a years worth at my brokerage acct, but I just make sure I don't go under $xx. I do have a local checking acct but only keep a couple of months worth of cash there. But not a bad idea to keep it somewhere else if you are tempted to buy stocks.

EDIT: Oh yes, I keep a ladder of cd's at my broker too. 5 years worth.
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Old 10-07-2008, 03:05 PM   #4
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I keep two years in a money market . I am never tempted to toss money into a diving market even if it is the smart thing to do .
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Old 10-07-2008, 03:12 PM   #5
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So I am thinking that for my personality anyway, I might need to keep whatever cash cushion I think I might need- likely no more than one tight year's worth-in an account entirely separate from my brokerage accounts.

Do many people here do that?

Ha
Me! And I have been doing it ever since I retired.

Oh - and usually I keep 2 to 3 years, not just 1. And I never let it go below 1. Having at least 2 years whenever I replenish the account really helps make market turmoil seem not so important. I feel like I have plenty of time to wait and see what happens.

Audrey
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Old 10-07-2008, 03:27 PM   #6
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Not ER here, but we keep our emergency fund (which ultimately will be about 2 yrs. tight living expenses) separate from our brokerage accounts. The whole point of that fund, for us, is backup -- I don't need it riding the same waves as my primary source of ER money.

I suspect we'll do the same thing once we ER, and just keep that cash laddered in CDs.
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Old 10-07-2008, 03:31 PM   #7
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My cash is in the brokerage account. The spreadsheet keeps me fairly honest.
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Old 10-07-2008, 03:35 PM   #8
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I usually keep 2 years cash on hand, but I've been saving to buy a second home and move out of state so right now I have about 4.5 years cash on hand.

I am so tempted to do some buying, but know I'll need the money within 6 months or so. Since I'll be keeping my current home for at least a year, I'll need all my cash to support 2 homes too.
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Old 10-07-2008, 03:36 PM   #9
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Hmmm - be aware I'm left handed.

Screw cash. On auto deduct - every Feb I have about 1 yrs auto deducted from trad IRA to VG Prime MM and spend it during the yr.

Now in VG broker depending on my putzing in the market - dividends build up/or not which I sometimes transfer some to MM to spend.

So at the start of each year - I have 1 + yrs cash depending on div's.

heh heh heh - my SEC yield is north of 3%. .
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Old 10-07-2008, 03:38 PM   #10
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Ha, while DH and I are a long way from the joys of retirement, this is something we discuss often--how we will manage our investments and cash in retirement.

I think your 1 tight year will be exactly what we keep in cash once we are FIREd. This market is a good exercise for me and other young dreamers to remember that a cash cushion will be waaay more important when we retire.
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Old 10-07-2008, 03:39 PM   #11
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So I am thinking that for my personality anyway, I might need to keep whatever cash cushion I think I might need- likely no more than one tight year's worth-in an account entirely separate from my brokerage accounts.
I think it depends what you mean by "entirely separate."

Our emergency/short term/next year's groceries etc. cash mingles in our brokerage account along with our allocation of "cash" that's part of our long term investment allocation strategy. The separation is only on my spreadsheet. I find this enables me to best manage total cash for maximum yields and, so far, I haven't been lacking in self-discipline to keep to my plan despite the quick availability of the cash. (Note: I didn't say my plan is working in this crappy economic predicament! I'm losing my butt! But not because I grabbed readily available cash meant for non-investment purposes like paying utility bills. )

Someone else might find it too tempting to dip into short term cash if it's right there in your brokerage account and would be better off making it more difficult to re-allocate it than a quick click-click on the brokerage account web site. Maybe move it to another account or even put it in a brick and mortar bank where an actual paper CD certificate is issued?

For me, the key is deciding (hopefully correctly) how much non-investment cash you want to hold and how you will replinish that plus how much investment cash you want as part of your investment allocation. How you keep these "separate" depends on what you personally need to keep it straight and not have any intermingling of the species!
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Old 10-07-2008, 03:58 PM   #12
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We've been retired for 3.5 years. We keep about 3 years in cash and another 10 or so years worth in bonds. Our WD rate is just about equal to our portfolio yield so that 3 year cash stash stays about the same all the time.

Why 3 years? One year's worth would probably be enough to keep us sleeping at night, especially with the yield refilling it. Hopefully, the yield in these turbulent times will not deteriorate too badly, but if it does, then more than 1 year of cash will help keep us at the sleeping point. We also want to have additional cash to cover emergencies (we live in an old house and drive old cars), opportunities (buy the land next door if/when possible), and emergencies for our kids that they might not be able to handle.
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Old 10-07-2008, 04:22 PM   #13
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Not RE'd yet and feeling like it will be a lot longer road than I thought a year ago... but I will say that as unsettling as it is, we own the house free and clear, the cars are paid for, we have no debts and at least a year of living expenses in the bank. That goes a long way toward providing at least some peace of mind...
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Old 10-07-2008, 05:13 PM   #14
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I can see 3-6 months MM or something very liquid like that. Beyond that, what is the point (unless your spending patterns are very volatile)? For those with multi-year expenses in cash, that always struck me as giving up average market returns for a 'just-in-case' that might never come. And if it did come, it might not be in a downturn. Even if it was, would it be worth giving up average market returns for many, many years?

haha - what is the realistic odds that your dividends will shrink or your spending increase? If you feared that, (he says with perfect hindsight ), the time to boost your cash reserves was when the market was up.

I'm pretty much faced with the same decision. And I can't see the point of cashing out of anything to have cash 'just in case' I need cash. I will wait until I need cash. Market may be better by then. Or not. But that's market timing.

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Old 10-07-2008, 05:24 PM   #15
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I can see 3-6 months MM or something very liquid like that. Beyond that, what is the point (unless your spending patterns are very volatile)? For those with multi-year expenses in cash, that always struck me as giving up average market returns for a 'just-in-case' that might never come. And if it did come, it might not be in a downturn. Even if it was, would it be worth giving up average market returns for many, many years?
Yep, it's definitely worth giving up average market returns on 1 to 3 years of money for 'just-in-case' which DOES INDEED sometimes come. At least you are making short term interest rates on it, and sometimes that beats market returns .

When you are retired, optimizing return is no longer the primary concern. Preserving capital and lowering volatility is important. This cash strategy is one way of doing that.

Audrey
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Old 10-07-2008, 05:26 PM   #16
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There are really two separate questions in Ha's post:

1. Keep cash? How much?

2. If keeping cash, where? Do you feel you need to keep it (as Ha put it) "entirely separate" from your investment funds or are you comfortable with spending money mingling with investment money with only your personal plan and records saying which is which?
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Old 10-07-2008, 05:28 PM   #17
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haha - what is the realistic odds that your dividends will shrink or your spending increase? If you feared that, (he says with perfect hindsight ), the time to boost your cash reserves was when the market was up.
I did that, but I have already committed almost all of the cash that I realized other than the one year's expenses mentioned above. (By that I mean one year, pretending that I will get zero dividends or interest during that year.)

Kind of working capital equal to one years expenses. I also have another year or so in CDs that I could get at in a pinch.

If I start SS and no divs are cut I will be getting excess cash flow.

What has kind of thumped me in the head is that my portfolios were resisting the fall until this last week when they made up for lost time with a vengeance. Certainly a larger absolute dollar drawdown than I have ever experienced before, and I have been investing since 1973.

At the same time, this accelerating fall suggests to me that for a time at least, it likely about over.
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Old 10-07-2008, 05:41 PM   #18
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Yep, it's definitely worth giving up average market returns on 1 to 3 years of money for 'just-in-case' which DOES INDEED sometimes come.

Audrey
Well, if you are experiencing the need to draw down that much cash from time to time, it makes sense for you to keep that much. I've generally found that a 3-6 month buffer was enough for most surprises for me. If I know expenses are coming, then I'll start figuring out where to draw ahead of time.


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If I start SS and no divs are cut I will be getting excess cash flow.
Well, that's another option. And, as foreign as it is to most of us here on the forum, borrowing money on a credit card could be cheaper than pulling it from a down market.

Quote:
At the same time, this accelerating fall suggests to me that for a time at least, it likely about over.
Let's hope so!


BTW, I got an email from an old co-worker/employee - younger than me and still working, asking about what to do in this market. He knows me well enough to know the answer was going to be " don't sell, keep adding to the 401K". I expect he was just looking for re-assurance

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Old 10-07-2008, 05:41 PM   #19
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When you are retired, optimizing return is no longer the primary concern. Preserving capital and lowering volatility is important. This cash strategy is one way of doing that.
As the saying goes, there are times when return OF investment is more important than return ON investment, and this is increasingly feeling like one of those times.
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Old 10-07-2008, 05:44 PM   #20
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BTW, I got an email from an old co-worker/employee - younger than me and still working, asking about what to do in this market. He knows me well enough to know the answer was going to be " don't sell, keep adding to the 401K". I expect he was just looking for re-assurance
People who are very young and pretty new to the workforce should be licking their chops over this. If I were 10-15 years younger, I would be gleeful (in a selfish and opportunistic way) about the prospect of spending my first few years of the accumulation phase buying stocks at fire-sale prices.

I'm a little too old to be that giddy, since most of my expected gain from here on out is return on existing investments and not new contributions... but I still am plodding away. I may be cranking up my 401K contributions in the next few months to get me closer to maxing it out at these prices.
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"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

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