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View Poll Results: FIREd folk only: How much cash in your AA?
less than 6 months expenses 6 12.00%
between 6 and 18 months expenses 11 22.00%
between 18 and 30 months expenses 11 22.00%
more than 30 months expenses 22 44.00%
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Poll:Percent cash in AA after FIRE
Old 07-29-2009, 09:28 AM   #1
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Poll:Percent cash in AA after FIRE

For FIREd folk only:

What percentage of your AA is in cash equivalents? By cash equivalent, I mean assets whose value is fixed and not subject to market variation: MMFs, bank accounts, redeemable savings bonds. Short-term bond funds not included.

I ask this because discussions about cash are usually aimed at people who are still working, and the scenario is very different for those who are retired and living off of dividends, interest, pensions, and SS. These income streams cannot suddenly be "lost" like a job.
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Old 07-29-2009, 10:11 AM   #2
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Since I will be retired in a mere 103 days, my asset allocation is already in place and I already voted.

My cash equivalents (10% of my A.A.) are equal to:

8 years based on what I spent from 2002-2006,
5 years based on what I spent in 2008, or
3.5 years based on my planned ER budget.

I plan to start spending more after retirement than I did in 2008 if the economy picks up. I am a little leery about bond funds after watching mine drop in 2008, right along with equities and real estate. OK, they didn't drop as much as equities but I was floored by how much they did drop. I have 45% more of my A.A. in bond funds (some in the bond portion of Wellesley), but I am still heavy on cash for that reason. Maybe I will shift more into bond funds later, though, due to the low interest rates in MM funds or savings accounts.
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Old 07-29-2009, 10:32 AM   #3
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My cash allocation generally runs about 8% of total portfolio. That is probably higher than it needs to be but allows me to sleep well at night, knowing that if any unforeseen need for cash crops up, I can cover it without selling any stocks, funds or bonds.
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Old 07-29-2009, 10:42 AM   #4
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I don't understand why people would want so much of their AA in true "cash equivalents". I don't think they are considering the opportunity costs.

I keep ~ 4 months of expenses, partially as an "emergency fund" for sudden unexpected expenses, partially just in case there would be some cash flow interruptions from my brokerage account. I even consider that a bit on the "paranoid" side, since many big expenses can be paid for by CC, that gives me ~ 3 weeks to get my ducks in line.

So after having 4 months expenses, what would I need cash for? It is a pretty unlikely event. Further, if it did occur, what are the odds that it would be a bad time to cash out one fund or another? You could probably just do some AA re-balance as part of the cash-out.

Here's an example:

VFIIX: Basic Chart for VANGUARD GNMA FUND - Yahoo! Finance

GNMA fund, pays 4.61% in dividends, and has only swung ~ 7% peak-trough in five years. What is your cash earning you? Is it *really* worth it to give up that extra dividend "just in case" you might need to pull some out, and "just in case" it was down when you did?

As LOL pointed out in a recent post, "loss aversion which is a well-known behavioral finance trap.". I really think some of you may be worried too much about the potential for a small loss.

-ERD50
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Old 07-29-2009, 11:06 AM   #5
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Quote:
Originally Posted by ERD50 View Post
I don't understand why people would want so much of their AA in true "cash equivalents". I don't think they are considering the opportunity costs.

I keep ~ 4 months of expenses, partially as an "emergency fund" for sudden unexpected expenses, partially just in case there would be some cash flow interruptions from my brokerage account. I even consider that a bit on the "paranoid" side, since many big expenses can be paid for by CC, that gives me ~ 3 weeks to get my ducks in line.

So after having 4 months expenses, what would I need cash for? It is a pretty unlikely event. Further, if it did occur, what are the odds that it would be a bad time to cash out one fund or another? You could probably just do some AA re-balance as part of the cash-out.

Here's an example:

VFIIX: Basic Chart for VANGUARD GNMA FUND - Yahoo! Finance

GNMA fund, pays 4.61% in dividends, and has only swung ~ 7% peak-trough in five years. What is your cash earning you? Is it *really* worth it to give up that extra dividend "just in case" you might need to pull some out, and "just in case" it was down when you did?

As LOL pointed out in a recent post, "loss aversion which is a well-known behavioral finance trap.". I really think some of you may be worried too much about the potential for a small loss.

-ERD50
I agree completely. A few years ago, it dawned on me that the opportunity cost of keeping six figures in a MM account (best place at the time) just wasn't worth the benefit of doing so. Now I have somewhere between 6 and 12 (usually closer to 6) months expenses in liquid cash and after that is spent, I'd have to liquidate some low volatility holding such as VFIIX or use credit such as margin or a HELOC. Or, as you suggest, see if there isn't something in my well diversified portfolio where it is a reasonable time to liquidate.

I think the subject of these threads should not be "cash" but rather "liquidity." I'm comfortable that I can cover emergencies in a timely way with few, if any, issues of high costs associated with liquifying assets. Yet, I hold relatively small amounts of true cash as expressed as a percentage of my total portfolio.

I test this from time to time. I'll hypothesize one of my cherished grandkids needed an emergency $150k, for example, and look and see how I'd get it out of the portfolio. It's never a big issue. The source, after true cash is expended, at any time is usually some low volatility fund such as VFIIX, CD's coming due or some holding I'd been thinking about liquidating anyway.

And if I had to liquidate something at an awkward time, regardless of how unlikely, losing a few $k would probably be the very least of my worries if I was scrambling to cover some huge emergency that required that high level of funds to solve.

It's liquidity, and the cost of liquifying, vs the opportunity cost of holding true cash that matters.
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Old 07-29-2009, 11:07 AM   #6
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Retired ten months as of June 30, 2009: 5.85% of PF is in cash including I-Bonds, by OP's definition. I am drawing down from the paltry interest savings/money market accounts.

I quibble at the idea that MM and savings accounts are not "subject to market variation."

I would expand the definition to include Ginnie Maes which is where I park money, and I'd also eye the long/now intermediate bonds which are coming in nicely in these awful times, and which will be cashed out no later than 2015. Those bonds will more than replenish my "Bucket No. 1," for draw down cash. The 5.85% in cash does not reflect how very conservative my PF is at the moment.
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Old 07-29-2009, 11:40 AM   #7
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I don't include cash to cover living expenses in my AA. In my mind that is not part of my asset allocation.

I hold 8 to 10% cash in my AA, but that is for rebalancing the portfolio as stock and bond funds vary.

I do hold 12 to 36 months of cash in a different account to cover living expenses. This lets me sleep easy at night and ignore the wild short-term variations in the stock and bond markets.

I don't care about the "opportunity cost" of having a large chunk in cash. I don't try to maximize the gain on my portfolio either, just manage the volatility and achieve enough long term return to support withdrawals and beat inflation.

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Old 07-29-2009, 11:50 AM   #8
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Originally Posted by audreyh1 View Post
I don't include cash to cover living expenses in my AA. In my mind that is not part of my asset allocation.

I hold 8 to 10% cash in my AA, but that is for rebalancing.

I do hold 12 to 36 months of cash in a different account to cover living expenses.

Audrey
Yes, that is my planned usage of cash as well. My living expenses for each year will not be part of my asset allocation. My asset allocation at Vanguard is 10% cash equivalents.

In early January, when I will be rebalancing (using the cash equivalents if necessary), I will withdraw that year's living expenses (12 months) from Vanguard into a different account which also includes my emergency funds.
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Old 07-29-2009, 11:50 AM   #9
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IndependentlyPoor, I'm not sure what you are trying to learn from this poll. I think the "years of living expenses in cash" question can lead to some misunderstanding and is a highly variable number based on the income sources of the individual.

For example, if I lived exclusively off the cash I hold in my AA, I could pay my expenses for approximately two years. Yet with SS income, dividends and a smidgen of interest, I project my cash should last more than 8 years assuming I do no rebalancing. So in my case, should I say 2 or 8 years?
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Old 07-29-2009, 12:28 PM   #10
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I'm one of the "bucket people" - more Armstrong than Lucia -as such in my second year of ER I still have 8 years of cash in 6% CDs. Sure made sleeping a little easier during the last year or so. We have even cut back a little and may get another 1-2 years before dipping into the tax sheltered funds. The amount of cash in ER depends on when you ER - risk tolerance - and if you have a pension - We don't.
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Old 07-29-2009, 12:33 PM   #11
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I have just about two years of living expenses in cash . I had less but I found that the two years let me sleep better when the market was fluctuating .
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Old 07-29-2009, 12:50 PM   #12
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My AA is 1% cash to allow for rebalancing. I have a little more right now since the market has been up and hasn't gone back down so that I can reinvest. I may have to just DCA back in if there is no good dip the rest of this year. I'll sell equities as needed to meet expenses, but I've had the cash to meet expenses early in retirement so far.
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Old 07-29-2009, 02:35 PM   #13
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Currently I have 16%. Half of which is I-bonds. Until recently I-bonds have paid more than most bond funds of any duration. I plan to reduce my non I-bond cash and will probably move some to a short term bond fund or ETF.
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Old 07-29-2009, 03:09 PM   #14
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Currently I have 16%. Half of which is I-bonds. Until recently I-bonds have paid more than most bond funds of any duration. I plan to reduce my non I-bond cash and will probably move some to a short term bond fund or ETF.
Oops! I just noticed your post asks one question and your poll asks another. I have either two years cash or 15 yrs. depending upon how you calculate it based on what REWahoo said.
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Old 07-29-2009, 03:12 PM   #15
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Thank you all for voting and especially your comments.

REWahoo, numbers is hard, but so is words, and I should have used more of them in explaining my poll question. I asked for cash in terms of expenses instead of, say, withdrawals because I suspect that a lot of folks on this forum live entirely from their dividends, interest, SS, and/or pensions. They don't touch their principal at all. Cash in terms of months of withdrawals would be infinite for these folks.

As for CuppaJoe's MMF quibble: yes, there was the recent unpleasantness with the Reserve Primary Fund:

Reserve Money Fund Falls Below $1, Delays Withdrawals (Update1) - Bloomberg.com

but I had to draw a line somewhere. Anyway, quibbling can be enlightening.

I see now that my big mistake (in addition to not including longer time periods) was not explicitly eliminating CDs from my definition of cash. IMHO, early withdrawal penalties make CDs too illiquid to qualify as cash, and there is inflation risk too.

Even with poor wording, the poll answered the question I had in mind. Folks who retire early really are financially very conservative: as I write this, of 23 respondents, 12 have more than 30 months of expenses in cash.

I posted the poll because I am changing my thinking from extremely conservative to something more like that of ERD50 and youbet. When I rebalanced last week, I cut my cash position significantly, moving from the 7 year crowd to the 2 year crowd. If the company paying my pension (which covers about 1/3 of our living expenses) was as financially secure as say, Exxon or IBM, I would be comfortable with even less.

Also, I keep forgetting that many (maybe most) folks consider their cash asset allocation separately from cash used to cover their living expenses. I don't. In my mind, it is all lumped together.

Thanks again everybody.
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Old 07-29-2009, 06:13 PM   #16
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Maybe I will shift more into bond funds later, though, due to the low interest rates in MM funds or savings accounts.
Or Real Return Bonds, perhaps?

I'm not retired so I didn't vote, but I did look up my spreadsheet, and currently I'm 9% cash, which would keep me fed and watered for approximately 30 months. Right now I'm facing some uncertainty in my career which makes me appreciate my cash buffer. Before I RE I won't necessarily build a bigger cash buffer, but I will reallocate to ensure a higher dividend stream in my nontaxable portfolio, which will be the first one I draw on.
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Old 07-29-2009, 08:02 PM   #17
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My AA calls for 7.5% cash but I'm running higher. That covers enough living expenses until Social Security at age 66. Each year when I rebalance the cash% should reduce based on the time left until age 66.

Overall portfolio goal is 55/45, but Mr. Market keeps putting me at 50/50.

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Old 07-29-2009, 09:28 PM   #18
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I agree completely. A few years ago, it dawned on me that the opportunity cost of keeping six figures in a MM account (best place at the time) just wasn't worth the benefit of doing so.
I think the subject of these threads should not be "cash" but rather "liquidity." I'm comfortable that I can cover emergencies in a timely way with few, if any, issues of high costs associated with liquifying assets. Yet, I hold relatively small amounts of true cash as expressed as a percentage of my total portfolio.
And if I had to liquidate something at an awkward time, regardless of how unlikely, losing a few $k would probably be the very least of my worries if I was scrambling to cover some huge emergency that required that high level of funds to solve.
It's liquidity, and the cost of liquifying, vs the opportunity cost of holding true cash that matters.
We carry two years' expenses in cash because the other 92% of our ER portfolio is equities. History says that bear markets are generally less than two years (although there are notable exceptions) and we're willing to take the risk of having to sell some Berkshire Hathaway less-profitable shares in the third year.

The problem with words like "emergency" and "liquidity" is that people confuse the purpose of the money. If the purpose of the money is "paying my bills for 10 months of unemployment" then those words make sense. If the purpose is "pay college tuition in 12 months" or "home down payment in 24 months" then words like "zero risk of loss" are more appropriate.

Another problem with the cash stash (whatever it's for) is the temptation to chase yield. People will work far harder to squeeze another 0.1% out of a CD, even at significant risk of uninsured loss, than they'll work to reduce their spending or identify a good bond or stock that could return an order of magnitude more yield for the same effort.

But the purpose of a cash stash isn't to maximize risk yield. It's to maximize bargains & discounts. The real advantage of a cash stash isn't being able to chase the yield from 2.65% to 2.69%. It's being able to get a mortgage without paying PMI, or being able to hire contractors when no one else has the cash, or being able to negotiate a significant discount on houses and used cars.

And if that cash stash is for putting into the market when it drops 50%, then I don't think words like "emergency" or "liquidity" are appropriate...
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Old 07-29-2009, 11:25 PM   #19
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We carry two years' expenses in cash because the other 92% of our ER portfolio is equities.
And I would too if my equity allocation was that high. As a FIRE'd geezer, I've chosen to have a chunk in GNMA funds which is fairly stable and would likely be available at any time reasonably priced vs my acquisition cost. A differnt strategy from your high equity allocation.
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The problem with words like "emergency" and "liquidity" is that people confuse the purpose of the money. If the purpose of the money is "paying my bills for 10 months of unemployment" then those words make sense. If the purpose is "pay college tuition in 12 months" or "home down payment in 24 months" then words like "zero risk of loss" are more appropriate.
I agree with that.
Quote:

Another problem with the cash stash (whatever it's for) is the temptation to chase yield. People will work far harder to squeeze another 0.1% out of a CD, even at significant risk of uninsured loss, than they'll work to reduce their spending or identify a good bond or stock that could return an order of magnitude more yield for the same effort.

But the purpose of a cash stash isn't to maximize risk yield. It's to maximize bargains & discounts. The real advantage of a cash stash isn't being able to chase the yield from 2.65% to 2.69%. It's being able to get a mortgage without paying PMI, or being able to hire contractors when no one else has the cash, or being able to negotiate a significant discount on houses and used cars.

And if that cash stash is for putting into the market when it drops 50%, then I don't think words like "emergency" or "liquidity" are appropriate...
Yep. Generally, I have cash in two categories. The first is cash I want for non-investment purposes and which must be available and therefore be held with little/no risk of loss. The second is cash intended to be invested when some set of future conditions is met such as me thinking "now" is the right time.
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Old 07-29-2009, 11:42 PM   #20
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Interesting thread. I am not retired yet and thus have not answered the poll. What I had been planning was to keep approximately 3-4 years worth of "basic needs" in a cash account, but have been considering that I really don't need that much. I will probably let it stay at about that level though, and use it for rebalancing. My cash needs look like they will be well covered by bond interest and equity dividends. For the first several years anyway, it looks like those sources of cash will also provide enough to re-balance as well, provided the swings are not like those of 2008-09. So the cash account we keep will really just be for dire emergencies or for particularly good buying opportunities. That what I'm thinking anyway...we'll see how it turns out.

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