Reserve Money

[Bir48die]

So I pay myself a salary every two weeks. Of that I put $600 into a fund of Taxes, Car/Home Insurance, Christmas & Copays. Fund number two is $500 per paycheck for Home & Auto Repairs. Third is $500 for Entertainment/Clothing/Travel. The rest is for everyday bills. Hopefully these all cover yearly and surprise bills. If these are not spent then I'll deposit back to earn interest.

[Islandtraveler]

Someone told me that Ally offers a 5 year CD @ 2% with a six month interest forfeiture if broken early. If I wanted to stash a bunch of cash ultra conservatively, that’s what I would do. This way you still remain liquid.

[Shanky]

I think the OP does not trust any retirement calculators, formulas and such and is asking how much they should adulterate the formula by to feel safe. Call it a fear factor. As others have indicated, the $700K amount may or may not be reasonable depending on the OP's total assets and how fearful they are.

[Texas Proud]

Quote:

Originally Posted by jkern I live in earthquake country and earthquake insurance is far too expensive. I can see needing to rebuild (about $600k) after a major quake if you are self insured.

I cannot see taking a risk of $600K... what kind of premium are you talking about

IIRC, the chance of something major happening to a house is less than 1%... I do not know the chance of a major earthquake.... but I think that if it happened then almost all houses would have damage so I can see why it is so high.... kinda like flood insurance if you live in a flood zone... when it happens, most houses are affected....

[fh2000]

We are not retired yet. We keep a mental 10% amount of our portfolio as our reserve. This is for large purchases; 2-3 more cars; new roof; DD's wedding; graduate schools, etc.

The remaining account will give us 25X retirement estimated expenses. We are ready but our jobs are without much pressure, so we keep going for now.

[kgtest]

Had family lose their livelyhood and home in Hurricane Katrina. They only had about 100k in retirement and all other accounts. It was enough to get them back on their feet. Sure life might not be the same after one of these "events" but it won't take 700k to recover.

[6miths]

I have to admit not reading the entire thread but think I have the gist. I am with the 'nothing in reserve', 'all invested', 'I can always sell something from somewhere' crowd. And I guess if I couldn't sell something - as in the world was ending... then I break into the coin collection.

[F-One]

To Major Tom, I have no major expenses now that would require that amount. Investments (stocks, bonds, cds, cash) north of $3M. House, cars paid for but not included in assets.

I guess I just have a hard time not worrying (my parent's curse, my brother has it too). DW thinks it is excessive based on last 3 years of retirement expenses and I thought I would see what others thought.

[mrfeh]

Quote:

Originally Posted by COHgirl It earns .001% in the cash account.

You are your bank's favorite customer.

[Major Tom]

Quote:

Originally Posted by F-One To Major Tom, I have no major expenses now that would require that amount. Investments (stocks, bonds, cds, cash) north of $3M. House, cars paid for but not included in assets. I guess I just have a hard time not worrying (my parent's curse, my brother has it too). DW thinks it is excessive based on last 3 years of retirement expenses and I thought I would see what others thought.

Thanks for the response, F-One. If you can afford to keep that much in an account that gives a low return, and it's necessary to do this for you to feel comfortable, then that is all the justification you need, I think.

For me, the key decider is whether your portfolio overall will return enough income for you to live. If it does, your approach sounds fine to me. There's no point in maximizing your long-term return if the result is that your retirement feels like a white-knuckle ride. We all have different tolerances for risk and volatility.

[Huston55]

Quote:

Originally Posted by F-One The reserve is money I don't count on when running FireCalc, i-orp, retirement calculations. I should have worded it and question better. The question might be better asked, when you run retirement calculations do you add all your resources into retirement calculations or keep some reserve and if you keep some reserve, how much?

The alternate (and IMO better) way to handle this "reserve" in FIRECalc is to select the $xxx remaining option, instead of excluding it from the calculation altogether.

Quote:

Originally Posted by REWahoo IMO, not including all your investable financial assets in your calculations is just playing mind games with yourself. But since we all know playing with yourself is completely normal, don't worry about it - you won't go blind.

+1

You can pretend all you want that the $xxx is not there but, it really is (it's part of your AA), and Mr. Market knows it is & acts accordingly with your portfolio.

Now, having said all that, we DO keep a substantial amount in cash (laddered CDs) but, not as high a % as 7/30ths. We do it as a back-up for several bad years of market returns (search on this forum for "galeno" and related threads for more on this approach). The counter argument is that this approach is a drag on portfolio performance; you have to choose what approach is best for you. In any case though, we DO include the CD ladder in our AA and any runs of FIRECalc, FIDO or, other retirement calculators. That way, it's...oamcie[ap,. Ewe I.,e. Cm304..c,eye and the omoewoulrlamc. Woirmlojj ....

Sorry, sorry, I went temporarily blind there for a moment.

Anyway, I think you get the point.

[REWahoo]

Quote:

Originally Posted by Major Tom There's no point in maximizing your long-term return if the result is that your retirement feels like a white-knuckle ride.

+1

However, she's right:

Quote:

Originally Posted by F-One DW thinks it is excessive based on last 3 years of retirement expenses...

[calmloki]

Thanks for this thread: we have way too much earning a massive 1% at Discover. Have requested a payoff amount on our 3% PenFed 5/5 loan that is to reset a year from now. That isn't a big move, but it sure is a safe one to gain 2% over the next year on our payoff amount.

[jkern]

Quote:

Originally Posted by Texas Proud I cannot see taking a risk of $600K... what kind of premium are you talking about IIRC, the chance of something major happening to a house is less than 1%... I do not know the chance of a major earthquake.... but I think that if it happened then almost all houses would have damage so I can see why it is so high.... kinda like flood insurance if you live in a flood zone... when it happens, most houses are affected....

I haven't checked in several years, but I think the premium is about 4 or 5 times your regular insurance plus it comes with a huge deductible (maybe $50k). It's expensive enough that I don't know anyone with earthquake insurance.

[CountryGal]

Great thread. Got me thinking. Just opened up a few CDs I had been dragging my feet on. Rates looked good at the credit union. Need to think harder about how any reserve (cash in bank) plays into asset allocation.

[Car-Guy]

For me, I don't keep a reserve. I started with X dollars (or net worth) when I retired and projected my spend rate out for 35+ years. I keep track of X, and as long I'm within ~5% of that "original" projection on an annualized basis, I just don't worry about it. If I need (or more likely, want) to buy a new car or have other major expenses, that is just an expense that comes out of X. I decide where to take the money when the expense is incurred. (checking accounts, sell stock, withdraw from an IRA or 401k, etc). I'm amazed that after starting my 5th year of retirement that my projections are as close as they are. I've never (so far) been out of my projected 5% range (positive or negative), but then again, it's only been 5 years.

Works for me....

[Markola]

Quote:

Originally Posted by pb4uski If you keep a couple year's of spending less a couple years of dividends in cash that should be plenty.

That makes a lot of sense. If you put the cash part in a CD ladder, you could earn a little interest, too.

[Sunset]

Quote:

Originally Posted by jkern I live in earthquake country and earthquake insurance is far too expensive. I can see needing to rebuild (about $600k) after a major quake if you are self insured.

If I lived in that place, and the earthquake destroyed the home, I'd leave, or live in a tent.
Because if you spend your 600K to build another, it could easily be destroyed at any time.

[Sunset]

Quote:

Originally Posted by F-One To Major Tom, I have no major expenses now that would require that amount. Investments (stocks, bonds, cds, cash) north of $3M. House, cars paid for but not included in assets. I guess I just have a hard time not worrying (my parent's curse, my brother has it too). DW thinks it is excessive based on last 3 years of retirement expenses and I thought I would see what others thought.

You know what your retirement expenses are per year.
My cautious thinking is:
Calculate 1/2 of the dividends you currently get per year, figure out how much cash is needed to add up to 1 year retirement expenses.
Multiply that cash amount by 5, and you have the amount of cash to keep handy (in 2% cds) in case of another giant recession.

Any more than that, and you are losing money value over the years by not being in a very broad based etf (example VTI).

I say calculate 1/2 of dividends as some companies will reduce/cut divs during extreme recessionary times, others won't so an off the cuff feeling is it is safe to count on 1/2 of them.

[daylatedollarshort]

Quote:

Originally Posted by Sunset If I lived in that place, and the earthquake destroyed the home, I'd leave, or live in a tent. Because if you spend your 600K to build another, it could easily be destroyed at any time.

I think I'd like a tiny house if that happened to us, or at least as small as the building codes would let us. We sit outside a lot anyway.