Reserve Money

[F-One]

I started wondering this after seeing recent threads about how much people spend in retirement / have in retirement / medical billing versus actual payments / etc.

How much do you keep in reserve for unknowns?

My retirement budget has a yearly amount that covers normal spending / vacations / taxes / insurance / healthcare (insurance and out of pocket). Then I have monies set aside for future car replacement / major household appliances replacement - house maintenance (roof / hvac). Finally, I have an extra amount for big unknowns (issues that I do not think insurance may cover completely (medical issues (we have no known issues) / hurricanes / something I just haven't envisioned).

I realize I am cautious but sometimes I wonder if I am being too cautious. My current reserve for unknowns is $700k. I also realize the right amount should allow you to sleep at night, but sometimes I wake up wondering if it is over kill.

 

[GrayHare]

From the way I look at it all unspent assets are the reserve. Or do you mean how much to keep in cash?

 

[COHgirl]

He's 64 and I'm 51. We live off dividend money. The cash account has stayed right around $500,000. We talk about investing more but the income we have is enough for us so the cash just sits there.

 

[Texas Proud]

Are you talking about reserve money invested in a MM account or some other very low interest bearing account?

If so, then nothing...


I try and invest all my money... and all my money is available for any kind of major emergency... I cannot ever see an emergency that would cost $700K... I would try and insure for anything that might cost that much...

So, yea, I think it is overkill...

 

[Sunset]

He's 64 and I'm 51. We live off dividend money. The cash account has stayed right around $500,000. We talk about investing more but the income we have is enough for us so the cash just sits there.

You do have it earning 2% at a minimum FDIC insured

 

[Sunset]

OP.

That is way overkill, are you worried you might need to suddenly buy a 747 (downpayment), or a house or two ??

It better be earning interest at 2% or better, and not in a checking account at 0%.

 

[48Fire]

I started wondering this after seeing recent threads about how much people spend in retirement / have in retirement / medical billing versus actual payments / etc.

How much do you keep in reserve for unknowns?

I realize I am cautious but sometimes I wonder if I am being too cautious. My current reserve for unknowns is $700k. I also realize the right amount should allow you to sleep at night, but sometimes I wake up wondering if it is over kill.

Wow! You are a major worrier. That's not too much more that I retired with

 

[FUEGO]

I budget for "unknowns" explicitly and don't keep a separate reserve.

For example, I have $500 for unexpected dental expenses. That's a cavity or three. Or a half a root canal. Or in our actual case, it'll be the 20% copay we'll owe for 2 of our kids for routine cleanings because they got denied the state Medicaid and instead are on our UHC policy (so it'll be about $20 per kid per routine exam/cleaning I think).

I have $440 for healthcare beyond the cost of health insurance premiums (out of pocket max is $500 per person or $1000 max per family). $440 covers almost the whole OOP max for 1 person, or the family OOP max every other year. Some years we'll spend less, others we'll spend more. So far I think we're at $165 healthcare spending YTD due to a minor surgery for DW (that we had planned for 2016 since we got the sweet health insurance).

House repairs is another good one. We budget $1000 for routine repairs/maintenance and another $1500 annually for big capital items (like new roof, major plumbing, siding, windows, etc). In 2014 we spent $9,000 because we tackled siding replacement and new windows but in 2015 we spent $400 on home repairs/maintenance.

Similarly, we budget $1,000 per year for auto replacement. This year we paid a net of $5,400 for a 2009 minivan (after applying the $2900 I got by selling my 2000 civic). Most likely we won't buy another car for 4-5 more years.

I guess I have a "reserve" in a way because we carry 1-2 years in cash or very short term bonds and plan on maintaining that cash reserve indefinitely. So covering the occasional $5000-10000 new car or major home improvement item isn't too hard. We can plan ahead to some extent with the purchases to spread them out (roof replacement of $4,000 to $7,000 is coming up in 2017-2018 time frame), and these major purchases rarely occur in the same year (because they are relatively rare).

For major catastrophes, I have homeowners ($2500 deductible) and liability insurance.

 

[pb4uski]

I started wondering this after seeing recent threads about how much people spend in retirement / have in retirement / medical billing versus actual payments / etc.

How much do you keep in reserve for unknowns?

My retirement budget has a yearly amount that covers normal spending / vacations / taxes / insurance / healthcare (insurance and out of pocket). Then I have monies set aside for future car replacement / major household appliances replacement - house maintenance (roof / hvac). Finally, I have an extra amount for big unknowns (issues that I do not think insurance may cover completely (medical issues (we have no known issues) / hurricanes / something I just haven't envisioned).

I realize I am cautious but sometimes I wonder if I am being too cautious. My current reserve for unknowns is $700k. I also realize the right amount should allow you to sleep at night, but sometimes I wake up wondering if it is over kill.

Worst case... future car $30k, appliances $5k, roof $30k, HVAC $20k, 2 years medical deductions $15k = $100k should be plenty... $700k is crazy. The reality is that most of these things can be financed or put on credit cards if needed to give you time to liquidate assets in an orderly manner.

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

 

[jazz4cash]

OP.

That is way overkill, are you worried you might need to suddenly buy a 747 (downpayment), or a house or two ??

It better be earning interest at 2% or better, and not in a checking account at 0%.

Where are these 2% FDIC savings you speak of? Sounds more like a 5yr CD rate.


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[petershk]

Yeah. I'm not sure what you mean by "keep in reserve." I usually have about 10-20K in my checking account and everything else invested in target asset allocation.

If I suddenly needed 50K I would treat it the same as any other withdrawal. Sell stocks or bonds or cash out CDs or whatever makes sense.

I budget mostly looking backwards. I notice in aggregate I spend around 300$/mo on unexpected stuff... 500$ on house stuff etc. So some months are twice as much spending as others but as long as we stay in our annual range I don't think about it.

If we had some kind of weird one time event that cost 500K that might require a bit more analysis and I probably wouldn't factor that into future budgets.

But... I certainly wouldn't keep 500K in a low interest checking account "just in case" because the risk to retirement over the long run from that money being uninvested is probably bigger than the risk that I need it within a day or two and can't get it fast enough by selling investments..

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[COHgirl]

You do have it earning 2% at a minimum FDIC insured

It earns .001% in the cash account. He feels better having cash because he will never trust the market. I know it could be working for us but he sleeps better with things the way they are. All our expenses are covered and we have fun money so I guess we are good.

 

[REWahoo]

It earns .001% in the cash account.

Yikes!

What about at least buying a few FDIC or NCUA insured CD's to at least attempt to keep up with inflation?

 

[jazz4cash]

He's 64 and I'm 51. We live off dividend money. The cash account has stayed right around $500,000. We talk about investing more but the income we have is enough for us so the cash just sits there.

Isn't that over the FDIC limit? So I assume it is split between institutions or has some other form of insurance? The online banks like Ally or Synchrony pay .85 to 1.05 and are covered by FDIC.


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[Sunset]

Where are these 2% FDIC savings you speak of? Sounds more like a 5yr CD rate.
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Yes they are 5 year CD's at Ally Bank, and you can cash them at any time for a 6 month penalty.

So get a bunch of 10K or 20K CDs each for 5 years, if you need a new roof, cash one (so you only get about 1.4% -> 1.7% interest depending on when you cash it).

The ones you don't cash earn you 2%

These are fully FDIC insured, and won't drop in value when rates go up.

 

[Sunset]

It earns .001% in the cash account. He feels better having cash because he will never trust the market. I know it could be working for us but he sleeps better with things the way they are. All our expenses are covered and we have fun money so I guess we are good.

You can earn 2% at a bank ALLY bank ( allybank.com ) so it's FDIC insured up to 250K per account type.

That is $10,000 in interest each year you are missing out on.
Think of it as a free cruise each year or whatever.

See my other post on the details.

 

[COHgirl]

Isn't that over the FDIC limit? So I assume it is split between institutions or has some other form of insurance? The online banks like Ally or Synchrony pay .85 to 1.05 and are covered by FDIC.


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"The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category." --- From FDIC website

I was told that this meant with 2 names on the account, we are covered to $500,000 so it should be ok.

 

[COHgirl]

You can earn 2% at a bank ALLY bank ( allybank.com ) so it's FDIC insured up to 250K per account type.

That is $10,000 in interest each year you are missing out on.
Think of it as a free cruise each year or whatever.

See my other post on the details.

I would love to see it earn more but he is a bit stubborn and set in his ways. I suggested moving a small lump sum into a local savings account but he hates change and wasn't interested.

I do appreciate your suggestions though! I still bring up new ideas occasionally to see if he might think about moving the cash to a better rate. At least when the account was over $600,000 I convinced him to get it down to the FDIC level...

 

[petershk]

I know the feeling. My MIL came from a war torn country and doesn't trust much beyond cash in the mattress (not kidding). I try to explain that banks are safe, market returns I value, inflation eats it, etc.

She says... well... when our country went to war everything I didn't have in my hands was taken.

Hard to argue with that and people can do what they want with their money . In the end sleeping at night matters a lot.

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[cyber888]

I never remembered having an emergency needing $500,000 or even $5,000. As far as I can remember recently, my biggest emergency spending is around $1,500 and that's when my 13-year old water heater leaked and needed replacement. DW Dad passed away - plane ticket & expenses was $1,200. Getting sick suddenly - medical insurance took care of most. Copay for emergency room was $100 and after diagnosis walked out the same day. Blew a tire - $200. I pray I don't need a big emergency, but there's the entire nest egg if needed. Can always sell stocks, bonds, etc ... in a few seconds.

You can have a $1 million or $10 million in reserve, a reserve Jet if you need to fly to get away from catastrophe, a reserve house if your house got hit by a meteor and still not feel safe. Feeling safe is all in the mind. You could croak tomorrow in your sleep and that's the end of it. Just go thru life without so much fear and I think you'll be ok.

 

[Sunset]

Heck, just have a credit card with a 20K limit for emergency usage, or a few of them. Then you can put the money into CD's and earn interest and still be able to cash them when you need to pay off the credit cards.

 

[Sunset]

I would love to see it earn more but he is a bit stubborn and set in his ways. I suggested moving a small lump sum into a local savings account but he hates change and wasn't interested.

I do appreciate your suggestions though! I still bring up new ideas occasionally to see if he might think about moving the cash to a better rate. At least when the account was over $600,000 I convinced him to get it down to the FDIC level...

• Show him this forum.
• Open an Ally account for yourself so he can see it works.
• I mean in 20 years he will have missed out on $200,000 of income or even more as interest rates rise in a few years.

 

[Totoro]

I like to keep about 50k in a place where I can get to it within a few days with minimal cost penalties.

In practice it's much higher right now for lack of decent investment alternatives.

 

[pb4uski]

It earns .001% in the cash account. He feels better having cash because he will never trust the market. I know it could be working for us but he sleeps better with things the way they are. All our expenses are covered and we have fun money so I guess we are good.

I dunno if you can trust the banks either. They are scoundrels... [mod edit] Cash under your mattress is best, he'll sleep better if he sleeps on his money.

After you put it under the mattress, text me your address and when you'll be away from home.

 

[Golden sunsets]

If I'm not mistaken the OP has not responded yet. One thing not addressed here is asset allocation. Most models suggest 5 or perhaps 10% allocated to cash. We personally don't consider CD's to be cash. I include them in our FI allocation. So depending on one's total portfolio a 10% allocation to cash could approach the OP's stash or some of the rest of those on this board could have half that amount easily. We have a sizeable amount in FDIC insured MM accounts earning 1.05%. I'm constantly on the lookout for higher rates but not seeing any. Ultra short term bond funds are one possible alternative but I still dislike the idea of NAV dropping below cost in a rising rate environment, especially seeing that their yield isn't that much greater than MM accounts. One possibility that I see is buying I bonds regularly, which for the first five years would occupy a portion of the FI portion of our portfolio and then could be considered part of our cash position, as the 90 day EWP goes away. We have a chunk of I bonds purchased more than 6 years ago that we continue to slot as FI, that could be moved to cash, freeing up some cash to move into FI, perhaps new I bonds. But we would have to pay federal income taxes if we redeemed them, creating a tax problem. And then again the current fixed rate component of I bonds is abysmal and we'd be stuck with that rate as long as we owned them. No easy answers.