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Sidebar to how many months of expenses do you carry in cash
Old 09-18-2017, 05:16 PM   #1
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Sidebar to how many months of expenses do you carry in cash

I didn't want to hijack rec7s thread, but when everyone is counting months, is that based on income per month, or actual expenses? Like BCG, I expect my income from pensions and SS to easily exceed expenses, but the excess will be used for after tax investing and discretionary spending, which I expect to be all over the place, depending on travel plans etc. So is most everyone using a years total expenses, including discretionary and dividing by 12, or simply using whatever their expected "income" per month is supposed to be?

That is one of theings I find difficult gleaning from the FIREed people here. So many are retired and live off of just their investments, others have pensions and investments, others still pensions, SS and investments, so while I know the bottom line is more in than out, I find it hard to wrap my head around a fixed income EQUALLY for all those scenarios.

After all, someone that is living of just investments and didn't need any more than dividends provided, would just not sell anything, and if they needed small amounts, use their cash bucket. During great bulls they sell equities to rebalance and refill as needed. I haven't read yet of anyone that has lived a few years of down markets, where they rode out the equities and cashed bonds for income, though the strategy is bandied about often. During those times, it would be instinctual to tighten the belt and reduce expenses so now the monthly income is reduced.

Does this make sense?
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Old 09-18-2017, 05:38 PM   #2
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Since the question was "months of expenses" I took my cash balance and divided it by my actual expenses.

The way I calculate actual expenses is to take the last six months of expenses in Quicken and divide by 6. This smooths out some of the month to month variability.

I do also have some miscellaneous income, so while I don't count on it, it does come in and saves me from spending my savings exclusively. So while I reported 11 months in the other thread, it will probably end up lasting 15 or 18 months or possibly longer. I don't really pay attention to that much as my plan was for zero income, so anything above zero is a bonus.

My AA is 90/10, and during a downturn my plan is to monitor and rebalance as needed to that AA, which could involve stocks -> bonds or bonds -> stocks. I also expect that I will tighten my belt instinctively as you suggest.

I have only been FIREd about 2 years so have not yet lived through a downturn while FIREd. I did live through and remember 1987, 2000, and 2008 and remained 100/0 through all those. But all those times I had income, so I expect it will be harder psychologically without income. Even though I expect it to be hard, I still expect to follow my plan as outlined in the previous paragraph. I tend to be very coldly rational about such things.

I am 47 and living off investments, will have no pension but plan to start SS in about 22 years at age 70.
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Old 09-18-2017, 05:45 PM   #3
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The number of months' spending that my cash would cover, as I believe was requested in that thread, was computed from my actual monthly spending in 2016 minus the part of it that my pension and SS covered. In other words, the spending that came from some of my investment dividends.

I can see how different people might have computed that differently, perhaps using their entire spending instead of subtracting out the part already covered by SS and pension.
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Old 09-18-2017, 05:48 PM   #4
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I took our annual expenses less my annual pension and taxable account dividends and divided by 12 to get an average monthly spend from our cash. Then I took my current cash balance and divided it by the average monthly spend in cash to get the number of months in cash. IOW, we could last that many months without selling any stocks or bonds.
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Old 09-18-2017, 06:56 PM   #5
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During our w@rking days, DW and I received $3300/2 weeks as part of our take home net. We met all expenses, and had a little extra. We were already contributing $50,000+ to 401ks, 403bs, and Roths. My withdrawal rate is based upon the difference of that number and 2 pension checks. The rental income, while always cash positive, is not even included in our net, it is "bonus" money.
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Old 09-18-2017, 07:06 PM   #6
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I'm living entirely on pension/other income and not my investments (yet). In responding to the thread, I simply divided the cash/mm total by 12 mo's regular living expenses. (I excluded income taxes, as I can spend the cash balances without a tax liability.)

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Old 09-18-2017, 07:14 PM   #7
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It's based on expenses.
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Old 09-18-2017, 07:19 PM   #8
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What pee before you ski said is what I did.
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Old 09-18-2017, 07:30 PM   #9
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I receive 12 monthly dividend payments in cash from my main bond fund. I also receive 4 quarterly dividend payments in cash from a stock fund. Together, that makes 16 dividend payments per year. Those 4 extra dividend payments roughly coincide with the months I incur extra, "lumpy" expenses, so this lessens the need to carry forward surpluses in the leaner months into the costlier months. I still target about one month's expenses in my local bank's checking account which is about $500 more than the account's minimum balance to avoid monthly account fees.
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Old 09-18-2017, 09:13 PM   #10
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I did in terms of after tax expenses and I use my after-tax budget as the measure. The thing is, you won't pay taxes on the cash that's sitting there. You'll pay taxes on the interest, but that interest is income above and beyond the cash you already have. You've already paid the taxes on past interest.

At the moment I only live off taxable investments. No pension, no SS, and not old enough for RMDs.
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Old 09-18-2017, 11:30 PM   #11
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Ahhhh, thank you all very much. That was not ar all how I understood it! I could not understand how or why anyone would have 5 years in cash, at an income of $100k/yr! Who keeps $500k in cash?!?

You all understood him to mean NET expenses that required cash beyond whatever your income is defined as. That's why the numbers are so high and one was 20 years! So if you never need extra monthly cash then the number is what ever you want it to be. So while I will need cash until I decide when to collect SS, that will only be 5-6 years after I retire.
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Old 09-19-2017, 10:35 AM   #12
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Originally Posted by Perryinva View Post
Ahhhh, thank you all very much. That was not ar all how I understood it! I could not understand how or why anyone would have 5 years in cash, at an income of $100k/yr! Who keeps $500k in cash?!?

You all understood him to mean NET expenses that required cash beyond whatever your income is defined as. That's why the numbers are so high and one was 20 years! So if you never need extra monthly cash then the number is what ever you want it to be. So while I will need cash until I decide when to collect SS, that will only be 5-6 years after I retire.
Perhaps one of the objectives of keeping some cash, is to prepare for the possibility of another 2008-2009 type recession.

It will be nice, if that happens, to be able to live off of my cash for a few years and invest my dividends while the market is down, instead of selling low.

On the other hand, by not having that cash invested now, I am probably losing some. But when the next recession happens, you won't find me here lamenting about selling huge chunks of my investments for almost nothing. At least, I hope not.

I also like having the extra cash, in case of huge unexpected expenses. That hasn't happened during the first 8 years of retirement, but it could. You know, the minute the stock market falls through the floor, is the minute my roof would give up the ghost.
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Old 09-19-2017, 10:59 AM   #13
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Perhaps one of the objectives of keeping some cash, is to prepare for the possibility of another 2008-2009 type recession.

It will be nice, if that happens, to be able to live off of my cash for a few years and invest my dividends while the market is down, instead of selling low.

On the other hand, by not having that cash invested now, I am probably losing some. But when the next recession happens, you won't find me here lamenting about selling huge chunks of my investments for almost nothing. At least, I hope not.

I also like having the extra cash, in case of huge unexpected expenses. That hasn't happened during the first 8 years of retirement, but it could. You know, the minute the stock market falls through the floor, is the minute my roof would give up the ghost.
+1. We keep about 3+ years in cash /cash equivalents. If the SHTF on the markets, we could squeeze out another year. Yeah, that money isn't working for us like it could, but knowing we could ride out a somewhat lengthy downturn without selling portfolio holdings helps us sleep well. Ditto on surprise expenses.
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Old 09-19-2017, 11:41 AM   #14
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In the other thread, I answered 7.5 years, and that was using the last 12-month total expenses. And I counted as cash all fixed-income investments that are not bonds such as I-bonds and stable value funds.

If the market goes down the chute like it did in 2003 and 2008, I may cut back and this money could last me 10 years. Or I may decide that I am older now and have less time on earth to skimp and will keep the same spending. Or I may draw SS early and keep on partying. I dunno.
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Old 09-19-2017, 12:17 PM   #15
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Ahhhh, thank you all very much. That was not ar all how I understood it! I could not understand how or why anyone would have 5 years in cash, at an income of $100k/yr! Who keeps $500k in cash?!?

You all understood him to mean NET expenses that required cash beyond whatever your income is defined as. That's why the numbers are so high and one was 20 years! So if you never need extra monthly cash then the number is what ever you want it to be. So while I will need cash until I decide when to collect SS, that will only be 5-6 years after I retire.
I understood it to mean how many months/years of expenses, without regard to income. I think this is the way it is usually understood (though clearly could be different for retirees). I think some were using some different approaches.

In that regard, the figure could certainly be multiple hundreds of thousands. And if you think of cash as the most conservative portion of your fixed income allocation, you are not giving up much by staying liquid.
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Old 09-19-2017, 03:08 PM   #16
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Originally Posted by Perryinva View Post
Ahhhh, thank you all very much. That was not ar all how I understood it! I could not understand how or why anyone would have 5 years in cash, at an income of $100k/yr! Who keeps $500k in cash?!?

You all understood him to mean NET expenses that required cash beyond whatever your income is defined as. That's why the numbers are so high and one was 20 years! So if you never need extra monthly cash then the number is what ever you want it to be. So while I will need cash until I decide when to collect SS, that will only be 5-6 years after I retire.
I understood it to mean just that, how much cash I had. Meaning no pension, social security, dividends, cold hard cash. Yes it is hundreds of thousands.
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Old 09-19-2017, 03:23 PM   #17
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Since pensions and Social Security cover about 150% our basic expenses, our portfolio withdrawal is purely for discretionary expenses (mainly travel).

So our cash component (including CDs) is about 2 years of discretionary spending.
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Old 09-19-2017, 04:12 PM   #18
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I didn't want to hijack rec7s thread, but when everyone is counting months, is that based on income per month, or actual expenses? Like BCG, I expect my income from pensions and SS to easily exceed expenses, but the excess will be used for after tax investing and discretionary spending, which I expect to be all over the place, depending on travel plans etc. So is most everyone using a years total expenses, including discretionary and dividing by 12, or simply using whatever their expected "income" per month is supposed to be?


Good point. In my case, passive income from interest and dividends covers all expenses and when I reported multi years of cash, that was simply cash divided by expenses. If I looked at cash needed to bridge the gap from income less expenses, I'd have infinity month's of cash on hand.
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Old 09-19-2017, 06:18 PM   #19
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I suppose I anticipated OP's question and figured it both ways in the other thread. Assuming SS and pension come in as usual, my cash stash in the check book adds enough to get me through a year. If some unfortunate event occurred which suddenly meant I would no longer receive SS and pension, my cash stash would cover 3 to 4 months expenses.

As of this year, my RMD's are filling the cash bucket (aka check book). I could add more, but do not need to at current cash burn - that could, of course, change and it probably should so that I don't croak without spending a good chunk of my stash.

Hope this helps as YMMV.
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Old 09-19-2017, 06:33 PM   #20
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I did in terms of after tax expenses and I use my after-tax budget as the measure. The thing is, you won't pay taxes on the cash that's sitting there. You'll pay taxes on the interest, but that interest is income above and beyond the cash you already have. You've already paid the taxes on past interest.

At the moment I only live off taxable investments. No pension, no SS, and not old enough for RMDs.
+1. ER 4 years ago this month. 16 years to go to hit 67 and eligible for full SS (tiny pension available at 65)
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