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Thoughts on Short-Term Reserves
01-12-2017, 01:00 PM
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#1
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2006
Posts: 12,880
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Thoughts on Short-Term Reserves
We've been very fortunate with our investments, and after ten years of retirement, we've just about used up our taxable funds. That is, we're just about to start actually using our retirement funds.
All our retirement funds are in stock or bond funds in Vanguard. As per our plan, we've shifted our asset allocation 1-2% every year, and now stand at 43% stocks, 55% bonds, and 2% short-term reserves (age 63).
My target calls for 6% short-term reserves, and I'm considering whether I should convert some of the retirement funds to money market (still within the IRAs).
The two reasons I see for the short-term reserves are (1) to have money that's highly liquid (in case of emergency), and (2) to be able to avoid cashing in stocks or bonds during a big change in their valuation (e.g. crash of Weee!).
As for liquidity, I can sell shares of a stock fund just as quickly as for a MM fund.
So, the only value in converting some to MM would be for reason 2.
I'm thinking, therefore, that we should convert an amount equal to six month's expenses to MM funds.
What are your thoughts?
Thanks!
Al
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Al
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01-12-2017, 01:32 PM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
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When we first REd, I went from a 60/40/0 AA to 60/34/6 with the 6% in an online savings account that pays 0.95% (MM returns stink compared to online savings accounts). I changed my AA principally for the reasons that you mention, particularly reason 2... and because retirement was new to us.
Last year, I shaved the cash back to 5%, in part because I started my pension so we now have some income monthly other than just savings withdrawals.
I figure that the 5% in cash cost me probably 0.15%/year in total return (4% return from bonds less 1% on cash, times 5%) and am willing to forego that 0.15% in return for the peace of mind.... I suspect as I get more comfortable with retirement that I may shave the cash back even further.
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If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
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01-12-2017, 01:37 PM
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#3
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Thinks s/he gets paid by the post
Join Date: Mar 2007
Posts: 1,854
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I think it depends on your risk tolerance. I"m 55, but have been become quite risk averse since we are phasing out of w*rking....no easy way to make up for losses. I would always want to have at least 2 years' worth of spending in a guaranteed account for the reason you mention #2.
As for bonds, I always differentiate between maturities (technically the terms are bills, notes, and bonds). If you really mean bonds (greater than 10 years to maturity), even then the duration can dramatically affect volatility with interest rates...so I'd want to know the portfolio duration.
I'm comfortable holding bills as part of the "cash cushion", but not notes or bonds....I see those as having moderate risk levels.
In summary, you mention 6 months of spending in MM, I would do 2 years.
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"Live every day as if it were your last, and one day you'll be right" - unknown
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01-12-2017, 01:49 PM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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I like the peace of mind that comes from having a year or two in cash or cash-like securities (CDs, short term bond fund). We have somewhere around $40-50k in our money market account right now. That cash plus dividends from taxable accounts will last us two years.
Market crashes tomorrow (and all my current side hustle income disappears)? Not worried for 2 years. Of course I don't have any bond holdings, so this cash IS my fixed income allocation. Like a mega emergency fund.
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Retired in 2013 at age 33. Keeping busy reading, blogging, relaxing, gaming, and enjoying the outdoors with my wife and 3 kids (8, 13, and 15).
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01-12-2017, 02:14 PM
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#5
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Thinks s/he gets paid by the post
Join Date: Mar 2007
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Quote:
Originally Posted by FUEGO
I like the peace of mind that comes from having a year or two in cash or cash-like securities (CDs, short term bond fund). We have somewhere around $40-50k in our money market account right now. That cash plus dividends from taxable accounts will last us two years.
Market crashes tomorrow (and all my current side hustle income disappears)? Not worried for 2 years. Of course I don't have any bond holdings, so this cash IS my fixed income allocation. Like a mega emergency fund.
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That's exactly how I feel...but everyone is different and that's what makes the world interesting.
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"Live every day as if it were your last, and one day you'll be right" - unknown
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01-12-2017, 02:15 PM
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#6
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Thinks s/he gets paid by the post
Join Date: Dec 2015
Location: Michigan
Posts: 4,939
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I keep about a year's worth of spending in cash.
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01-12-2017, 02:18 PM
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#7
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Join Date: Jan 2011
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I think the best approach for cash reserves is CD ladders. You can renew if the cash is not needed, or obviously cash in when they come due. Meanwhile, you are maximizing the return; Money Market and straigh savings instruments yield so little, CD ladders at least pay somewhat more.
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01-12-2017, 02:28 PM
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#8
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Thinks s/he gets paid by the post
Join Date: Mar 2007
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Quote:
Originally Posted by mystang52
I think the best approach for cash reserves is CD ladders. You can renew if the cash is not needed, or obviously cash in when they come due. Meanwhile, you are maximizing the return; Money Market and straigh savings instruments yield so little, CD ladders at least pay somewhat more.
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Good point, agree
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"Live every day as if it were your last, and one day you'll be right" - unknown
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01-12-2017, 02:29 PM
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#9
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Moderator
Join Date: Jul 2010
Posts: 7,913
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I now usually move expected cash needed for the year into the bank MM fund in January. I also keep a good portion of our bond allocation in a limited-term tax-exempt bond fund that has demonstrated relatively consistent NAV even during large market fluctuations.
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01-12-2017, 02:34 PM
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#10
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by mystang52
I think the best approach for cash reserves is CD ladders. You can renew if the cash is not needed, or obviously cash in when they come due. Meanwhile, you are maximizing the return; Money Market and straigh savings instruments yield so little, CD ladders at least pay somewhat more.
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But online savings accounts offer better interest than CDs on the short end so it depends on how long a CD ladder that you have and how much you value simplicity.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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01-12-2017, 02:36 PM
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#11
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Thinks s/he gets paid by the post
Join Date: Oct 2015
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I don't hold that much cash (certainly not 2 years' worth) - instead, I view my untapped HELOC and my untapped margin account as appropriate sources of cash, should I need to weather a 2 year downturn.
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01-12-2017, 02:42 PM
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#12
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by mystang52
I think the best approach for cash reserves is CD ladders. You can renew if the cash is not needed, or obviously cash in when they come due. Meanwhile, you are maximizing the return; Money Market and straigh savings instruments yield so little, CD ladders at least pay somewhat more.
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I agree with this also, but would substitute an online savings account for 6-12 mos of expenses or possible emergency.
What do MM accounts pay? Last time I checked at Ally, the online savings account was higher than the MM account.
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...with no reasonable expectation for ER, I'm just here auditing the AP class.Retired 8/1/15.
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01-12-2017, 02:45 PM
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#13
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
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Mine is much higher... Discover pays 0.95% and my Vanguard Federal MM fund pays something like 0.30%.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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01-12-2017, 03:26 PM
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#14
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Join Date: Feb 2007
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Quote:
Originally Posted by jazz4cash
I agree with this also, but would substitute an online savings account for 6-12 mos of expenses or possible emergency.
What do MM accounts pay? Last time I checked at Ally, the online savings account was higher than the MM account.
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I agree, online savings account to hold one year of expenses (equivalent yield on a one-year CD is half what you can get at an internet bank).
Local checking/savings to hold 6-months of expenses (covers an unexpected expense), with the rest in a short term bond fund - ideally in a Roth account where there is no subsequent tax consequence for liquidating.
- Rita
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01-12-2017, 09:26 PM
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#15
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You might consider keeping some reserve outside the IRA so you don't get bumped up a tax bracket when an emergency strikes.
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01-12-2017, 10:40 PM
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#16
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Quote:
Originally Posted by GravitySucks
You might consider keeping some reserve outside the IRA so you don't get bumped up a tax bracket when an emergency strikes.
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+1
I always like to have a good taxable account, and it does not have to be all in cash either. It can be in stocks, and I make sure to harvest gains whenever possible so that some shares have been washed of gains. These can be sold for spending money with little tax implication, if and when I need the money.
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01-12-2017, 10:44 PM
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#17
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2014
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We are secure with 4-5 yrs worth of cash earning 1% interest.
Obviously missing out on some gains, but sleep pretty easy.
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01-12-2017, 11:24 PM
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#18
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Quote:
Originally Posted by GravitySucks
You might consider keeping some reserve outside the IRA so you don't get bumped up a tax bracket when an emergency strikes.
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Agree with this.
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Retired since summer 1999.
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01-13-2017, 04:34 AM
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#19
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I'm starting to keep a little more in cash myself. It helps that I have a taxable savings account at my CU earning 1.00%, and that I have access to the G Fund in my TSP. Not earning 0.05% on my cash makes it easier to take some of the table (or leave more of your additional savings off the table).
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01-13-2017, 05:25 AM
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#20
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Full time employment: Posting here.
Join Date: Oct 2015
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While still a few yrs from RE, I wonder where I will fall on this. Intellectually, I would think if you believe in your AA then your once/twice a yr rebalancing would produce your needed funds for the coming yr. OTOH, I see where the defensive gene will start to potentially override some of this by playing "what if" mind games... what if the market craps out for 2, 5, 7 yrs? I suppose this is where we start to argue with ourselves that we should create a 2 - 7 yr cash balance to buffer a market collapse? However, unless this was part of your real AA plan, the larger the cash balance being held, the more you potentially negatively affect your long term planned returns. So here are my questions, particularly for those that hold more than 2 yrs in cash... How/when are you replenishing the current yrs cash you are spending? In other words, if you are a 2 yr guy you are spending now 1 of those yrs worth of cash. At the end of 2017 do you rebalance and replenish the 2 yr balance regardless of market performance or do you make a personal judgement of letting your securities ride and spend the 2nd yr of cash? Of course, if you did the ladder, you are now potentially creating the anxiety that I would think you were trying to avoid by keeping the cash balance. Curious as to how those of you who practice keeping a balance in RE actually implement your use/replenish of the cash.
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