How much cash to hold?

[brucethebroker]

So much goes into why do you need to have cash at all?
Cash flow? Not much needed if your SS plus pensions cover most of it.
Emergency bills (hospital, new roof, etc.)?. Wouldn't $10k or so handle that?
Opportunity (market lows, deals on a property, etc.)? That would really be part of your portfolio AA, right?
Planned expenditures (car replacement, vacation, kid's wedding/college)? Then it becomes part of your annual savings.

I feel it is like planning how much $ you need to FIRE, which really depends on your lifestyle when retired. And how much of a percentage of cash on hand, whether 5%, 10%, or 20% is too vague-it needs to be personalized to your situation.

 

[donheff]

MM is currently one year but often falls below as I use it for expenses and before I liquidate to replenish it. But I keep almost 10% in the TSP G fund which serves as a portion of our bond allocation and is a bit like a super-cash reserve. I can tap it during a prolonged downturn in equities.

 

[gerntz]

I consider the gold we hold in ETF's as cash & and as such, plus other cash, about two years of expenses.

 

[Dan32]

I tend to think of how much cash to hold in terms of asset allocation. Not in terms of how much do I need to cover expenses. Some have responded in this manner, but I may be in the minority. With that said my asset allocation is: 4.5% Cash. FWIW the rest of my allocation is: 4.5% Bonds, 2.5 % Gold, 12% Preferreds and CEFs, 6.5 % REITs, and 70 % Stocks. The OP asked in terms of both questions (in terms of living expenses and investable assets). Based on the answers it appears people manage cash to only one of these goals. In my case it's investable assets since living expenses are covered by a pension.

 

[audreyh1]

I tend to think of how much cash to hold in terms of asset allocation. Not in terms of how much do I need to cover expenses. Some have responded in this manner, but I may be in the minority. With that said my asset allocation is: 4.5% Cash. FWIW the rest of my allocation is: 4.5% Bonds, 2.5 % Gold, 12% Preferreds and CEFs, 6.5 % REITs, and 70 % Stocks. The OP asked in terms of both questions (in terms of living expenses and investable assets). Based on the answers it appears people manage cash to only one of these goals. In my case it's investable assets since living expenses are covered by a pension.

I do both and keep them separate as I keep my retirement portfolio separate from funds set aside for short-term living expenses.

That's what works for me. I see many different approaches on this forum.

 

[CaliKid]

I really appreciate this thread and seeing what others do. As I am still working I make more than we spend so cash flow is not much of an issue. However, when retired I could see it being more so as cash flow is likely to be a bit less. Currently if a "big" expense comes up we can handle it. So doing about $25k of household improvements right now is fine. However, you just never know when emergencies (or that car I really want) will come up so good to have some cash. Currently trying to get cash as low as possible, in my taxable accounts, since interest rates are so bad. Been putting most of our extra money into investment real estate lately.

Also, I have an inherited IRA with mandatory distributions and I try to keep about 3 years worth of distribution in cash in there so I wouldn't have to sell stuff if market is way down for a prolonged period of time.

 

[SecondCor521]

13.46 months of cash (checking + savings - cc balances). Target is 9.29 months, so I have a little too much on hand right now. Often November/December are more expensive months for me, though, with Christmas and property taxes.

0% for investment opportunities. I am a LTBH index investor with a 90%/10% stocks/bonds allocation. I plan to rebalance whenever I get out of whack by more than 2 percentage points, which hasn't happened yet.

 

[braumeister]

I keep about 2.5 years of basic expenses in cash. Discretionary expenses (travel and the like) vary greatly, so are not included.

 

[Lsbcal]

About 0.8% of our portfolio is cash.

The next level up is short term investment grade bonds (VFSUX) currently at 5% of the portfolio. This is refreshed each year to include the next year's expenses plus the "set aside". This "set aside" is my term for money not spent from the previous year's available-to-spend money.

I think short term IG bonds has had a good history over the decades of riding the market up's and down's. Over a few decades, using this approach should be better then large dollops of cash. Yes, in 2008 VFSUX went down -1.1% but in 2009 it was up 13.5%.

 

[eta2020]

Enough to span bear market or more.

 

[FreeBear]

We're holding 9% cash, might gradually reduce to about 7%. We're also at 50% total equities. I need this AA to sleep at night. It has help get me through the couple of "bumps in the road" marketwise over the last 2 years of ER.

 

[FreeBear]

We keep about 8% (0.08X) of annual expenses in cash or a little less than a month's worth.

When I was working... 0%.

When I first retired....6% but recently revised down to 5% as 6% seemed to be too much.

Ditto when I was still w*rking-only held about 2 months worth of cash. Was all equities, all the time, until within just a few years of ER. Made a huge change to only 50% equities late in 2014 and, mostly, 2015 as I coasted into FIRE. I retrospect, I would have made this change over 5-10 years, but I surprised myself by retiring 7 years ahead of plan.

 

[SpinDr]

Approximately 14 months of expenses. Has generally ranged from between 6 months and 1 year. Both my wife and I are still working. Part of the cash is savings bonds purchased while at a former employer. Some are coming up on the 30 year timeframe where they stop earning interest. I would love to have more of those early bonds and the interest they earned.

 

[OnTheBeach]

We typically keep 3 years worth of expenses in cash and Short Term Bonds.

 

[jerryo]

Hmmm....perhaps my DW and I are risk averse, but (to my surprise) we seem far more conservative than most respondents. Semi-retired at ages 67 & 59, we have nearly 20% of our portfolio in cash and other short term U.S. government securities, which equals about 4-5 years of expenses. We also keep about 5-10% of our resources in bonds, about 5-10% in a quasi-annuity (from a rock solid former international employer) that guarantees 8% annual growth, about 15% in real estate equity and about 50% in stocks (a mixture of low cost growth funds, index funds and individual holdings).

We currently receive pensions (supplemented by part-time consulting) covering about 2/3 of our expenses and expect to receive additional pensions and social security over the next 3 years totaling 100% to 125% of expenses.

So while we're quite fortunate in that our savings and investments are more for luxuries and "insurance) than for necessities, it still feels more comfortable (particularly given our relatively high equity exposure) to keep a substantial cash cushion to ride out market ups and downs, even though this won't "maximize" our potential returns.

Anyone else in a similar situation?

 

[Dd852]

In response to jerryo: If you have what you need, take your chips off the table and go home! Sounds like you're in a good situation ~ unless you want to build up a big estate for legacy or family purposes, rest easy, de risk, and be thankful I'd say.

 

[Earl E Retyre]

Hmmm....perhaps my DW and I are risk averse, but (to my surprise) we seem far more conservative than most respondents ...
Anyone else in a similar situation?

Including CD's, we are at 49%. Probably the most conservative of all.

 

[foxfirev5]

Currently we are about 20% in cash, CD's, I bonds etc. Until the interest rates on bonds and bond funds go up I don't feel we're missing out on much.

 

[Dawg52]

Including CD's, we are at 49%. Probably the most conservative of all.

Including CD's, I'm right there with you. I'm too lazy to figure the exact percentage.

 

[DawgMan]

3 yrs from RE, so this is interesting to me. By way of simple example, I'm am curious to everyones feedback which I think is relative to OP's questions.

Assumptions (General based on common principles on this site)
- 4% rule so roughly 25 times annual expenses
- using an AA between 60/40 to 70/30 to produce the returns needed
- Eg. $25K living expenses (including allowance for capital items), $1.25m portfolio at RE, no pensions/SS/working spouse or any other income.

Questions (based on financial logic/FIRECALC, buy in to 4% rule, removal of emotion, go robotic with me for a moment)
- since your AA is designed to mitigate risk, in theory, wouldn't say creating cash once/twice a yr thru rebalancing to cover your expenses maximize your long term returns, despite overall market performance?
- isn't keeping an additional 1 - 3 yrs cash outside of your AA really just making your overall AA that much more conservative?
- after buying in to the 4% rule/FIRECALC, are we chickening out in RE by stashing more cash?


Ok, now let all the emotion/"sleep well at night"/"prepared just in case the market is down for 3 yrs" feelings all back in. It seems like most want to pad the cash between 1 - 3 yrs (which feels good to me), but a few roll the dice with little cash.
- using my eg. of $25k living expenses (Inc a capital reserve), what order do you fund/spend your living expenses... 1) any pensions/SS, 2) dividends/interest paid out which is not auto reinvested, 3) cash in these 1 - 3 yr savings accts outside of AA, 4) sale of assets in AA?
- if you keep a 1 - 3 yr cash acct outside of your AA, are you spending that down 1st to cover your expenses or do you have some magic formula that tells you when to use it/not use it (I.e. If AA returns over 4%, pull from AA, otherwise spend from cash acct)?
- when/how often do you replenish this cash acct?

As noted, you can't take the emotional component out of the mix, but it "seems" like we to some degree sabotage the original strategy/buy in to what is preached most on this site about AA and FIRECALC.

 

[LOL!]

I think folks who keep years of cash do not let it be depleted by more than one year's worth of expenses before replenishing it.

In the same way, folks who keep one month's of cash do not let it be depleted by more than one month's worth of expenses before replenishing it.

In both (all) cases, there is an error bar of say 50%. I am happy to have my cash go to say under $1,000 before replenishing it. That's because my bills are well known and credit cards work.

Also note that there is no such thing as an emergency fund for retirees per se. For that reason I do not have 6 months worth of cash for an emergency since I can always raise cash in a timely manner.

(OK, if I am going to do a job where I might need bail money, then I raise cash ahead of time.)

 

[jollystomper]

My current strategy is keep enough cash on hand that, based on our planned expenditures, will not force us to sell investments for 7 years, to minimize the impact of any bear market on our portfolio.

 

[W2R]

Dawgman, I only withdraw from my portfolio during the first week in January. At that time, I move the year's spending money from Vanguard money market to the bank. I not only withdraw enough for my anticipated spending, but also withdraw a little more (or less) to make sure my emergency buffer amount in the bank is the same size as it was. Right now, since it is the end of the year, my total in the bank would only cover about 8 months worth of spending. One month of that I will spend on my December living expenses, four months' worth is my emergency buffer amount and the rest is unspent money that goes back to my portfolio at the end of the year.

I don't withdraw steadily throughout the year, because I think this way my total withdrawal amount is clearer to me and I am less likely to mess up. You just cannot be too clear about these things with yourself, IMO. I rebalance right after withdrawing the year's cash, and also as needed during the year (which is fairly seldom if ever). I do not withdraw a full 4% most years.

I don't consider money withdrawn from my portfolio to still be IN the portfolio. Otherwise I'd have to count not only my spending money in the bank, but also the change in my pocket to know what my total portfolio amount was (and count that as being part of the cash component of my portfolio. My portfolio is entirely at Vanguard and the TSP. My spending money is entirely at my local bricks and mortar bank. Again, this is part of my effort towards being totally clear and honest with myself.

As for what to spend first, here are my comments. When I determine how much to withdraw for the year's spending money, I reduce that amount by the amount I am going to receive from my SS and pension that year. That (reduced) withdrawal goes in the same bank account where my SS and pension are deposited and from which I get my spending money.

 

[gerntz]

13.46 months of cash (checking + savings - cc balances). Target is 9.29 months,.

I'm surprised that anyone knows their assets total to four significant figures unless the total is less than $100.

 

[CRLLS]

In response to jerryo: If you have what you need, take your chips off the table and go home! Sounds like you're in a good situation ~ unless you want to build up a big estate for legacy or family purposes, rest easy, de risk, and be thankful I'd say.

I must fall in a different outlying group. My thinking is, if you have more than what you "need", then why not keep the remainder of the chips on the table? Time in the market will overweigh the ebb and flow of bear and bull markets. What have we got to lose? Helping my DS's and their families was never a plan while accumulating. DW and I always adhered to the "We are spending our children's inheritance" bumper sticker philosophy. But now that we are here, and may have a bit more that we "need", we feel it would be nice to leave them something. History has shown that time in the market is the best way to grow it. And hopefully we have 20-30 yrs for it to grow before they will get it. Even if we lose it all, we will still have enough to cover our retirement.

As far as cash is concerned, I have had as much as 20% in cash. It was my safety net held in bank accounts in case of being RIF'd. And that happened. The cash was part of my plan to manage my 10 yr slide into SS and control ACA subsidies while keeping our standard of living. That cash has slowly been depleted down while our investments increased. I still have a year or two to go before withdrawls of out investments and currently have about 5% in the bank. After I start relying on my investments, I'm not sure what my strategy will be for "cash management".

And what do we consider "cash"? My thought is that moving cash from my "cash bucket" to my "Roth IRA bucket" is still cash. In my situation, I can tap into it in a quick timeframe. Yeah, it is at market risk, but I can withdraw at a moment's notice at no cost or tax to me. How about an old whole life insurance policy? It has a cash value of about 1 yr's expenses. That can be cashed in or a loan taken out against it at anytime I want. Does that count as "cash" too?

I guess everyone has their own definitions of cash, financial situations and plans. Kind of hard to say one size fits all when it comes to how much "cash" to hold. Reading the above replies certainly support that.