Hi from Rural Missouri

[rogerwilkouk]

Hi Everyone.

Just want to start by saying how much I appreciate this forum and all the wisdom it has given me over the last few years.
I am just turning 50 and DW is just turning 55. We are aiming for another 7 years before we can retire to the good life.
Current Income is around $130K and saving around $40K per year across 401K, HSA, ROTH IRA and Taxable.
I feel like our plan is on track, however still too far off to really know due to the unknowns (the Market, Inflation etc.) and right now, that’s not my primary question.

My big question which over the years I don’t think I’ve ever really seen addressed is this, and I may simply be drastically overthinking this (something I am guilty of)
A lot of people carry say 2 years of Cash in their portfolio that they can turn to as opposed to selling their portfolio in a downturn.
If so, what is your trigger for when to actually turn to your cash reserves. I am not talking about buying a down market, I am talking about pulling your living expenses from your investments.
Say you draw your required spending each month throughout the year, did you turn to Cash in February/March 2020 as the market took a drop? If so, was it because it was down 10%, 20%? And down from what level? It’s all time high?
Do you look and say, my return from this time last year is negative, therefore utilize Cash or is it if the return is more than x% drop from last year or more than x% drop from the beginning of the year etc.

I hope that makes sense. And please feel free to tell me if I am just overthinking this.

 

[Sunset]

For me, if the market drops 15->20% , I'll start spending my cash rather than think of selling stock.
This is because a 20% drop often recovers back a lot in a few months. Then I can sell the stock and replenish the cash.

I always spend my dividends each year, so that part has nothing to do with the market.
I have about 4 years worth of cash, sitting in CD's.

 

[gerntz]

Very nice save rate. Congrats.

I donh't have an answer to your question.

 

[AZ2020]

Welcome to the forum.

This is a great question. I just retired myself and have not faced this issue yet. I'm interested to see what the experienced people have to say.

 

[captain3d]

Spend cash until you hit your rebalance trigger.

 

[pjigar]

There was a blog on early retirement now about this very question. Conclusion was that keeping cash on the side is a futile exercise from pure portfolio return perspective, exactly due the fact that you can't predict the triggers before hand. If anything, cash bucket may give you piece of mind.

 

[W2R]

Personally, I withdraw the year's spending money from my investment portfolio during the first week in January (selling some to do that, and then re-balancing so that my portfolio's asset allocation doesn't change).

If doing that meant selling low, I'd just not sell and rely upon my cash reserves instead. My definition of "selling low" is totally subjective, though, so that's not much help I suppose.

Now that I have Social Security to help out, I really don't have to sell anything; all I need to do is to just withdraw the dividends from the past year, which I take in cash. But my retirement is a little over-funded.

Rural Missouri is a terrific place to retire, in my opinion! Low cost of living, and lots of peace and quiet I would think. We very nearly moved up there right after we retired. The area around Springfield was our target location. But then Frank (my SO) had a change of heart since his family has always lived here in New Orleans, so we decided not to move.

 

[sengsational]

I wasn't going to answer because I was afraid you'd say "Show Me"

Seriously.... So I think you are talking post retirement since I see your spending is covered by earnings now.

It's not an easy thing to do in a down market ... to rebalance. It might not be hard to pull from your bond allocation to give yourself some spending money, but to sell bonds and buy equities is "hard". That move shortens the duration that you can weather the storm of a depressed equity market. If you have enough in asset classes that aren't in the dumps to last, even while rebalancing, then that's the best case scenario.

 

[rogerwilkouk]

Thank You all for your replies.
Yes, we love Rural Missouri. We live nice and quietly and yet I work remotely for a "Big City" company which explains the Savings Rate, even though we would be considered lavish in our lifestyle for around here.
Extremely Lucky and Blessed. LCOL but HCOL Salary.

Most of it I understand is a mind game and knowing when to switch to Cash Reserves as opposed to selling your portfolio (yes once I am retired) seems almost like Market Timing.

 

[Winemaker]

My portfolio pulls in a little more in interest and divvies than my annual 4% withdrawal. But I only took my inflation adjusted amount the last 2 years, retiring 6 years ago in October 2014. DW and I "practiced" the first 4 years, just to be sure of our plan, and took a 2.5, 3, and twice a 3.5% WD. It has been more than successful. I keep 3 years cash in my stable value fund, and sell equities randomly throughout the year, taking my stash January 2nd. While I usually keep equities about 65%, I trimmed that back to about 55% recently, thus raising my cash back to the 3 year level, and bought more of my TIPS fund.


Welcome to the Forum.

 

[MRG]

Welcome to a great place to learn. We spent great 38 years in KC.

I'm 7 years from having earned income and it's a process. I'm probably market timing when I sell anything. It's all good.

 

[CardsFan]

OP, welcome to the forum. I am a little north of you, and not quite rural, but also enjoy a lower COL than many places.

The first question is: What do you consider cash? To me it is what I have in my B&M bank, plus my on-line MM account. So, for us, it is about 4.5% of total investments, and about 2 years of spending. I used to consider CD's as cash, but since I am currently getting 2.2-3% on those, they are more like bonds right now.

A small portion of the cash is for the next few months bills. The balance is our emergency fund. This is the emotional part that helps us sleep at night.

As far as spending goes, I typically take my after tax Cap Gains, Int and Div as cash and supplement that with selling bonds in the after tax account for the monthly spend.

In 4.5 years we have yet to tap the cash for expenses. As long as I can sell bonds close to my invested value, that is what I will do. If TSHTF and both stocks and bonds were down a lot, for an extended period of time, I would tap the cash. But, to be honest I can't tell you what "a lot" is until it happens.

 

[Navigator]

Keeping large sums of cash on hand is not a great financial strategy, it is simply for peace of mind during a market downturn. When do you start spending your cash? You do so whenever it would be psychologically painful to sell stock.

 

[pjigar]

There was a blog on early retirement now about this very question. Conclusion was that keeping cash on the side is a futile exercise from pure portfolio return perspective, exactly due the fact that you can't predict the triggers before hand. If anything, cash bucket may give you piece of mind.

Personally, I would only create AND use up cash bucket EXACTLY once when I retire: First few years of retirement. The goal will be to avoid SOR risk.

 

[Big_Hitter]

welcome, one of my good bros here is from Trenton, MO

 

[FreeBear]

Hi Everyone.

...

A lot of people carry say 2 years of Cash in their portfolio that they can turn to as opposed to selling their portfolio in a downturn.
If so, what is your trigger for when to actually turn to your cash reserves. I am not talking about buying a down market, I am talking about pulling your living expenses from your investments.

...

We've been Fired for around 6 years. We aim for 1-2 years in cash at any given time, basically 1 yr minimum and 2 years max.

To replenish our cash, we sell mutual funds once or twice yearly, together enough for about 1 year's expenses. I do some market timing looking for a local maximum value when I sell since I don't have a fixed time or amount.

The basic idea is that I have a least a year in cash so that I can wait many months for a "good" time to sell stock funds. As a backup, we can always sell bond funds, although we haven't had to do this yet. We don't hold more than 2 years in cash since I hate "lazy" money.

The nice thing about selling only twice yearly is that I don't have to think about it the rest of the year. When we sell a chunk, we also can rebalance to maintain our 55-60% equities target allocation. Not much w*rk at all!