How Much Cash to hold in Retirement

[Gary 1958]

I have two years set aside but my suggestion is to start funding your ROTH ASAP. If you have money in a 401k you need to covert as much as possible. The government is spending money like a drunkin sailor and that tab is going to come due soon. If you have a nice next egg they will help you spend it but not on things that you choose.

 

[Out-to-Lunch]

Yes, I should have said average 4-5% returns for bonds. But after correcting, what else is wrong?

I don't have any misgivings about holding bonds. I have bonds, not cash myself.

Sometimes I have temptations to "lock in" my gains and switch from bonds to cash, and sometimes I have temptations to seek higher yield with riskier bonds. I manage to sit on my hands and do nothing!

 

[2017ish]

....

Sometimes I have temptations to "lock in" my gains and switch from bonds to cash, and sometimes I have temptations to seek higher yield with riskier bonds. I manage to sit on my hands and do nothing!

"don't do something, just stand there" is not bad advice. (See Jack Bogle quotes asserting the same....)

 

[Out-to-Lunch]

"don't do something, just stand there" is not bad advice. (See Jack Bogle quotes asserting the same....)

Yup!

I admit to having that in the back of my mind whilst posting!

 

[jollystomper]

Going into retirement at age 60, I had 5 years of estimated expenses not covered by my pension in cash. I did not want to be forced to sell equities during down streaks. I also envision taking SS 5 years out at the earliest, at which point pension + SS would cover our expenses. Close to half of that cash was planned to cover medical insurance and expenses before medicare.

I over planned, but I am fine with it. The medical premiums will be less than half of what I planned for. Our actual spending - which has been at a "very comfortable" level - was slightly less than planned before this year. This year, try as we might, we are going to be savers. Interest, dividend, and DW's part time income for the past 2.5 years have been higher than expected. Add to that an unexpected large work bonus after I retired, plus a much larger than expected inheritance that I did not factor in. The current outlook is that our cash will last 7 years.The main change that impacted was our decision to pay off our mortgage 7 years early.

I am fine with that. Even accounting for the yet-to-be-paid taxes in our tax deferred accounts, I do not feel the need to increase our stock/bond allocation beyond current levels. It helps that the vast majority of our "bond" allocation is is a stable value fund that still yields 3%. I am happy with "singles" instead of "swinging for the fences". They still move us along very well.

 

[Nightingale9]

My MO is similar to SecondCor521. I replenish my checking account with 2-3 months of expenses whenever it runs low. Other than that, I don’t keep anything in cash. Cash yields less than other types of fixed income, and I fail to see the benefit of giving up that additional yield.
My target AA is 40/60/0. Whenever I need to replenish my checking account, I take it from the asset class (equities or fixed income) that is above its target—a sort of mini-rebalancing.
I invest almost entirely through low cost index funds, and there’s no cost to liquidate some to replenish checking account.
I don’t worry about having to sell assets at a loss because, (1) the amounts involved are small, (2) I’m usually selling the better performing asset class, so it’s less likely to have a loss, (3) if there’s a loss, it’s there whether I sell or not; selling is just a way of recognizing that reality.
Bottom line, I just don’t see sufficient reason for keeping any money in cash and giving up the higher yield you get from bonds, CDs, etc.

 

[Almost There 2021]

Keep an adequate amount of cash available that will let you sleep soundly a night. One incorrect consideration is that holding cash means no returns. I keep at least five - seven years in a bond paying 3-4% and is triple fee tax free.

Buy the bond in the state/municipality you live in to get triple free. Conservative investment but 3-4 tax free yields 5-6%. Nice strategy for "holding cash".
GL

 

[Months.in.Wyoming]

Our cash treatment is a bit unique from what I can tell. So I'm getting close but haven't yet stopped working. We've over saved (if that's believed possible) so plan to allocate as follows:
55% Equities - index and managed value strategy
30% Real Estate - syndicated deals giving K1's
10% Cash - Put Option Selling strategy
5% Cash - amounts to a comfortable 18 months of expenses

For Put Option selling you need three things - desire, time, knowledge - need all three and the knowledge part is fairly base level! But definitely need the desire and time. I keep rolling 30 days or less expiration dates at out of the money strike prices on stocks I don't mind owning. Selling Cash Covered Puts. I collect premium (and I've done this and tracked every trade for over a year now as practice for retirement) and earned 48% on that money. So plan is to not withdraw anything from any allocations except this one, and actually continue funding the others if so blessed with continued performance. With short time horizons as market begins a drawdown I can adjust strikes, lessen cash on hold, etc... and then make bigger premiums as the market hits lower lows. I love this practice and can't wait until the conference calls are over and I only do this - along with a bunch of volunteer and family activity.

Curious if others use their Cash in this manner vs. simply sitting at .6%?

 

[aaronc879]

I plan to have minimum 2 years expenses in a Money Market account. Then i'll have between 2-3 additional years in CDs. I won't put it all in CDs because in the past I put my cash in CDs then needed to take a penalty when I needed to get the money early. I lost principal on that CD.

 

[youbet]

, I'll be back to 2.5-3 years worth of cash, bond fund, and money market fund assets. Sure makes it easier to sleep at night, rather than being forced to sell equities in a down market!

Your example points out how very different each situation is. You have an extremely aggressive equity allocation and therefore keep cash as a buffer to prevent selling equities in a down market. I'm much older (early 70's and FIRE'd 16+ years) and have a more conservative portfolio (56/44) and could likely go for a decade or more on interest, divs and fixed asset liquidation supplementing SS + pension. Even with a bit over half of our assets in equities, it would take a really bad, really long market downturn before being forced to liquidate equities to cover expenses.

Just pointing out why stating your personal situation is key to understanding why someone is holding, or not holding, some level of cash.

 

[NW-Bound]

Less than 60% of my portfolio is in stocks. Because I do not like bonds, the rest is in short-term instruments or I bonds. I have very little in real bonds.

With a low WR of less than 1%, that cash will outlast me. No fear of having to sell stocks in a prolonged market downturn.

 

[tenant13]

I plan to have minimum 2 years expenses in a Money Market account. Then i'll have between 2-3 additional years in CDs. I won't put it all in CDs because in the past I put my cash in CDs then needed to take a penalty when I needed to get the money early. I lost principal on that CD.

I really hesitate to bring this up because this board is not exactly in love with anything related to cryptos but you may want to look into parking SOME of your savings into stable coins (pegged to USD) - spread small-ish amounts between a few places if you're concerned about risk.

https://celsius.network/rates/
https://blockfi.com/rates/
https://nexo.io/earn-crypto#
https://crypto.com/en/earn.html

 

[rayvt]

Right - just to clarify - I should have asked how many years of living expenses do people hold in cash reserve?

Virtually none. A couple months worth of bills, that's about all you need. Just enough to comfortably tide us over any foreseeable short-term glitches.

The rest stays invested. When you need money, take it out of your investment portfolio. Just maintain your chosen asset allocation, and stay approximately within the 4% SWR.

Especially these days, when all my banks are dropping their savings account interest rates to 0.30%.


People talk about N-years of expenses in cash, but never talk about what happens after. Suppose you start with 3 years cash, a 2 year crunch comes and now you are down to 1 years cash. What then?

 

[aaronc879]

Virtually none. A couple months worth of bills, that's about all you need. Just enough to comfortably tide us over any foreseeable short-term glitches.

The rest stays invested. When you need money, take it out of your investment portfolio. Just maintain your chosen asset allocation, and stay approximately within the 4% SWR.

Especially these days, when all my banks are dropping their savings account interest rates to 0.30%.


People talk about N-years of expenses in cash, but never talk about what happens after. Suppose you start with 3 years cash, a 2 year crunch comes and now you are down to 1 years cash. What then?

For me, I would take out enough to get to the top of the 12% bracket. Normally I don't need nearing that much so I can build up a good amount of cash that way. Most people on here would likely want to go at least to the top of the 22% bracket.

 

[rayvt]

For me, I would take out enough to get to the top of the 12% bracket. Normally I don't need nearing that much so I can build up a good amount of cash that way. Most people on here would likely want to go at least to the top of the 22% bracket.

I suspect that most people here are, or soon will be, close to the end of the 12% point. Or past it. If you have been a successful investor and are taking RMDs and Social Security then you are likely to be getting quite a bit of taxable income.

A million or two dollars of portfolio at 4% withdrawal is a handsome income. And RMD percentage goes up every year.

 

[aaronc879]

I suspect that most people here are, or soon will be, close to the end of the 12% point. Or past it. If you have been a successful investor and are taking RMDs and Social Security then you are likely to be getting quite a bit of taxable income.

A million or two dollars of portfolio at 4% withdrawal is a handsome income. And RMD percentage goes up every year.

That's valid for most on this forum but not for most people overall. I have never in my life(20+ years of work) made an income over the 12% bracket limit and I won't in retirement either. There is definitely not a "one size fits all" approach to this topic or most others.

 

[LXEX55]

I am holding five years in cash. I have planned for all living expenses, including property tax, new car, life insurance payments, emergency medical bills, vacations. The money is literally sitting in savings and checking accounts as CD rates are so low, I won't bother to move the money.

 

[mickeyd]

I often quote my AA as being 45/45/10, but in reality the 10 is closer to 15 and the FI is closer to 40. Gotta find a better place for all of that cash, or step up my spending quite a bit.

 

[dtbach]

I don't have a whole lot, maybe 3%. But then my military pension and SS pay all the bills now that I'm debt free so really no need to hold much cash.