Initial FIRE Cash Reserve

[DINKFIRE]

We plan to FIRE in two months and we have relative large sum of cash on hand. We are wondering for those retired/planning to retire this year who are not on social security/pension (we are 20+ years away), how many times of your annual expenses do/did you keep in cash upon retirement?

We won't qualify for ACA subsidy this year but expect to qualify after, we currently have about 10 years of expense in cash.

 

[Montecfo]

It's a lot of cash. How are you holding it?

I have about 3.5 years in cash presently, in CDs and money market. Retired in 2019.

 

[ATX78701]

I plan to FIRE in one month. At that point I’ll have about 10 years in reserve, too. I think it’s too much but it will help me sleep at night as I begin the new stage of my journey.

 

[flyingaway]

What cash are you talking about?

 

[DINKFIRE]

It's a lot of cash. How are you holding it?

I have about 3.5 years in cash presently, in CDs and money market. Retired in 2019.

Our cash are about half in various CD accounts and half in savings. The cash balance doesn't include any in investment accounts.

 

[jollystomper]

I went into retirement at age 60 with 5 years of cash. At the time I thought the earliest I would take SS would be around 64 or 65, so I wanted to have my planned expenses covered and not be forced to sell any equities. 2.5 years later I overestimated and also receive unplanned income so it is larger than that now.

If I have chosen to retire with a longer runway to SS, I would probably still go with 5 years. For me it is the right balance for my portfolio.

The other item to consider is what % of your total portfolio will be in cash if you set aside 10 years.

 

[FreeBear]

We plan to FIRE in two months and we have relative large sum of cash on hand. We are wondering for those retired/planning to retire this year who are not on social security/pension (we are 20+ years away), how many times of your annual expenses do/did you keep in cash upon retirement?

We won't qualify for ACA subsidy this year but expect to qualify after, we currently have about 10 years of expense in cash.

We always maintained about 6-7 years worth of expenses in bond funds and cash. Of this 6-7 years, 1-2 years are actual cash (online savings and/or money market funds).

I'm normally an equities guy and held very little cash or bonds when w*rking, but this helps me sleep now in retirement. Six years into FIRE were are still sticking with this plan. We let our equities holdings drift up with the rising market (rising glide path) while still keeping the 6-7 years in bonds/cash.

 

[O2Bfree]

I retired in 2019 at age 57 with 4 years of cash in a money market fund and another 2 years in CDs.

 

[DINKFIRE]

I went into retirement at age 60 with 5 years of cash. At the time I thought the earliest I would take SS would be around 64 or 65, so I wanted to have my planned expenses covered and not be forced to sell any equities. 2.5 years later I overestimated and also receive unplanned income so it is larger than that now.

If I have chosen to retire with a longer runway to SS, I would probably still go with 5 years. For me it is the right balance for my portfolio.

The other item to consider is what % of your total portfolio will be in cash if you set aside 10 years.

we have about 9% of our market investment portfolio in cash, but most of them are in either a managed portfolio that requires a percentage of cash, or 401K accounts. So they are not easily accessible.

The question I asked in part is to help us decide if we want to put about 4 years worth of cash into land purchase, which we don't expect to be liquid or generate any cash flow. We are considering it because we like the idea of building our retreat in the future (5+ years down the road) once we sell our house.

 

[monte1022]

Right now we have 4.7 yrs cash cash (cash/yr=2x last yrs spending) parked in "high yield" savings accounts. I plan on leaving work sometime early 2022 and the cash will cover estimated retirement expenses until I reach 59.5yo. After that a combination of stocks, bonds, stable value, and 2xSS will see us to the grave or homeless shelter.

 

[smoghat]

Of course anything is possible, but when I FIRE'd in 2016 with 15% of my assets in cash, my accountant (who has served our family well for 40 years) said, "Spend the cash first!" I did, and now we only have about 5% in cash. Meanwhile, an item costing $1.00 in 2016, now on average, has increased to $1.08. As usual, my accountants advice proved to be the right move. The wrong move was having so much cash in the first place. But it helped me get over my fear of FIRE with an equity heavy portfolio.

Yes, anything is possible. At the same time, in even those five years that cash would have basically doubled if invested in ^VTI. And there *are* risks in having that much cash, for example an unexpected rise in inflation.

 

[walkinwood]

You should keep as much in cash as you need to make you feel secure. That is very personal and will also change as you get more comfortable with ER & age.

We usually have about 2 years spend in Short Term Investment Grade bond funds (Vanguard). That fund & the strategy has served us well. At its worst, the fund lost ~10% (NAV) during the financial meltdown in 2008, but recovered.

Keep in mind that your investments in taxable accounts will throw off cash in dividends or cap gains distributions (mutual funds), so that adds to the cash bucket too. I usually move the bulk of these distributions to the short-term bond fund.

 

[pjigar]

The question I asked in part is to help us decide if we want to put about 4 years worth of cash into land purchase, which we don't expect to be liquid or generate any cash flow. We are considering it because we like the idea of building our retreat in the future (5+ years down the road) once we sell our house.

This is the reason enough to reduce your cash holding. I just love land and I would do anything to buy dreamland.


But seriously, all jokes aside: The only function of cash in my mind (logically speaking) is to help you avoid SORR. My number is 3 years worth of expenses which will not be replenished once it runs out. Disclaimers: I am not FIREd yet and I will have reasonably steady cash-flow (worth half our annual expenses) from a variety of rentals and partnerships when I FIRE.


Like others have mentioned, cash portion is for mental safety for the most part. Maintaining the cash reserve forever is detrimental to overall portfolio returns. You will have to pick your own number that lets you sleep well at night.

 

[Green Papaya]

I retired at 60-1/2 with 2 yrs cash in MM and 4 yrs in bond funds. I planned to replenish the cash with yearly IRA distribution and taxable dividends to stay off ACA cliff until 65.

 

[marinauser]

We start each year with one year of expenses in cash in a tax deferred account and one year of expenses in cash in our taxable account - knowing that dividends in the taxable account should replenish at least part of that cash as we go through the year. So far, dividends and fund capital gain distributions have always replenished the cash by the end of the year in the taxable account.

 

[Koolau]

I suppose it depends somewhat on what you call "cash." I pretty much define cash as what's in the checking account and any CDs or other savings accounts. When we retired, we had a couple of years in cash (as defined above.) Of course, I had ready access to cash from a Guaranteed Income Fund as well as SPDAs and I-bonds, etc. These were "investments" I didn't want to give up to get cash, so I go back to my original definition of "cash" as "checking/savings accounts" of some kind.

With that in mind, here is what cash is really good for: Paying the taxes on ROTH conversions. We didn't have enough of that kind of cash over the years, so had to dip into some "investments" to get cash for ROTH conversions. My suggestion would be to plan your next 20 years (before SS). If you plan significant ROTH conversions, keep enough cash for the taxes. Read up on the advantages/disadvantages of ROTH conversions, of course. Be sure to understand the advantage of paying the taxes from cash - not from other investment money.

Other than that, I like to have a years worth of expenses in cash, but that's just me. YMMV