3 years to go and I need $150k CASH. Help...

[pjigar]

Yes, here is a suggestion... get yourself past the notion that you need $150k of cash as there is no need to carry that much cash in retirement.

Keep putting it to the 401k to get the tax benefit. Then once you retire and have no earned income you can take out 401k money at low tax rates (assuming that you can take money out without penalty).

It looks like you have plenty to retire now if you have close to $2m now and only spend $45k a year.... what are you waiting for?

I would second that. The cash cushion/bucket sounds good in theory. ERN crunched some numbers on the "cash bucket" idea: Be sure to check it out.

 

[pb4uski]

As I said, I am not sure what the tax ramification on a withdraw of cash from 401K. I guess it is just like regular income? Hmmm, maybe I am making more out of this than I should.

Yes, a withdrawal is ordinary income.

 

[pb4uski]

Yes, I believe the last time I looked at it I could get some assistance if I made under $60k per year or something like that. It would be nice to get assistance but I don't want to "starve ourselves" (in my DW's words) in the process.

It looks like you live on less than $45k a year now so $60k is hardly starving yourself.

Between your tax-deferred and taxable it should be easy to manage your income to qualify for subsidies if needed.

 

[Aerides]

3 years is a long time, so I would adjust your savings to find a way over that period.

We have a "3 years expenses" approach for cash equiv for sleep at night, downturn-riding money. We are way short of 59.5 and the rule of 55 as well, so it's a little more important for us, as well as managing withdrawals under the ACA rates.

But jiggle with your numbers to reduce from other buckets for the short term to build up this one over the next 3 years. We also have a heloc but that's for true emergencies beyond our normal reserve.

 

[OldShooter]

Just listen to @pb4uski.

 

[street]

I for one have maybe more in liquid assets then most here. I would never have to in my life time have to sell any investments. Now that is me, but looking at your nest egg a 150K liquid assets would only be 7% of your portfolio. It really comes down to what you want and I might say there is no right or wrong way in IMO. It is what fits you and good to hear opinions, you do what works for you, is bottom line.

I can say with all the liquid funds it works well when I want to add to my portfolio and not sell and juggling funds to do so. I actually didn't participate for a few years in a 401K to do what you want to do (I still got Company contribution). I paid the taxes as I went but I didn't want everything in the markets, and it have me options having cash.

 

[susswein]

If your money has been invested in the ROTH for more than 5 years you can withdraw the principal penalty-free.

 

[OldShooter]

JMO, but "buckets" are a concept with limited usefulness and detrimental to optimal planning if carried too far. Money is fungible. I would get used to looking at the portfolio globally to set your allocation, then work out the best strategic asset placement for taxes within that allocation.

It does appear that you need to work up a tax strategy for tax deferred distributions. Like a lot of us, you have a hefty percentage in tax deferred. I'd make planning for that a priority that will have more utility than worrying about satisfying a self imposed bucket requirement.

@rmcelwee, don't worry too much about this. Thinking about "buckets" is just an example of what Richard Thaler calls "mental accounting." All of us have been doing it all our lives.

For example, as middle-schoolers we probably kept our lunch money and our money to go to the movies in separate mental buckets. Later, day-to-day expenses were in a separate bucket from college tuition. Then, day-to-day expenses were in a separate bucket from retirement savings. All household budgets are examples of mental accounting. It's all money, all fungible, but doing the mental accounting was and is valuable for organizing our finances and our thinking.

Thaler's book, "Misbehaving" has a chapter on this pointing out the benefits and the downsides of mental accounting. I'd recommend the whole book to anyone here, but that chapter in particular will help you decide how you want to do your mental accounting.

FWIW DW and I think of our AA more like buckets than as an AA, though both views are useful.

 

[24601NoMore]

I'm probably in the minority here, but am a big believer in the bucket approach with a good amount of cash in reserve. First read about it on M* from Christine Benz, and it makes a lot of sense IMHO.

Guess it all depends on your risk tolerance. With me ER'd and DW ER'ing in a couple of months, we may not have the time to recover (in some cases over history, 5-10+ years) from a major market drop with portfolio selling while stocks are way down. I'd prefer to lower my risk, keep "enough" equity for growth, and have the cash available to pull from in down markets. The trade-off is opportunity cost, but I don't desire to "run up the number" as high as I can get it - but instead to have "enough" to fund my ER. And reducing risk increases the likelihood that a down market environment won't derail my plans..

The other benefit of holding a good amount of cash is dividends, which can reduce your need for portfolio sales to fund your retirement. 3% of $150K is a $4,500 predictable income stream that can cover a good % of the expenses you mentioned.

If your 401K has a good cash equivalent fund option, that'd be a good way to continue getting the tax benefits of contributing to it while still building cash. Unfortunately, most do not and the stable value funds often have low yields and in some cases higher expenses than something like VMMXX that you can more easily buy with after-tax or IRA $$s.

YMMV, and everyone seems to have different opinions on this, but you're not alone in taking the "bucket" approach with your first several years spend covered in cash.

Best of luck!

 

[MarieIG]

If your reason for having cash is worry about a downturn and the impact on your whole portfolio, you can accomplish that same objective by putting $150k in(side) your 401k into cash.. in fact you can do that now... better yet, perhaps your 401k has a good stable value fund... better than cash.

OP, does your 401k have this? It solves a lot of your issues.

 

[pb4uski]

I'm probably in the minority here, but am a big believer in the bucket approach with a good amount of cash in reserve. First read about it on M* from Christine Benz, and it makes a lot of sense IMHO. ....

I took a large hard look at buckets when I first retired, following the principles the Christine Benz talks about. At the end of the day it came back to 60/40, and I find 60/40 just easier to deal with.

 

[rmcelwee]

OP, does your 401k have this? It solves a lot of your issues.

We have a fixed fund that yields around 3% interest (I haven't figured how they do this safely but that is what it gets). My main question is whether or not withdraws from that is the same as selling off taxable investments to stay within the 0% taxable range, i.e. is the 401K just like my etrade taxable acct.

 

[Dtail]

We have a fixed fund that yields around 3% interest (I haven't figured how they do this safely but that is what it gets). My main question is whether or not withdraws from that is the same as selling off taxable investments to stay within the 0% taxable range, i.e. is the 401K just like my etrade taxable acct.

Withdrawals from the 401k account is no different than from a TIRA and are taxed as ordinary income.
If you move monies within the 401k, then not a taxable event.
Sounds like you have a Stable Value type fund for 3%. This type of fund can be very valuable as part of your Fixed Income allocation with minimal risk. These type of accounts are usually insurance wrapped products and not mutual/index type funds.
I wouldn't give it up.

 

[lhamo]

You will take a hit on the growth you are expecting over the next three years, but if having more in liquid funds (inside or outside the 401k) is that important to you then why not just stop reinvesting all dividends and do some strategic tax loss harvesting? Probably could generate a decent amount of cash equivalents that way.


Taking this approach would also give you a good sense of how much you are getting in dividends on average each year -- between those and tax free LTCG you probably don't need as much cash on hand as you are estimating. Factor in some strategic use of your Roth funds and you can probably pay 0% in Federal taxes.

 

[joeea]

I'd like $120K-$150K cash to fund my first bucket.

I make around $90K per year and invest more than half of it.

Stop investing for 3 years.

 

[SumDay]

I'm probably in the minority here, but am a big believer in the bucket approach with a good amount of cash in reserve. First read about it on M* from Christine Benz, and it makes a lot of sense IMHO.

Guess it all depends on your risk tolerance. With me ER'd and DW ER'ing in a couple of months, we may not have the time to recover (in some cases over history, 5-10+ years) from a major market drop with portfolio selling while stocks are way down. I'd prefer to lower my risk, keep "enough" equity for growth, and have the cash available to pull from in down markets. The trade-off is opportunity cost, but I don't desire to "run up the number" as high as I can get it - but instead to have "enough" to fund my ER. And reducing risk increases the likelihood that a down market environment won't derail my plans..

The other benefit of holding a good amount of cash is dividends, which can reduce your need for portfolio sales to fund your retirement. 3% of $150K is a $4,500 predictable income stream that can cover a good % of the expenses you mentioned.

If your 401K has a good cash equivalent fund option, that'd be a good way to continue getting the tax benefits of contributing to it while still building cash. Unfortunately, most do not and the stable value funds often have low yields and in some cases higher expenses than something like VMMXX that you can more easily buy with after-tax or IRA $$s.

YMMV, and everyone seems to have different opinions on this, but you're not alone in taking the "bucket" approach with your first several years spend covered in cash.

Best of luck!

Then I'm in the minority too. We probably have more in than most people here would be comfortable with, but it helps me sleep. I got my inspiration for this from Retirement Manifesto.

 

[pb4uski]

We have a fixed fund that yields around 3% interest (I haven't figured how they do this safely but that is what it gets). My main question is whether or not withdraws from that is the same as selling off taxable investments to stay within the 0% taxable range, i.e. is the 401K just like my etrade taxable acct.

401k withdrawals are taxable.. so you would want to be judicious with 401k withdrawals if managing income for ACA subsidies.... what you could do though is to sell taxable investments (you'll likely have a taxable gain but some will be basis/principal and not taxable)... and then exchange a similar amount of stable value in your 401k for equities... at the end of the day it is the same as using your stable value money but generates less income.

So for example... say you need $60k for spending. Sell $60k of equites in your taxable account... that will likely generate a gain.. let's say a $30k gain. Then sell $60k of stable value in your 401k and buy $60k of equities in your 401k.

Net result is that you have $60k less of stable value and the same amount of equities... but rather than having $60k of income that you would have if you did a straight withdrawal, you only have the gain... in this example $30k. YMMV.

 

[Dtail]

401k withdrawals are taxable.. so you would want to be judicious with 401k withdrawals if managing income for ACA subsidies.... what you could do though is to sell taxable investments (you'll likely have a taxable gain but some will be basis/principal and not taxable)... and then exchange a similar amount of stable value in your 401k for equities... at the end of the day it is the same as using your stable value money but generates less income.

So for example... say you need $60k for spending. Sell $60k of equites in your taxable account... that will likely generate a gain.. let's say a $30k gain. Then sell $60k of stable value in your 401k and buy $60k of equities in your 401k.

Net result is that you have $60k less of stable value and the same amount of equities... but rather than having $60k of income that you would have if you did a straight withdrawal, you only have the gain... in this example $30k. YMMV.

Not a bad idea, but then isn't one effectively substituting down the road their fixed income allocation from Stable Value to something else, whereas the stable value account at least for now might have a better yield?

 

[pb4uski]

Not a bad idea, but then isn't one effectively substituting down the road their fixed income allocation from Stable Value to something else, whereas the stable value account at least for now might have a better yield?

Possibility I guess, but if that happens then just do the opposite of what I described... in the taxable account sell the something else and buy equities (or use the proceeds for spending) and then in the 401k sell equities and buy stable value.

 

[RunningBum]

Not a bad idea, but then isn't one effectively substituting down the road their fixed income allocation from Stable Value to something else, whereas the stable value account at least for now might have a better yield?

One of the concerns stated was a downturn in the market, and presumably having to sell equities in a downturn. This is a way to get cash without reducing their overall equity position, and without having find a way to accumulate a lot of cash in their taxable account.

If they want to keep their AA balanced, say 50/50, then buy $30K in equities rather than $60k in the 401K to replace the $60K sold in taxable.

 

[HI Bill]

If your money has been invested in the ROTH for more than 5 years you can withdraw the principal penalty-free.

If I was in your situation, I'd move the appropriate amount of $ within your ROTH from equities to a money market fund within the ROTH IRA. That way, the $ aren't subject to market risk (only inflation risk), you allow the money to grow tax-free, and in the event you ever needed to tap the money, you can withdraw the contributions (e.g., principal) included in the money market account, tax and penalty-free!

This option allows you to simultaneously max out your 401(k) contributions, keep the company match, lower taxes, and keep your options open!

 

[JackJester]

We're 18 mo from ER. I too needed to build up some cash reserve since I have most of my retirement income tied up in my 401K. This year I cut back my 401K contributions to the level of the company match (75% match for the first 8%). I was at 16% contribution before and now our cash reserves are starting to really pile up. I'm 52 and I just don't want to ride it out 3 more years so I can take advantage of the Rule 55. Therefore, I'm going to make it to 59.5 with a combination of SEPP 72t, cash, and the after tax account.

 

[marinauser]

As several people have said, if you are just trying to get an asset allocation that includes a component of $150 in cash, you can do that in the 401k. I do a combination for the amount of cash I want on hand for the last 5 years. I keep 50% in 401k/IRA tax deferred account and 50% in a taxable account that we use to spend during the course of the year. Through the year dividends and capital gains we may take generally replenish that account with cash and even some extra by the end of the year and the extra is then invested in equities. The cash in the tax deferred account just keeps setting there. If we run into a really bad year or two and our operating taxable cash account does not replenish from dividends and capital gains, I have another year cushion that I can access to avoid having to sell any equities or bonds that I don't want to sell at that time. 401k withdrawal penalties are not an issue for us any longer, we don't worry about trying to keep our income below a certain amount, and, if it is a bad year with little or no capital gains or reduced dividends, our tax bill for a 401k withdrawal would not be excessive.

 

[VungTau]

Do you have any dividends that are being reinvested that you could take as cash instead?

 

[sheehs1]

Then I'm in the minority too. We probably have more in than most people here would be comfortable with, but it helps me sleep. I got my inspiration for this from Retirement Manifesto.

Then I too am in the minority. Half of what I have in cash is "cash" waiting for good interest rates on CD's and the half is in CD's. What I have in the market is to help with inflation.
Everyone has their own risk tolerance. The older I get the shorter that 10 year recommended investment window for recovery seems. Although, even that is a moving target because none of us have crystal balls.