Did you go heavier on cash at start of withdrawals?

[DawgMan]

I plan on starting withdrawals as of 2022 (age 57). While I do not really expect any earned income, a few drips may come in. None the less, I've been trying to right size all my accounts and will be 100% dependent upon my assets to fund my spend, with no plans to take SS until 70. I plan on doing significant annual Roth conversions to the upper end of the 24% tax bracket (at least based on today's tax code) until RMDs hit. As I have noted in previous posts, I plan on a larger annual spend which has significant discretionary $$ factored in. My plan right now is 1) do my annual rebalance at the first of the year as tax efficient as I can, 2) estimate my taxable interest/dividends that will be generated from my after tax accounts for the year, 3) run a projected tax return to understand my total tax obligation for the year based on planned spend + projected taxes and then fund my high yield savings account with this amount and drawdown from there for the year.

What I'm questioning is should I be a little more conservative as I start my withdrawals (in the 2+ % range) and bank closer to 2 - 3 years in cash to better protect from SORR and get my sea legs, or, is my 1 year of cash sufficient? I know it's somewhat personal preference, but just curious how most started and eventually modified the amount of cash they held annually.

 

[audreyh1]

There have been several threads on this very topic recently. Hopefully someone can find them for you.

I was doing a two year averaging in to my new retirement asset allocation after selling a quite large chunk of company stock shortly before I retired in 1999, so by definition I was initially in a high cash position, although that resolved quickly enough.

In addition we had a pretty generous extra travel budget “slush fund” set aside to spend the first couple of years in retirement as we expected to travel very heavily right away, and then maybe settle down a little bit.

We did travel a lot, but it eventually morphed into having about two years worth of spending on hand and being able to ignore things like 2000-2002 and 2007-2009 without changing our spending plans, so we stuck with it. It did help our comfort level because we could ignore market volatility for the rest of the year.

We currently pull out a year’s worth of income every Jan. Dividends and distributions in the retirement portfolio go to cash during the year, and much of that is ultimately part of the next Jan withdrawal. There is also rebalancing to be done after each Jan withdrawal, with an eye on tax efficiency if possible. We use the % remaining portfolio withdrawal method, so our income varies each year depending on what the portfolio did the prior year. We currently draw 3% of the retirement assets (ages 61 and 66). This is theoretically too low, but we still rarely spend it all and usually end up banking the unspent funds. As they build we gift some of the excess.

We have no pensions, and draw no SS income yet.

I usually have remaining taxes owed and new year estimated taxes guesstimated in Jan when we make our annual withdrawal. These are set aside, and then reconciled (i.e, corrected)in March or April when we file our taxes.

It’s all ultimately personal preferences and goals/priorities.

 

[DawgMan]

There have been several threads on this very topic recently. Hopefully someone can find them for you.

I was doing a two year averaging in to my new retirement asset allocation after selling a quite large chunk of company stock shortly before I retired in 1999, so by definition I was initially in a high cash position, although that resolved quickly enough.

In addition we had a pretty generous extra travel budget “slush fund” set aside to spend the first couple of years in retirement as we expected to travel very heavily right away, and then maybe settle down a little bit.

We did travel a lot, but it eventually morphed into having about two years worth of spending on hand and being able to ignore things like 2000-2002 and 2007-2009 without changing our spending plans, so we stuck with it. It did help our comfort level because we could ignore market volatility for the rest of the year.

We currently pull out a year’s worth of income every Jan. Dividends and distributions in the retirement portfolio go to cash during the year, and much of that is ultimately part of the next Jan withdrawal. There is also rebalancing to be done after each Jan withdrawal, with an eye on tax efficiency if possible. We use the % remaining portfolio withdrawal method, so our income varies each year depending on what the portfolio did the prior year. We currently draw 3% of the retirement assets (ages 61 and 66). This is theoretically too low, but we still rarely spend it all and usually end up banking the unspent funds. As they build we gift some of the excess.

We have no pensions, and draw no SS income yet.

I usually have remaining taxes owed and new year estimated taxes guesstimated in Jan when we make our annual withdrawal. These are set aside, and then reconciled (i.e, corrected)in March or April when we file our taxes.

It’s all ultimately personal preferences and goals/priorities.

I go back and forth with withdrawing my planned spend, or as you suggested, taking say a 3% WR based on portfolio balance, banking any excess, as opposed to redeploying it back into your AA. Merits to both approaches. Taking your approach probably gives you that much more comfort in spending/gifting, especially if there is excess that year, whereby taking just your annual planned spend as a withdrawal may mentally hold you back from BTD, especially when you are well (arguably) overfunded.

Appreciate the comments.

 

[audreyh1]

You have to look at your long term goals to make such decisions. You have to have some context that personally fits you and your family.

We are well funded with no children. So plowing back otherwise spendable funds into an already substantial portfolio has little appeal (knocking on wood as I hate tempting fate.)

 

[street]

If it were me, I would spend what you normally would on expenses and watch what your WR percentages is at on a monthly basis. If you feel you can spend 3% and portfolio is still growing or staying even, then spend or splurge accordingly.

I don't use a given number or percentage for WR in retirement or ever had a budget. I watch it and see where I'm at and adjust from there. JM2¢

Good Luck!

 

[Koolau]

If it were me, I would spend what you normally would on expenses and watch what your WR percentages is at on a monthly basis. If you feel you can spend 3% and portfolio is still growing or staying even, then spend or splurge accordingly.

I don't use a given number or percentage for WR in retirement or ever had a budget. I watch it and see where I'm at and adjust from there. JM2¢

Good Luck!

This has been our approach as well. We've never had a budget and only calculated WDR in the rear-view mirror. As long as the NW is on an upward trend, we figure we're in reasonably good shape. As far as how much cash to keep - it depends on your comfort level. Right now, most cash is a "loser" if you consider the low-interest options plus the fact that inflation is heating up. BUT cash may keep you from selling at lows in the future, so you have to play it the way you feel it. If you've run FIRECalc or similar and they say you are good, then the details (how much cash) are probably secondary - especially if you are flexible in your spending over a year or two basis. Good luck and note that YMMV.

 

[street]

Koolau, yes you are right. Right now, most cash is a "loser" if you consider the low-interest options plus the fact that inflation is heating up.

 

[TheWizard]

I retired in 2013 at age 63 and waited till age 70 to start SS.
I had/have monthly retirement income from pension/annuities and withdrawals from tax-deferred.

But the only cash I've had, from 2013 to present, is in my checking account, which I try to keep around $10,000 to buffer various lumpy expenses, including travel.
I no longer keep any savings account.

Ok, there's a few $k in my settlement accounts as well most of the time, but that's generally waiting for a limit order to execute so I don't count that.

Excess retirement income beyond current expenses and that checking account target goes into my taxable account, and eventually into various stock index funds, no bond funds...

 

[eytonxav]

I retired in 2013 and now am 72. Took SS at 68.5, no pension. I probably held 10-15%, sometimes more in cash, and still do. What can I say, other than admit I am very conservative, to the point that I've missed out on better market returns, although I do sleep well at night.

 

[W2R]

My plan right now is 1) do my annual rebalance at the first of the year as tax efficient as I can, 2) estimate my taxable interest/dividends that will be generated from my after tax accounts for the year, 3) run a projected tax return to understand my total tax obligation for the year

Lately I haven't been spending anything from my portfolio except for my RMD's. All of my spending now comes from RMD's, Social Security, and mini-pension.

But earlier in retirement, I used to spend from my portfolio. Here's what I did:

1) Your first step is identical to what I did.

2) For the second step, I considered my previous year's interest and dividends to be fair game for spending, instead of estimating what this year's interest and dividends would be. Keeps me honest with myself. Anyway, I would move the amount equal to my previous year's interest and dividends, to my bricks 'n' mortar bank in January right after the rebalance, to use for the coming year's spending.

3) I'd pay my taxes out of this same interest and dividends that I moved to the bank in 2). Then I'd adjust my discretionary spending depending on how much my taxes cost me.

I kept quite a bit of cash in my portfolio, and still do, enough to cover about 6-7 years' spending. I do this for convenience and laziness, I suppose. Despite my low risk, low reward 45:55 asset allocation, including lots of cash, I still have 171% of what I retired with back in 2009. Love this booming market.

 

[CardsFan]

And, it depends on what you call "cash".

We are 5 years in to retirement, but the percentages have not changed much.

What I call "true cash" (B&M accounts plus on-line MM account): 3.7% of portfolio, or about 1.5 years spending.

True cash plus CD's: about 12% of port., or about 6 years of spending. Of course, all this is FDIC insured (or the credit union equivalent)

I consider CD's paying 2-3% to be closer to bonds, but it is all semantics and all part of my fixed income allocation.

 

[5Miler]

I retired at 58 in 2012 and will turn 68 next week. I have no real pension or income as I'm still waffling on when to take my Social Security. Originally I kept 2 years living expenses in cash but after a few years I cut that to a maximum of 1 year of cash. I usually find my cash bucket dwindling down to the 6 or 9 month level and finally take action to replenish the cash. I have an automatic monthly transfer from my IRA to my checking account like having a monthly paycheck which I haven't bothered to increase over the past 9 years.

I usually pull in an extra 3 to 5 thousand a year from my IRA, not because I need it for living expenses, but I consider it my stupid money that I can buy stupid things with and not feel guilty about it. Camera equipment, servers, network gear or maybe a new gun or two (or three).

I feel comfortable with the 1 year or less of cash cushion now as I can always elect to start Social Security if the market turns south for an extended period. DGF and I are currently in Bonaire diving for three weeks so we are not concerned yet.

 

[GravitySucks]

I had a bit over a years cash do to megacorp incentive plan. Built a bond ladder that would cover essential spending. After year 1 I sold equity funds every quarter until November 2019. I thought things were over heating so I took all 2020 spending out of equity funds at that time.
The bond ladder worked out better than multiple years of cash and still gave me peace of mind.

 

[Exchme]

Academic studies would of course say not to hold so much cash, but I had (probably unnecessarily) been OMY-ing for a couple years and was mentally unable to declare "enough", so setting up a 2 year cash supply was a trick to allow me to pull the plug. Makes no sense, but there you go. We are spending it down, we don't want to hold that much cash forever.

 

[walkinwood]

Kitces, I think, wrote a paper showing the benefit of starting retirement with a more conservative equity allocation and then increasing it gradually to your target allocation. Essentially, that's what you'll be doing if you start with a larger cash buffer.


SWR is based on the worst outcomes in over a hundred years. (Obviously, there is nothing that says that things can't be worse in the future) Keeping that in mind, is it necessary to squeeze every bit of gain from your portfolio? Wouldn't it be better to have some peace of mind that you have a cash/near-cash hoard that will see you through for a couple of years (or whatever keeps you from getting stressed)?



SWR is pretty constant for a wide range of equity allocations (IIRC, 40%-70%), so you're not taking undue risk by adding a year or two of cash to your portfolio & decreasing equity allocations by a like amount.



As someone said before, you need to look at your personal situation - your risk profile, the head-room in your budget etc to come to a conclusion.


Getting personal - our allocation is ~60/40. We have about 2 years in a short-term bond fund in our taxable account, but that's part of the 40% bond allocation.


Good luck.

 

[SecondCor521]

When I started out, my plan was to have 8 months of expenses on hand in savings on January 1st and July 1st, and draw that down over the subsequent six months by transferring a month of expenses at a time from savings to checking.

After five years, I've relaxed my process quite a bit. I spend from checking. When checking gets low, I refill from savings. If savings is empty, I refill savings from taxable by selling 3-6 months of expenses worth of stock. I sell taxable once or twice a year. If taxable is empty, I'll refill from my Roth pipeline. I refill my Roth pipeline from my traditional IRA. It looks like my Roth pipeline is full enough to get me to 59.5 (11/26/2028).

I rebalance lazily sort of whenever opportunity presents. In my case since I'm 97/3, I don't really need to rebalance very often. I did rebalance into stocks on the way down last spring when the world was ending, but haven't done so since.

I do tax-related stuff generally in December so I can dial things in as needed. Usually this means picking my target federal AGI and doing the necessary Roth conversion to reach that AGI.

 

[FLSUnFIRE]

In 2021 (FIRE date 7/16) I contributed only enough to get the employer match in my TSP(401k) instead of maxing it out to build my cash cushion and give me more resources that I can touch (TSP is limited at age 47). I do not reinvest any distributions from my taxable MF, they go into cash. I'll start my FIRE with enough cash (MMSA earning 0.4%) after vacation time payout to cover all my projected expenses through then end of 2022. At the end of this year, I will decide if I want to realize any capital gains to boost it further (paying 15%) or wait until next year when I hope to manage my income to pay no CG taxes (but will only be able to realize $25-30K without MAGI impacting ACA subsidy too much). Every year thereafter I will liquidate investments in Nov/Dec to provide cash to cover the next year's projected expenses and "harvest" gains if my expenses are lower than the MAGI/0% CG rate.

 

[sengsational]

The OP sounds a bit like me, but I like December for Roth conversion and rebalancing... pretty easy to complete (not submit) my Federal taxes in December, and define a conversion based on actuals instead of estimates.

I'd say spend it now, while you're healthy and motivated to get life experiences. So "no" don't be conservative, especially if that discretionary goes out beyond 70. The observation is pretty much universal... people slow down and spend less as they get older. But most plans presume level spending. That's just not how it's likely to happen. These are your go-go years... get those life experiences you have earned!

ETA: Just read "Die With Zero" book, so I've changed my tune, based on the ideas presented there