Getting close - switch to saving cash?

[FIREmenow]

Within about 2-2.5 years from quitting.

Any reason not to take the 50% of income that we've been piling into investments and start saving it as cash instead for the remainder of the work time?

This would serve to build up the ~2yrs of cash needed to have on hand to live on and prevent having to dip into investments on day 1.

What say ye?

Thanks,

 

[aggie76]

That is exactly what I did a year ago when I thought I had about 2-2.5 years left. Unfortunately I was " retired" a year earlier than my plan but I am still glad that I had started to build that cash pile AGGRESSIVELY. The cash has been a godsend allowing me to continue the pre-retirement lifestyle ( slightly modified), start the remodel of our eventual retirement home and take the overseas trip we already had planned and sighed up for...all while not having to touch retirement savings.
My advise for all, based on unfortunate experience, is that once you are pretty sure that retirement is on you horizon , I think the that is within 2-3 years, you should aggressively plan and structure your finances as if retirement was only a month away.
Do NOT get caught with your finances down. In many industries ( especially my old one O&G) once you hit your 60's you are a HUGE TARGET for the butchers in HR and mahogany row. THEY know you are winding down and they will look at your higher salaries and , in their minds, diminishing returns on YOU and you will be in the cross hairs for every blood letting.
BE PREPARED

 

[braumeister]

I firmly believe it's a good idea.
I've maintained 2-3 years living expenses in cash or very short term, highly liquid form throughout my ER experience. It earns very little, but is invaluable as "help me sleep soundly" money.

 

[RobbieB]

I agree. I also have a large stash of cash on hand. It doesn't make much interest but it's FDIC insured and it lets me not worry about market fluctuations.

 

[ERD50]

And many of us would NOT agree that a big cash stash is required or advantageous.

On average, you expect your investments to grow. A cash stash is just a drag on that. There seems to be a big fear from many that they will need to tap their investments when they are down. But on average, investments are up.

You have dividends from your investments, right? Are you having those paid out, or re-investing? I'd normally recc to have them paid to you, with that cash flow you have less (maybe nothing) to sell off. And it avoids wash sale complications if you do need to sell.

I keep enough cash for cash flow purposes, so I don't need to rush to cover a bill. Other than that, I maintain a balance of Equities/bonds, np other cash holdings.

-ERD50

 

[Sunset]

And many of us would NOT agree that a big cash stash is required or advantageous.

On average, you expect your investments to grow. A cash stash is just a drag on that. There seems to be a big fear from many that they will need to tap their investments when they are down. But on average, investments are up.

You have dividends from your investments, right? Are you having those paid out, or re-investing? I'd normally recc to have them paid to you, with that cash flow you have less (maybe nothing) to sell off. And it avoids wash sale complications if you do need to sell.

I keep enough cash for cash flow purposes, so I don't need to rush to cover a bill. Other than that, I maintain a balance of Equities/bonds, np other cash holdings.

-ERD50

It's that average thing that is the problem, just need a 3 yr cycle of severe downward movement, in the range of 40% or more to show the value of having "cash" to preserve stocks holdings.

I view bonds in gov't issue stuff are much like cash these days, assuming one puts their cash in online banks to earn 1%

Pre-retirement, I went for 100% stock, since I didn't need to touch it.

Now we have about 4 years worth of cash, and the rest is stocks, very little in bonds. Willing to ride the fluctuation of stocks knowing we have cash if there is a long downdraft in the market.

 

[BrianB]

+1 on building a cash reserve. We also stopped DRIP'ing our taxable dividend account a year before retirement to let some more cash accumulate there. It really helped our peace of mind when the paychecks stopped coming in. Starting early retirement with 2 years of base level expenses in cash just seems prudent to us since we have at least 2.5 years until we can tap into our IRA's.

This white paper I found on line helped us understand how we could arrange our accounts in a logical way: http://www.thornburg.com/pdf/TH1929_CashFlow.pdf

 

[hnzw_rui]

Question, by cash, do you mean taxable savings accounts?

Personally, we already keep sufficient cash in taxable savings for the e-fund so not planning on building up more. We do plan on putting new money in stable value funds and US savings bonds when it's closer to retirement.

 

[FIREmenow]

Question, by cash, do you mean taxable savings accounts?

Personally, we already keep sufficient cash in taxable savings for the e-fund so not planning on building up more. We do plan on putting new money in stable value funds and US savings bonds when it's closer to retirement.

Yes, our normal mode is to fund a taxable brokerage account/investments (after all tax-advantaged vehicles fully funded each year) with our excess monthly paychecks from w*rking. Taxable savings accounts are currently minimal in favor of OMY if things got bad.

Now, 2+ years out (for sure), do we want to forego any (potential) investment proceeds and start stashing the extra paycheck money in cash? In doing this, we would end up with 2 years worth of basic living expenses by FIRE time.

Thanks.

 

[tennisno1]

I had a similar experience as AGGIE 76. I had my FIRE plan and my company had another one...about 6 months faster then i planned. I'm now 7 months into retirement and having my cash reserve was very helpful for piece of mind as well as allowing me not to touch my other investments during all these market ups and downs.

That is exactly what I did a year ago when I thought I had about 2-2.5 years left. Unfortunately I was " retired" a year earlier than my plan but I am still glad that I had started to build that cash pile AGGRESSIVELY. The cash has been a godsend allowing me to continue the pre-retirement lifestyle ( slightly modified), start the remodel of our eventual retirement home and take the overseas trip we already had planned and sighed up for...all while not having to touch retirement savings.
My advise for all, based on unfortunate experience, is that once you are pretty sure that retirement is on you horizon , I think the that is within 2-3 years, you should aggressively plan and structure your finances as if retirement was only a month away.
Do NOT get caught with your finances down. In many industries ( especially my old one O&G) once you hit your 60's you are a HUGE TARGET for the butchers in HR and mahogany row. THEY know you are winding down and they will look at your higher salaries and , in their minds, diminishing returns on YOU and you will be in the cross hairs for every blood letting.
BE PREPARED

 

[hnzw_rui]

Yes, our normal mode is to fund a taxable brokerage account/investments (after all tax-advantaged vehicles fully funded each year) with our excess monthly paychecks from w*rking. Taxable savings accounts are currently minimal in favor of OMY if things got bad.

Now, 2+ years out (for sure), do we want to forego any (potential) investment proceeds and start stashing the extra paycheck money in cash? In doing this, we would end up with 2 years worth of basic living expenses by FIRE time.

We do have 2+ years of living expenses cash in our e-fund so don't feel the need to increase that position. If you don't have 1-2 years yet in cash savings, by all means, save in cash. With just 2 years investment horizon, while that new money may grow, there's also the possibility that it will go down in value. I'm pretty conservative so personally willing to miss out on growth on new monies for 2 years if that means minimizing risk of market loss. I don't think inflation risk will be an issue for such a short period.

 

[DrRoy]

With a year to go I am going to start holding back more cash than usual, but not reduce my 401K contribution for a while longer.

 

[hnzw_rui]

With a year to go I am going to start holding back more cash than usual, but not reduce my 401K contribution for a while longer.

Unless retirement income will be higher than income while working, I don't think there's any need to reduce 401k contributions. That's still quite a bit saved on taxes. You could however, direct new contributions towards the stable value fund.

 

[Steevo]

In the last year before retirement, we built up our savings/checking cash to enough to live on for a couple of years. It was very handy to not have to take any kind of withdrawals from investments for over two years after retiring (lasted about 30 months), as we adjusted to retired life and got to know our actual living costs.

 

[youbet]

And many of us would NOT agree that a big cash stash is required or advantageous.

You have dividends from your investments, right?

I keep enough cash for cash flow purposes, so I don't need to rush to cover a bill. Other than that, I maintain a balance of Equities/bonds, np other cash holdings.

-ERD50

I generally agree with ERD50's outlook.

I fully retired mid-2006 too young for pension or SS. DW was collecting a pension that covered about 40% of our expenses. Our FIRE portfolio was roughly 60/40. When the 2008/2009 recession hit, I found that by changing my divs and int from reinvest to pay-out, we were pretty much good to go. (Prior to that we had lived on my severance pay and selective, opportunistic harvesting from the portfolio.)

For a one-time extraordinary expense, such as when I wanted to buy my son a car, I poked around in the portfolio and found that, despite being down 30% overall, there were a few holdings that were excellent candidates to liquidate, and I did.

Since then, I've continued to hold only cash that's temporarily between investments, although I do have some short term bond funds. Being aware of where in the diversified portfolio I would go if I needed liquid cash has become automatic.

 

[papadad111]

Having cash was helpful to steady my newly retired nerves during the last 12 months post FIRE.

Academically it would have been better to put that cash to work in the markets but I acknowledge there is a mental aspect of finance for me - cash helps steady my nerves and makes me a more pleasant person to be around .. To each his or her own.

I keep my AA @ 15% cash-- no bonds - rest equities.

I keep approx 1 year in regular bank account as cash and rest in cash taxable account -at times pre FIRE I went to 100 percent equities. Cash is there to perhaps buy equities if the market hiccups and goes on a blue light special.

I'm a new retiree. As I get the hang of it, I'll likely move toward 90-95 percent equities philosophy and reduce cash longer term.

I'm 46... 20 years from SS. No pension. Been Worried about sequence of returns early on so cash is king for now. Ask me in 3-5 years how my tolerance for risk has changed post FIRE.

 

[hnzw_rui]

I'm a new retiree. As I get the hang of it, I'll likely move toward 90-95 percent equities philosophy and reduce cash longer term.

Kudos to you. I don't think I'll have the fortitude to go that aggressive unless I've got at least $10 million.

 

[youbet]

Academically it would have been better to put that cash to work in the markets but I acknowledge there is a mental aspect of finance for me - cash helps steady my nerves and makes me a more pleasant person to be around .. To each his or her own.

That is a very rational reason to keep cash which I fully support. If my temperament was the same as yours, I'd do the same!

OTOH, folks who fear selling equities low due to not having enough true cash on hand during a downturn are likely exaggerating the issue. Assuming a well diversified portfolio and a 4% or less WR, it would take one hell of a deep and long recession before a retiree would have to start selling depressed equities to buy the groceries.

But, as you say, everyone has to do what they're comfortable with in this regard.

 

[ERsoonihope]

Good thread! I'm interested in some feedback on our situation.

We did not have a big stash of cash waiting for us as the market slowed last summer. We do, though, have pensions that cover almost 70% of expenses. So my issue is covering that last 30%.

We aim for a 70/30 asset allocation. So, over the last six months, when we need cash, it turns out that I am always selling fixed income assets (because the equity share of the portfolio has lost value). Which, I think, is OK. We are not selling equities at a "low" and we are maintaining the AA. And someday the equities will come roaring back and then we'll be selling them in order to get the AA back in shape.

Am I fooling myself here? Missing something? Because so far I'm sleeping fine. The only downside I see, is if equities stay down long enough that we run out of fixed income assets to sell...but it will take some time to get to that point.

 

[2017ish]

...

We aim for a 70/30 asset allocation. So, over the last six months, when we need cash, it turns out that I am always selling fixed income assets (because the equity share of the portfolio has lost value). Which, I think, is OK. We are not selling equities at a "low" and we are maintaining the AA. And someday the equities will come roaring back and then we'll be selling them in order to get the AA back in shape.

....

This is our drawdown plan--to the extent that withdrawal amount isn't covered by portfolio income. From my reading over the past couple of years, it seems like a sound approach. (Of course, we are still in the "not past the last day at work" stage...)

 

[Hermit]

Good thread! I'm interested in some feedback on our situation.

We did not have a big stash of cash waiting for us as the market slowed last summer. We do, though, have pensions that cover almost 70% of expenses. So my issue is covering that last 30%.

We aim for a 70/30 asset allocation. So, over the last six months, when we need cash, it turns out that I am always selling fixed income assets (because the equity share of the portfolio has lost value). Which, I think, is OK. We are not selling equities at a "low" and we are maintaining the AA. And someday the equities will come roaring back and then we'll be selling them in order to get the AA back in shape.

Am I fooling myself here? Missing something? Because so far I'm sleeping fine. The only downside I see, is if equities stay down long enough that we run out of fixed income assets to sell...but it will take some time to get to that point.

I think you are doing it right. Its sort of what I am doing. I do one transaction a year. When I take cash out of my 401k, they take out a percentage from each fund. When that transaction has cleared, I rebalance. Gets me to the same place you are.

 

[hurricane harry]

Stash the cash near the end.
If you're a gambler you could always throw down on the wall st casino.

 

[papadad111]

Kudos to you. I don't think I'll have the fortitude to go that aggressive unless I've got at least $10 million.

It does depend on a combination of ones net worth and required expenses/withdraw rate. Plus risk tolerance

But an example - an ultimate goal would be to have withdraw rate equal to current year's portfolio (stock ) dividend yield. Around 2.4 percent currently

In this regard, a 95 percent equities portfolio might have some real advantages including dividend income taxes, equity inflation protection, and higher long term growth potential.

Unless dividends take long and protracted cut, one would not need to sell equities and incremental cash of say 5 percent (like an emergency fund) would be ok to smooth out the occasional spending bumps.

As a younger retiree the risks are really centered on sequence of return and potential inflation.

By comparison Older retirees with shorter likely retirement time horizons, and possible guaranteed pensions (even if just part of needs) etc do not have same risk profile.

 

[ERD50]

Good thread! I'm interested in some feedback on our situation.

We did not have a big stash of cash waiting for us as the market slowed last summer. We do, though, have pensions that cover almost 70% of expenses. So my issue is covering that last 30%.

We aim for a 70/30 asset allocation. So, over the last six months, when we need cash, it turns out that I am always selling fixed income assets (because the equity share of the portfolio has lost value). Which, I think, is OK. We are not selling equities at a "low" and we are maintaining the AA. And someday the equities will come roaring back and then we'll be selling them in order to get the AA back in shape.

Am I fooling myself here? Missing something? Because so far I'm sleeping fine. The only downside I see, is if equities stay down long enough that we run out of fixed income assets to sell...but it will take some time to get to that point.

You are in good shape, and not mistaken about anything, IMO.

You pretty much filled in the second part that I would have added to what I posted earlier (in post #5). I'll provide a bit more detail now.

So as I said, an investor has dividends coming in, which soften any need to 'sell in a downturn'. Couple that with the idea that, a conservative cash-holding type will probably be planning on a 3.0-~3.5% WR, rather than a more risky 4%. And something like SPY pays 2% divs, so the amount that needs to be made up is only 1.0 ~1.5%.

And a conservative investor may have an AA of 60/40? So in the process of rebalancing, we are talking about selling off 1.0~1.5% of assets ( so < 2% of fixed income holdings 1.25 * 60/40 ?). Over-simple math says 20 years, but that % would grow as fixed shrinks - still, that is many consecutive years of selling fixed.

Bottom line, I feel that the fears are over stated.

-ERD50

 

[Fedup]

I was 100% last year as we were preparing to transfer to Vanguard. We ended up only transferred my account because Vanguard screwed up so much, I was getting nervous about transferring. Finally, we decided not to transfer my husband's account, I moved his money back into stocks before Feb 11. He still 75-78% in G fund. No plan to take it yet until 2-3 years or maybe RMDs. Frankly I was getting very nervous to be all in cash, but I had taxable account in stocks. I'm never going to be more than 30-40 stocks for his account. I might be a bit more aggressive with my account, but still not crazy. I don't depend on the liquid asset to fund retirement but I would like it to be there in case I need it.


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