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How Much Cash to hold in Retirement
Old 11-01-2020, 05:58 AM   #1
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How Much Cash to hold in Retirement

Greetings all,

I'm planning on retiring in 3 yrs,7 months, 28 days, 17 hours and 7 min. from now...lol

Well on track on the investment side with the exception of a cash pile for emergencies, bear markets etc. Ideally, I was hoping to have 2-3 yrs of living expenses stashed in cash prior to retirement. However, achieving that goal, plus eliminating all debt in 3 yrs looks daunting. I could always work an extra yr, but I think age 60 is a nice retirement age.

How much cash do people hold for emergencies, living expenses? 2 yrs? 3 yrs?
When calculating do folks use strictly needed expenses or the full budget, ie) travel, gifts , etc?

Thx
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Old 11-01-2020, 06:31 AM   #2
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I suggest defining specifically what you want cash for. Is it for living expenses when you don't want to sell depressed stocks? (The average bear is a couple of years). Is it for investing when stocks are cheap? (Or would you just reallocate?).

I could tell you my cash position, but I'm not sure that's of any real value to your circumstance or portfolio strategy.
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Old 11-01-2020, 06:59 AM   #3
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Right - just to clarify - I should have asked how many years of living expenses do people hold in cash reserve?
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Old 11-01-2020, 07:11 AM   #4
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I would recommend 3-4, but there are other Things you should be considering.

1) will you be making any large purchases just after FIRE? If so, add that on top of the 4 years. Car? Vacation home? Boat? You want to be able to pay cash for those things.

2) The choices are not just cash or equities. For example, you might elect to have 2 years in your checking account, and 5 years worth in a CD ladder...that would be 7 years’ worth. Or you might have 2 years in checking, 1 year in MM mutual fund, and 2 years in a very short term treasury bond fund....I think that would be ok.

IMO you either want 4 years in “guaranteed” assets or maybe 2-3 years in guaranteed and then 2-3 in very low risk items.

Congrats on having a plan!
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Old 11-01-2020, 07:19 AM   #5
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We are holding about 3.5 years of living expenses in cash. That cash is roughly divided between two accounts: (1) a traditional savings account; and (2) the settlement account for our Vanguard after-tax brokerage account.

I'm about your age, with similar aspirations for retirement dates -- i.e., I'm still w*rking and counting the days. We are already FI, have no debt and the kids are successfully launched. We are holding the cash as a safety blanket. We probably could and should make more efficient use of it, or hold less of it. But our sense is we have already won the race, so our risks are on the downside. I also don't want to spend hours obsessing over financial details (e.g., how to get 0.1% more out of idle cash); I'd prefer to be fly fishing. So we are happy to sit on some cash, even if it is too much.

Here is how our AA (equities/fixed income/cash) has changed over the past several years, give or take, with respect to my age. (We have always held a small EF amount, which isn't reflected in the below. Having an EF is important, of course. The below shouldn't be interpreted to suggest that we have never had an EF)

Age AA

<50: 90/10/0
50-54: 80/20/0
55: 65/35/0
56: 65/30/5

We are really comfortable with how 65/30/5 is playing out, with our current plan to stay at that level indefinitely. When the market jumps up, our NW goes up a bit, too. When the market drops, our NW drops a bit less. And the cash hoard enables us to watch Jeopardy in the evenings instead of that guy on CNBC who is always screaming about the markets.
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Old 11-01-2020, 07:46 AM   #6
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As "racy" noted, situations differ. How flexible is your spending, have you "oversaved" in comparison to your fixed spending, do you have another source of income in retirement (such as pension)?

We are 60 and 59 now and have exhausted our taxable accounts. Thus, apart from when we transfer spending money from retirement accounts to checking, our "cash" is in short term, investment grade bond funds, as are all of our nonequity investments.

Since the year before we retired, we have increased that position to almost 40% of our portfolio. So, call it ~20 years of living well or ~10 years of spending like we prefer.

Prior to reaching 59.5, we had true cash in our taxable accounts to ensure that they didn't prematurely run dry.
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Old 11-01-2020, 08:12 AM   #7
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I've gone back and forth on this cash issue. Prior to retirement I had reliable income so I held negligible cash... and the same was true even in the first year of retirement.

Then I changed my AA from 60/40/0 to 60/35/5 with the 5% of cash at the time that I rebalanced sufficient to fund a couple years of expenses net of taxable account dividends and my small pension. The cash was in an online savings account and I set up a monthly automatic withdrawal from there to the local checking account that I use to pay our bills.... my monthly "paycheck". I would do additional transfers when needed, usually once or twice a year as our property taxes and insurances are all due in the 4th quarter. I would then replenish the cash back up to 5% in December as part of my year end tax planning, Roth conversions, etc. Rinse and repeat.

In December 2019, I decided to get rid of the 5% allocated to cash, which was earning 1.7% at the time (and is now 0.6%) and pay off our 3.375% mortgage and a small 1.9% car loan balance so we were then debt free.

My plan was to just do monthly automatic withdrawals for our monthly 'paycheck" directly from my Roth and leave our taxable account equities alone to ultimately get a stepped-up basis. The Roth withdrawals would be more than offset by our annual Roth conversions, so net-net, the withdrawals were effectively just tIRA withdrawals used for living expenses.

After a couple of those withdrawals, Ms. Covid (the bitch) came along and I decided to exit equities and into capital preservation mode, so I no longer have a burning need for cash to ride out an equity storm.

I have enough in online savings to carry us to when a couple 12 month CDs mature in May 2021 plus $25k safety stock and ~50% in CDs maturing between 2021 and 2024 that are yielding between 1.35% and 3.50%.
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Old 11-01-2020, 08:19 AM   #8
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I hold what I used to hold in bonds as cash/guaranteed savings. Bonds just was not doing it for me, seemed they always muddied my equity growth and never made up the loss when the market headed down. Now I'm 80/0/20 with the cash 20%. Now that I've started SS, I really don't need that much cash, but it's there if I chose to, say, buy a boat or something expensive on short notice.
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Old 11-01-2020, 08:19 AM   #9
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As "racy" noted, situations differ. How flexible is your spending, have you "oversaved" in comparison to your fixed spending, do you have another source of income in retirement (such as pension)?
I agree. The cash portion, I would look at as "of your additional funding". IOW, If you have 50% or more of your annual planned "income" from SS, Pensions, etc), then I would remove that from the plan. 3 years of what you require to WD to fund your retirement income.
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Old 11-01-2020, 08:21 AM   #10
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We typically plan for 3 years "all in" expenses, and that can go up or down depending on other factors, including just general feeling, not particularly scientific about it.
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Old 11-01-2020, 08:24 AM   #11
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We have 1 year of cash in savings and are 60/20/20(cash) AA in our after tax investment account, so we are cash heavy at the moment.
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Old 11-01-2020, 08:36 AM   #12
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Originally Posted by WyomingLife View Post
I'd prefer to be fly fishing. So we are happy to sit on some cash, even if it is too much.
It's always interesting to me to see how different people approach financial independence and retirement...and I mean that in a good way.

I too would rather be fly fishing, but right now the wife has multiple furniture requests so I'm in the woodworking shop for a while...

Anyways, we might have over saved a bit in the after tax act.,and real estate, but not by much. At 56 I have met our goals there but will work to 60 and still contribute to the 401K. We are one of those folks that for better or worse got dragged into the cash value life insurance deal, we will have about 1M of that at age 60, but I plan to partially draw that down in retirement. So, I'm thinking more about the emergency fund for a new roof, car replacement, new outboard engine...etc..

While I'd love to have 3 years of necessary living expenses saved that may not be feasible while paying off remaining debt. I'm going to shoot for 2 years of necessary expenses in cash/MM. I might siphon off the dividends the final year before retirement from the after tax account and contribute that to my EF.
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Old 11-01-2020, 08:48 AM   #13
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Each situation is different. If you have other income streams such as pensions, your reliance on your investments will be much smaller. Prior to retirement we set ourselves up to generate a steady stream of income from a laddered bond portfolio and carrying zero debt. The idea was to replace the salary with the semi-annual coupon payments from bonds. I did not want to be in a situation where I had to sell investments to generate cash. My original plan was to retire at 45 but ended up retiring at 55 with a generous pension starting at age 55 that covered all our expenses except for income tax on taxable interest from our bonds and CDs. We started with a cash reserve of $200K in a money market savings account when we retired but found that we never needed to touch it and it continued to grow. Our cash reserves have swelled considerably over the past few months due to bond maturities, selling bonds for capital gains, recurring interest income, and a lack of fixed income options at this time (I always time my fixed income purchases).

I would project what your expenses will be for the next 12 months and minus the cash inflows that you will have from all sources of income and keep at least 12 months of excess expenses in savings.
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Old 11-01-2020, 08:59 AM   #14
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I’m sure there is no “right answer” to this question and for each it is “Enough so that I sleep at night.” We keep some, $30-$50K as a sort of “family bank” to draw on for significant home repairs, mostly and leave the rest fully invested.
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Old 11-01-2020, 09:06 AM   #15
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We typically plan for 3 years "all in" expenses, and that can go up or down depending on other factors, including just general feeling, not particularly scientific about it.
This was my "strategy" for the first few years. Now I've got cash to cover (along with projected dividends) to age 65. Once 65, or if the ACA subsidy ends, I'll go back to keeping "enough", whatever that means to me.
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Old 11-01-2020, 09:28 AM   #16
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I’m sure there is no “right answer” to this question and for each it is “Enough so that I sleep at night.” We keep some, $30-$50K as a sort of “family bank” to draw on for significant home repairs, mostly and leave the rest fully invested.
May I ask what your AA is?

I recall your sage perspectives a year ago or so on the use of the fee-based Vanguard advisor service for providing peace of mind, specifically for one's spouse. I may need to go that route one of these days else DW may never let me stop toiling away at the desk. Anyway, I always value your perspectives.
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Old 11-01-2020, 10:17 AM   #17
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Everyone has a personal preference. We keep almost no cash. This year I made an exception and stashed enough in our savings bank to cover estimated taxes. Did this in case the virus got me -- didn't want spouse to have to sort that out until the next cycle.
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Old 11-01-2020, 10:50 AM   #18
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I do not distinguish between cash and bonds, so my fixed income part is about 12 years of expenses.
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Old 11-01-2020, 11:10 AM   #19
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I do not distinguish between cash and bonds, so my fixed income part is about 12 years of expenses.
Yes. My cash reserve is two twenties and a five in my wallet plus whatever is in my checking account. In addition we hold assets with varying liquidity, yield, and risk parameters. Some of the assets are easy to liquidate, planned to cover near-in needs, 1-2 years maybe. Others may have less liquidity and higher yield. These are positioned to be available maybe 3-4 years out. An MYGA might suit this longer timing, though few would call it "cash."

One thing I think people tend to forget is that assets held for "emergencies" are unlikely to be tapped even though they need to be available. But these might be put into higher yielding form like a CD, with the acceptance that if an emergency materialized, the event might involve selling the CD or paying an early withdrawal penalty. The tradeoff is higher yield versus the early withdrawal risk. One could even argue that unlikely-to-be-needed reserve funds could be held in equities with below-average volatility.
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Old 11-01-2020, 11:56 AM   #20
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I'm 51, FIREd almost 5 years, AA of 96/4, net WR of 0.79%.

When I run low on cash, I sell three months of expenses from my taxable account and stick it in my savings account. I then pull from my savings account into my checking account as needed.

Because that 3 months expenses ignores my non-portfolio income, it has always lasted longer than 3 months. My last draw was 12/3/19.

Why 3 months? Just my personal preference on the balance between how frequently I would have to make a draw, and minimizing the amount of cash sitting in a <1% APY HYSA.

I have had very few emergencies in my life, and I would plan any large purchase well in advance. I can get any money I need from Vanguard in less than a week, and I have plenty of time / liquidity / credit / notice / margin to manage the details of that transfer.

I don't understand or use the bucket approach, so I don't need cash for that purpose. I rebalance to my AA periodically whenever it gets too far out of whack.
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