How much cash to set aside if interest/dividend more than cover annual expenses?

[mickeyd]

I am curious how everyone does this as for most ERs, we would be relying on passive income stream to cover our expenses.

I developed this "problem" after retiring. My income streams come from various investments and locations and is a grand problem to have. I stash away any amount over $1K when I reconcile my checkbook monthly. I stash the overage in my PMMF and eventually use it for fun and adventure.

 

[street]

I have 14% of my portfolio in liquid assets not including bonds. I have mentioned before on topics that come up that I have enough to live my life out, just on those funds (30 years). With SS I won't hardly touch those funds unless I spend like there is no tomorrow. As it looks I would never have to sell a share of stock if I didn't want too as long as I live but RMD will take care of that.

Call me crazy but I have a life time of cash to live on, through how ever long a down turn there is. Yes, I have forfeited 14% of funds that gains aren't the best but on the other hand, if I lost everything in stocks, I still be fine to live and cover all my expenses.

 

[FireFool]

I have 14% of my portfolio in liquid assets not including bonds. I have mentioned before on topics that come up that I have enough to live my life out, just on those funds (30 years). With SS I won't hardly touch those funds unless I spend like there is no tomorrow. As it looks I would never have to sell a share of stock if I didn't want too as long as I live but RMD will take care of that.

Call me crazy but I have a life time of cash to live on, through how ever long a down turn there is. Yes, I have forfeited 14% of funds that gains aren't the best but on the other hand, if I lost everything in stocks, I still be fine to live and cover all my expenses.

I'm no economist, but what's your strategy in a hyper-inflationary period? I guess your remaining 86% would be used in that situation. This strategy works well if your portfolio is several multiples of what you need to live on. I too presently have much more than I expect I'll be able to spend in my lifetime. It's because of this I don't feel it's necessary to hold cash as I can stand pulling funds, either from my bonds or equities, even during a down market if necessary.

My fear of holding cash is inflation - somewhere down the road the massive government debt will need to be repaid. This fear also causes me to be over allocated in equities vs. bonds by traditional standards. My feeling is that those excess funds I have should be more so invested like my children should be investing, as ultimately I expect that portion of my portfolio to roll over to them. At their ages they should be nearly fully allocated to equities so I rationalize my over-allocation on a familial basis is correct.

 

[street]

^ I really don't know how to answer your question and I have always done things the unorthodox way. To me having liquid funds that really had no risk, but with little gains seemed to be a comfort zone for me. As far as inflation goes it might be a part of my plan I didn't plan.

With those funds that have little risk, except inflation risk is why my risk level goes up with the 80/20 AA. I feel like this plan fits my over all plan to keep my portfolio to keep growing. I got to where I'm at doing things unorthodox way and so far it seems to be a plan that fits me.

 

[45th Birthday]

Even before I FIRE'd 12 years ago, I never kept much of a stash of cash on hand. I figured in an emergency I could borrow if needed. After FIRE, I did the same, keeping essentially no cash and borrowing on margin on the portfolio while carrying mortgages on both houses. Portfolio income more than covers expenses, and I would put the excess back into equities.

Lately, though, I have been letting cash build up for several reasons. 1) I think equities are pretty fully valued and bonds are headed down. 2) I eliminated margin debt as rates have crept up, making it more expensive. 3) I'm trying to reduce mortgages because the tax advantages are not as favorable and one is a balloon due in seven years. 4) I'm planning for an expensive kitchen renovation next summer.

 

[MarieIG]

Not retired yet. I do like the idea of enough cash to cover three years of expenses, especially pre-social security.

 

[Prague]

What is your current AA? Are you sure that in a down equity market you'd have to sell diminished equities? That is, there would be absolutely nothing else in your portfolio you could tap?

I think the need for holding cash to cover expenses in a so-called "down market" is highly overstated for folks with diversified portfolios....... Now, having said that, if you have an extremely high equity AA paying low dividend levels, that might be another story. Why don't you share some details with us in that regard?
!

We are 100% in equities in the taxable accounts that we will have access to in the next 10-15 years before we have access to SS or $ in tax-advantaged accounts. The bond allocations are in the tax-advantaged accounts.

We are probably more conservative than many but the rationale behind this is also due to the fact that we are somewhat uncertain about the future spending habits as we have not retired yet. We would like to do more travel than our working days and that will certainly take more money than what we have done in the past. While I have gone over our spending from past data quite a few times, it is based on past data only where we only travel a few weeks a year. I suspect that once we have a good baseline of "retirement spending pattern", we may be more confident of keeping less cash.

To be able to sleep better at night definitely plays into it as well. Suddenly have all the earnings statement disappear once retire takes a bit adjustment.

 

[rayvt]

If you have a typical asset allocation like 60/40, then in a bear market you would not be selling stocks at all. You would be rebalancing your portfolio by selling bonds and buying stocks. Buying stocks when they are down, not selling stocks when they are down.

So keeping a large amount in cash doesn't protect you from having to sell stocks that are down-----because you would not be selling stocks anyway.

 

[ERD50]

If you have a typical asset allocation like 60/40, then in a bear market you would not be selling stocks at all. You would be rebalancing your portfolio by selling bonds and buying stocks. Buying stocks when they are down, not selling stocks when they are down.

So keeping a large amount in cash doesn't protect you from having to sell stocks that are down-----because you would not be selling stocks anyway.

100% agree. I've been repeating this for some time now, but many people just can't seem to get past that emotional "but, but, but... stocks!"

Originally Posted by youbet View Post What is your current AA? ...

We are 100% in equities in the taxable accounts that we will have access to in the next 10-15 years before we have access to SS or $ in tax-advantaged accounts. The bond allocations are in the tax-advantaged accounts.
...

Perhaps you don't realize it, but you didn't answer the question (What is your AA?). You told us equities are in taxable, bonds in tax deferred. Maybe I missed it, but I didn't see where you broke out taxable and tax deferred in order to figure an AA from that info.

-ERD50

 

[audreyh1]

It can be intimidating to withdraw AND rebalance after a big nasty bear like 2008. You are pulling your annual income from your fixed income, and then using even more of that fixed income to buy beaten down stocks. It’s particularly tough because you know stocks could keep dropping after you bought more, and you also see your fixed income shrink substantially.

 

[COcheesehead]

If you have a typical asset allocation like 60/40, then in a bear market you would not be selling stocks at all. You would be rebalancing your portfolio by selling bonds and buying stocks. Buying stocks when they are down, not selling stocks when they are down.

So keeping a large amount in cash doesn't protect you from having to sell stocks that are down-----because you would not be selling stocks anyway.

Where does the cash needed for daily living come from in this scenario? Has to come from selling something, right? If bonds are sold to rebalance stocks, then you are selling some of your cash generators too, no?

 

[audreyh1]

Where does the cash needed for daily living come from in this scenario? Has to come from selling something, right? If bonds are sold to rebalance stocks, then you are selling some of your cash generators too, no?

This kind of setup is based on total return, and does not worry about interest or dividend income paid out by assets within the fund.

The year after a market crash you would:
1. Sell from fixed income to pull out funds to cover living expenses.
2. Sell from fixed income to rebalance the portfolio back to 60/40.

So yes, your fixed income would shrink substantially.

 

[REWahoo]

It can be intimidating to withdraw AND rebalance after a big nasty bear like 2008. You are pulling your annual income from your fixed income, and then using even more of ithe fixed income to buy beaten down stocks. It’s particularly tough because you know stocks could keep dropping after you bought more, and you also see your fixed income shrink substantially.

True, painfully true.

One way to avoid a significant chunk of this intimidation and pain is to invest in balanced funds. You still have to contend with the withdrawal issue but rebalancing requires no action on your part as the funds do it for you.

Wellesley and Wellington funds were my 2008/09 security blankets.

 

[copyright1997reloaded]

Our plan is to set aside cash for three year worth of expenses to avoid selling stocks in a downturn market. We figure probability wise, three year would be sufficient in general. Our total annual expenses are about 100K but our current investments in our taxable accounts generate about 110K per year, mostly come in the form of monthly or quarterly dividend/interest. So does that mean we only need to set aside two years worth of cash to meet our goal of three year or we do not need any cash set aside since the income stream comes in on a regular basis? Knowing that in a downturn market, dividend could be cut, but our 100K/yr expense includes discretionary spending which I assume that we could cut back if needed.

I am curious how everyone does this as for most ERs, we would be relying on passive income stream to cover our expenses. Having worked our whole lives and most of our effort is spent on saving and now has more questions on spending as we plan for our retirement.

If the downturn is severe enough, your dividend income stream will also be impacted. For example, from peak to trough in the great depression, dividends on the S&P composite fell from .98 to .44, i.e. a drop of 45%. (Source: Shiller data).

^ I really don't know how to answer your question and I have always done things the unorthodox way. To me having liquid funds that really had no risk, but with little gains seemed to be a comfort zone for me. As far as inflation goes it might be a part of my plan I didn't plan.

With those funds that have little risk, except inflation risk is why my risk level goes up with the 80/20 AA. I feel like this plan fits my over all plan to keep my portfolio to keep growing. I got to where I'm at doing things unorthodox way and so far it seems to be a plan that fits me.

No loss of principal risk does not mean no risk. In this century we've already seen cases of loss of buying power due to hyper inflation.

 

[SoReadyToRetire]

OP, may I ask what kinds of investments you have such that dividends more than cover your annual expenses? I want in! We are foolishly invested all in aggressive growth mutual funds right now, which I know isn't advised when you're this close to retirement, but ... we did it anyway. And now we're regretting it.