How much money needed in cash and how to get it?

[RxMan]

Everyone has their own strategy for cash reserves in retirement. It really depends on several factors including risk tolerance, asset allocation, sources of income, and personal preference.

For tax planning purposes it seems to be common to withdrawal enough for a year’s worth of expenses at one time. Others set up a monthly transfer plan that can mimic a regular paycheck. If you are aggressively invested you might consider holding a larger cash reserve to minimize the need to sell equities during a correction.

My wife and I haven’t really talked about what our plan will be for cash holdings during retirement yet. We’re still far enough away (probably 6-8 years away) from retirement that it isn’t currently a concern. I’d imagine we’ll settle on an emergency fund of a few months worth of living expenses just for peace of mind.

We hope to retire after we have a large enough margin of error that finances won’t be a concern. I’m much more concerned with other financial issues like healthcare costs, tax planning and inflation.

It really comes down to what you think is best for you. If having more cash will help you sleep well at night it’s worth it to boost your reserves. My only suggestion would be to plan ahead for any possible big ticket items you think you might need within the first two years of your retirement so it won’t be a financial shock when you need the money. Either way good luck and I hope you enjoy your retirement!

 

[jollystomper]

First, my goal is to have one year's worth of cash as a sponge - does this seem excessive or insufficient or okay?

If you can tolerate a years worth of cash, that is fine. It varies according to ones needs, as has been mentioned. For us we went with 5 years of cash, to supplement a non-COLA pension and big ticket items before I would choose to take SS. But that is a relatively conservative approach.

I have a couple of thoughts to build cash, but would love some feedback.
Idea 1: turn off dividend reinvestment, this appears to be able to accumulate 7 months worth of cash before I retire.
Idea 2: start social security two months before I retire, this would accumulate 1.5+ months worth of cash before I retire.
Idea 3: Not contribute to the 401k the last two months before I retire, this would add another 1.5+ months worth of cash.

Idea #1 is the best. Along with that, one you have not mentioned - can you reduce your expenses and increase your savings rate in that time. I had a longer run to build our cash (a couple of years) and that was our approach. I understand you might not have enough time.

I do not like the other 2 ideas. #2 seems short sighted, to get cash in the short run and ignoring the potential longer term benefit of higher SS payments. #3 is probably okay - you would have to pay more taxes now but that might be fine - but I look at "oh no, too much in my 401ks means higher RMDs!" as a 1st-world "consideration" and not a "problem" .

I think selling current investments for the cash after you retire is a good approach. Presumably you will be in a lower tax bracket so the taxes would be less that if you sold them now.

 

[Koolau]

If you can tolerate a years worth of cash, that is fine. It varies according to ones needs, as has been mentioned. For us we went with 5 years of cash, to supplement a non-COLA pension and big ticket items before I would choose to take SS. But that is a relatively conservative approach.



Idea #1 is the best. Along with that, one you have not mentioned - can you reduce your expenses and increase your savings rate in that time. I had a longer run to build our cash (a couple of years) and that was our approach. I understand you might not have enough time.

I do not like the other 2 ideas. #2 seems short sighted, to get cash in the short run and ignoring the potential longer term benefit of higher SS payments. #3 is probably okay - you would have to pay more taxes now but that might be fine - but I look at "oh no, too much in my 401ks means higher RMDs!" as a 1st-world "consideration" and not a "problem" .

I think selling current investments for the cash after you retire is a good approach. Presumably you will be in a lower tax bracket so the taxes would be less that if you sold them now.

I'm with jollystomper. Yes, deal with your cash issue, you need "some" for emergencies. BUT if it were me and it is not, I'd be seeing how to lower my TOTAL monthly cash burn. If at 65 you're on the edge (needing 6+% withdrawal rate) that would be where to place your efforts in my humble opinion. I have no idea of your life style. If you do the $4.50 coffee every morning - I'd cut that out. If you have monthly stuff you can cut out (ditch ONE of your phone plans and if you both need a phone for emergencies buy a "burner" phone and minutes. Heck, cancel one of your "plans" and carry the planless phone. It WILL reach 911! Don't forget to keep it charged.)

We're ditching the second car - not because we need to but because we don't need the extra car. It'll save us a $grand - probably $2grand/year though that varies by state - car is "officially" a $1grand car at best ('99 beater.) Don't jeopardize your retirement by swinging for the fences (too much equities - especially with PE rations up a lot.) CUT something. If you need some ideas, give us a sketch of your monthly expenses. We'd love to help (boy would we love to help)

I'm gonna do something I don't think I've ever done and suggest maybe keep w*rking if that's a possibility. I hate saying that, but your WDR is just too high to make me feel comfortable. Cutting costs is (almost always) easier and definitely more efficient than w*rking longer - but you may need to consider doing both until you get your cash burn under control. SO SORRY to be saying this - especially on the Early Retirement forum. Those disagreeing with me, feel free to tell me to fly a kite as YMMV.

 

[iloveyoga]

My way is sort of accidental. I ended up with most of our saving in my IRA. So I keep a good chunk in money market and short term bond funds and pull from there as needed. Paying the taxes is not fun but that's why I saved it. When we were working I got a little carried away with tax deferral.

 

[TheWizard]

If you're in the US, you have penalty-free access to retirement funds at 59 1/2. For that reason, we've only kept 2-3 months of reserves outside of retirement accounts. Our post history here notes that we were uncomfortable with it before retiring. My wife is returning to the part-time work she had before COVID, and we will probably increase that cushion by 1-2 months this fall.

For our one "emergency" since retiring in 2018/19, replacing our heat pump, we made a retirement account withdrawal and had funds within a week.

This is quite true, for funds in an IRA, 401(k), or 403(b).
But a withdrawal of these funds is taxed as Ordinary Income on top of whatever other income you have.

So if I withdrew a lump of $30k to buy a new car with, that would push me into the next higher IRMAA tier as well as topping out the 24% income tax bracket and getting a bit into the 31% bracket.

So a better idea for most of us is to do modest Roth conversions in our 60s and early 70s and then reinvest excess income in your taxable account once RMDs start...

 

[TheWizard]

Another way to approach this is to look at what you did for your last ten working years before retirement.

Most folks probably had a decent Emergency Fund somewhere safe and then lived off income hitting their checking account every two weeks or every month.

So that's what I set up for retirement, except that what passed for an emergency fund years ago is now invested in stock funds, because the primary emergency situation of losing my job is no longer applicable...

 

[24601NoMore]

I am very confused about bonds, first, my situation is I have barely enough
Most of my money is in retirement target year funds and my portfolio AA is 60/40. So if that 40 means that 40% are in bond type investments, are they kind of like cash and I could just sell those to avoid selling investments that are at a low price in a bad market? Or do the bond prices go down too? Or since it is a target-year fund would selling any of it be sold at a 60/40 ratio? Should I sell all my target year fund and buy instead separate equity and bond funds so I can control where I am selling from?

I'm not understanding why people should have the AA of 60/40 at my age (65 yrs), it is sounding to me like maybe a person should have a few years of cash and then use an AA of 70/30?
I really need a good amount of growth because according to the Fidelity guy I talked to this week, I need to be able to take out 6% a year, so I need at least 7 or 8% increase. I'm wondering if I should nudge my portfolio toward a 65/35 AA?

One thing that I haven't seen mentioned is that having a cash cushion allows you to pay the bills without having to sell into a down market. Take March-April 2020, for example. Wouldn't you rather be "selling" cash shares than equity shares? I sure would.

Cash also reduces overall risk. I think people tend to forget at times that there have been a lot of periods over time where equities are down - and stay down for years. My own plan is to not "have" to sell any equities during those times, and to pull from cash instead. Some will say "but, you're giving up gains and losing to inflation!" To which I'd respond - yep, I'm "losing" to inflation..but my losses in a down market for those same funds could easily exceed what I'm "losing" to inflation by 10X or more. And there is certainly no guarantee that equities will "always" go up. There are plenty of times they won't be up.

Your situation seems really tight to me..I haven't ever heard of an Asset Allocation that allows for 6 or 7% withdrawals that survives a 30 year retirement. Is there a way that you can either lower your expenses to get to a MAX 4% SWR? Or perhaps work another year (realize that might be challenging at your age) to add to the kitty?

Regarding bonds - many bond funds got crushed during the equity meltdown last Spring. "Typically", bonds provide ballast during equity meltdowns. But that's in the past and unlikely to perform similarly in the future as we are now in a rising rate environment for the first time in 40-50 years. And rising rates are of course not good for bond funds. That's not to say some allocation to bonds is not a good idea - and I in fact still hold a good chunk of bonds (and even more in cash) simply because I don't want to risk those funds in what I believe are currently hugely overvalued equities markets..

Bottom line - it's not possible to advise you on how much cash to hold without digging into a lot more details. But I do think overall that the "cash is bad, hold lots and lots of stocks!" is not particularly great advice. Instead, many professional financial advisors recommend having at least an "emergency fund" (6-12 months of expenses) and in many cases holding even more cash than that to cover periods of badly performing markets..

 

[kevink]

The tendency among those who have "plain vanilla" all-stock-and-bond portfolios is to both not count cash as part of their overall portfolio and (often) to underestimate just how long and deep equity market downturns can be. As a retiree (early or otherwise) the depth and duration of equity market drawdowns can end up mattering greatly - unless of course your portfolio is so large that you can reign in withdrawals at will or are mostly investing for legacy anyway.

I've found this rule of thumb offered by Bernstein and others to be useful (having lived through two major market crashes in ER): whatever you have in equities be fully prepared for it to lose 50% of its value and to stay down for up to a decade before recovering.

In terms of cash specifically, this article is the best I've found for explaining its value and dispelling some of the most pervasive myths about it:

https://portfoliocharts.com/2017/05/12/understanding-cash-will-make-you-a-better-and-happier-investor/

 

[pb4uski]

But you will have to think about what you’ll sell to meet that monthly redemption.

No, not at all. Set up the automatic withdrawal on whatever ticker you want... perhaps something that is overweight at the time that you set up the withdrawal. Then occasionally look at it and either rebalance or change the monthly automatic withdrawal to a ticker that is overweight. Easy peasy.

 

[UnrealizedPotential]

For myself, I have a little bit too much in one particular stock as a percentage of my portfolio. So I waited until such time that the stock had reached long term gain status so I could sell what I needed to sell and use part of that to keep in cash and the rest can be used to diversify among my other investments.

How much cash to keep is a personal decision. I keep whatever cash I can afford to keep while maintaining my income since cash returns are still very, very low.

 

[marko]

I used to have a cash cushion when I first FIREd. After a few years I decided I didn't have a reason to have one. Yes, if the markets are down and I need a lot of money I'll sell low(ish). But most of the time they are not, and when they are not I am earning more in the market than in my savings account (18.40% last year vs. 0.55%).

+1 This is how we view it.

If you can live off of your portfolio's growth, dividends and interest, having $X set aside not working for you is a bad idea. IMO once you retire, 'savings' that is not in the market is wasted opportunity and lost income.
YMMV.

 

[FLSUnFIRE]

This will differ for each. My plan (8wks to go!!!) will have me with about $40K in liquid cash (MMSA/MMF) and annual expenses ~$36K (minus 6K next year with ACA subsidy). I'll be doing fun things for money so I'll see how long I can stretch it out but I should be good through late 2022 at which point I will sell equities up to ACA/Cap Gains threshold. If I'm lucky, I'll actually build a bit more cash as I harvest gains over the first couple years faster than my burn rate. Once I have "too much" -probably 2X annual expenses, I will reinvest excess after harvesting capital gains to step up my cost basis.


I also have a HELOC set up if I need instant liquidity but I hate debt so not likely to use it for anything except extraordinary crisis or opportunity.



My general plan FWIW.


FLSunFIRE

 

[audreyh1]

No, not at all. Set up the automatic withdrawal on whatever ticker you want... perhaps something that is overweight at the time that you set up the withdrawal. Then occasionally look at it and either rebalance or change the monthly automatic withdrawal to a ticker that is overweight. Easy peasy.

Yes, you have to make that choice.

 

[RunningBum]

I went heavier on cash a couple years ago to help get me to 65 (end of ACA coverage and subsidies) to supplement my taxable dividends and interest without having to sell stock funds and take gains. I may be a little short but can tap my HSA and Roth if needed. At 65 I'll probably be back down to keeping about a year's worth of expenses in cash but I'll start thinking more about that as I get closer. 5.5 years to go.

In hindsight I'd have been better off keeping that cash invested, but not without more risk.

 

[TheWizard]

No, not at all. Set up the automatic withdrawal on whatever ticker you want... perhaps something that is overweight at the time that you set up the withdrawal. Then occasionally look at it and either rebalance or change the monthly automatic withdrawal to a ticker that is overweight. Easy peasy.

Some custodians even allow pro rata withdrawals from the mix of investments in your account...

 

[TheWizard]

+1 This is how we view it.

If you can live off of your portfolio's growth, dividends and interest, having $X set aside not working for you is a bad idea. IMO once you retire, 'savings' that is not in the market is wasted opportunity and lost income.
YMMV.

I totally agree. I do try to keep around $10k in checking to deal with lumpy expenses but everything above that goes into my taxable account at Vanguard and eventually into stock index funds...

 

[24601NoMore]

The tendency among those who have "plain vanilla" all-stock-and-bond portfolios is to both not count cash as part of their overall portfolio and (often) to underestimate just how long and deep equity market downturns can be. As a retiree (early or otherwise) the depth and duration of equity market drawdowns can end up mattering greatly - unless of course your portfolio is so large that you can reign in withdrawals at will or are mostly investing for legacy anyway.

I've found this rule of thumb offered by Bernstein and others to be useful (having lived through two major market crashes in ER): whatever you have in equities be fully prepared for it to lose 50% of its value and to stay down for up to a decade before recovering.

In terms of cash specifically, this article is the best I've found for explaining its value and dispelling some of the most pervasive myths about it:

https://portfoliocharts.com/2017/05...-will-make-you-a-better-and-happier-investor/

Could not agree more wholeheartedly! Equity risk seems frequently underestimated here on ER and elsewhere.

The advice to be prepared for the equity portion of your portfolio to lose up to 50% (possibly higher nowadays given extreme valuations) and stay down for a decade before recovering is very good advice indeed. I've also heard it said "never hold $$ in equities that you plan to need within 10 years".

Allocations to cash allow you to pay the bills without pulling from equities that are down - perhaps largely down. Plus, if held in taxable accounts allows you to dip into your "piggy bank" as needed to manage MAGI for ACA subsidies and similar reasons.

Like KevinK, I'd advise that there is nothing wrong whatsoever with holding cash. How much depends on one's overall plan, risk tolerance, etc. But as I said before - most professional advisors recommend at least 6-12 months in an "emergency fund" if nothing else. And that's usually just a starting point with many of us holding far more than 12 months expenses in cash.

 

[audreyh1]

In hindsight I'd have been better off keeping that cash invested, but not without more risk.

There is the rub.

I don’t worry about excess cash. Certainly not a year or two’s worth. We already have plenty invested in equities and bonds for the long term and the retirement portfolio has grown significantly (knock on wood). So I’m pretty sanguine about getting it to grow even faster.

 

[Koolau]

There is the rub.

I don’t worry about excess cash. Certainly not a year or two’s worth. We already have plenty invested in equities and bonds for the long term and the retirement portfolio has grown significantly (knock on wood). So I’m pretty sanguine about getting it to grow even faster.

Yep. I've always worried more (been concerned more) about LOSING money than NOT making money. Since I have "enough" now, why would I chance NOT having enough just to get more than I need? Definitely a YMMV situation.

 

[24601NoMore]

Yep. I've always worried more (been concerned more) about LOSING money than NOT making money. Since I have "enough" now, why would I chance NOT having enough just to get more than I need? Definitely a YMMV situation.

EXACTLY!! If you have "enough", risking what you have to get "more" may not be a smart move - unless you aspire to a fancier lifestyle or leaving "more" for heirs. And many of us that have achieved "enough" do not fall into either category.

At some point, achieving 'enough' means you dial back your risk.

OP, however, seems to not have this luxury and needs to balance growth and risk. I do get the sense they may not be 'ready' for retirement without significant expense reduction first..or working a few more years to add to the kitty..because independent of amount of cash to hold, I'm not aware of ANY plan that allows for 6-7% SWR over an up to 30 year retirement..

 

[rodi]

As several have suggested a HELOC can be your emergency fund. But apply for it while still working - less hassle. (Though I was approved a few months after I retired... so no job doesn't mean an automatic 'no' on the loan.)

As several have suggested - #2 is a bad idea. If you have too much income this year that overlap period could be clawed back/taxed. My husband had started SS, then had to go back to work for 5 months due to his replacement quitting with no notice. He had to finish up the job he'd done 70% of the work on. Because he had extra income, he hit some income threshold that made SS a less than bueno deal.

I do a variation of some of the cash flow discussions here. Like the OP much of my money is pre-tax accounts - so I kill two birds with one stone... I transfer money from the pre-tax account each quarter - having income taxes withheld. This saves me from having to file quarterly taxes. I have a little extra taken out because we have a little rental income - and it's enough to cover both taxable events for the quarter. Quarterly is finite enough for me.

 

[TheWizard]

Yep. I've always worried more (been concerned more) about LOSING money than NOT making money. Since I have "enough" now, why would I chance NOT having enough just to get more than I need? Definitely a YMMV situation.

What about long term care possibilities as we get older?
And at age 71, I still do my own yardwork and cut and stack several cords of firewood each year.

But when I'm 91, maybe I'll get tired of doing that myself and would like to hire that work done.
So where's the money for that coming from?
Charity

 

[MarieIG]

Thanks for all the replies. Now I have even more to think about though! So sounds like, which I never realized, there are 'stable value' funds in 401k plans so I could cover both getting reduction on my taxes during this last year of work while simultaneously building 'cash'-ish pot of money (assuming a person can sell out of stable value funds at any time??).

If I do that, and also turn off reinvestment of dividends for this year, the combination will meet (and slightly exceed) the one year of 'cash' which the Fidelity advisor suggested.

I am very confused about bonds, first, my situation is I have barely enough money to retire, and it does not look like I will have to worry (unfortunately) about too-large RMDs down the road.

Most of my money is in retirement target year funds and my portfolio AA is 60/40. So if that 40 means that 40% are in bond type investments, are they kind of like cash and I could just sell those to avoid selling investments that are at a low price in a bad market? Or do the bond prices go down too? Or since it is a target-year fund would selling any of it be sold at a 60/40 ratio? Should I sell all my target year fund and buy instead separate equity and bond funds so I can control where I am selling from?

I'm not understanding why people should have the AA of 60/40 at my age (65 yrs), it is sounding to me like maybe a person should have a few years of cash and then use an AA of 70/30?
I really need a good amount of growth because according to the Fidelity guy I talked to this week, I need to be able to take out 6% a year, so I need at least 7 or 8% increase. I'm wondering if I should nudge my portfolio toward a 65/35 AA?

This important bit of information . . . I would suggest that you lay out your financial situation including expenses and sources of income.

The problem here is that 7 or 8 percent - is not guaranteed. Sure, you could get it, but if there is a big market drop, how would you deal with that.

Also, is that "Fidelity guy" intending to charge you for assets under management?

 

[Koolau]

What about long term care possibilities as we get older?
And at age 71, I still do my own yardwork and cut and stack several cords of firewood each year.

But when I'm 91, maybe I'll get tired of doing that myself and would like to hire that work done.
So where's the money for that coming from?
Charity

Well, in my case I did purchase LTC insurance years ago. I pay my HOA to do all the yard work. I don't have heat or AC, so there's that. Don't plan to live to 91, but if I do, there's money in the stash for hiring help.

Now, all this says no "black swan" events. One 1/4 mile asteroid 100 miles off our coast would pretty much void everything else but YMMV.

 

[levindb]

I plan on running out of money at age 105...at that age, children will be in their 70's, grandchildren in their 40's and great grandchildren may be ready for college.

If we don't make it to 105, then there will be funds for the heirs...but I do want to make sure I have funds to pay for fresh diapers as I age...

I have a HELOC for unplanned expenses, or to help spread an expense beyond the current calendar year to help with IRMA. We keep just a few months CASH in our retirement accounts that I can transfer to my checking account within 1 day. I see no need to keep years worth of cash earning less than inflation.

Our BOND LADDER fills up the CASH as they mature, and the STOCKS are used to purchase the next BONDS. Rinse and repeat until there is nothing left. We delayed SSA until age 70 and that will meet most of our required spending and should handle inflation. Since we just purchased our forever home with 30 year mortgage (at age 70), that portion of our expenses will not be impacted by inflation.

This approach works for us, as we tend to live well within our means and then blow a wad on experiences every so often (6 week safari, 4.5 month world cruise, 1 month Alaska cruise/RV adventure). In time, travel expense will be replaced by medical expenses. Retirement is not for everyone, but we intend to enjoy it till the end...