How To Classify Cash as part of Asset Allocation

[tpkinsl]

Hi everyone - I picked a great time to retire - March 31, 2020! Oh well...I'm holding tight!

My question is on asset allocation, which is a target of 65/35 (stocks to bonds). I am also keeping 5% cash (roughly 2 years living expenses) in a combination of MM and laddered CDs. So that really makes my actual allocation 60/35/5.

How do you folks classify cash - do you lump it in with bonds? (if so, I'd be 60/40). My reason for asking is most tools - including Vanguard's - put everything into neat stock or bond categories.

I'm comfortable with 65/35, along with that 2 years of living expenses, but as I go to re-balance each quarter, I'm a bit stumped on how to categorize the cash portion.

I've been called "Captain Overthink" before....thanks for the advice. Tom

 

[Onward]

Expressed as a three-part ratio, your AA is 60/35/5.

Expressed as a two-part ratio, it's 60/40.

I'd put the cash in with the bonds.

 

[audreyh1]

No, I don’t lump cash in with bonds. I treat is as a separate asset class. I do sometimes just look at it as part of my fixed income asset allocation, but I do rebalance between bonds, cash and equities.

 

[SumDay]

Since I follow a Bucket Strategy, I just call my cash Bucket 1. Bucket 2 are my bonds, and Bucket 3 are my equities.

 

[jimbee]

I don't keep enough cash as a percent of my total assets to worry about breaking it out separately.

 

[Closet_Gamer]

I account for cash in an asset class I call "Cash"

 

[RunningBum]

Closer to bonds than stocks, by a lot. My AA plan calls for a certain % in stocks. The rest can be in bonds or cash. I have other factors for how much I want in cash at any given time.

So you have 60% stocks, and your AA calls for 65% stocks, so you are 5% short on stocks right now. If I read your post correctly.

 

[Dtail]

Expressed as a three-part ratio, your AA is 60/35/5.

Expressed as a two-part ratio, it's 60/40.

I'd put the cash in with the bonds.

This is what I do.

 

[OldShooter]

I have so little cash in my wallet, maybe fifty bucks, that I don't keep track of it separately. My checking account balance is usually a couple of grand that can be turned into cash at the ATM but I don't keep track of that separately either. Everything else is in investment accounts, which are not cash.

 

[pb4uski]

Expressed as a three-part ratio, your AA is 60/35/5.

Expressed as a two-part ratio, it's 60/40.

I'd put the cash in with the bonds.

That's the way I think of cash.

 

[Jerry1]

I account for cash in an asset class I call "Cash"

And then whatever is left, I would allocate 60/40. Per OP's question, he's trying to respond to a financial tool. Adding cash to the bond percentage is common and like many things here, there's no right or wrong way - it depends on the use of the number. So, If I have $1M and $50K per year expenses. The OP says his cash is two years. So that's $100K. To be conservative, I'd take that right out of an AA model and split the balance of the $1M ($900K) 60/40. Though I recognize that the more specific number is 54/36/10, using 60/40 on the $900 for modeling purposes would make me feel better (more conservative).

 

[tpkinsl]

Thanks Folks....Jerry describes my question better than I did...I like the bucket strategy and am holding a lot of cash as I am buying (and furnishing) a house and I also want ample living expense in MM or CDs until the world settles down. Different tools lump cash with bonds or leave it in a 3rd category. I appreciate the comments to date, and welcome other views on how people categorize things.

 

[BeachOrCity]

It really doesn't matter whether you lump it in w/ bonds or treat it separate, but I would argue that with bonds / cash it is more straight forward to include in your investment policy how you allocate for duration (term), and risk (Govt, investment, high yield) and allocate accordingly.
CD's, MM certainly fit on that spectrum and no reason why they have to be completely separate.

 

[vince]

50/50 plus cash for (x) years

 

[jazz4cash]

I consider both cash and bonds to be components of fixed income. I count CDs as bonds except short term maturities (e.g. <2 yrs). So I would express your AA as 65/40 or 65/35/5 depending on the purpose. The problem with CD's is that they don't rebalance as easily as bonds or cash.

 

[mrfeh]

How do you folks classify cash - do you lump it in with bonds?

Yes.

Just call that portion of your AA "fixed income" instead of bonds.

 

[easysurfer]

No, I don’t lump cash in with bonds. I treat is as a separate asset class. I do sometimes just look at it as part of my fixed income asset allocation, but I do rebalance between bonds, cash and equities.

This is what I do also. I refer to the bonds and cash portion as fixed income in my asset allocation. Then my fixed income portion, I rebalance between the bonds and cash the same way that I refer to the US and international index funds portions as equities but also rebalance between them.

 

[Perryinva]

So if you lump it as part of fixed income, then do you count actual fixed income (pensions, SS, annuities, even rental income) as part of your AA? Naturally a person with no pensions, too young for SS and living entirely off the portfolio with a 60/35/5 AA is in an entirely different risk/income required situation than that same allocation for someone with hefty pensions, SS, annuities etc.

 

[mrfeh]

So if you lump it as part of fixed income, then do you count actual fixed income (pensions, SS, annuities, even rental income) as part of your AA? Naturally a person with no pensions, too young for SS and living entirely off the portfolio with a 60/35/5 AA is in an entirely different risk/income required situation than that same allocation for someone with hefty pensions, SS, annuities etc.

No, those are current/future income streams.

 

[mountainsoft]

I only include "investments" when determining my asset allocation. In other words, what percentage of stocks and what percentage of bonds. In my case, I'm aiming for a 50/50 allocation right now. All I care about is the average return and volatility of my investments.

I don't factor in cash we keep in savings, cash in our checking accounts, income from side hustles, or future social security or pension income. While they may be part of our assets or net worth, I don't consider these investments for determining my ratio of stocks/bonds, or what returns I might receive.

However, if I'm using a retirement calculator, such as Flexible Retirement Planner, I combine my Savings balance with my Taxable investment account (regardless of the stocks/bonds in that account) to determine my "taxable savings". My traditional IRA is my "tax deferred" savings, and my Roth IRA is my "tax free" savings. Again, in this context I don't factor in the stocks/bonds ratio, other than the estimated returns for those allocations.

 

[GravitySucks]

I consider MM, CDs and Bonds as Fixed Income.
Don't consider checking or savings accounts as part of my investments.

 

[Mdlerth]

A reply from Captain Underthink

I've been called "Captain Overthink" before...

...and now we know why.

If 5% of your savings covers 2 years of expenses, that means you've got 40 years worth of living costs in the can, i.e., a WR of 2.5%. That would be considered on the safe side, no matter which calculator you deploy.

Think about what you want those simulations to do for you. I'm guessing it's to help guide decisions. Of course, you've already made the Big One: you retired in March. Subsequent decisions will be directed toward things like rebalancing, or whether you can afford some special discretionary spending that wasn't in the original forecast.

With your conservative WR, it's unlikely that even an error in rebalancing will pose a threat to your success. And unless your tastes run to Bugattis and cocaine, an occasional "Blow That Dough" impulse similarly won't derail you.

As a counterpoint, the next time you run your favorite calculator consider ignoring your cash stash. Input only the resources you have invested in equities or bonds and be guided by that. Some folks will object, saying you aren't completely optimizing your portfolio. That is both accurate and irrelevant. No retirement calculator "knows" the future at all, much less to within the 5% you're hiding in the mattress. So don't let it bother you. Make it easy on yourself and get on with enjoying your retirement.

Full disclosure: In the months before I retired in December, I ran calculators constantly, several times a week. Not because the numbers changed meaningfully, but for reassurance. Starting in January I found I had lost interest in them; the die had been cast. When the markets cratered in March, I felt pressured to jump on the National Panic bandwagon, so in a moment of weakness I re-ran FIRECalc again. There was no need to; its historical record already includes SORR. Either this bear market will turn out to be worse than anything in the last century-and-a-half, in which case it's outside the scope of what FIRECalc can analyze, or it won't be worse, in which case if I was good in January I'm still good. I haven't bothered to do it since.

Good luck.

 

[Perryinva]

For a lot of people here, once you are retired and have a handle of expenses etc, successful retirement is not the question anymore. For some people it was never the question; that was a given and instead was how much income you could count on, or perhaps how large you can grow your stash. You read it all the time in “Can’t blow that dough” threads, or “nut is up 20% despite taking out a full years expenses plus” kind of threads.

Along with that there is the “won the game, not playing anymore” vs “income no concern, so I can be more risky for more reward” vs “slow & steady”...there is no typical nor best approach as everyone has different goals. I missed much of that distinction for a long time, as I would automatically peg every post to think along what is best for me, vs trying to decide where I really am on my own.

Like the previous poster, I ran all sorts calculators till I was dizzy and now, only retired 11 months, I’ve not run one a single time since. What’s the point? (For me). If I die with $4M (never gonna happen, I’d increase spending) or 500k, (unlikely) as long as I do what I set out to do, and have plenty, I’m fine. They were helpful in getting me here and reassuring, along the way, as just 6 years ago, I barely had $500k. Once I realized that anywhere around 50/50 indexed means I don’t have to worry a bit, I realized I didn’t have the energy to waste in 5% answers.

 

[Montecfo]

I treat cash as part of bond allocation. I keep a minimum of 2 years' expenses as cash