Nitty Gritty of Cash Management for Retirees

[Gotadimple]

I keep about 18 months in a credit union account (just because the yield is better), with another 6 months earmarked as 'emergency' in CDs in a brokerage account.

I am concerned about maintaining purchasing power during a market downturn, and two years expenses seems to give me comfort -- although it isn't nice watching the rest of the portfolio shrivel.

I probably won't do much with any other cash investments until after the new year, when I rebalance. Hopefully, the market will be less volatile by then.

-- Rita

 

[audreyh1]

To repeat - once you are retired you stop worrying about opportunity losses and instead worry about real losses. Portfolio survival (and sleeping at night) is the name of the game. You don't have to have anywhere near an aggressive stock allocation to beat inflation, and that's all you really care about if you've managed to accumulate enough to support a 4% or less withdrawal rate.

Audrey

 

[Eagle43]

Audreyh1, I concur 100%. Always play defense.

I'm down 14% this year, but I have adequate pensions to cover living expenses. I'd hate to be in a position whereby I had to live on investments alone, although I know some on this forum do exactly that.

On the same subject, I see where Vanguard will join the Treasury Guarantee Program offered by the feds. Good. I was going to move the pile to my credit union. Now I can just leave that money there.

Here's a partial quote: October 07, 2008 - Vanguard’s money market funds will apply for the U.S. Treasury Department’s program to support the account values of money market mutual funds. Trustees of the funds decided to participate in the program because they believe it is a helpful step toward stabilizing the credit markets in general, which should benefit investors in all money market funds.

 

[Rich_by_the_Bay]

But I still wonder if a large cash position is the way to do it. Sure, there is the benefit of not drawing down equities in a few-year-long bear. But how does that compare with the opportunity losses of not being in the market with that money, in the loooooong run? If it is a net negative (and I don't know if it is or not), then it is just a feel-good approach. Which is OK, if that is what you need. Or maybe it is 6 of one, half-dozen of the other - then feel-good certainly has its place.0

I hear what you're saying but along with those opportunity costs there are losses and volatility. Those will of course work out in the long run in favor of stocks, but will be volatile along the way. Like now.

And historically, bear markets last 10--20 months every 5 or 6 years, on average, larger business cycles run in the range of every 7 years, and recessions every 10-15 years (guessing on that one), not to mention flukes and black swans.

That's a lot of ups and downs. If I retire at 60, my remaining 30 years will be pockmarked by some 12+ major disturbances (averaging 1 every 2 1/2 years). Now I can just wait and work my way through them. After FIRE, I don't need the grief. Lots of cash smooths the way.

Each to his own, as they say. I'm planning on 12 years in near-cash and safer bonds to start, burning through much of it for expenses, lightly pruning stocks once in a while, and when I approach 2-3 years of cash left, start sweeping 10 year old stock winners into cash so I can start again.

At least that's the theory for now. Might change as reality intervenes.

 

[audreyh1]

I'm down 14% this year, but I have adequate pensions to cover living expenses. I'd hate to be in a position whereby I had to live on investments alone, although I know some on this forum do exactly that.

I wish I were only down 14%! more like over 22%, and I DO live completely off investments. So you better believe the 2.5 year cash cushion I currently have separate from my brokerage account feels really, really good right now.

I actually did recently move about 1 years worth into an FDIC insured account! Up until last month I used my bank checking account to cover only 1 month's worth of expenses with the rest in money markets. Two weeks ago I decided I ought to take advantage of the FDIC insurance available to me in that account, just in case there are any disruptions in the future that cause delays in transfers from my money market funds to my bank checking account.

These are scary times!

Audrey

 

[Meadbh]

I'm planning on 12 years in near-cash and safer bonds to start, burning through much of it for expenses, lightly pruning stocks once in a while, and when I approach 2-3 years of cash left, start sweeping 10 year old stock winners into cash so I can start again.

12 years, Rich?
Has this been a recent conversion or are you already flush with cash?

To accumulate 12 years in expenses, I would have to put all my savings into cash from now till ER.

OTOH, I have decided to put about 75% of future savings into a high interest savings account for the present. I can begin by taking advantage of a tax free savings account in 2009. A nice big cash reserve would make me feel much more secure right now. As it accumulates I plan to establish a GIC (CD) ladder and perhaps a bond ladder. Fortunately bank failure is one think I don't believe I have to worry about.

 

[audreyh1]

Note that Rich said near-cash. That probably means ultra short-term bonds or some such. 12 years translates to 48% of a portfolio assuming 4% withdrawal rate.

Audrey

 

[socca]

On the same subject, I see where Vanguard will join the Treasury Guarantee Program offered by the feds. Good. I was going to move the pile to my credit union. Now I can just leave that money there.

As long as your pile was there on Sept. 19th, you're covered. If your pile was added after Sept. 19th - no coverage. You're probably aware of this - just clarifying for other folks listening in.

https://personal.vanguard.com/us/Va...ws/news_ALL_mmtreasguaruntee_10072008_ALL.jsp

 

[Bestwifeever]

Thanks for posting the Vanguard money market info and link, Eagle and Socca. I'll sleep a little easier tonight.

 

[Rich_by_the_Bay]

12 years, Rich? .

Yup, and Audrey got it right - about 3 years in MMF and short term federal, remainder in intermediate gov't bond, a wee bit of foreign bonds, broad commercial bond, and TIPS.

It's not 12 years in true cash, obviously, but everything beyond cash has at least 6 years to accumulate before being touched.

Actually, it's a fairly classic Buckets situation (Lucia often recommends 14 years in cash). Mine works out to just a little over 50% in stocks, and a little under in bonds and cash.

While no one is happy these days, I like the way it's holding up in the worst of times; hope it does OK in the best...

 

[ERD50]

To repeat - once you are retired you stop worrying about opportunity losses and instead worry about real losses. Portfolio survival (and sleeping at night) is the name of the game. You don't have to have anywhere near an aggressive stock allocation to beat inflation, and that's all you really care about if you've managed to accumulate enough to support a 4% or less withdrawal rate.

Audrey

Sorry, disagree. So does FireCalc.

Like many of us who RE'd, I could be looking at 40-50 years for my portfolio to survive. True, you don't need an *aggressive* AA, but you will need stocks to offset inflation. You *do* need to worry about opportunity costs over that time frame.

And it isn't just about stocks. Relatively safe bonds pay more than short term cash investments. You would be taking too much opportunity cost by always keeping a large cash balance, if it is there to keep from drawing down other investments, 'just in case'.

And I will define 'large cash balance' as 'larger than you reasonably expect to need' at any point in time. For me, 3-6 months seems to do it, you mentioned several years. One should tailor it to their needs. But holding more than that does have an opportunity cost, and I disagree that that isn't an issue for a retiree with many years ahead of them.

-ERD50

 

[audreyh1]

I do have a long 50+ year time horizon for portfolio survival. That's why I have a reasonably large percentage in equities (58%). I have plenty in short term bonds too 32%. I have a 10% cash position in my portfolio too - and have been using it lately to rebalance into this major downturn. This cash allocation has also helped during rising interest rate periods when I was able to rebalance into beaten down bond funds. Having the additional "cash cushion" account lets me take advantage of investment opportunities during wild market swings AND sleep at night.

You could also say that I saved an extra 2 to 3 years on top of the portfolio above what I really needed to retire. That would be an accurate assessment - I retired with both the asset allocated retirement portfolio and at least 2.5 years in cash needs in a separate account. I did a lot of "padding" before I felt secure enough to retire. I like padding! I like sleeping at night while being very early retired!

But I really don't give a hooey about "opportunity costs" in terms of optimizing my long term returns - just about beating inflation. I figure I'm getting enough "opportunity" in being willing to rebalance into a down market once in a while. I also have a large portfolio and can live with a 3% withdrawal rate if I really have to (well, as long as we don't keep going down so much!). Some folks would say that I saved way too much before retiring (actually, I mostly got lucky). So I suppose that's another reason I don't care that much about optimizing future growth, more about long term capital preservation taking into account inflation.

BTW - all we are having is a philosophical argument about what is most important in managing ones portfolio after retirement. Such a philosophy is a very personal thing and one has to live with those choices every day. There are multiple ways to achieve portfolio survival over a long period of time.

Audrey

 

[rickier55]

I've thrown up a pretty potent outdoor antenna earlier this year because I'm starting to lean toward getting rid of pay TV before long. But I need to have a HD DVR with no monthly fee as a precondition to this. There is technically one option for this now, but another and more affordable one is supposedly coming within a few months. A one-time $300 purchase -- if this upcoming product pans out -- could replace close to $1000 a year in satellite TV bills.

We're 60 miles from the TV signals but with good antennas and digital TV, the pictures are great.

If you're getting over the air reception, and simply want to record for later viewing, you can buy DVD recorders that have hard drives for $240 bucks. (walMart Magnavox 2160). Hard drives will hold quite a lot, and you can always move recording to RW DVD's for watching. (these record digital TV, but not in High Def).

Rick