Reserve Money

[Huston55]

The reserve is money I don't count on when running FireCalc, i-orp, retirement calculations. I should have worded it and question better.

The question might be better asked, when you run retirement calculations do you add all your resources into retirement calculations or keep some reserve and if you keep some reserve, how much?

The alternate (and IMO better) way to handle this "reserve" in FIRECalc is to select the $xxx remaining option, instead of excluding it from the calculation altogether.

IMO, not including all your investable financial assets in your calculations is just playing mind games with yourself. But since we all know playing with yourself is completely normal, don't worry about it - you won't go blind.

+1

You can pretend all you want that the $xxx is not there but, it really is (it's part of your AA), and Mr. Market knows it is & acts accordingly with your portfolio.

Now, having said all that, we DO keep a substantial amount in cash (laddered CDs) but, not as high a % as 7/30ths. We do it as a back-up for several bad years of market returns (search on this forum for "galeno" and related threads for more on this approach). The counter argument is that this approach is a drag on portfolio performance; you have to choose what approach is best for you. In any case though, we DO include the CD ladder in our AA and any runs of FIRECalc, FIDO or, other retirement calculators. That way, it's...oamcie[ap,. Ewe I.,e. Cm304..c,eye and the omoewoulrlamc. Woirmlojj ....

Sorry, sorry, I went temporarily blind there for a moment.

Anyway, I think you get the point.

 

[REWahoo]

There's no point in maximizing your long-term return if the result is that your retirement feels like a white-knuckle ride.

+1

However, she's right:

DW thinks it is excessive based on last 3 years of retirement expenses...

 

[calmloki]

Thanks for this thread: we have way too much earning a massive 1% at Discover. Have requested a payoff amount on our 3% PenFed 5/5 loan that is to reset a year from now. That isn't a big move, but it sure is a safe one to gain 2% over the next year on our payoff amount.

 

[jkern]

I cannot see taking a risk of $600K... what kind of premium are you talking about

IIRC, the chance of something major happening to a house is less than 1%... I do not know the chance of a major earthquake.... but I think that if it happened then almost all houses would have damage so I can see why it is so high.... kinda like flood insurance if you live in a flood zone... when it happens, most houses are affected....

I haven't checked in several years, but I think the premium is about 4 or 5 times your regular insurance plus it comes with a huge deductible (maybe $50k). It's expensive enough that I don't know anyone with earthquake insurance.

 

[CountryGal]

Great thread. Got me thinking. Just opened up a few CDs I had been dragging my feet on. Rates looked good at the credit union. Need to think harder about how any reserve (cash in bank) plays into asset allocation.

 

[Car-Guy]

For me, I don't keep a reserve. I started with X dollars (or net worth) when I retired and projected my spend rate out for 35+ years. I keep track of X, and as long I'm within ~5% of that "original" projection on an annualized basis, I just don't worry about it. If I need (or more likely, want) to buy a new car or have other major expenses, that is just an expense that comes out of X. I decide where to take the money when the expense is incurred. (checking accounts, sell stock, withdraw from an IRA or 401k, etc). I'm amazed that after starting my 5th year of retirement that my projections are as close as they are. I've never (so far) been out of my projected 5% range (positive or negative), but then again, it's only been 5 years.

Works for me....

 

[Markola]

If you keep a couple year's of spending less a couple years of dividends in cash that should be plenty.

That makes a lot of sense. If you put the cash part in a CD ladder, you could earn a little interest, too.

 

[Sunset]

I live in earthquake country and earthquake insurance is far too expensive. I can see needing to rebuild (about $600k) after a major quake if you are self insured.

If I lived in that place, and the earthquake destroyed the home, I'd leave, or live in a tent.
Because if you spend your 600K to build another, it could easily be destroyed at any time.

 

[Sunset]

To Major Tom, I have no major expenses now that would require that amount. Investments (stocks, bonds, cds, cash) north of $3M. House, cars paid for but not included in assets.

I guess I just have a hard time not worrying (my parent's curse, my brother has it too). DW thinks it is excessive based on last 3 years of retirement expenses and I thought I would see what others thought.

You know what your retirement expenses are per year.
My cautious thinking is:
Calculate 1/2 of the dividends you currently get per year, figure out how much cash is needed to add up to 1 year retirement expenses.
Multiply that cash amount by 5, and you have the amount of cash to keep handy (in 2% cds) in case of another giant recession.

Any more than that, and you are losing money value over the years by not being in a very broad based etf (example VTI).

I say calculate 1/2 of dividends as some companies will reduce/cut divs during extreme recessionary times, others won't so an off the cuff feeling is it is safe to count on 1/2 of them.

 

[daylatedollarshort]

If I lived in that place, and the earthquake destroyed the home, I'd leave, or live in a tent.
Because if you spend your 600K to build another, it could easily be destroyed at any time.

I think I'd like a tiny house if that happened to us, or at least as small as the building codes would let us. We sit outside a lot anyway.

 

[petershk]

To Major Tom, I have no major expenses now that would require that amount. Investments (stocks, bonds, cds, cash) north of $3M. House, cars paid for but not included in assets.

I guess I just have a hard time not worrying (my parent's curse, my brother has it too). DW thinks it is excessive based on last 3 years of retirement expenses and I thought I would see what others thought.

That makes sense.
I guess it's just two competing risks... risk of running out of money because of investments going bad vs risk of running out of money because of not keeping up with inflation.

As long as the annual burn rate gives you a comfortable long term success rate with a large cash allocation, the rest is just optimization.

I'm not sure what you consider safe but I have most cash in an ally savings account (1%) and checking account (0.6%). The amount is well under FDIC so even bank failure doesn't matter. With 700K you'd have to break it into a few accounts at different banks/different names.

Now... FDIC could fail... but now were in a risk area that goes beyond my ability to deal with beyond buy guns and start hunting for food .

My own opinion is 700K on 3m is way overkill. I have around 4.5 and keep about 20K in checking account 500K in laddered cds and the rest invested in stock/bond mix. The CD ladder guarantees 100K of cash available every year for 5 years if market dies enough that I don't want to take money out. I can pay a 6 month interest penalty if market dies and there's a big emergency cash and credit cards don't cover.

If I needed 500K right now... I'd sell stocks. If the market dropped 25% tomorrow I'd sell bonds. If the bond and stock market went down 30% tomorrow I'd crack the CD ladder. If it all dies then I guess whatever I need the 500K for may prefer to be paid in apple pies

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[papadad111]

You know what your retirement expenses are per year.
My cautious thinking is:
Calculate 1/2 of the dividends you currently get per year, figure out how much cash is needed to add up to 1 year retirement expenses.
Multiply that cash amount by 5, and you have the amount of cash to keep handy (in 2% cds) in case of another giant recession.

Any more than that, and you are losing money value over the years by not being in a very broad based etf (example VTI).

I say calculate 1/2 of dividends as some companies will reduce/cut divs during extreme recessionary times, others won't so an off the cuff feeling is it is safe to count on 1/2 of them.

Good approach. It's essentially what I do...

 

[Golden sunsets]

Not really.... if you have two names on one account it is only covered to the $250,000... adding names does not change the amount covered... Now, you can structure different accounts with different names to have greater coverage.... like 2 accounts under a single different name for both.... To be sure, you can put in info here and they will tell you if it is covered.... https://www.fdic.gov/edie/calculator.html

Actually that is incorrect. If you have two names on an account and have a balance in that account of $500,000 it is fully insured. Using the link you provided demonstrates that fact.

 

[Huston55]

OP-Looks like there are several of us here who take a similar approach, just with a smaller % of assets and, perhaps, with different risks in mind.

Now, having said all that, we DO keep a substantial amount in cash (laddered CDs) but, not as high a % as 7/30ths. We do it as a back-up for several bad years of market returns (search on this forum for "galeno" and related threads for more on this approach). The counter argument is that this approach is a drag on portfolio performance; you have to choose what approach is best for you. In any case though, we DO include the CD ladder in our AA and any runs of FIRECalc, FIDO or, other retirement calculators.

You know what your retirement expenses are per year.
My cautious thinking is:
Calculate 1/2 of the dividends you currently get per year, figure out how much cash is needed to add up to 1 year retirement expenses.
Multiply that cash amount by 5, and you have the amount of cash to keep handy (in 2% cds) in case of another giant recession.

Any more than that, and you are losing money value over the years by not being in a very broad based etf (example VTI).

I say calculate 1/2 of dividends as some companies will reduce/cut divs during extreme recessionary times, others won't so an off the cuff feeling is it is safe to count on 1/2 of them.

My own opinion is 700K on 3m is way overkill. I have around 4.5 and keep about 20K in checking account 500K in laddered cds and the rest invested in stock/bond mix. The CD ladder guarantees 100K of cash available every year for 5 years if market dies enough that I don't want to take money out. I can pay a 6 month interest penalty if market dies and there's a big emergency cash and credit cards don't cover.

If I needed 500K right now... I'd sell stocks. If the market dropped 25% tomorrow I'd sell bonds. If the bond and stock market went down 30% tomorrow I'd crack the CD ladder. If it all dies then I guess whatever I need the 500K for may prefer to be paid in apple pies

Good approach. It's essentially what I do...

 

[Texas Proud]

Actually that is incorrect. If you have two names on an account and have a balance in that account of $500,000 it is fully insured. Using the link you provided demonstrates that fact.

Well, what do you know.... you learn something every day.... I wonder if and when it changed...

I know that many years ago when I worked at a bank that option was not covered... I worked at a bank that failed and people got a rude shock when they might have lost money.... we informed them what was covered and what was not... now that I am thinking about it... maybe it was where someone had the max and then had their name on another account and it was not fully covered.... I just ran that through the link and it say it is fully covered... oh well, it was a long time ago....

The good news was that the bank was closed prematurely and was sold for more money than they thought, so the FDIC made a profit and paid off everybody....

 

[gayl]

My reserve is pitifully small compared to others. I have 10k at USAA, had 5k at Schwab but just paid for a cruise for 6 (maybe 500 left?).

Normally I'm 100% invested (50% index ETF, 20% CA tax free, 30% individual stocks) but several stop losses crossed so I have a boat load to me waiting to get back in

 

[gcgang]

Thanks for the response, F-One. If you can afford to keep that much in an account that gives a low return, and it's necessary to do this for you to feel comfortable, then that is all the justification you need, I think.

For me, the key decider is whether your portfolio overall will return enough income for you to live. If it does, your approach sounds fine to me. There's no point in maximizing your long-term return if the result is that your retirement feels like a white-knuckle ride. We all have different tolerances for risk and volatility.

+1

I never held cash when I was working/saving. Now the earning has stopped, I also have a large cash reserve earning next to nothing, 0.85-1,75%, but at least I know these funds aren't subject to market risk, and my other assets seem to pretty well cover expenses.

Btw, I think you can get up to $1mm in FDIC coverage, $250k each individual, and $500k on a joint account.

 

[Golden sunsets]

Well, what do you know.... you learn something every day.... I wonder if and when it changed... I know that many years ago when I worked at a bank that option was not covered... I worked at a bank that failed and people got a rude shock when they might have lost money.... we informed them what was covered and what was not... now that I am thinking about it... maybe it was where someone had the max and then had their name on another account and it was not fully covered.... I just ran that through the link and it say it is fully covered... oh well, it was a long time ago.... The good news was that the bank was closed prematurely and was sold for more money than they thought, so the FDIC made a profit and paid off everybody....

The two names on an account effectively doubling the insurance has always been in place, but the coverage has increased dramatically. I'm a former bank regulator. When I became a commissioned examiner in 1976, the coverage was $40,000 per account holder, so an account with two names on it with $100,000 in it would have received $80,000 in coverage in a bank failure.

 

[Car-Guy]

The two names on an account effectively doubling the insurance has always been in place, but the coverage has increased dramatically. I'm a former bank regulator. When I became a commissioned examiner in 1976, the coverage was $40,000 per account holder, so an account with two names on it with $100,000 in it would have received $80,000 in coverage in a bank failure.

Clearly I'm getting old. I can recall seeing an FDIC window sticker (seems I recall it was gold and black) at the drive in banking window that said $10,000 per account. I recall thinking at the time, wow, that's a lot of money. That was sometime in the early to mid 60's.

 

[Texas Proud]

The two names on an account effectively doubling the insurance has always been in place, but the coverage has increased dramatically. I'm a former bank regulator. When I became a commissioned examiner in 1976, the coverage was $40,000 per account holder, so an account with two names on it with $100,000 in it would have received $80,000 in coverage in a bank failure.

OK, so let's say someone had an account of $40K back then.... and also was on a joint account with their sister with another $40K... were both covered fully

As I said, it was a LONG time ago and I am trying to remember what happened for people to howl... I was in the finance dept, so was not on the front lines, but heard that a number of people where upset they were not covered...

 

[Golden sunsets]

OK, so let's say someone had an account of $40K back then.... and also was on a joint account with their sister with another $40K... were both covered fully

As I said, it was a LONG time ago and I am trying to remember what happened for people to howl... I was in the finance dept, so was not on the front lines, but heard that a number of people where upset they were not covered...

I believe I am correct - but to be absolutely certain I'd have to go back to the regs or use the lync that you posted. Some of this has to do with the capacity in which the account is held, so apples to apples, each person is covered for a total of $40,000 for all accounts at any one FDIC insured bank. So in the example you cite, where the amount of FDIC insurance is $40,000, if Person 1 and Person 2 have a joint account for $40,000 the account is fully insured with an allocation of $20,000 to each person. If Person 2 and Person 3 have a joint account with $40,000, the account is also covered, but Person 2 is maxed out, $20,000 for each of the accounts. But Person 1 and Person 3 could have a joint account with $40,000 in it and they would also be fully covered. Or they could individually each have other accounts not totalling more than $20,000. That totals $120,000 covered. If there are beneficiaries, the rules change, but that's a story for another day.

 

[Texas Proud]

I believe I am correct - but to be absolutely certain I'd have to go back to the regs or use the lync that you posted. Some of this has to do with the capacity in which the account is held, so apples to apples, each person is covered for a total of $40,000 for all accounts at any one FDIC insured bank. So in the example you cite, where the amount of FDIC insurance is $40,000, if Person 1 and Person 2 have a joint account for $40,000 the account is fully insured with an allocation of $20,000 to each person. If Person 2 and Person 3 have a joint account with $40,000, the account is also covered, but Person 2 is maxed out, $20,000 for each of the accounts. But Person 1 and Person 3 could have a joint account with $40,000 in it and they would also be fully covered. Or they could individually each have other accounts not totalling more than $20,000. That totals $120,000 covered. If there are beneficiaries, the rules change, but that's a story for another day.

Then I think I might be correct from what you are saying.... person 1 had $40,000.... person 1 and 2 had another account with $40,000.... so person 1 had a total of $60,000 with only $40,000 covered... that is what I think happened..

 

[W2R]

How much do you keep in reserve for unknowns?

I guess you could consider finding your dream house when you weren't even looking, and wanting to buy it in cash, as an emergency of sorts. I had some cash and sold some mutual funds in taxable accounts in order to beef up the amount of cash I had. I guess it took a couple of days to access that cash.

As a retiree, this was my first emergency that my usual WR couldn't handle.

Before I retired, about $10K or so seemed adequate for an emergency fund. For a while, I had a HELOC solely for that purpose as well.