Transitioning to Full Retirement - What's the Right Cash Position?

[latexman]

I think "5 years cash" ≠ '25 years of “residual spending” in cash'. Totally different.

My SS + pension more than covers expenses in my early retirement years, but not in the latter retirement years. So '25 years of “residual spending” in cash' in my case is not a lot of cash. Nowhere near "5 years cash".

 

[Exchme]

Totally understand the cash position is personal, but reading this strategy does not seem real clear...

"...assume that we only withdraw from that cash cushion if the investment portfolio goes more than 20% underwater. Once the cash cushion is exhausted we tap the investment portfolio and we never replenish the cash account it again. So, think of the cash cushion strictly as an insurance policy against Sequence Risk for the first few years after retirement."

If this right, he is suggesting hold 2 - 3 years of cash, but if the portfolio is down say 15%, leave the cash alone and pull from the portfolio?? Seems a little wonkey unless I am missing something. I always looked at the cash as being the first line of defense if my protfolio was down by any amount??

For those that didn't click through to the ERN sit, the cash is above and beyond the 25X conventionally used for 30 year retirements as he found no asset allocation, bucket strategy or withdrawal rule that would survive a 50 year period at 25x.

For his proposed cash bucket with a 20% drawdown rule, I think the idea is that you only pull the ripcord in really bad downturns as you would have survived the so-so sequences without using the cash reserve. But you have a really important point. Adding a trigger means adding a free parameter to the model and increasing the risk that the model is overly fitted to limited data.

A buddy calls these "baseball stats". When the announcer tells you a bad hitter is actually good - against left handed pitchers, at home, in July, during night games. We all instinctively roll our eyes at that, because it's clear they've simply tortured the data until it confessed to something.

That's the risk here too since we only have a few independent long historical sequences to work with, as you start adding more "rules", the odds that the findings are actually fundamental goes down. Here, there are two historical sequences that are meaningful - 1929 and 1966. For the 50 year horizon, so the data we have is not even fully independent - the 1929 data includes the inflation and bear markets that hurt the 1966 cohort so badly.

So great caution is needed in drawing conclusions for really long portfolio survivability - there just isn't much data. Adding another "rule" of a cash bucket that is used only on a 20% drop is getting us into "baseball stat" territory. There could have been another sequence that just hasn't happened yet where you really needed the portfolio growth that the cash could have provided had it been invested.

 

[AlabaMalaysia]

ERN seems to demonstrate cash usually just doesn't make any sense from everything I have read and heard him talk about. This high level of a cash position I don't understand maybe missing something but the math seems to make zero sense. Would it not be best to just save enough in stocks/bonds to live off dividends and capital gains from investments during any of the bear times not selling any shares until the market is back above past levels CPI adjusted? If working a few extra years to have cash that is always going to be eroded away over time, why not just have it in things that generate interest and live off that in rough periods? The math on having that much cash seems to not compute.

 

[OldShooter]

... For his proposed cash bucket with a 20% drawdown rule, I think the idea is that you only pull the ripcord in really bad downturns as you would have survived the so-so sequences without using the cash reserve. But you have a really important point. Adding a trigger means adding a free parameter to the model and increasing the risk that the model is overly fitted to limited data.

A buddy calls these "baseball stats". When the announcer tells you a bad hitter is actually good - against left handed pitchers, at home, in July, during night games. We all instinctively roll our eyes at that, because it's clear they've simply tortured the data until it confessed to something.

That's the risk here too since we only have a few independent long historical sequences to work with, as you start adding more "rules", the odds that the findings are actually fundamental goes down. Here, there are two historical sequences that are meaningful - 1929 and 1966. For the 50 year horizon, so the data we have is not even fully independent - the 1929 data includes the inflation and bear markets that hurt the 1966 cohort so badly.

So great caution is needed in drawing conclusions for really long portfolio survivability - there just isn't much data. Adding another "rule" of a cash bucket that is used only on a 20% drop is getting us into "baseball stat" territory. There could have been another sequence that just hasn't happened yet where you really needed the portfolio growth that the cash could have provided had it been invested.

I think this is one of the best posts I have seen on this board. Thank you.

To underline the point about the data being limited, I remember seeing a video of Nobel winner Dr. Eugene Fama bemoaning the fact that he has "only 100 years of data."

I will add this: We are not seeing 100 years of sample results from a stable process. "The market" today is wildly different than the market of the 1920s, the 1950s, or even the 1980s. So while aggregating the data and trying to draw conclusions is irresistible, it is also fraught.

 

[FANOFJESUS]

ERN seems to demonstrate cash usually just doesn't make any sense from everything I have read and heard him talk about. This high level of a cash position I don't understand maybe missing something but the math seems to make zero sense. Would it not be best to just save enough in stocks/bonds to live off dividends and capital gains from investments during any of the bear times not selling any shares until the market is back above past levels CPI adjusted? If working a few extra years to have cash that is always going to be eroded away over time, why not just have it in things that generate interest and live off that in rough periods? The math on having that much cash seems to not compute.

Watch this

 

[ncbill]

ERN seems to demonstrate cash usually just doesn't make any sense from everything I have read and heard him talk about. This high level of a cash position I don't understand maybe missing something but the math seems to make zero sense. Would it not be best to just save enough in stocks/bonds to live off dividends and capital gains from investments during any of the bear times not selling any shares until the market is back above past levels CPI adjusted? If working a few extra years to have cash that is always going to be eroded away over time, why not just have it in things that generate interest and live off that in rough periods? The math on having that much cash seems to not compute.

Dividends get cut in bad times while the stock price is also tanking.

"What can go wrong with a blue-chip dividend payer?

The easy answer is everything.

Consider that General Motors and Eastman Kodak were two of the 10 most valuable companies on the planet a quarter century ago.

Their dividends were safe, many thought.

Want a more recent example?

The General Electric dividend was considered safe until...it was cut by 50% and investors cut the price of the stock by 60%."

https://www.advisorperspectives.com/articles/2018/10/01/income-is-the-wrong-goal-for-your-clients

Capital gains implies retirement savings in taxable...I can see that for someone who sold a business, but would expect most to have their retirement savings in tax-deferred, so coming from there withdrawals would probably be taxed as ordinary income.

 

[ncbill]

I think this is one of the best posts I have seen on this board. Thank you.

To underline the point about the data being limited, I remember seeing a video of Nobel winner Dr. Eugene Fama bemoaning the fact that he has "only 100 years of data."

I will add this: We are not seeing 100 years of sample results from a stable process. "The market" today is wildly different than the market of the 1920s, the 1950s, or even the 1980s. So while aggregating the data and trying to draw conclusions is irresistible, it is also fraught.

Yep, it's a lot better place to be in today than in the Great Depression of the 1930s or the stagflation of the late 1960s through the early 80s.

 

[Palmtree]

Most people are worried about having to sell equities in a really down market. If you have a diversified portfolio, then draw from your bonds. That's what they are there for.

 

[big-papa]

There simply is no "right" answer to your question. Otherwise, you wouldn't see the diversity of recommendations from so-called experts that exists out there. So, it's about what makes you comfortable at the end of the day.

Cheers,
Big-Papa

 

[DawgMan]

Most people are worried about having to sell equities in a really down market. If you have a diversified portfolio, then draw from your bonds. That's what they are there for.

At the end of the day, this is where I settle out as my overall plan. Holding one-ish + years worth of cash at .50% is there for now just to get me comfortable as I take withdrawals year 1. While I subscribe to the total return/rebalance approach, I like to overlay my "buckets" to appease any "what if" fears of a long bear market. To your point, I would draw down my fixed assets (i.e. cash, bonds) in a down market naturally (at least more often than not) as part of my rebalance. I suppose where the rub is for me (and those of us who have retired during this last long bull run) is the 2nd guessing of how to better prepare for that day you need to implement bear market/SORR withdrawal strategies.

As the great philosopher Mike Tyson said "Everyone has a plan until they get punched in the mouth!"

 

[NYC1967]

I just read The 5 Years Before You Retire . It recommends
5 years cash
10 years in a 40/60 fund
the rest in total market fund
What do you think of that idea?

Do you recommend reading "The 5 years before you retire"?

 

[Markola]

Vanguard is pretty smart, and our Vanguard CFP has us in zero cash.

 

[FANOFJESUS]

Do you recommend reading "The 5 years before you retire"?

I thought it was a good book.

 

[TheWizard]

Vanguard is pretty smart, and our Vanguard CFP has us in zero cash.

I'm self managed with Vanguard.
My taxable account target is to have ~5% of that account in my settlement fund ("cash") so that I can take advantage of corrections in the Market...

 

[brett]

We keep very little cash. At most 90K in HISA and part of that is earmarked for income tax installments.

We have some cash floating around in our investment accounts from time to time but it can really vary by month.

Not a believe in keeping a great deal of cash or in term deposit ladders. Cash does not work as hard as equities over the long term.

But..we do have pension income that will cover much or expenses with the exception of tax installments and international travel. If the market tanks, the tax installments will also drop.

Been retired for ten years now. This continues to work well for us.

 

[FANOFJESUS]

Makes my head hurt.

Tell me more about why you don't like it.

 

[corn18]

Tell me more about why you don't like it.

Didn't say I don't like it. Just too complex to figure out.

 

[pb4uski]

I think Bill Bernstein recommends you have 25 years of “residual spending” in cash. Residual spending is the amount you need to spend to maintain your standard of living after social security, pensions, other income.

Cash for something like that would be stupid. If you really want to be conservative then a CD or Treasury ladder would be ultraconservative and yield more than cash.

 

[FANOFJESUS]

Didn't say I don't like it. Just too complex to figure out.

Pull from the all stock bucket if it is up. If it is down pull from the 40/60 if it is down pull from the cash.

 

[Anthonyin2022]

I just retired in December and have 3.5 years of our annual budget in cash. The rest is invested 100% in stock index funds. I move the cash around doing different bank promos, some I-bonds, and such to get a little better return on the cash.

 

[I am He]

Pull from the all stock bucket if it is up. If it is down pull from the 40/60 if it is down pull from the cash.

I'd do a 40/60 allocation so you you could decide which side to draw from. Otherwise it will siphon from perhaps the wrong side.

 

[Mike999]

Right amount of cash to sleep well

It is a personal preference, for me with no pension I sleep well knowing my my annual budget is covered by cash(MM or CD) plus planned IRA withdrawal on January 1.

During the year, I work on building the cash for the next year, so I guess I’m at 1-2 years locked in funding.

I read somewhere that people with pensions reported higher happiness in retirement. I can understand why, and that led me to this approach. If my nest egg was smaller, a lean fire, I’d probably want more year’s funding in liquid investment. In a lean fire I would I have kept the pension.

 

[mickeyd]

What's the Right Cash Position?

Cash is funny stuff. I hate to have not enough (younger days); now I that have so much (crappy yield). I hate that I get <1% on deposits. I have about 5 years worth of expenses. Too much...

 

[FANOFJESUS]

I'd do a 40/60 allocation so you you could decide which side to draw from. Otherwise it will siphon from perhaps the wrong side.

I think pulling is very easy. I think refilling the buckets is harder. But between the cash and 60/40 you would have 15 years of money. The 60/40 will not go down that much in a bear.

 

[Markola]

The title of this post would answer itself if it was called “….What’s the Right Cash Position Given 7.5% Inflation?”