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

[punkinhead]

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

And since we're using crystal balls, it would also answer itself if the title was "...What's the Right Cash Position in a 50% Market Correction?"

 

[Markola]

One has happened and one has not, but the answer is easy: When a 50% market correction happens, you should be 100% cash. It’s knowing the when part that’s annoying.

 

[olyveoil]

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.

A little less cherry picking would be nice.

DOW 30 in 1997

AlliedSignal Incorporated (Now Honeywell)
Exxon Corporation
Merck & Co., Inc.
Aluminum Company of America (now Alcoa)
General Electric Company
Minnesota Mining & Manufacturing Company
American Express Company
General Motors Corporation
Philip Morris Companies Inc.
AT&T Corporation
Goodyear Tire and Rubber Company
The Procter & Gamble Company
The Boeing Company
Hewlett-Packard Company ↑
Sears Roebuck & Company
Caterpillar Inc.
International Business Machines Corporation
Travelers Inc. ↑
Chevron Corporation
International Paper Company
Union Carbide Corporation (now owned by DOW)
The Coca-Cola Company
Johnson & Johnson ↑
United Technologies Corporation
E.I. du Pont de Nemours & Company
J.P. Morgan & Company
Wal-Mart Stores, Inc. ↑
Eastman Kodak Company
McDonald's Corporation
The Walt Disney Company

Now, let's pretend the someone bought 10K worth of each of the DOW 30 25 years ago for $300k.
1. Sears is a bust
2. Eastman Kodak div got killed

28 of them over 25 years did quite well, thank you AND paid dividends for the vast majority.
So, there's that.

 

[timbervest]

I have pension, SS income, and dividends which meet near term cash flow needs. I use investment cash as part of my overall fixed income barbell to adjust duration.

 

[Exchme]

A little less cherry picking would be nice.

DOW 30 in 1997

AlliedSignal Incorporated (Now Honeywell)
Exxon Corporation
Merck & Co., Inc.
Aluminum Company of America (now Alcoa)
General Electric Company
Minnesota Mining & Manufacturing Company
American Express Company
General Motors Corporation
Philip Morris Companies Inc.
AT&T Corporation
Goodyear Tire and Rubber Company
The Procter & Gamble Company
The Boeing Company
Hewlett-Packard Company ↑
Sears Roebuck & Company
Caterpillar Inc.
International Business Machines Corporation
Travelers Inc. ↑
Chevron Corporation
International Paper Company
Union Carbide Corporation (now owned by DOW)
The Coca-Cola Company
Johnson & Johnson ↑
United Technologies Corporation
E.I. du Pont de Nemours & Company
J.P. Morgan & Company
Wal-Mart Stores, Inc. ↑
Eastman Kodak Company
McDonald's Corporation
The Walt Disney Company

Now, let's pretend the someone bought 10K worth of each of the DOW 30 25 years ago for $300k.
1. Sears is a bust
2. Eastman Kodak div got killed

28 of them over 25 years did quite well, thank you AND paid dividends for the vast majority.
So, there's that.

You sure that all of the other 28 did quite well? GM, Goodyear, General Electric, AT&T, International Paper, Dupont, Alcoa didn't seem so hot.

 

[Winemaker]

While I debate with myself over to do more Roth conversions, I try to build up a cash stash that I can live off instead of taking tIRA withdrawals to supplement our spending. We sold a rental last year so we lived off that and converted an equivalent amount to a Roth. Tax bracket stayed the same, budget stayed the same. I'm counting it as a win for last year. I'll never get the whole thing converted, but if I convert anything it will be DW's tIRAs, so she'll never have to take an RMD from her account.

 

[RxMan]

Part of my strategy will be to stop reinventing dividends and using that money as part of the money I will need for expenses. But I think we will also hold cash. Maybe a little more than I would normally hold at the beginning of retirement just to be more comfortable with the plan to decrease the cash holdings over time.

If I had to guess I’d say I would feel comfortable with about 6-12 months of expenses in cash or cash equivalents. That would all depend on how the markets are doing and how much I’ve spent.

If there was one right answer for everyone we wouldn’t have all of these options. To me these discussions are helpful because they get me to think about what I will want to do myself when the time comes.

 

[olyveoil]

You sure that all of the other 28 did quite well? GM, Goodyear, General Electric, AT&T, International Paper, Dupont, Alcoa didn't seem so hot.

As a whole, yes.
Point being. Picking a few out of thirty to whinge about dividends as part of a portfolio is nonsense.
1997 to now
Alcoa up 90% PLUS dividends
GM down 13% PLUS dividends
Goodyear down 69% Plus dividends
ATT down 13% Plus dividends
IP Up 31% Plus dividends
Dupont Up 102% Plus dividends
--Assuming a $10k investment for each of just these that you picked the investor would have gone from $60k to $76k PLUS dividends.
Now add in the 22 that you didn't select and see what the investor gets.