Tightening the screws and plan to keep the training wheels on for 2022 so I can get my sea legs. I'm 57 (as is DW) and have been down shifting my business since 55 by design. My business has been in a cycle where it has been extremely lucrative despite my reduction in hours of 5 - 10 hours a week (Cinderella is way overdue to turn into a pumpkin). Despite this, I continue just cherry pick a few clients and expect 2022 to be the first year I take some kind of withdrawal. No pensions, but I have been fortunate to accumulate a nice nest egg which will fund my desired FAT FIRE spend(highly discretionary, 2.5% or less WR) Until further notice, I plan on staying with a 60/40 AA. I also plan on doing significant annual Roth conversions annually until age 72 (24% bracket). Where I scratch my head is how much cash to keep on hand at the beginning of each year? Roth conversions aside, I think I'm fine keeping 1 yrs planned spend in cash, looking at quarterly returns and replenishing IF markets are up from stocks, but IF NOT, ride out cash and address at rebalance at end of year. So, assuming Roth conversions annually, should I hold additional cash for anticipated additional taxes at beginning of year or just make strategic trades at end of year? Candidly, the whole Roth conversion exercise until 72 makes my head spin, but I have bought into the the value of doing them.
Transitioning to Full Retirement - What's the Right Cash Position?
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FI_RElater
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I'll throw one out...
First, I know my experience was different as I retired some time ago and do have a pension... and "fixed income" including CD's had a bit better yield
what we did, knowing the range of spending that we experienced in the prior five to seven years, was consider the top end of spending within that range, then subtract the pension, to give a "high spend" number. Then we looked at "aspirational" wants for the next few years...then said annual should be "high spend" plus "aspirational"... and had set up a five year CD ladder (we had one in place earlier... just increased the numbers... using two and three year CD's, which at that time were the "sweet spot" having enough yield but not extending too long). We dropped to lower equity (~45%) for SWAN and will be increasing once we start first SS (next year); you will probably just stay 60/40 for the duration.
Under today's yields, I wouldn't go beyond three years for CDs (possibly use MYGAs for longer period.... but I'm not fully versed in these products)... possibly use stable value to help replenish; we use intermediate term bond rather than long term in current conditions and use whatever short term CDs (right now it's 15-18 month) rather than short term bonds.
[FWIW, we haven't yet hit 3% wr despite HVAC replacement, deck work, purchase of used RV trailer and new truck, and other things... so as long as you correctly estimate your "aspirational" number you should stay in range].
We also have been doing Roth conversions... but staying below the IRMAA level, as once we start SS we will definitely be in 22% bracket.
There was no way to convert all, or even nearly all, into Roth (you are likely in same situation)... but we plan on taking some out of one of the 401k/IRA (before second SS starts) to help reduce it a bit before, then RMD's won't be as much of a concern to kick us into a higher bracket, otherwise likely to be in 24% and second IRMAA for the duration... and that's a bit costly for two medicares.
First, I know my experience was different as I retired some time ago and do have a pension... and "fixed income" including CD's had a bit better yield
what we did, knowing the range of spending that we experienced in the prior five to seven years, was consider the top end of spending within that range, then subtract the pension, to give a "high spend" number. Then we looked at "aspirational" wants for the next few years...then said annual should be "high spend" plus "aspirational"... and had set up a five year CD ladder (we had one in place earlier... just increased the numbers... using two and three year CD's, which at that time were the "sweet spot" having enough yield but not extending too long). We dropped to lower equity (~45%) for SWAN and will be increasing once we start first SS (next year); you will probably just stay 60/40 for the duration.
Under today's yields, I wouldn't go beyond three years for CDs (possibly use MYGAs for longer period.... but I'm not fully versed in these products)... possibly use stable value to help replenish; we use intermediate term bond rather than long term in current conditions and use whatever short term CDs (right now it's 15-18 month) rather than short term bonds.
[FWIW, we haven't yet hit 3% wr despite HVAC replacement, deck work, purchase of used RV trailer and new truck, and other things... so as long as you correctly estimate your "aspirational" number you should stay in range].
We also have been doing Roth conversions... but staying below the IRMAA level, as once we start SS we will definitely be in 22% bracket.
There was no way to convert all, or even nearly all, into Roth (you are likely in same situation)... but we plan on taking some out of one of the 401k/IRA (before second SS starts) to help reduce it a bit before, then RMD's won't be as much of a concern to kick us into a higher bracket, otherwise likely to be in 24% and second IRMAA for the duration... and that's a bit costly for two medicares.
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Cash is a personal matter. We keep none. I just lied. Starting last year I put an amount in a savings account to cover four quarterly ES payments and they are pushed automatically to checking account two days before EFTPS. I do this not because I care about having cash but to make sure it happens on schedule if a tree falls on me and my spouse has to deal with the consequences.
gcgang
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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.
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ncbill
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I'll probably do the "cash bucket" strategy for mitigating sequence of return risk (SORR)
Note the bucket that is never refilled once depleted:
https://earlyretirementnow.com/2018...hdrawal-rates-part-25-more-flexibility-myths/
Note the bucket that is never refilled once depleted:
https://earlyretirementnow.com/2018...hdrawal-rates-part-25-more-flexibility-myths/
OldShooter
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IMO it is very personal depending both on psychology/emotions and on other liquidity in the portfolio. For me, "cash" is what is in my billfold -- maybe twenty bucks. Everything else is an investment mix with varying return, varying liquidity, and varying risk.
I have seen that said before. Do you have a link? It seems so crazy that I'd like to read it in context. Thx.
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??
+1 25 years in cash seems nuts
gcgang
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https://www.morningstar.com/podcasts/the-long-view/100
Here’s a podcast from March, 2021. You can hit transcript rather than listening. He says 25 is ideal, but 15-20 years is something worthwhile.
I believe he also said this in his books.
It does seem excessive, especially since the market has basically done nothing but go up all of my investing life (1980), when I think the Dow was around 750 or so. He mentions that valuations are high (S&P500 PE of >20 now vs PE of <10 back then). I guess the question for each of us to answer is how would we handle a 10 year bear market with occasional 50% declines?
He also mentions one of the greatest risks is inflation (hyper?) and dismisses one of my “alternatives”, gold, as an effective way of hedging.
Here’s a podcast from March, 2021. You can hit transcript rather than listening. He says 25 is ideal, but 15-20 years is something worthwhile.
I believe he also said this in his books.
It does seem excessive, especially since the market has basically done nothing but go up all of my investing life (1980), when I think the Dow was around 750 or so. He mentions that valuations are high (S&P500 PE of >20 now vs PE of <10 back then). I guess the question for each of us to answer is how would we handle a 10 year bear market with occasional 50% declines?
He also mentions one of the greatest risks is inflation (hyper?) and dismisses one of my “alternatives”, gold, as an effective way of hedging.
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FANOFJESUS
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Took about six years to recover from the bear of 08. I say at least six years of cash or short term bonds.
Gotadimple
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3 years cash. Why? For emergencies where you can't wait for a settlement date. You need one year to live on and two sitting in short-term liquid funds (depending on your tax situation these may be corporate bond or municipal bonds. If you prefer an ETF can yield slightly higher returns as the expense ratios are slightly lower.
The short-term funds lets you fund year-2 in a down market without dipping into your investment portfolio. In this situation you are at risk for sequence of returns risk.
A cash bucket strategy may help with reducing SOR.
The short-term funds lets you fund year-2 in a down market without dipping into your investment portfolio. In this situation you are at risk for sequence of returns risk.
A cash bucket strategy may help with reducing SOR.
OldShooter
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Thanks for the link. Not a lot of context for his opinion there, though. If we had 25x in hand, our AA would be about 20/80. I like the guy and have several of his books, but I don't like him enough to take that advice.
Re the Dow, we used to have a set of highball glasses that DW got when she finished up her Series 7. They celebrated Dow 500!
And I agree, nothing in our investment history tells me that a 10 year unabated bear is very likely. If it comes we'll muddle through if we don't end up dead before its over.
Re the Dow, we used to have a set of highball glasses that DW got when she finished up her Series 7. They celebrated Dow 500!
And I agree, nothing in our investment history tells me that a 10 year unabated bear is very likely. If it comes we'll muddle through if we don't end up dead before its over.
OldShooter
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
The thing is that "recovery" really doesn't mean anything. Usually it is recovery to a market level which was thought to be crazy the first time and, anyway, the assets don't know what we paid for them or what their previous high values were. The reason we pay so much attention to "recovery," IMO, is the loss aversion that evolution has wired into us. It has little to do with cold-hearted investing. Consult Thaler and Kahneman for details.
Recoveries begin very shortly after bottoms and, though they can be jagged, nearing the end of a 6 year recover, the asset prices are going to be approaching their previous highs. So whats the big deal if I sell a broad fund at 80 or 90% of it's previous high? IMO the end of a recovery provides a pretty good soft landing for someone whose "cash" is running low.
Probably ask anyone on this forum who retired in 2008 how much cash is enough. Selling in a down market is probably not the end of the world, but also probably not ideal. It's funny I haven't seen any of those SORR threads lately...I wonder now that the bears are out if those will start showing up again.
For us it will be around 500k of taxable broker that is LTCG and dividends. Short term cash will come from Money market that really only holds enough for 3 to 6 months of our core expenses minus anything 529 and HSA can cover.
For us it will be around 500k of taxable broker that is LTCG and dividends. Short term cash will come from Money market that really only holds enough for 3 to 6 months of our core expenses minus anything 529 and HSA can cover.
In "Deep Risk" Bernstein writes about how much liquidity you should have:
"if you're a retiree, at least 15-20 years of residual living expenses"
RLE = cash flow needed after SS + pension
He recommends this RLE be in "pool of safe assets"..."short treasuries & insured CDs".
"if you're a retiree, at least 15-20 years of residual living expenses"
RLE = cash flow needed after SS + pension
He recommends this RLE be in "pool of safe assets"..."short treasuries & insured CDs".
corn18
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No cash. All money working all the time.
Ok, I lied. I have 3 mo cash right now, but it is part of my 50/50 AA, so it is working a little harder than bonds and a lot less than equities right now.
Ok, I lied. I have 3 mo cash right now, but it is part of my 50/50 AA, so it is working a little harder than bonds and a lot less than equities right now.
ncbill
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It's essentially saving 27.5x expenses instead of 25x, with that extra 10% in the cash bucket.
Yes, you'd still pull from the portfolio, not the cash bucket if your portfolio was down less than 20%.
FANOFJESUS
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True I just don't like spending stocks in the red.
FANOFJESUS
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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?
5 years cash
10 years in a 40/60 fund
the rest in total market fund
What do you think of that idea?
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corn18
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FANOFJESUS
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correction it should read
5 years cash
10 years in a 40/60 fund
the rest in total market fund
OldShooter
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I think you would enjoy Richard Thaler's "Misbehaving." He explains the loss aversion that evolution has wired into us humans and how it affects our decisions. Your sentence could have come right out of the book. Also try Jason Zweig's "Your Money and Your Brain." Both books have made me a better investor.
Not sure who you're asking, but I'd say it is on the conservative side of the middle of the road. But it's out of context. It would probably be impossible for someone with a very small portfolio and would be ridiculous for someone with a very large one.
I'll be retired as of next week. I just accumulated 2 years' worth of living expenses in cash. Each December / January, I plan to replenish back to 2 years of expenses UNLESS the market takes a dive, in which case I might wait longer into the following year.
It pains me to have that much cash sitting there not working, but I also really like having the 2 year cushion.
It pains me to have that much cash sitting there not working, but I also really like having the 2 year cushion.
We’ve been retired just over 5 years. For most of that time, we’ve had about 2 years of cash. This has most certainly dragged down our returns, but the market has done so well that we’ve hardly noticed, and I’ve been more comfortable knowing we had cash to draw on should the market take a sudden dive. In 2020, when the market was first hit due to COVID, we opportunistically invested some of the cash, which turned out to be a good decision.
I don’t have a rigid rebalancing policy that I follow. I look at everything near year end and then decide. In 2021, I decided to do a small Roth conversion, only what we could do while staying in a very low tax bracket. So in 2022, between the cash we withdrew in 2020 and 2021, our normal living expenses, and the taxes on the Roth conversion, we are probably down to about a year of cash now. We do have some bonds though in a taxable account, so our overall allocation is about 70/30, maybe 65/35.
I hope to rarely if ever be forced to sell securities at a loss to fund cash flow, and I also don’t want to have to radically reduce our discretionary spending in a down market. Therefore we have generally carried enough cash for us to avoid those situations.
I don’t have a rigid rebalancing policy that I follow. I look at everything near year end and then decide. In 2021, I decided to do a small Roth conversion, only what we could do while staying in a very low tax bracket. So in 2022, between the cash we withdrew in 2020 and 2021, our normal living expenses, and the taxes on the Roth conversion, we are probably down to about a year of cash now. We do have some bonds though in a taxable account, so our overall allocation is about 70/30, maybe 65/35.
I hope to rarely if ever be forced to sell securities at a loss to fund cash flow, and I also don’t want to have to radically reduce our discretionary spending in a down market. Therefore we have generally carried enough cash for us to avoid those situations.
