How much cash to hold?

[Dd852]

In response to jerryo: If you have what you need, take your chips off the table and go home! Sounds like you're in a good situation ~ unless you want to build up a big estate for legacy or family purposes, rest easy, de risk, and be thankful I'd say.

[Earl E Retyre]

Quote:

Originally Posted by jerryo Hmmm....perhaps my DW and I are risk averse, but (to my surprise) we seem far more conservative than most respondents ... Anyone else in a similar situation?

Including CD's, we are at 49%. Probably the most conservative of all.

[foxfirev5]

Currently we are about 20% in cash, CD's, I bonds etc. Until the interest rates on bonds and bond funds go up I don't feel we're missing out on much.

[Dawg52]

Quote:

Originally Posted by Earl E Retyre Including CD's, we are at 49%. Probably the most conservative of all.

Including CD's, I'm right there with you. I'm too lazy to figure the exact percentage.

[DawgMan]

3 yrs from RE, so this is interesting to me. By way of simple example, I'm am curious to everyones feedback which I think is relative to OP's questions.

Assumptions (General based on common principles on this site)
- 4% rule so roughly 25 times annual expenses
- using an AA between 60/40 to 70/30 to produce the returns needed
- Eg. $25K living expenses (including allowance for capital items), $1.25m portfolio at RE, no pensions/SS/working spouse or any other income.

Questions (based on financial logic/FIRECALC, buy in to 4% rule, removal of emotion, go robotic with me for a moment)
- since your AA is designed to mitigate risk, in theory, wouldn't say creating cash once/twice a yr thru rebalancing to cover your expenses maximize your long term returns, despite overall market performance?
- isn't keeping an additional 1 - 3 yrs cash outside of your AA really just making your overall AA that much more conservative?
- after buying in to the 4% rule/FIRECALC, are we chickening out in RE by stashing more cash?


Ok, now let all the emotion/"sleep well at night"/"prepared just in case the market is down for 3 yrs" feelings all back in. It seems like most want to pad the cash between 1 - 3 yrs (which feels good to me), but a few roll the dice with little cash.
- using my eg. of $25k living expenses (Inc a capital reserve), what order do you fund/spend your living expenses... 1) any pensions/SS, 2) dividends/interest paid out which is not auto reinvested, 3) cash in these 1 - 3 yr savings accts outside of AA, 4) sale of assets in AA?
- if you keep a 1 - 3 yr cash acct outside of your AA, are you spending that down 1st to cover your expenses or do you have some magic formula that tells you when to use it/not use it (I.e. If AA returns over 4%, pull from AA, otherwise spend from cash acct)?
- when/how often do you replenish this cash acct?

As noted, you can't take the emotional component out of the mix, but it "seems" like we to some degree sabotage the original strategy/buy in to what is preached most on this site about AA and FIRECALC.

[LOL!]

I think folks who keep years of cash do not let it be depleted by more than one year's worth of expenses before replenishing it.

In the same way, folks who keep one month's of cash do not let it be depleted by more than one month's worth of expenses before replenishing it.

In both (all) cases, there is an error bar of say 50%. I am happy to have my cash go to say under $1,000 before replenishing it. That's because my bills are well known and credit cards work.

Also note that there is no such thing as an emergency fund for retirees per se. For that reason I do not have 6 months worth of cash for an emergency since I can always raise cash in a timely manner.

(OK, if I am going to do a job where I might need bail money, then I raise cash ahead of time.)

[jollystomper]

My current strategy is keep enough cash on hand that, based on our planned expenditures, will not force us to sell investments for 7 years, to minimize the impact of any bear market on our portfolio.

[W2R]

Dawgman, I only withdraw from my portfolio during the first week in January. At that time, I move the year's spending money from Vanguard money market to the bank. I not only withdraw enough for my anticipated spending, but also withdraw a little more (or less) to make sure my emergency buffer amount in the bank is the same size as it was. Right now, since it is the end of the year, my total in the bank would only cover about 8 months worth of spending. One month of that I will spend on my December living expenses, four months' worth is my emergency buffer amount and the rest is unspent money that goes back to my portfolio at the end of the year.

I don't withdraw steadily throughout the year, because I think this way my total withdrawal amount is clearer to me and I am less likely to mess up. You just cannot be too clear about these things with yourself, IMO. I rebalance right after withdrawing the year's cash, and also as needed during the year (which is fairly seldom if ever). I do not withdraw a full 4% most years.

I don't consider money withdrawn from my portfolio to still be IN the portfolio. Otherwise I'd have to count not only my spending money in the bank, but also the change in my pocket to know what my total portfolio amount was (and count that as being part of the cash component of my portfolio. My portfolio is entirely at Vanguard and the TSP. My spending money is entirely at my local bricks and mortar bank. Again, this is part of my effort towards being totally clear and honest with myself.

As for what to spend first, here are my comments. When I determine how much to withdraw for the year's spending money, I reduce that amount by the amount I am going to receive from my SS and pension that year. That (reduced) withdrawal goes in the same bank account where my SS and pension are deposited and from which I get my spending money.

[gerntz]

Quote:

Originally Posted by SecondCor521 13.46 months of cash (checking + savings - cc balances). Target is 9.29 months,.

I'm surprised that anyone knows their assets total to four significant figures unless the total is less than $100.

[CRLLS]

Quote:

Originally Posted by Dd852 In response to jerryo: If you have what you need, take your chips off the table and go home! Sounds like you're in a good situation ~ unless you want to build up a big estate for legacy or family purposes, rest easy, de risk, and be thankful I'd say.

I must fall in a different outlying group. My thinking is, if you have more than what you "need", then why not keep the remainder of the chips on the table? Time in the market will overweigh the ebb and flow of bear and bull markets. What have we got to lose? Helping my DS's and their families was never a plan while accumulating. DW and I always adhered to the "We are spending our children's inheritance" bumper sticker philosophy. But now that we are here, and may have a bit more that we "need", we feel it would be nice to leave them something. History has shown that time in the market is the best way to grow it. And hopefully we have 20-30 yrs for it to grow before they will get it. Even if we lose it all, we will still have enough to cover our retirement.

As far as cash is concerned, I have had as much as 20% in cash. It was my safety net held in bank accounts in case of being RIF'd. And that happened. The cash was part of my plan to manage my 10 yr slide into SS and control ACA subsidies while keeping our standard of living. That cash has slowly been depleted down while our investments increased. I still have a year or two to go before withdrawls of out investments and currently have about 5% in the bank. After I start relying on my investments, I'm not sure what my strategy will be for "cash management".

And what do we consider "cash"? My thought is that moving cash from my "cash bucket" to my "Roth IRA bucket" is still cash. In my situation, I can tap into it in a quick timeframe. Yeah, it is at market risk, but I can withdraw at a moment's notice at no cost or tax to me. How about an old whole life insurance policy? It has a cash value of about 1 yr's expenses. That can be cashed in or a loan taken out against it at anytime I want. Does that count as "cash" too?

I guess everyone has their own definitions of cash, financial situations and plans. Kind of hard to say one size fits all when it comes to how much "cash" to hold. Reading the above replies certainly support that.

[audreyh1]

Quote:

Originally Posted by CRLLS I must fall in a different outlying group. My thinking is, if you have more than what you "need", then why not keep the remainder of the chips on the table? Time in the market will overweigh the ebb and flow of bear and bull markets. What have we got to lose? Helping my DS's and their families was never a plan while accumulating. DW and I always adhered to the "We are spending our children's inheritance" bumper sticker philosophy. But now that we are here, and may have a bit more that we "need", we feel it would be nice to leave them something. History has shown that time in the market is the best way to grow it. And hopefully we have 20-30 yrs for it to grow before they will get it. Even if we lose it all, we will still have enough to cover our retirement.

This is a matter of personal choice. Some folks choose to leave funds invested even if their portfolio has grown to be larger than they need to support their annual spending. The result of this is the portfolio will probably be larger when they pass, and if they have heirs that may be an important goal. Other folks choose not to do this for various reasons including perhaps not having next generation heirs, or preferring to gift excess funds while they are alive.

It's just like thinking about a high net worth, say >$10M. For some folks, they would just put it all in municipal bonds and live off the tax free interest and never think about markets again. Other folks would feel like with so much they can afford to take greater risks with the money and invest more aggressively than they might otherwise. It comes down to personalities and preferences.

[Lsbcal]

Quote:

Originally Posted by audreyh1 ... Other folks would feel like with so much they can afford to take greater risks with the money and invest more aggressively than they might otherwise. It comes down to personalities and preferences.

And let's not forget old fashion greed.

[audreyh1]

Quote:

Originally Posted by DawgMan Questions (based on financial logic/FIRECALC, buy in to 4% rule, removal of emotion, go robotic with me for a moment) - since your AA is designed to mitigate risk, in theory, wouldn't say creating cash once/twice a yr thru rebalancing to cover your expenses maximize your long term returns, despite overall market performance? - when/how often do you replenish this cash acct?

We pull a year's worth of cash out using the % of remaining portfolio method (one of the FIRECALC models) and rebalance annually. That cash goes into high yield savings accounts and from that an amount is sent to checking each month to spend. So each year any cash accounts are replenished by the annual withdrawal.

Quote:

Originally Posted by DawgMan - isn't keeping an additional 1 - 3 yrs cash outside of your AA really just making your overall AA that much more conservative? - after buying in to the 4% rule/FIRECALC, are we chickening out in RE by stashing more cash?

One's overall AA may be more conservative, but I would say the overall AA doesn't matter at all as you aren't rebalancing that part. What matters is the AA of the amount you use to calculate your annual withdrawal. As long as that portfolio is maintained and rebalanced and withdrawn from according to whichever FIRECALC model you are using (there are several) that's all that matters. What happens with funds outside that doesn't matter.

Chickening out because you have additional funds outside your retirement portfolio? That's really an emotional judgement question and I don't see the point. Someone can choose to limit the funds exposed to the markets if they prefer, and as long as the retirement portfolio is large enough to meet their annual withdrawal goals with the appropriate AA and withdrawal rate, they are good to go.

If as a retiree you suddenly came into an extra million $, what would you do with it?

• Would you add it to your retirement portfolio so you can increase your annual withdrawal and support a larger income over the next 30 years?
• Would you add to your retirement portfolio but decrease your withdrawal percent to match current needs so that your portfolio will end up larger when you expire, thus passing more along to heirs after your death?
• Would you decide to set aside all or a part of it and invest it differently?
• Would you decide that your retirement portfolio was already "big enough" for your regular spending needs and set aside a good chunk of the new funds to spend on other things in the immediate future (including gifting)?

These are all personal choices and people have different personalities and different goals. Maximizing long term returns isn't necessarily a primary goal in retirement like it is during the accumulation phase. For some folks they may prefer to still maximize long term returns. Others may be more concerned with having plenty available to spend in the short term while they are young and healthy, and maximizing long-term returns isn't a priority (especially if they hope to spend down), and as long as they have enough set aside for long-term needs they are in a good place.

Quote:

Originally Posted by DawgMan As noted, you can't take the emotional component out of the mix, but it "seems" like we to some degree sabotage the original strategy/buy in to what is preached most on this site about AA and FIRECALC.

Again, I don't see what the point is of using terms like "sabotage". What is sabotaged? As long as someone has sufficient funds invested in an appropriate AA and using an appropriate withdrawal rate to meet their spending needs they will be fine. They get to decide how much risk to take, how high of a failure rate to tolerate, how much volatility they can live with.

That would be like saying someone is sabotaging something if they choose use a lower withdrawal rate than is generally considered "safe" for a given time period. Or they are sabotaging themselves if they decide they would prefer a 40/60 equities to fixed income AA rather than the default FIRECALC 75/25 equities to fixed income AA that only very slightly improves long-term survival yet is much more volatile every year.

In general, retirees and retiree wannabes here are looking at the models and their available funds, deciding what they can live with and how they want to implement the options, and going with that. There is really not one "true way" or one size fits all when living off your assets in retirement.

[Dd852]

Quote:

Originally Posted by DawgMan 3 yrs from RE, so this is interesting to me. By way of simple example, I'm am curious to everyones feedback which I think is relative to OP's questions. Assumptions (General based on common principles on this site) - 4% rule so roughly 25 times annual expenses - using an AA between 60/40 to 70/30 to produce the returns needed - Eg. $25K living expenses (including allowance for capital items), $1.25m portfolio at RE, no pensions/SS/working spouse or any other income. Questions (based on financial logic/FIRECALC, buy in to 4% rule, removal of emotion, go robotic with me for a moment) - since your AA is designed to mitigate risk, in theory, wouldn't say creating cash once/twice a yr thru rebalancing to cover your expenses maximize your long term returns, despite overall market performance? - isn't keeping an additional 1 - 3 yrs cash outside of your AA really just making your overall AA that much more conservative? - after buying in to the 4% rule/FIRECALC, are we chickening out in RE by stashing more cash? Ok, now let all the emotion/"sleep well at night"/"prepared just in case the market is down for 3 yrs" feelings all back in. It seems like most want to pad the cash between 1 - 3 yrs (which feels good to me), but a few roll the dice with little cash. - using my eg. of $25k living expenses (Inc a capital reserve), what order do you fund/spend your living expenses... 1) any pensions/SS, 2) dividends/interest paid out which is not auto reinvested, 3) cash in these 1 - 3 yr savings accts outside of AA, 4) sale of assets in AA? - if you keep a 1 - 3 yr cash acct outside of your AA, are you spending that down 1st to cover your expenses or do you have some magic formula that tells you when to use it/not use it (I.e. If AA returns over 4%, pull from AA, otherwise spend from cash acct)? - when/how often do you replenish this cash acct? As noted, you can't take the emotional component out of the mix, but it "seems" like we to some degree sabotage the original strategy/buy in to what is preached most on this site about AA and FIRECALC.

I used the 4% rule to help decide if i was ready, and I was both by rule and by emotion. Now that I'm in it, I spend what I want/need, track it, and check against the various schemes (4% swr, g-k, rmd, autopilot, variable) to see where I stand. Currently I'm spending well below what I "could". That's comforting to me because I also have no great unmet spending desires. If/when my spending approaches or passes the levels indicated by the schemes, I'd take that as a warning and reassess.

You are right that my cash cushion interferes with the traditional AA but I'm fortunate enough that it isn't a hugely significant delta.
(I.e. 4% of my cash cushion wouldn't hugely increase my annual potential spending)

When the market is up yr/yr I spend from cash and from rebalancing, which tends to mean from stocks. When it is down (like last year) I leave stocks be and take from cash and fi.

So not coldly robotic, and not totally logical I admit, but it is a system that has do far kept me comfortable

[Rustic23]

Quote:

Originally Posted by LOL! Also note that there is no such thing as an emergency fund for retirees per se.

If you define "emergency fund" as cash to replace lost income, I would agree with you. However, I believe everyone needs an emergency fund for exactly what the title implies. There are both natural and man-made emergencies that require cash, and quite possibly more cash than you have coming in as income. This may require the sale of assets at a time when the market is unfavorable.

[Car-Guy]

Quote:

Originally Posted by Dd852 If you have what you need, take your chips off the table and go home!

I know there are others here that agree with that but they don't speak up very often since that's not a popular position with many on this forum. Well I'm one of them, sort of. I've set a bottom limit (more than a couple of million) that is in cash (e.g. CD's, MM, etc). The rest is for everything else.

[pb4uski]

Quote:

Originally Posted by Car-Guy I know there are others here that agree with that but they don't speak up very often since that's not a popular position with many on this forum. Well I'm one of them, sort of. I've set a bottom limit (more than a couple of million) that is in cash (e.g. CD's,MM, etc). The rest is for everything else.

You have a couple million in cash?

[Car-Guy]

Quote:

Originally Posted by pb4uski You have a couple million in cash?

Yes 2m+ (CD's, MM's, etc) but also invest/trade in the market with additional funds.

My biggest issue/concern is, if (sorry, I mean when) we have a major market correction, will I have the discipline to keep that cash on the sidelines in CD's as I have planned. I think so since I have plenty in reserve to buy in at that point but it will likely be tempting to use more.

[NW-Bound]

Quote:

Originally Posted by audreyh1 ...It's just like thinking about a high net worth, say >$10M. For some folks, they would just put it all in municipal bonds and live off the tax free interest and never think about markets again. Other folks would feel like with so much they can afford to take greater risks with the money and invest more aggressively than they might otherwise. It comes down to personalities and preferences.

Quote:

Originally Posted by Lsbcal And let's not forget old fashion greed.

I have nowhere near $10M, but if I did, I would not do anything different. I just, well, like money. It may not help, but it cannot hurt unless one mishandles it, so why not have more?

[LOL!]

Quote:

Originally Posted by Rustic23 If you define "emergency fund" as cash to replace lost income, I would agree with you. However, I believe everyone needs an emergency fund for exactly what the title implies. There are both natural and man-made emergencies that require cash, and quite possibly more cash than you have coming in as income. This may require the sale of assets at a time when the market is unfavorable.

I don't care about selling if the market is unfavorable because I can sell equities or bonds. It is true that both could be down lots at the same time, but that is very unlikely.

Also, I've never seen an emergency where folks needed all that cash in a few hours on a Saturday afternoon. All "emergencies" could wait a few days. Perhaps it deserves yet another thread on the subject, but the closest answers to true emergencies were
a. Bail somebody out of jail. I'd probably let them sit in jail.
b. Cash to be the first to have trees cut away from house after a hurricane.
c. Bribe border guards to get out of a country during hostilities.

I've not seen anybody pay tens of thousands of dollars cash to get their vehicle out of an impound lot.