build up cash reserves before retirement day?

[albireo13]

Hi,
I am not investment savvy at all so, am looking for inputs. I am close to paying off short term debts (CC, car loan). I am looking at retiring in 3 years or less. We have a big mortgage (347K) at 3.625%.

liquid cash reserves arevery small (<$3K).

During the next few years before I retire I want to concentrate on building up some liquid reserves as a buffer.

Should I invest in taxable investment accounts? Any suggestions?

Should I instead just max out 401K? Currently it hasn't been maxed since we've been focussing on paying off debt. I am 61yo so I can dip into my 401K without penalty. Some folks tell me that this is the same as liquid reserves.

Thoughts?

 

[ace8]

Welcome to ER.org. I think the questions should be considered a bit differently.

Should I invest in taxable investment accounts?

Should I instead just max out 401K?

This is a tax question. The goal with IRA and 401K is to minimize your tax.

Some folks tell me that this [401K+61YO] is the same as liquid reserves.

You need to develop a cash flow model. When you retire, what are you expenses and where is that money going to come from. Typical answers include pensions, brokerage accounts, retirement accounts.

There are a lot of threads here on Asset Allocation (AA). You will want money needed in the short term to be in fixed income investments (the second number) and available/liquid.

 

[pj.mask]

Someone said to me the other day essentially the same thing: your retirement savings are your emergency fund. You just need to review allocation (safe/riskier) to make sure the cash is there when you need it.

Cc debt makes me want to ask if you have run models/research on cash flow as asked above.

 

[bingybear]

In other threads you also noted your 401k amounts. I assume those were traditional.
As others have said, you should do a cash flow model... really just a simple budget. However, at the same time to a tax model. This should be real easy if I have understood you to primarily have just traditional 401k as financial assets. That would look like normal income so you could just use the tax tables or marginal calculations.

It is hard to say what the best thing to do is when you are right next to the finish line and so little info in this post.

To even tell you to fund a traditional account or a roth account I would need to understand at least your present marginal tax rate verse expected rate in retirement.

If you are comfortable with a spreadsheet, just do a budget for the next 10 years or so. Include expenses and taxes and assume your traditional accounts grow at 5% or 6%. This does make some assumption as to allocation... but should be a good start to see what is going on.
Usually it is good to have a mix of types of accounts: traditional, roth, after tax. When I RE at 53 I was happy to have a chunk in after tax $, but was light on roth. So I have been converting traditional to roth while I'm in a low tax bracket.
Everyone's situation is a little different and some are a lot different. You need at least a simple model so you can understand what is happening. Don't make your retirement plan based on SGOTI said to do it this way based on 10% of the needed info.

 

[pb4uski]

It depends on the tax bracket that you are in now and will be in when you retire. If you are currently in a higher tax bracket than when you will retire, I would continue tax-deferred savings since as you say, if you are 61 yo you can get penalty free access to those funds and only need to pay the tax.

 

[Koolau]

For me, the trick has always been to have SOME sort of cash (equivalent) reserve. It could be literally cash in a savings account or checking account, a HELOC line of credit, "empty" credit card (no balance with lots of room to expand if need be) even a CD you can cash at a penalty. BUT you really do need to have ready access to cash - no matter what it's in for the "what ifs" of life.

Personally, I like cash in an account I can get my hands on whenever the "bank" is open. Not everyone is willing to forgo the growth, but if I can't lay my hands on $10K cash in an hour, I feel a bit nervous. YMMV

 

[btdt22]

For members of Fired and Boglehead forums I don't recommend a large emergency cash reserve, because we are pretty much the exception rather than the rule when it comes to savings. I can access 100k on credit cards in less than an hour, and payback from index funds at Vanguard in a couple of days, so why have a lot of money tied up in 'cash' accounts that are earning very little.

 

[Sunset]

For members of Fired and Boglehead forums I don't recommend a large emergency cash reserve, because we are pretty much the exception rather than the rule when it comes to savings. I can access 100k on credit cards in less than an hour, and payback from index funds at Vanguard in a couple of days, so why have a lot of money tied up in 'cash' accounts that are earning very little.

That works great for unexpected emergency spending, but does nothing for the situation of the stock market falling drastically.

While you could use the credit cards for spending money, you face the issue of not everything is payable with CC , and the recovery to the market could take a couple of years (or more).

 

[audreyh1]

For members of Fired and Boglehead forums I don't recommend a large emergency cash reserve, because we are pretty much the exception rather than the rule when it comes to savings. I can access 100k on credit cards in less than an hour, and payback from index funds at Vanguard in a couple of days, so why have a lot of money tied up in 'cash' accounts that are earning very little.

I don't worry about cash accounts earning very "little" when I have plenty of other money exposed to volatile markets. Cash may grow very slowly, but it doesn't go down. A retiree does not have to have all funds invested in higher return investments, just enough to keep up with inflation.

Our cash is not (just) for emergencies.

 

[btdt22]

That works great for unexpected emergency spending, but does nothing for the situation of the stock market falling drastically.

While you could use the credit cards for spending money, you face the issue of not everything is payable with CC , and the recovery to the market could take a couple of years (or more).

That's why a specifically stated in my post I was addressing "emergency cash" not stocks versus bonds allocation.There are literally thousands of threads (and opinions) oh stocks versus bond allocation before and after retirement.

 

[NW-Bound]

One may have a lot of money in 401k/IRA, but if he needs to draw a lot of money in case of non-recurrent expenses like car replacement or major house repair, he may get bumped up to a higher tax bracket. Some after-tax accounts to serve as buffer will be desirable.

For me, the trick has always been to have SOME sort of cash (equivalent) reserve. It could be literally cash in a savings account or checking account, a HELOC line of credit, "empty" credit card (no balance with lots of room to expand if need be) even a CD you can cash at a penalty. BUT you really do need to have ready access to cash - no matter what it's in for the "what ifs" of life.

Personally, I like cash in an account I can get my hands on whenever the "bank" is open. Not everyone is willing to forgo the growth, but if I can't lay my hands on $10K cash in an hour, I feel a bit nervous. YMMV

I used to have a lot of cash in my checking account (>$50K) when working. Not a wise thing I did that, but I was too busy with work and was always looking for the "best way" to invest that money.

Now, having no earned income anymore, it is rare that I have more than $10K in the checking account. However, I can make an online transfer from my Merrill Edge brokerage account to my Bank of America checking account. Immediately after the mouse click, the balances are adjusted to reflect that when I query online.

I don't think there's a holdback period the same as when I deposit a check. The money is being transferred between 2 accounts of mine, and it is just a matter of being earmarked differently.

By the way, I do not have to sell stocks if I do not have enough cash in the brokerage account and do not want to sell stocks. However, they will charge me margin interest, which they would love to do as it is high, something like 9%.

 

[l8_apex]

As others have said, you need to determine your monthly budget and taxes when in retirement first.

What is driving the question about cash reserves? Can you access cash via a credit card? I'm personally comfortable with $10k in cash, but I've got a lot of unforeseen expenses related to being a landlord. So YMMV.

 

[btdt22]

One may have a lot of money in 401k/IRA, but if he needs to draw a lot of money in case of non-recurrent expenses like car replacement or major house repair, he may get bumped up to a higher tax bracket. Some after-tax accounts to serve as buffer will be desirable.



I used to have a lot of cash in my checking account (>$50K) when working. Not a wise thing I did that, but I was too busy with work and was always looking for the "best way" to invest that money.

Now, having no earned income anymore, it is rare that I have more than $10K in the checking account. However, I can make an online transfer from my Merrill Edge brokerage account to my Bank of America checking account. Immediately after the mouse click, the balances are adjusted to reflect that when I query online.

I don't think there's a holdback period the same as when I deposit a check. The money is being transferred between 2 accounts of mine, and it is just a matter of being earmarked differently.

By the way, I do not have to sell stocks if I do not have enough cash in the brokerage account and do not want to sell stocks. However, they will charge me margin interest, which they would love to do as it is high, something like 9%.

+1. I drastically lowered the cash in my checking accounts after retirement because there is just no need to keep it there.

 

[Rianne]

It's all a matter of comfort zone. High risk money and safe money are a bit like a puzzle of moving pieces. I like a strong and secure amount of accessible cash. Just makes me sleep better. It's all in your personal risk assessment.

 

[NW-Bound]

+1. I drastically lowered the cash in my checking accounts after retirement because there is just no need to keep it there.

I still have a big chunk of money in I-bonds and other instruments that I call cash because their principal is not affected if the interest rate rises, unlike bonds. However, to move money in an emergency still takes a few days, while a money transfer between accounts of the same financial institution is instantaneous. This includes IRA withdrawal, although it would affect tax planning.

Because selling stocks for cash would take a couple of days to settle, I would draw on margin, and pay 9% annual interest for a couple of days while waiting for the stock sales to settle, or to move money from elsewhere to pay off that margin loan.

I have not had the need to do this, but the above is what I would do if I need some spending money in a hurry.