How much money needed in cash and how to get it?

[UpQuark]

I plan to retire soon (in 9 months or less). I used to have a little cash cushion but CD rates were so awful last year and stock prices so attractive, that every time a CD in my ladder matured, I invested it. It definitely made a lot more money in stock so I feel good about that.
But, now I need to build a cash cushion. I feel like I need to keep putting the max into my 401k this final year of working, to save on taxes. But that leaves no extra money to save up as cash (I'm saving a little but it is earmarked for property taxes, house maint, and - if covid goes away - a vacation tho I am pretty sure I will lose my vacation deposit made right before covid, due to the destination country deciding to fight covid with just prayer, sighhhh).


First, my goal is to have one year's worth of cash as a sponge - does this seem excessive or insufficient or okay?


I have a couple of thoughts to build cash, but would love some feedback.
Idea 1: turn off dividend reinvestment, this appears to be able to accumulate 7 months worth of cash before I retire.
Idea 2: start social security two months before I retire, this would accumulate 1.5+ months worth of cash before I retire.
Idea 3: Not contribute to the 401k the last two months before I retire, this would add another 1.5+ months worth of cash.


So all together the above would be 10 months of cash reserves.


I can't think how to get any more, except if after I retire I just sell investments to leave them sit as cash.

 

[Time2]

I plan to retire soon (in 9 months or less). I used to have a little cash cushion but CD rates were so awful last year and stock prices so attractive, that every time a CD in my ladder matured, I invested it. It definitely made a lot more money in stock so I feel good about that.
But, now I need to build a cash cushion. I feel like I need to keep putting the max into my 401k this final year of working, to save on taxes. But that leaves no extra money to save up as cash (I'm saving a little but it is earmarked for property taxes, house maint, and - if covid goes away - a vacation tho I am pretty sure I will lose my vacation deposit made right before covid, due to the destination country deciding to fight covid with just prayer, sighhhh).


First, my goal is to have one year's worth of cash as a sponge - does this seem excessive or insufficient or okay?


I have a couple of thoughts to build cash, but would love some feedback.
Idea 1: turn off dividend reinvestment, this appears to be able to accumulate 7 months worth of cash before I retire.
Idea 2: start social security two months before I retire, this would accumulate 1.5+ months worth of cash before I retire.
Idea 3: Not contribute to the 401k the last two months before I retire, this would add another 1.5+ months worth of cash.


So all together the above would be 10 months of cash reserves.


I can't think how to get any more, except if after I retire I just sell investments to leave them sit as cash.

I know this is not optimizing profits, but I load next years spending into my checking account in December of the year before and live on that. This is my 3rd year of retirement, and this could change,

 

[Sunset]

I plan to retire soon (in 9 months or less). .....
But, now I need to build a cash cushion. ......

First, my goal is to have one year's worth of cash as a sponge - does this seem excessive or insufficient or okay?
....

I can't think how to get any more, except if after I retire I just sell investments to leave them sit as cash.

I have about 4->5 yrs worth of cash (CD's, etc) so I find 1 yr would be a pretty short cushion.

To build up your cushion, my view is:
Turn off re-investments.
Sell some of your gains, remember only part of it is taxable and the Long Term capital gain is taxed at a low rate.

Also check how full your 401K is, as some people find they saved too much and face higher tax rates once RMD's start.

 

[RunningBum]

Why don't you just sell off some equity investments?

 

[audreyh1]

Cash flow management is indeed something to plan for in retirement. Everyone here seems to do it differently.

Each Jan I withdraw a year’s worth of income and move it to checking/savings.

I imagine before retiring you are going to want something like that. This is something you will have to deal with every year, so figure out something sustainable.

It happens that in our taxable accounts I do take all distributions in cash, since I will owe taxes on them anyway. But I let them all accumulate in the retirement portfolio until the next year withdrawal. Since most mutual fund distributions are paid out in Dec, they aren’t sitting around very long. I have equities, bonds and cash in the retirement portfolio and rebalance to a target AA after my January withdrawal.

 

[MRG]

I would consider #1, #3. Two would be a bon-starter depending upon your age. SS is a permanent thing are you OK with a lesser benefit forever? I guess if your close to 70 it doesn't matter but....(when to start SS is similar to religion so that's just.my opinion).

 

[SecondCor521]

I have about one week worth of cash, so I find 1 year would be a pretty long cushion.

I have everything invested and sell when I need it. From a sale in my taxable to cash in my checking account it's only a few days. Since I put most things on my credit card and I have a month of float, I can sell what I need to and have the money in time.

I used to have a cash cushion when I first FIREd. After a few years I decided I didn't have a reason to have one. Yes, if the markets are down and I need a lot of money I'll sell low(ish). But most of the time they are not, and when they are not I am earning more in the market than in my savings account (18.40% last year vs. 0.55%). Also, I lead a very boring life so the chances of me needing a lot of money quickly are exceedingly low.

 

[brett]

Everyone's situation is different. We have pension incomes that we could easily live on if we had to.

We require more than this for travel. We typically download a year or less of cash requirements from our investment accounts into an on line bank HISA. Then move this to our check account as needed to subsidize our pensions for travel expenses and for income tax installments.

 

[OldShooter]

... But, now I need to build a cash cushion. ...

Are you sure? We have money invested in an ultra-short bond fund aka "cash" because we will be shelling out to pay for a new lake home build in the next 9 months or so. But if we did not have this identifiable need I would have our fixed income tranche somewhere else, mostly TIPS.

For "emergency cash" I have always relied on credit lines of one sort or another. $250K HELOC lately. This gives me flexibility to respond to true emergencies while not tying probably-never-needed assets tied up in low-yielding investments. IMO credit lines are an especially attractive reserve tactic in inflationary times. That worked fine for us in the late 70s/early 80s excitement and it will again be beneficial if inflation heats up (as feared by many).

 

[Out of Steam]

If you're in the US, you have penalty-free access to retirement funds at 59 1/2. For that reason, we've only kept 2-3 months of reserves outside of retirement accounts. Our post history here notes that we were uncomfortable with it before retiring. My wife is returning to the part-time work she had before COVID, and we will probably increase that cushion by 1-2 months this fall.

For our one "emergency" since retiring in 2018/19, replacing our heat pump, we made a retirement account withdrawal and had funds within a week.

 

[street]

I read your plan and I can say, if you think you have enough cash on hand, then you should. Like others have mentioned everyone seems to manage and have that plan to take them to the end. I beleive those plans work just great for each person needs and their goals.

I have enough in cash that I don't see that I will ever need to sell any investments, until RMD. That is not the norm here but it was my plan to never have to depend on my investments to live life day to day. That cash is ~ 11% of total portfolio. That percentage keeps going down of my total cash because investments keep growing. My plan isn't for most so I'm not trying to sell my program to anyone. It is just how I to set myself up for the long haul and that I would never have to depend on what the markets ups and downs.

No shoe fits everyone the same, so do what you feel safe/comfortable with in cash going into retirement.

 

[Montecfo]

I have several years of expenses in cash, savings, CDs, or other, in lieu of a portion of my bond portfolio. I auto-transfer a "paycheck" to my checking account twice a month, same as when I worked.

I do not reinvest divs in my taxable account. And no plans to take SS for a while (not yet eligible for one thing).

 

[pb4uski]

One doesn't necessarily "need" cash reserves... you could just set up a monthly redemption of $x with the proceeds transferred to checking for spending.

 

[Winemaker]

I keep 3 years cash withdrawals on hand, selling equities once I have "made enough" to cover the amount I withdraw. The market has been pretty sweet so I haven't had to sell in a "bad" year.
This year I sold a rental, so I won't be taking a withdrawal, I'm going to convert an equal mount in DW's tIRA to her Roth. So this year I have 4 years of withdrawals in cash.

 

[audreyh1]

One doesn't necessarily "need" cash reserves... you could just set up a monthly redemption of $x with the proceeds transferred to checking for spending.

But you will have to think about what you’ll sell to meet that monthly redemption.

 

[RetireAge50]

Rather than not contributing to the 401k (your option 3) maybe put those contributions into a stable value fund?

 

[O2Bfree]

I'd go with 1 and 3.

I keep 3-4 years of cash on hand to ride out market lulls and keep my taxable income down for ACA premium tax credits. Much of it was built up by stashing extra cash while I was working. Now it gets some contributions from dividends.

I like OldShooter's HELOC idea too. Inflation does appear to be heating up.

 

[bizlady]

We keep almost 2 years in IRA money market accounts (after adjusting for SS and pension), along with the cost of a new vehicle as we prefer to pay cash for those. We let the accounts build to that after retirement moving dividends etc to those accounts. We will only use that if the market is really down when we make our annual withdrawal in Jan.

We keep about 15k in after tax accounts for emergencies, (deductibles, new furnace, major car repair, etc)

 

[UpQuark]

Thanks for all the replies. Now I have even more to think about though! So sounds like, which I never realized, there are 'stable value' funds in 401k plans so I could cover both getting reduction on my taxes during this last year of work while simultaneously building 'cash'-ish pot of money (assuming a person can sell out of stable value funds at any time??).

If I do that, and also turn off reinvestment of dividends for this year, the combination will meet (and slightly exceed) the one year of 'cash' which the Fidelity advisor suggested.

I am very confused about bonds, first, my situation is I have barely enough money to retire, and it does not look like I will have to worry (unfortunately) about too-large RMDs down the road.

Most of my money is in retirement target year funds and my portfolio AA is 60/40. So if that 40 means that 40% are in bond type investments, are they kind of like cash and I could just sell those to avoid selling investments that are at a low price in a bad market? Or do the bond prices go down too? Or since it is a target-year fund would selling any of it be sold at a 60/40 ratio? Should I sell all my target year fund and buy instead separate equity and bond funds so I can control where I am selling from?

I'm not understanding why people should have the AA of 60/40 at my age (65 yrs), it is sounding to me like maybe a person should have a few years of cash and then use an AA of 70/30?
I really need a good amount of growth because according to the Fidelity guy I talked to this week, I need to be able to take out 6% a year, so I need at least 7 or 8% increase. I'm wondering if I should nudge my portfolio toward a 65/35 AA?

 

[OldShooter]

... Should I sell all my target year fund and buy instead separate equity and bond funds so I can control where I am selling from? ...

Yes. In addition to allowing you to withdraw from your fixed income tranche without selling equities, Separate equity and fixed funds allow you to select the best one for each purpose snd gives you visibility into their performance vs benchmarks.

A balanced fund is like mixing the red and the green Kool-Aid. You can't tell where the flavor or the color came from.

 

[1242Vintage]

I have $50k stashed away just in case I need and if a bigger emergency happens have an untapped $160k HELOC.

 

[audreyh1]

A lot of people had their untapped HELOC's called in 2008/2009. In a financial crisis it may not be a reliable source for a quick cash infusion.

 

[RobbieB]

I like a year or 2 in cash for sure!

 

[Montecfo]

A lot of people had their untapped HELOC's called in 2008/2009. In a financial crisis it may not be a reliable source for a quick cash infusion.

This is true. And with good reason, equity no longer provided sufficient collateral.

Another point is that it may matter who issues the line. Out of state lenders or national financial firms may be more likely to pull lines than banks more invested in the local area. Who banks you is more important with a HELOC than "getting the best deal" in my opinion.

The HELOC is a good tool to have in the toolbox, but it should not be the only tool.

 

[TheWizard]

One doesn't necessarily "need" cash reserves... you could just set up a monthly redemption of $x with the proceeds transferred to checking for spending.

Checko!
This is the correct answer, more or less.

In my eighth year of retirement, I continue to target having roughly $10k in my checking account month to month.
Excess monthly income beyond that gets moved to my taxable investment account and eventually into stock index funds...