Advice on how much cash to hold in my situation

[SecondCor521]

Hi all.

I'd like to ask for advice on how much cash to hold in my situation. I may frustrate you with this request because I have an ironclad rule that I don't disclose income or asset numbers, so I recognize the impediment. But I think I can describe qualitatively where I am and perhaps garner some helpful thoughts.

I am 56, single, and have been FIREd for about 10 years. For almost all of that time, I have had essentially a zero allocation to cash, and I've been between 90/10 and 100/0 in stocks/bonds. As I needed cash flow, I would spend income from my side gig, dividends, and would supplement with LTCG sales in taxable each month.

It is likely that I will receive a notable amount of life insurance proceeds in the next month or so. I have gone ahead and made a prioritized list of things I would like to spend money on. The list is almost entirely deferred house maintenance and some travel. I know it is still early but I think I am being careful enough that these things are worthwhile. Almost the entire list is things I've had on my mind for a while that I would like to do.

The life insurance will be approximately seven times the total price of everything on my list.

The total cost of the items on my list is approximately the same as one year of regular spending.

Including my assets, the other inherited assets, life insurance, and Social Security, I am currently at about a 1% withdrawal rate.

Due to a variety of factors, it could easily take me six months to a year to complete the things on my list.

I am almost certain that I will invest 6/7ths of the life insurance proceeds immediately in my taxable account.

For the 1/7th that I would probably spend over the next six months to a year, I see two options:

1. The classic conservative option would be to leave it in some form of cash / MM / CDs. Earn some interest, transfer it over to my checking account as needed.

2. Invest all of it in taxable. Potential market gains and losses, sell as needed to fund spending on the list.

Any mixture of these two options is available to me as well. Of note there is the classic "I don't know so do half of each option" middle ground.

I think most would go for option 1. It's simple, safe, and straightforward. I think the things nudging me to consider option 2 are: (a) I'm comfortable with an aggressive asset allocation and an essentially non-existent cash position, and (b) I'm not sure on the exact timing or amounts of the spending - it would not surprise me if it took me longer or spent less.

Thoughts welcome.

 

[Koolau]

I couldn't feel comfortable without a fair amount of ready cash - whether in checking or savings/CDs, etc. It's not unusual for me to have between 25K and 75K in available cash. If I get below 25K, I cash out something from my 401(k) - likely my GIF (Guaranteed Income Fund). AND I keep it in two (2) at least separate checking/savings accounts (two separate entities). Only way I feel okay about cash! YMMV

 

[Aerides]

One reason to put your thumb on the "more cash" side of the scale is the ACA, and avoiding the cliff, maximizing PTC's, especially given your age and the uncertainty of how the ACA will perform for the next 10 years. I'm your age and would not rush to lock up any windfall.

I'm not sure how close your wd/spending needs ride up to the cap, but it's not hard for me to imagine a year when a perfect super pricey vacation opportunity comes along right after I get a new roof right after I decide to buy a new car. Cash makes all those decisions easy without creating capital gains and dancing around MAGI.

So I say, cash, and BTD.

 

[Montecfo]

option 1 due to short time horizon.

 

[SecondCor521]

I couldn't feel comfortable without a fair amount of ready cash - whether in checking or savings/CDs, etc. It's not unusual for me to have between 25K and 75K in available cash. If I get below 25K, I cash out something from my 401(k) - likely my GIF (Guaranteed Income Fund). AND I keep it in two (2) at least separate checking/savings accounts (two separate entities). Only way I feel okay about cash! YMMV

Thanks. I think the operative word is comfort. For me, I feel uncomfortable having a lot of cash "sitting around doing nothing" for long-ish periods of time. But I'm not sure how I would define "a lot of cash" and a "long-ish period of time". This situation I'm in is a gray area.

I do expose myself to the risks of (a) needing to sell a lot when the market is down, and (b) tax issues if I need to raise cash near the end of a tax year and am in some sort of tax bind, like being near an IRMAA or ACA cliff. So the cash isn't "doing nothing" I suppose.

 

[SecondCor521]

One reason to put your thumb on the "more cash" side of the scale is the ACA, and avoiding the cliff, maximizing PTC's, especially given your age and the uncertainty of how the ACA will perform for the next 10 years. I'm your age and would not rush to lock up any windfall.

I'm not sure how close your wd/spending needs ride up to the cap, but it's not hard for me to imagine a year when a perfect super pricey vacation opportunity comes along right after I get a new roof right after I decide to buy a new car. Cash makes all those decisions easy without creating capital gains and dancing around MAGI.

So I say, cash, and BTD.

Thanks for the thoughts.

It's hard to say the relationship between my spending needs compare to my ACA cliff situation, because another variable that is also changing is that I can now BTD more. A lot more; probably 3.5x what I'm spending now.

On the flip side, I do have some AGI flexibility. I can contribute my side gig income to my traditional IRA. I can do HSA contributions. After I invest the 6/7ths, I will have at least six and probably more like 8 years of current spending in my taxable account with a high cost basis / low AGI impact. And I will probably want to go up to 399% FPL so I will want to realize / generate taxable income.

I bought the new car last year, the new roof and some of the expensive trips are items on my aforementioned list, but your general point is well taken.

 

[deserat]

I seem to remember you just recently got your PPL? Cash to pay for flying is good.....

 

[SecondCor521]

I seem to remember you just recently got your PPL? Cash to pay for flying is good.....

Correct. But that's already included in the 1% WR (*). If I didn't include it, I'd be at about 0.72% WR.

(*) It's actually 0.93% at the moment.

 

[TheWizard]

I'm a moldy oldie with about $17k per month gross income.
So I just keep $10k cash in checking most of the time unless I'm planning a major expenditure soon. Excess cash goes into stock index funds in my taxable account.

It's worked fine for me for over a decade...

 

[Surewhitey]

I'm for the cash option. Aerides point of the ACA makes me wonder how much income the other 6/7 will throw off... Sounds like a a bit of juggling to do.

 

[TickTock]

For the spend expected in the next 6-12 months, I'd go with a MMF for the principal stability. But if you aren't worried about the volatility you can go with equities.

You're ~9 years out from Medicare. Maybe put some of the remaining 6/7ths into MYGAs? If you want/need to, you can typically siphon of 10% per year without penalty (although owing ordinary taxes) and if not then keep it compounding tax-deferred.

You've been heavily into equities for >10 years and have a ~1% WR. I don't think you can make a bad decision. Nice spot to be in.

 

[ut2sua]

I think the reason it is not clear which way for you to go is because there is not really a consequence either ways. At 1% WR, and having an extra 7x spending to add to your NW. Let's say by keeping that 1x in cash causing you to lose out 0.5x due to a 50% gain in the market (very aggressive optimistic assumption here). It is not a big deal to your overall financial picture to not have that extra 0.5x.
OTOH, let's say by fully invest that 1x, and the future market crashes 50%. You will lose 0.5x which is, again, not a big deal overall (same as above).
In your situation, you can do whatever you like. There is not really any consequence in the big picture.

 

[ShokWaveRider]

We hold .5m in mm. Works for us, not for some. We consider it our cash bucket.

 

[HI Bill]

With a 1% WR, it doesn't really matter what you do with the $, except with regard to convenience. You'll likely never come close to depleting your stash.

 

[SnowballCamper]

I say stick with your high stock asset allocation where you seem to be comfortable taking LTCGs. Continue with the same approach. I don't hear a reason to change your AA. If the market tanks in the next couple years, presumably you've got some old holdings that will still sell at a gain. I think post #12 is accurate also.

 

[NW-Bound]

With a 1% WR, it doesn't really matter what you do with the $, except with regard to convenience. You'll likely never come close to depleting your stash.

I remember the OP as having close to 100% stock AA, and that served him well over the years. So, why change now?

As for me, throughout my life, I always keep tons of cash (10-20%). Looking back, I saw that I would do better putting it all in the market. Now, I have even more cash, but also become more active in investing, and been doing OK. I myself see no reason to change my way.

 

[MarieIG]

Me? I would choose option #1 but with all the additional funds coming in and your low W/D rate you'll be fine either way.

 

[jollystomper]

I'm just a SGOTI, and with a very low "I will outlive it" withdrawal rate I tend to focus more on simplicity and convenience rather than optimization . I would keep that 1/7 you intend to spend in the next 6-12 months in a HYSA or MM fund and have fun spending it down. That is my simple approach and not having to deal with selling things as I need. Yeah I know these days that does not not take much effort, but just keeping it in a MM fund in my view is simpler .

 

[38Chevy454]

Another vote for 1/7 in a MM account, and invest the rest same as your other savings. The available cash can help with ACA or IRMAA calculations. Since several items for spending are things you want for a while, just blow the dough and spend the (kind of) free money.

 

[mrfeh]

I would absolutely keep money needed in <6 months in a cash-like vehicle. MM/treasuries, etc.

 

[tulak]

Over one year, and since you’re investing the majority, I’d go with option #1.

Why not keep money you’re about to spend in cash, especially since it’s a max of one year?

 

[Koolau]

Thanks. I think the operative word is comfort. For me, I feel uncomfortable having a lot of cash "sitting around doing nothing" for long-ish periods of time. But I'm not sure how I would define "a lot of cash" and a "long-ish period of time". This situation I'm in is a gray area.

I do expose myself to the risks of (a) needing to sell a lot when the market is down, and (b) tax issues if I need to raise cash near the end of a tax year and am in some sort of tax bind, like being near an IRMAA or ACA cliff. So the cash isn't "doing nothing" I suppose.

Yep. We all have our own comfort levels. I look at a pile of cash as an insurance policy. Insurance policies do cost you money. I'm willing to pay insurance premiums to have the protection (in this case, the protection that a pile of cash offers).

My one question would be: IF (and only if) you have "enough" of a retirement stash, why are you uncomfortable not being maximally invested? IOW why do you need more return?

In my case, I consider that I have plenty of stash but there are real downsides to running low on cash (as you mention: Taking from depressed funds or as I think about: Needing to cash in something that pushes me over a cliff (IRMAA, NIIT, etc.).

Not a criticism - we are all different and have different things which push our various buttons.

Good luck with your cash situation. And, hey, "It's only money."

 

[SecondCor521]

Why not keep money you’re about to spend in cash, especially since it’s a max of one year?

From my OP: "(b) I'm not sure on the exact timing or amounts of the spending - it would not surprise me if it took me longer or spent less."

 

[tulak]

From my OP: "(b) I'm not sure on the exact timing or amounts of the spending - it would not surprise me if it took me longer or spent less."

For the 1/7th that I would probably spend over the next six months to a year, I see two options:

Misreading on my part?

 

[SecondCor521]

Yep. We all have our own comfort levels. I look at a pile of cash as an insurance policy. Insurance policies do cost you money. I'm willing to pay insurance premiums to have the protection (in this case, the protection that a pile of cash offers).

My one question would be: IF (and only if) you have "enough" of a retirement stash, why are you uncomfortable not being maximally invested? IOW why do you need more return?

Excellent question.

My Mom was a worrier, and one of the things she worried about was running out of money. She reused tea bags and saved rubber bands from the newspaper even when she and my Dad had more than "enough".

Her point of view, which we each absorbed from her life in different ways, was that there was never more than enough, and that one should always be striving to pile up more. Just in case that extra dollar (or tea bag or rubber band) might be the one that was needed.

In my case, I consider that I have plenty of stash but there are real downsides to running low on cash (as you mention: Taking from depressed funds or as I think about: Needing to cash in something that pushes me over a cliff (IRMAA, NIIT, etc.).

I handle these issues differently. I either don't sell the depressed fund, or accept the sale at depressed prices as a tradeoff for selling at a profit most of the time. I have other knobs to avoid IRMAA / NIIT / ACA.

Not a criticism - we are all different and have different things which push our various buttons.

Good luck with your cash situation. And, hey, "It's only money."

Thank you!