Building that cash bucket, start when??

[doneat54]

I am 8 months (10 days, 14 hours and 22 minutes, but who's counting ) way from FIRE. My wife will work 3-4 years beyond me, and it looks like we will probably be able to live off of her salary for those years and not really touch the portfolio.

I like the "3-bucket" approach to portfolio management and especially the cash pile/first bucket to ward off 1-3 years of market volatility if needed (yes, I know not all agree, and there is cost of losing growth there).

So I am getting a 3/4 yr salary severance when I retire, that will actually be paid as "Continuing" paychecks for 9 months after my last day (as opposed to a lump sum, not my choice). At that same time, I'd guess we would have probably another 1/2 yr of my salary's worth in cash. After I retire, we do not plan on saving much, if any, cash from my wife's salary.

So my thought is to channel those 9 months of paychecks into a cash, or cash equivalent account to start building that first bucket. Too early? Better to invest it and then convert to cash when my wife retires? If we can live off my wife's salary until she retires, then we are immune from any market fluctuations in theory, so why would we need the cash pile? But then if when she retires we need to convert some of the portfolio to make the cash bucket, aren't we at the mercy of the markets then?

BTW, for calcs sake, annual expenses are expected to be about 85% of my salary.

Thoughts?

 

[DrRoy]

I'm RE in a year and will be on only retirement income at that point. I just started a "cash stash" last month.

 

[jazz4cash]

I was in a similar position one year ago and I also like the bucket approach. I only had 5 weeks "severance" (unused vacation, actually). I started about 6 months prior to RE. I also had the cash allocation of my savings. I would start now if I was in your position even if you could only go 50% to start.


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[papadad111]

I think the answer depends how big your overall portfolio is and how much of it is in cash like assets such as bonds, And in cash providing investments such as stocks that toss off dividends.

With the wife working and covering expenses you probably don't need as much cash as you think at least for the next 3-4 years.

An analysis of your actual incremental cash needs 4 years out after she retires probably will help ...

I think it's prudent to keep 3-6 months cash emergency fund always.

 

[Fermion]

We are keeping four years living expenses in cash (and by cash I mean things totally safe earning 1% to 3%, like I-bonds, short term FDIC insured CDs, online saving accounts with bonus offers).

Excessive? Maybe. Do you sleep well when the market crashes? Definitely.

Edit: But very little bond exposure. We have perhaps 10% in a bond fund, 75% in the stock market, and 15% in cash.

 

[GrayHare]

Since a cash burcket is insurance against a down market in securities, and that down market could start any time though your expenses will continue, you want to have at least some of the bucket already in place upon retiring.

 

[MBAustin]

If you are going to live off your DW's salary, then I don't see a big need to build up the cash bucket before retiring. I would use the severance checks just as you suggested to start it, and then when she is a year or so from retirement, decide how to top it off before you start using cash.

 

[doneat54]

I think the answer depends how big your overall portfolio is and how much of it is in cash like assets such as bonds, And in cash providing investments such as stocks that toss off dividends.

With the wife working and covering expenses you probably don't need as much cash as you think at least for the next 3-4 years.

An analysis of your actual incremental cash needs 4 years out after she retires probably will help ...

I think it's prudent to keep 3-6 months cash emergency fund always.

Roughly, at my wife's retirement, total portfolio value will be about 20X annual expenses. In my head I am thinking that having 2x annual expenses in cash (real cash, T bonds, liquid stuff), leaving 18x annual exp invested in buckets 2 and 3 with probably 10-12x annual in 3rd bucket, securities and dividend and growth investments.

As I stated above, diverting all the severance cash and adding what we will have already at years end should get me around 1.5x annual exp in pure cash already at the end of the severance, leaving my wife's working years to come up with the other 0.5x. Living off her salary alone will provide little to no opportunity to save during that period. The only thing I am committed to saving away is $6500 year into an HSA.

 

[mathjak107]

we do 2 years cash set a side plus a 50k emergency fund . rest is in 40/60 mix and real estate

 

[papadad111]

We are keeping four years living expenses in cash (and by cash I mean things totally safe earning 1% to 3%, like I-bonds, short term FDIC insured CDs, online saving accounts with bonus offers).

Excessive? Maybe. Do you sleep well when the market crashes? Definitely.

Edit: But very little bond exposure. We have perhaps 10% in a bond fund, 75% in the stock market, and 15% in cash.

+1. Similar situation except we keep zero bonds- stock dividend yields paying 2.5% versus 10 year bonds paying 1.7%, I made an argument to avoid bonds.

While true that stocks are more risky than bonds for principle protection I don't think the SP500 falls to zero over the long run but I do think interest rates go higher from here over the next decade so selling bonds at any point prior to maturity (like when the market goes down and you need to raise real Ben Franklin cash) you won't get your bond principle back if rates rise.

 

[mathjak107]

of course while cash buckets are comforting , study after study shows they add nothing mathematically to the equation compared to just selling equally from a diversified portfolio maintaining your allocation through good and bad times .

 

[papadad111]

Roughly, at my wife's retirement, total portfolio value will be about 20X annual expenses. In my head I am thinking that having 2x annual expenses in cash (real cash, T bonds, liquid stuff), leaving 18x annual exp invested in buckets 2 and 3 with probably 10-12x annual in 3rd bucket, securities and dividend and growth investments.

As I stated above, diverting all the severance cash and adding what we will have already at years end should get me around 1.5x annual exp in pure cash already at the end of the severance, leaving my wife's working years to come up with the other 0.5x. Living off her salary alone will provide little to no opportunity to save during that period. The only thing I am committed to saving away is $6500 year into an HSA.

Seems reasonable ..2 years of cash. 20x is a little light for this crowd but maybe you have SS coming soon or a pension etc to augment portfolio

I do a mental exercise of "if I couldn't touch portfolio how would I survive" to determine draw down options -- rely on dividend payments plus , spend some of my cash, plus spend down HSA, plus side hustle if any plus etc etc and then how long would all that last. I'd bet you could stretch the 2x cash to 2.5x or 3x if really pressed. That helps the sleep at night process for me anyway. No doubt when the market tanks, cash is king.

 

[mathjak107]

No doubt when the market tanks, cash is king.

odds are if they held lots of cash because they were nervous they didn't put a good part back in when it looked like we were going to hell in a hand basket .

when it comes to amateur investors , usually it is the nervous nellie type that has a lot of cash instead of investments .

it is those with nerves of steel that buy when we are plunging with no end in sight .

the two contrasting personalty's are rarely found in one person .

 

[doneat54]

Seems reasonable ..2 years of cash. 20x is a little light for this crowd but maybe you have SS coming soon or a pension etc to augment portfolio

I do a mental exercise of "if I couldn't touch portfolio how would I survive" to determine draw down options -- rely on dividend payments plus , spend some of my cash, plus spend down HSA, plus side hustle if any plus etc etc and then how long would all that last. I'd bet you could stretch the 2x cash to 2.5x or 3x if really pressed. That helps the sleep at night process for me anyway. No doubt when the market tanks, cash is king.

Yes, we both have 30 years in corporate America so SS comes in strong in 10+ years. In today's dollars, it should fund about 50% of our current annual expenses. And you are right, our current budget denies us nothing. It would be very easy to squeeze a bit and bring the budget down. That, and/or selling some "toys" that I have that hold their value well...