How much cash to hold?

[audreyh1]

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]

... 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]

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.

- 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.

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]

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]

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]

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]

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]

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]

...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.

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!]

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.

 

[Earl E Retyre]

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.

+1. I agree that not many speak up and it seems to be an unpopular position on this forum. I was thinking it would be interesting to start a thread with an anonymous poll to see what % of folks on this forum have a lower % in equities (and a higher position in cash/CDs, bonds, and real estate). But I have seen so many polls that were not ideally formed/worded that I hesitate to instigate one.

 

[RobbieB]

Ok, I'll start one. If you don't like it you don't get to complain.

 

[calmloki]

Very rough percentages, but we are about at 20% equities with about 20+% of that in tax free California bonds. Cash in savings accounts is about 11%, with ~25% of that in a PenFed CD. Over 25% of our net worth is in property loans or property sales contracts receivable. A bit over 40% of our NW is in fully owned rental properties. We fly by the seat of our pants, as retirement calculators just weren't built for us.

 

[SecondCor521]

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

Heh. More than $100.

What? Nobody else balances their 41 Quicken accounts and updates their 13 tab Excel spreadsheet daily? Anyone? Bueller?

I guess you could call me a bit odd.

 

[W2R]

What? Nobody else balances their 41 Quicken accounts and updates their 13 tab Excel spreadsheet daily? Anyone? Bueller?

I guess you could call me a bit odd.

Only 13 tabs? Definitely! My Excel spreadsheet has 21 tabs and I update it daily as well.

No Quicken, though. I bought it and tried it but I prefer the flexibility of setting up my own Excel spreadsheets. It probably takes longer but I enjoy it.

 

[target2019]

Youse are incredible. I'm still trying to fill Sheet 1.

 

[Lsbcal]

Only 13 tabs? Definitely! My Excel spreadsheet has 21 tabs and I update it daily as well.

No Quicken, though. I bought it and tried it but I prefer the flexibility of setting up my own Excel spreadsheets. It probably takes longer but I enjoy it.

21 tabs! And you have how many cells per sheet? Updated daily from downloads or by hand?

I agree, Excel is my approach too. Have not tried Quicken. There are plenty of tabs in my portfolio file but only 2 basic sheets per year. Other sheets are 20 year incremental picture (estimated stock/returns), AA history, VPW run summaries.

Then there is another Excel file for spending with one sheet per year updated monthly by hand.

 

[Rosie]

This is a very interesting and helpful thread, I really appreciate reading about other peoples' approaches as I try to fine tune my own.

So, on thanksgiving day, I say thanks everyone!

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.

This is pretty much my approach too.

 

[Months.in.Wyoming]

Cash while still working

52 and still working - so we have 2 years worth of expenses in cash - cash is:

in my vault at home
in Ally.com earning 1%
in LendingClub earning 5.8% or so.
in Unused HSA money mkt funds - so can tap for any reason at this point with my receipts.

 

[SecondCor521]

Only 13 tabs? Definitely! My Excel spreadsheet has 21 tabs and I update it daily as well.

No Quicken, though. I bought it and tried it but I prefer the flexibility of setting up my own Excel spreadsheets. It probably takes longer but I enjoy it.

Ah, W2R! My sister from another mother...

 

[NW-Bound]

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.

Quicken downloads transactions for all my accounts, so it takes no work at all to know the size of my stash to the last penny. That's 9 digits. I do have to enter by hand the monthly interest of our I-bonds.

However, in order to convert the cash content to monthly expenses with 4 significant figures, or to 0.01 month, I need to control my spending so it will not fluctuate. That's very hard to do, as my past annual expenses have varied +-25% from one year to the next.

 

[Badger]

18% that according to our annual spending would last us 20 years. That would put us at almost 90 yrs old. However, once RMD kicks in next year it will give us more than enough to try and spend. Some of that cash is in MM IRA accounts in which dividends are placed and will be tapped for the RMD.

Cheers!

 

[tmm99]

About 9% in cash (CD's, checking and savings accounts).


Sent from my iPad using Early Retirement Forum

 

[respond2u]

Recessions usually last a few years, so I'm shooting for 2 years cash--enough to last so that I won't have to sell stocks on the cheap.

I've got more cash than that now, over 14% of my portfolio. Should be a bit less than 10%.

 

[UnrealizedPotential]

I hold a little cash. Not too much. Cash doesn't pay anything. My reasoning is if the stock market goes down there is usually enough of a window to buy shares at a lower cost. Besides, sitting there with all that cash and sitting and waiting and doing nothing while all that cash earns nothing is hard.