How much cash?

[InTheBasement]

I feel like this would have already been discussed at some point but I could not find it in a search. Presently I have a cash account that will last me almost 5 years in such case as there were a market downturn. All the rest of my investments are 90% stocks. I feel like having a large cash account that is not subject to market volatility is a good thing. I'm getting 4% return on that cash account right now. Am I overdoing it with a 5 year cash cushion?

 

[Kings over Queens]

Am I overdoing it with a 5 year cash cushion?

Probably, but "Opinions are like noses, everyone has one, and they all smell." ~ unknown

Truth told, I don't think 5 years is too much. It's a lot, and likely would outlast all but the most severe, world changing type of an event. The plus side is you are getting a nice return.

I will likely have a similar portfolio, perhaps not 5 years, but at least 3, and the majority in S&P 500 EFT's and QQQ. Something like that.

 

[pb4uski]

No, not at all. Your overall AA is 90/10 or alternatively 90/0/10.

You might consider keeping 1 year in cash and 4 years in a 4 rung bond or TIPS ladder, but that is just anal fine tuning and won't make much of a difference.

 

[InTheBasement]

OK, so maybe I am not all out crazy.

 

[Kings over Queens]

OK, so maybe I am not all out crazy.

Simmer down, you got 2 replies. Lets see what the day brings before jumping to conclusions.

 

[audreyh1]

I feel like this would have already been discussed at some point but I could not find it in a search. Presently I have a cash account that will last me almost 5 years in such case as there were a market downturn. All the rest of my investments are 90% stocks. I feel like having a large cash account that is not subject to market volatility is a good thing. I'm getting 4% return on that cash account right now. Am I overdoing it with a 5 year cash cushion?

This is a totally personal preference thing. With 90% in equities I don’t see how 10% cash would be overdoing it.

 

[jollystomper]

I do not see a problem with that. I do not have that large a percentage in equities, but based on our spending intentions we have about 5 years in cash for spending beyond my pension and DW's SS. My philosophy is also to avoid being forced to sell equities in a downturn. It is whatever makes you comfortable for sleeping at night. I am fortunately to no longer have the need to optimize ever dollar I have in investments .

I do evaluate this yearly. When I start taking SS, I will probably feel comfortable with a smaller cushion.

 

[DJRR]

What is your overall allocation? You seem to say 5 years cash, plus an additional portfolio of 90/10. If the cash and portfolio are equal then you are 45/5/50 overall for example, so I would say that may be too conservative.

Is 5 years a bridge to something specific or just a comfort factor? If you have 5 years to go to age 62 or 67 or 70 to meet your social security strategy then I think it is a good idea but could probably be improved with other products. If it is just comfort then do what works for you. 5 years covers most historical bear markets, but not all, and x% of all future bear markets.

 

[Surewhitey]

Not crazy. That would be us, 10 years worth & in 4-10 yr CD's and Treasuries and still w*rking. Now that's crazy. But momma's happy. Averaging 4.7% on everything...

 

[street]

No, IMO. I have ~11% of my portfolio in cash earnings from >4% to 5.8%. With 8 more years with 6% of that 11% earning the 5.8%. My cash will supply my expenses for my life here on earth.
The rest of our portfolio is in the markets and mostly will never have to touch them.
It was my plan and goal in ER to not have to spend any money that has been invested if I choice to do that. Good or bad agree or disagree but it is how we have planned our ER till death. So, if life is kind to me, we have a lot more years in cash, then 5 years.

 

[InTheBasement]

What is your overall allocation? You seem to say 5 years cash, plus an additional portfolio of 90/10. If the cash and portfolio are equal then you are 45/5/50 overall for example, so I would say that may be too conservative.

Is 5 years a bridge to something specific or just a comfort factor? If you have 5 years to go to age 62 or 67 or 70 to meet your social security strategy then I think it is a good idea but could probably be improved with other products. If it is just comfort then do what works for you. 5 years covers most historical bear markets, but not all, and x% of all future bear markets.

My exact allocation I am not sure of. I am guestimating it. I have the 5 years of cash cushion. I have a 401K that is split into 2 funds. One is an all stock fund, the other is a target 2035 fund. The target fund has a fair amount of bond percentage at the moment but I have only 10% of my total 401K in that. My wife has a couple IRA's and I have some all stock investments outside of the retirement accounts that equal to around another years worth of funds if I were to sell it. The 401K and the IRA's (one roth, one traditional) are the bulk of our retirement support. I am not a fan of bonds only because all of the information I get seems to indicate that the stock market has always prevailed during any given 10 year period. So I like the growth opportunity of staying mostly stocks as long as I have that cushion to carry me through a market downturn. Unfortunately I am an engineer and as much as I am into the numbers, I am not so much into the market research so I may be lacking on some of the required knowledge. And being the engineer, I seem to always want to calculate on the side of safety while challenging the possibility reward in spite of potential risk. You know, if there's a significant possibility that something will explode make sure you engineer a very effective containment system around it

 

[Jerry1]

I consider the money I have at Fidelity in my non IRA accounts cash. Most of it is in SPAXX and all of it is readily available. I also hold cash in our credit union. We’re at 2 years or ten years depending how it’s calculated. It 2 years if all our income was shut off. So if my budget is $100, I have $200 in cash. If my budget is $120, that $200 will last me 10 years as I draw $20 per year to add to my regular income. I feel very comfortable at that level and, as others have said, it’s just part of my overall asset allocation. I’m 40% equities. The rest is cash and CD’s along with a MYGA. So, a very conservative portfolio.

 

[RetiredHappy]

My husband moved 20% of his IRA into 6-7 year MYGAs last year, the rest are in equities ETF. Based on our calculations, those money in addition to dividends, would last 6 to 7 years of forced RMDs. They make 5+% per year. We consider those cash equivalents.

 

[Aerides]

5 years in and of itself might be considered conservative, but not at all if the rest of the portfolio, 90%, is equities. In your shoes I'd stick with it, at least until the volatility settles, and as long as you are making decent interest on the cash.

We're at about 2.5 years right now which is a bit low for my taste, usually keep at 3-4.

Oh, and age is a factor. If you are 75 with that much cash, eh. If you are 55, for sure.

 

[MichaelB]

Here’s a recent discussion that might be of interest Strategy: Having enough low risk savings to cover spending needs for most statistically likely market downturns...

 

[Out-to-Lunch]

My exact allocation I am not sure of. I am guestimating it.

You're an engineer. Why don't you just create a 5-minute spreadsheet to calculate your overall AA?

 

[TheWizard]

You can do as you please with your assets, depending on your risk tolerance.
In my case, I have relatively high retirement income hitting my checking account each month, so I just keep around $10k in cash and invest the excess into my (growing) taxable account.
In that account, my target AA is 95% stock funds and 5% cash, so a $400k balance there would have around $20k cash in my settlement fund, some of which usually has low-ball limit orders pending.

So, situations vary...

 

[surprising]

Related question - how does one decide when to tap the emergency cash fund? Do you look at net worth changes for the year and if it's negative, use some cash instead of selling stock? Do you keep doing this until net worth comes back to where it was (perhaps over many years)?

 

[target2019]

OP, I suggest you look at the exact allocation of your investments at year's end. Guessing and estimating are something. But what really are the numbers?

Is 90% equity and 10% cash a good thing? It sounds like it's been working for you, but something has spooked you, and now you are wondering if you hold too much cash. Is that a fair assumption?

I'll take a guess, and propose that when/if interest rates drop below your comfort setting, you (and I) will question how much cash we hold.

If you're looking for random numbers, we have 10% allocation to cash, MMF, CD's, iBonds.

 

[Midpack]

Depends somewhat on what each of us define as cash. I have a very small amount in online savings, but I have a little in MMFs (arguably cash) and quite a bit in T-Bills (very liquid) at present. There are tax implications for how we hold "cash."

 

[Dash man]

I started with ten years cash if you include treasuries, MYGAs, CDs and bonds. Build a ladder and keep a year’s worth of cash in a MMF or HYSA that can easily feed your checking account. Replenish it with interest and dividends and withdraw from other investments depending on performance.

 

[corn18]

A 60/40 portfolio with a 4% withdrawal rate has a 10 year fixed income reserve. So maybe you don't have enough?

 

[Sunset]

My husband moved 20% of his IRA into 6-7 year MYGAs last year, the rest are in equities ETF. Based on our calculations, those money in addition to dividends, would last 6 to 7 years of forced RMDs. They make 5+% per year. We consider those cash equivalents.

Good point, how various fairly certain income adds to the spending money available if equities fall a lot and a person doesn't want to sell them.

Besides cash equivalents, I think our interest and dividends will mostly continue during a prolonged period. Note one recession some banks ceased their divs or dropped them to 1 cent, so some companies will stop divs, but a diversified ETF will largely continue to pay (IMHO)

 

[aaronc879]

I feel like this would have already been discussed at some point but I could not find it in a search. Presently I have a cash account that will last me almost 5 years in such case as there were a market downturn. All the rest of my investments are 90% stocks. I feel like having a large cash account that is not subject to market volatility is a good thing. I'm getting 4% return on that cash account right now. Am I overdoing it with a 5 year cash cushion?

I think that is the way to do it. Minimum 2 years and up to 5 years of expenses in cash with the rest in a diversified equity index fund like S&P 500 or Total Stock Market index.

 

[Out-to-Lunch]

I don't believe that the PO ever gave us enough information to judge where he/she is in the accumulation/decumulation/retirement phases. We can assume that he/she has saved 25x expenses, but we do not know that. The fact that the target fund is 2035 suggests that he/she is some ways away from retiring.