How much cash?

[Exchme]

OP told us that 5 years of expenses in cash is 10% of the portfolio, meaning portfolio is 50x expenses. At that level asset allocation is irrelevant to success.

 

[mrfeh]

OP told us that 5 years of expenses in cash is 10% of the portfolio, meaning portfolio is 50x expenses. At that level asset allocation is irrelevant to success.

Probably true, but overall AA is relevant to determine if 5 years in cash makes sense.

 

[old medic]

Depends somewhat on what each of us define as cash.

That was my exact thought. My take is what we have on hand/in pocket right now. Generally have $100 or so on me unless traveling. 3-4 K of paper and metal in the safe. In the bank we have several different stashes that can easily become tax free cash, Savings, Roth, HSA if needed (and accessible) or about 15% of our nest egg.

 

[pjigar]

I would ask a rhetorical question: "How do you feel about that?" If you feel good/comfortable then it is the "right" amount of cash to hold. If not then change it until you feel comfortable. Same "rule of thumb" applies to Bonds.

We hold cash which would not last more than 3-6 months. No bonds/CD. 65% stocks, 35% RE. We are still w*rking. My plan is to start off retirement with a cash/CD/bonds bucket worth 3-5 years of expenses, deplete the bucket and never refill it. This is my way to address SORR risk.

 

[Car-Guy]

I don't think you are overdoing it by having five years of cash since I've been 100% cash (well CD's and MM's) for several years now. And I've never been so comfortable with my portfolio. Average return rate is starting to drop now. It's down to ~4.36%.

 

[pjigar]

FireCalc says that the worse failures occurred due to inflation rather than market downturns which I've always found very interesting.

To put it little differently: Inflation causes permanent loss of portfolio whereas downturn cause temporary loss of portfolio.

 

[Trailwalker]

When we retired at 60, we held 5 years in cash (mostly Treasuries). At 64, we've spent that down and sold some land to replenish. We currently have 2-3 years in cash, but one year may get spent on a house upgrade. I think you are good, especially if it helps you sleep well at night.

 

[Car-Guy]

To put it little differently: Inflation causes permanent loss of portfolio whereas downturn cause temporary loss of portfolio.

Absolutely, it's just been "transitory", so far.

 

[COcheesehead]

If you are over funded, inflation is less of a threat because you just die with less and to some with no heirs, that’s an OK outcome.

 

[VanWinkle]

No need to hold cash in a taxable account if you have cash or bonds in a tax deferred account. 100 stocks in taxable works. You can sell them even when they are down, and replace them the same day in your tax deferred account. That way you still have your allocation and have actually sold bonds in your tax deferred account to raise the cash, without the ordinary tax rate of your tax deferred account.

 

[COcheesehead]

No need to hold cash in a taxable account if you have cash or bonds in a tax deferred account. 100 stocks in taxable works. You can sell them even when they are down, and replace them the same day in your tax deferred account. That way you still have your allocation and have actually sold bonds in your tax deferred account to raise the cash, without the ordinary tax rate of your tax deferred account.

You could incur a wash sale based on what you describe.

 

[treeofpain]

I think it depends on how much "dependable" income you have - like Social Security or pension - beyond your investments. If your dependable income covers your expenses, then you have a lot more freedom to invest, if you choose to do so. But people have different levels of risk tolerance, so even if you could theoretically be all into stocks, it might not fit your personality. A lot of folks have the perspective that, "If you've won the game, why take on risk?"

 

[Out-to-Lunch]

OP told us that 5 years of expenses in cash is 10% of the portfolio, meaning portfolio is 50x expenses. At that level asset allocation is irrelevant to success.

At first I thought that is what OP said, but upon rereading, I don't think so. She or he said:

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 take this to mean there are two buckets, one is all cash, and one is 90% stocks. We don't know the relative size of them. That is why I asked for clarification, and in post #28 the OP said they were just short of 25x.

 

[Koolau]

I start the year with 2 years of spending cash, then refill in Dec.

We're usually about 1 year at start of year (RMD+).

 

[engineernerd]

Doesn't it depend on how much total savings (investable assets) you have? If you have barely enough to qualify for FI then you need more cash and if you have many times FI then you can afford to take more risk and hold less percentage in cash. Seems like a combination of risk tolerance coupled to how far into FI you are to make that call.

I was surprised, but what FIRECalc showed me when I tried a bunch of what-ifs was that the smaller your portfolio is relative to your needs, the more you need to have in stocks and the less you should keep in fixed income assets.

 

[mrfeh]

I was surprised, but what FIRECalc showed me when I tried a bunch of what-ifs was that the smaller your portfolio is relative to your needs, the more you need to have in stocks and the less you should keep in fixed income assets.

Sure, because equities return more and are better against inflation.

Of course, that assumes one doesn't panic sell, and that what happened in Japan doesn't happen in the US.

 

[engineernerd]

Sure, because equities return more and are better against inflation.

Of course, that assumes one doesn't panic sell, and that what happened in Japan doesn't happen in the US.

Wow, does Japan have a worse 40- or 30-year series than anything in the FIRECalc record?

(And absolutely, you are not allowed to panic-sell your stocks if you want the best-funded retirement possible!)

 

[mrfeh]

Wow, does Japan have a worse 40- or 30-year series than anything in the FIRECalc record?

Go look at a history of the Nikkei index from 1989 to today.

 

[engineernerd]

Go look at a history of the Nikkei index from 1989 to today.

It's 37,677 today vs 38,275 at the peak in late 1989.

OTOH, it looks like inflation has been pretty minimal over the same time frame - one 1989 yen is only worth 1.28 yen today. And I'm not sure how to look up the dividend history but I assume there's been a more-or-less steady dividend stream from the stocks in that index...

 

[Sunset]

I'm the other way. 80% of my funds are in insured CD's and the rest is invested with UBS. Gambling performance has been spotty, even in the up market and their 1.5% house 'vig' takes a righteous bite out of the 5% gains.

I don't like the idea of gambling with a higher percentage of my savings. What it took to earn that money was an excessive number of hours, putting up with zero support and tons of hard physical work. Put another way, very little of my life so far, has been mine. Retirement is glorious.

I guess my life long aviation career has my Safety Consciousness trickling down into my money management.

To me, it doesn't sound safe to be 80% in CDs.
Interest earnings are eaten up by inflation most years.

 

[RetireBy90]

To me, it doesn't sound safe to be 80% in CDs.
Interest earnings are eaten up by inflation most years.

A lesson learned in 70’s and 80’s but forgotten by many. Called recency bias. Sigh, wish I were not influenced like that, but my first thought last couple years was wow, 4% yield, I gotta lock that in. Now 5% or more doesn’t seem like that much, 1% more but 5% is 25% more.

 

[mrfeh]

It's 37,677 today vs 38,275 at the peak in late 1989.

OTOH, it looks like inflation has been pretty minimal over the same time frame - one 1989 yen is only worth 1.28 yen today. And I'm not sure how to look up the dividend history but I assume there's been a more-or-less steady dividend stream from the stocks in that index...

All true, but still - absolute value is about the same as it was 35 years ago. Folks talk about the "lost decade" in the US from 2000-10, and with Japan we're talking about "lost 35 years".

The curve of the index over this period is also important; it wasn't flat. During the GFC, it was down about 80% from its peak.

 

[ncbill]

I'm currently reading Wade Pfau's Retirement Planning Guidebook. His suggestion for using this kind of "buffer asset" to manage SORR is - IF the nominal value of the portfolio is larger than at the start of retirement (the buffer asset is not included in the portfolio value) THEN draw from the portfolio ELSE draw from the buffer asset.

IF the portfolio later recovers to larger than starting amount THEN you have discretion on whether to refill the buffer asset.

Sounds similar to the "once used, it is never refilled" cash bucket to manage SORR outlined here.

 

[corn18]

That's what happens when you don't grow. It's the economy, stupid.

GDP US vs Japan

 

[Cobra9777]

We hold almost no cash. Just enough in checking to cover the lumpiness throughout the year. We're both 64, with SS still to come. Two pensions and dividends cover our normal monthly expenses. I sell some shares every January to cover: (1) property tax, (2) federal tax, and (3) any large discretionary expenses planned for the year (home improvements, international travel, new car). Then rebalance (if needed) to our target AA of 85/15.