How much in cash?

[FinallyRetired]

I have 10 years in cash equivalent, with the remainder in balanced funds. This seems a bit much but up to now it was driven by the withdrawal rules of my account, which pays around 5.7%, and I could only withdraw it over 10 years. The rules have now changed, and I can take it all out, with a 2.5% one time penalty. That may be worth it if I invest a portion of it in higher return balanced funds and keep a lesser amount in cash equivalent (ie, MM funds). But how cash much is prudent, 3 years, 5 years,

 

[W2R]

I have 10 years in cash equivalent, with the remainder in balanced funds. This seems a bit much but up to now it was driven by the withdrawal rules of my account, which pays around 5.7%, and I could only withdraw it over 10 years. The rules have now changed, and I can take it all out, with a 2.5% one time penalty. That may be worth it if I invest a portion of it in higher return balanced funds and keep a lesser amount in cash equivalent (ie, MM funds). But how cash much is prudent, 3 years, 5 years,

I think that most people would have less than 10 years in cash equivalent. Personally, I tentatively plan to have 10 years' worth but that is because I am a champion worrier and I plan to withdraw nothing from the rest of my portfolio in the event the market plummets, and to continue to withdraw nothing until it is fully recovered. That sometimes can take a while.

Keeping 10 years worth of cash equivalent (CD's or money market) is not a wise move for overall lifetime earnings. However, it may be the best for me because I would KNOW that I had enough to live on during the crucial first 10 years of my retirement.

Bear in mind that I am not one of our financial whizzes and I still have a lot to learn. I am someone who finds more financial value in not having to worry than do most other people.

 

[megacorp-firee]

I am not a financial wiz either. I keep 3 to 4 years in cash equivalents. If things go south, I will tighten up and the 3 to 4 years could last up to 5 to 6 years if needed. However, I do have multiple income sources ... a moderate pension, my income portion of taxable portfolio and then the cash equivalents to fill the gap. So that makes my cash requirements a lot less.
IMO, it is a 'sleep at night' comfort level that you want to achieve.
Good luck.

 

[jIMOh]

10 years in cash the year I retire makes sense, with target allocation being 7 years expenses in cash or bonds.

 

[CuppaJoe]

I've totally changed my ideas about this since coming to this forum. My old plan was to wait for that last day at work and then play equity accounts against bond accounts. I would then withdraw quarterly from whichever area had the best gain.

Now, I'm shifting things arround and already have three year's expenses in a savings account. Don't know exactly where it will be when that final day comes (sometime between 4/08 and 4/09); that is, if I'll stay at three years or go on to seven or so years in cash. I really like the idea of taking current expenses from saving and MM accounts and just letting the AA from the main accounts go on as they will until I'm ready to move a few more years expenses into the cash area again.

 

[CyclingInvestor]

I lean in the other direction. I am 49, retired a year, and keep about 98% in top-quality equities,
all paying 2-5% dividends with a history of increasing them faster than inflation (GE, JNJ, PG,
KIM, GGP, VNO, etc). I live on this 3.5% dividend flow and expect never to have to
sell any stocks, so market price drops are not relevant to me. It allows me to sleep very
well at night, with only about $30k-50k in cash at any time.

 

[Corporateburnout]

I think 10 years in cash is way too conservative for me. I plan to have no more than 3 to 4 years of spending in cash.

85% of my portfolio is in tax deferred accounts 20% of which is in bonds. In a prolonged market downturn I will liquidate the bonds and hold on to the equities until the market recovers.

 

[2B]

I'm an asset allocator and the years of cash will take care of themselves. I am targeting for 40% cash/CD/bonds which will work out to about 10 years of "normal" withdrawls. Right now I'm close to 35% so I'm planning to sell some assets "soon." I'm within a couple of years of actual retirement so I'm moving to the more conservative mode.

If you are in the accumulation phase, it makes sense to have a higher equities % but then you are betting that the equities will perform well. The price of them underperforming is delaying your retirement. Once you retire, it becomes a question of finding a j*b in what is probably a poor economy since the stock market has tanked.

 

[ChrisC]

I'm trying to understand the math of keeping cash. If living expenses in retirement are $60K a year, when people say they are keeping 10 years in cash equivalents, does that mean they are keeping $600K in cash equivalents?

 

[walkinwood]

My target allocation is 70/25/5, but a large percentage of my bonds are in Short term high quality corporate bonds. I don't plan to keep more than the 5% in cash which for me will work out to little more than one year - in addition to the withdrawal for the current year.

I'll see how that works out. Planning to ER middle of next year though we're looking at it as a "sabbatical" so that we don't get too nervous. We're in our mid-late 40s.

 

[W2R]

I'm trying to understand the math of keeping cash. If living expenses in retirement are $60K a year, when people say they are keeping 10 years in cash equivalents, does that mean they are keeping $600K in cash equivalents?

Well, when I retire in two years I want to have at least $2000/month after taxes to spend per month (in 2007 dollars), with a paid off house. Social security plus pension will give me some of that, but I would be $700/month short.

So, when I say I plan to keep 10 years in cash, I am figuring about $85,000.

I will have enough in equities to pay me a fair amount more than $2000/month when the market is cooperating. And I COULD live on half that if I had to. But I think that $2000/month would be a happy level of consumption for me and probably more than I could spend.

 

[Bigritchie]

I'm trying to understand the math of keeping cash. If living expenses in retirement are $60K a year, when people say they are keeping 10 years in cash equivalents, does that mean they are keeping $600K in cash equivalents?

Yes

 

[2B]

Part of it is "years of living expenses" but part of it is stability in the value of the portfolio. In retirement you don't want wild swings in valuation of the portfolio.

 

[Spanky]

My plan is 5% in cash.

 

[Lsbcal]

Here is what I'm currently doing in retirement. We are talking about the fixed income (FI) side of the allocation. This stuff is suppose to be the SAFE part of your allocation. Take the risk in the equities side. I have the FI mostly in retirement accounts:

25% TIPS with average real rate of 2.5%
04% Ibonds, 3.4% keepers (from year 2000 or so)
08% DODIX general bond fund, duration 3.7 yrs
03% cash in retirement account
03% cash in taxable account

So my approach is to try to be very efficient at making my FI money work and also to cover myself in event of bad inflation or deflation (note: TIPS might not work so well if we have major increase in real rates). To generate more cash I'll sell equities in my taxable equities accounts and buy about 50% of this back in retirement accounts to keep AA constant. That is the purpose of the DODIX fund, to use for rebalancing into equities if equities go down or if I need to liquidate equity in taxable accounts for living expenses.

I realize the specifics of these things are very dependent on your particular circumstances at retirement. Just thought this would be helpful for some.

Les

 

[chinaco]

The term cash equivalents may be used slightly differently by each person. If the meaning is x amount of money in a money market account and y amount in say some form of intermediate bonds (or some bond mix)... Then I would be inclined to agree.


My target retirement allocation is 60/40. If I have 25x expenses in my portfolio then 40% of that is equal to 10 years of cash equivalents.

I was thinking about perhaps 8% in cash (60%/32%/8%). The cash portion along with pension would give me about 2 years of expenses.

 

[Moemg]

Right now I only have a year in cash but I plan on boosting it up to three years .I've rode the market for enough swings that I can sleep fine at night .

 

[FinallyRetired]

The term cash equivalents may be used slightly differently by each person. If the meaning is x amount of money in a money market account and y amount in say some form of intermediate bonds (or some bond mix)... Then I would be inclined to agree.
.

What I mean by cash equivalent is that portion of your portfolio that doesn't fluctuate with the market -- MM, annuities, etc. When I say I have 10 years cash equivalent I mean if the market went to zero, I would have enough cash equivalent to live on, at current expenses and with average inflation, for 10 years without touching my variable investments.

As time moves, if I don't reallocate, the 10 years becomes shorter and in 10 years I would be living off my variable investments. With allocation, I can maintain the 10 years by selling some funds to generate another year's income each year.

From the responses, it seems there is no concensus on how much cash to maintain. I do think my 10 years is too much, so I may reduce to 7 years. Not sure why, it sounds biblical, withstand 7 years of famish. Wonder if someone has done some analysis on the optimal cash. This problem probably reduces to an allocation problem, so maybe if 20/40/40 cash/bonds/stocks is optimal for someone, that may translate to x number of years cash if one wanted to live only off the cash portion

 

[WilliamG]

Cash equivalent to me is something which is reasonably liquid (very short term; eg., less than 6 mos. Tbill/CD) and stable value. We have been retired 7 years and have settled on a Cash allocation of 5% which is now entirely in money market. It serves the purpose of emergency reserve as well as a small buffer against really sour markets. With other income (eg., dividends, social security) I would guesstimate it would supply almost 3 years of living expenses if necessary.

We are 50/50 equity/non-equity so I guess we would classify 45% of our portfolio as Bond. Bond is somewhat allocated in a hierarchy of risk/reward if markets are really bad for more than 3 years. We are lucky in having around 7% in IBonds with a 3.4 and 3.6 real rate. If we wished, we could classify this as cash equivalent, but since we want to hold on to these for a while we don't. We have around 23% in Vanguard's Total Bond Market index in my rollover IRA. The other 15% in bonds comes from 15% each in Wellington and Wellesley, the "riskiest" part of our bond allocation.

ps - once considered CD ladder but haved decided to stick with mostly bond funds. fyi, here is a Paul Merriman article on this choice.

//www.fundadvice.com/articles/investing-basics/paul-merriman-ten-reasons-i-favor-bond-funds.html

 

[ChrisC]

I'm struggling with the cash portion of my retirement portfolio, which might become operational in 3 years. If I had to only be concerned with me, I probably wouldn't need to have a cash balance in the portfolio. I have one of those generous Federal retirement pensions coming my way, which should basically cover all of my living expenses, as we further downsize. We have combined taxable and tax-deferred acounts that we don't really need to use in retirement but would generate an income stream of around 1/3 of my pension stream if we took a 3 percent cut every year. These non-pension assets are 90 percent in equities and 10 percent in cash equivalents.

My problem is protection of my wife if I were to die before her, which means that my pension annuity/her survivor annuity drops by almost 50 percent. Life insurance could make up this gap, if I were to pass within the next ten years. (I don't plan to carry these term policies after that time.) But she would probably need to access our taxable and tax-deferred accounts to make up a gap if insurance doesn't cover it. I'd like to put this all in place so my wife does have to deal with this issue; I'm thinking the easiest and simplest thing to do is to have a CD ladder to cover 10 years of the gap that might exist. Anyone else do this type of contingency, cash planning, for a surviving spouse?

 

[walkinwood]

I'm trying to understand the math of keeping cash. If living expenses in retirement are $60K a year, when people say they are keeping 10 years in cash equivalents, does that mean they are keeping $600K in cash equivalents?

Close, but not exactly. Since cash generates interest, you'll need less than $600K. You'll need to figure out the exact amount by guessing your rate of return and using a net-present-value function in a spreadsheet.

 

[Donzo]

After selling some investment property -- I am way cash heavy. Most is in Prime MM w/ Vanguard and w/ Citi E savings(5%APY) that I have send me monthly E checks.
As the smoke clears concerning our market, more will go from prime into equities - I have made a couple smaller equity purchases, but right now .... having cash feels real good. But, I don't want to be to conservative.
For now - I am going to "sit on my hands" (not be impulsive) and take my time.
Let me know when to jump in w/ both feet ;-) !

 

[windsurf]

Retired (sort of; in a grad program for fun, not livelihood though it is huge work). Wife with a modest cola'd teacher retirement, ss in the future for me(70 yrs old?). Right now about 60% in money funds paying a little over 5% tax deferrred. I have an 11 year horizon on withdrawing from sheltered accounts (ira) but don't have the stomach right now for big risk. I think the market (domestic and world) is right there with Las Vegas right now. Note, I am 40% into the crap shoot. I love the advice and takes available on this forum. I appreciate the folks who do homework and put it out there for the rest of us proletariat dweebs. I don't trust the fed bs with the tweeks to market. That ain't a free market; it's a stacked deck. If anyone is in touch with the dealer, please let the rest of us know.

 

[Lsbcal]

Why are some people so worried about cashing out of an intermediate bond fund if it is really necessary. Seems a bad year for a bond fund might be around -5% (less if short term bond fund). If you are cashing out 4% of your assets from this bond fund then the "permanent loss" amounts to only 0.2% of total assets. Not an ideal situation but hardly something to loose sleep over.

Most likely in a bad equities market you will be experience good to modest bond gains with the exception of recessions that have sudden upswings in inflation and/or rises in real interest rates. In the case where equities are on the upswing you will probably have to rebalance out of them thus providing the cash you need for living expenses.

Seems that some people are letting emotions overrule rational investing. Or am I missing something?

 

[chinaco]

Why are some people so worried about cashing out of an intermediate bond fund if it is really necessary. Seems a bad year for a bond fund might be around -5% (less if short term bond fund). If you are cashing out 4% of your assets from this bond fund then the "permanent loss" amounts to only 0.2% of total assets. Not an ideal situation but hardly something to loose sleep over.

There may be some reason. I am sure everyone's situation is a little different.

I believe there are a number of ways to handle the draw-down in a bad market.

Our basic options are as follows:

DB pension - covers 17% of yearly expenses
Stock Mutual Fund dividends covers 20% of yearly expenses
Bond dividends covers 36% of yearly expenses

This represents 73% of our planned yearly expenses. We could get by on that fine.

The money market account will hold 8% of the total portfolio. 60/32/8

The other 27% of planned yearly expenses will be taken from the Money Market. It can cover almost 7 years of withdrawals (i.e., 27% of expenses).

Alternately that 8% represents 2 full years of expenses in cash.

We have a number of options to ride out a bad market for several years.

Even if the market dives, as long as the companies are still around, they will pay their dividends.

I am not too concerned about the market going to zero and staying there. If that happens, my dollars will not worth the paper they are printed on. Better be hold gold bullion instead of cash.