How much of a cash cushion?

[nun]

Not ERed yet, but my plan is as follows:

1 year of expenses in bank account
1 year of expenses in MM fund and pay all after tax dividends and capital gains distribution into MM.
2 years in short duration bonds held in tax deferred account. If I need money from them I'll transfer some to an equity fund in my IRA and sell the same dollar value of the equity fund in my after tax accounts.

That 4 years of expenses in cash and short duration bonds will be 10% of my portfolio. My asset allocation will be 45/45/10 in a couch potato portfolio made up of low cost index funds. The equities will be a US equity Index and an International equity index with a little bit of REIT. The bonds will be a total bond market index and an intermediate investment grade corporate bond.

I'm not considering CDs right now as I don't think the rates are worth locking the money away for a number of years. I might replace the short duration bonds with tax free muni bonds if bargains are to be had there when I ER.

 

[obgyn65]

I am still working so my amount of cash in money market is pretty low compared to my non-money market assets.

 

[Telecaster]

5 years expenses in cash/MM (due to no pension, and it's 5 years to 62).

 

[nun]

+1

When I was referring to small amounts of cash in posts above, I was referring to "working capital," as you put it. Depending on what I'm doing with the FIRE portfolio at the time, it may have large chunks of liquidity (cash) or none, depending.

I'm always interested to learn how people organize and manage their cash and investment accounts in retirement. I'm a couple of years from ER so I just reinvest all dividends etc and don't bother to have a large cash bucket as I have a salary coming in, but I follow Bogle's "age in bonds" approach so I'm tending towards capital preservation the closer I get to ER.

My questions would be.

1) How much do you keep in a bank account, how often do you top it up and where does that money come from?
2) How much cash do you keep in after tax investments accounts like CDs and MMs?
3) How much do you put in short term bonds and do you keep that in tax deferred accounts?

 

[Retire2013]

Three years of living expenses in CASH. I am not FIRED yet. Once FIRE'd I still plan to keep 3 years of living expenses in cash.

 

[scrabbler1]

I'm always interested to learn how people organize and manage their cash and investment accounts in retirement. I'm a couple of years from ER so I just reinvest all dividends etc and don't bother to have a large cash bucket as I have a salary coming in.

My questions would be.

1) How much do you keep in a bank account, how often do you you it up and where does that money come from?
2) How much cash do you keep in after tax investments accounts like CDs and MMs?
3) How much do you put in short term bonds and do you keep that in tax deferred accounts?

I run my daily banking the same way as when I was working. The checking account is mainly a conduit between its inflows from elsewhere and the outflows which pay the bills. I keep enough in there to cover minimum balance requirements plus a small cushion to cover any small, unforeseen expenses. For larger, unforeseen expenses, I use one of my bond mutual funds which have checkwriting provileges.

I seek to keep at least $1,000 in this no-interest checking account but the amount can be higher because I have to budget for irregular expenses which ware paid quarterly (i.e. health insurance), semi-annually (i.e. car insurance, dentist), or annually (i.e. some taxes, homeowners insurance). Any long-term surpluses are reinvested into the main long-term bond fund described immediately below.

I have a large chunk of money in a long-term bond fund whose monthly dividends are automatically sent to my bank checking account the same way my former work paycheck was done biweekly. To supplement this bond fund's dividends, I have one of my smaller (intermediate-term) bond fund's dividends also sent to the same checking account. Other mutual funds I own have their dividends reinvested somewhere, whether it is into their own funds or a different one. Cap gains distributions are handled similarly but not identically, mainly because they are more irregular.

I have an IRA whose dividends are reinvested. I have no short-term or MM funds. I don't like the low returns. I want as much of my money either growing in a stock mutual fund or getting at least 3%-4% in a bond fund.

 

[freebird5825]

My questions would be.

1) How much do you keep in a bank account, how often do you top it up and where does that money come from?
My income streams (pension and fixed annuity) are deposited in a credit union savings account, which I will refer to as the "income" account. The automatic deposits come on the 1st and the 17th of each month.
A separate account is used stricty for paying bills, i.e. the "bill" account. I transfer money from the income account to the bill account on a schedule that coincides with the automatic deposits. Just like when I was w*rking.
Keeping the income and outflow in two separate accounts saves me the trouble of doing and maintaining an income/expense spreadsheet.
I established my COL baseline when I first FIREd. I know what my recurring household expenses are versus credit card purchases. All consumer purchases are made on the same credit card, so I have a monthly total of expenditures.

2) How much cash do you keep in after tax investments accounts like CDs and MMs?
I do not own any CDs.
I currently have 6 months expenses in a TE money market fund.
I hold a large position in VWALX, average duration 7 years, and reinvest the 30 day dividends. If I need extra income in the short term, I will redirect that to my bank account. So far so good.

3) How much do you put in short term bonds and do you keep that in tax deferred accounts ?
I am currently building up a position in VMLTX, average duration less than 2 years, in a taxable account using monthly DCA from the income account. Gas prices and recent increases in my property taxes are forcing me to hold the contributions at only $100 per month.
I have a balanced fund in my Roth IRA that covers my non-muni bond diversification needs. I can't contribute to my Roth anymore because I am single with no earned income.

 

[Moemg]

My questions would be.

1) How much do you keep in a bank account, how often do you top it up and where does that money come from?
2) How much cash do you keep in after tax investments accounts like CDs and MMs?
3) How much do you put in short term bonds and do you keep that in tax deferred accounts?

In my bank account is my monthly expense money . It comes from my pension ,SS and a small amount from my MM account .I top it off monthly .In my MM I keep a year and a half of my yearly expense allocation . Everything else is invested . No CD's .

 

[nun]

I seek to keep at least $1,000 in this no-interest checking account but the amount can be higher because I have to budget for irregular expenses which ware paid quarterly (i.e. health insurance), semi-annually (i.e. car insurance, dentist), or annually (i.e. some taxes, homeowners insurance). Any long-term surpluses are reinvested into the main long-term bond fund described immediately below.

I keep a bit more readily available in by bank account. Right now I have 3 months expenses in there. Once I have paid off the mortgage and ER the same balance will be 6 months of expenses. Maybe I'll just keep it at the same level so that I can pay any big bills. I also have the same amount sitting in a MM fund, I like to have some liquidity.

 

[WilliamG]

In my bank account is my monthly expense money . It comes from my pension ,SS and a small amount from my MM account .I top it off monthly .In my MM I keep a year and a half of my yearly expense allocation . Everything else is invested . No CD's .

How often and how do you replenish that year and a half of MM?

 

[youbet]

I'm always interested to learn how people organize and manage their cash and investment accounts in retirement. I'm a couple of years from ER so I just reinvest all dividends etc and don't bother to have a large cash bucket as I have a salary coming in, but I follow Bogle's "age in bonds" approach so I'm tending towards capital preservation the closer I get to ER.

My questions would be.

1) How much do you keep in a bank account, how often do you top it up and where does that money come from?
2) How much cash do you keep in after tax investments accounts like CDs and MMs?
3) How much do you put in short term bonds and do you keep that in tax deferred accounts?

1) If by "in a bank account" you mean dollars set aside as working capital for day to day living (as opposed to cash meant to be liquid assets temporarily inbetween investment opportunities), I keep very little cash. With DW's pension, my SS, interest from bonds and bond funds and dividends from equities flowing in, I'm comfortable with less than $20k in actually cash. I recharge that stash from various opportunities that arise out of normal FIRE portfilio management as opportunities arise.

2) I do have a CD ladder which I don't consider cash. One of those which comes due this spring will be used for a new roof and a booster to our vacation funds. I consider MM the same as a bank account.

3) I do have about 4% of our assets in a short term bond fund (SIGVX) which is in DW's roll over IRA. If we needed that for some emergency, withdrawing it would trigger ordinary income taxes, a negative, but I'll deal with that if we have an emergency and using those funds was the best way to get some needed cash.

A low cash position vs a high cash position is just another way of asking are you more comfortable with the risk of having to sell something at an non-opportune time or holding a bunch of cash at near zero interest rates? During the recession bottom, I didn't have any trouble finding 2% or so of my portfolio to liquidate at not-so-painful prices.

Keeping cash as liqudity to facilitate portfolio moves or to take advantage of investment opportunities is an entirely different kettle of fish than the cash you hold for working capital.

Each to his own and we all have to sleep at night...... But I'd sleep less well knowing that I had a ton of cash I was holding "just in case" at near zero interest rates than knowing some possible emergency might cause me to liquidate some assets at a non-opportune time.

EDIT: Folks reading these responses need to be aware that some respondents are:

1) Living primarily off of pensions, SS, annuities, etc., are their cash management is a budgeting exercise aimed at smoothing out income arrivals to accomodate spending needs. Or,

2) Living off of FIRE portfolios and likely using a total return approach which means they liquidate assets from time to time to generate cash. Or,

3) Many are somewhere in the middle. At our house, about two thirds of our budget is covered by pension, SS, interest and dividends and I'm always looking for opportunistic situations to liquidate assets to cover the needed additional one third.

Point is, you need to understand everyone's particular scenario when listening to how they handle cash/liquidity needs.

 

[Danmar]

I suspect most people would not consider cash held to take advantage of security purchase opportunities as true "cash" for this discussion. True cash would probably mean cash that is eventually slated for consumption. The level people would feel comfortable with would depend on other sources of dependable cash flow(interest, divs, pension,etc), and the expected consumption level. You would also need to cover any unexpected special expenses. So, that's the theory. In our case we keep 1-2 years of expenses that are not covered by divs. Still have big option cash-outs coming. Once I start collecting my pension next year we can probably keep less cash as divs and pension will more than cover all expenses.

 

[Moemg]

How often and how do you replenish that year and a half of MM?

Yearly . My dividends & capital gains from my taxable account go there and then I sell a little to top it off .

 

[Rustic23]

I have almost three times the amount of cash than I would normally have, about 24%. We are planning for a rather large expense next year so I have beefed up cash now. I will reduce it after that.

 

[Danmar]

I was thinking a little more about this issue. When I was working I oversaw the development of a new more stingent liquidity risk management system at one of Canada's largest banks. Needless to say this was a pretty complicated project, with most of the issues relating to data gathering and exception reporting. The way banks manage this risk is interesting(at least to me). They segregate all assets and liabilities into time buckets and assign degrees of liquidity(how easy to sell or use as security). They then ensure that each bucket of liabilities is covered by an equal or larger bucket of cumulative liquid assets. This is how a bank would ensure they always have enough funds on hand to pay depositors and oher liabilities.

Applying these concepts to our situation: Make sure you have liquidity to meet your known expenses after taking into account known sources of future liquidity. I guess that is pretty obvious. I was hoping for something a little more profound out of the banking story. Sorry.

 

[nun]

When I get my pension and SS I can see myself reducing the amount of cash I hold to pay daily bills and as a buffer against market down turns. But until that happens I want to have enough cash to live for 2 or 3 years so that I'm not forced to sell and at a bad time.

 

[Danmar]

When I get my pension and SS I can see myself reducing the amount of cash I hold to pay daily bills and as a buffer against market down turns. But until that happens I want to have enough cash to live for 2 or 3 years so that I'm not forced to sell and at a bad time.

Makes sense. Would you reduce your cash holdings once you get within 2/3 years of pension/SS receipt?

 

[nun]

Makes sense. Would you reduce your cash holdings once you get within 2/3 years of pension/SS receipt?

I suppose so. I'm still working and I have 2 months living expenses in the bank and another 2 months in a MM and I'm happy with that as I know there's a pay check coming in. If I ER I'll want that 2 to 3 year cash cushion, but once SS and the pension start and I have a regular check coming in I can see myself reducing the amount of cash I hold.

 

[cardude]

I have about 14 year's worth of living expenses in cash/cd/bonds.

I have a large equity allocation (50%) to one stock, and I use the cash as security if the market stays depressed for that stock for a long period of time, keeping me from selling some to fund expenses/replenish cash.

Rental real estate provides about 35% of my living expenses.

SWR is 2% if rentals are at 90% occupancy.

Not the typical portfolio, obviously.

 

[nun]

I have about 14 year's worth of living expenses in cash/cd/bonds.

I have a large equity allocation (50%) to one stock, and I use the cash as security if the market stays depressed for that stock for a long period of time, keeping me from selling some to fund expenses/replenish cash.

Rental real estate provides about 35% of my living expenses.

SWR is 2% if rentals are at 90% occupancy.

Not the typical portfolio, obviously.

I have rental property that will cover half my expenses after the mortgage is paid off, so that reduces the actual amount of cash I need to cover 2 or 3 years of expenses. I'm 50/50 allocated and the bond terms are around 5 to 7 years. Once I ER I'll probably do 1 year of cash in a bank account, one year in a MM and one year in a short duration bond and top up the bank account with rent, distributions, interest and capital gains from after tax accounts. Right now I have no plans to use CDs and the returns aren't worth locking up money for 5 years....but if interest rates go up they might become an option.