Multiple years of expenses in cash when starting retirement

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lazynovice
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Re: Multiple years of expenses in cash when starting retirement

Post by lazynovice »

KlangFool wrote: Tue Apr 13, 2021 1:51 pm
lazynovice wrote: Tue Apr 13, 2021 1:41 pm
No. It is currently set up to convert our 401(k)s to Roth which will hurt us from a subsidy viewpoint. We will make the calculations at that point to determine which is more valuable to us. We also have close to six figures of tax loss carryforwards to offset capital gains if we have to take them to sell bonds.
lazynovice,

And, depending on how much CASH that you have, you could spend CASH, Roth IRA contribution, and do Roth conversion at the same time. You may qualify for ACA subsidy that way.

<<We will make the calculations at that point to determine which is more valuable to us. >>

The option is not available if you do not accumulate CASH ahead of time.

<<We also have close to six figures of tax loss carryforwards to offset capital gains if we have to take them to sell bonds.>>

But, you could only deduct 3K per year of ordinary income (interest income) with the capital loss.

In summary, you may want to plan ahead and see whether CASH could help you.

KlangFool
You are right in the first two but not the last, I believe. Capital loss carryforwards offset capital gains before they offset ordinary income. Do they not?
Northern Flicker
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Re: Multiple years of expenses in cash when starting retirement

Post by Northern Flicker »

SnowBog wrote: Tue Apr 13, 2021 2:24 pm
Northern Flicker wrote: Tue Apr 13, 2021 2:13 pm My view is that if portfolio liquidity is properly managed, a very large cash position will just be a drag on returns while meeting a need for more liquidity than is required. If the portfolio has N years of expenses in intermediate treasuries and N years of expenses in some combination of i-bonds, short-term TIPS, and cash, you should have a good source of liquidity in times of financial duress. For me, N = 1.
I don't necessarily disagree, as I mentioned in my post, there is a "cost" for holding cash and other conservative investments.

That said, for myself I'm willing to pay the cost. We are blessed to likely have "enough" either way. But by having a more conservative approach, we are more assured of our plan to retire early being successful.

And since we plan to delay our social security and pensions as late as possible, we need to plan on funding 17+ years almost exclusively from our portfolio, regardless of what the markets are doing. To me "knowing" I could successfully retire when I'm 52-53 is more important than having a bigger net worth when I'm 80. So I'm willing (and luckily able) to make that tradeoff.
Your asset level also means you likely don't need to make that tradeoff. But cash is not the lowest risk asset for funding the first 17 years of a retirement.
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life in slices
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Re: Multiple years of expenses in cash when starting retirement

Post by life in slices »

Broken Man 1999 wrote: Tue Apr 13, 2021 11:57 am Our Short-term Treasury Index MF is very stable, close enough to cash for us. We can cover anything that comes our way, if needed, so no emergency fund or dedicated uses for any of our portfolio.

Broken Man 1999
Just curious as to what fund you are using?
Thanks!
ensign
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Re: Multiple years of expenses in cash when starting retirement

Post by ensign »

FlamePoint wrote: Tue Apr 13, 2021 9:07 am I started retirement with $400k in cash and am glad I did. We’re using these funds for aggressive Roth conversions over the next few years (living expense and taxes). In hindsight I wish I’d set aside even more in taxable for this purpose.
That’s precisely what I’m doing as well.
MathWizard
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Re: Multiple years of expenses in cash when starting retirement

Post by MathWizard »

2Scoops wrote: Tue Apr 13, 2021 9:25 am Thanks for everyone’s comments about how they are using the cash and the reasons for stockpiling. However, I’m really looking at how people actually accumulated that cash? Was it slowly over time, selling bonds/equities right before retirement, foregoing other investments the final X years to fund their cash position, other?
For us, in 2017, I was maxing tax advantaged, had the youngest in college, and a mortgage.
Once our son graduated, we paid off the last $17K of the mortgage that next year,
With the cashflow from paying for college and the cashflow from the mortgage, cash just started to
build up in savings.
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Re: Multiple years of expenses in cash when starting retirement

Post by SnowBog »

Northern Flicker wrote: Tue Apr 13, 2021 3:04 pm Your asset level also means you likely don't need to make that tradeoff. But cash is not the lowest risk asset for funding the first 17 years of a retirement.
Color me curious... What do you view as lower risk?

That said, I'm not approaching this from a "lowest risk" viewpoint. More "predictable" perhaps. And lots of flexibility.
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Re: Multiple years of expenses in cash when starting retirement

Post by ensign »

2Scoops wrote: Tue Apr 13, 2021 9:25 am Thanks for everyone’s comments about how they are using the cash and the reasons for stockpiling. However, I’m really looking at how people actually accumulated that cash? Was it slowly over time, selling bonds/equities right before retirement, foregoing other investments the final X years to fund their cash position, other?
From decades of saving.
Nivek
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Re: Multiple years of expenses in cash when starting retirement

Post by Nivek »

I have a little over 3 years of Cash on hand but that was primarily from options maturing and imminent downsizing at MegaCorp. I set it aside for that day and that day came and went with me still working for said MegaCorp but plan to keep it there. I'm 2 to 4.5 years away from retiring depending on a couple of factors and I'm good with the amount plus plan to leverage it when I retire to minimize taxable income. Even with that amount, my asset allocation is 58% stock, 20% bonds, 17% cash and 5% real estate (rental property). For me, it's the right level of risk that let's me sleep better at night. When the market crashed during COVID, I was happy I had the cash. When it came back, I was happy I had 58% stock. Helluva a ride but I didn't change course. I know a few people who jumped off the rollercoaster at the bottom and missed the rise up.
Northern Flicker
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Re: Multiple years of expenses in cash when starting retirement

Post by Northern Flicker »

SnowBog wrote: Tue Apr 13, 2021 3:16 pm
Northern Flicker wrote: Tue Apr 13, 2021 3:04 pm Your asset level also means you likely don't need to make that tradeoff. But cash is not the lowest risk asset for funding the first 17 years of a retirement.
Color me curious... What do you view as lower risk?

That said, I'm not approaching this from a "lowest risk" viewpoint. More "predictable" perhaps. And lots of flexibility.
Typically, a year of cash for year one, and a TIPS ladder with a TIPS that matures to fund each if years 2-17 would be the normal way to achieve lower risk. With negative real yields for TIPS you would have to overfund the principal of each to achieve the neutralization of all risk. Today, I think i-bonds would be the lowest risk way to do it, but you cannot set that up in a single year due to annual purchase limits.

Are you trying to achieve predictability in nominal or real terms?
Last edited by Northern Flicker on Tue Apr 13, 2021 3:49 pm, edited 1 time in total.
KlangFool
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Re: Multiple years of expenses in cash when starting retirement

Post by KlangFool »

lazynovice wrote: Tue Apr 13, 2021 2:53 pm
KlangFool wrote: Tue Apr 13, 2021 1:51 pm
lazynovice wrote: Tue Apr 13, 2021 1:41 pm
No. It is currently set up to convert our 401(k)s to Roth which will hurt us from a subsidy viewpoint. We will make the calculations at that point to determine which is more valuable to us. We also have close to six figures of tax loss carryforwards to offset capital gains if we have to take them to sell bonds.
lazynovice,

And, depending on how much CASH that you have, you could spend CASH, Roth IRA contribution, and do Roth conversion at the same time. You may qualify for ACA subsidy that way.

<<We will make the calculations at that point to determine which is more valuable to us. >>

The option is not available if you do not accumulate CASH ahead of time.

<<We also have close to six figures of tax loss carryforwards to offset capital gains if we have to take them to sell bonds.>>

But, you could only deduct 3K per year of ordinary income (interest income) with the capital loss.

In summary, you may want to plan ahead and see whether CASH could help you.

KlangFool
You are right in the first two but not the last, I believe. Capital loss carryforwards offset capital gains before they offset ordinary income. Do they not?
lazynovice,

You are right. My point being that in the best case where you had offset all the capital gains, you can only deduct $3,000 of ordinary income. Hence, the interest income may still cause problem for you.

KlangFool
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Wiggums
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Re: Multiple years of expenses in cash when starting retirement

Post by Wiggums »

We accumulated cash over a long period of time. Our approach has always been to hold a years w2 income in cash. I’m sure that we left money on the table, but what was invested was 100% low cost s&p 500 fund and no bonds. I feel like the cash gives us flexibility.

It makes sense to me to go into retirement understanding your sources of retirement income, what is in cash and what would be sold. The selling part is what you need to decide how to handle in a down or falling market.
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Re: Multiple years of expenses in cash when starting retirement

Post by Bogle7 »

FlamePoint wrote: Tue Apr 13, 2021 9:07 am I started retirement with $400k in cash and am glad I did. We’re using these funds for aggressive Roth conversions over the next few years (living expense and taxes). In hindsight I wish I’d set aside even more in taxable for this purpose.
+1
For us, it was $320K and higher would have been better.
When you have $1.5M in Roth conversions to do, you need a lot for taxes.
Old fart who does three index stock funds, baby.
Broken Man 1999
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Re: Multiple years of expenses in cash when starting retirement

Post by Broken Man 1999 »

life in slices wrote: Tue Apr 13, 2021 3:13 pm
Broken Man 1999 wrote: Tue Apr 13, 2021 11:57 am Our Short-term Treasury Index MF is very stable, close enough to cash for us. We can cover anything that comes our way, if needed, so no emergency fund or dedicated uses for any of our portfolio.

Broken Man 1999
Just curious as to what fund you are using?
Thanks!

Vanguard Short-term Treasury Index mutual fund (VSBSX). That mutual fund is the only mutual fund we have in our TIRAs, our Roths have only equity ETFs. I sometimes use VSBSX to exchange into another mutual fund then convert the new mutual fund to the ETF equivalent later on. Makes it easy.

We do have Vanguard mutual funds in our VA, but that is all we can hold.

Broken Man 1999
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ad2007
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Re: Multiple years of expenses in cash when starting retirement

Post by ad2007 »

2Scoops wrote: Tue Apr 13, 2021 9:25 am ....I’m really looking at how people actually accumulated that cash? ...
We've always had cash in our saving account between 1-3 year's worth of annual expenses for the past few decades. We've only needed it a few times for various family members, so they appreciated that we were sitting on that much cash.

When we retired, I had quarterly payments coming for about 18 months, so we parked those payments in savings earning next to nothing. To be fair we wanted to buy something big (second home, RV, reward myself with a kick ass sports car) but never did pull the trigger on any of those purchases.

Now that we have a firm grasp on our retirement spending, we hold about 2 months spending in of cash.

In hindsight, sitting on cash all this time was financially stupid for us, but it made us feel good/safe.
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beernutz
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Re: Multiple years of expenses in cash when starting retirement

Post by beernutz »

2Scoops wrote: Tue Apr 13, 2021 9:25 am Thanks for everyone’s comments about how they are using the cash and the reasons for stockpiling. However, I’m really looking at how people actually accumulated that cash? Was it slowly over time, selling bonds/equities right before retirement, foregoing other investments the final X years to fund their cash position, other?
I am accumulating 4 to 5 years worth of expected living expenses above my pension for my retirement next year.

About 20% of the amount I plan to accumulate came from selling a mutual fund in my taxable account. I had planned to sell it eventually as it had the highest expense ratio of any mutual fund I hold and I decided not to reinvest the proceeds in other equities.

About 50% of the amount will come from an inheritance I will receive in the next 30 days. I've decided not to put any of it in equities.

The other 30% will come from selling shares of a SP500 company stock my wife accumulated in an ESPP prior to her retirement.

I'll likely keep the cash in savings accounts at Ally and Marcus but that is yet to be decided.
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SnowBog
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Re: Multiple years of expenses in cash when starting retirement

Post by SnowBog »

Northern Flicker wrote: Tue Apr 13, 2021 3:33 pm
SnowBog wrote: Tue Apr 13, 2021 3:16 pm
Northern Flicker wrote: Tue Apr 13, 2021 3:04 pm Your asset level also means you likely don't need to make that tradeoff. But cash is not the lowest risk asset for funding the first 17 years of a retirement.
Color me curious... What do you view as lower risk?

That said, I'm not approaching this from a "lowest risk" viewpoint. More "predictable" perhaps. And lots of flexibility.
Typically, a year of cash for year one, and a TIPS ladder with a TIPS that matures to fund each if years 2-17 would be the normal way to achieve lower risk. With negative real yields for TIPS you would have to overfund the principal of each to achieve the neutralization of all risk. Today, I think i-bonds would be the lowest risk way to do it, but you cannot set that up in a single year due to annual purchase limits.

Are you trying to achieve predictability in nominal or real terms?
Gotcha. I may have to revisit TIPS, but currently I'm avoiding. If our plan works, we'll need to fund 6-7 years before we can easily touch retirement accounts, and I'm not interested in holding TIPS in taxable in our tax brackets.

As I put in my post, I have been maxing out I Bonds. Did $20k last year, expecting to buy $45k this year (with tax refund and two living trusts). Plan to keep doing that until we retire. I'll also have a few years of EE Bonds in there, but I didn't know about/buy those early enough (so they'll only help cover from say 65 - 69 at this point).

My goal is I/EE Bonds will provide an income floor of around $35k/year (bulk of that being "real") until 70. Again, might not choose to spend them that way, but we could...

Will have another 2-3 years in cash, primarily for tax management especially if we need to balance ACA (still figuring this out, spouse should have access to retiree healthcare so will need to figure out which is better). But I'm intending on doing large Roth conversions and/or TGH at low LTCG rates, so will use cash (and if needed Roth) to stay below key thresholds for income.

Add my munis to the mix (needed to maintain AA and keep enough stock in 401k for rebalancing), and it's a quasi-LMP setup. Should cover bulk [all essential expenses] during early retirement years. But only partially in "real" terms. We are lucky enough to have pensions/SS that should cover the bulk of spending when they kick in at 70 (80% of which with COLA). So it's really about making sure to get through the middle years from retirement until 70...
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celia
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Re: Multiple years of expenses in cash when starting retirement

Post by celia »

I've seen many people here posting about this as they start retirement and also asking how others spend down their savings. What they often have not thought about is what will happen in the future when RMDs start along with being on SS and/or a pension. Their retirement may be financially secure, but they may have never considered that spending from Taxable only in their early retirement years will give them a few year of low taxes, but that there is a "tax bomb" waiting for them at age 72.

What they should consider is instead of having a few years of low taxes followed by high taxes for the rest of their lives (after 72), it may be better to "level" their Taxable Income throughout all their reaming years, in order to "level" out their taxes. They can make a big difference by doing Roth Conversions before age 72 arrives.

My general observation is that someone filing Single with over half a million in tax-deferred, or filing MFJ with a million in tax-deferred, should at least run some numbers to see what is in their future. In early retirement, you have a chance to change things, but after the "tax bomb" hits, there's not much you can do except pay the taxes.

Note that if you are married, at some time either you or your spouse will be a widow(er) and have to file as Single, while still withdrawing the same RMDs as when married. That alone could push the survivor into a higher tax bracket.
Last edited by celia on Tue Apr 13, 2021 4:50 pm, edited 1 time in total.
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Re: Multiple years of expenses in cash when starting retirement

Post by Buddtholomew »

2Scoops wrote: Tue Apr 13, 2021 9:27 am
KlangFool wrote: Tue Apr 13, 2021 9:24 am OP,

1) I keep 3 years in CASH for tax management purposes. I need the ACA insurance subsidy until I am old enough for MEDICARE. I am on COBRA last year and this year.

2) My portfolio target is 1.5 million. My annual expense is 60K. I am slowly de-risking my portfolio

Phase 1

A) When the portfolio grow cross a 60K threshold, I CASH out 30K and put into the EF.

B) Reset the threshold

For example, 1.56 million, CASH out 30K, the portfolio is 1.53 million now. The new threshold is 1.59 million. My EF is at 3 years. I am reaching the limit of the CASH that I want to hold.

Phase 2
A) When the portfolio grow cross a 60K threshold, I CASH out 30K and pay down the mortgage and buy 2K of physical Gold or Silver.

B) Reset the threshold

For example, 1.59 million, CASH out 30K, the portfolio is 1.56 million now. The new threshold is 1.62 million.

I am on phase 2 now.

KlangFool
Thanks KlangFool! Very helpful with the methodology for setting and maintaining that position. Would love to hear from others.
How do you cash out 30K while not incurring taxes?
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KlangFool
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Re: Multiple years of expenses in cash when starting retirement

Post by KlangFool »

Buddtholomew wrote: Tue Apr 13, 2021 4:49 pm
2Scoops wrote: Tue Apr 13, 2021 9:27 am
KlangFool wrote: Tue Apr 13, 2021 9:24 am OP,

1) I keep 3 years in CASH for tax management purposes. I need the ACA insurance subsidy until I am old enough for MEDICARE. I am on COBRA last year and this year.

2) My portfolio target is 1.5 million. My annual expense is 60K. I am slowly de-risking my portfolio

Phase 1

A) When the portfolio grow cross a 60K threshold, I CASH out 30K and put into the EF.

B) Reset the threshold

For example, 1.56 million, CASH out 30K, the portfolio is 1.53 million now. The new threshold is 1.59 million. My EF is at 3 years. I am reaching the limit of the CASH that I want to hold.

Phase 2
A) When the portfolio grow cross a 60K threshold, I CASH out 30K and pay down the mortgage and buy 2K of physical Gold or Silver.

B) Reset the threshold

For example, 1.59 million, CASH out 30K, the portfolio is 1.56 million now. The new threshold is 1.62 million.

I am on phase 2 now.

KlangFool
Thanks KlangFool! Very helpful with the methodology for setting and maintaining that position. Would love to hear from others.
How do you cash out 30K while not incurring taxes?
A) I pay tax. But, that is not a problem since I am on COBRA last year and this year. With the CASH, I am prepared for the ACA premium credit next year and onward.

B) For this year, unless I found employment. Most of the capital gains will be taxed at long-term capital gain tax rate of 0%.

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celia
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Re: Multiple years of expenses in cash when starting retirement

Post by celia »

lazynovice wrote: Tue Apr 13, 2021 1:41 pm It is currently set up to convert our 401(k)s to Roth which will hurt us from a subsidy viewpoint. We will make the calculations at that point to determine which is more valuable to us.
Have you considered that maybe it would be worth it to give up a year or two of subsidies (costing you an additional $x) to save on IRMAA surcharges that could increase your Medicare premiums for the rest of your live(s)? If the IRMAA surcharges will be more than $x, why wouldn't you want to avoid them by doing early Roth conversions instead of taking the ACA subsidy?

You'd have to do the calculations now to see if this would benefit you. Once you start Medicare, you can't go back to these ACA years.
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Re: Multiple years of expenses in cash when starting retirement

Post by SnowBog »

celia wrote: Tue Apr 13, 2021 4:48 pm I've seen many people here posting about this as they start retirement and also asking how others spend down their savings. What they often have not thought about is what will happen in the future when RMDs start along with being on SS and/or a pension. Their retirement may be financially secure, but they may have never considered that spending from Taxable only in their early retirement years will give them a few year of low taxes, but that there is a "tax bomb" waiting for them at age 72.

What they should consider is instead of having a few years of low taxes followed by high taxes for the rest of their lives (after 72), it may be better to "level" their Taxable Income throughout all their reaming years, in order to "level" out their taxes. They can make a big difference by doing Roth Conversions before age 72 arrives.

My general observation is that someone filing Single with over half a million in tax-deferred, or filing MFJ with a million in tax-deferred, should at least run some numbers to see what is in their future. In early retirement, you have a chance to change things, but after the "tax bomb" hits, there's not much you can do except pay the taxes.

Note that if you are married, at some time either you or your spouse will be a widow(er) and have to file as Single, while still withdrawing the same RMDs as when married. That alone could push the survivor into a higher tax bracket.
+1

For me, that's part of our plan to have cash and taxable investments to attempt to "level" taxes as you say. In fact, we are currently leaning towards some "pre-payment" of taxes (pay slightly more during early retirement if we can) - so that the survivor doesn't have a massive tax jump late in life.

We've looked at iORP, RPM, Paralana Gold, and others for Roth conversion optimizations. Minimally we'll be doing up to the 1st brackets. TBD beyond there, subject to ACA, LTCG rates (and gains at that point), etc.
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Re: Multiple years of expenses in cash when starting retirement

Post by englishgirl »

My cash cushion has grown over the years, and I will be looking to reduce it somewhat closer to retirement. I am self employed, and therefore don't have sick or vacation pay, so my emergency fund/cash stash grew so I could pay myself some sick pay and take a vacation without worrying. Or to cover times when the business wasn't bringing in a lot. As the business did better, I started saving in a business savings account to cover things like that, so I kind of duplicated it in another account so there's more of a business emergency fund in addition to the personal emergency fund. Then I realized that instead of spending money on disability insurance (which is very expensive for an individual), I could put that money aside and self fund a kind of disability policy so that I would have money that I could tap prior to age 59.5 to live on should I need it. [I know, I know, I could withdraw from my retirement accounts early in that case, but it was a mental accounting/calming thing.] And so it went on.

I do aim to have a year or two set aside during retirement for cashflow reasons, but there's no need for 5+ years of living expenses in cash in my case. I can't see myself needing to do Roth conversions or anything.
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Re: Multiple years of expenses in cash when starting retirement

Post by lazynovice »

celia wrote: Tue Apr 13, 2021 5:09 pm
lazynovice wrote: Tue Apr 13, 2021 1:41 pm It is currently set up to convert our 401(k)s to Roth which will hurt us from a subsidy viewpoint. We will make the calculations at that point to determine which is more valuable to us.
Have you considered that maybe it would be worth it to give up a year or two of subsidies (costing you an additional $x) to save on IRMAA surcharges that could increase your Medicare premiums for the rest of your live(s)? If the IRMAA surcharges will be more than $x, why wouldn't you want to avoid them by doing early Roth conversions instead of taking the ACA subsidy?

You'd have to do the calculations now to see if this would benefit you. Once you start Medicare, you can't go back to these ACA years.
Yes, that is what we are planning for as of right now. Our plan is Roth conversions from my retirement to 62 for the older spouse (roughly 8 years) to avoid IRMAA. But that likely means no premium credits at all. We have close to 2 million in 401(k)s- all in bonds to try to minimize the future RMDs.

Given our ages (50 and 51), doing the calculations now is pretty hard. Tax rates will change, IRMAA rates will change and premium tax credits will change. Tax rates seem like the easiest ones to guess right now.
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2Scoops
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Re: Multiple years of expenses in cash when starting retirement

Post by 2Scoops »

mptfan wrote: Tue Apr 13, 2021 2:38 pm
2Scoops wrote: Tue Apr 13, 2021 7:48 am... it seems most people keep 3-6 months for their EF (some less) on a regular basis.
How do you know this?
I'm generalizing based on the countless threads I've read about EF's.
Last edited by 2Scoops on Wed Apr 14, 2021 4:57 am, edited 1 time in total.
GG1273
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Re: Multiple years of expenses in cash when starting retirement

Post by GG1273 »

As we earned more, our spending didn't increase so we've been able to accumulate a few years net salary over time.
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Re: Multiple years of expenses in cash when starting retirement

Post by simpletone »

We are approaching our date with hopefully (knock on wood) a lot of years in front of us. We spent the last few years generating cash from portfolio sales, and income savings. We are conservative and our plans are currently 3x, in cash, as we transition into this next phase of life. While we have done a lot of modeling, budgets and other planning activities, we think we still have a lot to learn. The cash gives us peace of mind to navigate the transition, offer some protection from SORR, and help us learn to live off our portfolio over time and optimize for healthcare and taxes.
Northern Flicker
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Re: Multiple years of expenses in cash when starting retirement

Post by Northern Flicker »

celia wrote: Tue Apr 13, 2021 5:09 pm
lazynovice wrote: Tue Apr 13, 2021 1:41 pm It is currently set up to convert our 401(k)s to Roth which will hurt us from a subsidy viewpoint. We will make the calculations at that point to determine which is more valuable to us.
Have you considered that maybe it would be worth it to give up a year or two of subsidies (costing you an additional $x) to save on IRMAA surcharges that could increase your Medicare premiums for the rest of your live(s)? If the IRMAA surcharges will be more than $x, why wouldn't you want to avoid them by doing early Roth conversions instead of taking the ACA subsidy?

You'd have to do the calculations now to see if this would benefit you. Once you start Medicare, you can't go back to these ACA years.
But you still have 7 (or possibly more if MFJ) years to do conversions before age 72 and RMDs.
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Re: Multiple years of expenses in cash when starting retirement

Post by Northern Flicker »

celia wrote: What they should consider is instead of having a few years of low taxes followed by high taxes for the rest of their lives (after 72), it may be better to "level" their Taxable Income throughout all their reaming years, in order to "level" out their taxes. They can make a big difference by doing Roth Conversions before age 72 arrives.
One way to level it that is rarely discussed on BH is to purchase one or more SPIAs in trad space before age 72.
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Re: Multiple years of expenses in cash when starting retirement

Post by Runyer »

I am just over a year from my planned retirement. I am in the “ building cash” mode. I have stopped my additional $2,000 a month to my retirement account to help build my cash position. We will also be paying off our mortgage at the end of this month, thanks to selling some property (set to close next week). We will use our former mortgage payment to build our cash each month. Also, we won’t contribute to TIRA this year and keep it in cash. I want to be in a position to convert some Traditional to Roth in 2023 and reduce risk as I enter retirement.
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Re: Multiple years of expenses in cash when starting retirement

Post by livelovelaugh00 »

2Scoops wrote: Tue Apr 13, 2021 9:25 am Thanks for everyone’s comments about how they are using the cash and the reasons for stockpiling. However, I’m really looking at how people actually accumulated that cash? Was it slowly over time, selling bonds/equities right before retirement, foregoing other investments the final X years to fund their cash position, other?
Downsized.
Dandy
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Re: Multiple years of expenses in cash when starting retirement

Post by Dandy »

Always had some allocation to cash, cash-like assets, changed taxable equities to cash vs reinvest, severance from forced early retirement, later a small inheritance, and knowing last employment was on shaky ground increased cash holdings e.g. banked most of bonuses vs spending or investing them.
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Re: Multiple years of expenses in cash when starting retirement

Post by dcabler »

SnowBog wrote: Tue Apr 13, 2021 1:36 pm I've started buying I Bonds (and EE Bonds), and plan to keep doing so until we retire. While not technically "cash" - I count these as "cash like" for this purpose. My goal is these will fund roughly $35k of "income" per year between when we retire and start collecting social security. (We may not use them in that way, if markets are doing well, we might not cash any of them those years.)
Similar here regarding an income stream added to SS. We do it with Ibonds and TIPs funds where we adjust the total effective duration downward periodically. If it weren't for the fact that I "discovered" Ibonds late in the game and they have annual purchase amount restrictions, I'd prefer to hold only them. Still, I'll look opportunities to purchase more Ibonds over time and reduce the amount of TIPs I hold accordingly.

Beyond that, no cash specifically for any other purpose. Not looking for opportunities to buy an investment by otherwise holding dead money in the meantime while I wait for such an opportunity to come along. We keep enough in our checking account for small emergencies, but I have a high enough credit card limit that medium sized emergencies can be handled instantly. Most large emergencies could always wait the 2-3 days it takes to sell something in my taxable account and get it transferred to my checking account.
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Re: Multiple years of expenses in cash when starting retirement

Post by mptfan »

2Scoops wrote: Tue Apr 13, 2021 5:55 pm
mptfan wrote: Tue Apr 13, 2021 2:38 pm
2Scoops wrote: Tue Apr 13, 2021 7:48 am... it seems most people keep 3-6 months for their EF (some less) on a regular basis.
How do you know this?
I'm generalizing based on the countless threads I've read about EF's.
I've also read countless threads about emergency funds and I don't think that's a fair generalization. I recall a variety of views on this subject, some people do not have an emergency fund, some people use a HELOC or other available credit, some people have several years of cash, some people keep 1-2 months of cash, some people are 100% stocks and treat their stock portfolio as an emergency fund, some people have pensions and don't feel that an emergency fund is necessary.
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Re: Multiple years of expenses in cash when starting retirement

Post by namajones »

2Scoops wrote: Tue Apr 13, 2021 9:25 am Thanks for everyone’s comments about how they are using the cash and the reasons for stockpiling. However, I’m really looking at how people actually accumulated that cash? Was it slowly over time, selling bonds/equities right before retirement, foregoing other investments the final X years to fund their cash position, other?
Living well under my means. Saving 60 percent of every (net) paycheck. Over the years, that adds up. Assist from capital gains (stock).
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Re: Multiple years of expenses in cash when starting retirement

Post by dbr »

2Scoops wrote: Tue Apr 13, 2021 9:25 am Thanks for everyone’s comments about how they are using the cash and the reasons for stockpiling. However, I’m really looking at how people actually accumulated that cash? Was it slowly over time, selling bonds/equities right before retirement, foregoing other investments the final X years to fund their cash position, other?
Someone else mentioned downsizing.

I know a couple that sold a home in a HCOL area, put the proceeds in T Bills, and moved to an apartment in a MCOL area and paid the rent from the T Bills for many years.

That is also a lesson about how a real estate asset might play a role in investing for retirement.
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Re: Multiple years of expenses in cash when starting retirement

Post by grok87 »

2Scoops wrote: Tue Apr 13, 2021 9:25 am Thanks for everyone’s comments about how they are using the cash and the reasons for stockpiling. However, I’m really looking at how people actually accumulated that cash? Was it slowly over time, selling bonds/equities right before retirement, foregoing other investments the final X years to fund their cash position, other?
Here is the approach i would advocate based on David Swensen.

viewtopic.php?f=10&t=311560

No need for cash until around 10 years till retirement. Then start building cash position over those 10 years that would equal 18% of portfolio at retirement
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Re: Multiple years of expenses in cash when starting retirement

Post by Sandtrap »

8-10 years expenses and much much more when we formally retired.
Bought an expensive “flipper” home and homestead so knew we needed lots of ready cash over a period of time for construction costs, etc.
The funds came out of closing most of my businesses.
Over the past 9 years it’s worked out well.
A long range plan is a good thing.
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Re: Multiple years of expenses in cash when starting retirement

Post by ruralavalon »

2Scoops wrote: Tue Apr 13, 2021 7:48 am I’ve read a lot of posts recently where people have mentioned having X number of years in cash when entering retirement. The reasons were varied but it got me thinking how they may have positioned themselves to have this cash since it seems most people keep 3-6 months for their EF (some less) on a regular basis.

Hoping to get some insight from those that are retired about how you allocated to your cash position.

- Did you just gradually increase this over an extended period of time?
- Stop/reduce other investments as you approached retirement to build up this position?
- Sell equities from taxable potentially to build up cash reserves? (Tax issues)
- Other?

Thanks
As kd2008 correctly noted "There is no one-size fits all answer for this. Each person's sleep-well-at-night number for cash is different and so are sources that replenish it as it gets spent." Our number is zero.

I have been retired 10 years, with no pension or annuity.

Since about 3 years before my retirement our asset allocation has been 50/50. The fixed income allocation was and still is entirely in an intermediate-term bond index fund.

We have had no cash allocation, no savings account, no CDs, and no money market fund. We had and still have a significant taxable account invested in stock index funds. So we have had easy, quick access penalty-free to assets othat can become cash in our checking account in a day or two.

We have had and still have high limit credit cards, paid off every month, so could quickly access that if any needed spending couldn't wait a day or two.

Our living expenses are covered by Social Security benefits and by Required Minimum Distributions (RMDs) taken automatically every month from my rollover IRA, paid directly to our joint checking account.

Our only cash is whatever happens to be in our joint checking account. The amount varies and is usually just a couple of months worth of living expenses, used to pay our living expenses as they are incurred.
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Re: Multiple years of expenses in cash when starting retirement

Post by grobertj »

I keep 6 months spending in an Ally savings account as an EF. When I need to take a distribution, I withdraw from my IRA if has increased at least as much as I need to withdraw. If not, I wait until it has. I've been retired for 8 years, and with only the exception of the stock market correction, that has worked. I've also paid off my mortgage and have no debt which markedly reduces my monthly spending. But I agree with others that it's really a personal choice as to how large an EF you need.
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Re: Multiple years of expenses in cash when starting retirement

Post by Leif »

2Scoops wrote: Tue Apr 13, 2021 9:25 am Thanks for everyone’s comments about how they are using the cash and the reasons for stockpiling. However, I’m really looking at how people actually accumulated that cash? Was it slowly over time, selling bonds/equities right before retirement, foregoing other investments the final X years to fund their cash position, other?
About 10 years prior to retirement I decided to start to de-risk. I created a downward target AA for equities. Each year I sold 2% of my equities in taxable (or the market reduced my equity AA for me). The cash was placed in CDs. I built a CD ladder for each year. Once retired instead of rolling over the CDs I used them for expenses. I'm still in that process. Once I reach my SS & RMD stage the CDs should be gone. I also have my gov't paper bonds (EE & I). I can cash them if needed.
1moreyr
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Re: Multiple years of expenses in cash when starting retirement

Post by 1moreyr »

I live below my means and never counted on my bonus. I took the bonus for the last 4-5 years and put it in a ladder of CDs. 5-4-3-2-1 duration. When i did it it made sense, rates were better.

I then decided to retire and take a one year contract position that paid well. I am living off a retirement pension and my DW income. while i am banking the total check from the contract. it proved to me I didn't need to work and added to the cash cushion

i am finishing up now with 5 years of cash (outside pension needs). it has been a SORR play as I have read a bad start can undermine all else

It's feeling a little heavy now and I am thinking of any additional cash to investments again
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Re: Multiple years of expenses in cash when starting retirement

Post by MikeG62 »

2Scoops wrote: Tue Apr 13, 2021 7:48 am I’ve read a lot of posts recently where people have mentioned having X number of years in cash when entering retirement. The reasons were varied but it got me thinking how they may have positioned themselves to have this cash since it seems most people keep 3-6 months for their EF (some less) on a regular basis.

Hoping to get some insight from those that are retired about how you allocated to your cash position.

- Did you just gradually increase this over an extended period of time?
- Stop/reduce other investments as you approached retirement to build up this position?
- Sell equities from taxable potentially to build up cash reserves? (Tax issues)
- Other?

Thanks
May depend on what you define as cash?

We keep very little cash sitting around uninvested (i.e., in a checking account). This is what I think of when most people use the term "cash". Most of our cash is invested in CD's (traditional or NP) and I consider them as part of the short end of our fixed income allocation. When we have immediate cash needs, there is always a place to go to get access to cash to settle that obligation. Some cash flows in naturally from monthly interest and some comes from quarterly dividends and some comes from maturing CD's. Also have lots of muni bonds, which sadly get called from time to time, and these provides access to additional cash.

Also, I retired a year after my employer was acquired and upon exiting the company I had payout from a separation package (as well as a cash out event from company equity). Those funds pretty much went into CD's. So that provided a large infusion. We currently have many years of expenses sitting in CD's of one form or another and of varying duration.
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Re: Multiple years of expenses in cash when starting retirement

Post by HenryG »

2Scoops wrote: Tue Apr 13, 2021 9:25 am Thanks for everyone’s comments about how they are using the cash and the reasons for stockpiling. However, I’m really looking at how people actually accumulated that cash? Was it slowly over time, selling bonds/equities right before retirement, foregoing other investments the final X years to fund their cash position, other?
Our plan is to forego other after-tax investments in the final years to build the cash position. In general, our new/incoming money went to stock investments early in our accumulation phase, to bond investments as we neared financial independence, and is planned to grow our cash position in the 12-18 months before we fully exit W-2 employment. We will be more comfortable with the additional money in checking/savings accounts ahead of retirement.
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Re: Multiple years of expenses in cash when starting retirement

Post by corn18 »

I was RIF'd this past Mar (age 55). Severance package was very generous, so I set aside $300k for the next three years expenses. Never held any cash prior to that. Not even an EF. That covers the how did we accumulate it question.

We have more than enough to retire, so I am not looking for a new job. Now I am wondering what I need the cash for. I can convert all of my 401k (rule of 55) in the 12% tax bracket and tax gain harvest all of my LTCG @ 0% between now and age 72. When SS kicks in, my military COLA pension and SS covers all expenses. I don't need to manage ACA subsidies (I get free healthcare as a military retiree). The only reason I set aside the $300k in cash is because KlangFool convinced me it is a good thing to do. I do include the cash in my AA of 50/50 which is what I have chosen for our retirement.

So I am now trying to figure out if I need any cash at all. Would appreciate any thoughts for my personal situation.

Corn
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Re: Multiple years of expenses in cash when starting retirement

Post by KlangFool »

corn18 wrote: Sun Apr 18, 2021 7:58 pm I was RIF'd this past Mar (age 55). Severance package was very generous, so I set aside $300k for the next three years expenses. Never held any cash prior to that. Not even an EF. That covers the how did we accumulate it question.

We have more than enough to retire, so I am not looking for a new job. Now I am wondering what I need the cash for. I can convert all of my 401k (rule of 55) in the 12% tax bracket and tax gain harvest all of my LTCG @ 0% between now and age 72. When SS kicks in, my military COLA pension and SS covers all expenses. I don't need to manage ACA subsidies (I get free healthcare as a military retiree). The only reason I set aside the $300k in cash is because KlangFool convinced me it is a good thing to do. I do include the cash in my AA of 50/50 which is what I have chosen for our retirement.

So I am now trying to figure out if I need any cash at all. Would appreciate any thoughts for my personal situation.

Corn
corn18,

I would always keep some CASH. I know that I know nothing. Hence, I do not rule out the possibility of short-term deflation. If that happened, CASH will come in handy. As to how much is enough, it is up to you. I would assume that besides this 300K in CASH, the rest is in the stock and the bond.

How big is your portfolio? Is it 12X or 25X? Or more? You need to bridge the gap between now and 62/65/67 years old.

My 60/40 portfolio is at 27X and my EF is at 3X. I am de-risking by keeping 50% in portfolio and 50% to pay down the mortgage when it goes up by 60K. In your case, you may want to harvest more CASH if the portfolio goes up more. You should think about what you want to do if the portfolio goes up another 5%/10%/15%.

I am getting more defensive/conservative. My 60/40 portfolio is up 7.25% YTD. The RISK is getting higher than the REWARD.

Do whatever let you "Sleep Well At Night" (SWAN).

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Re: Multiple years of expenses in cash when starting retirement

Post by corn18 »

KlangFool wrote: Sun Apr 18, 2021 8:47 pm
corn18 wrote: Sun Apr 18, 2021 7:58 pm I was RIF'd this past Mar (age 55). Severance package was very generous, so I set aside $300k for the next three years expenses. Never held any cash prior to that. Not even an EF. That covers the how did we accumulate it question.

We have more than enough to retire, so I am not looking for a new job. Now I am wondering what I need the cash for. I can convert all of my 401k (rule of 55) in the 12% tax bracket and tax gain harvest all of my LTCG @ 0% between now and age 72. When SS kicks in, my military COLA pension and SS covers all expenses. I don't need to manage ACA subsidies (I get free healthcare as a military retiree). The only reason I set aside the $300k in cash is because KlangFool convinced me it is a good thing to do. I do include the cash in my AA of 50/50 which is what I have chosen for our retirement.

So I am now trying to figure out if I need any cash at all. Would appreciate any thoughts for my personal situation.

Corn
corn18,

I would always keep some CASH. I know that I know nothing. Hence, I do not rule out the possibility of short-term deflation. If that happened, CASH will come in handy. As to how much is enough, it is up to you. I would assume that besides this 300K in CASH, the rest is in the stock and the bond.

How big is your portfolio? Is it 12X or 25X? Or more? You need to bridge the gap between now and 62/65/67 years old.

My 60/40 portfolio is at 27X and my EF is at 3X. I am de-risking by keeping 50% in portfolio and 50% to pay down the mortgage when it goes up by 60K. In your case, you may want to harvest more CASH if the portfolio goes up more. You should think about what you want to do if the portfolio goes up another 5%/10%/15%.

I am getting more defensive/conservative. My 60/40 portfolio is up 7.25% YTD. The RISK is getting higher than the REWARD.

Do whatever let you "Sleep Well At Night" (SWAN).

KlangFool
My portfolio is at 25x in a three fund stocks and bonds. I am comfortable with that since it only needs to last 15 years.

I really have no clue what to do with the cash or how to manage it. I thought I would just spend this year's expenses and withdraw enough next year to keep 3 years of expenses and just keep doing that. If the market was down that year, I guess I would just not make a withdrawal and wait for the market to go up? And I have no plan for up years.

Seems simpler just to keep it all in my 50/50 portfolio and withdraw what I need each year and use the withdrawal to manage my AA. If stocks are down, withdraw bonds. If stocks are up, withdraw stocks. If everything is up or down, sell both.
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Re: Multiple years of expenses in cash when starting retirement

Post by Zeno »

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Last edited by Zeno on Sun May 16, 2021 4:22 pm, edited 1 time in total.
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Re: Multiple years of expenses in cash when starting retirement

Post by KlangFool »

corn18 wrote: Sun Apr 18, 2021 9:05 pm
My portfolio is at 25x in a three fund stocks and bonds. I am comfortable with that since it only needs to last 15 years.
corn18,

Are you comfortable enough not to do anything if your portfolio goes up to 30X in a few months? That is the question that you may want to answer. I am not. If you are not comfortable, you should work out a plan to make yourself comfortable.

My portfolio was at 25X and my EF at 2X around 7/2020. Now, my portfolio is at 27X and my EF is at 3X. This is after harvesting 1.5X from my portfolio. Essentially, my portfolio had gone from 27X to 31.5X. I am taking money away from my portfolio. The RISK is greater than the reward for me.

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Re: Multiple years of expenses in cash when starting retirement

Post by Wricha »

2Scoops wrote: Tue Apr 13, 2021 9:25 am Thanks for everyone’s comments about how they are using the cash and the reasons for stockpiling. However, I’m really looking at how people actually accumulated that cash? Was it slowly over time, selling bonds/equities right before retirement, foregoing other investments the final X years to fund their cash position, other?
Cash, (meaning cds, savings, short term government) I had extra cash flow from consulting, rent and investments that went into cash and I have a fair amount of individual muni bonds (5%) that are called regularly which allowed me a build up cash reserves quickly. I did not want to cash in equities as they generate a tax bill.
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corn18
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Re: Multiple years of expenses in cash when starting retirement

Post by corn18 »

KlangFool wrote: Sun Apr 18, 2021 9:15 pm
corn18 wrote: Sun Apr 18, 2021 9:05 pm
My portfolio is at 25x in a three fund stocks and bonds. I am comfortable with that since it only needs to last 15 years.
corn18,

Are you comfortable enough not to do anything if your portfolio goes up to 30X in a few months? That is the question that you may want to answer. I am not. If you are not comfortable, you should work out a plan to make yourself comfortable.

My portfolio was at 25X and my EF at 2X around 7/2020. Now, my portfolio is at 27X and my EF is at 3X. This is after harvesting 1.5X from my portfolio. Essentially, my portfolio had gone from 27X to 31.5X. I am taking money away from my portfolio. The RISK is greater than the reward for me.

KlangFool
I'm struggling with why my comfort would change if my portfolio goes up? I think I would be more comfortable if it went up.

If it went down, I would be less comfortable.

I don't consider my cash outside my AA. That $300k cash is part of my 50/50. If that matters.
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