Multiple years of expenses in cash when starting retirement

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

Post by NancyABQ »

I consider "cash" to be cash-like holdings that are not in an IRA/401K. Basically HYSA, CDs, Money Market and iBonds. I would prefer not to sell the iBonds if possible, though. I have about $100K "cash" now, another almost-$100K in iBonds. I count this as part of my fixed income portion of my AA.

I am currently in any-moment mode on retiring (leaning towards maybe June, but nothing decided for sure) and as I look at tax numbers for the next ~5 years (I am 59), and considering Roth conversions and IRMAA (and possibly ACA, but being single with ~$50K of unavoidable income per year, that seems fairly moot), I am realizing I wish I had more cash -- maybe $300K total (or approx 3-4x expenses, not counting iBonds).

This has nothing to do with sequence-of-returns-risk in my case -- I am comfortable with my 55/45 AA and the size of my portfolio, future pension and SS, etc. It is purely an issue of being able to control my tax rate for the next few years, as needed. My taxable brokerage account is all equities with significant gains, so selling some of that for funding incurs additional income (especially for MAGI/ACA/IRMAA).

It would all be a lot more flexible if I'd thought to stockpile more cash, which I would then mainly use to enable Roth conversions for the next few years. After 65 I have a (moderate) pension kicking in, and probably won't try to do any more conversions.

For the moment, I have stopped reinvesting dividends from my taxable account, but that will barely put a dent in it (as I will be spending those dividends for living expenses anyway, when I do actually retire).

Oh well, I will just optimize the tax situation year by year and see how it all works out!
KlangFool
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Re: Multiple years of expenses in cash when starting retirement

Post by KlangFool »

corn18 wrote: Sun Apr 18, 2021 10:02 pm
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.
corn18,

Then, you do not have a problem. "Don't worry, be happy!"

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
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vanbogle59
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Re: Multiple years of expenses in cash when starting retirement

Post by vanbogle59 »

I do the calculation like this:
1) What is the least amount of guaranteed income we need for 10 yrs? My wife and I write down that number. Ah, safety.
In retirement (soon?) we will get that from only 2 places: SS and "safe investments" (think CD ladder).
2) The rest is invested very simply: VTSAX + fixed income (think total bond).
For this category, we are comfortable with 75% VTSAX as the maximum.

I used to have detailed spreadsheets to track the implications of these ideas. But it has gotten simpler over time.
Now, it basically reduces to: overall 50/50 VTSAX/Fixed with a variable withdrawal rate averaging to 4% over time.

We buy more VTSAX when it dips. Rebalance to 50/50 at market highs. Never buy so much VTSAX as to impact #1 (that happens around overall 80/20.)
I know I am leaving a lot of potential gains on the table. I'm perfectly OK with that.
We will be perfectly happy if we end up living on #1. Honestly, I expect to do 20-30% better on average.

Oh, and I own 1 BTC :D
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WoodSpinner
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Re: Multiple years of expenses in cash when starting retirement

Post by WoodSpinner »

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?
OP,

In our case we decided to retire earlier than we had originally planned (at 58 rather than 65). Once We had made the decision we shifted our AA from 70/30 to 50/50 within a few days (95% of assets were in Tax Deferred accounts). Our risk profile had changed significantly and we acted quickly on that.

Originally we held 3 years of expenses in Cash (or short term bonds).

Nothing gradual about it! No regrets.....

Since retiring we have simplified the portfolio a bit and are now 60/40 using a 3 fund portfolio. We have gotten a lot more comfortable that we actually have ENOUGH and we have a good enough balance between Growth and Safe assets.

Our plan is to always have a rolling 10 years of expenses in Fixed Income. Fortunately our cash flow needs decline once SS kicks in and our aggressive Roth Conversions end. This allows the 10 years of expenses to decline over time as well. The 10 years of expenses becomes a floor that we will NOT rebalance past.

Current allocation is:
45% - Total US Mkt (VTI)
15% - Total Intl Mrkt (VXUS)
40% - Intermediate Treasuries (VGIT)

The hardest decision by far was to take the Pension (and the security of its income) rather than the LumpSum. Glad we did, but this was much more difficult than our shift to a new AA.

WoodSpinner
WoodSpinner
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vanbogle59
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Re: Multiple years of expenses in cash when starting retirement

Post by vanbogle59 »

WoodSpinner wrote: Mon Apr 19, 2021 10:14 am Our plan is to always have a rolling 10 years of expenses in Fixed Income.
Your plan sounds like one I could easily live with (but I took the lump sum :-) )

The hardest part for me was settling on 10 yrs in fixed as a required feature. It just seemed like such a HUGE number. But, at least for me, it's not really. I use the amount that would be the least I would require so I wouldn't feel compelled to go back to work. We actually spend quite a bit more than that typically. But we don't have to. Ultimately, I settled on something like 4X my current salary. (We are 1 income.)
Since we made that decision, I have felt soooo much more at ease with the rest of the portfolio.

The part that took longer was getting the rest of the portfolio to reasonably promise the yearly replacement, 25-30X.

We are there now. But, I like my job, and Medicare and SS will make things even easier, so we will probably wait a couple more years.
namajones
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Re: Multiple years of expenses in cash when starting retirement

Post by namajones »

bltn wrote: Tue Apr 13, 2021 9:15 am I currently have several years of expenses in stable investments that can be liquidated easily for expenses. Cd s with low early withdrawal penalties. Ultra short term bond funds. Modest amount in money market accounts. I keep several years expenses in these funds currently yielding minimal returns just to protect against a market downturn of several years. I don t want to be forced to sell less stable investments for expenses at inopportune times and incur losses.
Agree.
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AnnetteLouisan
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Re: Multiple years of expenses in cash when starting retirement

Post by AnnetteLouisan »

My ability to sleep at night has been very expensive, I guess, because I’ve kept over 5 years of expenses in cash most of my working life, and more than that now as I approach retirement.

When I was 23 I read in a special pull-out personal finance section of the WSJ among other things that I should pay myself first and send part of my salary automatically to another bank so as not to have my full paycheck in checking making me feel flush. That section, and The Millionaire Next Door, changed my life when I still had time to act on them.

To be fair, for decades I earned 5-7 percent on it in 5 year CDs, so the opportunity cost was not that bad, especially relative to the benefit of having insured funds. My reasoning has been that as a single person in a very competitive job field in a VHCOL area with ultra high taxes and no one else to rely upon, I needed a buffer.

Maybe this approach was prosaic, but it kept the wolf from the door during 2000, 2008, health problems and job changes. In retrospect, that money probably should have been invested, but I was unsophisticated and may not have made the right investment choices. And we did just go through three decades of relatively low inflation compared to my childhood in the 1970s, when our local grocery clerk went mad from having to put new price labels on the entire inventory with his hand held price sticker apparatus. Anyone remember that time of 5 increasing price stickers on top of each other on a single standard item? Let’s pray those times aren’t coming back.
Last edited by AnnetteLouisan on Thu Sep 23, 2021 7:31 am, edited 1 time in total.
Beehave
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Re: Multiple years of expenses in cash when starting retirement

Post by Beehave »

I'm comfortable with a barbell of cash and equities with a smattering of bonds. This happened gradually and consistently over time.

I really wanted to buy bonds when interest rates were high around 1980, when I did not have the funds. That spoiled me to be waiting for that opportunity to come around again. Still waiting. The stable value funds with cash that I held instead of bonds probably sub-performed bonds, but served well for aggressive rebalancing when stocks tumbled (no frequency limits on taking funds out of stable value to buy stocks in 401k). So I've kept a reasonable (approximating 60/40) allocation over the years and have been able to rebalance into market drops.

It's interesting to read cold analyses of optimum performance based on percentages and exhaustive back-testing. And these rational considerations have some impact on emotions. But if not all, most of us I suspect are still deeply emotional and if assets are to provide peace, optimization of results may not mean maximizing the dollar (or Euro, yen, or whatever) outcome, but rather having assets that make you both fiscally secure (in reality) and emotionally secure (psychologically). I think much of this really depends on experience, current circumstances, future prospects, and temperament, so it is really individual.

For me, the bottom line about cash is this. Cash is liquid. Cash is great to hold as part of an asset allocation. It should not become an end in-itself, but the liquidity should serve as a means to ends. For me, cash serves as a highly liquid source of funds for health emergency (long-term care) and for market downturn (easy, fast, steady rebalance into market drops). The other end of the barbell is mostly very broad index, with a smattering of materials and/or dividend oriented individual individual stocks accumulated over the years through employment or perceived special opportunity. The overall objective is for these assets to be a significant part of a sleep-as-well-as-possible overall environment.
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