Multiple years of expenses in cash when starting retirement

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2Scoops
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Multiple years of expenses in cash when starting retirement

Post by 2Scoops »

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
Last edited by 2Scoops on Tue Apr 13, 2021 8:34 am, edited 2 times in total.
dbr
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Re: Multiple years of expenses in cash when starting retirement

Post by dbr »

I never had a cash position before, at, or through retirement. Now retired 14 years.

But there can also be confusion about emergency fund, whatever. It is inevitable that cash exists in various accounts because cash management is not that precise. It isn't worth the effort to make it precise. There is always some process of getting income to supply outgo and like a bucket with a hose filling it at one end and a spout letting it out at the other there will be some water in the middle. Specifically if you need to pay a bill, there has to be cash in an account to disburse to pay the bill. That could be $100 for the electric company or $2000 for property tax, or $40,000 for a car and you do cash flow management accordingly. It can be helpful to have fixed income streams such as Social Security, pensions, or annuities to make cash management less "urgent" feeling. Investment companies can also be asked to arrange to disburse regular payments from investment accounts of any kind.

As far as emergencies, there is almost no amount that can't be raised from general investments in a few days or a week. Currency can be pulled from an ATM with just a little money in a checking account. It isn't dumb to keep a few hundred dollars in cash in your desk drawer. Realistically the most common way of paying for something "now" is a credit card.

From the point of view of investment finance the math is that there is a portfolio if investments that has a return and that return has some variability, called risk. Cash is just an investment that has low return and low variability of return* that you add up with all the other investments. The course of that portfolio is that in every period of time the whole grows or shrinks according to the sum of return gained (or lost) and money withdrawn. Cas per se has nothing in particular to do with it.

*The variability of return for cash is the variability over time of what interest it can earn. For CDs the range is probably 1%-5% for a risk of 2%. For cash the range is perhaps 0%-1% for a risk of 0.5%. A total bond fund has a risk of about 6% and stocks of 20%.
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watchnerd
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Re: Multiple years of expenses in cash when starting retirement

Post by watchnerd »

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
We're 4.5 years away from retirement, but getting ready.

One of the things I like about cash is that we can add cash to the portfolio and keep a constant Sharpe ratio.
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mnsportsgeek
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Re: Multiple years of expenses in cash when starting retirement

Post by mnsportsgeek »

I'm not retired, but the idea of retiring with 3-5 years in cash is appealing to me in case the market tanks shortly after I retire. Others may choose to mitigate this by saving 30% above their "number." I think it's just personal preference.
FlamePoint
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Re: Multiple years of expenses in cash when starting retirement

Post by FlamePoint »

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.
kd2008
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Re: Multiple years of expenses in cash when starting retirement

Post by kd2008 »

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.
bltn
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Re: Multiple years of expenses in cash when starting retirement

Post by bltn »

Agree with dbr.

My concept of a safety cushion of cash is having investments which are liquid. Part of my concept of liquidity are investments which have a relative stability of principal.

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.
dbr
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Re: Multiple years of expenses in cash when starting retirement

Post by dbr »

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.
This is an example of a special case use of money where one estimates that the cost of variability of return is greater than the loss of return.

However, I am not sure you actually know what loss of return has or might have cost you or, for that matter what decreased variability of return has or might have benefited you.
Freefun
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Re: Multiple years of expenses in cash when starting retirement

Post by Freefun »

I put aside a few years expenses in cash when I retired last year. I will likely spend at least some of it on travel after the pandemic as I can live off my pension if needed.
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KlangFool
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Re: Multiple years of expenses in cash when starting retirement

Post by KlangFool »

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
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2Scoops
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Re: Multiple years of expenses in cash when starting retirement

Post by 2Scoops »

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?
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BrooklynInvest
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Re: Multiple years of expenses in cash when starting retirement

Post by BrooklynInvest »

I'm doing this - trying to get to 2 years of fixed expenses, not total, in cash. But I have to acknowledge that for me it's an emotionally-driven thing.

If my target pre-retirement was 70-30 then that should work the day after retirement too. But psychologically I think my motivation for getting to 60-30-10, give or take, may be that I'm just gonna be uncomfortable withdrawing if the equity market's on a downswing.

Heck, after a lifetime of saving and investing to get to this point withdrawing at any time's gonna be weird for me too!
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Re: Multiple years of expenses in cash when starting retirement

Post by KlangFool »

dbr wrote: Tue Apr 13, 2021 9:16 am
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.
This is an example of a special case use of money where one estimates that the cost of variability of return is greater than the loss of return.

However, I am not sure you actually know what loss of return has or might have cost you or, for that matter what decreased variability of return has or might have benefited you.
dbr,

But, the loss of return may not matter as much as the variability of the return. For example, the loss of return may not cause the person to lose some sleeps. But, variability of the return could.

Personal finance is personal.

KlangFool
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Topic Author
2Scoops
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Re: Multiple years of expenses in cash when starting retirement

Post by 2Scoops »

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.
MAKsdad
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Re: Multiple years of expenses in cash when starting retirement

Post by MAKsdad »

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
For me it just sort of happened. I would just build it up through the larger infusions of cash that come sporadically (bonuses, stock comp exercises, etc.). There were short periods of time when I had over 10 years of cash built up, waiting to be invested (DCA'd into investments for the most part).
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retired@50
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Re: Multiple years of expenses in cash when starting retirement

Post by retired@50 »

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've been a cash accumulator my whole life, so "slowly over time" fits as a description. I didn't do anything special before retirement or since. I think that reaching the age 59.5 might change the mindset for some retirees since they gain penalty free access to retirement accounts. If you retire after that age, then you won't have to deal with the complications of trying to access that money early.

Regards,
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kingcrimson
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Re: Multiple years of expenses in cash when starting retirement

Post by kingcrimson »

In my case, the accumulation was to purchase a house. We ended up buying one that was actually below our estimates, and so now we find ourselves with cash on hand, and what appears to be an inflated stock market :-)

The cash was accumulated slowly over the period of about 5 years prior to my approximate retirement and subsequent moving date.
FlamePoint
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Re: Multiple years of expenses in cash when starting retirement

Post by FlamePoint »

KlangFool wrote: Tue Apr 13, 2021 9:26 am
dbr wrote: Tue Apr 13, 2021 9:16 am
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.
This is an example of a special case use of money where one estimates that the cost of variability of return is greater than the loss of return.

However, I am not sure you actually know what loss of return has or might have cost you or, for that matter what decreased variability of return has or might have benefited you.
dbr,

But, the loss of return may not matter as much as the variability of the return. For example, the loss of return may not cause the person to lose some sleeps. But, variability of the return could.

Personal finance is personal.

KlangFool
The cash was the result of a home sale a year ago. The $400k is the net after we purchased and paid for a new home. So technically it will only be sitting in a cash account for a few years before it’s all spent.
rich126
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Re: Multiple years of expenses in cash when starting retirement

Post by rich126 »

While money is money and in reality it is one big bucket, I prefer to think of it as various buckets. Also I don't view cash as losing but instead provides opportunities to buy when everyone else is selling.

Anyhow I'm thinking of the following:
1. My core bucket where I will be taking ~4% from yearly (67%)
2. My bridge bucket to get me from ~60 to whenever I take social security (13%)
3. My emergency bucket in case #1 has terrible returns (13%)
4. My medical emergency bucket (6.5%)

Right now the bridge bucket is in a couple of MYGAs. The other buckets have various amounts of stocks.
Overkill and not designed to be market beating but easier for me to think of retirement and being a bit more conservative.
Each of them are in different accounts for now. Partly due to changing jobs and leaving money in the TSP or rolling some over to TD or other money at Fidelity due to current job.

I'm not a big bond person and prefer to keep money in stocks and cash. That has worked fairly well for me.
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Re: Multiple years of expenses in cash when starting retirement

Post by sailaway »

We are about a year out and our plan is to begin to accumulate a cash buffer about 2x the usual with the last lump sums that would have normally gone into taxable accounts - RSUs, ESPP, it just depends on when we actually decide to pull the plug. Obviously, this plan depends on a fairly high savings rate. Some people will also have a vacation lump sum or other severance that they could put to this purpose.
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Re: Multiple years of expenses in cash when starting retirement

Post by JS-Elcano »

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
Where do you buy the gold and silver?
Snuffycuts99
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Re: Multiple years of expenses in cash when starting retirement

Post by Snuffycuts99 »

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?
We're about 5 years out from early retirement. I plan on having about 3x expenses in cash. As to how I'm building that allocation, I'll be slowly adding to it over the next few years. Then in the last couple years before retirement I plan on switching from automatic reinvestment of dividends in taxable accounts to depositing them into the cash account.
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Re: Multiple years of expenses in cash when starting retirement

Post by KlangFool »

JS-Elcano wrote: Tue Apr 13, 2021 10:23 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
Where do you buy the gold and silver?
https://www.jmbullion.com/

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JS-Elcano
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Re: Multiple years of expenses in cash when starting retirement

Post by JS-Elcano »

KlangFool wrote: Tue Apr 13, 2021 10:28 am
JS-Elcano wrote: Tue Apr 13, 2021 10:23 am Where do you buy the gold and silver?
https://www.jmbullion.com/

KlangFool
Thank you!
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tennisplyr
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Re: Multiple years of expenses in cash when starting retirement

Post by tennisplyr »

Retired 10 years and have ~5% in an Ally savings account. Feels good having a small amount for whatever...not a big deal.
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Re: Multiple years of expenses in cash when starting retirement

Post by lazynovice »

Not sure we will have multiple years of cash at retirement. At max- maybe one. Whatever we decide, we’ll build up by stopping new investments to taxable in the final few months of working. Currently our taxable accounts are more than 60 percent of our total portfolio. There is about 18 months in bonds in the taxable accounts so those can be sold for cash needs if I have to retire involuntarily.
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Re: Multiple years of expenses in cash when starting retirement

Post by pasadena »

I'm (hopefully) 10 years out from retirement, so my plans aren't set in stone. I'm planning on keeping a large-ish sum in cash, maybe 4 years of expenses. The main reason is that I will retire in a different country with all of my assets in the US. I'll need to keep some money locally, and in Euros to avoid having to do international transfers too often, and to protect myself from both bear markets and currency risks. Also, tax management / Roth conversions.

I'll eventually review that once I get social security and my local retirement pension, which should happen about 10 years after I retire.

The plan is currently to cash out my brokerage account and bring all of it to my home country, buy a home (cash) and keep the rest in cash. I haven't worked out how I'm going to minimize the taxes when I sell everything. I guess I'll do it over a couple of fiscal years.

If I were to retire in the US, I would probably keep less cash. Maybe 1-2 years of living expenses?
Last edited by pasadena on Tue Apr 13, 2021 1:47 pm, edited 1 time in total.
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Re: Multiple years of expenses in cash when starting retirement

Post by Broken Man 1999 »

We hold cash only for transactional activities, like buying more of an investment, or for transfer to credit union for expenses. The life of cash in our retirement portfolio is very short, usually less than two weeks unless I am accumulating dividends for reinvestment. We haven't ever held a lot of cash, even when first in retirement. My first withdrawal for expenses was a year's worth of expected expenses. I didn't like cash just sitting around, so now we withdrawal enough monthly to pay our expenses.

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
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Harry Livermore
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Re: Multiple years of expenses in cash when starting retirement

Post by Harry Livermore »

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.
This is our plan as well; to have a couple of years after "working" and before RMDs and SS where we live mostly by withdrawals from a plain Jane savings account. I'm not sure if we will actually get there at this point but we'll see...
I put quotes around "working" because I have a feeling we will both have some kind of vocation all the way up to 65 or so, but I suspect with lower time commitments and lower remuneration. It's while that income is low, and we supplement with cash savings, that Roth conversions might make sense for us.
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Re: Multiple years of expenses in cash when starting retirement

Post by Harry Livermore »

KlangFool wrote: Tue Apr 13, 2021 10:28 am
https://www.jmbullion.com/

KlangFool
+1. I have had a very good customer experience with them.
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Re: Multiple years of expenses in cash when starting retirement

Post by KlangFool »

lazynovice wrote: Tue Apr 13, 2021 11:18 am Not sure we will have multiple years of cash at retirement. At max- maybe one. Whatever we decide, we’ll build up by stopping new investments to taxable in the final few months of working. Currently our taxable accounts are more than 60 percent of our total portfolio. There is about 18 months in bonds in the taxable accounts so those can be sold for cash needs if I have to retire involuntarily.
lazynovice,

If you need to use the ACA insurance and want to get the subsidy, you may need to manage your taxable income.

A) The bond generate unavoidable interest income.

B) Selling bond generate capital gain = taxable income.

C) Spending CASH generate ZERO taxable income.

The ACA subsidy is worth up to 10K per year. For some people, that pays for the ZERO return of the CASH.

In summary, if you are going to retire early aka before qualifying for MEDICARE, you should learn more about ACA insurance and subsidy. I had been unemployed for more than 1 year a few times. Hence, I have some practices dealing with this issue.

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

Post by Harry Livermore »

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 method is actually a plan for the future, since we are not at that stage yet, but we have talked about eventually selling our SFH rental, and would direct the proceeds into both VTSAX and a cash position. We'd use the cash position during the in-between years when income is low to do some Roth conversions.
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Exchme
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Re: Multiple years of expenses in cash when starting retirement

Post by Exchme »

We always averaged 0.5-1 year of cash and bumped that up to 2 years prior to retirement as a sort of mind game to convince ourselves we were ready when we retired a couple months ago. Counted it as part of the fixed income with the idea that we would first spend it back down to our normal comfort zone. The idea was that money you are going to spend in less than say 2 years should be in something fairly short term so you don't have a lot of volatility on it. Somewhat borne out by the bond market the last year or so where bonds lost money (and of course our cash didn't much better as it was nibbled at by inflation, but that's less visible).

We just built it up with our normal savings - by the end, we were making enough that we were saving more than a year's worth of expenses each year. It was a little hard to walk away when saving that much, but several small health issues started to make it clear that we were trading away our remaining reasonably healthy time for money that wouldn't make much difference to our lifestyle.
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Re: Multiple years of expenses in cash when starting retirement

Post by lazynovice »

KlangFool wrote: Tue Apr 13, 2021 12:22 pm
lazynovice wrote: Tue Apr 13, 2021 11:18 am Not sure we will have multiple years of cash at retirement. At max- maybe one. Whatever we decide, we’ll build up by stopping new investments to taxable in the final few months of working. Currently our taxable accounts are more than 60 percent of our total portfolio. There is about 18 months in bonds in the taxable accounts so those can be sold for cash needs if I have to retire involuntarily.
lazynovice,

If you need to use the ACA insurance and want to get the subsidy, you may need to manage your taxable income.

A) The bond generate unavoidable interest income.

B) Selling bond generate capital gain = taxable income.

C) Spending CASH generate ZERO taxable income.

The ACA subsidy is worth up to 10K per year. For some people, that pays for the ZERO return of the CASH.

In summary, if you are going to retire early aka before qualifying for MEDICARE, you should learn more about ACA insurance and subsidy. I had been unemployed for more than 1 year a few times. Hence, I have some practices dealing with this issue.

KlangFool
My bonds in taxable are tax exempt for federal purposes. Not sure yet how the ACA premium credit treats them. Right now, they have capital losses or small gains.
KlangFool
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Re: Multiple years of expenses in cash when starting retirement

Post by KlangFool »

lazynovice wrote: Tue Apr 13, 2021 1:04 pm
KlangFool wrote: Tue Apr 13, 2021 12:22 pm
lazynovice wrote: Tue Apr 13, 2021 11:18 am Not sure we will have multiple years of cash at retirement. At max- maybe one. Whatever we decide, we’ll build up by stopping new investments to taxable in the final few months of working. Currently our taxable accounts are more than 60 percent of our total portfolio. There is about 18 months in bonds in the taxable accounts so those can be sold for cash needs if I have to retire involuntarily.
lazynovice,

If you need to use the ACA insurance and want to get the subsidy, you may need to manage your taxable income.

A) The bond generate unavoidable interest income.

B) Selling bond generate capital gain = taxable income.

C) Spending CASH generate ZERO taxable income.

The ACA subsidy is worth up to 10K per year. For some people, that pays for the ZERO return of the CASH.

In summary, if you are going to retire early aka before qualifying for MEDICARE, you should learn more about ACA insurance and subsidy. I had been unemployed for more than 1 year a few times. Hence, I have some practices dealing with this issue.

KlangFool
My bonds in taxable are tax exempt for federal purposes. Not sure yet how the ACA premium credit treats them. Right now, they have capital losses or small gains.
Is your portfolio setup for you to qualify for the ACA subsidy over many years? That is the question that you need to answer for yourself. In my opinion, it is easier and more flexible to do this with 3 years of expense in CASH.

That 10K per year of subsidy pays more than any interests that you may earn from your bond in your taxable account.

<<Right now, they have capital losses or small gains.>>

That works if the interest rate did not drop big for that year and generate a huge gain for the bond. Or the interest rate keep going up and generate huge unavoidable interest income. I do not know whether they are countable towards the ACA premium credit. CASH is simpler. It has less complication.

KlangFool
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retired@50
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Re: Multiple years of expenses in cash when starting retirement

Post by retired@50 »

lazynovice wrote: Tue Apr 13, 2021 1:04 pm
My bonds in taxable are tax exempt for federal purposes. Not sure yet how the ACA premium credit treats them. Right now, they have capital losses or small gains.
Tax-exempt interest is added back into your MAGI for ACA.

See link:
https://www.healthcare.gov/income-and-h ... come/#magi

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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Re: Multiple years of expenses in cash when starting retirement

Post by RXfiles »

mnsportsgeek wrote: Tue Apr 13, 2021 8:52 am I'm not retired, but the idea of retiring with 3-5 years in cash is appealing to me in case the market tanks shortly after I retire. Others may choose to mitigate this by saving 30% above their "number." I think it's just personal preference.
Wouldn't their "number" be too low if it didn't account for this as a possibility?
SnowBog
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Re: Multiple years of expenses in cash when starting retirement

Post by SnowBog »

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.)

We also have checking/savings accounts, which currently hold roughly 1x expenses. I currently let this naturally grow to > 1X throughout the year so we can front load Roth, HSA, 529, I/EE Bond purchases.

My plan is to do the same in the years leading up to retirement, such that we'll have 2-3 years in "cash" (in addition to I/EE Bonds). We are 5+ years away, so I've not thought about the details, but I'm expecting this to be mostly natural cash flow (save more than we make, in this case just don't "invest" into taxable as much leading up to retirement).

For what it's worth, I no longer think of my "cash" as separate from my portfolio. It's just another form of fixed income. Right now my AA is 60/40 with about 3% as cash (so 60/37/3 if you break cash out). Let's say I needed to get to 9% (3x at current portfolio balance) - that just means funds that would have otherwise bought "bonds" are now buying "cash" (or ultra short term bonds if you think of cash that way). So I'll basically just be readjusting my "new investments" to keep my AA the same, but using "cash" instead of bonds.

(For what it's worth, I also have about 3x of muni bonds in my taxable account, which might grow some if needed to maintain AA. All that said, there is obviously a "cost" to this. I'm trading a higher potential end balance for a less volitale journey with as much bonds/cash/etc. as well have. But we expect we'll have "enough".)
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Re: Multiple years of expenses in cash when starting retirement

Post by lazynovice »

KlangFool wrote: Tue Apr 13, 2021 1:14 pm
lazynovice wrote: Tue Apr 13, 2021 1:04 pm
KlangFool wrote: Tue Apr 13, 2021 12:22 pm
lazynovice wrote: Tue Apr 13, 2021 11:18 am Not sure we will have multiple years of cash at retirement. At max- maybe one. Whatever we decide, we’ll build up by stopping new investments to taxable in the final few months of working. Currently our taxable accounts are more than 60 percent of our total portfolio. There is about 18 months in bonds in the taxable accounts so those can be sold for cash needs if I have to retire involuntarily.
lazynovice,

If you need to use the ACA insurance and want to get the subsidy, you may need to manage your taxable income.

A) The bond generate unavoidable interest income.

B) Selling bond generate capital gain = taxable income.

C) Spending CASH generate ZERO taxable income.

The ACA subsidy is worth up to 10K per year. For some people, that pays for the ZERO return of the CASH.

In summary, if you are going to retire early aka before qualifying for MEDICARE, you should learn more about ACA insurance and subsidy. I had been unemployed for more than 1 year a few times. Hence, I have some practices dealing with this issue.

KlangFool
My bonds in taxable are tax exempt for federal purposes. Not sure yet how the ACA premium credit treats them. Right now, they have capital losses or small gains.
Is your portfolio setup for you to qualify for the ACA subsidy over many years? That is the question that you need to answer for yourself. In my opinion, it is easier and more flexible to do this with 3 years of expense in CASH.

That 10K per year of subsidy pays more than any interests that you may earn from your bond in your taxable account.

<<Right now, they have capital losses or small gains.>>

That works if the interest rate did not drop big for that year and generate a huge gain for the bond. Or the interest rate keep going up and generate huge unavoidable interest income. I do not know whether they are countable towards the ACA premium credit. CASH is simpler. It has less complication.

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

Post by lazynovice »

retired@50 wrote: Tue Apr 13, 2021 1:28 pm
lazynovice wrote: Tue Apr 13, 2021 1:04 pm
My bonds in taxable are tax exempt for federal purposes. Not sure yet how the ACA premium credit treats them. Right now, they have capital losses or small gains.
Tax-exempt interest is added back into your MAGI for ACA.

See link:
https://www.healthcare.gov/income-and-h ... come/#magi

Regards,
I was pretty sure that was the case. I am all out of room in tax deferred for bonds so tax exempt in taxable is my only bond option for now.
GoneCamping
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Re: Multiple years of expenses in cash when starting retirement

Post by GoneCamping »

mnsportsgeek wrote: Tue Apr 13, 2021 8:52 am I'm not retired, but the idea of retiring with 3-5 years in cash is appealing to me in case the market tanks shortly after I retire. Others may choose to mitigate this by saving 30% above their "number." I think it's just personal preference.
This is exactly our thinking, especially given the somewhat overheated market we're in. Additionally, we have the majority of our portfolio (investments + cash) in 401k accounts so we plan to use the cash along with the taxable accounts for tax management and for ACA subsidies.
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.
and this...
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Re: Multiple years of expenses in cash when starting retirement

Post by KlangFool »

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

Post by MathWizard »

I only plan to have about 8 months of expenses in cash.
If equities crater, I will have bonds to draw from.
GoneCamping
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Re: Multiple years of expenses in cash when starting retirement

Post by GoneCamping »

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?
Some of ours came from accumulation over several years of not investing every extra dollar we had and not spending it either. However, most of it came from downsizing our home, which was always the plan, to have no mortgage in retirement and with any luck some bonus cash to boot. We were lucky enough to be in a larger house than we needed in an area of high demand and prices.
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Monster99
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Re: Multiple years of expenses in cash when starting retirement

Post by Monster99 »

I was fortunate in that my Megacorp was downsizing at the time I was retiring - I got a 18 month salary buyout in cash when I retired and put 2 years of cash in the bank and invested the remainder.
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Re: Multiple years of expenses in cash when starting retirement

Post by Northern Flicker »

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 at least N years of expenses in intermediate treasuries and M 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, M = 1 and N is larger.
Last edited by Northern Flicker on Tue Apr 13, 2021 3:47 pm, edited 1 time in total.
UpperNwGuy
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Re: Multiple years of expenses in cash when starting retirement

Post by UpperNwGuy »

I retired with six months of cash, and I really didn't need most of that. I don't know why anyone would want multiple years of cash at retirement.

In reading some of the responses to your questions, I think some folk are simply expressing a preference for going heavy on cash in the fixed income side of their portfolio, but that we often see that same preference on the part of people who are not retiring. Others are giving you their philosophies of emergency funds, but that, too, is not unique to entering retirement.

For retirement, I would recommend you figure out how your financial needs will change as you (a) retire, (b) start Social Security, and (c) deal with health insurance both before and after Medicare begins. Then plan your cash flow accordingly, taking into account lump sum payments from your employer, proceeds from the sale of your pre-retirement home, purchase of your retirement home, and any other financial change that will accompany retirement,.
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 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.
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Re: Multiple years of expenses in cash when starting retirement

Post by jebmke »

I retired in 2007 at age 55 with almost no cash in portfolio. Never was an issue.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
mptfan
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Re: Multiple years of expenses in cash when starting retirement

Post by mptfan »

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?
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