How Much Cash do I Need to Retire?

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How Much Cash do I Need to Retire?

Postby Chicago60 » Fri Mar 22, 2013 1:54 pm

Fairly new to the Forum and have been reading quite a bit.

I very much like the concept of "if you've won the game, why keep playing". So, here is my question: assume a married couple both 53 (no debt, house paid in full, 529 fully funded for kids' college and post-grad degrees), how much cash must the couple have (cash=CD, I-Bonds, Treasuries, etc...all cash with "no risk") in order to retire assuming current annual after tax expenditures of $120,000/year not including medical insurance premiums which are currently paid by employer? In other words, if I liquidated all investments (and paid the tax) and want to take no risk, how much do I need to know I have truly "won the game and can consider stop playing"? (Additional facts likely necessary for analysis: all four parents still alive in 80's, couple in reasonably sound health for purposes of needing to obtain medical insurance, wife has not worked outside the home, husband's income for 28 years would max out social security to be received starting in 17 years).

Thanks in advance for your analysis and input.
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Re: How Much Cash do I Need to Retire?

Postby SpringMan » Fri Mar 22, 2013 2:02 pm

If you assume 4% is a safe withdrawal rate, the $3,000,000 would be the number. It would be less because this is not including SS. I would not think going 100% cash would be wise even if you have "won the game". At least 20% equity is about as low as I would go.
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Re: How Much Cash do I Need to Retire?

Postby ddunca1944 » Fri Mar 22, 2013 2:06 pm

Indeed, cash is not risk free either. You may not lose principle, but over time, you lose buying power to inflation.

We will probably always keep somewhere between 20% to 40% in equities for that reason.
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Re: How Much Cash do I Need to Retire?

Postby Yanksin2013 » Fri Mar 22, 2013 2:13 pm

I would think about 5 million not including SS if the cash and treasuries were able to keep pace with inflation. 4% SWR assumes some growth & cash would likely not even keep up with inflation
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Re: How Much Cash do I Need to Retire?

Postby Chicago60 » Fri Mar 22, 2013 2:24 pm

Thanks for the responses. Yanks, I tend to agree with your assessment--other than medical insurance. 120K/year for 40 years is around $5 million. I have a number of 5 year CDs earning 2% which approximates current inflation. But our 120K/year expenditure does NOT include medical insurance expense. How much will that likely be unti Medicare kicks in? 4% withdrawal rate likely assumed we were 15 years older than we are, Springman so I think a 4% withdrawal rate for a 53 year old is overly aggressive. And yes Dunca of course inflation is a factor but cash is (investment) risk free.
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Re: How Much Cash do I Need to Retire?

Postby wesleymouch » Fri Mar 22, 2013 2:36 pm

Per William Bernstein a 2% withdrawal rate is bombproof. I would not go much above 2.5% at such a young age. That would put you closer to $6 milllion
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Re: How Much Cash do I Need to Retire?

Postby tyrion » Fri Mar 22, 2013 2:42 pm

Chicago60 wrote:And yes Dunca of course inflation is a factor but cash is (investment) risk free.


It sounds like you are very risk averse. Even so, I think it's probably worth your time to do some research into the different risks and try to construct a portfolio that addresses all of them to some degree.
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Re: How Much Cash do I Need to Retire?

Postby Peter Foley » Fri Mar 22, 2013 3:16 pm

I have a safe withdrawal calculator that I downloaded from someone who posts here (Mike Piper? The Finance Buff?). I ran the numbers for 20% stock, 60% bonds and 20% T Bills and came up with a 40 year safe withdrawal rate of 2.69%. For a bonds and TBills only mix it was 1.8%.

I think you really need to consider some inflation protection (stocks) if you are going to retire that early.
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Re: How Much Cash do I Need to Retire?

Postby Sidney » Fri Mar 22, 2013 4:38 pm

Chicago60 wrote: How much will that likely be until Medicare kicks in?

This is really something you need to work out yourself. Estimates vary all over the map. I am a little older than you but still pre-medicare. If I combine my insurance cost, the portion paid by my employer and my out of pocket expenses for regular medical care, dental care and eye care I think my cost runs about $2,000-2,500 a month. Of this, my former employer picks up $1,500 as part of a retiree health care plan. I have an out-of-pocket max on medical but I pay my own way on dental and eye care. A bad year of dental (e.g. implants, endo, or perio or something major that isn't a medical issue) could be in the single digit thousands easily, or more.

This is for myself and spouse. Both of us are relatively healthy with no major issues right now.
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Re: How Much Cash do I Need to Retire?

Postby Gill » Fri Mar 22, 2013 5:10 pm

What about your income taxes? You said the $120K was after tax. You're probably looking at at least $25,000 in income tax.
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Re: How Much Cash do I Need to Retire?

Postby jsl11 » Sat Mar 23, 2013 12:16 am

Chicago60 wrote:And yes Dunca of course inflation is a factor but cash is (investment) risk free.

Inflation risk is just as real as investment risk. At age 53, you should plan for a 40 or 45 year retirement. If you want an idea of what inflation risk looks like, take a look at prices in 1968 compared to today. As an example, in 1968, I bought a very nice car for $5300 (sales tax included). A similar car today would cost roughly $35000. Underestimating the effects of inflation over a long time period can be a serious miscalculation.
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Re: How Much Cash do I Need to Retire?

Postby livesoft » Sat Mar 23, 2013 6:20 am

MBMiner wrote:What about your income taxes? You said the $120K was after tax. You're probably looking at at least $25,000 in income tax.
Bruce

That's a terribly high estimate, but maybe you are including property taxes and sales taxes. Income taxes could be close to zero. One should figure this out before they retire based on their personal circumstances.

For example, if one has only $5 million in their checking account paying no interest whatsoever, then they will have no income and pay no income taxes. They will have plenty of money to spend.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: How Much Cash do I Need to Retire?

Postby Bill M » Sun Mar 24, 2013 4:02 pm

This is a calculation I started doing about 10 years ago, before it had such a catchy phase. The "game", as I see it, is to avoid three big risks: (1) market risks, mainly underperformance and fluctuations, (2) inflation, and (3) longevity. Once you've avoided all three, you've won.

The "all cash" deals with item (1). Your I-Bonds deals with item (2). Stopping there and calculating--- I-Bond accounts are taxable accounts; you would need ~$150K/year in taxable income to produce $120K/yr after-tax. So for 50 years (lasting until age 103), that means $7.5M in I-Bonds. Fido publishes an estimate each year of present value of expected health care expenses, the most recent one I've seen was $250K/person. So for two, add $500K to the above, making $8M.

The problem is you can't buy $8M in I-Bonds, only $20-25K each year. So you need to substitute TIPS. These currently sell at a premium, which increases the cost of the solution. Also, they have fixed maturity dates and there are some years for which there are no maturing TIPS; you need to assume some reinvestment risk. I estimate this as a 7% premium, making $8.6M. There is also a second problem: what if you live past 103. But you have dealt with risks (1) and (2).

For risk (3), a quote for an inflation-adjusted single-premium immediate annuity from Vanguard/Hueler for a couple age 53 costs $38614 per $1K, so buying $150K would cost $5792100; add to this the $250K/person for healthcare. The cost here is significantly less than the partial solution above, because the insurance company can assume am average lifespan (mid 80s) in the calculations, where you can't.

The problem here is that you are putting your faith in the longevity of the insurance company. State guaranty funds vary, and some cover as much as $500K in annuity contract premiums. You would need to diversify the annuity purchase across 12 different companies, but I only know of three that offer these products.

Is there no way to win the game? I don't think there is, unless you're willing to partially assume one of the three big risks. My choice is to make some assumption about the longevity risk. The 98%-ile of joint survivorship (i.e. age that last one dies) is 103; 99%-ile is age 107; 99.9%-ile is 110. Pick one. Also, pick how much of your longevity risk you want to convert into insurance company longevity risk.

At 53 your earned Social Security benefit is not likely to significantly impact these figures, but they will later. With every year you delay, three things happen: (i) Social Security benefits increase (and pension benefits, but you didn't mention one), (ii) one less year that needs to be funded from savings, since its being funded from income, and (iii) one additional year less to fund from savings, since you're a year older. This reduces the amount needed to win the game by more than $300K each year. And you've presumably added to savings. Consider two functions of age -- first the amount needed to win the game, and the second the amount you actually have. If you graph these two curves, with the x-axis being age, the "need" curve will be decreasing, and the "have" curve will be increasing. At some point they cross, and at that point you've won the game.
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Re: How Much Cash do I Need to Retire?

Postby Chicago60 » Sun Mar 24, 2013 10:15 pm

Thanks for the helpful responses. For those of you suggesting a non all cash AA, I am not in that position. As I indicated in my hypothetical, I would liquidate (or consider doind so if I was confident that I had the number to have won the game) and pay tax on any gains. But the question helps me analyze to what extent I am willing or needing to keep working vs future market risk based off investable assets.

BillM, you have given me more to think through. I very much appreciate the thoughtful response.
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Re: How Much Cash do I Need to Retire?

Postby Watty » Sun Mar 24, 2013 10:48 pm

I think the premise of your question where you have the built in assumption that you will be spending a constant amount in retirement is likely to cause you to be too cautious since you will have different income needs at different ages.

I have seen older relatives naturally slow down when they reached their mid-seventies and even though they were in relatively good health their spending dropped dramatically since they didn't want to do things like travelling or shopping. While their health remained good there would often be months where they would not even spend their entire social security check.

With a target of $120,000, not including healthcare and having a paid off house that also leaves you a lot of room to adjust your budget downward if you needed. This means that you could spend at a level that might have some risk drawing down your money too fast and that could be OK if you were willing to cut back if you needed to.

Also investing everything in things like CD's and treasury bonds gives you a lot of risk that you will be hurt if the dollar tanks so you really need an assortment of investment types for diversification.
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Re: How Much Cash do I Need to Retire?

Postby Chicago60 » Sun Mar 24, 2013 10:56 pm

Watty...your point concerning possible expenditure changes later in life is well taken but why MUST I invest in alternatives to cash? Maybe what you are saying is that my number might need to be higher than $5 million, going on some reasonable assumptions above. Maybe the number then is $7 million? $8 million? If I won the lottery and have $10 million in cash, would I still have to invest in stocks and bonds?
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Re: How Much Cash do I Need to Retire?

Postby Watty » Sun Mar 24, 2013 11:56 pm

Chicago60 wrote:Watty...your point concerning possible expenditure changes later in life is well taken but why MUST I invest in alternatives to cash? Maybe what you are saying is that my number might need to be higher than $5 million, going on some reasonable assumptions above. Maybe the number then is $7 million? $8 million? If I won the lottery and have $10 million in cash, would I still have to invest in stocks and bonds?


If you were older then going to all cash might be more of an option but since you are only 53 there are still a lot of years for things like inflation to cause you a lot of problems. The problem is that there isn't really any good "cash like" investment that is guaranteed to keep up with inflation. Even TIPS won't work well since they are taxed on the inflation adjustment.

On your question about the target number what I was trying to say was that your target number would be lower if you are willing to take the risk that you might have to cut your spending back some if you needed to. For example if you were very safe with a five million dollar nest egg then if you were willing to accept a 10% chance that you might need to cut your spending down to $100K a year then you could get by with a smaller nest egg.

You also need to be careful when you are reading about the various safe withdrawal rate strategies since they all make assumptions about what the nestegg is invested in. Often a 4% safe withdrawal rate if mentioned for funding a 30 year retirement but it makes a lot of assumptions on how the money is invested. These numbers really don't mean much if you invest your money differently

You can run all sorts of numbers at this link to see how you would have done in the past with various plans.

http://www.firecalc.com/

This web site takes a little digging into to learn how to change the assumptions but you can change lots of different factors so you should be able to set it up for the all cash investment choice.
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Re: How Much Cash do I Need to Retire?

Postby nedsaid » Mon Mar 25, 2013 12:33 am

My answer, and I don't mean to be a smart alec is as much as possible.

A lot depends on things that are unknowable. The biggest variable is your health at the time of your retirement. Bad health is very expensive. We also don't know what the state of the markets will be at the time you retire.

It sounds like you come from good stock and that the odds are that you will live a long time.

The estimates of the posters of $2 million to $5 million are probably correct. It is a good idea to be conservative in your projections. Assume that investment returns will be a bit low by historical standards and that you will live longer than what the actuarial tables tell you. Give yourself wiggle room in your planning.

You might consider a variation of the buckets of money strategy. Have at least 3-5 years of your expenses in safe assets to give your risky assets time to recover if the market tanks. You might go up to seven years of expenses in money markets or short term bonds. The problem with this is that interest rates are really low right now. At the time you actually retire, rates will probably be higher and this strategy will be more workable.

I don't really agree with the "winning the game" concept unless you have an awful lot of money. Interest rates are really, really low and when they go up the value of your bonds will go up. You just won't make enough interest off of CDs right now. I really like what the famous investor Benjamin Graham had to say about asset allocation, a maximum of 75% in the stock market to a minimum of 25%. A study of risks in a portfolio shows that a 20% stock/80% bond portfolio is actually less risky than a 100% bond portfolio.

You might think about a 25% stock/75% fixed income portfolio if you want to "cash in your chips." This will give you some protection of the buying power of your portfolio. Certainly, at your age you should be dialing down the risk.

As for myself, I am your age. I have 2/3 stocks and 1/3 fixed income portfolio for retirement. I would have more bonds but interest rates are really low and bond prices really high. I am not enthusiastic about bonds right now.
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Re: How Much Cash do I Need to Retire?

Postby chicagobear » Mon Mar 25, 2013 2:42 pm

I think cash is potentially a risky asset in the long-term given the risk of high inflation. I would certainly want to own some stocks no matter what. I think of people in Argentina and Brazil who saw their fixed income investments go to zero in the 1980s. It probably won't happen to the dollar but it could happen and then you'd be up a creek. Stocks will survive long-term given that they represent actual businesses that generate wealth no matter what happens to the currency. A Permanent Porfolio approach makes sense to me.
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Re: How Much Cash do I Need to Retire?

Postby Chicago60 » Mon Mar 25, 2013 3:16 pm

Ned...Bear...and Watty....thanks for thoughtful responses, which, respectfully, miss the point of the post. I am NOT seeking advice (not in this post anyway) on an appropriate asset allocation, given the current value of my assets, my risk tolerance, and my perceived annual needs.

Look at my inquiry this way: If I had $50 million in cash, is there any question that I would be able to take that cash, deposit it in 100+ different financial instiutions in a joint account with my spouse, be fully protected within FDIC limits, and could withdraw $120K/ year for the rest of our lives (plus medical insurance and taking into account inflation)? Sure the cash would generate interest income, and I would need to pay tax on it. But, so what? Sure I likely could generate greater returns with an allocation in stocks and bonds, but why would I want or need to? Will $40 million do it as well? $20 million? $8 million? $5 million? What number....will, and why?
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Re: How Much Cash do I Need to Retire?

Postby chicagobear » Mon Mar 25, 2013 3:26 pm

Chicago60 wrote:Ned...Bear...and Watty....thanks for thoughtful responses, which, respectfully, miss the point of the post. I am NOT seeking advice (not in this post anyway) on an appropriate asset allocation, given the current value of my assets, my risk tolerance, and my perceived annual needs.

Look at my inquiry this way: If I had $50 million in cash, is there any question that I would be able to take that cash, deposit it in 100+ different financial instiutions in a joint account with my spouse, be fully protected within FDIC limits, and could withdraw $120K/ year for the rest of our lives (plus medical insurance and taking into account inflation)? Sure the cash would generate interest income, and I would need to pay tax on it. But, so what? Sure I likely could generate greater returns with an allocation in stocks and bonds, but why would I want or need to? Will $40 million do it as well? $20 million? $8 million? $5 million? What number....will, and why?



95 -53 = 42 years x $120,000 = $5,040,000. I think $5 million is enough. I assume that any interest earned after tax is really just to keep your principal whole.
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Re: How Much Cash do I Need to Retire?

Postby Chicago60 » Mon Mar 25, 2013 3:34 pm

Pretty much what Yanks suggested above as well (with which I agree generally) but what about medical insurance premiums until Medicare kicks in? And what about the likely spread between inflation eating into purchasing power vs what interest I will be earning?
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Re: How Much Cash do I Need to Retire?

Postby Noobvestor » Mon Mar 25, 2013 3:44 pm

Chicago60 wrote:Ned...Bear...and Watty....thanks for thoughtful responses, which, respectfully, miss the point of the post. I am NOT seeking advice (not in this post anyway) on an appropriate asset allocation, given the current value of my assets, my risk tolerance, and my perceived annual needs.

Look at my inquiry this way: If I had $50 million in cash, is there any question that I would be able to take that cash, deposit it in 100+ different financial instiutions in a joint account with my spouse, be fully protected within FDIC limits, and could withdraw $120K/ year for the rest of our lives (plus medical insurance and taking into account inflation)? Sure the cash would generate interest income, and I would need to pay tax on it. But, so what? Sure I likely could generate greater returns with an allocation in stocks and bonds, but why would I want or need to? Will $40 million do it as well? $20 million? $8 million? $5 million? What number....will, and why?


The question has no single reasonable answer if the criteria is cash, in my opinion. A number that would work in most cases could also be blown away if we have 70s-style inflation, let alone even higher or hyper-inflation. To some extent, there's no amount of 'cash only' money that would insure things would work out for you (see: German hyperinflation). In short: you can't 'take into account inflation' unless you can predict the future, so answering this question requires being able to predict the future.
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Re: How Much Cash do I Need to Retire?

Postby Bill M » Mon Mar 25, 2013 5:37 pm

Noobvestor wrote:A number that would work in most cases could also be blown away if we have 70s-style inflation, let alone even higher or hyper-inflation. To some extent, there's no amount of 'cash only' money that would insure things would work out for you (see: German hyperinflation). In short: you can't 'take into account inflation' unless you can predict the future, so answering this question requires being able to predict the future.

I beg to differ. In Canada there are "Real Return Bonds". In the US there are I-Bonds and TIPS. Just be careful to own the bonds themselves (not a mutual fund holding the bonds), and don't count on them for short-term inflation protection.
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Re: How Much Cash do I Need to Retire?

Postby nedsaid » Tue Mar 26, 2013 12:13 am

It would take a lot for $120K in income in a cash only portfolio.

The interest rates that my bank pays on savings are so small that I need a microscope to see them. I would guess you would need about $24 million. $24 mil x .005 equals $120K. If you could get one percent, it would be $12 mil. If you went with 10 year treasuries and collected the interest about $6 mil to $7 mil.

Of course this gives you no inflation protection.
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Re: How Much Cash do I Need to Retire?

Postby linguini » Tue Mar 26, 2013 12:49 am

Inquiring minds want to know: is this a hypothetical, or something you're actually considering doing?
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Re: How Much Cash do I Need to Retire?

Postby Bill M » Tue Mar 26, 2013 8:55 am

Speaking for myself and not the OP, this calculation was an interesting academic exercise -- until the curves crossed (see my earlier post). That caused some portfolio adjustments, to say the least. In RIIA terms, we now have a solid floor, and separate accounts for upside. It is nice not worrying about the 401k becoming a 201k (like it did in 2001, like it did in 2009, ...), which makes the stock investing fun again.
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Re: How Much Cash do I Need to Retire?

Postby RobInCT » Tue Mar 26, 2013 9:22 am

Chicago60 wrote:Ned...Bear...and Watty....thanks for thoughtful responses, which, respectfully, miss the point of the post. I am NOT seeking advice (not in this post anyway) on an appropriate asset allocation, given the current value of my assets, my risk tolerance, and my perceived annual needs.

Look at my inquiry this way: If I had $50 million in cash, is there any question that I would be able to take that cash, deposit it in 100+ different financial instiutions in a joint account with my spouse, be fully protected within FDIC limits, and could withdraw $120K/ year for the rest of our lives (plus medical insurance and taking into account inflation)? Sure the cash would generate interest income, and I would need to pay tax on it. But, so what? Sure I likely could generate greater returns with an allocation in stocks and bonds, but why would I want or need to? Will $40 million do it as well? $20 million? $8 million? $5 million? What number....will, and why?

The answers miss the point because your question is not coherent. There are too many unknowns, particularly over a potentially 40+ year retirement.

To answer your question, if you have $50 million, no, there is not really a question that you could withdraw $120k per year until you die without running out. However, imagine a situation of hyperinflation (admittedly unlikely but not impossible given the history of the world) where your $120k yearly withdrawal is now worth $12k per year in today's dollars. Are you going to be able to live off that? I suspect not. So you'll have to increase your withdrawals, which increases the amount you would have needed to begin with.

I guess I don't understand the point of your question. Are you asking at what amount of cash people here would personally feel comfortable having in the bank to support $120k worth of annual expenditures for 40+ years? That is as a personal risk calculation that many can answer. Or are you asking what it sounds like you are asking which is how much is necessary to guarantee you will never run out? If that is your question, then there is no answer.

Cash is a notoriously poor investment for keeping up with inflation. If inflation goes through the roof and stays the for a number of years--something difficult to predict, especially decades into the future--the "safe" amount will go up rapidly.

That is why most of the responses are suggesting not cashing out. Diversifying away from 100% cash decreases rather than increases risk. Cash also carries risks, and there is really no guarantee that any amount will be enough.
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Re: How Much Cash do I Need to Retire?

Postby Chicago60 » Tue Mar 26, 2013 3:13 pm

nedsaid: If you had $24 million in cash in various banks, would you really need to worry about interest income? Couldn't you literally take the cash, line the hundreds up in your closet, and use that to pay living expenses for the rest of your life? Second, we are currently earning 2% or more on various 5 year CDs. Maybe you should check out depositaccounts.com, an excellent site for current interest rates at varying terms at various financial institutions. Depending on the size of your deposit, you might be able to increase materially your interest income.
linguim: not completely hypothetical, see below
Bill: This has been a helpful academic exercise for me as well.
Rob: the point of My hypothetical question? Not the former (as you suspected) but more of the latter. For many years my employment has been in a high risk potential high reward area of my profession. I have only recently found this site and now read it religiously (so many posters are terribly generous with their time and thoughts), though I pretty much had adopted a similar approach to my investing. I have an AA that is no doubt more conservative than most would suggest based on my age (no doubt to what I perceive as the high risk nature of my employment) and I invest exclusively in I-Bonds (since 2000 maxing out--or more than maxing out on our upper limits per year), CDs, and muni-bond funds on the fixed income side. Our equities have always had a very high percentage in low expense broadly diversified mutual funds or ETF, but since joining this forum I have been persuaded to add international to our holdings and have done so with all new money invested and will continue to do so in the foreseeable future to get a better diversified international exposure. Pulling the trigger to get out of the game is a risky endeavor. When most people do, I suspect they rightly and justifiably keep a certain financial exposure to stocks and bonds, because history tells them they must do so based on historical returns and their needs to fund their retirement. Having started investing before the crash of 1987, and all downturns since, I have seen fast equity deterioration. I have never sold and the market has rebounded every time and the smart thing has always been to "stay the course." I have done so, but it has been easy to stay the course when I have had substantial income from employment and many years to wait for the market to come back. Staying the course might appear more difficult for those in or close to retirement. Hence...the purpose of my inquiry. My question is a corollary to other posts asking "what is your number"? It seems to me the answer for most people relies heavily on what they think they likely will earn (and more frankly likely must earn) to sustain paying the bills. Each person's assessment takes into account future market risk. When I do decide to get out of the game, I no doubt will maintain a healthy exposure to the market (through IRA, Roth IRA, and after tax accounts with Total Stock Market and International Market ETFs....but it would be nice to feel comfortable that the FI side of my AA may alone be sufficient to sustain our lifestyle.
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Re: How Much Cash do I Need to Retire?

Postby Grt2bOutdoors » Tue Mar 26, 2013 3:51 pm

Here's what I would do: keep 2 years in cash, 5 years in a CD Ladder (you pick the intervals) - that gets you to 60. Keep the next 7 years in the total bond market index. The remainder in a diversified basket of equities. If you don't have at least $3.0MM in your portfolio today, then keep working. Alot can change over the next 14 years. At age 67, collect Social Security.
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Re: How Much Cash do I Need to Retire?

Postby Dandy » Tue Mar 26, 2013 4:59 pm

I also like if you won the game why keep playing. But I wouldn't put it all in cashlike vehicles. I would consider using annuities and having maybe 30% equities with any remainder. You are quite young so that a standard annuity might not be as good now. Maybe some money in a limited term annuity - one that pays only for the years from current age to when you can collect social security, pension or be old enough for a more traditional annuity.

No place you put you money is truely safe. An all cash portfolio will not necessarily keep up with inflation and will suject your income to changes interest rates and taxes and if you lived in Crete your safe savings account may be subject to a haircut. Who says that over a 40 year period the US might have some strange tax rules. Having all your retirement eggs in one type of basket may be an over reaction.
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Re: How Much Cash do I Need to Retire?

Postby Noobvestor » Tue Mar 26, 2013 5:02 pm

Bill M wrote:
Noobvestor wrote:A number that would work in most cases could also be blown away if we have 70s-style inflation, let alone even higher or hyper-inflation. To some extent, there's no amount of 'cash only' money that would insure things would work out for you (see: German hyperinflation). In short: you can't 'take into account inflation' unless you can predict the future, so answering this question requires being able to predict the future.

I beg to differ. In Canada there are "Real Return Bonds". In the US there are I-Bonds and TIPS. Just be careful to own the bonds themselves (not a mutual fund holding the bonds), and don't count on them for short-term inflation protection.


You misunderstand me. I'm saying that if the OP's question is 'how much cash money dollars do I need to retire?', which is how I understood it, then there is no answer - outlier cases like hyperinflation can destroy basically any cash pile. If the answer is 'how much in real-return bonds do I need?' then it becomes an answerable question, at least in my opinion (and it sounds like in yours too). Why the OP isn't posing it in terms of TIPS I can't say I fully understand.
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Re: How Much Cash do I Need to Retire?

Postby Noobvestor » Tue Mar 26, 2013 5:07 pm

Chicago60 wrote: I no doubt will maintain a healthy exposure to the market (through IRA, Roth IRA, and after tax accounts with Total Stock Market and International Market ETFs....but it would be nice to feel comfortable that the FI side of my AA may alone be sufficient to sustain our lifestyle.


For that to happen, you need to be considering inflation-adjusted bonds. Then the answer becomes relatively easy, rather than almost impossibly difficult ;)
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Re: How Much Cash do I Need to Retire?

Postby Chicago60 » Tue Mar 26, 2013 5:38 pm

Noob.....such as my reasonably substantial I-Bonds holdings as a start...?
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Re: How Much Cash do I Need to Retire?

Postby Noobvestor » Tue Mar 26, 2013 5:55 pm

Chicago60 wrote:Noob.....such as my reasonably substantial I-Bonds holdings as a start...?


Definitely a good start, but the allocation limits are a perpetual and impossible to overcome issue. Even assuming a couple maxing out their allocation for decades, we're talking more than a lifetime of I Bonds needed. That's no reason not to max them out (I do!) but if your goal is high perpetual and safe income from just FI, they won't be enough. I think Zvi Bodi (you can search for other threads on him on BH or Google) may be the guru to look at, or Bernstein IIRC, for inflation-bond liability-matching on the FI side.

Purely for the theoretical fun of it though, imagine you could buy unlimited I Bonds. Then the math becomes *really* easy. 120K/year for, say, 30 years, means you just need 120x30 in I Bonds + the tax liability, since they have a real return of zero. Anything nominal-only (including cash/CDs/TBM) becomes a much harder calculation because of unknown future inflation. So if I were really interested in trying to get my spending only from the FI side, I would definitely have at least, say, half of that FI in inflation-adjusted securities/annuities.
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Re: How Much Cash do I Need to Retire?

Postby Chicago60 » Tue Mar 26, 2013 9:32 pm

Noob...thanks for the Bodie referral. I will add his writings to my reading list. As I suggested above, for a period of time before we were aware of the annual limit per person, starting in 2000, we invested over the annual limit (and subsequently resolved the issue with the IRS), but not in the numbers needed as you suggested....though I take (minor) issue with your reference to them being nominal only....the substantial ones we bought in 2000-2002 had fairly favorable fixed components to the blended return. Thanks for your comments.
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Re: How Much Cash do I Need to Retire?

Postby azanon » Tue Mar 26, 2013 10:15 pm

I damn near chocked on an ice-cube I had in my mouth when I saw you're needing estimates for 120K after tax to live on. Good lord. I live like a king on less than half that. I'd suggest googling "mister money moustache" and read about 20 articles there, then using whatever number these experts here give you to answer you question, then divide it by at least 2 and still live like a king.

Thank the good lord above I don't need that much to retire. I'd have to work until I'm 70, and that's even despite the fact that my household income is well north of 6 digits.
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Re: How Much Cash do I Need to Retire?

Postby orthros » Tue Mar 26, 2013 10:52 pm

I have to second AZAnon. If you want to spend tons of $$$ in retirement, well, yes, you'll need a multi-million nest egg. If you want to live a comfortable (but not crazy) lifestyle you're looking at a number much closer to $1 - 1.5 million in most of the country.

I have half a dozen children and I still only spend about $55,000 per year, which would equate to $1.4 million assuming you can spend like me AND that you'll earn zero dollars in retirement.

If you can pick up $10K a year in side/part-time work (net) and spend $55,000, then your figure just dropped to $1.1 million. If you can pick up $15K net and spend $45K, you can retire on a mere $750K.

Of course, if you want to be a little more conservative than 4%, feel free to drop it to 3% or whatever, but risk is never 100% eliminated in life. Eliminate 90% and be flexible if things go awry and you can survive most black swan type events.
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Re: How Much Cash do I Need to Retire?

Postby OneDay » Tue Mar 26, 2013 11:54 pm

If you kept a lump sum of cash under you bed you would need a lot more than the 5m estimate people are saying. It's not as simple as multiplying the 120k by 40 or so to get the lump sum. In 40 years, to have the spending power of 120k, you would need around 400k because of inflation. So you can see you would need a lot more if you were truly holding straight cash and not earning interest.
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