Retirement planning--how many years of cash equiv should I aim to have?

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whyme
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Retirement planning--how many years of cash equiv should I aim to have?

Post by whyme » Wed Dec 05, 2018 2:57 pm

I am not yet retired, but that will come sometime in the next five years. I'm single, I will get a pension that will cover roughly 40% of my desired income (a little more if I work longer, of course). Social security will be very small when I claim it at 70, as I am subject to the "windfall elimination provision," maybe another 10% of desired income. So I'll need for investments to generate roughly half of my retirement income. My question is this: I'd like to have peace of mind and a relatively smooth income stream even as I keep most of my long-term investments in stocks. I'm thinking that means having more than one year of income from investments at the ready, in a money market account or perhaps CDs or Treasurys of appropriate duration. I'm interested whether anyone has employed this system successfully or sees problems with it. My main question is: how many years out should I go? Is two years enough? Three? Five?

I have no doubt this topic has been addressed in previous Boglehead threads; if anyone is aware of a particularly good discussion, please point me toward it.

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bengal22
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Re: Retirement planning--how many years of cash equiv should I aim to have?

Post by bengal22 » Wed Dec 05, 2018 3:05 pm

I am currently in a somewhat similar situation to you. I have a pension that covers about 40% of my expenses. I am drawing a little with my wife's s.s. and my spousal benefit until I start drawing full benefits when I reach 70. I keep about 2-4 weeks in cash because I just draw monthly what i need by selling mutual funds. I think in the long run one is better keeping as much in the market as possible. Of course if interest rates go up this may change. My asset allocation is about 55/45 and I am 66.
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MathWizard
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Re: Retirement planning--how many years of cash equiv should I aim to have?

Post by MathWizard » Wed Dec 05, 2018 3:20 pm

You want the high return of stocks without volatility.

Using cash gives you low volatility, but puts a drag on returns.

I suggest that you instead put some of your money into a SPIA, enough so that your
guaranteed income + the SPIA meets your bare minimum needs. Then you do not
have to pull from your equities in down years.
You will want some small amount in a cash equivalent for short term needs, I typically
use $5K in a savings account that I can access from an ATM anywhere in the world for that.
That and Credit cards are sufficient that I can let things slide for a month or two if some
calamity strikes.

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Peter Foley
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Re: Retirement planning--how many years of cash equiv should I aim to have?

Post by Peter Foley » Wed Dec 05, 2018 3:46 pm

I remember taking an on line quiz about investing in retirement and getting one answer wrong. It was the same question you posed and my answer was 2 years. The "right" answer was 1 year. I mention this because there is no doubt a wide range of opinion here.

If you are at a 50/50 AA and have an average return for non equities equal to the rate of inflation, I think you can be more flexible. I think the TSP has that option if that is your retirement plan.

Otherwise, IMHO 2 years is the minimum with 3-5 years reasonable. I would use a combination of I-bonds and a CD ladder as investment vehicles.

jebmke
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Re: Retirement planning--how many years of cash equiv should I aim to have?

Post by jebmke » Wed Dec 05, 2018 3:52 pm

You'll get a range of answers -- ranging from (no cash - which is my structure) to multiple years of cash. If you have a reasonable allocation that includes bonds, you won't be "selling equities in down years" -- if you are re-balancing to a target allocation you will be buying equity.

I retired in December, 2007. The market tanked right after that (wasn't my fault!). I was selling bonds to fund expenses as well as re-balance to equity. My last equity purchase was March 16, 2009.
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ruralavalon
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Re: Retirement planning--how many years of cash equiv should I aim to have?

Post by ruralavalon » Wed Dec 05, 2018 6:01 pm

This depends a lot on personal preference, and what allows you to feel comfortable.

I am 73, retired 7 years, have no pension or annuity, and receive Social Security. Our asset allocation is 50/50.

We have about 14 years worth of living expenses (net of Social Security) in an intermediate-term bond fund, but no "cash or equivalent" allocation at all.

We have no savings account or CDs. At this moment we have about 2 - 3 months of net living expenses in a joint checking account, that's it.
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retiredflyboy
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Re: Retirement planning--how many years of cash equiv should I aim to have?

Post by retiredflyboy » Wed Dec 05, 2018 10:37 pm

spia + 1 for a little more guarantee income to go with your pension snd SS, then set an AA that you are comfortable with around 50% stock 50 % fixed income plus or minus to your tast. Enough cash for unexpected upkeep, auto repairs health care etc. Many different views on this but I hold about 5% cash all at Ally savings and Vanguard Prime MM.
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ReadyOrNot
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Re: Retirement planning--how many years of cash equiv should I aim to have?

Post by ReadyOrNot » Thu Dec 06, 2018 3:06 am

It really depends on the amount of assets, your asset allocation, and how well you tolerate market downturns. If your all stock market investment is worth 60 times your annual investment income need, and you can calmly stay invested when it drops to 30 times your annual investment need, and you only need it to last 30 years, you should be fine selling and spending from your investment as you go, without much cash allocation.
If you won't have that much, or won't tolerate that kind of variation, find an allocation that you will be able to live with.

jojay
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Re: Retirement planning--how many years of cash equiv should I aim to have?

Post by jojay » Thu Dec 06, 2018 8:49 am

We have 5 years in cash. Yes, that is not the best use of the money. Yes, it reduces our overall return. Yes, it is much longer than any historical recession or market downturn.
However, we do not need a very high rate of return to maintain principle and still grow the portfolio. Our needed annual withdrawal is less than our annual return.
We can sleep at night.

Jordan4FI
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Re: Retirement planning--how many years of cash equiv should I aim to have?

Post by Jordan4FI » Thu Dec 06, 2018 9:35 am

I plan to retire early at age 40, I plan right now to keep 2 years expenses in cash in a Checking account (estimated at the top of the range of the budget).

But another .5 or 1 year of the lowest estimated expenses in a Savings/Money Market account as an extra buffer for any wild event.

Dandy
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Re: Retirement planning--how many years of cash equiv should I aim to have?

Post by Dandy » Thu Dec 06, 2018 9:56 am

Just a comment on "cash" being a drag on performance. It was more true a few years ago when interest rates were so low - remember Prime paying .01%? I think I do. - it is now paying a bit more than 2.3% vs Total Bond yield of 3.37 but YTD down 1.39% (not a big deal), and a 2 yr VG brokerage CD is paying 3.10%.

Some cash, especially in a gently rising rate environment, isn't much different than intermediate bonds. Neither are growth vehicles and both have their pros and cons.

Many use their fixed income because they want to take the bulk of their risk on the equity side. They want their fixed income to provide some safety and stability to the portfolio. Most intermediate and short term bond funds and cash-like products meet that goal.

mak1277
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Re: Retirement planning--how many years of cash equiv should I aim to have?

Post by mak1277 » Thu Dec 06, 2018 10:09 am

My plan:

1) choose a WR % I am comfortable with, an AA that supports it, and achieve that
2) In addition to #1, set aside 3 years expenses in cash equivalents.
3) In addition to #1 & 2, set aside a chunk for children's college education, invested in a separate AA based on when I'll expect to use it
4) In addition to #1 - 3, set aside a chunk for the uncertainty of future health care costs
5) Retire once these buckets are filled

It's probably (definitely) more conservative than I need to be.

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Watty
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Re: Retirement planning--how many years of cash equiv should I aim to have?

Post by Watty » Thu Dec 06, 2018 10:27 am

Keeping a few months expenses in cash makes sense to me just for simplicity.

If you could also have a situation where additional funds will be needed, like for your first seven years of retirement until you start Social Security then having those funds invested in something like a CD ladder also makes sense to me.

If you will have a large expense in a few years like buying an RV then keeping that in something like cash also makes sense to me.

Other than situations like that when people say something like, "I want to keep three years(or whatever) expenses in cash." The way I look at it is like this;

For example in rough numbers you might have this situation;

1) You have a million dollar portfolio.
2) You need $40,000 a year which is 4%.
3) You have your investments set to not reinvest your interest and dividends which generates around 2% a year which is $20,000.

This means that you have to withdraw $20,000 a year or about 2% of you portfolio.

Even if the stock market is down withdrawing 2% is not going to make a huge difference and with the stocks being down you would be selling off bonds anyway to rebalance. For example if you started off with a million dollar portfolio that is 40% stock then you would;

1) Start of with $400K in stocks, if the stock market goes down 10% you would be down to $360K
2) Start off with $600K in bonds. To rebalance you would need to sell off more than $20K in bonds, but instead of buying stocks you would use that for the $20K withdrawal for the year.

That would mean that you would not need to sell the stocks when they were down to pay for your withdrawals.

The math may be a bit different when you are older and spending more than 4% a year but your stock asset allocation would also be lower.

You may need it to sleep better but I don't see a lot of advantages to having a lot of cash.

jojay
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Re: Retirement planning--how many years of cash equiv should I aim to have?

Post by jojay » Thu Dec 06, 2018 11:03 am

Watty wrote:
Thu Dec 06, 2018 10:27 am
Keeping a few months expenses in cash makes sense to me just for simplicity.

If you could also have a situation where additional funds will be needed, like for your first seven years of retirement until you start Social Security then having those funds invested in something like a CD ladder also makes sense to me.

If you will have a large expense in a few years like buying an RV then keeping that in something like cash also makes sense to me.

Other than situations like that when people say something like, "I want to keep three years(or whatever) expenses in cash." The way I look at it is like this;

For example in rough numbers you might have this situation;

1) You have a million dollar portfolio.
2) You need $40,000 a year which is 4%.
3) You have your investments set to not reinvest your interest and dividends which generates around 2% a year which is $20,000.

This means that you have to withdraw $20,000 a year or about 2% of you portfolio.

Even if the stock market is down withdrawing 2% is not going to make a huge difference and with the stocks being down you would be selling off bonds anyway to rebalance. For example if you started off with a million dollar portfolio that is 40% stock then you would;

1) Start of with $400K in stocks, if the stock market goes down 10% you would be down to $360K
2) Start off with $600K in bonds. To rebalance you would need to sell off more than $20K in bonds, but instead of buying stocks you would use that for the $20K withdrawal for the year.

That would mean that you would not need to sell the stocks when they were down to pay for your withdrawals.

The math may be a bit different when you are older and spending more than 4% a year but your stock asset allocation would also be lower.

You may need it to sleep better but I don't see a lot of advantages to having a lot of cash.

You are absolutely correct. When I mentioned cash for 5 years, it is really 1 year in cash cash and 4 years in laddered CDs. Anticipating the Fed raises interest rates rise as suspected, in a year, the interest on the cds alone will outpace withdrawl needs.

OffGridder
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Re: Retirement planning--how many years of cash equiv should I aim to have?

Post by OffGridder » Thu Dec 06, 2018 5:02 pm

We start each year with 18 months cash, mostly in a money market account. We spend from that pool. We replenish it annually when we do our once per year rebalancing of our 3 fund portfolio.
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The Wizard
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Re: Retirement planning--how many years of cash equiv should I aim to have?

Post by The Wizard » Fri Dec 07, 2018 6:53 am

I'm another one with a zero cash bucket.
I retired in 2013 and have pension/annuity income that covers the bulk of my expenses.
I keep up to $10,000 iny checking to cover lumpy expenses but no longer have a savings account. Excess cash gets invested in VTSAX.

I withdraw a few thousand dollars each month from my tax-deferred account in lieu of SS, but these withdrawals are pro rata from my mix of investments (55% stocks).
About 20% of my tax-deferred portfolio is in TIAA Traditional paying in the 3% to 4% range, so you might call that a cash or CD equivalent. But as I said, my withdrawals are pro rata...
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tennisplyr
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Re: Retirement planning--how many years of cash equiv should I aim to have?

Post by tennisplyr » Fri Dec 07, 2018 8:02 am

IMO many questions on this forum ask "what should I do" rather than "what are you doing". The latter will give you insight into peoples' behavior and how they feel things are going. There's no right or wrong. That said, I've been retired ~8 years and have roughly 5% in cash...for me I sleep at night and don't worry about selling things off.
Those who move forward with a happy spirit will find that things always work out.

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