Where to hold 2-3 years of living expenses

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260chrisb
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Where to hold 2-3 years of living expenses

Post by 260chrisb » Sun Apr 14, 2019 7:31 pm

I'm three years away and after many years of saving I am slowly increasing my cash holdings in my taxable portfolio, tax deferred 401K, rollover IRA, and slightly in my Roth. I never see it being more than 10% (probably 2% now) and plan to have at least 3 years worth of cash to draw from when the day comes in my rollover IRA. Which means I'll have to sell some stuff! Having said that; where does one hold this amount of cash?

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arcticpineapplecorp.
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Re: Where to hold 2-3 years of living expenses

Post by arcticpineapplecorp. » Sun Apr 14, 2019 7:37 pm

An online savings account is liquid, FDIC insured and has the highest rates. I use Ally, but there are others (Marcus/Goldman Sachs, Capital One, etc):
https://www.bankrate.com/banking/savings/rates/

You could also use a short term bond index fund (but there could be slight volatility as rates change).

Finally, you could use a money market mutual fund. Vanguard is often recommended:
https://investor.vanguard.com/mutual-fu ... ount-rates

but know that a money market mutual fund is not FDIC insured. Money market accounts (through a bank) usually are, but not necessarily money market mutual funds.

CDs are fine too if you match the maturity date with when you will actually need the money.
Last edited by arcticpineapplecorp. on Sun Apr 14, 2019 7:42 pm, edited 1 time in total.
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Wiggums
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Re: Where to hold 2-3 years of living expenses

Post by Wiggums » Sun Apr 14, 2019 7:39 pm

My cash is in the form of CDs and VG money market. I use Ally, Capital One and Vanguard

jwaxjwax
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Re: Where to hold 2-3 years of living expenses

Post by jwaxjwax » Sun Apr 14, 2019 7:56 pm

OP, I like using a Vanguard money market fund because it's easy and I use Vanguard for other investments. It's true that it doesn't yield what the highest savings accounts yield.

Taylor, I presume that he's increasing cash reserves so that he won't have to draw down stocks (or bonds) if the market takes a dip. What would your plan be in that event? Let's say that stocks take a hit, and then you need to make a withdrawal in retirement. Would you sell bonds in a way that essentially tried to re-balance your account (i.e. selling only bonds in that case)?

pdavi21
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Re: Where to hold 2-3 years of living expenses

Post by pdavi21 » Sun Apr 14, 2019 7:57 pm

I suggest a short-term bond fund. They conveniently typically have a duration of 2-3 years.
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Wiggums
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Re: Where to hold 2-3 years of living expenses

Post by Wiggums » Sun Apr 14, 2019 7:58 pm

My guess is that Taylor has cash coming to him each month from annuities and maybe dividends.

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Re: Where to hold 2-3 years of living expenses

Post by radiowave » Sun Apr 14, 2019 8:05 pm

I primarily use CDs for short term cash. Ally currently has a 2.75% 1 year CD which keeps up with inflation.
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NYCwriter
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Re: Where to hold 2-3 years of living expenses

Post by NYCwriter » Sun Apr 14, 2019 8:45 pm

I use, in order:
Capital One MM for a smaller always-available liquid fund.
Vanguard Prime for most emergency savings

Also use short term Treasury fund in taxable. but count this as part of bond allocation.

I'm considering moving some from Prime and short-term treasury into CDs, but in my tax bracket might just consider adding to intermediate bond funds this year. I am currently holding more cash in Prime than I really need for an emergency fund.

DecumulatorDoc
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Re: Where to hold 2-3 years of living expenses

Post by DecumulatorDoc » Sun Apr 14, 2019 9:00 pm

Taylor Larimore wrote:
Sun Apr 14, 2019 7:47 pm
260chrisb wrote:
Sun Apr 14, 2019 7:31 pm
I'm three years away and after many years of saving I am slowly increasing my cash holdings in my taxable portfolio, tax deferred 401K, rollover IRA, and slightly in my Roth. I never see it being more than 10% (probably 2% now) and plan to have at least 3 years worth of cash to draw from when the day comes in my rollover IRA. Which means I'll have to sell some stuff! Having said that; where does one hold this amount of cash?
260chrisb:

I do not hold a separate, low-yielding, "cash" account. If needed, I can obtain cash from my credit card, my portfolio, bank loan, family, etc.

Strive for simplicity.

Best wishes.
Taylor
I imagine this is more of a personal choice based on Taylor's specific situation. I don't believe he is recommending credit cards or loans for cash needs for the average person on this forum.

I believe many, including myself, hold 2-3 years of cash for their needs. Particularly good to have if you'd like to avoid selling equities during market downturns. Personally I have year one expenses in Ally Savings, year two in 1 yr Ally CD and year 3 in short term bond fund. Its simple and it works. That cash also allows me to avoid capital gains when I'm actively keeping my income low to allow more IRA conversions.

This is in taxable. I'm not sure I see the need for cash in my IRA since thats heavily fixed income with little risk of market downturn during RMD time. And definitely no cash in my Roth, don't plan withdrawals there for quite a long time.

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ruralavalon
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Re: Where to hold 2-3 years of living expenses

Post by ruralavalon » Mon Apr 15, 2019 8:36 am

260chrisb wrote:
Sun Apr 14, 2019 7:31 pm
I'm three years away and after many years of saving I am slowly increasing my cash holdings in my taxable portfolio, tax deferred 401K, rollover IRA, and slightly in my Roth. I never see it being more than 10% (probably 2% now) and plan to have at least 3 years worth of cash to draw from when the day comes in my rollover IRA. Which means I'll have to sell some stuff! Having said that; where does one hold this amount of cash?
We don't hold a cash allocation at all. Our investments are all in Vanguard mutual funds, which can be turned into cash in a couple of days if needed.

If I wanted 2-3 years of living expenses in cash or similar I would use a combination of:
1) Vanguard Prime Money Market Fund (VMMXX) current SEC Yield = 2.45%;
2) Vanguard Ultra Short-term Bond Fund (VUBFX) current SEC Yield = 2.67%; and
2) Vanguard Short-term Bond Index Fund Admiral (VSCSX) current SEC Yield = 2.99%.
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Peter Foley
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Re: Where to hold 2-3 years of living expenses

Post by Peter Foley » Mon Apr 15, 2019 11:27 am

We use Ally bank and brokerage money market funds that pay close to the rate of inflation. We want to avoid anything where the value might fluctuate or where buying power is lost.

The Wizard
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Re: Where to hold 2-3 years of living expenses

Post by The Wizard » Mon Apr 15, 2019 11:57 am

Wiggums wrote:
Sun Apr 14, 2019 7:58 pm
My guess is that Taylor has cash coming to him each month from annuities and maybe dividends.
Well, MOST retirees have cash hitting their checking account each month if they've planned properly.

As for me, I keep no more than $10,000 in cash, in my checking account.
The rest is kept invested in my various accounts...
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Re: Where to hold 2-3 years of living expenses

Post by h82goslw » Mon Apr 15, 2019 11:59 am

DecumulatorDoc wrote:
Sun Apr 14, 2019 9:00 pm
Taylor Larimore wrote:
Sun Apr 14, 2019 7:47 pm
260chrisb wrote:
Sun Apr 14, 2019 7:31 pm
I'm three years away and after many years of saving I am slowly increasing my cash holdings in my taxable portfolio, tax deferred 401K, rollover IRA, and slightly in my Roth. I never see it being more than 10% (probably 2% now) and plan to have at least 3 years worth of cash to draw from when the day comes in my rollover IRA. Which means I'll have to sell some stuff! Having said that; where does one hold this amount of cash?
260chrisb:

I do not hold a separate, low-yielding, "cash" account. If needed, I can obtain cash from my credit card, my portfolio, bank loan, family, etc.

Strive for simplicity.

Best wishes.
Taylor
I imagine this is more of a personal choice based on Taylor's specific situation. I don't believe he is recommending credit cards or loans for cash needs for the average person on this forum.

I believe many, including myself, hold 2-3 years of cash for their needs. Particularly good to have if you'd like to avoid selling equities during market downturns. Personally I have year one expenses in Ally Savings, year two in 1 yr Ally CD and year 3 in short term bond fund. Its simple and it works. That cash also allows me to avoid capital gains when I'm actively keeping my income low to allow more IRA conversions.

This is in taxable. I'm not sure I see the need for cash in my IRA since thats heavily fixed income with little risk of market downturn during RMD time. And definitely no cash in my Roth, don't plan withdrawals there for quite a long time.
Question for DecumulatorDoc......what happens after year 1?
Where does the money for the following year come from?
Do you literally move around funds that were allocated to year two and three?

Broken Man 1999
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Re: Where to hold 2-3 years of living expenses

Post by Broken Man 1999 » Mon Apr 15, 2019 1:09 pm

We hold no X number of years living expenses in any special investment/allocation. We do have a retirement portfolio that is 50% bonds and 50% equities.

With a 50/50 AA, we can weather a very long stock decline, so I just don't see the need of holding any assets earmarked for various expenses, or for yearly expense needs. The vast majority of our bond funds hold US Treasury instruments, and we have a decent amount of Series I and EE US Savings Bonds to help us on the inflation front. So, no worries about bond quality.

If you can't SWAN (sleep well at night) sans some dedicated investment, certainly put your 2-3 years worth of expenses in what you feel most comfortable holding. You might set up a three year CD ladder. Just buy another CD each year as you use the maturing rung of the ladder.

But seriously, simplify your portfolio as much as you can, after a bit you might find you no longer need dedicated portion of your retirement portfolio for X number of years expenses.

10% in such an allocation seems a bit much to me.

Broken Man 1999
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DorothyB
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Re: Where to hold 2-3 years of living expenses

Post by DorothyB » Mon Apr 15, 2019 9:06 pm

I've been retired since late 2014. I calculate the amount I will need to withdraw from my retirement savings and have 4 years (less estimated dividends) outside of my Vanguard equity / bond funds. The purpose of this money is to be able to not sell my funds when the market is way down. Because I have this buffer, I am very comfortable with having an asset allocation within my Vanguard equity / bond funds that is about 90% equities. Including my buffer, I am at about 65% US equity, 10% foreign equity, 10% bonds and 15% buffer (cash)

Each year I've been pulling some of this "cash buffer" out of my IRA without going into the next higher tax bracket. If I use the "already out of IRA money", I need less since I don't have to pay income tax out of it. That tax savings I am calling "prepaid taxes".

I have about 40% of this in Vanguard Prime MM within my IRA. Close to 30% of this is in I Bonds outside of my IRA. A bit under 20% is currently loaned to friends (very secure loan) and most of the rest is prepaid taxes.

I expect the loan to be paid back within a year and will need to figure out what to do with this - may go in Synchrony savings or maybe some in a CD?

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Re: Where to hold 2-3 years of living expenses

Post by 3funder » Tue Apr 16, 2019 7:42 am

Savings account, money market account or fund, short-term bond fund. My wife and I hold ours in Vanguard's Prime Money Market Fund (VMMXX).

DecumulatorDoc
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Re: Where to hold 2-3 years of living expenses

Post by DecumulatorDoc » Tue Apr 16, 2019 9:54 am

Question for DecumulatorDoc......what happens after year 1?
Where does the money for the following year come from?
Do you literally move around funds that were allocated to year two and three?
Assuming no bear market, I replenish the Ally Savings (2.20% interest currently) for next year one living expenses with capital gain harvesting from my taxable. 1 year CD (currently Ally at 2.75% interest rate) gets renewed for another year (automatically by Ally if I ignore it). And the third year short term bond fund remains untouched with constant duration (2.5 year duration, 3% yield) still appropriate for its potential future need. So no effort involved in moving things around. With the above interest rates and yields, I don't feel like I'm experiencing any cash drag, just short term end of my fixed income allocation.

I retired 5 years ago so I haven't seen any significant downturn in equities in retirement. When, not if, we get that bear market, I feel I will sleep better knowing that I have 3 years of reserves there. I hate selling equities when they are down, so hopefully these reserves for 3 years would also allow me to rebalance from fixed income into equities while they're on sale.
Last edited by DecumulatorDoc on Thu Apr 18, 2019 1:42 pm, edited 2 times in total.

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David Jay
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Re: Where to hold 2-3 years of living expenses

Post by David Jay » Tue Apr 16, 2019 2:36 pm

pdavi21 wrote:
Sun Apr 14, 2019 7:57 pm
I suggest a short-term bond fund. They conveniently typically have a duration of 2-3 years.
+1
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miket29
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Re: Where to hold 2-3 years of living expenses

Post by miket29 » Tue Apr 16, 2019 4:48 pm

DorothyB wrote:
Mon Apr 15, 2019 9:06 pm
I've been retired since late 2014. I calculate the amount I will need to withdraw from my retirement savings and have 4 years (less estimated dividends) outside of my Vanguard equity / bond funds. The purpose of this money is to be able to not sell my funds when the market is way down. Because I have this buffer, I am very comfortable with having an asset allocation within my Vanguard equity / bond funds that is about 90% equities. Including my buffer, I am at about 65% US equity, 10% foreign equity, 10% bonds and 15% buffer (cash)
If you're comfortable with the risk of this then it makes sense, but keep in mind the market can be down for protracted periods. Even ignoring the example of Japan and looking at just the US market, the data you can create at https://dqydj.com/sp-500-historical-return-calculator/ shows that 10% of the time for rolling 5 year periods over the last 60 years the market averaged an annual loss of about 3.3% so you could be down 15% at the end of the period in your US holdings and out of the cash. In 1974 it took the S&P500 another 5 years to reach its previous high point, and in 2000 it took until 2008.

DorothyB
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Re: Where to hold 2-3 years of living expenses

Post by DorothyB » Tue Apr 16, 2019 7:52 pm

miket29 wrote:
Tue Apr 16, 2019 4:48 pm
DorothyB wrote:
Mon Apr 15, 2019 9:06 pm
I've been retired since late 2014. I calculate the amount I will need to withdraw from my retirement savings and have 4 years (less estimated dividends) outside of my Vanguard equity / bond funds. The purpose of this money is to be able to not sell my funds when the market is way down. Because I have this buffer, I am very comfortable with having an asset allocation within my Vanguard equity / bond funds that is about 90% equities. Including my buffer, I am at about 65% US equity, 10% foreign equity, 10% bonds and 15% buffer (cash)
If you're comfortable with the risk of this then it makes sense, but keep in mind the market can be down for protracted periods. Even ignoring the example of Japan and looking at just the US market, the data you can create at https://dqydj.com/sp-500-historical-return-calculator/ shows that 10% of the time for rolling 5 year periods over the last 60 years the market averaged an annual loss of about 3.3% so you could be down 15% at the end of the period in your US holdings and out of the cash. In 1974 it took the S&P500 another 5 years to reach its previous high point, and in 2000 it took until 2008.
Interesting link - haven't seen this before.

However, I'm reading it differently than you are. When I put in 5 years, I see the -3.279 and 90% - is that what you are seeing that you are interpreting as the average annual loss of 3.3%? When I read the verbage above that, it says "Percentage Beating Annual Return over Period(s)" so that tells me that 90% of the time the return is 3.3% less than the "average" of just over 7%. I would like to see something that shows how much below the high that the market is 4 years after each decline of 2.5% or more.

I do realize that there are times that the market will still be "down" after 4 years, but the buffer will at least give the market some time to recover and I will have less years of needing to sell at a loss. Even if the market doesn't get up to it's previous high, it might be less of a low.

I did look at some "pullback" info when determining to do 4 years. The data is similar to what you are saying - Aug 2000 shows recovery date of Sep 2007 (a tad earlier than your post, but still a LONG time). However, if I can not sell equities for the first 4 years of that 7 years, I am still better off than if I have to sell every year during the loss. There was another long one from Dec 1972 to Jun 1980 (7 1/2 years) and another from Oct 2007 to Mar 2013 (almost 5 1/2 years).

So, first, hoping that I will at least not have to sell during the first part of any bad market. Also, my plan says OK to sell equity funds when they get up to 97.5% of my previous high so not back up to previous high. If I have to sell at a loss for a couple of years, that shouldn't affect my ability to "not run out of money" as much as having to sell at a loss every time there is a loss.

Second, since I am invested in 7 funds, it could be that some of them recover enough within the 4 years (my biggest holdings are Wellington VWENX, Total Stock Market VTSAX, Small Cap VSMAX and Equity Income VEIRX) to lessen the impact of selling when market isn't great. My plan is not to have to pick and choose based on how each fund is doing, but . . .

Third, this gives me a few years to figure out whether I should cut expenses (which reduces need to withdraw funds from IRA).

trustquestioner
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Re: Where to hold 2-3 years of living expenses

Post by trustquestioner » Tue Apr 16, 2019 7:57 pm

I have about 2 years of expenses in an Amex Savings account. Very easy to use and an excellent website. Rate might be 10-20 basis points below others but the convenience and familiarity are worth it to me.

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Re: Where to hold 2-3 years of living expenses

Post by averagedude » Tue Apr 16, 2019 8:11 pm

ruralavalon wrote:
Mon Apr 15, 2019 8:36 am
260chrisb wrote:
Sun Apr 14, 2019 7:31 pm
I'm three years away and after many years of saving I am slowly increasing my cash holdings in my taxable portfolio, tax deferred 401K, rollover IRA, and slightly in my Roth. I never see it being more than 10% (probably 2% now) and plan to have at least 3 years worth of cash to draw from when the day comes in my rollover IRA. Which means I'll have to sell some stuff! Having said that; where does one hold this amount of cash?
We don't hold a cash allocation at all. Our investments are all in Vanguard mutual funds, which can be turned into cash in a couple of days if needed.

If I wanted 2-3 years of living expenses in cash or similar I would use a combination of:
1) Vanguard Prime Money Market Fund (VMMXX) current SEC Yield = 2.45%;
2) Vanguard Ultra Short-term Bond Fund (VUBFX) current SEC Yield = 2.67%; and
2) Vanguard Short-term Bond Index Fund Admiral (VSCSX) current SEC Yield = 2.99%.
I also think a shorter term bond fund would be good in your situation. Also if you have most of your money in Vanguard, there is a benefit of having most if not all of your money in the same location. If these three funds that ruralavalon suggests have too much credit risk (corporate bonds), I would suggest this fund. It is allocated the same as total bond, but it has a shorter duration with lower credit risk, but with a lower SEC yield. Any of these 4 funds would be reasonable for you.
Vanguard Short-term Bond Admiral (VBIRX) current SEC Yield= 2.50% expense ratio 0.07%

miket29
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Re: Where to hold 2-3 years of living expenses

Post by miket29 » Tue Apr 16, 2019 9:08 pm

DorothyB wrote:
Tue Apr 16, 2019 7:52 pm
However, I'm reading it differently than you are. When I put in 5 years, I see the -3.279 and 90% - is that what you are seeing that you are interpreting as the average annual loss of 3.3%? When I read the verbage above that, it says "Percentage Beating Annual Return over Period(s)" so that tells me that 90% of the time the return is 3.3% less than the "average" of just over 7%.
They could give better guidance to interpreting the generated tables and use better titles. However if you scroll farther down the page they have an explanation from a sample table. They highlight the first row of the example with 90% in the left column and 4.899% in the right column, then say the line means "90% of 40 year periods beat or matched a 4.899% annual average return, inflation adjusted". So the right column is the actual return, not a return relative to the average.

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Re: Where to hold 2-3 years of living expenses

Post by DorothyB » Wed Apr 17, 2019 11:55 am

miket29 wrote:
Tue Apr 16, 2019 9:08 pm
DorothyB wrote:
Tue Apr 16, 2019 7:52 pm
However, I'm reading it differently than you are. When I put in 5 years, I see the -3.279 and 90% - is that what you are seeing that you are interpreting as the average annual loss of 3.3%? When I read the verbage above that, it says "Percentage Beating Annual Return over Period(s)" so that tells me that 90% of the time the return is 3.3% less than the "average" of just over 7%.
They could give better guidance to interpreting the generated tables and use better titles. However if you scroll farther down the page they have an explanation from a sample table. They highlight the first row of the example with 90% in the left column and 4.899% in the right column, then say the line means "90% of 40 year periods beat or matched a 4.899% annual average return, inflation adjusted". So the right column is the actual return, not a return relative to the average.
Thanks! That makes sense. So 10% of the time the negative returns lasts over 5 years.
Looking at 2 years, 20% of the time there would be negative returns of at least 2.4% and at 4 years over 80% would have negative returns. Having a 4 year buffer brings the negative returns down . . . not sure exactly how much as this doesn't show when the 5 year returns actually become positive - at 82% or 89% of the time - but still better than negative over 80% of the time.

OK - now I did 4 yrs 3 months, 4 y 6 m, 4 y 9 m and 5 yr - while there are ups & downs which can mean that a longer period could be worse, the negative returns 80% of the time ends after 4 yrs 3 months.

I'm OK w/ the market not being recovered after 4 years all of the time since the "negative" is relatively small. I have some extra built in so should be fine.

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Re: Where to hold 2-3 years of living expenses

Post by joelly » Wed Apr 17, 2019 4:12 pm

I'm curious. Won't you lose money in these funds mentioned-below?
ruralavalon wrote:
Mon Apr 15, 2019 8:36 am
We don't hold a cash allocation at all. Our investments are all in Vanguard mutual funds, which can be turned into cash in a couple of days if needed.

If I wanted 2-3 years of living expenses in cash or similar I would use a combination of:
1) Vanguard Prime Money Market Fund (VMMXX) current SEC Yield = 2.45%;
2) Vanguard Ultra Short-term Bond Fund (VUBFX) current SEC Yield = 2.67%; and
3) Vanguard Short-term Bond Index Fund Admiral (VSCSX) current SEC Yield = 2.99%.
[/quote]

joelly
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Re: Where to hold 2-3 years of living expenses

Post by joelly » Wed Apr 17, 2019 4:14 pm

I'm curious. Won't you lose money in these funds mentioned-below? I'm new at these sorry...
ruralavalon wrote:
Mon Apr 15, 2019 8:36 am
We don't hold a cash allocation at all. Our investments are all in Vanguard mutual funds, which can be turned into cash in a couple of days if needed.

If I wanted 2-3 years of living expenses in cash or similar I would use a combination of:
1) Vanguard Prime Money Market Fund (VMMXX) current SEC Yield = 2.45%;
2) Vanguard Ultra Short-term Bond Fund (VUBFX) current SEC Yield = 2.67%; and
2) Vanguard Short-term Bond Index Fund Admiral (VSCSX) current SEC Yield = 2.99%.

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Re: Where to hold 2-3 years of living expenses

Post by ruralavalon » Wed Apr 17, 2019 5:44 pm

joelly wrote:
Wed Apr 17, 2019 4:14 pm
I'm curious. Won't you lose money in these funds mentioned-below? I'm new at these sorry...
ruralavalon wrote:
Mon Apr 15, 2019 8:36 am
We don't hold a cash allocation at all. Our investments are all in Vanguard mutual funds, which can be turned into cash in a couple of days if needed.

If I wanted 2-3 years of living expenses in cash or similar I would use a combination of:
1) Vanguard Prime Money Market Fund (VMMXX) current SEC Yield = 2.45%;
2) Vanguard Ultra Short-term Bond Fund (VUBFX) current SEC Yield = 2.67%; and
2) Vanguard Short-term Bond Index Fund Admiral (VSCSX) current SEC Yield = 2.99%.
Yes you might have a negative real return net of inflation and taxes, depending on what the inflation rate becomes and your tax bracket. But at a 2% inflation rate and in a low tax bracket you could eke out a little real return.

I think it's better not to have a cash allocation or a large multi-year "emergency fund", we don't do either.
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Leif
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Re: Where to hold 2-3 years of living expenses

Post by Leif » Thu Apr 18, 2019 1:11 pm

I keep about 1 year worth of expenses (less income) in cash (Money Market). I'm retired, but not yet on SS or RMDs.

I have a CD ladder that is providing me with cash each year until 70. I expect at 70 to have a small amount of cash since I'll have income taking care of most of my expected expenses. Unexpected expenses can be handled by my bonds or equity, if necessary, depending on what makes sense to rebalance.

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Re: Where to hold 2-3 years of living expenses

Post by The Wizard » Thu Apr 18, 2019 2:23 pm

ruralavalon wrote:
Wed Apr 17, 2019 5:44 pm
...I think it's better not to have a cash allocation or a large multi-year "emergency fund", we don't do either.
I tend to agree with RA.
I've been retired since 2013 and the bulk of my income comes from immediate annuities and a bit from divorced spouse SS.
I keep no more than $10,000 in my checking account and have no savings account, CDs, or MM funds.
Excess income gets reinvested in stock index funds in my taxable account.

I suppose if the bulk of your income comes from portfolio withdrawals AND you're doing 4% withdrawal rate then you may have more to worry about.
But I'm still not a bucket fan...
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