Retirees - do you hold extra cash for a bear market?

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ThankYouJack
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Retirees - do you hold extra cash for a bear market?

Post by ThankYouJack »

I forget his name but I recently read an article about a Boglehead who retired from the military in his 40's. I think he said he holds 2 years worth of cash to get him bear markets - that way he isn't selling low.

I'm curious if others on here do the same and if so, how much do you keep and where do you keep it?
Last edited by ThankYouJack on Thu Sep 26, 2019 5:01 pm, edited 1 time in total.
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Re: Retirees - do you hold extra cash for a bear market?

Post by abuss368 »

The retirement folks I know personally hold enough cash to sleep well and not to market time during the next downturn. They keep their portfolios invested and stay the course.
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Re: Retirees - do you hold extra cash for a bear market?

Post by RickBoglehead »

I believe he posted that he does not hold 2 years any longer, he did when first retired.
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Re: Retirees - do you hold extra cash for a bear market?

Post by cheese_breath »

And how many thousand points has the market gone up while he's been waiting for the bear?
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Re: Retirees - do you hold extra cash for a bear market?

Post by delamer »

Why would it be “mental accounting” to hold enough cash to get you through a stock market decline without needing to sell stocks?

Sure, reasonable people can argue whether it’s a good idea. But “mental accounting?”
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Re: Retirees - do you hold extra cash for a bear market?

Post by jebmke »

only bonds. Haven't had significant cash in decades -- even well before I retired.
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Re: Retirees - do you hold extra cash for a bear market?

Post by jebmke »

delamer wrote: Thu Sep 26, 2019 4:56 pm Why would it be “mental accounting” to hold enough cash to get you through a stock market decline without needing to sell stocks?

Sure, reasonable people can argue whether it’s a good idea. But “mental accounting?”
bonds would do the same.
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Wiggums
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Re: Retirees - do you hold extra cash for a bear market?

Post by Wiggums »

I don’t hold cash specifically for a bear market. When I retired last year, I switched from 100% stock in 401k and IRAs to 30% fixed income. It felt like the right thing to do for a few years. I’m not 59 1/2 yet.

I hope this helps.
Last edited by Wiggums on Thu Sep 26, 2019 5:36 pm, edited 1 time in total.
rich126
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Re: Retirees - do you hold extra cash for a bear market?

Post by rich126 »

I wouldn't necessarily think of holding cash for a bear market but more like trimming stocks as the market gets "lofty". For most here, they wouldn't do that but that has been my method for many years since I haven't been a bond holder until recently.
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Re: Retirees - do you hold extra cash for a bear market?

Post by Phineas J. Whoopee »

P1: Stocks are far more volatile than investment-grade intermediate-term bonds.
P2: Should stocks be below target one would sell from bonds, and contrariwise from stocks; should they be roughly at the target allocation one would sell proportionally from each.
C: In a moderate mixed stock / bond portfolio one does not have to hold a specific cash allocation to avoid selling stocks when they're below target.

Quod erat demonstrandum.

That demonstrandumed, cash can be conceived of as fixed income with zero duration. One could hold some to dial in an average duration they wanted. Given the volatility of capital markets attempts at fine tuning probably will make little difference.

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Re: Retirees - do you hold extra cash for a bear market?

Post by abuss368 »

Hold enough cash to let you sleep well at night. Then tune out the noise.
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ThankYouJack
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Re: Retirees - do you hold extra cash for a bear market?

Post by ThankYouJack »

Thanks for the replies. I guess it isn't that common on here.
delamer wrote: Thu Sep 26, 2019 4:56 pm Why would it be “mental accounting” to hold enough cash to get you through a stock market decline without needing to sell stocks?

Sure, reasonable people can argue whether it’s a good idea. But “mental accounting?”
I may have misused mental accounting so I removed it from the OP. I think if it allows someone to sleep well at night then that's great.
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Re: Retirees - do you hold extra cash for a bear market?

Post by Woodshark »

I hold a couple of years of cash in a Vanguard MMA. Some folks say that's way too much and it should be invested in bonds. It makes +/- 2% which is close enough to a short term bond fund that I don't care. I sleep well at night and that's all that matters.
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Re: Retirees - do you hold extra cash for a bear market?

Post by themuse »

If it's an appropriately low percent of ones portfolio, then sure, why not? You can then be more aggressive with equity allocations then you would be without that cash buffer.
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Re: Retirees - do you hold extra cash for a bear market?

Post by ruralavalon »

ThankYouJack wrote: Thu Sep 26, 2019 4:42 pm I forget his name but I recently read an article about a Boglehead who retired from the military in his 40's. I think he said he holds 2 years worth of cash to get him bear markets - that way he isn't selling low.

I'm curious if others on here do the same and if so, how much do you keep and where do you keep it?
We do not have a cash allocation. We have at most a couple months worth of expenses net of Social Security in our joint checking account.

Our only withdrawals are the Required Minimum Distributions (RMDs) from my rollover IRA, which are proportional from each fund in that account and automatic every month.
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Re: Retirees - do you hold extra cash for a bear market?

Post by z3r0c00l »

Absolutely, this should be one of the first thing anyone does with savings. Establish a solid and conservative emergency fund. My plan dictates 16 months because that was the median unemployment time for my cohort in a specific industry during the great recession. I am extra conservative in not counting unemployment insurance as part of this. Lots of folks say this is too much emergency fund and that you could use credit cards etc. But I want this not only in the case of prolonged recession and unemployment, but also something like a major health event during unemployment, a fire in my building, etc. I use something like the two war doctrine but for e-funds and sleep like a log at night.
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Re: Retirees - do you hold extra cash for a bear market?

Post by rixer »

We're retired. We have a balanced LS fund and a three year cd ladder with just enough to get through three years in a downturn. There is also some dividends and
cap Gains we take from the taxable account. That's our plan, if the market remains bad after the three years, we'll adjust our spending I guess.
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Re: Retirees - do you hold extra cash for a bear market?

Post by Rudedog »

One year of cash in Vanguard Prime MM. CD ladder with maturing CDs, each year, the following five years. I don't want to sell equities during a bear market.
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Re: Retirees - do you hold extra cash for a bear market?

Post by Jerry55 »

No.

I have an emergency fund, but my pension takes care of me regardless. I guess I'm fortunate in that aspect.
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Re: Retirees - do you hold extra cash for a bear market?

Post by DetroitRick »

No. We always hold roughly 6 months of total expected spending outside of our portfolios in cash. It's mostly in online savings, and not for a bear market set of issues. Our cash holdings are just a buffer against life, and a true emergency fund. Our portfolios typically hold almost no cash except transitional stuff, but it varies. Those portfolios just hold (beyond the larger piece of equities, and a bit of alternatives) individual bonds (mostly shorter-term) and bond funds that collectively equate to about 6 to 6.5 years of average withdrawals. We're retired and withdrawing. That bond slice is partly for bear markets.

We can shrink our spending if need be, and then reduce withdrawals accordingly, stretching that another year or two with only a wee bit of pain. No big deal for us. This is a very individual thing, we've done it for years, and we are totally comfortable with this risk level. Now in this bull market, as in past bear markets.
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Re: Retirees - do you hold extra cash for a bear market?

Post by arcticpineapplecorp. »

themuse wrote: Thu Sep 26, 2019 5:48 pm If it's an appropriately low percent of ones portfolio, then sure, why not? You can then be more aggressive with equity allocations then you would be without that cash buffer.
i was going to say something similar. For instance, say the person has enough savings to last 30 years. Then having 2 years in cash is 2/30 = 6.7% of the portfolio in cash. That's not unreasonable. Some portfolios have around 5% in cash and the rest invested. However, other fixed income (like short term bonds or no penalty cds) are also highly liquid and not volatile so not sure exactly why one would prefer cash over bonds, unless the interest rate was higher for cash than short term bonds.

If you're holding extra cash "for a bear market" then you're market timing, pure and simple. In the meantime as cheese_breath mentioned, holding cash waiting for a bear market can cost you dearly. Figure your asset allocation and stick with it. If you want to hold cash for emergencies, fine. But not because you're waiting for a bear market. You could be waiting a long time.

There was a poster who asked this last year but was waiting for a decline of 30+ percent. Once we showed him how infrequently that happens and how much he would have lost waiting on the sidelines, he saw the light.

We just had a 20% decline in the 4th quarter last year. You would have had to be quick about investing this "extra" cash because the market turned around, ended down 4.5% by 12/31/18 and then posted gains in the first quarter of 2019. Though the market fell 20% last year, did you hear many refer to the bear market of 2018? Do you hear people talk about it now?
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Re: Retirees - do you hold extra cash for a bear market?

Post by retiredjg »

ThankYouJack wrote: Thu Sep 26, 2019 4:42 pm I forget his name but I recently read an article about a Boglehead who retired from the military in his 40's. I think he said he holds 2 years worth of cash to get him bear markets - that way he isn't selling low.
The concept of "selling low" is frequently mentioned in these types of discussions. However, unless one is 100% stocks, one would not be selling stocks during a bear anyway. One would be selling bonds in an effort to maintain one's stock to bond target ratio (unless using a target fund).

A more direct answer to your question...I kept a year's expenses in cash when I first retired. Then decided that was dumb to have that much money sitting on the side and I stopped doing it. The only thing I have in cash now is enough to pay bills.
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Re: Retirees - do you hold extra cash for a bear market?

Post by chem6022 »

I plan to retire early with no pension, so a long way from SS and no backup plan. I always keep a 1-year emergency fund and that will not change. I'll then take one years worth of expenses out at my annual re-balance. Past that I can draw from a short-term TIPS ladder/fund, followed by long-term treasuries before ever touching equities. I may even add some gold into the mix if the world continues to head toward negative nominal interest rates.
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Re: Retirees - do you hold extra cash for a bear market?

Post by Broken Man 1999 »

We do not hold "extra" cash for a bear market, in fact we hold as little cash as will allow us to pay our monthly bills.

Each month at month's end I sell something that will provide enough cash to pay for my credit card which is used for any spending that doesn't involve any fees to pay for use of credit card. The CC bill is due on the second day of the month. A couple of other bills are due early in the month, so I account for those expenses as well.

I transfer the funds required for the first couple of weeks bills, then on the third Wednesday of the month my SS benefit arrives, and carries me through the end of the month. Repeat each month.

The lifespan of my cash is about 15 days.

The first year I started withdrawing expenses from my TIRA I took out the following year's expected expenses in December. But that was changed as I didn't want to have cash sitting there, I wanted to be as fully invested as I could be, so I started withdrawing next month's expenses as close to the end of the month as was possible.

Works well for me. But, I totally get that others like a cushion of cash and those who do should have the amount that allows them to SWAN (sleep well at night). There are no right or wrong answers, how much cash one holds is a very personal decision.

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Re: Retirees - do you hold extra cash for a bear market?

Post by abuss368 »

rixer wrote: Thu Sep 26, 2019 6:26 pm We're retired. We have a balanced LS fund and a three year cd ladder with just enough to get through three years in a downturn. There is also some dividends and
cap Gains we take from the taxable account. That's our plan, if the market remains bad after the three years, we'll adjust our spending I guess.
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Re: Retirees - do you hold extra cash for a bear market?

Post by DorothyB »

I have very little bond exposure in my portfolio. Instead, I keep the amount that I would need to withdraw from my 401k for the next 3 years in various "safer" investments like savings, i-bonds, etc. This will keep me from needing to sell funds during the first 3 years of a down market.
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Re: Retirees - do you hold extra cash for a bear market?

Post by FelixTheCat »

What you are inquiring is Buffett's philosophy. Enough $$$ in short-term government bonds so you don't have to sell stocks in a bear market.

I don't get paid on a regular basis and I have to plan my expenses. My cash account is for monthly/annual expenditures and not because of market fluctuations.
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Re: Retirees - do you hold extra cash for a bear market?

Post by pascalwager »

I don't keep cash for bear market use, but I do have about $45k in a money market fund for unspecified use. Now, as it dwindles, I may gradually keep it at a lower amount. My bank checking account receives monthly pension income which covers my living expenses, so I rarely need to sell out of my portfolio. In fact, I've mainly done so when making a few large purchases (house, cars) right after retiring.

I have a history of keeping far too much cash, even $250k, and I've been influenced recently by reading about BH members who keep virtually no cash. It's always been external to my portfolio of stocks and bonds.

I don't think I need to get down to no cash at all. That would be needlessly inconvenient for me considering the diligence and oversight needed to avoid overdrafts. But others, especially anyone without any non-portfolio income, might need to.

So basically, I use the MMF to be able to quickly feed my checking account if it gets down to $3k or so. I also use it for yearly income and property taxes and major home repairs/improvements. But I'm also using my credit card more now as a buffer for my checking account. Even though I'm deep into retirement, my use of cash is still developing.

I do have a plan for bear markets, especially considering that my pension might be threatened, requiring me to draw from my portfolio. I would probably draw only from my bonds and would not re-balance until market recovery.
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Re: Retirees - do you hold extra cash for a bear market?

Post by NoblesvilleIN »

From the context of the OP, I am assuming that you mean holding cash to keep from selling equities when they are low and not the idea of "dry powder" to purchase equities when they are low. I am getting ready to start month 10 of my retirement and DW is still working (until the end of this year), so I don't have lots of experience at the retirement thing. We are planning on getting most of our income from the dividends and interest and very little or no income from selling equities and bonds. In a recession, my risk is more from dividends being cut and interest rates being even lower than today. To offset that risk, we have 2 years of expenses in CD's, 18 months in a short term treasury fund, and 18 months in an intermediate term treasury fund. So we could go 5 years before we would have to liquidate stocks or other bonds funds. Realistically, it is probably much longer because it is unlikely 100% of the dividends would be cut to zero. The 2-years of CD's are divided into eight 2-year CD's with one maturing every 3 months. In a downturn we would have the option of not rolling all of a maturing CD into a new one, off-setting a reduction in dividend income. After a couple of years of this, we could begin to tap the short-term and intermediate-term treasury funds to supplement the diminished CD's. As a buffer, we have about 2/3rds of a year's expenses sitting in a money market in the taxable account. In the meantime, the CD's, treasury funds, and money market interest is added to our income. So far this year, we have used 78% of the income (dividends and interest) received from our taxable account to supplement my wife's income. The dividend and interest income in the tIRAs has been reinvested. In the last month, I have started to let the tIRA income accumulate into the sweep account instead of reinvesting. This is in anticipation of DW retiring and us starting to use the tIRA income next year. About 1/3 of our portfolio is in the taxable account and 2/3 in the tIRA. We are also trying to keep our income down to get a subsidy on our ACA premiums. So far it is working.
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Re: Retirees - do you hold extra cash for a bear market?

Post by 1210sda »

if you had a 1,000,000 portfolio that had 40% in Bonds, the income from the bonds would be $9,040.
(400,000 x 2.26%= 9,040) 2.26% is current 30 day SEC yield

If instead, you want $350,000 in bonds and 50,000 in MMF, income would be $8,925, only $115 less than first example. (350,000x 2.26% = 7,910; 50,000 x 2.03=1,015; 7,910 +1,015= 8,925) VMMXX 7 day SEC yield is 2.03%.

So, if having 5% of your portfolio in cash makes you feel better, the "cost" at current rates, is just $115.

If you want 10% of your portfolio in cash, the cost is $230.
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Re: Retirees - do you hold extra cash for a bear market?

Post by Nords »

ThankYouJack wrote: Thu Sep 26, 2019 4:42 pm I forget his name but I recently read an article about a Boglehead who retired from the military in his 40's. I think he said he holds 2 years worth of cash to get him bear markets - that way he isn't selling low.

I'm curious if others on here do the same and if so, how much do you keep and where do you keep it?
Hi, TYJ, that’s me.

I was recently profiled in Forbes magazine by Ryan Derousseau. I mentioned keeping two years’ expenses in cash during the first decade of financial independence. When that interview was edited/published, the word “always” had crept in.

The purpose of that cash stash was to counter sequence-of-returns risk during a portfolio’s initial years of vulnerability to failure. After our first decade we drew down the cash stash.

I’ve been retired from the U.S. military since 2002. I retired at 20 years of active duty, although (in retrospect) we reached financial independence in 1999 on our high savings rate. Our investments cover our spending (at the 4% Safe Withdrawal Rate) and the pension is a welcome boost.

We were aware of sequence-of-returns risk, and in early 2002 the stock market was still heading for the bottom. During my active-duty years we’d invested in an asset allocation of 100% equities, and as retirement approached we decided to add some cash. We chose two years’ expenses because the research back then indicated that the majority of bear markets lasted for two years or less.

For the next decade, we kept that stash in a money-market account and CDs. When the market was up at the end of a year, we’d replenish the cash stash. If the market was flat or down at the end of the year, we’d continue spending the cash for the second year.

During 2008-09 we spent the entire cash stash and contemplated cutting our spending even further. By 2010 the market had turned around a little and we started to replenish the cash stash again. In 2012 we replenished it for the final time.

Today we’re back to a portfolio of >95% equities. My pension has grown over 40% with its cost-of-living adjustments, and our spending has remained flat. Our withdrawal rate is sustainable.

An inflation-adjusted annuity (like a U.S. military pension or Social Security) can insure against failures of the 4% Safe Withdrawal Rate. However behavioral financial psychology is at least as powerful as logic & math, and during the bear markets that cash stash helped us sleep a lot better at night.
Last edited by Nords on Sun Sep 29, 2019 5:25 am, edited 1 time in total.
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Re: Retirees - do you hold extra cash for a bear market?

Post by Sheepdog »

(21 years living off of investments and SS)
In the 2008-09 recession I learned a lesson. At the time, I was having to sell reduced value stock containing funds to meet expenses to go along with my SS. That hurt. I reported here then that I would, in the future, keep 3 to 5 years worth of normal withdrawal needs in cash and cash equivalent (short term bond) funds to avoid having to sell stock containing funds in that period. I did and do. In addition, I purchased some SPIAs to reduce withdrawal needs so that I have less need to take from savings, but I still do, of course.
Within our rollover IRAs from which we have required distributions, I keep enough short term bond funds (adjusting annually) from which I take the RMDs so that I should not have to sell stock containing funds to cover those during a "crash". I help keep those short term bonds funded by transferring the dividends from the stock containing funds to them. Since the RMDs are now in such a higher percentage (7.1% this year and will be 7.5% next year) the dividends do not add enough, so I do sell some stock containing funds annually, but in a major downturn, I shouldn't have to sell any of those for 3 years to cover the RMDs.
Presently, between money markets and short term bond funds in the IRAs and non-IRA investments, plus the SPIAs, I will not "have to" sell any stock containing funds for over 3 years. Burned once was enough.......Even so, my nest egg has continued to grow more than enough to cover my inflation. (Hope the next one will not be much worse than 2008-09 though.)
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Re: Retirees - do you hold extra cash for a bear market?

Post by sixtyforty »

Sheepdog wrote: Sun Sep 29, 2019 3:14 am (21 years living off of investments and SS)
In the 2008-09 recession I learned a lesson. At the time, I was having to sell reduced value stock containing funds to meet expenses to go along with my SS. That hurt. ....)
If I may ask, what was your overall allocation during the down turn ? Did you own balanced funds or were equities and bonds held separately ?
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Re: Retirees - do you hold extra cash for a bear market?

Post by Sheepdog »

sixtyforty wrote: Sun Sep 29, 2019 6:22 am
Sheepdog wrote: Sun Sep 29, 2019 3:14 am (21 years living off of investments and SS)
In the 2008-09 recession I learned a lesson. At the time, I was having to sell reduced value stock containing funds to meet expenses to go along with my SS. That hurt. ....)
If I may ask, what was your overall allocation during the down turn ? Did you own balanced funds or were equities and bonds held separately ?
At that time it was about 40% stocks, but the only taxable was $5000 in Money Market, which disappeared first, plus a $15,000 CD. The rest were within traditional IRAs and Roth IRAs. The portfolio then was $700K. (I was in my 10th year in retirement.) The IRA stock containing funds on 1/1/2008 were Health Care, Primecap, Wellesley, REITS, Total International, and Target 2005. Outside of the IRAs, I did have some higher yielding I Bonds, but they were untouchable, and still are, as they can not be replaced because of their higher guaranteed yields (3.0 to 3.6% plus inflation). I had nothing else to draw from, so I had to sell stock containing funds.
(On 1/1/2009, I had only $20,000 in taxable including the CDs and $4,700 in money market. The traditional and Roth IRAs were invested in Health Care, Target 2005, REITs, Wellesley and Money Market. I also still have the I Bonds, of course.)
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Re: Retirees - do you hold extra cash for a bear market?

Post by BigJohn »

I've been living off just my investments (no SS, no pension) for five years since early retirement at age 58. I did two things to manage sequence of return risk.

I put about 2 years of expenses in short term, high quality bonds as a cushion to use if stocks go south and intermediate term bonds get hit at the same time. So not exactly cash but sort of "cash like". I also went to a more conservative AA, from 60/40 just before retirement to about 35/65. This didn't require massive rebalancing, I just invested most of my lump sum pension in bonds. Had I counted my pension as a pseudo bond, this would have been almost no change. I may let this drift up to 50/50 or even back to 60/40 at some point in the next few years but haven't decided for sure yet.
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Re: Retirees - do you hold extra cash for a bear market?

Post by jimmyq »

Just retired this year, and have approximately 3 years in cash (about 8% of my portfolio). I wanted some more insurance in case there was a sharp market decline shortly after retiring, as I have no pension. Having 3 years in a money market fund help me sleep well at night. I may move more of this cash allocation into bonds as I become more comfortable with retirement.
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Re: Retirees - do you hold extra cash for a bear market?

Post by 22twain »

Retired for three years so far. I aim to sell shares once a year, with the proceeds plus anticipated taxable dividends covering expenses for the coming year. This is purely for convenience to simplify taxes, and not as a counter-measure against a potential downturn. I do not keep extra cash (checking, money market) beyond this, but instead use the rest of my fixed-income allocation as my cushion against downturns. Reasons:
  • My stock allocation is only about 50%, the rest being in Total Bond Market and TIAA Traditional.
  • My spending rate is only about 2% of my portfolio.
  • When I start collecting Social Security at 70, about four years from now, it will cover most or all of my current expenses.
Last edited by 22twain on Tue Oct 01, 2019 6:14 am, edited 1 time in total.
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ThankYouJack
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Re: Retirees - do you hold extra cash for a bear market?

Post by ThankYouJack »

Nords wrote: Sun Sep 29, 2019 2:02 am
ThankYouJack wrote: Thu Sep 26, 2019 4:42 pm I forget his name but I recently read an article about a Boglehead who retired from the military in his 40's. I think he said he holds 2 years worth of cash to get him bear markets - that way he isn't selling low.

I'm curious if others on here do the same and if so, how much do you keep and where do you keep it?
Hi, TYJ, that’s me.

I was recently profiled in Forbes magazine by Ryan Derousseau. I mentioned keeping two years’ expenses in cash during the first decade of financial independence. When that interview was edited/published, the word “always” had crept in.

The purpose of that cash stash was to counter sequence-of-returns risk during a portfolio’s initial years of vulnerability to failure. After our first decade we drew down the cash stash.

I’ve been retired from the U.S. military since 2002. I retired at 20 years of active duty, although (in retrospect) we reached financial independence in 1999 on our high savings rate. Our investments cover our spending (at the 4% Safe Withdrawal Rate) and the pension is a welcome boost.

We were aware of sequence-of-returns risk, and in early 2002 the stock market was still heading for the bottom. During my active-duty years we’d invested in an asset allocation of 100% equities, and as retirement approached we decided to add some cash. We chose two years’ expenses because the research back then indicated that the majority of bear markets lasted for two years or less.

For the next decade, we kept that stash in a money-market account and CDs. When the market was up at the end of a year, we’d replenish the cash stash. If the market was flat or down at the end of the year, we’d continue spending the cash for the second year.

During 2008-09 we spent the entire cash stash and contemplated cutting our spending even further. By 2010 the market had turned around a little and we started to replenish the cash stash again. In 2012 we replenished it for the final time.

Today we’re back to a portfolio of >95% equities. My pension has grown over 40% with its cost-of-living adjustments, and our spending has remained flat. Our withdrawal rate is sustainable.

An inflation-adjusted annuity (like a U.S. military pension or Social Security) can insure against failures of the 4% Safe Withdrawal Rate. However behavioral financial psychology is at least as powerful as logic & math, and during the bear markets that cash stash helped us sleep a lot better at night.
Awesome, thanks for the response and congrats on your financial success!
rossington
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Re: Retirees - do you hold extra cash for a bear market?

Post by rossington »

NoblesvilleIN wrote: Sat Sep 28, 2019 12:34 pm From the context of the OP, I am assuming that you mean holding cash to keep from selling equities when they are low and not the idea of "dry powder" to purchase equities when they are low. I am getting ready to start month 10 of my retirement and DW is still working (until the end of this year), so I don't have lots of experience at the retirement thing. We are planning on getting most of our income from the dividends and interest and very little or no income from selling equities and bonds. In a recession, my risk is more from dividends being cut and interest rates being even lower than today. To offset that risk, we have 2 years of expenses in CD's, 18 months in a short term treasury fund, and 18 months in an intermediate term treasury fund. So we could go 5 years before we would have to liquidate stocks or other bonds funds. Realistically, it is probably much longer because it is unlikely 100% of the dividends would be cut to zero. The 2-years of CD's are divided into eight 2-year CD's with one maturing every 3 months. In a downturn we would have the option of not rolling all of a maturing CD into a new one, off-setting a reduction in dividend income. After a couple of years of this, we could begin to tap the short-term and intermediate-term treasury funds to supplement the diminished CD's. As a buffer, we have about 2/3rds of a year's expenses sitting in a money market in the taxable account. In the meantime, the CD's, treasury funds, and money market interest is added to our income. So far this year, we have used 78% of the income (dividends and interest) received from our taxable account to supplement my wife's income. The dividend and interest income in the tIRAs has been reinvested. In the last month, I have started to let the tIRA income accumulate into the sweep account instead of reinvesting. This is in anticipation of DW retiring and us starting to use the tIRA income next year. About 1/3 of our portfolio is in the taxable account and 2/3 in the tIRA. We are also trying to keep our income down to get a subsidy on our ACA premiums. So far it is working.
Very interesting.
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pascalwager
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Re: Retirees - do you hold extra cash for a bear market?

Post by pascalwager »

rossington wrote: Sun Sep 29, 2019 1:23 pm
NoblesvilleIN wrote: Sat Sep 28, 2019 12:34 pm From the context of the OP, I am assuming that you mean holding cash to keep from selling equities when they are low and not the idea of "dry powder" to purchase equities when they are low. I am getting ready to start month 10 of my retirement and DW is still working (until the end of this year), so I don't have lots of experience at the retirement thing. We are planning on getting most of our income from the dividends and interest and very little or no income from selling equities and bonds. In a recession, my risk is more from dividends being cut and interest rates being even lower than today. To offset that risk, we have 2 years of expenses in CD's, 18 months in a short term treasury fund, and 18 months in an intermediate term treasury fund. So we could go 5 years before we would have to liquidate stocks or other bonds funds. Realistically, it is probably much longer because it is unlikely 100% of the dividends would be cut to zero. The 2-years of CD's are divided into eight 2-year CD's with one maturing every 3 months. In a downturn we would have the option of not rolling all of a maturing CD into a new one, off-setting a reduction in dividend income. After a couple of years of this, we could begin to tap the short-term and intermediate-term treasury funds to supplement the diminished CD's. As a buffer, we have about 2/3rds of a year's expenses sitting in a money market in the taxable account. In the meantime, the CD's, treasury funds, and money market interest is added to our income. So far this year, we have used 78% of the income (dividends and interest) received from our taxable account to supplement my wife's income. The dividend and interest income in the tIRAs has been reinvested. In the last month, I have started to let the tIRA income accumulate into the sweep account instead of reinvesting. This is in anticipation of DW retiring and us starting to use the tIRA income next year. About 1/3 of our portfolio is in the taxable account and 2/3 in the tIRA. We are also trying to keep our income down to get a subsidy on our ACA premiums. So far it is working.
Very interesting.
It is interesting, and required a lot of careful thought and planning; but it may still be sub-optimal.

Estrada showed, in his portfolio studies, that a retirement portfolio actually becomes less productive when you remove cash/bonds from the general rebalancing process. The optimal portfolio doesn't include a lot of external cash. It still may fail(!), but will last longer than the portfolio and external cash combination.

So a portfolio in the range of 40 to 100% stocks, which is rebalanced annually, seems to be superior to a portfolio with 1 to 5 years of external cash. Ultimately, one may need to decide between more money and less sleep, or vice versa.
catalina355
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Re: Retirees - do you hold extra cash for a bear market?

Post by catalina355 »

pascalwager wrote: Mon Sep 30, 2019 3:10 pm
rossington wrote: Sun Sep 29, 2019 1:23 pm
NoblesvilleIN wrote: Sat Sep 28, 2019 12:34 pm From the context of the OP, I am assuming that you mean holding cash to keep from selling equities when they are low and not the idea of "dry powder" to purchase equities when they are low. I am getting ready to start month 10 of my retirement and DW is still working (until the end of this year), so I don't have lots of experience at the retirement thing. We are planning on getting most of our income from the dividends and interest and very little or no income from selling equities and bonds. In a recession, my risk is more from dividends being cut and interest rates being even lower than today. To offset that risk, we have 2 years of expenses in CD's, 18 months in a short term treasury fund, and 18 months in an intermediate term treasury fund. So we could go 5 years before we would have to liquidate stocks or other bonds funds. Realistically, it is probably much longer because it is unlikely 100% of the dividends would be cut to zero. The 2-years of CD's are divided into eight 2-year CD's with one maturing every 3 months. In a downturn we would have the option of not rolling all of a maturing CD into a new one, off-setting a reduction in dividend income. After a couple of years of this, we could begin to tap the short-term and intermediate-term treasury funds to supplement the diminished CD's. As a buffer, we have about 2/3rds of a year's expenses sitting in a money market in the taxable account. In the meantime, the CD's, treasury funds, and money market interest is added to our income. So far this year, we have used 78% of the income (dividends and interest) received from our taxable account to supplement my wife's income. The dividend and interest income in the tIRAs has been reinvested. In the last month, I have started to let the tIRA income accumulate into the sweep account instead of reinvesting. This is in anticipation of DW retiring and us starting to use the tIRA income next year. About 1/3 of our portfolio is in the taxable account and 2/3 in the tIRA. We are also trying to keep our income down to get a subsidy on our ACA premiums. So far it is working.
Very interesting.
It is interesting, and required a lot of careful thought and planning; but it may still be sub-optimal.

Estrada showed, in his portfolio studies, that a retirement portfolio actually becomes less productive when you remove cash/bonds from the general rebalancing process. The optimal portfolio doesn't include a lot of external cash. It still may fail(!), but will last longer than the portfolio and external cash combination.

So a portfolio in the range of 40 to 100% stocks, which is rebalanced annually, seems to be superior to a portfolio with 1 to 5 years of external cash. Ultimately, one may need to decide between more money and less sleep, or vice versa.
Since cash is fixed income with zero duration how can it be that a portfolio in the range of 40 to 100% stocks, which is rebalanced annually, seems to be superior to a portfolio with 1 to 5 years of external cash?

A 60:40 portfolio with several years cash is effectively a 50:50 portfolio which is still in the 40 to 100% range. Or are those with external cash never rebalancing the "main" stocks and bonds portfolio?
NoblesvilleIN
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Re: Retirees - do you hold extra cash for a bear market?

Post by NoblesvilleIN »

The intent of the CDs, MM, and treasury funds is not to optimize, it is to sleep well and prevent bad behavior (selling equities in a down market as a panicked reaction). I do not consider the X years of expenses to be external to my portfolio, but part of the fixed income allocation.
CurlyDave
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Re: Retirees - do you hold extra cash for a bear market?

Post by CurlyDave »

z3r0c00l wrote: Thu Sep 26, 2019 6:14 pm Absolutely, this should be one of the first thing anyone does with savings. Establish a solid and conservative emergency fund. My plan dictates 16 months because that was the median unemployment time for my cohort in a specific industry during the great recession. I am extra conservative in not counting unemployment insurance as part of this. Lots of folks say this is too much emergency fund and that you could use credit cards etc. But I want this not only in the case of prolonged recession and unemployment, but also something like a major health event during unemployment, a fire in my building, etc. I use something like the two war doctrine but for e-funds and sleep like a log at night.
Just how does unemployment count as an emergency for a retiree?

I have started keeping a couple of years cash in a bond fund but the whole portfolio is my emergency fund. The rest is in stocks and brick and mortar real estate.
pascalwager
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Re: Retirees - do you hold extra cash for a bear market?

Post by pascalwager »

catalina355 wrote: Mon Sep 30, 2019 6:28 pm
pascalwager wrote: Mon Sep 30, 2019 3:10 pm
rossington wrote: Sun Sep 29, 2019 1:23 pm
NoblesvilleIN wrote: Sat Sep 28, 2019 12:34 pm From the context of the OP, I am assuming that you mean holding cash to keep from selling equities when they are low and not the idea of "dry powder" to purchase equities when they are low. I am getting ready to start month 10 of my retirement and DW is still working (until the end of this year), so I don't have lots of experience at the retirement thing. We are planning on getting most of our income from the dividends and interest and very little or no income from selling equities and bonds. In a recession, my risk is more from dividends being cut and interest rates being even lower than today. To offset that risk, we have 2 years of expenses in CD's, 18 months in a short term treasury fund, and 18 months in an intermediate term treasury fund. So we could go 5 years before we would have to liquidate stocks or other bonds funds. Realistically, it is probably much longer because it is unlikely 100% of the dividends would be cut to zero. The 2-years of CD's are divided into eight 2-year CD's with one maturing every 3 months. In a downturn we would have the option of not rolling all of a maturing CD into a new one, off-setting a reduction in dividend income. After a couple of years of this, we could begin to tap the short-term and intermediate-term treasury funds to supplement the diminished CD's. As a buffer, we have about 2/3rds of a year's expenses sitting in a money market in the taxable account. In the meantime, the CD's, treasury funds, and money market interest is added to our income. So far this year, we have used 78% of the income (dividends and interest) received from our taxable account to supplement my wife's income. The dividend and interest income in the tIRAs has been reinvested. In the last month, I have started to let the tIRA income accumulate into the sweep account instead of reinvesting. This is in anticipation of DW retiring and us starting to use the tIRA income next year. About 1/3 of our portfolio is in the taxable account and 2/3 in the tIRA. We are also trying to keep our income down to get a subsidy on our ACA premiums. So far it is working.
Very interesting. It is interesting, and required a lot of careful thought and planning; but it may still be sub-optimal.

Estrada showed, in his portfolio studies, that a retirement portfolio actually becomes less productive when you remove cash/bonds from the general rebalancing process. The optimal portfolio doesn't include a lot of external cash. It still may fail(!), but will last longer than the portfolio and external cash combination.

So a portfolio in the range of 40 to 100% stocks, which is rebalanced annually, seems to be superior to a portfolio with 1 to 5 years of external cash. Ultimately, one may need to decide between more money and less sleep, or vice versa.
Since cash is fixed income with zero duration how can it be that a portfolio in the range of 40 to 100% stocks, which is rebalanced annually, seems to be superior to a portfolio with 1 to 5 years of external cash?

Because the cash has been removed from the portfolio balancing process and is not, therefore, available for buying more stocks when stocks are down.

A 60:40 portfolio with several years cash is effectively a 50:50 portfolio which is still in the 40 to 100% range. Or are those with external cash never rebalancing the "main" stocks and bonds portfolio?

They are, presumably, but not with the external cash (see above).
pascalwager
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Re: Retirees - do you hold extra cash for a bear market?

Post by pascalwager »

NoblesvilleIN wrote: Mon Sep 30, 2019 7:36 pm The intent of the CDs, MM, and treasury funds is not to optimize, it is to sleep well and prevent bad behavior (selling equities in a down market as a panicked reaction). I do not consider the X years of expenses to be external to my portfolio, but part of the fixed income allocation.
When you say "X years of expenses", that implies being external to your portfolio and not part of the rebalancing process. Being a part of your portfolio means that the cash is not X years of expenses, but rather some fixed percentage of your portfolio.
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Re: Retirees - do you hold extra cash for a bear market?

Post by willthrill81 »

NoblesvilleIN wrote: Mon Sep 30, 2019 7:36 pm The intent of the CDs, MM, and treasury funds is not to optimize, it is to sleep well and prevent bad behavior (selling equities in a down market as a panicked reaction). I do not consider the X years of expenses to be external to my portfolio, but part of the fixed income allocation.
Actually, CDs may offer a bit of a free lunch compared to bonds. Larry Swedroe has been recommending them as an excellent, perhaps superior, alternative. The big catch is that it can be difficult for accumulators to get adequate access to them (e.g. seldom feasible in a 401k). Right now, you can easily get 2 year CDs yielding 3.20% vs. the 2.72% of VBTLX.
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Re: Retirees - do you hold extra cash for a bear market?

Post by smectym »

We hold a lot of cash too. It’s too much cash. It does dampen volatility, but usually bonds, not cash, do a better job of dampening volatility, because typically bonds zag when stocks zig.

But we own bonds too—and probably too much in bonds. And then we have quite a bit in savings bonds: bonds, yes, but like cash, savings bonds neither zig nor zag. We probably hold too much in savings bonds. But the savings bonds, most purchased decades ago, yield above current bond market rates, so we’re reluctant to cash them.

Then there are stocks. At our age, mid-60’s, our equity exposure is on the edge: some would say too high, others too low. And we also hold CD’s. SS is a buffer, as are several SPIA’s.

The result is a lower-volatility portfolio that produces unimpressive but thus far positive returns in the 4-6% range. And enough assets are notionally crash-proof that we’re unlikely to be profiled in a post-crash “morality tale” in WSJ.

When I tell spouse that we have enough in non-fluctuating assets that we’ll be OK even when (not “if,” of course) they blow up the world, spouse likes to hear that. I sometimes rephrase that narrative and relate it again: spouse never gets tired of hearing that idea of “We’re OK even in the implausible worst case.”
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Re: Retirees - do you hold extra cash for a bear market?

Post by bearcub »

Hold two balanced funds + reinvest dividends. Hold both Vanguard TIPS Funds also. Keep seven years what I need in the short-term one. All in IRAs. Still holding two years of mature EE Bonds.
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Re: Retirees - do you hold extra cash for a bear market?

Post by chipperd »

willthrill81 wrote: Mon Sep 30, 2019 11:34 pm
NoblesvilleIN wrote: Mon Sep 30, 2019 7:36 pm The intent of the CDs, MM, and treasury funds is not to optimize, it is to sleep well and prevent bad behavior (selling equities in a down market as a panicked reaction). I do not consider the X years of expenses to be external to my portfolio, but part of the fixed income allocation.
Actually, CDs may offer a bit of a free lunch compared to bonds. Larry Swedroe has been recommending them as an excellent, perhaps superior, alternative. The big catch is that it can be difficult for accumulators to get adequate access to them (e.g. seldom feasible in a 401k). Right now, you can easily get 2 year CDs yielding 3.20% vs. the 2.72% of VBTLX.
Can you share where you are seeing 2 year CD at 3.2%? I can't find anything over 2.6% for 18-24 months. Thanks
Paddygirl
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Re: Retirees - do you hold extra cash for a bear market?

Post by Paddygirl »

Yes, I keep 2 to 3 years worth of cash for any crisis that may develop. Safety first!
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