Cash allocation after retirement...

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
LAMan1977
Posts: 4
Joined: Sat Aug 22, 2020 12:28 pm

Cash allocation after retirement...

Post by LAMan1977 »

Would like some thoughts concerning cash as part of asset allocation after retirement (I am talking about in addition to what you have in a checking account for expenses).

Current portfolio: low 7 figures

Currently have 100k in prime money market fund, remaining portfolio 100% equities (mix of SNP 500 index, VTSAX, VTIAX). No debt, no plans for future debt.

Plan is to consider retirement in about 7 years. In case it matters, this would be an early retirement (early 50s). Plan is to increase add bonds gradually at some point in the future so to have a balanced allocation (eg 60/40) at retirement. At the point that I starting adding bonds to my taxable account, I am considering eliminating the money market fund.

Question: after retirement, what are the pros and cons of keeping a set percentage in cash? If I decide to do so, what percent is typical and for what reason?

New to forum, so apologize if this has been answered before (if so, could you please link to a forum post to read)...
Last edited by LAMan1977 on Sun Aug 23, 2020 12:36 am, edited 1 time in total.
User avatar
David Jay
Posts: 9617
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Cash allocation after retirement...

Post by David Jay »

Welcome to the forum!

To some extent it depends on bond holdings. For instance, the NAV of short term bond funds doesn’t’t vary much, so I would not be concerned about holding next year’s expenses in a short term bond fund. By comparison, long term bond fund NAVs can stay depressed for extended periods in a rising interest rate environment, so I would not “bet” next year’s expenses on a long term bond fund.

Personally, I have 2021 expenses in cash already (just did this a few weeks ago). Then I typically have an additional 2 years expenses in short term bonds, so after I withdraw next year’s expenses I will still have 2 years expenses in relatively stable assets.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
dbr
Posts: 33842
Joined: Sun Mar 04, 2007 9:50 am

Re: Cash allocation after retirement...

Post by dbr »

You will get answers all over the place. There are people who insist on keeping multiple years spending in cash and those who actually work at cutting down cash holding to an absolute minimum.

Because interest rates on fixed income across the yield curve are low right now it doesn't matter a lot exactly how all your fixed income is distributed. Under more normal conditions holding a lot in cash is a drag on returns. That, however, can be offset by holding a little more in stocks than if one had fixed income in higher returning/longer duration/higher credit risk bonds (keeping in mind a sop to the concept of liability/duration matching).

A practical concern is to have enough in cash to meet variable needs for spending without messing around too much with assets. For most people being able to meet the needs of a few months would work. I think that the idea that there is safety of some kind in holding years of spending in cash is bunk, but then I also consider CDs and high earning savings accounts to be investments for portfolio purposes and not "cash" in the sense of that conversation.

Also, you can have a massive discussion of what is cash depending on whether you are talking about the properties of the investment, meaning CDs are cash though not immediately accessible and short bonds are not, or only checking accounts and currency in wallet is cash. Also credit cards for practical purposes are cash for many people, and the credit limits there can can run to 10's if not 100's of thousands of dollars.

If all of the above sounds confusing, wait till you read the rest of the replies to your question.

Disclaimer: I hold whatever cash sloshes around in all the different accounts as things come and go. That amounts to between 1% and 2% of my assets and I make no special effort to hit any particular allocation. All my actual "fixed income" is in intermediate term bond funds of different kinds.
KlangFool
Posts: 18209
Joined: Sat Oct 11, 2008 12:35 pm

Re: Cash allocation after retirement...

Post by KlangFool »

OP,

1) What is your annual expense?

2) Do you care about how much taxes are you paying during retirement?

3) What is your plan in terms of health insurance?

4) Do you care whether you qualify for the ACA subsidy?

5) What is your portfolio breakdown in terms of tax-deferred, Rith, and the taxable?

Depending on your answers, you may or may not need to keep more CASH for tax management purposes. In general, you should keep 2 to 3 years of expense in CASH for maximum flexibility of tax management.

You should start a spreadsheet and plan out how you plan to withdraw for your retirement. Then, see whether you could optimize and/or reduce the amount of taxes that you could pay.

<<what are the pros and cons of keeping a set percentage in cash?>>

It should not be a set percentage. It is a fixed amount in terms of years of expense.

KlangFool
3feetpete
Posts: 478
Joined: Sun Dec 14, 2014 7:30 pm

Re: Cash allocation after retirement...

Post by 3feetpete »

I've been retired for three years and haven't started taking SS yet so I am sort of in the situation you will be when you retire. Dividends covers about a third of my expenses and I sell stocks or bonds a few times a year to make up the difference and get back to my AA. I try to sell whatever has hit a high. I usually only keep a few months expenses in cash but it has varied between 8 months and zero months. I let my cash get down to zero last Spring because both stocks and bonds were low. Then the Fed shored up bonds by purchasing them and I sold enough bonds to cover 6 months expenses. If I needed cash now I would be selling stocks.

The market that you retire into will be completely different, you might be in a volatile period or a prolonged downturn. So to answer your original question, no you don't need a lot of cash in retirement but you do need enough in bonds to cover your expenses and you should probably have enough to cover a few years in expenses in case we get into a prolonged market downturn. You just don't want to be forced to sell anything that has taken a dive.
J295
Posts: 2722
Joined: Sun Jan 01, 2012 11:40 pm

Re: Cash allocation after retirement...

Post by J295 »

Basically retired eight years ago at age 53. We have more than enough financial resources, and have around 50% in stocks, 30% in bonds, tips, etc., and 20% in “cash” meaning for us CDs, short term bond fund, I bonds, etc.

As you know, 20% of “a few million” is a fair amount of money, but our primary focus with “cash” is preservation of principal not growth. And yes, I do understand the impact of inflation.

Others in our identical situation certainly can justify taking on more risk with less “cash,” but it’s just not our size.

Ymmv.
Topic Author
LAMan1977
Posts: 4
Joined: Sat Aug 22, 2020 12:28 pm

Re: Cash allocation after retirement...

Post by LAMan1977 »

Thanks for the replies so far...

Little more information if it will help.

Annual spending = 150k. At time of retirement this will be 3-4% withdrawal rate. About 20% of portfolio is in 401K, the rest in taxable account. No Roths or anything else.

Current plan is to be 60% stock, 30% intermediate term bonds and 10% cash at retirement.
User avatar
geerhardusvos
Posts: 1289
Joined: Wed Oct 23, 2019 10:20 pm
Location: heavenlies

Re: Cash allocation after retirement...

Post by geerhardusvos »

LAMan1977 wrote: Sat Aug 22, 2020 7:12 pm Thanks for the replies so far...

Little more information if it will help.

Annual spending = 150k. At time of retirement this will be 3-4% withdrawal rate. About 20% of portfolio is in 401K, the rest in taxable account. No Roths or anything else.

Current plan is to be 60% stock, 30% intermediate term bonds and 10% cash at retirement.
There’s really no need to have much cash on hand in retirement. Having cash is not a silver bullet, and it is a bigger opportunity cost to not have that cash invested. Given the fact that you already have 30% in bonds, I would recommend spending down your cash and bonds at the beginning of your retirement, allowing your equities to grow. There is no need to replenish either your bonds or cash. Check out this article, specifically the conclusions at the end, in regards to cash management in retirement:

https://earlyretirementnow.com/2016/10/ ... #more-8206
VTSAX and chill
User avatar
David Jay
Posts: 9617
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Cash allocation after retirement...

Post by David Jay »

LAMan1977 wrote: Sat Aug 22, 2020 7:12 pmNo Roths or anything else.
Put this on your "To-Do" list": Start a Roth before December 31. Two accounts if you are married.

There is a 5 year clock for Roth qualification, you need to get that clock started. You can do this by making a non-deductible contribution to a traditional IRA (up to $6000 if under age 50, up to $7000 if age 50 or over) and immediately performing a Roth conversion. It is called a "backdoor Roth" here on Bogleheads and it can be done with no upper limit on income. Wiki link here: https://www.bogleheads.org/wiki/Backdoor_Roth

Roth accounts are extremely valuable in early retirement as they allow you to decide how much income to "show" for various means-tested programs. I would recommend a backdoor Roth for the maximum amount every year. All conversion dollars are available to use 5 years after conversion, so you can spend this money in your 50s but you need to get started.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
LAMan1977
Posts: 4
Joined: Sat Aug 22, 2020 12:28 pm

Re: Cash allocation after retirement...

Post by LAMan1977 »

Thanks for the replies so far...

Little more information if it will help.

Annual spending = 150k. At time of retirement this will be 3-4% withdrawal rate. About 20% of portfolio is in 401K, the rest in taxable account. No Roths or anything else.

Possible plan Is to be 60% stock, 30% intermediate term bond and 10% cash by retirement.
CurlyDave
Posts: 2057
Joined: Thu Jul 28, 2016 11:37 am

Re: Cash allocation after retirement...

Post by CurlyDave »

I have been retired for 13 years. Own some rentals which allows me to say I am self-employed, but mostly retired.

About 2 years ago I put 20 or 25% of our portfolio in ultra short-term bonds, maybe 4-5 years expenses if we were careful. Right now they are only 16% of our portfolio because the stocks have run up so far and so fast.

My plan is to sell bonds for expenses if stocks are down, otherwise just let the bonds ride and sell stocks for expenses.
User avatar
JoMoney
Posts: 9878
Joined: Tue Jul 23, 2013 5:31 am

Re: Cash allocation after retirement...

Post by JoMoney »

I use credit for almost all my purchases, but I would be hesitant to have no cash. Even if it's only a month or two or expenses, that seems more reasonable then none.
People that argue against having cash like to point out the 'opportunity cost' of being able to earn higher interest rates on a perpetual 'cash allocation', but I believe chasing return with what is the 'emergency fund' is the wrong approach. You need to look at the potential consequences of not having cash when you need it, and how well you'll sleep at night. While the terms of a bond promise the principal cash will be returned when it matures, there is no guarantee someone will buy it off you for a reasonable price before then, or that securities markets will be functioning properly.
-In normal times, bond funds are less volatile than stocks, but still volatile... are you comfortable with that for your 'safe' money?
-After the events of 9/11 you couldn't sell a bond fund for about a week (money markets opened up a bit quicker).
-Between September and November of 2008, Vanguard's "Total Bond" fund lost 5% of it's value, which is relatively nothing compared to the losses in stocks and other investments, but intra-day gyrations were chaotic, and there was panic in all the markets.
I think one needs to be aware bad things can happen that really gum-up the functioning of a 'market' and that they know how they'll respond in that situation.
Disasters sometimes occur where we lose power and/or network access. Sometimes physical cash is a necessity, and is recommended ... https://www.ready.gov/kit , https://clark.com/personal-finance-cred ... emergency/
It may be that a week or so of cash-on-hand is enough to provide the sleep-well-at-night security for any situation, and everything else in 'bond funds'... but that's not zero cash... and I do think you should consider the consequences of the risk more so than the "opportunity cost" of chasing higher returns, especially for the allocation that most consider their safe-money.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
dbr
Posts: 33842
Joined: Sun Mar 04, 2007 9:50 am

Re: Cash allocation after retirement...

Post by dbr »

There is a big difference between practical questions of having cash for cash flow purposes and cash from an asset allocation point of view of "being able to spend cash when stocks are 'down'" The investor should seriously plan ahead for cash flow needs, but the idea of saving many years of spending in cash as an asset allocation plan seems to me unnecessary and not helpful except psychologically. For longer term purposes a conventional split between stocks and bonds does the job. The concept can be confused by the fact that there are "cash" instruments such as longer term CDs that are also perfectly fine, but that is because they support the same purpose as bonds and not because they are "cash."
Juice3
Posts: 226
Joined: Sun Nov 05, 2017 7:40 am
Location: The Web
Contact:

Re: Cash allocation after retirement...

Post by Juice3 »

Your plan is reasonable. Put simply instead of in the polite speak often used here

At retirement target:
Spend 150
Max Min
Egg 5,000 3,750
Stock 0.6 3,000 2,250
Bond 0.3 1,500 1,125
Cash 0.1 500 375
(Why does this web site strip out formatting spacing???)

As others have pointed out. You may want to consider Cash and Bond as the same thing and be sure they are invested in alignment with your plan. You can use VFSTX as a benchmark yield, July Yield 2.25%. If you can get things like Ally no Penalty for same similiar returns, then you need to look to other differences to find the deciding factor.

If by cash, you mean sitting in your checking account with no interest, you are making a mistake. 500K in a checking account is craziness.

Much discussion on this board only talks about Cash and Bonds. Bonds are often inclusive any investment that is bond like, including high yield savings/CD. There are differences between these so caveat emptor.

Keep in mind that equities return ~2% invested in the Boglehead manner. So you would be generating ~50K annually.

Some posters have suggested on focusing on the 150 and specifically seeing if taxes can be reduced which would reduce the 150. This is also a great idea.

I am in favor of creating a cash flow model as others have suggested. There are opportunities that can be uncovered this way.

Good Luck.
dbr
Posts: 33842
Joined: Sun Mar 04, 2007 9:50 am

Re: Cash allocation after retirement...

Post by dbr »

When it comes to this bond/cash thing it is probably better to recognize that the issue at hand is what is the expected return and the expected risk of a whole portfolio of all the things that portfolio is invested in. On this forum, being originally a discussion of investing the Vanguard way, that starts out as a portfolio of stock and bond mutual funds. Stocks have high expected return and risk and bonds have low expected return and risk. The issue is how to portion out the assets between the two for an appropriate mutual selection of risk and return.

But this being a forum and stock/bond allocation in a simple three fund portfolio being boring and already covered, there is lots of discussion to be had of third order effects such as exactly what stocks and exactly what bonds and whether or not some notion of cash is really different from some notion of bond, and so on. And people are very welcome to have the discussion. I post on it a lot myself. Lots of discussion happens around something tghat has happened recently and what should I do, like interest rates are low now. Those things were supposed to have been already in the plan, but discussion is good. I post on that also. My personal investing plan is completely unaffected by almost all of it, but there is certainly learning to be had by anyone. It is a pass time.
MikeG62
Posts: 3254
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: Cash allocation after retirement...

Post by MikeG62 »

OP, nothing is typical. As others have said, you are going to get responses all over the map.

Having said that, for the most part what you describe as cash I consider the short-end of our fixed income exposure. DW and I have a good deal of money invested at the short end of our FI exposure (comprised almost entirely of traditional and to a lesser extent no penalty CD's). It's not the largest element of our FI, but it's considerable. In a different (more normal rate environment) nearly all of this would be in intermediate term bonds. However, we are not in normal times. We also hold a much larger allocation to fixed income (~60%) than most others. If we held a more traditional AA (say 60/40 equities/FI), and in more normal rate environment, would not likely hold as much at the short-end of fixed income as we currently do.

Not sure how much that helps, but that's our story.
Real Knowledge Comes Only From Experience
Broken Man 1999
Posts: 5305
Joined: Wed Apr 08, 2015 11:31 am
Location: West coast of Florida, inland on high ground!

Re: Cash allocation after retirement...

Post by Broken Man 1999 »

I think the only right answer to this question is this:

OP, what amount of cash will allow you to SWAN (Sleep Well At Night)?

For me, I don't hold cash and I SWAN. Others might not.

I think this question is very personal, as we all take different routes to where we finally end. And, I believe those different routes and experiences affect us all, they build a story we use. Someone who has had significant needs for cash before retirement for various reasons probably would want that security in retirement.

Though I have no cash, I do have lots of I-bonds, and lots of short-term treasury index fund, so I can get cash rapidly if needed. Plus, DDs hold way too much cash, and my credit is good with them. :D

Broken Man 1999

ETA: Kinda funny, I used to be the Bank of Dad, now I have the Bank of Daughters.
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go. " -Mark Twain
User avatar
Leif
Posts: 3068
Joined: Wed Sep 19, 2007 4:15 pm

Re: Cash allocation after retirement...

Post by Leif »

I'm retired, but not yet getting Social Security/Required Minimum Distribution (SS/RMD). Your cash allocation depends on how you've set up your cash flow. With a pension coming in, depending on your spending, you may not need to have much cash on hand.

I set it up so that between retirement and SS/RMD I have CDs coming due each year. So, I keep about 1 year (or less) of cash. Mostly these days it is in a high yield savings (HYS) account. More immediate needs I keep in a money market (MM). As needed I move money from the HYS to my MM spending account.

I think you should look at your cash flow instead of the percentage of your portfolio in cash.
LearningAlot
Posts: 45
Joined: Thu Aug 02, 2018 8:43 am

Re: Cash allocation after retirement...

Post by LearningAlot »

In third year of retirement, here is my approach (for what it is worth)

I define cash as immediately liquid without being taxable income. So, I do not consider anything in my tax deferred accounts as "cash"
as a distribution would be taxable.

In January each year, I "fund" a money market fund in a taxable account to equal approximately 2 years of typical spending.
By the end of the year it is down to approximately 1 year as I use that to live on. That 1-2 years seems to be the right cushion for me
to manage year to year spend variation.

The way I fund it is either from 1. selling equities from a taxable account (which is a LTCG) or 2. a distribution from a traditional IRA, (which
is ordinary income). The amount from each depends on my current asset allocation vs target, and optimizing(minimizing) my
tax liability for the year. So in January, I know almost exactly what my current year tax liability will be, which then determines
the estimated taxes I pay for the year. I pay 100% of my estimated taxes in April. I realize I lose a little interest but prefer
the simplicity of taking care of it one time and not thinking about it the remainder of the year.

The allocation in my "non cash" investments is then based on my investment policy statement asset allocation, which is a balance between
equity and bond funds.

This has worked fine for me. 😎
Old Sage(brush)
Posts: 164
Joined: Sat Dec 08, 2018 8:27 am

Re: Cash allocation after retirement...

Post by Old Sage(brush) »

LearningAlot wrote: Mon Aug 24, 2020 6:37 am In third year of retirement, here is my approach (for what it is worth)

I define cash as immediately liquid without being taxable income. So, I do not consider anything in my tax deferred accounts as "cash"
as a distribution would be taxable.

In January each year, I "fund" a money market fund in a taxable account to equal approximately 2 years of typical spending.
By the end of the year it is down to approximately 1 year as I use that to live on. That 1-2 years seems to be the right cushion for me
to manage year to year spend variation.

The way I fund it is either from 1. selling equities from a taxable account (which is a LTCG) or 2. a distribution from a traditional IRA, (which
is ordinary income). The amount from each depends on my current asset allocation vs target, and optimizing(minimizing) my
tax liability for the year. So in January, I know almost exactly what my current year tax liability will be, which then determines
the estimated taxes I pay for the year. I pay 100% of my estimated taxes in April. I realize I lose a little interest but prefer
the simplicity of taking care of it one time and not thinking about it the remainder of the year.

The allocation in my "non cash" investments is then based on my investment policy statement asset allocation, which is a balance between
equity and bond funds.

This has worked fine for me. 😎

I don’t understand how you know your current year tax liability in January, assuming current year is for the year started in January? And if current year is prior year how do you pay estimated tax in April of following year?
User avatar
tennisplyr
Posts: 2717
Joined: Tue Jan 28, 2014 1:53 pm
Location: Sarasota, FL

Re: Cash allocation after retirement...

Post by tennisplyr »

Retired 9 years and I've been keeping ~4-5% in an Ally savings account...works for us.
Those who move forward with a happy spirit will find that things always work out.
balbrec2
Posts: 361
Joined: Mon Nov 13, 2017 3:03 pm

Re: Cash allocation after retirement...

Post by balbrec2 »

I like the idea of keeping one years worth of expenses in the bank.
Feed that from you stock/bond portfolio at your SWR, from whichever one has outperformed.
Rebalance, rinse, repeat
User avatar
quisp65
Posts: 134
Joined: Wed Apr 10, 2019 7:44 am
Location: San Diego CA

Re: Cash allocation after retirement...

Post by quisp65 »

I just retired and I'm aggressive on equity but heavy on cash. AA & plan in my sig. Lots of cash provides more comfort to me than bonds and that is important to me since my high equity percentage. I'm not a wealthy Boglehead though and aggressively shopping for high CD rates might be a little more harder if I had a lot of money given FDIC limits.

I use to think I could beat an intermediate bond fund aggressively shopping for CDs but now I'm not so sure. It does provide more peace of mind.
Plan: stock index/roughly 7 years cash investments, one-way balance market highs, slide withdrawal rate for risk comfort instead of heavy fixed income allocation
jsh
Posts: 12
Joined: Tue Mar 19, 2019 2:56 pm

Re: Cash allocation after retirement...

Post by jsh »

I just retired at age 62. Our portfolio is 10% cash, 30% ST fixed, and 60% equities. I will not draw SSA until my FRA, maybe later. I never want to sell any asset, including bonds, at a depressed price. Even fixed prices fluctuate. So quarterly I move some fixed to cash when prices are stable. I keep one year's of cash flow needs in cash. I have enough fixed to last 7+ years, so I can let equities grow without drawing on them. It's probably not perfect, but it works for me. PS my wife was diagnosed this spring with stage 4 cancer. I'd give up the entire portfolio to have 20 more years with her. there is more to life than $$$.
User avatar
abuss368
Posts: 22151
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Cash allocation after retirement...

Post by abuss368 »

LAMan1977 wrote: Sat Aug 22, 2020 12:38 pm Would like some thoughts concerning cash as part of asset allocation after retirement (I am talking about in addition to what you have in a checking account for expenses).

Current portfolio: low 7 figures

Currently have 100k in prime money market fund, remaining portfolio 100% equities (mix of SNP 500 index, VTSAX, VTIAX). No debt, no plans for future debt.

Plan is to consider retirement in about 7 years. In case it matters, this would be an early retirement (early 50s). Plan is to increase add bonds gradually at some point in the future so to have a balanced allocation (eg 60/40) at retirement. At the point that I starting adding bonds to my taxable account, I am considering eliminating the money market fund.

Question: after retirement, what are the pros and cons of keeping a set percentage in cash? If I decide to do so, what percent is typical and for what reason?

New to forum, so apologize if this has been answered before (if so, could you please link to a forum post to read)...
The correct answer is the amount that works for you and lets you sleep well at night. That varies for everyone from minimal cash at one end to perhaps too much cash at the other.

There is an old saying, and for good measure, that "cash is king"!
John C. Bogle: “Simplicity is the master key to financial success."
flaccidsteele
Posts: 1140
Joined: Sun Jul 28, 2019 9:42 pm
Location: Canada

Re: Cash allocation after retirement...

Post by flaccidsteele »

LAMan1977 wrote: Sat Aug 22, 2020 12:38 pm Question: after retirement, what are the pros and cons of keeping a set percentage in cash? If I decide to do so, what percent is typical and for what reason?
I retired and keep no more than 10% in cash

I use cash to increase my buys during downturns, with the virus crisis being the last time I did this

I started investing in the 1990s and also increased buys during the dot com crash, credit crisis, housing crash

Buying during a crash becomes easier to do with each successive crisis

I hold cash because I was indoctrinated by Warren Buffett when I was a teenager to “be greedy when others are fearful” and felt that the best way to do this was to have cash aside as a call option

Warren Buffett's Unique Way Of Thinking About His Cash

Buying during downturns fast-tracked my wealth and I retired in my 40s

It works because the US market always recovers. Always. It’s never different this time. Ever

Image

Buffett’s advice was spot on. It’s insane how fast wealth grows when you’re “greedy when others are fearful”. It’s like creating money out of thin air because that’s exactly what happens

Another thing that listening to Buffett for 30 years (and Bogle for the last 10) has done for me is made me 100% pro-US

Simple game of rinse and repeat
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
LearningAlot
Posts: 45
Joined: Thu Aug 02, 2018 8:43 am

Re: Cash allocation after retirement...

Post by LearningAlot »

Old Sage(brush) wrote: Mon Aug 24, 2020 6:48 am
LearningAlot wrote: Mon Aug 24, 2020 6:37 am In third year of retirement, here is my approach (for what it is worth)

I define cash as immediately liquid without being taxable income. So, I do not consider anything in my tax deferred accounts as "cash"
as a distribution would be taxable.

In January each year, I "fund" a money market fund in a taxable account to equal approximately 2 years of typical spending.
By the end of the year it is down to approximately 1 year as I use that to live on. That 1-2 years seems to be the right cushion for me
to manage year to year spend variation.

The way I fund it is either from 1. selling equities from a taxable account (which is a LTCG) or 2. a distribution from a traditional IRA, (which
is ordinary income). The amount from each depends on my current asset allocation vs target, and optimizing(minimizing) my
tax liability for the year. So in January, I know almost exactly what my current year tax liability will be, which then determines
the estimated taxes I pay for the year. I pay 100% of my estimated taxes in April. I realize I lose a little interest but prefer
the simplicity of taking care of it one time and not thinking about it the remainder of the year.

The allocation in my "non cash" investments is then based on my investment policy statement asset allocation, which is a balance between
equity and bond funds.

This has worked fine for me. 😎

I don’t understand how you know your current year tax liability in January, assuming current year is for the year started in January? And if current year is prior year how do you pay estimated tax in April of following year?
Since I make and take my "big" decisions/actions in January every year, estimating that years taxes is pretty easy. About 95% of my taxable income
comes from 1. social security, 2. Any LTCG from the sale of equity mutual fund in my taxable account, 3. distribution from my IRA. So I
know those 3 with 100% precision in January. The other 5%(interest, dividends, cap gains dist) I estimate slightly on the high side, throw
those into Turbo tax and use that for my estimated tax payment. It has been spot on so far.
Ron
Posts: 6696
Joined: Fri Feb 23, 2007 7:46 pm
Location: NY-NJ-PA Metropolitan Statistical Area

Re: Cash allocation after retirement...

Post by Ron »

Cash allocation is a tricky term.

Since you referred to the term "allocation", does it mean cash held within your retirement investment accounts or does it mean cash held in all holdings (e.g. investments - both taxable, tax deferred, and tax free), including anything held in "bank like" deposits, such as CD's, checking/savings/etc?

For me (and only me), I only look at the cash held in retirement investment accounts. Like the OP, I/we hold substantial cash in bank accounts but that's driven by the situation of growing up and being poor in our early marriage years. It's driven by physiological need, not necessarily by sound financial reasoning and is considered outside our retirement investment holdings.

As far as our combined retirement accounts, there is also a bit of a problem. Cash held in MM/settlement accounts within our joint retirement investment accounts are currently computed to be less than 1% (which is considered desirable by many), but that's not the whole story.

According to M*, our combined joint portfolios hold 4.38% in cash, more than 4x our separately computed "raw" cash number. Why the disjoint? It's caused primarily due to two holdings - Fidelity® GNMA (FGMNX), which holds 18.92% in cash within the fund, along with Vanguard GNMA Inv (VFIIX) which currently holds 12.64% in cash.

Just to point out that what you think you have in cash vs. what you actually have in cash may not be the same.

BTW, our cash shown within our M* analysis within our funds held has been growing lately. I have a suspicion that more cash is being held within funds - either by taking profits and not re-investing or just insurance of further reductions in the market. That's for the experts to determine the reason why.

FWIW,

- Ron
User avatar
grobertj
Posts: 88
Joined: Fri May 15, 2020 1:02 pm
Location: Greensboro, NC

Re: Cash allocation after retirement...

Post by grobertj »

tennisplyr wrote: Mon Aug 24, 2020 6:50 am Retired 9 years and I've been keeping ~4-5% in an Ally savings account...works for us.
I do EXACTLY the same. 4% is my annual withdrawal rate so in essence I keep a year of spending in my Cash Reserve. One thing I just realized is if I keep at least $14,000 in my Ally check account, I get 0.5% interest versus 0.1%. Previously, I only kept one month's spending in my checking account.
The only constant is CHANGE!!
User avatar
ruralavalon
Posts: 19711
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Cash allocation after retirement...

Post by ruralavalon »

A lot of personal preference is involved in having, or not having, a cash allocation in retirement. Some people just feel more comfortable with a large cash stash available for use.

We are age 75, I retired almost 10 years ago, with no pension or annuity. Our asset allocation is 50/50 with no cash allocation at all, no savings account, no CDs, no money market funds. We normally have just a couple months worth of expenses in a joint checking account.

Our Social Security and monthly Required Minimum Distributions (RMDs) from my rollover IRA cover our monthly living expenses and a little more.

We can handle emergencies and extraordinary expenses with high credit limit credit cards, paid off every month. We also have a significant taxable account which could be used for extraordinary expenses, or to pay off the credit cards, if necessary. I see no reason to just assume that the market will be down when extraordinary expenses arise.

I would like have any extra cash invested in something with the prospect of a positive real return, rather than sitting idly in a low interest account of any kind likely to have a negative real return net of inflation and taxes.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
Post Reply