Cash allocation in early retirement

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neopsych12
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Cash allocation in early retirement

Post by neopsych12 »

Early retirees,

What percent of your total retirement assets do you keep in cash and what is your rationale?

I am aiming to retire in 2 years @40 with 80/20, 2 years of expenses in MMF, 2.5% wr.

50% US
25% Int
5% REIT
15% Intermediate Muni
5% Short Muni

Thank you for your input!
livesoft
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Re: Cash allocation in early retirement

Post by livesoft »

0%. We use quarterly dividends and/or sell shares of equity ETFs in order to pay expenses. Then if we need to rebalance from bonds to replace those equity ETFs and keep our asset allocation we do this:
https://www.bogleheads.org/wiki/Placing ... ed_account

At a 2.5% wr I think you can do anything you want. Also are you including that "2 years" in the 20 of your "80/20"?
Last edited by livesoft on Sun May 05, 2024 7:32 am, edited 1 time in total.
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siamond
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Re: Cash allocation in early retirement

Post by siamond »

We keep between 1 to 3 months of typical monthly expenses in cash. We replenish once we reach a low threshold, which is established essentially to make sure we won't miss credit card payments.

Why? Cash doesn't return anything and its purchasing power slowly erodes against inflation. We want to stay as fully invested as possible.
dbr
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Re: Cash allocation in early retirement

Post by dbr »

We keep whatever amount makes sense to manage cash flow requirements.

For us cash is not an asset for purposes of portfolio design.

However, we also have significant income from SS and pensions. Most of the cash flow transactions we exercise are basically SS/pension in and spending out. We also tend to have stock dividends from taxable accounts directly deposited in a checking account. The question is a what level does this store of cash flows tend to remain over time. Probably that fluctuates in the range 1%-4% of portfolio total value.
delamer
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Re: Cash allocation in early retirement

Post by delamer »

Assuming you’ll have no source of income other than portfolio withdrawals, keep 5 years of expenses in cash equivalents.

That should get you through the vast majority of stock market downturns, so you won’t have to sell stocks at reduced prices.

Alternatively, you could go with 100% stocks and accept the tradeoff of higher long-term returns for having to occasionally sell low.
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MathWizard
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Re: Cash allocation in early retirement

Post by MathWizard »

neopsych12 wrote: Sun May 05, 2024 7:14 am Early retirees,

What percent of your total retirement assets do you keep in cash and what is your rationale?

I am aiming to retire in 2 years @40 with 80/20, 2 years of expenses in MMF, 2.5% wr.

50% US
25% Int
5% REIT
15% Intermediate Muni
5% Short Muni

Thank you for your input!
I have 5% in MMF Funds in my tax advantaged accounts plus $43K in Bonds as my Emergency Fund.

The 5% in MM is for things we might need soon, like replacing our 25 year old HVAC and some older appliances, plus a substantial amount for replacing cars/house maintenance which will be coming in the next few years (I set aside $5K/year for car replacement, and $5K/year for house maintenance).
Topic Author
neopsych12
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Re: Cash allocation in early retirement

Post by neopsych12 »

livesoft wrote: Sun May 05, 2024 7:21 am 0%. We use quarterly dividends and/or sell shares of equity ETFs in order to pay expenses. Then if we need to rebalance from bonds to replace those equity ETFs and keep our asset allocation we do this:
https://www.bogleheads.org/wiki/Placing ... ed_account

At a 2.5% wr I think you can do anything you want. Also are you including that "2 years" in the 20 of your "80/20"?
2 years was separate from the 20%
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watchnerd
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Re: Cash allocation in early retirement

Post by watchnerd »

siamond wrote: Sun May 05, 2024 7:25 am Why? Cash doesn't return anything and its purchasing power slowly erodes against inflation. We want to stay as fully invested as possible.
MMFs are currently returning more than inflation.
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Wanderingwheelz
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Re: Cash allocation in early retirement

Post by Wanderingwheelz »

watchnerd wrote: Sun May 05, 2024 8:02 am
siamond wrote: Sun May 05, 2024 7:25 am Why? Cash doesn't return anything and its purchasing power slowly erodes against inflation. We want to stay as fully invested as possible.
MMFs are currently returning more than inflation.
Buffetts recent comments fall in line with many others, even here on the forum where “market timing” isn’t held in high regard. 5.4% risk free looks pretty good when you take into consideration valuations of US stocks- particularly growth stocks. By the way, I’m not the type to do anything because one of the richest people on the planet is doing it, my point was his comments fall in line with that a lot of ordinary investors are doing too.

As a near retiree I’d have no problems having 5 years of cash, maybe even a bit more. A few years back I’d have said two years was about right.
Being wrong compounds forever.
Lastrun
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Re: Cash allocation in early retirement

Post by Lastrun »

siamond wrote: Sun May 05, 2024 7:25 am We keep between 1 to 3 months of typical monthly expenses in cash. We replenish once we reach a low threshold, which is established essentially to make sure we won't miss credit card payments.

Why? Cash doesn't return anything and its purchasing power slowly erodes against inflation. We want to stay as fully invested as possible.
dbr wrote: Sun May 05, 2024 7:29 am We keep whatever amount makes sense to manage cash flow requirements.

For us cash is not an asset for purposes of portfolio design.
....
A third vote here, I view cash, not as part of the portfolio, but as a liquidity requirement for bills, gifts, lumpy expenses, etc. Keep the rest invested. We have about 4-6 months of base expenses as our liquidity fund.
dcabler
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Re: Cash allocation in early retirement

Post by dcabler »

neopsych12 wrote: Sun May 05, 2024 7:14 am Early retirees,

What percent of your total retirement assets do you keep in cash and what is your rationale?

I am aiming to retire in 2 years @40 with 80/20, 2 years of expenses in MMF, 2.5% wr.

50% US
25% Int
5% REIT
15% Intermediate Muni
5% Short Muni

Thank you for your input!
Can't really answer the question as stated because we don't target a specific percentage for cash. But here's what I do:

I make my withdrawals quarterly. After the withdrawal happens, 1/3 of the withdrawal goes to my checking. The other 2/3 stays in an ultra low duration bond fund. The next month, 1/2 of the remaining is withdrawn from the bond fund and sent to checking. The 3rd month, the remainder goes to checking. Next month, it's a new quarter and we start all over again. We do this because we get a smidge more return than we would if we transferred everything into the checking account upon withdrawal. We also want to be systematic about this and not chase the high-yielding-product du jour...

I also have another, separate cash stash, also in an ultrashort bond fund, whose purpose is only to fund home improvements. It's withdrawn as needed for that purpose and that purpose only.

Finally, we have I-bonds. We have no intention of ever redeeming any of them before they mature and they begin to mature in our mid/late 80's. What we do with them is totally TBD at this point.

Cheers.
Last edited by dcabler on Sun May 05, 2024 8:54 am, edited 1 time in total.
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watchnerd
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Re: Cash allocation in early retirement

Post by watchnerd »

Wanderingwheelz wrote: Sun May 05, 2024 8:36 am
watchnerd wrote: Sun May 05, 2024 8:02 am
siamond wrote: Sun May 05, 2024 7:25 am Why? Cash doesn't return anything and its purchasing power slowly erodes against inflation. We want to stay as fully invested as possible.
MMFs are currently returning more than inflation.
Buffetts recent comments fall in line with many others, even here on the forum where “market timing” isn’t held in high regard. 5.4% risk free looks pretty good when you take into consideration valuations of US stocks- particularly growth stocks. By the way, I’m not the type to do anything because one of the richest people on the planet is doing it, my point was his comments fall in line with that a lot of ordinary investors are doing too.

As a near retiree I’d have no problems having 5 years of cash, maybe even a bit more. A few years back I’d have said two years was about right.
Is it even market timing if we get a repeat of stocks vs cash, 1972 - 1981?

https://www.portfoliovisualizer.com/bac ... wLWg8xrdQ1

In that scenario, having a cash allocation as a permanent part of one's portfolio would have improved returns, and even more so in risk-adjusted terms, vs being all stocks.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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siamond
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Re: Cash allocation in early retirement

Post by siamond »

watchnerd wrote: Sun May 05, 2024 8:02 am
siamond wrote: Sun May 05, 2024 7:25 am Why? Cash doesn't return anything and its purchasing power slowly erodes against inflation. We want to stay as fully invested as possible.
MMFs are currently returning more than inflation.
I was assuming the OP defined cash as 'hard cash' (money sitting idle on a bank account), but you're right, I missed the MMF reference, so I might have misinterpreted. This wouldn't change my view though, bucketizing with any form of cash makes no sense on the long run. I don't understand why anybody would want to do that.
dcabler
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Re: Cash allocation in early retirement

Post by dcabler »

watchnerd wrote: Sun May 05, 2024 8:53 am
Wanderingwheelz wrote: Sun May 05, 2024 8:36 am
watchnerd wrote: Sun May 05, 2024 8:02 am
siamond wrote: Sun May 05, 2024 7:25 am Why? Cash doesn't return anything and its purchasing power slowly erodes against inflation. We want to stay as fully invested as possible.
MMFs are currently returning more than inflation.
Buffetts recent comments fall in line with many others, even here on the forum where “market timing” isn’t held in high regard. 5.4% risk free looks pretty good when you take into consideration valuations of US stocks- particularly growth stocks. By the way, I’m not the type to do anything because one of the richest people on the planet is doing it, my point was his comments fall in line with that a lot of ordinary investors are doing too.

As a near retiree I’d have no problems having 5 years of cash, maybe even a bit more. A few years back I’d have said two years was about right.
Is it even market timing if we get a repeat of stocks vs cash, 1972 - 1981?

https://www.portfoliovisualizer.com/bac ... wLWg8xrdQ1

In that scenario, having a cash allocation as a permanent part of one's portfolio would have improved returns, and even more so in risk-adjusted terms, vs being all stocks.
As likely would TIPS, had they existed back then...

Cheers.
KlangFool
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Re: Cash allocation in early retirement

Post by KlangFool »

neopsych12 wrote: Sun May 05, 2024 7:14 am Early retirees,

What percent of your total retirement assets do you keep in cash and what is your rationale?

I am aiming to retire in 2 years @40 with 80/20, 2 years of expenses in MMF, 2.5% wr.

50% US
25% Int
5% REIT
15% Intermediate Muni
5% Short Muni

Thank you for your input!
neopsych12,

1) What is your plan for medical insurance?

2) Do you qualify for the ACA insurance subsidy?

3) What is your withdrawal plan to minimize the amount of the taxes that you will be paying?

I keep 2 to 3 years of expense in cash. This gives me additional flexibility in tax management and ACA subsidy.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
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Re: Cash allocation in early retirement

Post by KlangFool »

siamond wrote: Sun May 05, 2024 8:56 am
I was assuming the OP defined cash as 'hard cash' (money sitting idle on a bank account), but you're right, I missed the MMF reference, so I might have misinterpreted. This wouldn't change my view though, bucketizing with any form of cash makes no sense on the long run. I don't understand why anybody would want to do that.
siamond,

It makes perfect sense for some early retiree that need to manage their MAGI for the ACA insurance subsidy. Spending cash generate zero capital gain. In my case, the ACA insurance subsidy could worth about 10K per year.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Topic Author
neopsych12
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Re: Cash allocation in early retirement

Post by neopsych12 »

KlangFool wrote: Sun May 05, 2024 9:12 am
neopsych12 wrote: Sun May 05, 2024 7:14 am Early retirees,

What percent of your total retirement assets do you keep in cash and what is your rationale?

I am aiming to retire in 2 years @40 with 80/20, 2 years of expenses in MMF, 2.5% wr.

50% US
25% Int
5% REIT
15% Intermediate Muni
5% Short Muni

Thank you for your input!
neopsych12,

1) What is your plan for medical insurance?

2) Do you qualify for the ACA insurance subsidy?

3) What is your withdrawal plan to minimize the amount of the taxes that you will be paying?

I keep 2 to 3 years of expense in cash. This gives me additional flexibility in tax management and ACA subsidy.

KlangFool
We would not qualify for any subsidy based on dividend income alone. We plan to get an ACA plan for family of 4 (budgeting 36k per year).
upwind
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Re: Cash allocation in early retirement

Post by upwind »

siamond wrote: Sun May 05, 2024 8:56 am
watchnerd wrote: Sun May 05, 2024 8:02 am
siamond wrote: Sun May 05, 2024 7:25 am Why? Cash doesn't return anything and its purchasing power slowly erodes against inflation. We want to stay as fully invested as possible.
MMFs are currently returning more than inflation.
I was assuming the OP defined cash as 'hard cash' (money sitting idle on a bank account), but you're right, I missed the MMF reference, so I might have misinterpreted. This wouldn't change my view though, bucketizing with any form of cash makes no sense on the long run. I don't understand why anybody would want to do that.
Mitigate sequence of return risks? For one.
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WeakOldGuy
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Re: Cash allocation in early retirement

Post by WeakOldGuy »

My nominal "target" for cash is 2%. That is only about 15% of current expenses. Now, that doesn't include what is in my bank account which currently has an amount that is equal to about 1% of my portfolio.

I'm between the time of pretty much retired, but not yet taking SS or taking any RMDs. I do have some other income from my wife's SS and pension as well as rental income. However, we are pretty much living month to month right now. In another 5 years when I start to take the RMDs, I'll likely boost my cash position to give me a bigger cushion, but I'll likely never aim for anything like 1-5 years of expenses. I should have a large enough portfolio to cover any downturns.
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Outer Marker
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Re: Cash allocation in early retirement

Post by Outer Marker »

Entering retirement, I plan to build out a TIPS ladder with 10 years spend. I'll have "cash" maturing and available to fully fund necessary spending for a decade without the need to sell equities. Rationale is that market downturns rarely last more than a decade. So long as markets are behaving, I'll rebalance and extend the ladder out each year in retirement to keep the spending ladder evergreen. If we're in a prolonged downturn, I'll leave the equties alone and spend down the ladder, allowing my AA to drift up until it becomes essential to start selling in year 10.
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Re: Cash allocation in early retirement

Post by Jack FFR1846 »

For a couple years before retiring, I "hoarded" cash, building up in Redneck Bank, Ally and my own credit union checking account. Upon retirement with about $350k (5 years) in cash, I realized that not only did I have easy to get Roth money, but I have nearly half a million dollars in savings bonds. The savings bonds are all paper so I know I can go to my credit union and have available cash instantly. So I've whittled down the actual cash to the point we've got a total of about $100k. But we're having a house project currently being worked on, so I know that $40k will be coming from that cash. We probably don't even need the $60k that will remain and I'll whittle that down, buying BRK/b in my taxable account.

I also do want to reduce interest and taxable dividends because we're Roth converting like crazy to avoid RMDs that'll push us into Medicare IRMAA territory. So changing interest generating accounts and dividend generating ETFs in taxable into BRK/b is our goal.
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Wannaretireearly
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Re: Cash allocation in early retirement

Post by Wannaretireearly »

Very good question OP. Thanks for posting.
I’m planning to have one to two years expenses getting ready to retire in 4-5 years. I only have 4 months expenses in cash today.
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doobiedoo
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Re: Cash allocation in early retirement

Post by doobiedoo »

One of the biggest risks immediately after retirement is Sequence of Return Risk [SORR].
There are several ways to protect against this, including
-- retiring later [e.g. having 33x expenses instead of 25x],
-- keeping extra cash on hand for the first few years,
-- adjusting asset allocation for the first few years.

I did all three, but SORR wasn’t a problem for me. [I retired in 2012.] But better safe than sorry.
I kept about 5 yrs of expenses in cash for the first 3-4 years of retirement.
Today I keep 2 years of expenses in cash.

Here are some relevant threads:
"Re: Post Retirement Investment Strategy"
viewtopic.php?t=406287

"Re: 4 Methods of Reducing Sequence of Returns Risk - Dr. Jim Dahle" viewtopic.php?p=7774069#p7774069

"How are People Mitigating Sequence of Return Risks?"
viewtopic.php?t=363361

5 yrs of cash was a recurring theme in these threads, especially for those retiring young.
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Re: Cash allocation in early retirement

Post by jebmke »

I retired in 2007. We held no cash other than a small amount of working capital for monthly expenses

viewtopic.php?p=7854380#p7854380
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Squirrel208
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Re: Cash allocation in early retirement

Post by Squirrel208 »

neopsych12 wrote: Sun May 05, 2024 7:14 am Early retirees,

What percent of your total retirement assets do you keep in cash and what is your rationale?
We're in our mid and late 50s and retired several years ago. We keep around 5 years of living expenses in cash (currently FZCXX) and everything else remains invested in equities (VTI) for long-term growth.

I could calculate the cash percentage of our total portfolio to answer your question above, but the answer would likely be irrelevant without the context of our unique annual expenses and portfolio balance.

Our view is that cash provides income stability and insulation from inevitably unpredictable market volatility. Sure, it's disappointing when cash doesn't grow, and sometimes loses value, due to inflation. But at least it's predictably disappointing, rather than the unpredictable disappointment that accompanies the risk and volatility associated with stocks and bonds. So for us cash serves as a form of stock and bond market volatility insurance, and we acknowledge and accept the potential cost associated with that.

I try not to think too long or too hard about exactly when to refill the cash bucket. I.e. I don't have any specific target dates or hard rules for doing so, but I do confess to a bit of attempted market timing here. I'm more motivated and prone to selling some VTI to refill cash when the market has been steadily expanding as it did in Q4 last year and Q1 this year, but I don't pay too much attention to day-to-day or even week-to-week stock market volatility.

A deep stock market contraction extending beyond 5 years is unlikely, but of course also entirely possible. If that happens we recognize that we may need to sell equities at an inopportune time. But our portfolio balance is large enough that it would likely be more emotionally painful to do, rather than financially so. If such an extended event were to occur it's more likely that we'd adjust our discretionary spending downwards, which would extend our cash buffer for a couple more years before requiring a refill from equities.
oakbluffs
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Re: Cash allocation in early retirement

Post by oakbluffs »

siamond wrote: Sun May 05, 2024 8:56 am
watchnerd wrote: Sun May 05, 2024 8:02 am
siamond wrote: Sun May 05, 2024 7:25 am Why? Cash doesn't return anything and its purchasing power slowly erodes against inflation. We want to stay as fully invested as possible.
MMFs are currently returning more than inflation.
I was assuming the OP defined cash as 'hard cash' (money sitting idle on a bank account), but you're right, I missed the MMF reference, so I might have misinterpreted. This wouldn't change my view though, bucketizing with any form of cash makes no sense on the long run. I don't understand why anybody would want to do that.
What about the point made earlier: keep enough in short term CDs TBills etc to ride out an extended down period in stocks without selling shares that have lost value?
Wanderingwheelz
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Re: Cash allocation in early retirement

Post by Wanderingwheelz »

watchnerd wrote: Sun May 05, 2024 8:53 am
Wanderingwheelz wrote: Sun May 05, 2024 8:36 am
watchnerd wrote: Sun May 05, 2024 8:02 am
siamond wrote: Sun May 05, 2024 7:25 am Why? Cash doesn't return anything and its purchasing power slowly erodes against inflation. We want to stay as fully invested as possible.
MMFs are currently returning more than inflation.
Buffetts recent comments fall in line with many others, even here on the forum where “market timing” isn’t held in high regard. 5.4% risk free looks pretty good when you take into consideration valuations of US stocks- particularly growth stocks. By the way, I’m not the type to do anything because one of the richest people on the planet is doing it, my point was his comments fall in line with that a lot of ordinary investors are doing too.

As a near retiree I’d have no problems having 5 years of cash, maybe even a bit more. A few years back I’d have said two years was about right.
Is it even market timing if we get a repeat of stocks vs cash, 1972 - 1981?

https://www.portfoliovisualizer.com/bac ... wLWg8xrdQ1

In that scenario, having a cash allocation as a permanent part of one's portfolio would have improved returns, and even more so in risk-adjusted terms, vs being all stocks.
That’s a big “if”. Back in ‘72 investors has no way of knowing what the next decade was going to look like, no different than we do now.

It’s safe to assume we won’t be going back to ZIRP any time soon. Or is it?
Being wrong compounds forever.
Iconicus
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Re: Cash allocation in early retirement

Post by Iconicus »

Outer Marker wrote: Sun May 05, 2024 9:46 am Entering retirement, I plan to build out a TIPS ladder with 10 years spend. I'll have "cash" maturing and available to fully fund necessary spending for a decade without the need to sell equities. Rationale is that market downturns rarely last more than a decade. So long as markets are behaving, I'll rebalance and extend the ladder out each year in retirement to keep the spending ladder evergreen. If we're in a prolonged downturn, I'll leave the equties alone and spend down the ladder, allowing my AA to drift up until it becomes essential to start selling in year 10.
+1
steadyosmosis
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Re: Cash allocation in early retirement

Post by steadyosmosis »

I do like Livesoft does, I hold as little cash as possible (0%), especially not in taxable accounts, because I dislike paying unnecessary taxes.
Age<59.5 | Early-retired | AA ~55/45 | Taxable=100% VTI | Roth IRA=97% equities | HSA=94% equities | Traditional IRA=100% fixed income | I spend from the taxable account |
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siamond
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Re: Cash allocation in early retirement

Post by siamond »

upwind wrote: Sun May 05, 2024 9:28 am
siamond wrote: Sun May 05, 2024 8:56 am
watchnerd wrote: Sun May 05, 2024 8:02 am
siamond wrote: Sun May 05, 2024 7:25 am Why? Cash doesn't return anything and its purchasing power slowly erodes against inflation. We want to stay as fully invested as possible.
MMFs are currently returning more than inflation.
I was assuming the OP defined cash as 'hard cash' (money sitting idle on a bank account), but you're right, I missed the MMF reference, so I might have misinterpreted. This wouldn't change my view though, bucketizing with any form of cash makes no sense on the long run. I don't understand why anybody would want to do that.
Mitigate sequence of return risks? For one.
Well, you would need a LARGE allocation to 'cash' (aka money market / T-Bills) to start seeing any meaningful impact on SORR. 5% or 10% won't cut it (barring dubious market timing schemes). But then anything larger than that will significantly impact your long-term portfolio returns. If you can afford it, good for you, but that's a big price to pay...

Better address the root cause of sequence-of-return-risk (SORR), i.e. the use of a constant (inflation-adjusted) annual spending budget. When using (or modeling) any form of variable withdrawal method (Guyton-Klinger rules, amortization methods like VPW or ABW, or a simple % of one's current portfolio), then SORR is strongly mitigated. This is a much more efficient use of one's money. I modeled all of the above to death when I retired and I think the case is pretty clear cut.
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watchnerd
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Re: Cash allocation in early retirement

Post by watchnerd »

Wanderingwheelz wrote: Sun May 05, 2024 7:57 pm It’s safe to assume we won’t be going back to ZIRP any time soon. Or is it?
It all depends on inflation.

If we're looking at potential deflation, ZIRP could be a tool.

But deflation doesn't seem like the current tajectory.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Claudia Whitten
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Re: Cash allocation in early retirement

Post by Claudia Whitten »

neopsych12 wrote: Sun May 05, 2024 7:14 am Early retirees,

What percent of your total retirement assets do you keep in cash and what is your rationale?
Percentages are meaningless to me. I keep 10 easy-living years in cash-like instruments (thankfully I have access to the G fund). Beyond that, I invest in stocks. Why 10 years? That's the number that makes me feel secure. I can stretch that cash-like pile to 20 years w/o breaking a sweat, too, so that's really the rest of my life, in all likelihood. The rest is gravy--and for my heirs.

I've always lived well below my means and don't plan to change that, ever. Stuff doesn't bring happiness. Quite the opposite, actually, I've found.
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Wiggums
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Re: Cash allocation in early retirement

Post by Wiggums »

Retired. Started with 2 years in cash mainly because we wanted to do Roth conversions. Moved AA slowly down to 65/35.

Today, we keep whatever amount makes sense to manage cash flow requirements. We maintain a list of upcoming lumpy expenses and keep that amount in treasuries or similar. No state tax. This method has worked best for us.
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James.534
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Re: Cash allocation in early retirement

Post by James.534 »

What exactly do you determine as cash? checking account, MM, ultra short muni, short muni , int muni ?

I have a large portion of my "cash" in short muni and int muni. Would you consider this cash , I put it in the bond category, but serves pretty much the same purpose.
ReadyOrNot
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Re: Cash allocation in early retirement

Post by ReadyOrNot »

I think I have about 50% in money market funds, high yield savings, stable value fund, or TIAA traditional. Mostly accidentally. It turned out that I saved and invested more than I need, so I moved my tax-deferred out of equities into the slowest-growing cash-like assets, to keep them manageable. Otherwise, they could grow into uncontrollable Required Minimum Distributions. Now I should be able to donate enough in Qualified Charitable Donations to consume it without raising my Medicare IRMAA payments and other taxes.

In taxable accounts, I had too much in equities. I can spend cash without affecting income or taxes in additional income. But if I want to spend some of the equities, I would have to cash some equities, have capital gains, increase Adjusted Gross Income, and increase Medicare IRMAA and other taxes. But it is too late to change, without affecting AGI. (In other words, I should have kept more in cash instead of equities.)
Last edited by ReadyOrNot on Mon May 06, 2024 11:13 am, edited 2 times in total.
rule of law guy
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Re: Cash allocation in early retirement

Post by rule of law guy »

in retirement, we view cash not as something for emergencies but as a safe asset class that, yielding 5.3% with no credit risk, should get a significant allocation simply as an investment class. if rates go back to .1% we will change our view. we are 70% short term treasuries, 30% equities
Never wrong, unless my wife tells me that I am.
rule of law guy
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Re: Cash allocation in early retirement

Post by rule of law guy »

deleted double post
Never wrong, unless my wife tells me that I am.
togb
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Re: Cash allocation in early retirement

Post by togb »

I just retired. Seriously, this is the first day of being retired. In preparation, I wanted at least a year's expenses to be in something super safe and liquid "just in case". With CD and MM rates at 5%+, I actually ended up with 2-3 years in MM and CDs. It's more than I planned but I didn't know I could get 5% in super safe stuff.

The CDs have staggered maturity dates for the next 3-5 years. So far, as they matured, I got new CDs as long as the suits me. When MM returns erode, I'll probably limit cash to 3 months of expenses.

Overall AA remains about 75/25, and I count the cash/MM/CDs in the 25%.
Wannaretireearly
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Re: Cash allocation in early retirement

Post by Wannaretireearly »

togb wrote: Mon May 06, 2024 10:35 am I just retired. Seriously, this is the first day of being retired. In preparation, I wanted at least a year's expenses to be in something super safe and liquid "just in case". With CD and MM rates at 5%+, I actually ended up with 2-3 years in MM and CDs. It's more than I planned but I didn't know I could get 5% in super safe stuff.

The CDs have staggered maturity dates for the next 3-5 years. So far, as they matured, I got new CDs as long as the suits me. When MM returns erode, I'll probably limit cash to 3 months of expenses.

Overall AA remains about 75/25, and I count the cash/MM/CDs in the 25%.
Awesome, congrats! I can only imagine the elation today :)
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HarmlessDrudge
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Re: Cash allocation in early retirement

Post by HarmlessDrudge »

delamer wrote: Sun May 05, 2024 7:42 am Assuming you’ll have no source of income other than portfolio withdrawals, keep 5 years of expenses in cash equivalents.

That should get you through the vast majority of stock market downturns, so you won’t have to sell stocks at reduced prices.

Alternatively, you could go with 100% stocks and accept the tradeoff of higher long-term returns for having to occasionally sell low.
That's my rule of thumb (5 years). It's not cash per se, but the Stable Value Fund in my 401k. And the 5 year amount is part of my bond allocation, so it's not in addition to. But having it in Stable Value lets me worry less about sudden interest rate shifts.
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neopsych12
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Re: Cash allocation in early retirement

Post by neopsych12 »

HarmlessDrudge wrote: Thu May 09, 2024 5:48 pm
delamer wrote: Sun May 05, 2024 7:42 am Assuming you’ll have no source of income other than portfolio withdrawals, keep 5 years of expenses in cash equivalents.

That should get you through the vast majority of stock market downturns, so you won’t have to sell stocks at reduced prices.

Alternatively, you could go with 100% stocks and accept the tradeoff of higher long-term returns for having to occasionally sell low.
That's my rule of thumb (5 years). It's not cash per se, but the Stable Value Fund in my 401k. And the 5 year amount is part of my bond allocation, so it's not in addition to. But having it in Stable Value lets me worry less about sudden interest rate shifts.
5 years of cash equivalents in addition to your bond allocation. Or do you consider that within your bond allocation? What percent equities are you?
esteen
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Re: Cash allocation in early retirement

Post by esteen »

I'm not there yet, but as of now my rough plan is at least 2 years expenses in "cash" at retirement when my sequence of returns risk is highest... probably mostly not actual cash. But MMF, CD ladder, etc.
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James.534
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Re: Cash allocation in early retirement

Post by James.534 »

This is the hardest concept for myself, if I have 2-3 years in cash going into retirement. Do I just draw from the cash when I need money? Do I draw from the cash only if the market is down? If the market is up, do I sell for consumption and replenish the cash? How do you make those decisions? It is much easier deciding how much to save.
dbr
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Re: Cash allocation in early retirement

Post by dbr »

James.534 wrote: Fri May 10, 2024 7:01 am This is the hardest concept for myself, if I have 2-3 years in cash going into retirement. Do I just draw from the cash when I need money? Do I draw from the cash only if the market is down? If the market is up, do I sell for consumption and replenish the cash? How do you make those decisions? It is much easier deciding how much to save.
You have it backwards. You don't have cash and then try to figure out how to use it.

You figure out how to use your money and if that dictates a need for some of that money to be cash, then that is the cash you hold.

In the first instance above you are talking about cash flow management, meaning where do you get the money to pay for things. That starts with what is your plan to obtain income -- Social Security, pension, annuities, withdrawals from one or another of several investment accounts, deposit dividends from taxable accounts in your checking account, etc. By the nature of things cash will flow in and cash will flow out and there will be some amount that accumulates and provides for the next spending. How much that is would depend on how income sources match what and when you spend.

In the second instance above a logical and straightforward way to manage a portfolio is to decide on the allocation to different things and then rebalance when the allocation gets too far out of bounds. If cash is one of those assets you add or remove cash as your plan dictates. I don't know what the concept of the market being up or down even means in terms of drawing from cash instead. Someone else can explain how you do that. Right now my stock holdings are 300% appreciated over their purchase price so it would be a pretty big crash for the value to fall to less than I bought it all for, hence the market being "down" isn't going to happen except in some extreme disaster.
Mr. Buzzkill
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Re: Cash allocation in early retirement

Post by Mr. Buzzkill »

Not retired yet, but thinking of it for next few years.

My current plan for retirement is 5% of my portfolio in cash for a year of living expenses, an emergency fund, and dry powder for a few potential speculative investments for fun.

Remaining 95 percent will be 40/60:
40 to large blend index funds
60 to treasury ladder of bonds bought at auction except (for the small portion of that for my total bond market index fund option in my 401k, which doesn’t offer a brokerage window for buying bonds at auction).

I endure the bond index fund because I took my (hopefully terminal) job for the cash income not expecting to stay long enough for the 401k contribution, even maxed out, to make a difference in my retirement lifestyle. But I’m fond of tax deferral despite that.
A strategy that works only in bull markets isn’t much of a strategy. Anyway, four dollars a pound.
TravelforFun
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Re: Cash allocation in early retirement

Post by TravelforFun »

delamer wrote: Sun May 05, 2024 7:42 am Assuming you’ll have no source of income other than portfolio withdrawals, keep 5 years of expenses in cash equivalents.

That should get you through the vast majority of stock market downturns, so you won’t have to sell stocks at reduced prices.
This is very conservative. The OP has 20% in bond/MMF and plans on 2.5% withdrawal.

TravelforFun
chitownguy
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Re: Cash allocation in early retirement

Post by chitownguy »

Retiring is 7 weeks. I have the opportunity to have 5 - 10 years in cash with an influx of new money (not selling securities or bonds). I know keeping that much cash is a drag on performance (though not as bad at 5%). But what about the benefits of tax free income from the cash. Aren’t I saving somewhere between 10-20% by not withdrawing from taxable or pretax?
delamer
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Re: Cash allocation in early retirement

Post by delamer »

TravelforFun wrote: Fri May 10, 2024 7:34 am
delamer wrote: Sun May 05, 2024 7:42 am Assuming you’ll have no source of income other than portfolio withdrawals, keep 5 years of expenses in cash equivalents.

That should get you through the vast majority of stock market downturns, so you won’t have to sell stocks at reduced prices.
This is very conservative. The OP has 20% in bond/MMF and plans on 2.5% withdrawal.

TravelforFun
William Bernstein has suggested a TIPS ladder (or the equivalent) of 20 to 25 years of residual expenses, with the rest of the portfolio in stocks: https://www.whitecoatinvestor.com/berns ... -the-game/

So I don’t agree that 5 years in cash equivalents is very conservative, relatively speaking.

In any case, the purpose of the portfolio’s allocation is to meet the (financial & psychological) needs of the retiree — regardless of how the allocation is labeled.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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HanSolo
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Re: Cash allocation in early retirement

Post by HanSolo »

neopsych12 wrote: Sun May 05, 2024 7:14 am What percent of your total retirement assets do you keep in cash
20. It's mostly in Treasury money market (VUSXX).
and what is your rationale?
My AA is 40/30/20/10 (stocks/bonds/cash/commodities). It's somewhere between a Boglehead-type portfolio and a Harry Browne "fail-safe" portfolio (each of which have their respective rationale points). I don't think having cash in one's AA is the heresy that some Bogleheads make it out to be, e.g. (from another thread):
HanSolo wrote: Tue May 07, 2024 2:04 pm
windaar wrote: Wed May 01, 2024 6:11 pm So you're posting on the Bogleheads forum that you are doing the opposite of Boglehead investing philosophy.
How is that "opposite"? In the Bogleheads wiki, the Asset Allocation article begins with: "Asset allocation means dividing an investment portfolio among different asset classes. Typically these are stocks, bonds, and cash."
Recently, there have been posts from people whose AA includes cash (in some cases stocks/cash only). They seem to not be chiming in on this thread much, so here are a few relevant quotes from other threads (and I'm guessing that those with a cash allocation pre-retirement will still keep as much or more in cash upon reaching retirement):
adave wrote: Wed May 08, 2024 5:55 pm What about a 5% cash, 95% VTI portfolio? You hold cash to sleep better at night and let the rest ride it out.....
adave wrote: Wed May 08, 2024 7:20 pm Bonds are also risky as we saw in 2022.
MrsDaisy wrote: Thu May 09, 2024 3:04 am 20 years from retirement. 5% cash, 95% SP500
Buzzman wrote: Mon Apr 29, 2024 9:15 am I look at cash in a money market fund as a bond with no negative return potential. I'm currently at about 85% TSMI and 15% MMkt for the accounts I can control.
dbltrbl wrote: Fri Aug 16, 2019 6:54 am I am retired and have 90% stocks, 10% cash and yes I sleep soundly. My RMDs and pension ( NO Social security) provide more than enough for our daily living. And yes I can stomach a 40-50% down turn.
fdc064 wrote: Sat Apr 20, 2024 5:21 pm New to Bogleheads and ready to retire - maybe! ... In the last two years I have gotten extremely shy/intimidated and have been moving my balances to safer investments in preparation for full retirement.

Here is where I am today:
Emergency funds: $125k in high yield bank account (at 4.5%)
...

Asset Allocation for Rollover IRA: My plan I have in place is based on a 3-bucket-approach I read on morningstar. Currently I am about a 53/47 split between stocks and money market. The breakdown is:

... (details) ...

Asset Allocation for 2x Roth IRA:
--Vanguard S&P Index (VOO) 20%
--Invesco Nasdaq (QQQ) 70%
--Money Market (FDRXX) 10%
And here's nisiprius on how cash is less common as an AA component now, compared to the old days:

viewtopic.php?p=7844371#p7844371
Strategic Macro Senior (top 1%, 2019 Bogleheads Contest)
MrsDaisy
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Re: Cash allocation in early retirement

Post by MrsDaisy »

I consider cash a valid component of an asset allocation. Prior to the prolonged low interest rate environment, it was included in asset allocation planning. People seem to have dropped it during those years due to low returns (we may consider that performance chasing?)

20 years from retirement I'm 5% cash/95% stocks. I plan to keep a cash position indefinitely (with increasing cash and bonds over time)

By the time I retire, I plan to have 3X expenses in cash, 7X bonds, and 15X stocks. That makes a 60 stock/40 fixed income portfolio.

I consider a lot of things "cash" and try to keep up with/beat inflation when possible. Anything that I can reasonably get my money back out of with minimal loss of principle is "cash" to me including: MMF, short T-bills, CDs, I-bonds after 1 year.
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