How much to hold in cash during retirement?

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duffer
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How much to hold in cash during retirement?

Post by duffer » Thu Feb 06, 2020 10:15 am

I am a year out from retirement. My spouse is retired. I am on track to replace 100% of my current income stream from retirement assets.

Forty-five percent of my retirement income stream will be from joint-life annuities and two substantial social security accounts. I consider those to be safe assets and that income stream as secure. The balance of my income stream will come from withdrawals from my IRA and brokerage accounts which are almost entirely invested in equities.

I want to minimize the risk of having to sell equities during downturns in the market without losing too much of future returns on equities. We have strong bequest motivations, so I want to preserve and grow principal. I want to protect myself without losing more on potential equity growth than is necessary.

Question: Assuming a flexible spending policy that would withdraw an average of 4% from the equity investments each year, what is the optimum percentage of my investment portfolio to hold in cash (by which I mean money market and short term-treasury bills) in order to minimize my risk of having to sell equities during downturns?

Another way of asking the same question is: how many years of withdrawals should I hold in cash to minimize the risk of having to sell equities during downturns? Currently, I am holding two years of withdrawals in cash (short term bills and money market funds).

Thank you for your thoughts and insights.

vipertom1970
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Re: How much to hold in cash during retirement?

Post by vipertom1970 » Thu Feb 06, 2020 10:24 am

I hold 2 years of spending in CD plus 22 years of spending in bonds and my AA is around 60/40.

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Re: How much to hold in cash during retirement?

Post by Stinky » Thu Feb 06, 2020 10:29 am

I’ve got about 1 year spending in money market fund, plus 5+ years in short term bonds and 5 years in intermediate bonds. Also, I’m building up the short term position by reinvesting equity dividends in my IRA into the short bonds.

My plan is to sell equities when they are within 10% of their all time highs, and to liquidate bonds if/when equities are more than 10% lower than the highs.

We’ll see how this works out.
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duffer
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Re: How much to hold in cash during retirement?

Post by duffer » Thu Feb 06, 2020 10:34 am

vipertom1970 wrote:
Thu Feb 06, 2020 10:24 am
I hold 2 years of spending in CD plus 22 years of spending in bonds and my AA is around 60/40.
22 years of spending in bonds?

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duffer
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Re: How much to hold in cash during retirement?

Post by duffer » Thu Feb 06, 2020 10:36 am

Stinky wrote:
Thu Feb 06, 2020 10:29 am
I’ve got about 1 year spending in money market fund, plus 5+ years in short term bonds and 5 years in intermediate bonds. Also, I’m building up the short term position by reinvesting equity dividends in my IRA into the short bonds.

My plan is to sell equities when they are within 10% of their all time highs, and to liquidate bonds if/when equities are more than 10% lower than the highs.

We’ll see how this works out.
Nice. I have thought about doing something similar to this, but you have articulated it more precisely. How exactly do you implement this? Do you use the S&P as the criterion or your own equity holdings?

vipertom1970
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Re: How much to hold in cash during retirement?

Post by vipertom1970 » Thu Feb 06, 2020 10:45 am

duffer wrote:
Thu Feb 06, 2020 10:34 am
vipertom1970 wrote:
Thu Feb 06, 2020 10:24 am
I hold 2 years of spending in CD plus 22 years of spending in bonds and my AA is around 60/40.
22 years of spending in bonds?
Yes sir and it’s 40% of my portfolio. The 60% in equites generates enough for yearly expenses and if we have a bad down year then the CD will kick in. That’s the plan but I only retired 4 months ago at the age of 50.

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Re: How much to hold in cash during retirement?

Post by David Althaus » Thu Feb 06, 2020 10:54 am

We put yearly spending (plus a bit) in checking during January. Remaining fixed assets are in intermediate bond fund BIV. Seven years in bonds as ballast against the lean years seems about right to me. Read that as a strategy in some old book--or maybe I dreamt it. More important--whatever ensures you will stay the course is how you should proceed.

All the best

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Re: How much to hold in cash during retirement?

Post by willthrill81 » Thu Feb 06, 2020 10:59 am

duffer wrote:
Thu Feb 06, 2020 10:15 am
Question: Assuming a flexible spending policy that would withdraw an average of 4% from the equity investments each year, what is the optimum percentage of my investment portfolio to hold in cash (by which I mean money market and short term-treasury bills) in order to minimize my risk of having to sell equities during downturns?
Short-term Treasuries are not considered to be cash-equivalents, but money markets are.

I would suggest that rather than finding out what others do, you look at historic data to see what you are most comfortable with and why. Portfolio Visualizer is a good way to see this.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: How much to hold in cash during retirement?

Post by evofxdwg » Thu Feb 06, 2020 11:03 am

I just looked and I have 5 months in money market.
But over 10 years current spending are spread over short term bond index, short term corporate bonds, and short term inflation protected bonds. All in IRA.
Not selling any stock or bond funds now since started social security in 2019 and current spending from IRA dropped. Just directing all dividends and cap gains to the money market. It is keeping the bucket full enough for current spending.

Have near term plans to sell real estate and shut off all withdrawals and go to full reinvestment of divs/cap gains for a couple of years, combined with some IRA to Roth conversions. Payoff of one small mortgage (3.4% APR) and an Equity Management loan (4% APR) used this year to pay taxes on a Roth conversion are in that plan. Maybe pay off two car loans (2% APR) as well, maybe not.

Hope I don't get too senile to puzzle this stuff out. Retiring, and juggling withdrawal strategy, property liquidation strategy, debt strategy, and fed/state tax avoidance are more complex than saving it!

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Post by dbr » Thu Feb 06, 2020 11:19 am

A person holding a balanced portfolio of stocks and bonds sells bonds to take withdrawals and to rebalance into more stocks. There is no selling of stocks when stocks are down. There is no need to hold cash in addition to the already planned asset allocation of stocks and bonds. In any case cash is just a form of "bonds" from the investment planning point of view. If one is 100% stocks, then one does sell stocks in a downturn. That would be part of that plan.

For convenience some cash is going to be around all the time. I tend to end up with 1%-2% of total invested assets in checking accounts, savings accounts, money market or sweep accounts etc. This has to do with cash flow management which is a different thing from investment management.

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Re: How much to hold in cash during retirement?

Post by Rudedog » Thu Feb 06, 2020 12:50 pm

One year of spending in ICSH (Ultra-Short Bonds) and Vanguard Prime Money Market. Wife has cash in local credit union as she feels she needs to for security. I then have CD ladder, each equal to one year of spending, maturing over the following five years. So, in theory, we could last through a five-year downturn without selling any equities.

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Re: How much to hold in cash during retirement?

Post by Ramjet » Thu Feb 06, 2020 12:55 pm

I always thought a CD ladder of a few years of expenses made sense for this purpose

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Re:

Post by wolf359 » Thu Feb 06, 2020 1:11 pm

dbr wrote:
Thu Feb 06, 2020 11:19 am
A person holding a balanced portfolio of stocks and bonds sells bonds to take withdrawals and to rebalance into more stocks. There is no selling of stocks when stocks are down. There is no need to hold cash in addition to the already planned asset allocation of stocks and bonds. In any case cash is just a form of "bonds" from the investment planning point of view. If one is 100% stocks, then one does sell stocks in a downturn. That would be part of that plan.

For convenience some cash is going to be around all the time. I tend to end up with 1%-2% of total invested assets in checking accounts, savings accounts, money market or sweep accounts etc. This has to do with cash flow management which is a different thing from investment management.
I agree with this perspective, but I would add one observation. In our case, cash has some sort of magical mental calming influence that bonds lack.

During 2008, bonds may have stopped the overall portfolio from being more volatile than they otherwise would have been, but they were still volatile. People were panicking that the market was down 50% -- it wasn't that much comfort that we were down only 40%. We were still down significantly.

But you know what was comforting? The fact that I had a big fat emergency fund in cash. I've since reduced it, because I have other backup plans (like being part of a two-income household).

However, when I get to retirement age, I intend to start growing that cash reserve again. I expect that I'll be nervous about not having income.

In OP's case, two years is probably plenty. You are only dependent on investments for about half your income. If you have the ability to cut back on your spending when times are bad (which you will naturally want to do when all the bad news is blaring all around), then you will find that your two year cash buffer will actually grow longer as your expenses reduce. And if your fixed income covers ALL your core expenses, then your investments are all about discretionary expenses, which makes it even easier. (The cash is only necessary to cover the critical core expenses like housing, food, medicine, and other things you MUST pay.)

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duffer
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Re: How much to hold in cash during retirement?

Post by duffer » Thu Feb 06, 2020 1:21 pm

vipertom1970 wrote:
Thu Feb 06, 2020 10:45 am
duffer wrote:
Thu Feb 06, 2020 10:34 am
vipertom1970 wrote:
Thu Feb 06, 2020 10:24 am
I hold 2 years of spending in CD plus 22 years of spending in bonds and my AA is around 60/40.
22 years of spending in bonds?
Yes sir and it’s 40% of my portfolio. The 60% in equites generates enough for yearly expenses and if we have a bad down year then the CD will kick in. That’s the plan but I only retired 4 months ago at the age of 50.
Congratulations! As I said, 45% of my assets are in very safe forms, and those assets would cover necessary expenses indefinitely, so i guess my allocations are not so different.

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duffer
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Re: How much to hold in cash during retirement?

Post by duffer » Thu Feb 06, 2020 1:29 pm

willthrill81 wrote:
Thu Feb 06, 2020 10:59 am
duffer wrote:
Thu Feb 06, 2020 10:15 am
Question: Assuming a flexible spending policy that would withdraw an average of 4% from the equity investments each year, what is the optimum percentage of my investment portfolio to hold in cash (by which I mean money market and short term-treasury bills) in order to minimize my risk of having to sell equities during downturns?
Short-term Treasuries are not considered to be cash-equivalents, but money markets are.

I would suggest that rather than finding out what others do, you look at historic data to see what you are most comfortable with and why. Portfolio Visualizer is a good way to see this.
Yes, but rolling 30 or even 90 day bills are enough like cash for my annual spending needs. The issue is strong safety against lost yield, and for that purpose, bills function like cash for me, but with a better return. So, for me they are cash-equivalents.

And yes, I have gamed all this out with Portfolio Visualizer and many other tools as well as against my actual historical spending in recent years. But i still am interested in the thoughts, insights, and experiences of others, amplified by the numbers of people in the forum and distilled by the high level of experience of many Bogleheads.

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duffer
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Re: How much to hold in cash during retirement?

Post by duffer » Thu Feb 06, 2020 1:32 pm

evofxdwg wrote:
Thu Feb 06, 2020 11:03 am
I just looked and I have 5 months in money market.
But over 10 years current spending are spread over short term bond index, short term corporate bonds, and short term inflation protected bonds. All in IRA.
Not selling any stock or bond funds now since started social security in 2019 and current spending from IRA dropped. Just directing all dividends and cap gains to the money market. It is keeping the bucket full enough for current spending.

Have near term plans to sell real estate and shut off all withdrawals and go to full reinvestment of divs/cap gains for a couple of years, combined with some IRA to Roth conversions. Payoff of one small mortgage (3.4% APR) and an Equity Management loan (4% APR) used this year to pay taxes on a Roth conversion are in that plan. Maybe pay off two car loans (2% APR) as well, maybe not.

Hope I don't get too senile to puzzle this stuff out. Retiring, and juggling withdrawal strategy, property liquidation strategy, debt strategy, and fed/state tax avoidance are more complex than saving it!
That is a handful, with a lot of movable parts!

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duffer
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Re:

Post by duffer » Thu Feb 06, 2020 1:42 pm

dbr wrote:
Thu Feb 06, 2020 11:19 am
A person holding a balanced portfolio of stocks and bonds sells bonds to take withdrawals and to rebalance into more stocks. There is no selling of stocks when stocks are down. There is no need to hold cash in addition to the already planned asset allocation of stocks and bonds. In any case cash is just a form of "bonds" from the investment planning point of view. If one is 100% stocks, then one does sell stocks in a downturn. That would be part of that plan.

For convenience some cash is going to be around all the time. I tend to end up with 1%-2% of total invested assets in checking accounts, savings accounts, money market or sweep accounts etc. This has to do with cash flow management which is a different thing from investment management.
Sounds like you are doing some form of Prime Harvesting?

If I were to own intermediate or longer bonds, which I don't, I would limit those to about 5% and then maybe another 5% in short term treasuries. My security in my present plan is the 45% of the income stream coming from annuity income and two large social security accounts. We can pay necessary expenses out of that.

The purpose of cash in my current current strategy is to use as a cushion against selling equities during downturns. The purpose of keeping the equity percentage high and using a flexible spending policy is to try to keep principal outgrowing expenses. We would like to leave our children and grandchildren some bucks.

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duffer
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Re: How much to hold in cash during retirement?

Post by duffer » Thu Feb 06, 2020 1:44 pm

Rudedog wrote:
Thu Feb 06, 2020 12:50 pm
One year of spending in ICSH (Ultra-Short Bonds) and Vanguard Prime Money Market. Wife has cash in local credit union as she feels she needs to for security. I then have CD ladder, each equal to one year of spending, maturing over the following five years. So, in theory, we could last through a five-year downturn without selling any equities.
Thanks! This is the sort of thing I am trying to do. I wonder if my two years is enough and whether your five years is too much!

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Re:

Post by Third Son » Thu Feb 06, 2020 1:53 pm

dbr wrote:
Thu Feb 06, 2020 11:19 am
A person holding a balanced portfolio of stocks and bonds sells bonds to take withdrawals and to rebalance into more stocks. There is no selling of stocks when stocks are down. There is no need to hold cash in addition to the already planned asset allocation of stocks and bonds. In any case cash is just a form of "bonds" from the investment planning point of view. If one is 100% stocks, then one does sell stocks in a downturn. That would be part of that plan.

For convenience some cash is going to be around all the time. I tend to end up with 1%-2% of total invested assets in checking accounts, savings accounts, money market or sweep accounts etc. This has to do with cash flow management which is a different thing from investment management.
This is what I am planning on doing since my portfolio is very simple. I have sufficient wealth to safely draw $100K after taxes and live well below a 4% safe withdrawal. Any other cash will be used for Roth conversions in the first few years. My head gets tied up in knots when I hear of CD ladders, bond ladders, annuities, etc....I would rather worry about living in retirement than juggling cash streams.
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duffer
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Re: Re:

Post by duffer » Thu Feb 06, 2020 2:05 pm

wolf359 wrote:
Thu Feb 06, 2020 1:11 pm
In OP's case, two years is probably plenty. You are only dependent on investments for about half your income. If you have the ability to cut back on your spending when times are bad (which you will naturally want to do when all the bad news is blaring all around), then you will find that your two year cash buffer will actually grow longer as your expenses reduce. And if your fixed income covers ALL your core expenses, then your investments are all about discretionary expenses, which makes it even easier. (The cash is only necessary to cover the critical core expenses like housing, food, medicine, and other things you MUST pay.)
Thank you! This is exactly what iI am trying to think about--whether two years is enough cash.

My assured income does cover all necessary expenses, so the equities draw is for discretionary or expenses that I can be flexible about (e.g., waiting to replace the roof or the mattress). I still will have to sell some equities every year for my RMD, but apart from the amount that goes for taxes, I could roll the after-tax proceeds into the same equities in my brokerage account. And I could use cash to pay the taxes so the whole RMD could get rolled into equities--but that of course adds to the rate of depletion on the cash buffer. At present, about two-thirds of equity assets are in IRAs and one-third in brokerage.

Thank you again.

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Re: Re:

Post by dbr » Thu Feb 06, 2020 3:32 pm

duffer wrote:
Thu Feb 06, 2020 1:42 pm
dbr wrote:
Thu Feb 06, 2020 11:19 am
A person holding a balanced portfolio of stocks and bonds sells bonds to take withdrawals and to rebalance into more stocks. There is no selling of stocks when stocks are down. There is no need to hold cash in addition to the already planned asset allocation of stocks and bonds. In any case cash is just a form of "bonds" from the investment planning point of view. If one is 100% stocks, then one does sell stocks in a downturn. That would be part of that plan.

For convenience some cash is going to be around all the time. I tend to end up with 1%-2% of total invested assets in checking accounts, savings accounts, money market or sweep accounts etc. This has to do with cash flow management which is a different thing from investment management.
Sounds like you are doing some form of Prime Harvesting?

No, it is just nothing more than selling what is overweight if you need to sell something for a withdrawal and then if you still aren't in balance, selling more to get in balance, etc., however it works out. I am just trying to shoot down this bizarre myth that if you don't have a pile of cash, specifically cash, you are somehow forced to sell stocks low.

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Re: How much to hold in cash during retirement?

Post by Broken Man 1999 » Thu Feb 06, 2020 4:03 pm

We have 50/50 portfolio with a good bit of short-term and intermediate-term treasury index funds, but no allocation to cash.

Given the market's climb over the years, we have only sold equities for expenses.

We sell what we need each month for expenses, and route the proceeds into our credit union accounts to pay our bills for the first half of the month, then use our SS benefits to finish out the month. Repeat each month. We know our expenses for the next month near the end of current month, so we just withdraw what we need. No cash left after bills are paid.

At some point in time we might have to look at selling bonds, as equities won't always be rising. But, for now they are rising enough for us to end up with more at the end of each month, even after expenses.

Broken Man 1999
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Re: How much to hold in cash during retirement?

Post by Dandy » Thu Feb 06, 2020 4:07 pm

Forty-five percent of my retirement income stream will be from joint-life annuities and two substantial social security accounts. I consider those to be safe assets and that income stream as secure. The balance of my income stream will come from withdrawals from my IRA and brokerage accounts which are almost entirely invested in equities.

So 55% of your retirement income needs will come from equities. I think it would be helpful if you posted your portfolio size that you are basing withdrawals on, the split between account types e.g. IRA, brokerage taxable, other ,your age and what the dollar amount the 55% amounts to. Also, it helps to know the wiggle room you might have to dial back expenses if needed. e.g. can you handle a 3% withdrawal for a few years?

I'm pretty moderate with my investments and think that in many cases a long retirement that essentially banks on 4% from an all equity portfolio is too risky.

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Re: How much to hold in cash during retirement?

Post by Stinky » Thu Feb 06, 2020 4:08 pm

duffer wrote:
Thu Feb 06, 2020 10:36 am
Stinky wrote:
Thu Feb 06, 2020 10:29 am
I’ve got about 1 year spending in money market fund, plus 5+ years in short term bonds and 5 years in intermediate bonds. Also, I’m building up the short term position by reinvesting equity dividends in my IRA into the short bonds.

My plan is to sell equities when they are within 10% of their all time highs, and to liquidate bonds if/when equities are more than 10% lower than the highs.

We’ll see how this works out.
Nice. I have thought about doing something similar to this, but you have articulated it more precisely. How exactly do you implement this? Do you use the S&P as the criterion or your own equity holdings?
I’ll keep it simple and just use S&P as the criterion for the 10% trigger.
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Re: How much to hold in cash during retirement?

Post by Blue456 » Thu Feb 06, 2020 5:00 pm

willthrill81 wrote:
Thu Feb 06, 2020 10:59 am
duffer wrote:
Thu Feb 06, 2020 10:15 am
Question: Assuming a flexible spending policy that would withdraw an average of 4% from the equity investments each year, what is the optimum percentage of my investment portfolio to hold in cash (by which I mean money market and short term-treasury bills) in order to minimize my risk of having to sell equities during downturns?
Short-term Treasuries are not considered to be cash-equivalents, but money markets are.

I would suggest that rather than finding out what others do, you look at historic data to see what you are most comfortable with and why. Portfolio Visualizer is a good way to see this.
Or one could use 3 months T bills such as BIL ETF. This gets as close to cash as you get and often with higher after tax yield than money market funds since you only pay federal taxes.

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Re: How much to hold in cash during retirement?

Post by JoeRetire » Thu Feb 06, 2020 5:12 pm

duffer wrote:
Thu Feb 06, 2020 10:15 am
Another way of asking the same question is: how many years of withdrawals should I hold in cash to minimize the risk of having to sell equities during downturns?
Two years of expenses.
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The Casualty
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Re: How much to hold in cash during retirement?

Post by The Casualty » Thu Feb 06, 2020 5:37 pm

Two years cash.

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duffer
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Re: Re:

Post by duffer » Thu Feb 06, 2020 8:57 pm

dbr wrote:
Thu Feb 06, 2020 3:32 pm
duffer wrote:
Thu Feb 06, 2020 1:42 pm
dbr wrote:
Thu Feb 06, 2020 11:19 am
A person holding a balanced portfolio of stocks and bonds sells bonds to take withdrawals and to rebalance into more stocks. There is no selling of stocks when stocks are down. There is no need to hold cash in addition to the already planned asset allocation of stocks and bonds. In any case cash is just a form of "bonds" from the investment planning point of view. If one is 100% stocks, then one does sell stocks in a downturn. That would be part of that plan.

For convenience some cash is going to be around all the time. I tend to end up with 1%-2% of total invested assets in checking accounts, savings accounts, money market or sweep accounts etc. This has to do with cash flow management which is a different thing from investment management.
Sounds like you are doing some form of Prime Harvesting?

No, it is just nothing more than selling what is overweight if you need to sell something for a withdrawal and then if you still aren't in balance, selling more to get in balance, etc., however it works out. I am just trying to shoot down this bizarre myth that if you don't have a pile of cash, specifically cash, you are somehow forced to sell stocks low.
Sometimes stocks and bonds move lower together.

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duffer
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Re: How much to hold in cash during retirement?

Post by duffer » Thu Feb 06, 2020 9:34 pm

Dandy wrote:
Thu Feb 06, 2020 4:07 pm
So 55% of your retirement income needs will come from equities. I think it would be helpful if you posted your portfolio size that you are basing withdrawals on, the split between account types e.g. IRA, brokerage taxable, other ,your age and what the dollar amount the 55% amounts to. Also, it helps to know the wiggle room you might have to dial back expenses if needed. e.g. can you handle a 3% withdrawal for a few years? [/color]

I'm pretty moderate with my investments and think that in many cases a long retirement that essentially banks on 4% from an all equity portfolio is too risky.
My goal is to have a pre-tax income stream in retirement of about 300k, which is where we are now before I retire. We can be quite flexible in our spending, as necessary. I am a fan of the Guyton-Klinger flexible spending rules.
We are both 70, in good health, and reasonably hope to live long. We have strong bequest motivations, so we want to try to preserve our principal.
Our social securities together = 85k
Our annuity in the form of my wife's pension which we took as joint life = 55k
So 140k is pretty well assured.
We have a bit over 4MM in investments (30% in a taxable brokerage and the rest in IRAs). All of this is in equities except for 300k in short-term Treasury Bills and in money market funds. I won't stop drawing a salary for another 13 months during which these amounts will remain untouched, so this total will change one way or another over the next year--we hope up.
The new SECURE Act means we won't have to take RMDs until we are 72.
We also have about 1MM in equity in our home and a 200k home equity line of credit that we could draw on.
Our Medicare costs are reimbursed by my wife's former employer. We pay for supplemental insurance. We do not have long-term care insurance.

How much cash/bills do we need to hold to protect the principal?

gamboolman
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Re: How much to hold in cash during retirement?

Post by gamboolman » Fri Feb 07, 2020 12:48 am

2 to 3 years of living expenses in cash
~40% equities, 48% bonds, 12% cash
ETA Still working but planning to retire by end of 2020 at the latest
Last edited by gamboolman on Fri Feb 07, 2020 1:01 am, edited 1 time in total.

Luckywon
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Re: How much to hold in cash during retirement?

Post by Luckywon » Fri Feb 07, 2020 12:56 am

I haven't intentionally held more than 4 months cash in at least ten years and don't plan to in the future. I'm at about 60/40 and would sell bond funds to raise needed cash.

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Re: How much to hold in cash during retirement?

Post by SandysDad » Fri Feb 07, 2020 6:01 am

People are WAY too hung up on the classification of bonds versus cash.
My advice: consider what you have in your total bond and cash bucket by yield, term / duration, and risk. Evaluate the term and risk premium you can get and whether it is sufficient and spread your bond / cash allocation accordingly.

the lower risk stuff will hold up well if economy tanks and you can consider that your cash buffer. The longer term stuff is more susceptible to gyrations based on prevailing rates and economic conditions in general.

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Re: How much to hold in cash during retirement?

Post by AlohaJoe » Fri Feb 07, 2020 6:20 am

duffer wrote:
Thu Feb 06, 2020 9:34 pm
How much cash/bills do we need to hold to protect the principal?
The 1973 crash took over 8 years to recover. The Great Depression took 25 years to recover. (And Japan's crash around the same.)

You need to spend $150,000+ a year from your portfolio. So if you want to "protect the principal" you need somewhere between $1.2 and $3.8 million in cash/bills.
Last edited by AlohaJoe on Fri Feb 07, 2020 7:15 am, edited 1 time in total.

snowox
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Re: How much to hold in cash during retirement?

Post by snowox » Fri Feb 07, 2020 6:59 am

I hold 3 years in cash via VMMXX and CD's am retired but will only due so for 4 more years till last Son is out of the house. 60/40 Portfolio. Probably will drop to 1 year then because I anticipate my expenses will really drop and I am currently doing a 3% withdrawal. All depends on what happens going forward.

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Re: How much to hold in cash during retirement?

Post by watchnerd » Fri Feb 07, 2020 7:32 am

duffer wrote:
Thu Feb 06, 2020 10:34 am
vipertom1970 wrote:
Thu Feb 06, 2020 10:24 am
I hold 2 years of spending in CD plus 22 years of spending in bonds and my AA is around 60/40.
22 years of spending in bonds?
It doesn't seem so crazy to me.

We have over 10 years spending in bonds and we have a lower bond allocation and are still accumulating. We should hit 15-17 years in bonds within about 5 years, and that would pivot a bit higher as we rebalance into a 60/40 allocation by that time.
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Re: How much to hold in cash during retirement?

Post by watchnerd » Fri Feb 07, 2020 7:52 am

willthrill81 wrote:
Thu Feb 06, 2020 10:59 am
duffer wrote:
Thu Feb 06, 2020 10:15 am
Question: Assuming a flexible spending policy that would withdraw an average of 4% from the equity investments each year, what is the optimum percentage of my investment portfolio to hold in cash (by which I mean money market and short term-treasury bills) in order to minimize my risk of having to sell equities during downturns?
Short-term Treasuries are not considered to be cash-equivalents, but money markets are.
If you squint, one might even be willing to call ultra-short bond funds with a duration <1 year, like VUSFX, to be nearly so.

But we'll see how it does in the next meltdown.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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Re: Re:

Post by dbr » Fri Feb 07, 2020 8:42 am

duffer wrote:
Thu Feb 06, 2020 8:57 pm
dbr wrote:
Thu Feb 06, 2020 3:32 pm
duffer wrote:
Thu Feb 06, 2020 1:42 pm
dbr wrote:
Thu Feb 06, 2020 11:19 am
A person holding a balanced portfolio of stocks and bonds sells bonds to take withdrawals and to rebalance into more stocks. There is no selling of stocks when stocks are down. There is no need to hold cash in addition to the already planned asset allocation of stocks and bonds. In any case cash is just a form of "bonds" from the investment planning point of view. If one is 100% stocks, then one does sell stocks in a downturn. That would be part of that plan.

For convenience some cash is going to be around all the time. I tend to end up with 1%-2% of total invested assets in checking accounts, savings accounts, money market or sweep accounts etc. This has to do with cash flow management which is a different thing from investment management.
Sounds like you are doing some form of Prime Harvesting?

No, it is just nothing more than selling what is overweight if you need to sell something for a withdrawal and then if you still aren't in balance, selling more to get in balance, etc., however it works out. I am just trying to shoot down this bizarre myth that if you don't have a pile of cash, specifically cash, you are somehow forced to sell stocks low.
Sometimes stocks and bonds move lower together.
Bonds are far less volatile than stocks. The amount of decline is far less for bonds. Also, within fixed income there is range of risk from holding currency to holding long term junk bonds. Low risk, meaning the return is not variable, is associated with lower expected return. There is danger in not getting enough return. For example the real return on currency is the negative of the rate of inflation, so money is constantly being lost when holding currency as inflation is almost always positive. You go up the ladder from there.

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Re: How much to hold in cash during retirement?

Post by Call_Me_Op » Fri Feb 07, 2020 8:47 am

vipertom1970 wrote:
Thu Feb 06, 2020 10:45 am
duffer wrote:
Thu Feb 06, 2020 10:34 am
vipertom1970 wrote:
Thu Feb 06, 2020 10:24 am
I hold 2 years of spending in CD plus 22 years of spending in bonds and my AA is around 60/40.
22 years of spending in bonds?
Yes sir and it’s 40% of my portfolio. The 60% in equites generates enough for yearly expenses and if we have a bad down year then the CD will kick in. That’s the plan but I only retired 4 months ago at the age of 50.
That equates to 33X in equities. Not bad at all!
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: How much to hold in cash during retirement?

Post by Call_Me_Op » Fri Feb 07, 2020 8:53 am

Broken Man 1999 wrote:
Thu Feb 06, 2020 4:03 pm
We sell what we need each month for expenses, and route the proceeds into our credit union accounts to pay our bills for the first half of the month, then use our SS benefits to finish out the month. Repeat each month. We know our expenses for the next month near the end of current month, so we just withdraw what we need. No cash left after bills are paid.
Doesn't selling something every month produce a lot of taxable events? Since I do my own taxes, I would probably not want to deal with that.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: How much to hold in cash during retirement?

Post by tennisplyr » Fri Feb 07, 2020 8:56 am

Retired 9 years:

5% cash/45% equities/50% bonds
Those who move forward with a happy spirit will find that things always work out.

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Re: How much to hold in cash during retirement?

Post by Broken Man 1999 » Fri Feb 07, 2020 9:28 am

Call_Me_Op wrote:
Fri Feb 07, 2020 8:53 am
Broken Man 1999 wrote:
Thu Feb 06, 2020 4:03 pm
We sell what we need each month for expenses, and route the proceeds into our credit union accounts to pay our bills for the first half of the month, then use our SS benefits to finish out the month. Repeat each month. We know our expenses for the next month near the end of current month, so we just withdraw what we need. No cash left after bills are paid.
Doesn't selling something every month produce a lot of taxable events? Since I do my own taxes, I would probably not want to deal with that.
So far as taxes, yes, each distribution is taxable. So, as we go thru the year, and thru the tax brackets, I just have Vanguard increase the taxes removed and shipped to Uncle Sam. During the year occasionally I run a taxcaster https://www.mortgagecalculator.org/calc ... ulator.php to make sure I'm sending enough.

Easy peasy. Total taxes sent and total distributions are both on our 1099-R forms.

Vanguard also tracks all distributions during the year, so I always know where we stand without doing anything except going to the Retirement Summary tab. It provides a running total of distributions and taxes sent.

Broken Man 1999
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Re: How much to hold in cash during retirement?

Post by MnD » Fri Feb 07, 2020 10:12 am

In 33 years of systematic accumulation I didn't ever spend any time worrying about buying stocks at record highs. Likewise in retirement I don't worry about selling stocks at levels lower than some recent high. That's just an example of a cognitive bias called anchoring. If you were a lifetime saver and investor you aren't selling stocks at a loss in retirement because your average cost is a small fraction of current value.

And the biggie for those with a balanced portfolio that maintain a fixed asset allocation in retirement - you aren't selling stocks in down markets even if you are taking modest periodic distributions proportionally from asset classes. You are in fact net buyers of stocks in bear markets because your rebalancing from fixed income to equity is substantially greater than the modest portion of withdrawals taken from equity for retirement income.

Cash buckets to spend from in "down" markets s a demonstrated suboptimal withdrawal approach in retirement that reduces returns and thus increases the risk of portfolio failure in retirement. Not to mention the messy details of trying to decide when a down market starts, when it ends, how far out of balance are you going to allow your portfolio to get as you spend only from fixed income, deciding when an up market starts, when and how fast do you refill the cash bucket ect. Emotions and hunches are going to guide those decisions with predictable results.

https://www.marketwatch.com/story/do-bu ... 2019-02-12
https://papers.ssrn.com/sol3/papers.cfm ... id=3274499

In the special case of the OP who had determined that his safe income streams justify a 100% equity portfolio, any movement of X years to cash will reduce long-term portfolio returns likely by a greater degree than any "spending from cash" savings that might arise.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.

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Re: How much to hold in cash during retirement?

Post by randomguy » Fri Feb 07, 2020 10:47 am

AlohaJoe wrote:
Fri Feb 07, 2020 6:20 am
duffer wrote:
Thu Feb 06, 2020 9:34 pm
How much cash/bills do we need to hold to protect the principal?
The 1973 crash took over 8 years to recover. The Great Depression took 25 years to recover. (And Japan's crash around the same.)

You need to spend $150,000+ a year from your portfolio. So if you want to "protect the principal" you need somewhere between $1.2 and $3.8 million in cash/bills.
It took the DJIA about 25 years to hit a new high after the great depression. The stock market recovered in under 5 years. Both of those statements are true. They are just measuring different things.

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Re: How much to hold in cash during retirement?

Post by Stormbringer » Fri Feb 07, 2020 10:51 am

One approach would be to make sure the money you need to cover basic expenses is covered by guaranteed income (i.e. social security, pension, or annuity), set aside a cash buffer for spending shocks, and then put the rest in risk assets. Your discretionary spending can come from the risk asset portfolio.

That way, when a bear market hits you can hunker down and your bills are still paid without having to sell assets at fire sale prices.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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Re: How much to hold in cash during retirement?

Post by dknightd » Fri Feb 07, 2020 10:56 am

duffer wrote:
Thu Feb 06, 2020 1:21 pm

Congratulations! As I said, 45% of my assets are in very safe forms, and those assets would cover necessary expenses indefinitely, so i guess my allocations are not so different.
As long as you have "safe" assets to cover necessary expenses indefinitely, you can do what you want with the rest :)

I've always used a "bucket" type of approach to finances. It is easier for me to visualize and keep straight.
Checking balance for a month. Savings account to cover expected and unexpected expenses (typically 3-6 months). Long term savings for retirement - almost all in a tax deferred account - invested for long term.

Now I'm retired I have shuffled my virtual buckets. Checking and after tax savings accounts did not change much. The difference is now I have to recharge those accounts from tax deferred, instead of salary. I created a new bucket in MM and short term bonds in my tax deferred account. That bucket will essentially cover my necessary expenses until I claim SS. Essentially it replaces my salary.

I'm not concerned about leaving a legacy. I am concerned about having to ask my kids to help care for me. I building up another bucket for potential legacy, or potential long term care. If we need long term care the kids will get no money when we die. My hope is they will get some money, my hope is they will never have to give us money.

It has been shown over and over that the bucket approach is sub-optimal. That is OK with me. I'm not looking for optimal. I'm looking for comfortable ;)
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds.

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Re: How much to hold in cash during retirement?

Post by B. Wellington » Fri Feb 07, 2020 11:15 am

MnD wrote:
Fri Feb 07, 2020 10:12 am
In 33 years of systematic accumulation I didn't ever spend any time worrying about buying stocks at record highs. Likewise in retirement I don't worry about selling stocks at levels lower than some recent high. That's just an example of a cognitive bias called anchoring. If you were a lifetime saver and investor you aren't selling stocks at a loss in retirement because your average cost is a small fraction of current value.

And the biggie for those with a balanced portfolio that maintain a fixed asset allocation in retirement - you aren't selling stocks in down markets even if you are taking modest periodic distributions proportionally from asset classes. You are in fact net buyers of stocks in bear markets because your rebalancing from fixed income to equity is substantially greater than the modest portion of withdrawals taken from equity for retirement income.

Cash buckets to spend from in "down" markets s a demonstrated suboptimal withdrawal approach in retirement that reduces returns and thus increases the risk of portfolio failure in retirement. Not to mention the messy details of trying to decide when a down market starts, when it ends, how far out of balance are you going to allow your portfolio to get as you spend only from fixed income, deciding when an up market starts, when and how fast do you refill the cash bucket ect. Emotions and hunches are going to guide those decisions with predictable results.

https://www.marketwatch.com/story/do-bu ... 2019-02-12
https://papers.ssrn.com/sol3/papers.cfm ... id=3274499

In the special case of the OP who had determined that his safe income streams justify a 100% equity portfolio, any movement of X years to cash will reduce long-term portfolio returns likely by a greater degree than any "spending from cash" savings that might arise.
This^^^ Thanks MnD for explaining what I have been trying to put together this past few months. Also for the great link to Mark Hulbert's article with Estrada's work. :beer

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Re: How much to hold in cash during retirement?

Post by Dandy » Fri Feb 07, 2020 12:33 pm

I roughly follow Dr. Bernstein's idea for those who have "enough" i.e. put X (he suggest 20 or so) years worth of residual expenses ($ needed to supplement other retirement income) in "safe" products - e.g. FDIC products, short term bond funds, money market funds. The rest he suggests can be invested anyway you want even 100% stocks. It really tries to address how do you "safely" address retirement funding as opposed guessing the proper overall allocation.

I chose to make a "safe" portfolio to fund residual expenses to age 90. I'm 72 this month. I withdraw from a combination of equities and fixed income with my RMD -- unless equities have a really bad year then I will likely do all or mostly fixed income. So the "safe" portfolio isn't like an ATM it is more like retirement funding "insurance" -- worst case --we're covered.

The OP has about $4 million with about 30% of that in non IRAs and 70% IRAs. Would like to withdraw 4% or 160k to have about 300k in retirement income. Wants to avoid as much as possible selling equities when they are in decline. It would seem that the IRAs would have lots of equities and RMDs will be quite large and therefore may sell equities at RMD time whether the equities are in decline or not. I would suggest the OP start to estimate their RMDs and determine any actions that can be taken to avoid or minimize this RMD impact.

I would suggest that the OP determine the minimum residual expense level that they can live with. Let's say that is $100k vs $160k or $240k vs $300k yearly income. Put at least 4 years or $400k in "safe" fixed income. Take you RMD all from equities when they have had a positive year and add more fixed income to the RMDs when equities have had a down year. It would seem to address the "dips" in equities that usually recover in 4 or so years - not the steep decline that has occurred less frequently. This would be the minimum fixed income allocation I would have you consider. It would be far short of what I would be comfortable with -- I'm much more conservative.

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Re: How much to hold in cash during retirement?

Post by pascalwager » Sat Feb 08, 2020 2:05 am

I notice the terms optimal and comfortable being used as though they're in opposition with each other. Maybe this calls for an annual session with an hypnotist so that an optimal allocation seems genuinely comfortable.

But David Swensen suggests being at 100% cash two years before reaching your investment horizon and beginning the conversion to cash when you're eight years away from your investment horizon.
Retired, pension, no SS | Bond funds: TIPS, TBM | Global stocks: total market, large value, small company, emerging market funds

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Re: How much to hold in cash during retirement?

Post by msk » Sat Feb 08, 2020 4:00 am

I feel that many BHs have an unjustifiable fear of having to sell stocks when the market is down. Firstly, unless you have "just" invested in stocks, you are not selling at a loss (long term gains, etc.). Secondly, you are selling a trivial amount annually anyway. The OP is, presumably, in good times, selling, say, 2% of his stocks portfolio. Let's say the market drops 50%, so, to maintain the same standard of living and acquisition of toys, he will have to sell 4% for that year. But he seems to have the option of cutting back on his "wants" anyway. Will the market then stay down for the next 10 or 20 years? So what? his legacy will still keep growing anyway (>5% real is the looooong term trajectory anyway). OK, for extra comfort, but avoidably constraining his legacy slightly, I would keep one year's cash. IMHO the best prospects for his legacy will be no significant cash at all. Just sell the minor amounts of stocks as needs arise but otherwise remain fully invested to grow his legacy. Me? I spend only "wants"from investments, not "needs" (like the OP?) but I give away 3.5% of my 100% stocks portfolio to my heirs. I keep 6 months cash so that the heirs do not get a shock if the market suddenly drops 80%. I wish to restrict my withdrawals to a max of 5% in any year no matter how deeply the stock market falls. Retired 20 years, age 75. 100% stocks portfolio is large enough that, unless the worldwide stock market falls by >50% and stays down for decades, all my heirs can retire immediately, either from current handouts or inheritance when I pop off. OP: we are both very lucky; you need your portfolio to fund only "wants", like me. Any lump sum cash you keep aside, diminishes, rather than protects, your legacy. Keep cash to the minimum. One year under the mattress may be enough to sleep on comfortably.
Last edited by msk on Sun Feb 09, 2020 3:01 am, edited 1 time in total.

aruba joe
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Re: How much to hold in cash during retirement?

Post by aruba joe » Sat Feb 08, 2020 5:56 am

I'm 73, retired 11 years: currently 50/50. A portion of the 50% bond allocation is 10 years of spending in CD's and MM's.

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