What do you do when you need access to money in an investment account?

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Miguelito
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What do you do when you need access to money in an investment account?

Post by Miguelito » Wed Aug 02, 2017 6:39 am

Let's say you want to spend $50k on a new car, or pay for a full year of room & board, etc. and you actually have the funds in non-retirement accounts, what do you do to pay for it?

Is there a clear priority to what to sell first? I'd imagine one would try to sell assets subject to LTCG as opposed to STCG, but beyond that, is there a preferred item to sell before others (bonds, index funds, individual stocks, etc.)?

Part 2...

Let's say you had the money in cash and needed to make the purchase in about a year from now. Leave it a high yield savings account? Invest on an index fund? Buy a CD or other short-term item?

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Re: What do you do when you need access to money in an investment account?

Post by ResearchMed » Wed Aug 02, 2017 6:57 am

Miguelito wrote:Let's say you want to spend $50k on a new car, or pay for a full year of room & board, etc. and you actually have the funds in non-retirement accounts, what do you do to pay for it?

Is there a clear priority to what to sell first? I'd imagine one would try to sell assets subject to LTCG as opposed to STCG, but beyond that, is there a preferred item to sell before others (bonds, index funds, individual stocks, etc.)?

Part 2...

Let's say you had the money in cash and needed to make the purchase in about a year from now. Leave it a high yield savings account? Invest on an index fund? Buy a CD or other short-term item?
Especially for something like "a full year of room & board" (college?) that can be anticipated, I'd have accumulated the cash in advance, to avoid the risk of selling quickly at a low point in the market.
And yes, avoiding short-term gains if possible would be important.

Ditto for a car. Either partially finance at a very low (or zero) interest rate, or have at least most of the cash already accumulated, perhaps in part as part of emergency fund, or just regular cash on hand.

It sounds like you don't have any/enough cash ready for things like these, especially those expenses that can be predicted.

Part 2: For short term (e.g., one year) definitely not invest it where market fluctuations could cause a noticeable drop at just the time you need it.

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Re: What do you do when you need access to money in an investment account?

Post by stan1 » Wed Aug 02, 2017 7:00 am

I'd sell whatever has the lowest long term capital gains. Also use it as an opportunity to sell an investment you no longer want to hold (such as an individual stock or an active mutual fund if you have any). Also can be an opportunity to rebalance by selling something you are overweight in for your asset allocation.

For one year I'd use a high yield savings account, maybe Prime Money Market fund, or a CD if I was sure I wouldn't break it. Whatever has the best interest rate.

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Re: What do you do when you need access to money in an investment account?

Post by Miguelito » Wed Aug 02, 2017 7:07 am

ResearchMed wrote:It sounds like you don't have any/enough cash ready for things like these, especially those expenses that can be predicted.
Thanks for the feedback.

Please refrain from theorizing about my personal situation. My kids are in elementary school. I have all the cars I need and they are owned outright. This is all hypothetical.

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Re: What do you do when you need access to money in an investment account?

Post by Miguelito » Wed Aug 02, 2017 7:09 am

stan1 wrote:I'd sell whatever has the lowest long term capital gains. Also use it as an opportunity to sell an investment you no longer want to hold (such as an individual stock or an active mutual fund if you have any). Also can be an opportunity to rebalance by selling something you are overweight in for your asset allocation.

For one year I'd use a high yield savings account, maybe Prime Money Market fund, or a CD if I was sure I wouldn't break it. Whatever has the best interest rate.
OK, that is what I figured. Thanks!

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Re: What do you do when you need access to money in an investment account?

Post by ResearchMed » Wed Aug 02, 2017 7:37 am

Miguelito wrote:
ResearchMed wrote:It sounds like you don't have any/enough cash ready for things like these, especially those expenses that can be predicted.
Thanks for the feedback.

Please refrain from theorizing about my personal situation. My kids are in elementary school. I have all the cars I need and they are owned outright. This is all hypothetical.
Sorry, but I was giving an example, and it doesn't matter whether it is college, kindergarten, boarding school, or room and board for an unpaid internship, or a year or more touring foreign countries. I simply followed on your "room & board" statement, trying to be somewhat relevant.
If you don't want someone mentioning room and board, then it's easy... don't bring it up in your question.

Ditto for the car example.

You mentioned those, so I simply replied, trying to keep on a similar topic.

As a suggestion, next time, just state something about the *amount* needed, or... don't even specify an amount.

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Re: What do you do when you need access to money in an investment account?

Post by Sidney » Wed Aug 02, 2017 7:43 am

Miguelito wrote:Please refrain from theorizing about my personal situation. My kids are in elementary school. I have all the cars I need and they are owned outright.
lol, you brought these up in your first post. I'll re-phrase ResearchMed
It sounds like you don't someone doesn't have any/enough cash ready for things like these, especially those expenses that can be predicted.
I always wanted to be a procrastinator.

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Re: What do you do when you need access to money in an investment account?

Post by livesoft » Wed Aug 02, 2017 7:53 am

This not theoretical for me at all. I routinely sell shares to pay for things since I don't keep cash around.

1. I am well aware of upcoming dividend payments and will use those first.

2. Since I have tax-loss harvested judiciously for decades, I don't have potential taxes to worry about which keeps emotions out of the decision.

3. I generally (but not always) sell shares with losses or the least gains. Both of them are shares held less than a year (short-term).

4. I sell shares that simplify my portfolio, For instance, if I have 10,038 shares of VEU, I will sell 38 shares of VEU to leave me with the simple-looking 10,000 shares. Or I sell the small lots of 2, 5, 6, 3, ... shares, so that I have fewer lines to look at in the future.

5. If I have recently purchased shares on a RBD, then they are the ones most likely to be sold, but ...

6. I sell shares that have no cost to sell.

7. I rebalance in tax-advantaged accounts as needed.
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Re: What do you do when you need access to money in an investment account?

Post by Miguelito » Wed Aug 02, 2017 7:55 am

Sidney wrote:
Miguelito wrote:Please refrain from theorizing about my personal situation. My kids are in elementary school. I have all the cars I need and they are owned outright.
lol, you brought these up in your first post.
I brought up two totally different examples and I said "let's say." In any event, that was not the question.

[OT comment removed by admin LadyGeek] The point is, whether or not it is something I can plan for or not, what does it matter? I didn't say I needed the cash tomorrow in my question. What if I were to think that, given my situation, all I need is $15k in cash savings and I am now considering buying a $100k boat in several months. At one point I'll likely have to sell assets to get the 100K. So the question remains.

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Re: What do you do when you need access to money in an investment account?

Post by The Wizard » Wed Aug 02, 2017 8:05 am

I did this sort of thing recently when I bought my new pickup.
I accumulated money in intermediate term bond fund VBILX in my taxable account. The dividends from VBILX are higher than an online savings account, though taxed the same, at my 28% marginal rate.
When the time came, I sold that entire holding, at a small capital loss since interest rates have been going up.

I'll need a new Mustang in a few years, so I am now accumulating funds in total stock market VTSAX in my taxable account. More volatility with that approach, yes, but at least those dividends are taxed at a lower rate.
Add I have various other options for getting cash for this purchase when the time comes...
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Re: What do you do when you need access to money in an investment account?

Post by jebmke » Wed Aug 02, 2017 8:09 am

I sell whatever is out of balance. Sometimes I will let equity ride a bit to avoid taking a tax hit but with all the harvested losses from the down-tick in 2009, that hasn't been an issue recently. Since I don't hold cash, this is a decision I make every month. Takes about 10 seconds to make the decision.

If I have money that I don't need in the next 30 days it goes into equity or bonds.
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Re: What do you do when you need access to money in an investment account?

Post by midareff » Wed Aug 02, 2017 8:17 am

Miguelito wrote:Let's say you want to spend $50k on a new car, or pay for a full year of room & board, etc. and you actually have the funds in non-retirement accounts, what do you do to pay for it?

Is there a clear priority to what to sell first? I'd imagine one would try to sell assets subject to LTCG as opposed to STCG, but beyond that, is there a preferred item to sell before others (bonds, index funds, individual stocks, etc.)?

I think much of the answer to this depends on if you are retired (decumulation) or still working and savings. Still working and adding funds I'd look at the bond fund first which would probably have the least tax consequences and re-buy as part of your ongoing savings program. Retired I'd look at the various purchase lots and see if there was a loss that could be booked, if not then look to minimize your tax burden using return of capital and LTCG from the asset that was the furthest over allocation..

Part 2...

Let's say you had the money in cash and needed to make the purchase in about a year from now. Leave it a high yield savings account? Invest on an index fund? Buy a CD or other short-term item?

Just handled that situation myself by the purchase of Ally 11 month CD's paying 1.5% with no breakage penalty.

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Re: What do you do when you need access to money in an investment account?

Post by The Wizard » Wed Aug 02, 2017 8:30 am

Miguelito wrote:
Sidney wrote:
Miguelito wrote:Please refrain from theorizing about my personal situation. My kids are in elementary school. I have all the cars I need and they are owned outright.
lol, you brought these up in your first post.
I brought up two totally different examples and I said "let's say." In any event, that was not the question.

Next time I'll say "let's say I want to buy $50k worth of cocaine." The point is, whether or not it is something I can plan for or not, what does it matter? I didn't say I needed the cash tomorrow in my question. What if I were to think that, given my situation, all I need is $15k in cash savings and I am now considering buying a $100k boat in several months. At one point I'll likely have to sell assets to get the 100K. So the question remains.
No need to get hissy about this.
Overall, it's probably best to accumulate money in stock index funds in your taxable account, rather than in a savings account.
Lower taxes and potential for higher gains are the reason.
But you also have potential for capital losses, so you need to be comfortable with that and know how to deal with it.

And you might have a situation where a sale of stock funds would have some short-term gains in addition to long-term gains. So maybe you borrow some $$$ from your HELOC for a few months to let the STCGs mature to LTCGs before selling those shares...
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Re: What do you do when you need access to money in an investment account?

Post by livesoft » Wed Aug 02, 2017 9:50 am

The Wizard wrote:And you might have a situation where a sale of stock funds would have some short-term gains in addition to long-term gains. So maybe you borrow some $$$ from your HELOC for a few months to let the STCGs mature to LTCGs before selling those shares...
I do not think taxes on STCG would be much of a problem because

1. One should have capital losses to offset them,

2. They won't be big anyways because of the small amounts of principal and short time involved,

3. And no one ever complains about paying taxes on a savings account making 10% or in interest.
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Re: What do you do when you need access to money in an investment account?

Post by Miguelito » Wed Aug 02, 2017 10:24 am

Good stuff guys. Thanks for the feedback. I'm a relative novice with respect to a taxable account. We have been holding too much cash for too long. I've managed to move over a good amount of our cash over to an investment account over the past year or two, but I know that we really should be more invested.

It's also pretty clear I need to get fully up to speed on tax loss harvesting. So far it hasn't been a problem, but I'd like to be ready and comfortable with it if I need to use it.

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Re: What do you do when you need access to money in an investment account?

Post by AlohaJoe » Wed Aug 02, 2017 10:27 am

Another option is: Don't sell anything, take a margin loan, and take advantage of leverage.

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Re: What do you do when you need access to money in an investment account?

Post by Toons » Wed Aug 02, 2017 10:29 am

I would probably sell shares in either Vanguard Total Bond or
Intermediate Term Tax Exempt.
I would steer clear of selling any Equity/Growth Investments
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Re: What do you do when you need access to money in an investment account?

Post by The Wizard » Wed Aug 02, 2017 10:30 am

livesoft wrote:
The Wizard wrote:And you might have a situation where a sale of stock funds would have some short-term gains in addition to long-term gains. So maybe you borrow some $$$ from your HELOC for a few months to let the STCGs mature to LTCGs before selling those shares...
I do not think taxes on STCG would be much of a problem because

1. One should have capital losses to offset them,

2. They won't be big anyways because of the small amounts of principal and short time involved,

3. And no one ever complains about paying taxes on a savings account making 10% or in interest.
All excellent points and more for the OP to consider in his planning...
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Re: What do you do when you need access to money in an investment account?

Post by House Blend » Wed Aug 02, 2017 11:41 am

I agree with livesoft that this is one of the primary reasons one should tax loss harvest. (And of course, use Spec ID.) With enough banked losses, you can be indifferent to ST vs LT and simply sell the shares with the least gains.

Without that, a typical dilemma might be $3000 LT gains vs. $2000 ST gains. Which one is better depends on your tax situation (Fed + State).

Another potential dilemma is a situation where the amount you need to sell/spend is large enough to materially affect your AA. The shares with the least gains are likely to be your most recent purchases, and if they were your most recent purchase, there's a good chance that the asset class was below target at the time, and selling may make things even worse.

Best way to deal with that is to rebalance in tax-advantaged if possible.

But not always possible. Ex., 100% of my mother's tax-advantaged accounts are fixed income, and IMO she's better off that way. US and Intl equity are in taxable. If she needed to raise large amounts of cash, the cheapest way would be to sell munis. However, if we were doing that today, it would force a rebalance in taxable. (So, not as cheap as it first seems.)

The alternative would be to sell stocks. Within stocks, the shares with the least gains are Intl, so would prefer to sell those instead of US. However, her Intl target is 30% of equity, currently at 27%, so selling Intl also has the potential to force a taxable rebalance.

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Re: What do you do when you need access to money in an investment account?

Post by remomnyc » Wed Aug 02, 2017 12:18 pm

Sell whatever asset class is out of balance. Within that asset class, sell whatever has the least gains (if in high tax bracket) or with most gains (if in low tax bracket). Rebalance in tax deferred to achieve target asset allocation.

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Re: What do you do when you need access to money in an investment account?

Post by obgraham » Wed Aug 02, 2017 1:57 pm

This is why I have a HELOC. On occasion I need the cash right now, and I don't keep much around. For instance, you're looking at cars, and the one that fits the bill is right there for the taking. Or maybe you're buying a house before the old one's sale has closed.
Then take the time to sort out which investment will provide the funds advantageously.

Last year doing this the total HELOC interest cost was around $60.

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Re: What do you do when you need access to money in an investment account?

Post by Pranav » Wed Aug 02, 2017 3:03 pm

This thread is relevant for me as I often wonder where I put the money for property tax before it's due every year.
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Re: What do you do when you need access to money in an investment account?

Post by Pranav » Tue Aug 08, 2017 10:02 am

livesoft wrote:This not theoretical for me at all. I routinely sell shares to pay for things since I don't keep cash around.

1. I am well aware of upcoming dividend payments and will use those first.

2. Since I have tax-loss harvested judiciously for decades, I don't have potential taxes to worry about which keeps emotions out of the decision.

3. I generally (but not always) sell shares with losses or the least gains. Both of them are shares held less than a year (short-term).

4. I sell shares that simplify my portfolio, For instance, if I have 10,038 shares of VEU, I will sell 38 shares of VEU to leave me with the simple-looking 10,000 shares. Or I sell the small lots of 2, 5, 6, 3, ... shares, so that I have fewer lines to look at in the future.

5. If I have recently purchased shares on a RBD, then they are the ones most likely to be sold, but ...

6. I sell shares that have no cost to sell.

7. I rebalance in tax-advantaged accounts as needed.
Do you use these steps/strategy for large, expected, yearly expenses such as property taxes?
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Re: What do you do when you need access to money in an investment account?

Post by ridebikeseveryday » Tue Aug 08, 2017 10:08 am

jebmke wrote:I sell whatever is out of balance. Sometimes I will let equity ride a bit to avoid taking a tax hit but with all the harvested losses from the down-tick in 2009, that hasn't been an issue recently.
I understand the point about selling stuff that is out of balance.

But your second sentence: doesn't TLH *lower* your basis, making the cap gains (and thus taxes) *higher* on your equity, making it more of an issue in the recent 8 year bull market, not less?

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Re: What do you do when you need access to money in an investment account?

Post by livesoft » Tue Aug 08, 2017 10:15 am

Pranav wrote:Do you use these steps/strategy for large, expected, yearly expenses such as property taxes?
Definitely, yes. And also for large, unexpected expenses, too.

I must also write that December distributions are paid in time to pay property taxes near the end of the year.
Last edited by livesoft on Tue Aug 08, 2017 10:45 am, edited 1 time in total.
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Re: What do you do when you need access to money in an investment account?

Post by jlcnuke » Tue Aug 08, 2017 10:18 am

tycho wrote:
jebmke wrote:I sell whatever is out of balance. Sometimes I will let equity ride a bit to avoid taking a tax hit but with all the harvested losses from the down-tick in 2009, that hasn't been an issue recently.
I understand the point about selling stuff that is out of balance.

But your second sentence: doesn't TLH *lower* your basis, making the cap gains (and thus taxes) *higher* on your equity, making it more of an issue in the recent 8 year bull market, not less?
TLH lowers the cost of taxes on your investments overall. I can't personally think of a time in any normal situation when TLH would result in you getting less money overall.

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Re: What do you do when you need access to money in an investment account?

Post by wrongfunds » Tue Aug 08, 2017 1:56 pm

You really should not have said "I want to buy $100K boat" especially after how the first few replies went. Buying boat would always be discouraged by BH.

I will give concrete example of what I did with my son's 529 plan. The money was in the balanced fund and I took proportional money two times year whenever the tuition and board was due. The 529 money made the cash flow easier.

I generally watched the market for few days and then pulled the trigger couple of times week before the payment was due. I continued that practice until the last semester when the fund was exhausted.

Frankly, my method really did not work that well. If the market was going down or going up for couple of days, I got tired of waiting and pulled the trigger. When you are paying couple of hundreds thousand over four years, this type of local optimization was just noise.

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Re: What do you do when you need access to money in an investment account?

Post by EnjoyIt » Tue Aug 08, 2017 2:15 pm

wrongfunds wrote:You really should not have said "I want to buy $100K boat" especially after how the first few replies went. Buying boat would always be discouraged by BH.

I will give concrete example of what I did with my son's 529 plan. The money was in the balanced fund and I took proportional money two times year whenever the tuition and board was due. The 529 money made the cash flow easier.

I generally watched the market for few days and then pulled the trigger couple of times week before the payment was due. I continued that practice until the last semester when the fund was exhausted.

Frankly, my method really did not work that well. If the market was going down or going up for couple of days, I got tired of waiting and pulled the trigger. When you are paying couple of hundreds thousand over four years, this type of local optimization was just noise.
For something like this would you recommend just setting a date in the future and pulling it out no matter what the market does or maybe cost average it out over a few months?

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Re: What do you do when you need access to money in an investment account?

Post by wrongfunds » Tue Aug 08, 2017 2:16 pm

[NEVER MIND] BH WiKi explains it very well.

I understand how TLH can minimize immediate tax bite but I just don't see how it makes any difference in aggregate. Am I missing something fundamental?

For example:- You Vanguard 500 Index purchased at $10K and during a market downturn it became $8K. You sold it and immediately purchased Fidility 500 from the proceeds. Now you have $2K of tax loss on paper but your overall position is still identical. I get that.

However, in few years when that investment becomes $20K and you needed to sell, your long term gain would be $12K. If you had stayed put and had done nothing, your long term gain be would $10K. If you still were carrying that $2K loss from previous TLH, the situation is identical.

Is there something in the tax code such as being able to offset real income with TLH at your marginal rate vs paying LTCG taxes on the profits which make this worth while?

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Re: What do you do when you need access to money in an investment account?

Post by wrongfunds » Tue Aug 08, 2017 2:44 pm

For something like this would you recommend just setting a date in the future and pulling it out no matter what the market does or maybe cost average it out over a few months?
I did cost average over a week. One could do it over a month or so just to be on the safe side but it all depends upon the bill vs how much you are planning to pull. In my case, it was about half. If majority of the money is coming from 529, then I think you should play it safer and average it over few months.

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Re: What do you do when you need access to money in an investment account?

Post by Earl Lemongrab » Tue Aug 08, 2017 3:47 pm

wrongfunds wrote:Is there something in the tax code such as being able to offset real income with TLH at your marginal rate vs paying LTCG taxes on the profits which make this worth while?
You are able to offset up to $3000 per year in ordinary income with net capital losses.
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Re: What do you do when you need access to money in an investment account?

Post by gasdoc » Tue Aug 08, 2017 4:00 pm

1. I keep a relatively large cash position to cover such expenses when they inevitably come up- around $75K.
2. If I must sell investments, I sell from a fund I still have that no longer fits my investment philosophy, or I sell whatever has recently increased in value, rebalancing (always long term gains).

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Re: What do you do when you need access to money in an investment account?

Post by grabiner » Wed Aug 09, 2017 9:38 am

I sell whatever minimizes the capital gain. If this takes me out of balance, I can rebalance within my retirement accounts.

For example, the only US stock I have in my taxable account has a huge capital gain, while I have international stock with much lower gains. If I need money, I will sell international stock, and if that means that my US/international ratio is off, I will sell US stock and buy international stock in my employer plan.

I did this when I bought my home. I sold enough stock to make the down payment. Since buying a home (and taking out a mortgage) changed my financial situation substantially, I also changed my asset allocation, and rebalanced within my employer plan to the new asset allocation.
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Re: What do you do when you need access to money in an investment account?

Post by inbox788 » Wed Aug 09, 2017 2:00 pm

jebmke wrote:I sell whatever is out of balance. Sometimes I will let equity ride a bit to avoid taking a tax hit but with all the harvested losses from the down-tick in 2009, that hasn't been an issue recently. Since I don't hold cash, this is a decision I make every month. Takes about 10 seconds to make the decision.

If I have money that I don't need in the next 30 days it goes into equity or bonds.
I'm a slower decision maker and my cash drag might be 3-6 months. I figure in retirement I'll have dividends and other payments that can be spent or reinvested most likely in taxable at the time. I assume I would save these cash amount over some months rather than be fully invested and pulling out a big lump sum when needed. If I've done the calculations right, I might still need to withdraw a lump sum, but not the whole amount. To reduce volatility, I might take out half a few months early. If cash is committed to be spent, it's staying or getting out of the market, so cash equivalent.

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