Cash allocation in early retirement

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
steadyosmosis
Posts: 1181
Joined: Mon Dec 26, 2022 11:45 am

Re: Cash allocation in early retirement

Post by steadyosmosis »

Less than 0.5% in cash.
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 |
CookieDough
Posts: 232
Joined: Sun Dec 25, 2022 1:07 pm

Re: Cash allocation in early retirement

Post by CookieDough »

I keep ~2x expenses in cash. Used to be more like 1x, but I found when I held more cash (in anticipation of a large purchase), I slept better at night.

It's one of those things that works out worse mathematically but better stress-wise. As with all things, YMMV.
simpletone
Posts: 88
Joined: Sat Oct 17, 2020 9:47 am

Re: Cash allocation in early retirement

Post by simpletone »

I’ll be stepping away from my career in a few months, currently holding 2X in cash.
User avatar
HomerJ
Posts: 21433
Joined: Fri Jun 06, 2008 12:50 pm

Re: Cash allocation in early retirement

Post by HomerJ »

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 years in money-market, and 5 years in a 5-year TIPs

So after I spend down the 5 years in money-market funds, the TIPs bond will mature, and I'll have another 5 years that I'll probably put in money-market then.

So that's 10 years pretty safe cash.

And then I have another 5x expenses in Total Bond. Oh, and another 3x or so in I-bonds.

So with interest paying decent for the next couple of years, probably 20 years of expenses in money-market/inflation-protected TIPs and I-bonds, and Total Bond market.

And after THAT, I'll still have the stock money.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Topic Author
neopsych12
Posts: 34
Joined: Sun Apr 12, 2015 11:37 am

Re: Cash allocation in early retirement

Post by neopsych12 »

HomerJ wrote: Fri May 10, 2024 11:32 pm
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 years in money-market, and 5 years in a 5-year TIPs

So after I spend down the 5 years in money-market funds, the TIPs bond will mature, and I'll have another 5 years that I'll probably put in money-market then.

So that's 10 years pretty safe cash.

And then I have another 5x expenses in Total Bond. Oh, and another 3x or so in I-bonds.

So with interest paying decent for the next couple of years, probably 20 years of expenses in money-market/inflation-protected TIPs and I-bonds, and Total Bond market.

And after THAT, I'll still have the stock money.
That is a lot of “risk-free” assets.
What is your age, wr, and overall asset allocation?
RacquetSports
Posts: 15
Joined: Wed Jan 23, 2019 9:49 am

Re: Cash allocation in early retirement

Post by RacquetSports »

My spouse and I retired @ a year ago at ages 53 and 57, respectively. We currently have 7% cash which is part of our fixed income (30%) and represents roughly 1-2 years of annual expenses and is in line with our IPS. Planning to rebalance quarterly. We are on ACA and utilizing subsidies. We remain flexible with our discretionary expenses as needed.
DetroitRick
Posts: 1529
Joined: Wed Mar 23, 2016 9:28 am
Location: SE Michigan

Re: Cash allocation in early retirement

Post by DetroitRick »

Through both early retirement and mid-retirement, I've typically kept around 7 years (of withdrawal needs) in a combination of intermediate bond funds, individual Treasuries (1 month to 2 year range mostly), and money market funds. Occasionally CDs instead of Treasuries, depending on relative rates. Cash allocation itself is, and was, all over the place.

In my earliest retirement years (age 50 +), more bank cash was used for spending, but bond positions were still similar. How I carve those 3 categories varies greatly depending on market conditions, so I have no consistent cash allocation. Except that I will keep at least 3 months of withdrawal needs in money market funds.

This approach is clearly not for everybody, but it right for me. I can flex spending, and fixed income now provides a decent floor anyway. Earlier in retirement, other sources of income (spouse wages, consulting income, etc.) gave me similar flexibility. It does require cash flow forecasting, which I find simple. I have yet to have this set of tactics result in security sales in adverse market conditions, so I'm happy.
User avatar
HomerJ
Posts: 21433
Joined: Fri Jun 06, 2008 12:50 pm

Re: Cash allocation in early retirement

Post by HomerJ »

neopsych12 wrote: Sat May 11, 2024 7:02 am
HomerJ wrote: Fri May 10, 2024 11:32 pm
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 years in money-market, and 5 years in a 5-year TIPs

So after I spend down the 5 years in money-market funds, the TIPs bond will mature, and I'll have another 5 years that I'll probably put in money-market then.

So that's 10 years pretty safe cash.

And then I have another 5x expenses in Total Bond. Oh, and another 3x or so in I-bonds.

So with interest paying decent for the next couple of years, probably 20 years of expenses in money-market/inflation-protected TIPs and I-bonds, and Total Bond market.

And after THAT, I'll still have the stock money.
That is a lot of “risk-free” assets.
What is your age, wr, and overall asset allocation?
55, wife is 63, we have about 33x expenses (so 3% withdrawals). 45/55 stock/bonds. (so 15x in stocks, and 18x in bonds/cash )

I was 50/50 stocks/bonds for the past 10+ years, but after hitting our goal number a year or two ago (around 28x-30x expenses), I've taken some gains out of the big stock market run-up last year, and built up the cash reserves.

Here's the thing...

REAL easy to be heavy on "risk-free" assets (let's just say safer than stocks) right now, when they are paying 4%-5%.

I don't even CARE what stocks do over the next 10+ years... That's an awesome feeling.

I have 5x in cash, 5x in inflation-protected TIPs, so there's the next 10 years covered. And that's not including the interest.

With 18x in cash/bonds, 4% interest is 0.72x, 5% interest is 0.9x

So right now, just the annual INTEREST from the bond/cash side is nearly covering my annual expenses. Even if interest rates go back down in a year or two, my ten years of "safe" money is very likely to last 15+ years.

Meanwhile, the 15x in stocks has 10,15,20 years to grow, where I don't have to care about crashes or bear markets in the short-term.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
HarmlessDrudge
Posts: 59
Joined: Fri Apr 29, 2022 4:41 pm
Location: Washington State, USA
Contact:

Re: Cash allocation in early retirement

Post by HarmlessDrudge »

neopsych12 wrote: Thu May 09, 2024 5:59 pm
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?
For me, the 5 years is part of my bond allocation, but it's in Stable Value, because that seems less volatile.
Finridge
Posts: 1134
Joined: Mon May 16, 2011 7:27 pm

Re: Cash allocation in early retirement

Post by Finridge »

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.
I expect that lost gains of keeping 5 years in cash (compared to a 100% stock portfolio) will probably outweigh the losses prevented during downturns.
User avatar
HomerJ
Posts: 21433
Joined: Fri Jun 06, 2008 12:50 pm

Re: Cash allocation in early retirement

Post by HomerJ »

Finridge wrote: Tue May 14, 2024 10:00 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.
I expect that lost gains of keeping 5 years in cash (compared to a 100% stock portfolio) will probably outweigh the losses prevented during downturns.
What you expect may be correct, but it means nothing to those of us living through those 5 years. We'll have to deal with actual returns, not what was likely or expected.

I am no longer trying to maximize gains. By definition, voluntary retirement means you ALREADY HAVE ENOUGH. There is no longer any need for MORE.

The goal is safety at this point. I no longer care about "lost gains", only minimizing the impact of losses.
Last edited by HomerJ on Wed May 15, 2024 11:06 am, edited 1 time in total.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
User avatar
watchnerd
Posts: 14309
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: Cash allocation in early retirement

Post by watchnerd »

Finridge wrote: Tue May 14, 2024 10:00 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.
I expect that lost gains of keeping 5 years in cash (compared to a 100% stock portfolio) will probably outweigh the losses prevented during downturns.
Have you heard of sequence of return risk?
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Claudia Whitten
Posts: 444
Joined: Wed Jul 05, 2023 12:56 pm

Re: Cash allocation in early retirement

Post by Claudia Whitten »

chitownguy wrote: Fri May 10, 2024 8:25 am 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?
Good point. Living off of cash means little or no "income," which means little or no tax. Plus no IRMAA concerns, potentially, depending on your age.

Downside is if you don't pull from tax deferred, you'll end up with higher RMDs, most likely, and thus in a higher tax bracket later in life.

There's no easy answer. Just tradeoffs.
Claudia Whitten
Posts: 444
Joined: Wed Jul 05, 2023 12:56 pm

Re: Cash allocation in early retirement

Post by Claudia Whitten »

Finridge wrote: Tue May 14, 2024 10:00 pm I expect that lost gains of keeping 5 years in cash (compared to a 100% stock portfolio) will probably outweigh the losses prevented during downturns.
Not a chance. Do you know how quickly a lifetime of savings can be cut in half by a decent bear market? See 2008-09, for example, and there's never a guarantee that downturns like that will reverse course in your lifetime, and your portfolio may never recover, especially if you're pulling from it while it's tanking.

The loss of "potential gains" of five years of living expenses in cash is nothing compared to the insurance it buys someone who otherwise would need to pull from a portfolio being hammered in a downturn.
Wanderingwheelz
Posts: 3301
Joined: Mon Mar 04, 2019 8:52 am

Re: Cash allocation in early retirement

Post by Wanderingwheelz »

Finridge wrote: Tue May 14, 2024 10:00 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.
I expect that lost gains of keeping 5 years in cash (compared to a 100% stock portfolio) will probably outweigh the losses prevented during downturns.
What is your age and how many years until you hit your planned retirement date?
Being wrong compounds forever.
delamer
Posts: 17692
Joined: Tue Feb 08, 2011 5:13 pm

Re: Cash allocation in early retirement

Post by delamer »

Finridge wrote: Tue May 14, 2024 10:00 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.
I expect that lost gains of keeping 5 years in cash (compared to a 100% stock portfolio) will probably outweigh the losses prevented during downturns.
Only you can decide if that’s a worthwhile risk to take.

I agree with HomerJ (above) that safety is more important than maximizing returns if you are dealing with funds that you need to cover your expenses.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Finridge
Posts: 1134
Joined: Mon May 16, 2011 7:27 pm

Re: Cash allocation in early retirement

Post by Finridge »

HomerJ wrote: Wed May 15, 2024 12:10 am
Finridge wrote: Tue May 14, 2024 10:00 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.
I expect that lost gains of keeping 5 years in cash (compared to a 100% stock portfolio) will probably outweigh the losses prevented during downturns.
What you expect may be correct, but it means nothing to those of us living through those 5 years. We'll have to deal with actual returns, not what was likely or expected.

I am no longer trying to maximize gains. By definition, voluntary retirement means you ALREADY HAVE ENOUGH. There is no longer any need for MORE.

The goal is safety at this point. I no longer care about "lost gains", only minimizing the impact of losses.
I assume by "safety" we mean reducing the risk that we will run out of money, correct?

Let's all take a field trip over to cFIREsim.com. This is a backtesting site.

We'll leave all the defaults alone except as described. The defaults assume a 30 year retirement starting with $1,000,000, taking out a SFW of 4% ($40,000).

So we will only make the following changes:

Simulation 1: Put in 100% Equities. Run the Simulation.
Success Rate: 95.2% (Failed 6 of 125 cycles).

Simulation 2: Put in 80% Equities, 20% Cash. Run the Simulation. (Note: If you are spending $40,000 a year, (which is what we are using here with the SFR of 4%, then 5 years of cash will be 20% of the $1,000,000 or $200,000. To allow for the expected increases from inflation, you could make it a bit higher, but for our purposes, we'll just use 20% for now.)
Success Rate: 90.4% (Failed 12 of 125 cycles).

Simulation 3: Put in 60% Equities, 20% Cash, and 20% Bonds. Run the Simulation.
Success Rate: 88% (Failed 15 of 125 cycles).

Running these again with a 5% withdrawal rate. Success Rates:
1. 79.2%
2. 71.2%
3. 60.8%

And with a 3.5% withdrawal rate. Success Rates:
1. 100%
2. 96.8%
3. 95.2%

You can run different withdrawal rates. As a general rule, you'll see that the lower your withdrawal rate, the less asset allocation matters to success.
And as a general matter, the higher your withdrawal rate, the more it matters. Why is this relevant? Because we all aim to have low withdrawal rats, or at least we should. But sometimes factors outside our control result in higher withdrawals than we would like. For example, medical expenses, or assisted living facility costs.

At 6%, the success rates are:
1. 65.60%
2. 50.40%
3. 44.80%

At 10%--which is crazy high, the success rates are:

1. 10.40% (Note: This is pretty incredible if you think about this considering you are starting with only $1,000,000 and taking out $100,000 adjusted for inflation every year for 30 years.)
2. 0%
3. 0%

Some observations, as to how this has played out in the past:
1. People fear market downturns, and the impact they have on equity, but the biggest risk of equities is that you sell at the bottom of the market- and crucially, this risk does not show up in the backtesting simulations because they assume you "stay the course" with the chosen asset allocation. If you stay the course, you can expect that your portfolio will recover.
2. Inflation is a much bigger risk than a lot of people give it credit for. And probably a bigger risk than market downturns for people using reasonable withdrawal rates. This is because inflation is almost always with us. It is there even in good times, and in bad times it can be worse. Also, the impact on cash is one way--it uniformly reduces its value. And this reduction is irreversible as a practical matter, because deflation is extremely unlikely. So cash is the riskiest asset over any appreciable time horizon, because inflation continually chisels away at its value--often slowly and sometimes quickly.
3. Stocks are volatile but provide the highest returns, and are the best hedge over the longer term against inflation.
4. If your withdrawal rate is low enough, your asset allocation makes less difference. But that said, a 100% cash allocation will generally drop like a rock.

Nobody knows what will happen in the future. But at least over the last 100+ years, the perceptions of risk regarding equities has not been consistent with how they have actually performed, at least in the portfolios of people who "stay the course" and don't panic and sell near the bottom.

There are not guaranties. Again, nobody knows what will happen in the future. Don't think that a 100% equities porfolio is "safe" - it is not. But historically a 80/20 equities/cash portfolio or a 60/20/20 equities/cash/bonds portfolio has been even less safe.
Last edited by Finridge on Fri May 17, 2024 11:32 am, edited 2 times in total.
Finridge
Posts: 1134
Joined: Mon May 16, 2011 7:27 pm

Re: Cash allocation in early retirement

Post by Finridge »

Wanderingwheelz wrote: Wed May 15, 2024 5:05 am
Finridge wrote: Tue May 14, 2024 10:00 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.
I expect that lost gains of keeping 5 years in cash (compared to a 100% stock portfolio) will probably outweigh the losses prevented during downturns.
What is your age and how many years until you hit your planned retirement date?
See the post I just made above. While a high equities portfolio is even more defendable for people who have 10+ years before retirement, it is not out of the question for people who are retired either. But most people shouldn't do this. And they shouldn't keep five years in cash either! Especially if they have just barely met their retirement goal and are on the edge of running out of money--it is especially in cases like that in which sitting on a large amount of cash is a bad idea. Bonds would be much, much better.

For people who have surpassed their retirement goal by a lot (and, say, for example have 35x+) they can keep a lot of money in cash without creating the same risks. Because they are "safe" already. For people who are not "safe," and who face a real risk of running out of money, keeping large amounts of their wealth in cash may create the illusion of increased safety, but it is an illusion--they are actually decreasing their safety.
Finridge
Posts: 1134
Joined: Mon May 16, 2011 7:27 pm

Re: Cash allocation in early retirement

Post by Finridge »

Claudia Whitten wrote: Wed May 15, 2024 4:48 am
Finridge wrote: Tue May 14, 2024 10:00 pm I expect that lost gains of keeping 5 years in cash (compared to a 100% stock portfolio) will probably outweigh the losses prevented during downturns.
Not a chance. Do you know how quickly a lifetime of savings can be cut in half by a decent bear market? See 2008-09, for example, and there's never a guarantee that downturns like that will reverse course in your lifetime, and your portfolio may never recover, especially if you're pulling from it while it's tanking.

The loss of "potential gains" of five years of living expenses in cash is nothing compared to the insurance it buys someone who otherwise would need to pull from a portfolio being hammered in a downturn.
The fears are real. Fair enough. Let's assume that I am the unluckiest guy in the world and have the bad luck to retire in November 2007 right when the Great Recession is starting. I have a $1,000,000 portfolio. I'm withdrawing $40,000 (4%), to live on. We can simulate this using Porfoliovisualizer.com.

Three alternative universes:
1. 100% stock (Hi-Stock)
2. 60%/40% stock/bonds. (Bond)
3. 60%40% stock/cash. (Cash)


Yes, with Hi-Stock there are dark times with my portfolio down about 51%.But by August 2013 it matches and then passes Cash. It takes longer to catch up to Bond, but I get there in 2018. Now in 2024, I have $2M, much more than Bond ($1.5M) or Cash ($1.2.M).

Am I just lucky? Maybe. But look at the previous posts I made with more extended backtesting. These results are not an aberration. They are consistent with how stocks, bonds and cash have generally performed over the last 100+ years.

By the way, note that in the different alternative portfolios I have been using, equities have never been less than 60%. The results are even more striking if you start comparing portfolios with higher percentages of bonds or cash. For example, use ones with 100% cash and 100% bonds.
Wanderingwheelz
Posts: 3301
Joined: Mon Mar 04, 2019 8:52 am

Re: Cash allocation in early retirement

Post by Wanderingwheelz »

Finridge wrote: Thu May 16, 2024 11:37 pm
Wanderingwheelz wrote: Wed May 15, 2024 5:05 am
Finridge wrote: Tue May 14, 2024 10:00 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.
I expect that lost gains of keeping 5 years in cash (compared to a 100% stock portfolio) will probably outweigh the losses prevented during downturns.
What is your age and how many years until you hit your planned retirement date?
See the post I just made above. While a high equities portfolio is even more defendable for people who have 10+ years before retirement, it is not out of the question for people who are retired either. But most people shouldn't do this. And they shouldn't keep five years in cash either! Especially if they have just barely met their retirement goal and are on the edge of running out of money--it is especially in cases like that in which sitting on a large amount of cash is a bad idea. Bonds would be much, much better.

For people who have surpassed their retirement goal by a lot (and, say, for example have 35x+) they can keep a lot of money in cash without creating the same risks. Because they are "safe" already. For people who are not "safe," and who face a real risk of running out of money, keeping large amounts of their wealth in cash may create the illusion of increased safety, but it is an illusion--they are actually decreasing their safety.
You failed to answer either of my questions.
Being wrong compounds forever.
User avatar
HomerJ
Posts: 21433
Joined: Fri Jun 06, 2008 12:50 pm

Re: Cash allocation in early retirement

Post by HomerJ »

You are ignoring the psychological aspects of it.

50% crash at 100% stocks is not something I want to live through in retirement while withdrawing money.

You can take comfort that most of the backtests show the market recovering quickly enough that you still do just fine.

Me, I'll take comfort in having 5-10 years of safe money, so I don't have to count on the market recovering quickly. It probably will, but nothing is for certain.

1929 is a real data point, where 100% stocks absolutely did fail.

You point out that in the long-run, in most cases, 20 years in, you ended up with MORE money with 100% stocks.

But I don't care about MORE in retirement. It's all about maintaining (or even slowly, but evenly, spending it down), not increasing my wealth. I want a smooth glide.
Last edited by HomerJ on Fri May 17, 2024 1:57 pm, edited 1 time in total.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
scrabbler1
Posts: 2803
Joined: Fri Nov 20, 2009 1:39 pm

Re: Cash allocation in early retirement

Post by scrabbler1 »

I am 61 and have been retired for 15.5 years, living off only the taxable part of my portfolio. I created a monthly income stream using dividends from a bond fund I have a large amount in. Therefore, I leave only a tiny amount in cash (<0.5%) in my local bank's checking account. It ranges from $2k to $4k, depending on the time of the month, enough to meet any minimum balance requirement plus a small buffer or cushion to cover smaller, unforeseen expenses. I have other larger blobs of money in different, more stable bond funds which act as second-tier EFs which I can use to pay for the rarer, larger, unforeseen expenses the local bank account can't cover.
Average Investor
Posts: 380
Joined: Fri Jul 13, 2012 11:27 am

Re: Cash allocation in early retirement

Post by Average Investor »

I recently retired and currently have 5% in cash due to a recent property sale. I have been buying tbills for the time being but anticipate I will reduce the cash allocation to 1-2% as I settle into retirement and the SOR risk diminishes.
Tomorrow never knows.
cme
Posts: 71
Joined: Fri Dec 11, 2009 3:32 pm
Location: San Francisco

Re: Cash allocation in early retirement

Post by cme »

For folks that do allocate to cash, do you market time when "refilling" the cash? i.e., if you start with 5 years expenses in a cash account - a year passes so you now have 4 years in cash - do you decide whether to sell equities to refill back up cash to 5 years based on current equity valuations?
User avatar
HomerJ
Posts: 21433
Joined: Fri Jun 06, 2008 12:50 pm

Re: Cash allocation in early retirement

Post by HomerJ »

cme wrote: Sat May 18, 2024 2:51 pm For folks that do allocate to cash, do you market time when "refilling" the cash? i.e., if you start with 5 years expenses in a cash account - a year passes so you now have 4 years in cash - do you decide whether to sell equities to refill back up cash to 5 years based on current equity valuations?
No. Not on valuations.

On what the market has done that year, instead. Looking backwards at actual results. Not making changes looking forward at "expected" results.

Market is down that year, I wouldn't sell equities to refill cash. The whole point of the cash bucket to is avoid selling equities when they are down.
Market is up that year, I'll sell equities to refill cash (Heck, if market jumped up 10% in January/Feb, I'd probably "refill" early)

Valuations would be completely meaningless to my decision.

No one knows enough to make accurate predictions. Valuations are not very useful.

My advice is always assume low 10-year returns, then adjust to ACTUAL results. Don't make changes based on guesses about the future with plus/minus 8% error bands - that's so wide, it's meaningless.

The ACTUAL past results are real. All the "expected" return predictions are just wild guesses.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
printer86
Posts: 422
Joined: Mon Apr 25, 2016 8:45 am

Re: Cash allocation in early retirement

Post by printer86 »

I retired about 4 years ago at age 56 with about 1/3 of our assets in taxable accounts. Our plan has been to live off our taxable accounts until we reach Medicare age. Since was are on an ACA plan, we manage our taxable income in order to maximize the subsidies. In addition to interest and dividends, I generate income by selling equities or doing Roth conversions.

Our taxable assets are about 75% VTSAX and a couple of highly appreciated stocks. The other 25% of our taxable money is held in interest bearing cash accounts. When our cash level gets below my comfort zone, I sell some equities to refill the cash accounts. If, after selling stocks, I have some taxable income space, I Roth convert.

We will eventually draw from our tax deferred (VWENX) and tax free (VTI & SPTM) accounts. In the meantime, their growth makes up for our taxable spending.
Post Reply