Cash as a portion of a pre-retirement portfolio

sushipup1July 18, 2011

I am all for balanced portfolios, cash and bonds/cash/CDs, etc. (This discussion need not go into non-cash assets.) But in going over our accounts, I'm wondering about how much cash to carry, with retirement perhaps 5 years away. We have IRAs/401k's plus non-tax sheltered accounts. I think I shouldn't have cash or equivalents in the tax-sheltered accounts, and perhaps just have a year of expenses in cash in the regular accounts. Or should/could that be in income-producing instruments?

Any thought on how much cash as a proportion of assets one might carry into retirement?

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I can't think of a good reason to have more than a year worth of expenses sitting as cash. The traditional compromise between safety and earnings is to "ladder" cd's so you have them maturing at 3 month intervals. eg buy 3,6,9,12 month cd's. As they come due, reinvest in a 12 month. That way, you have an emergency fund in cash to handle short term issues and chunks of cash becoming available every 3 months if something big goes wrong.

"Any thought on how much cash as a proportion of assets one might carry into retirement? "

I guess that depends on how much money you have and what your retirement plans are. You obviously will need more cash on had if you are retiring at 62 vs retiring at 67 with a full pension and social security.

    Bookmark   July 18, 2011 at 1:52PM
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When you retire, it's fair to assume you'll be getting only part of your income from your investments -- enoungh to cover the gap between the certain income stream you'll receive from Social Security, pensions, fixed annuities and the like and the amount you need to reach your retirement incomer goal.

That being the case, you wouldn't want to keep a whole year's expenses in cash. Rather, you'd want to keep enough in cash so that, when it's combined with your certain income stream, you'll be able to meet your income needs for a period of between one and two years. That way, you don't have to pull money out of your investments in a down market just to meet your needs.

If you combine that strategy with billl's idea of laddering CDs or, if you're willing to tolerate a bit of risk for higher returs, laddering bonds of varying maturities, to cover your income gap for two to five years, you can ride out stack market downturns lasting three to seven years without doing great damage to your portfolio.

Some experts call this the "bucket strategy," because you can think of the money being distributed in three buckets, one filled with cash, another with short and intermediate term bonds and one with equities. As you empty out the cash bucket by spending it to meed your daily needs, you refill it with money from the bond bucket, which in turn is refilled with money from the equities bucket, which ultimately is refilled by the returns they earn in the market.

If you follow this strategy, you'll have maybe 20% of your money in cash, maybe 30% in bonds and about 50% in equities. The percentages of each will be different depending on how secure you need to feel. If you have a one-year bucket of cash and a two-year bucket of bonds, for example, you'll have a lot more in equities and realize better returns, but you ability to tolerate a market downturn will be shorter than if you put more in the first two buckets and less in the third.

    Bookmark   July 18, 2011 at 2:31PM
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I believe in having a ready source of cash even if the return on it is low. Depending on where you live I would check out different money market accounts and put the minimum plus a couple of thousand extra. Then ladder the rest.

One thing that happened when I retired is that I had been covering part of hubby's taxes from my salary. We did not think to change and the first couple of years we owed taxes and the MM really helped.

    Bookmark   July 18, 2011 at 10:30PM
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I do about 20% of my total portfolio in cash at any time, not to exceed a year's salary. It give me maximum flexibility.

    Bookmark   July 19, 2011 at 9:37PM
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Thanks to all. I'm aware of the different cash vehicles available, just wondering what portion of a portfolio. There's been some great info here!

    Bookmark   July 19, 2011 at 11:25PM
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As a personal financial consultant I recommended that folks have 3 - 6 mos. income available in case of emergency, 9 mos. or a year`s worth if their position was shaky or if they were on commission, self-employed, etc. ... and recently Suze Orman suggested in her Money Class book that 8 mos. is necessary.

I used to say to some clients, however, that I didn`t always have such, myself, but that I had a rarely-used credit card, and a rarely-used line of credit available, so that I could use the credit card to cover an emergency if I lacked the cash, then draw on the line of credit (fully secured: backed by equities, not a home - I don`t own one) to pay off the credit card debt just after the first billing, to avoid paying high-rate interest.

Then I`d figure to pay off the line of credit a soon as possible, to incur only a smallish interest cost.

In my 80s, by the way, I`m about 80% invested in stocks and stock-based mutual funds ... and I haven`t bought a mutual fund in about 20 years: I prefer to study up stocks and buy my own ... then pay myself the 2.5% or higher fees that the mutual fund managers charge annually (1.5% or higher in the U.S.).

If those managers are so smart ... how come about 80% or more of mutual funds don`t outperform the section of the market in which they invest(question mark - I`m getting a capital ``�`` with a, French, grave accent over it - as you can see in the E that I posted - which was supposed to be in quotation marks, and you see what resulted).

I figure that well-chosen equities will quite likely retain most of their value after 10 years or so, and I expect that most of my assets have a good 10-year time horizon, as I live, rather frugally, by choice, within my pensions` income, so my investments are more or less `play money`: I don`t expect to have to draw on it, any time soon ... as I feel that I should plan to fund my retirement to age 100, at least ... 110, better.

Running out of days before running out of money is, in my opinion, better than the other way around.

Thus, some quality, dividend-paying stocks are, I think, the way to fly, as they drop less in adverse markets, and usually recover, given time.

Furthermore, I get a very important tax credit on dividend income on Canadian-based stocks, and later, should my stocks develop a capital gain, I pay tax on only half of it.

Plus ... if I give it to a charity, I get a tax-deductible receipt for the full amount ... and pay no tax on the capital gain, which, for a stock that I`ve held for 40 years, can be substantial.

Not only that ... my kids, in the neighbourhood of 50, aren`t in major need of money, and on my death can let those assets just continue to run. The base cost amount for them will be the value of the stock at my death ... and my estate will have had to pay tax at regular rate on half of those capital gains ... but some of those stocks, the ones with major capital gains developed, will be given to churches and charities: tax cost avoided.

ole (frugal) joyful

    Bookmark   November 24, 2011 at 7:24PM
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"I believe in having a ready source of cash even if the return on it is low. Depending on where you live I would check out different money market accounts and put the minimum plus a couple of thousand extra."

I think is a good idea to have some cash in treasury only money market funds while the restructuring of the markets here and overseas is going on.

What happens in Europe will eventually affect us here in the states. Who knows how many banks will fail as Greece, Italy, etc falter.

I'd rather have my principle earn lower returns but be able to get it when I need it, rather than have to play games with those who should be indicted for wrecking our financial system.

    Bookmark   November 28, 2011 at 1:04PM
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Recent message from my private pension carrier was that they could not add any indexing this year.

And a report at year end said that they are underfunded, and expect to need to go back to the employers and employees for a higher fee.

I feel that I should draw what had been developed by the contributions that I made, and my employer made parallel to mine ... but that current workers (or the employer`s contribution parallelling their contributions) should not be used to partially fund my benefit.

When I suggested to my landlord recently that I wondered whether I should contact the carrier suggesting that, on a temporary basis for this year, they reduce my pension by a certain amount, as I`m not hurting for money, he suggested that, if I have more money than I know what to do with ...

... that possibly we could increase the rent that I pay for the house.

When I suggested on the next day that, when a person has a mind as sharp as a steel trap, that were he to run that suggestion past that mind, quite likely the thought process would be something like, `Let`s see ... were I to invest more than about 1.5 seconds of my time pursuing such a project, I have a fairly strong feeling that such would be less than a fruitful enterprise`...

... the landlord threw back his head and laughed uproariously! He`s a good guy!

I don`t like having money lying around in cash or near-cash: earning about 1.5%, and taxed at top rate, cuts the after-tax return to just over 1% ... and with inflation running at about 2% (if you believe that story, when you go to buy fuel for the car ... or for your own body) ...

... leaves me with the distinct impression that I have a hole in my money-pocket!

ole joyful

    Bookmark   January 12, 2012 at 6:09PM
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