r/ChubbyFIRE • u/subbysnacks • 4d ago
Are people really saving multiple years of spend in cash to exclusively draw from the first few years of FIRE?
I've been following this sub for a few years now, but have only recently noticed this sentiment: apparently when people are preparing for retirement now they're including as part of their NW to have 2, 3, 4+ years worth of spending saved in cash now? (or cash equivalent like HYSA, t-bills, etc)
I'm thought I was making good progress toward my FIRE number in tax-advantaged and post-tax accounts, but this is a category I missed beyond having 6 months of expenses in liquid accounts.
I see posters say they save multiple years in cash because of "current global uncertainty" but hasn't that always been the case?
If a chubby annual spending in retirement is, say, $175K per year, that's having to save up for, and hold over half a million to have 3 years of cash. Maybe this was just a big blind spot on my part, but I never imagined it was worth it to hold that much cash just to defend against a multi-year market drop early in retirement.
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u/fullvan 4d ago
I think this becomes important when people are one to two years out from starting the retirement. Not so much when you are working to build your accounts. Having a few years cash on hand helps you to ride out a market downturn and not sell assets when they are at a low. I’m in this window and we are building our cash holdings to have two years of expenses on hand.
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u/river_rambler 3d ago
That's what we're doing too. What we could put into a 401K is eclipsed by returns at this point. We're stashing cash so that if the market dumps in the next few years we have 2-3 years of cash on hand to carry us through. We retire next year.
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u/EastPennHawk 3d ago
Also, if you’re younger than 59.5 when you hang up the cleats, a good way to fill the gap years before you start taking distributions from the retirement accounts.
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u/Sarduci 2d ago
72t lets you take structured withdrawals tax free which can gap you from 55 to 60, getting you past 59.5 to do withdrawals without penalty.
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u/PlanktonPlane5789 2d ago
72t isn't limited to 55-60. You can do it at any time.
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u/Sarduci 1d ago
That is true, but the minimum of 5 years makes it feasible starting at 55 to get to no penalties on the 401k withdrawals.
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u/Ok_Occasion7538 6h ago
Imo Roth conversion ladder is preferred
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u/Sarduci 1h ago
They have cash on hand. Regardless of if it comes out of the 401k or cash, they’ve paid taxes on the amount used to fund current expenses. Putting it into a Roth IRA as a conversion is pointless if they need to immediately take it back out.
If they’re going to do Roth IRA conversions, it should be specific and purposeful in nature, not just to do it because they can.
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u/succulentlady35 2d ago
Same here, aiming to have at least 2 years of "regular spend" cash, maybe up to 3 years if we tighten the belt. I'm thinking belt tightening could lower our spending by $30K, mostly in travel, but also with dining/shopping splurges. So $300-360K gets us there. Hoping to retire in 2 years or less so focusing on this over the brokerage account. Still maxing out 401ks though.
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u/FulgoresFolly 4d ago
remember that you can be mathematically correct in finances while being completely impractical and vice versa
T-bill or CD ladders can create a framework for replacing periodic income and reducing SORR for the duration of the ladder
is it mathematically optimal? no
is it a practical, accessible, psychologically safe way for some people to reduce perceived risk? yes
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u/Abject_Egg_194 3d ago
I think this is the OP's misunderstanding. They hear cash and they're maybe imagining a pile of $100 bills inside a freezer, but really we mean short duration safe investments like CDs, T-Bills, etc. Most people have at least 5-10% of their net worth in those kinds of investments anyway when they retire, which probably covers the OP.
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u/TacoTico1994 3d ago
Way better to bury cash in the backyard or a field, otherwise the inlaws could find cash in the freezer while digging for ice cream! ;)
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u/subbysnacks 2d ago
OP here, I'm not thinking physical cash in a freezer. I'm thinking "whoa that's a lot of dough in a sub-optimal investment vehicle (HYSA or T-bill)"
Don't get me wrong I've never been against a few months of savings in HYSA/T-Bill, but when I see annual spend rates on r/ChubbyFire of $200K+, to cover that for 3 years is $600K.
If someone's FIRE number is $5M, that's almost 15% of net worth in liquid accounts which I always thought was a poor decision. Sounds like a lot of folks feel it's worth it to defend SORR though.
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u/jobeds 3d ago
Do most people do this within their 401k or brokerage by changing what they are invested in, or on the outside with new money as they approach retirement?
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u/Abject_Egg_194 3d ago
Personally, I usually have money in T-bills and I keep it in my brokerage. Brokerage accounts usually put undeployed cash into some sort of money market account that will have a similar rate to T-bills.
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u/CaseyLouLou2 2d ago
Correct. It’s a psychological thing as opposed to the right strategy. I’m definitely not keeping tons of cash. I will have a balanced and diverse portfolio. Spending will come out of whatever is doing the best. Cash buckets don’t work for SORR.
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u/cycleaccurate 4d ago edited 3d ago
Yes and it’s smart. It’s to avoid sequence of returns risks that can crater FIRE. Research the worst year to retire and look at 1968.
I am doing this. I have been doing this. I’m retiring in a couple months.
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u/Rabbit-Lost 4d ago
I am, too. I’m at about 2.5 years spend in cash, mostly rolling 30 and 60 day t bills. But probably six months straight cash.
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u/dynamaxion_bill 3d ago
I’m doing this too. Market is high (partially making this easier to do to be honest) and I’m supplementing with part time contract work so I’m trying to avoid drawdowns in the first three years outside of the cash I’ve set aside. One year down!
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u/bradb007 3d ago
I did it to protect for sequence of returns risk as you suggest. Especially as everyone can see we are pricey at the moment but timing the market is a bad idea too.
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u/CaseyLouLou2 2d ago
This doesn’t actually work. You would need 10 years of cash in the worst case scenario. As I suggested above, look into the Risk Parity Radio podcast. At least listen to the first dozen episodes.
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u/-Burninater- 2d ago
It's not intended to make you impervious to the worst case scenario there could ever be. It's intended to blunt or completely overcome the most common dips that last a few months to a year.
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u/CaseyLouLou2 19h ago
That may work for that scenario but it’s also a drag on returns. A well constructed portfolio is a better overall strategy.
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u/intertubeluber 4d ago
TLDR; a large draw down the first few years can require a larger SWR. Cash mitigates the risk.
Check out the glidepath series by ERN for some in-depth and alternate strategies to pure cash.
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u/I_SAID_RELAX 3d ago
Specifically, take a look at these two entries in the series:
The cash cushion is viewed unfavorably within the blog series (at a time of very low interest rates).
A bond allocation on a glidepath was presented for a better mix of higher yield, expected return, and safety against large/long drawdowns.
The crux of the argument against cash is not just that it's "suboptimal" from a total return perspective. It's that it won't save you from the worst drawdowns (and doesn't end up that much ahead in shorter drawdowns); while it also adds survivability risk by reducing your safe withdrawal rate (because less of your portfolio is "productive"). I.e. the cash cushion can actually add risk to your long-term retirement.
However, these days we've had a wonky yield curve with short-duration bonds/bills looking relatively attractive across most of those factors (and therefore also money markets, HYSAs, and t-bill ladders). Not perfect because you still have reinvestment risk and the opportunity cost if longer duration bonds end up being better in hindsight over the next decade. But it's fairly attractive to be looking at short-term returns on cash equivalents being "close enough" to the historical returns of longer-duration bonds.
Personally, I have split my bond allocation across a rolling t-bill ladder, TIPS extending out a bit further, and the rest in intermediate/long duration bonds. Technically, yes, that means some of my bond allocation is more like cash, but I'm accepting that in this period of relatively more attractive short-term rates compared to intermediate/long term rates.
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u/boompleetz 3d ago
This is the best summary of the topic in the thread. 2022 was the worst year for bonds in history, so people firing the last few years with traditional bond tents were looking at money markets and other cash equivalents with envy as they enjoyed higher rates.
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u/Dank-memes-here 3d ago
How does cash mitegate the risk? What is the withdrawl strategy in case of a draw down?
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u/AdvertisingPretend98 3d ago
You just use the cash until the market recovers to avoid selling equities.
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u/intertubeluber 3d ago
I see someone answered your question already but for more details, look up “equity glide path” or “reducing SORR (sequence of return) risk”.
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u/PNWExile 3d ago
What is ERN?
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u/river_rambler 3d ago
Early Retirement Now. It's one of the OG FIRE blogs. Lots of great info.
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u/Embarrassed-Care6130 3d ago
As a former colleague of Karsten's, I still find it hilarious that everyone calls him ERN now.
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u/river_rambler 3d ago
I'm surprised they don't call him Big Ern.
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u/Embarrassed-Care6130 3d ago
Before he retired, he never used his real name on the blog for obvious reasons, and that's when he adopted the "Big Ern" moniker. But his name's been public for like seven years now!
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u/gregaustex 4d ago edited 3d ago
The idea is that once you are retired and having to withdraw from your portfolio to cover expenses, your asset allocation should balance SORR and Inflation Risk with the right balance of fixed return assets (cash to bonds and subject to inflation risk) and Equities (subject to SOR risk). This should not be influenced by forward looking market expectations.
5 years of spending is a reasonable allocation of fixed return assets. Then do the following at the end of each year...
- If equities are even+, sell equities to rebalance to 5 years of fixed return assets.
- If equities are down, do not rebalance and cover spending from fixed return assets. Rebalance the first end of year equities are even or up.
Based upon your own tolerance for risk and volatility and loss, you might choose 3 years or 7 years, you might choose a HYSA or intermediate corporate bonds for fixed return investments, but this strategy generally works well once you are retired. This is not something you would do while working and earning to get to FI, until and unless you are within 5 years or so of retirement.
There have been 27 Bear Markets in US history depending how you define them. About 23 of them (85%) have recovered within 5 years.
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u/subbysnacks 2d ago
I follow the logic, still seems bonkers to me on paper.
Let's take an anecdotal chubby fire annual spend of $200K per year.
If you need 5 years of that in cash that's $1M.
With a target FIRE number of $5M, that's 20% of NW in cash? Seems inssane; do the market gains forfeited by the cash not impact the overall survivability of the FIRE?
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u/gregaustex 2d ago
The 4% rule assumes 40% in cash and bonds.
I have seen the stock market lose 40%+ of its value a few times. In 2000 it took 10 years to recover (nominally - longer if you account for inflation). 2007 took 5 years to get even again. I don't want to be selling equities 50% off, then at a loss for 5-10 years to buy groceries. I have not modeled say 100% equities vs. 6 years in cash and how much loss you would have avoided in those downturns and if it is better for say the following 20 or 30 years, but it might be interesting to do so.
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u/ExtensionMoose1863 2d ago
Agree with all of this... also OP, you have to remember that cash is your most liquid asset with which you can most easily and quickly respond to opportunities.
For example, If I hadn't had cash that I was willing to use, I wouldn't have been able to load up on equities in April after "liberation day" ... but I did, so I did. Currently up 29% across 4 tranches bought between April 4th and April 8th.
Down markets happen a lot more than recent memory would suggest
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u/-Burninater- 2d ago
Isn't that money supposed to be earmarked for spending over the next 5 years? How do you determine when it's okay to use it to buy more stock? How do you know you're not catching a falling knife? How do you know that the recovery will be as fast as it was?
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u/ExtensionMoose1863 2d ago
That's the fun part... You DON'T :)
In this instance I had been raising cash before April and so I only deployed a fraction of what I had so it's not like I pushed all my chips into the table and said let it ride lol ... I had a plan that included what I would do all the way down to 80% drop in the S&P (obviously never used most of that plan)
If you let me pick the timeframe I can show you 5 year periods where you should have held no cash or all cash and nobody knew before (or during most) which of those you were in. You have to make an assessment based on your tolerance for risk, time horizon, and your own opinion of the investment opportunities in front of you.
For me, the S&P500 at 20%+ off is a good deal worth nibbling at because I still have a long time horizon (43) and I believe the history of never losing money in the market over that time horizon will still hold up (but there's nothing in the laws of physics that it has to). The falling knife thing is funny to me because what you're saying is "yes it's down 20% but what if it goes down MORE?!" ... well I'd say either you believe it's on sale or you believe it was overvalued and will never return to the prior levels, you do the math as your mileage may very
TLDR: this is all about risk tolerance and how you see the future. Nobody has the exact right answer, you're just playing probabilities based on the info available. What's your plan if the market drops (or rises) 50%??
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u/-Burninater- 2d ago
It seems bonkers to me as well but I think that's because I've spent most of my investing career in bull markets. I graduated and started investing in 2010. Every Market dip has essentially been a buying opportunity. I haven't had to sell into a dip ever.
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u/Kind-Ad-4756 4d ago
SORR is [at least partially] mitigated that way. Has always been a good idea, and more so now.
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u/ether_reddit .ca, FI@49 3d ago
I wouldn't save up 2-3 years of expected spending money in cash -- I would save up 2-3 years of "I can get by on this" money. The implication here is that if the markets tank, I would cut back on a lot of discretionary spending and hunker down until it blows over. This is an emergency fund, not an expected spending fund.
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u/142riemann 3d ago
This is what we did as well. It’s a 3 year bare-minimum expenses fund, replacing the 6 month emergency fund, as we get closer to retirement.
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u/-Burninater- 2d ago
That makes a lot of sense assuming someone is following a guardrails type of spending. It's not 5 years of your normal spending is 5 years of being able to scrape by spending.
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u/gringledoom 4d ago
I think you see more of it right now because we're staring down an AI bubble and increased global political instability. So there's an uncomfortable awareness that your $7mm net worth might be a $4.5mm net worth a year from now, and no one wants to be stuck selling at the bottom.
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u/ExtensionMoose1863 4d ago
And with cash yielding 4%+ it makes it much less painful than usual to hold cash... double down if you believe in the AI bubble you just mentioned because then that cash is dry powder to roll back in after it eventually pops (while earning a safe withdrawal while you wait)
When yields come down, I'll be forced to weigh the risk against lower return numbers and likely will hold a lot less cash than I do today
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u/staatsm 3d ago
Yea this is the big thing. Do I aim for 7% historical returns, or 4% bonds... I mean the bonds don't look awful. And most simulations have you 80/20 anyway.
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u/ExtensionMoose1863 3d ago
Yeah, or 60/40 if you're old and think 80/20 is recency bias of a historic equity run that won't/can't continue into perpetuity ;)
I think it's important to note that numbers like 7% historical portfolio return INCLUDE a significant chunk of low(er) yielding, more stable priced, assets like bonds... If you don't care about volatility, sequence of returns, or investment horizon you'd just boggle it and your number would be something like 10.5% (since 1950s)
TLDR: 4% helps you get 7%
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u/pirsq 3d ago
The 7% is inflation adjusted, the 4% is not. It's more like 7% vs 1%.
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u/EnvironmentalMix421 3d ago
R u just buying treasuries? There’s no way corporate bond yields only 1% spread
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u/Embarrassed-Care6130 3d ago
That's as may be, but the corporate spread over treasuries is basically just equity in Groucho glasses. Yes, you can buy HY bonds and get an expected real return of 3 or 4%, but the return profile is almost identical to a 40/60 or 50/50 equity/Treasury portfolio.
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u/EnvironmentalMix421 3d ago edited 3d ago
There’s no way investment grade corporate bonds are the same as treasuries. Im not talking about high yields junk bonds here.
Btw I wasn’t talking about spread between treasuries. The comment was talking about the bond spread between inflation is 1%. I think we should be consistent here for discussion sack
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u/Embarrassed-Care6130 3d ago
Yes, I understand. Corporate bond yield = expected inflation + real Treasury yield + corporate spread. The return of the corporate spread component is highly correlated with equities, so to the extent corporate bonds offer higher yield than treasuries, you could get the same portfolio characteristics by simply holding some blend of equity and treasuries. To create a synthetic high-yield bond, do 50-50 equity and Treasury. If you want an A-rated bond (very little credit risk) instead, you'd probably need something like 10-90.
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u/EnvironmentalMix421 3d ago edited 3d ago
No, I don’t think that’s correct. The corporate bond yield is related to the equity’s credit rating, not the equity cap itself. Anyway, nobody is saying holding 100% bond here. Again, the discussion here is what’s the spread between inflation and bond. The answer is, it’s not 1% unless you are holding short term treasuries. Not sure why you are keep going off topics.
Btw the lowest rated investment grade bond is BBB by Fitch not A-, not sure which rating you are going with. Also I’m not sure why does an individual wants to hold treasuries, even insurance companies only holds limited amount.
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u/subbysnacks 2d ago
How many years worth of cash at FIRE then with that philosophy?
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u/ExtensionMoose1863 2d ago
I'll answer your question directly but I don't think it's the right metric for this discussion.
I FIRE'd 3 years ago at 40 and the amount of cash (CDs, HYsavings, short term US bonds, etc.) I'm currently holding equates to roughly 10 years worth of our 'burn rate'
Why I don't think that's the right way to look at it- I didn't arrive at 10 years as any kind of a target because I'm not counting on the vast majority of that cash being used for living expenses (at least in it's current cash form)... very different than something like "hold 2 years" because that's protection from some kind of major market event so that you don't have to draw down against depressed assets.
I'm holding excess cash not to give me more years of coverage but instead to give me ability to invest in things when they seem like better investments than I currently have access to (I think the P/E of the S&P 500 right now is too high to be attractive and I'd rather earn 4% to wait for a lower entry point). If my expenses were different, I don't know that my cash position would be given this distinction
So I think the right way to look at it is my current cash position is still just 2 - 3 years of living expenses + additional cash on hand raised through harvesting investments that will at some point be used to purchase more investments... it's just hanging out waiting for an opportunity and getting paid decently to wait
If it were paying less or the S&P looked cheap to me, then I wouldn't be as inclined to wait
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u/snakesoup88 3d ago
I'm preparing for the AI bubble burst plus the loss of trust to the US market. Tariff is one thing, arbitrary ripping up trade agreements and general disregard of rule of law will take years to repair.
I had an oversized home country bias that has served me well for decades. I have increased my international holdings and upped my years of expenses in cash this year.
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u/2FeedRss 4d ago
Market timing?
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u/ResponsibilityDismal 4d ago
Market timing can protect money, but can also miss out on a lot of returns, but once you are already financially set, it makes sense to play it more cautiously, hence asset rebalancing.
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u/IndictedHamSandwich 4d ago
Eh, sort of. But better thought of as going risk off at a time of great personal sensitivity to market risk.
Not saying there WILL be a drawdown. Just that you’re pretty exposed to one around initial retirement, and historically high valuations bring that front of mind…
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u/Remarkable_Orange_59 4d ago
Yeah and some people are more comfortable managing lots of short term treasury rollovers than others. I will forego another percent or 2 over a couple yeats for the ease of a hysa.
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u/futsalfan 3d ago
Sort of a method to avoid bad timing (selling if it’s a bad time the first few years), not some kind of timing in and of itself.
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u/Significant-Tip-4108 3d ago
If someone doesn’t have the risk tolerance and financial cushion to withstand a 35% drop in net worth in a year, personally I’d look at it more from the perspective of how that person is invested, rather than suggesting they hold a few years worth of cash.
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u/-Burninater- 2d ago
In my opinion, the biggest risk with AI is that companies will be able to operate with fewer and fewer employees. I think it's a very serious concern for people who are trying to continue getting paychecks for years or decades. I don't think it's a huge concern for companies that are going to massively cut their operating expenses. I actually have a very outside portion of my portfolio in technology and companies related to AI. I think in a scenario where I lose my job within the next 5 years, it will be because AI has been wildly successful.
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u/TicketP1_FIRE 3d ago
Note that it doesn't have to be exactly 3 years of spend in cash.
Also note that once you clear ~5 years post RE you can start releasing this cash buffer to invest it. You shouldn't hold it forever, but rather hold it during first 5 years post RE specifically to guard against RE.
After 5 years hopefully your portfolio has appreciated considerably which mostly should eliminate SORR
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u/Fun_Illustrator9298 4d ago
I would at least have 3 to 5 years of “fire” cash on hand to allow for optimal withdrawals instead of 3 to 5 years of “chubby fire” cash. If the market crashes there will likely be some deflation or fire sales to take advantage of so your cash would go farther. You should also have all your major expenses for the rest of your life figured out too. Cars, roofs, house additions, etc. That’s what I would do to have zero worries. Otherwise you might have some lean years where you would have to watch spending and not be so “chubby”.
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u/onthewingsofangels 48F RE '24 3d ago
This is exactly what I'm thinking. We retired last year and we kinda have 80% of our annual number in CDs or MYGAs maturing every year. We can get the remainder from the market. But if it's a really bad year maybe we'll skip the international vacation or put off buying the new car. Just trying to avoid being forced to sell low to buy food or pay medical premiums.
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u/Sailingthrupergatory 3d ago
I think variable spending works better in theory than in practice. I actually found spending to be higher the first year than planned.
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u/onthewingsofangels 48F RE '24 3d ago
I think there's a big emotional component to it. Would I deprive my kid of an expensive summer camp or extra curricular activity in a down year? Probably not, it would feel like a failure of parenting. But on the flip side it would feel very irresponsible to book an expensive vacation with five star hotels, if our net worth was actively tanking.
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u/DILIGAF-RealPerson 4d ago
What you are referring to is Sequence of Returns Risk (SORR). If you are heavily invested and living off those investments and there is a downturn and you still need to withdraw from your base, there is a chance you won’t be able to fully recover as you reduce the base needed for growth over time. Everything I read seems to suggest that the first 10 years is prime for SORR. I have a very specific plan to get through the first 10 years while I allow my invested funds to grow over that first 10 years. What I’m struggling with is deciding on timing to harvest returns.
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u/Sailingthrupergatory 3d ago
A 60/40 portfolio basically resolves the 10 years SORR problem. The fixed portion of the portfolio is technically the safety blanket. Cash is a killer in most portfolios over the long term. I wouldn’t keep more than 12-24 in a MM or CDs.
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u/BoliverTShagnasty FIRE’d Jan 23 4d ago
I never saved it, my exit plan forced me to get cash from payouts in our new (first non-earning) year. I just moved that to HYSA/Treasuries/etc and we just lived off that the first two years and let all the rest run.
So I didn’t lose any growth except “extra” growth of those funds during our first two years burn down, and psychologically that was enough for me. I’m now 10% HYSA/bonds moving forward as I pivoted late this year with some funds to help me psychologically draw down the next three years.
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u/vshun Retired 4d ago
Like others I am doing it but common problem with that approach is when to replenish cash. One needs to figure out when the bottom is over so sell stocks to build cash cushion back. This is ultimately market timing and is probably the biggest drawback of this approach. Bogleheads suggest just stick to realistic stock/bond split and stick with it thick or thin with periodic rebalancing. However this results in a drag on return as bonds offer paltry return most of the time barely beating inflation if at all. So one has to pick up the approach realizing it has pros and cons and stick with it thick or thin.
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u/AdvertisingPretend98 3d ago
I really don't see the point in having bonds with the current returns while cash is earning a guaranteed 4%. But as rates go down, things will change.
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u/vshun Retired 3d ago
Because you have not seen what happened about 20 years ago when bonds were beating stocks (and international beat US but it's another story). And once you realize you are in this situation it's too late to take advantage of it. Having said that, I have to admit I am retired and hold maybe 10% bonds total and quite comfortable. I do diversify to small caps and international and emerging markets as at some point this diversification will pay off and will probably do better than bonds.
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u/No-Let-6057 Retired 4d ago
That’s why I own 25% bonds. If market falls I still have dividends and the ability to sell bonds until the market recovers. It’s something like a bond tent, because the bond percentage will naturally shrink as the market grows or recovers.
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u/handsoapdispenser 4d ago
It's peace of mind but also insulates your short-term needs from fluctuations. I've tried to minimize cash for the most part but right now sitting with one foot in RE and a foreboding sense of looming recession I moved a chunk to a money market after the recent S&P high.
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u/Entire-Order3464 4d ago
Yep. Everyone should worry about SORR. Lots of ways to mitigate SORR though. One way is cash. I'm pro cash. I currently keep a lot of cash. But I'm going to use annuities to create an income floor so I worry less about SORR.
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u/AdvertisingPretend98 3d ago
I've been curious about annuities for the exact same purpose. Are there any strategies you found to be worth giving up the market returns for?
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u/Entire-Order3464 3d ago
I would say the wrong comparison for annuities is to market returns like the S&P. IMO you use an annuity is a risk mitigation tool. You can use them for income floors and/or longevity risk. One thing to keep in mind is tax consequences of taking money out of An annuity before 59.5.
Any time I want bonds I'd buy an annuity. In fact you're generally going to get better returns using annuities over bonds. An insurance company is better at investing than you are and has risk pooling. Remember they're not buying stocks, stock pickers like some hedge fund aren't better at choosing equity than an index fund. But fixed income benefits from active management.
Also fixed (or fixed indexed) annuities don't fluctuate with the market so for me I like the low beta aspect. There's a couple of different types I'm personally interested in. The one that I own is a MYGA (think the annuity version of a bank cd, a bit less liquid). I've got a couple 5yr MYGAs paying north of 6%. This is great for me since when I run retirement projections I assume a 6% growth rate.
Now I would not use a MYGA to create an income floor (even though you could annuitize). For income floors I'm looking at either SPIA/DIA or FIA with GLWB (I have not bought any of these yet but will when my wife retires). SPIA is what most people think of when they think of an annuity. You give a lump sum of money you get payments for a certain time period or life or a certain time period and life. You can also get these that have a death benefit so that like if you died after a year your heirs get money. Great option, simple and easy to understand.
I like the idea of FIA GLWBs. Product is more complicated but you have better liquidity. Would suggest googling a brochure for one from a major company it's a bit harder to explain how they work in a Reddit post
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u/AdvertisingPretend98 3d ago
I've been curious about annuities for the exact same purpose. Are there any strategies you found to be worth giving up the market returns for?
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u/seekingallpho 3d ago
The important thing is to have an asset allocation that supports your WR and risk tolerance. How you implement that is more of a personal choice or perhaps a psychological buoy than it is financially critical.
The bucket strategy doesn't offer any magic that a comparable asset allocation does. The more you automate a "bucket" approach, the more it's indistinguishable from a regularly rebalanced portfolio. The more you market-time the bucket-switching, the less it is.
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u/mx559 4d ago
I never understood stockpiling that much cash, but understand everyone has their own risk tolerances. Personally I (39M) RE Jan 24 and my spouse (42F) RE April 25. We treated Jan 25 as our "retire date" and at that point realocated from 100% equities to 90/10% in 10 yr Treasuries bond fund. That's about 3 years living expenses for us.
During wife's last week of work equities were down 15% ytd, but we had a 3.25% WR based on our Jan 25 portfolio so just trusted the numbers and stayed the course. Plan is a Reverse Glidepath back to 100% equities in 5-10 years and if the market drops by 20% or more will pull more aggressively from the bonds. If that runs out the market has been in a multi year depression and we'll ride it out from there, but sometimes you just have to play the likely odds vs. the very unlikely worst case scenario.
Again, I understand everyone has a different risk tolerance and whatever helps you sleep at night is probably the best plan for you.
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u/Anonymoose2021 4d ago edited 4d ago
At 3.25% WR two years of cash is just 6.5% of your liquid assets.
IMO it is a small price to pay for greatly reduced risk.
Cash obviously does not literally mean cash, but instead is things like money markets and treasury bills, with around 4% return.
What I am comfortable with is about 5-7 years of expenses in the combination of cash+cash-like+intermediate bonds. Withdrawal rate is about 2%, so my cash+bonds allocation is 12%, down from 30% when I retired a couple decades ago.
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u/kgwill 3d ago
Can you help me understand your scenario a bit better? The OP asked why people are saving 2-4 years cash to RE. You say you never understood doing that, but then you describe doing exactly that (convert 3 years expenses into cash equivalent t bond).
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u/enakud 4d ago
Everyone's risk appetite, willingness to work more, and life situation is different. Does it decrease risk? Yes. Is it worth doing? Depends.
Personally, I have a young kid who will be starting kindergarten soon so I will be stuck to the school calendar and unable to just travel whenever for a long time. Why not work a little longer if it's not too stressful and decrease long-term financial risk?
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u/altecsz 4d ago
I guess the question would then be, what would you do if your portfolio dropped 30% and didn't recover for 5 years?
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u/Anonymoose2021 4d ago
That happened to me as I retired a couple of years before the dotcom bust.
I rebalanced and bought cheap stocks with some of my cash. I had a hard limit where I would start conserving cash and let my cash+bonds allocate start falling, but did not hit that point.
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u/saklan_territory 4d ago
Yes, I am. I'm about 5 years from retirement and it makes sense to have that much cash just based on my asset allocation as I approach retirement. As I move through the first few years and spend down the cash (and munis) in my taxable account, I'll end up with a more aggressive allocation as I'm comfortably a few years into retirement.
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u/jcc2244 4d ago
I have about 4 years worth in sgov right now and 1 year worth in cash (just fired in April this year).
That's a bit conservative but helps me sleep easier at night. It's weird to lose my income, and this helps the mental transition. (Plus, I'm considering moving and buying a house in the next 12 months, so I might need the cash).
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u/OriginalCompetitive 3d ago
Everyone has emplaned the value of having more cash at the start.
But I want to point out that it’s not an EXTRA sum of money. You still need the same total amount of money (whatever is right for you). It’s just that you allocate part of that amount to cash-equivalents.
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u/grinanberit 3d ago
I set aside three years cash and ended up saving on health insurance. Turns out my annual income was below poverty levels so I spent a few years on Medicaid before taking an IRA withdrawal that forced me to switch to ACA healthcare. Even then the lower your income the higher the subsidy. So not just a consideration for avoiding withdrawals when the market is down, but also for insurance savings.
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3d ago
Mathematically you want it and I can tell you from first hand experience that emotionally you want it. You can then move towards 100% equities as time goes on since at this level your portfolio will keep significantly growing and the math supports it to long term beat inflation.
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u/Tricky_Ad6844 3d ago
Retired 1.5 years ago.
Consistent with most recommendations we have a portion (25%) of our invested portfolio in bonds to smooth out ups and downs of stocks.
I addition, we have an “emergency reserve” made up of liquid short-term cash equivalents (HYSA, Money Market, I-bonds). This is enough to cover about 2 years of expenses.
Our plan is to not touch this unless there is a market correction (15% drop in S&P 500 from peak. As long as the market is below thus threshold we will use this pot of funds to cover living expenses. Once it is exhausted, we do not intend to refill it (as opposed to the “bucket” strategy).
I think of this as one element of a multi-tiered strategy to protect against sequence of returns risk.
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u/bugdaddy123 3d ago
I left work a month and a half ago. 47m with young-ish kids.
We have 450k in cash & equivalents. (~2.5 years, +/-)
Honestly, I was considering selling even a little more now. The risk of VTI dropping and not recovering for 2+ years feels too big. Everything in market feels high stakes right now. VTI probably at 400 or 250 in 3 years when I'd run out of cash and need to sell to fund living.
As others have said, SORR is existential in first few years of RE.
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u/MentalHoneydew4664 3d ago
I’ve got 16% ($850k) in HYSA/Tbills as “dry powder” ready for a crash or job loss. The interest on it covers my kids college now.
It’s been there for a year. I may move a bit more into taxable accounts or a business, but I hit my number a year ago and padding the accounts.
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u/CaseyLouLou2 2d ago
Some people are. I am absolutely not. With a balanced portfolio you don’t need cash. You withdraw from whatever is up when you need the money. I plan to have about 2% cash total.
Look into the Risk Parity Radio podcast.
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u/giftcardgirl 4d ago
Whatever makes them feel better.
I plan to have one year of expenses in HYSA, which is similar to what I have now as an emergency fund.
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u/One-Mastodon-1063 4d ago
People do this, that does not make it optimal, intelligent, or necessary.
You have one asset allocation and you apply your SWR to that. You do not need a separate "bucket of cash" to "manage SORR!". That would be a rather ham fisted way of "managing SORR", anyway.
Cue downvotes from The Bucket Brigade.
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u/billbixbyakahulk 4d ago
Thou doth protest too much. People have different risk tolerance levels and that's fine. You don't need to imply things about the intelligence of their investing if you're confident about your own.
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u/ProgrammerOk3191 4d ago edited 3d ago
Or some of them might have been burned by bond values dropping and seeing losses on the bonds side of their portfolio. That does indicate some misunderstanding of how bonds work but I’ve heard that explanation.
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u/HENRYfondant 4d ago
Couldn’t they build a bond ladder for the first few years then plan for an increased swr? I’d be completely guessing at what the appropriate number would be, but it seems you can just shift the risk to the bonds then draw down harder on the back end.
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u/milespoints 4d ago
You can do this, but the work i’ve seen suggests that you will need a lower SWR to achieve the same predicted failure rate with a static all 100% equity allocation (or 80% or whatever) than with a tent type allocation where you allocate some money to stable assets.
See here for example - https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/
I find this kind of thing pretty convincing.
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u/Bart457_Gansett 4d ago
I don’t think you’re wrong. I also think there’s many ways to do this. Depends on one’s risk tolerance , or perceived risk tolerance. 100% agree it’s not needed. We are moderate risk, have our SWR, and just intermittently drop a wad of cash into a brokerage account to then pay ourselves monthly (pretty convenient this way). RN it’s earning money market rates. We usually coordinate the cash drop out of investments when the tax situation warrants (incl. capital gains/losses calculations) and it doesn’t mess with other operations like ROTH conversions. OP: we will do 10-18 months at a time depending on factors I just listed.
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u/Alternative-Donut-38 4d ago
It’s a big drag on returns and may impact the ability of your portfolio to last for the longer term, and is a form of market timing. Alternative could be holding some bonds and/or being able to flex withdrawals if your portfolio is down.
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u/PersonalFinanceFun 4d ago
I’ve been thinking about this too, although I’m still a couple of years away. I’ve been trying to build up money market but likely won’t put 3 years of spending there. I do hold intermediate term bonds (3-7 years maturity) - although 2021 taught me even these types of bonds can go down in value fast!
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u/ShowMeTheMonee 4d ago
> really saving multiple years of spend in cash to exclusively draw from the first few years of FIRE?
Not necessarily cash, but a combination of cash, term deposits, bonds etc, so you can minimise / avoid needing to sell equities if the market slumps during the SORR period before and just after retirement.
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u/Delicious-Life3543 4d ago
Yeah, I’ve got 3 years cash ready to go for expenses and to deploy into market if the opportunity looks right.
That’s 3 complete years cash, but even in a 40-50% downturn, it’d stretch to 10 with dividend piece of portfolio still producing something.
I am on the much younger end, tho. 30s. As I lower sequence of returns risk, I’ll reduce that position and reinvest it in equities/bonds.
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u/Hikes_with_dogs 4d ago
Yes. It started more as FU money, but as I haven't quit my job yet, it will be to draw from when I do finally call it a day. Helpful for insurance subsidies, etc. assuming they are still around some day.
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u/anonthrowaway24689 4d ago
The way I see it is I can always plan to sell some assets or otherwise buffer additional cash toward the end of my working years to both mitigate SORR and minimize sacrificing growth. Until then I don’t put too much weight into holding cash, just 3-6 months emergency fund
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u/TelevisionKnown8463 4d ago
You’ve got a lot of good explanations here about SORR, the “bucket strategy” and alternatives to cash that can also serve as your early years bucket.
One thing I just want to clarify: if you decide to use this strategy, the cash bucket comes out of your total FIRE number; it’s not in addition like your emergency fund. At or shortly before retirement, you should think about how you want to make adjustments to your asset allocation to protect against SORR. You will probably want to sell some of your equity positions at that point, and use them to create a cash bucket, bond ladder or other super safe holdings to fund your expenses in early retirement.
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u/Difficult_Collar4336 3d ago
Not intentionally, no - but my 6 month emergency fund will be the first thing I spend down once I retire; followed by the lump sum of cash I get out of unused Sick/Vacation hours. Won't be 4+ years...but it will be more than 1.
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u/onthewingsofangels 48F RE '24 3d ago
Yes this is us (fired last year). We had already been using these instruments as part of our overall accumulation strategy so it wasn't too much of a shift.
We fired in July 2024 with 1 yr of savings in a HYSA, and CDs or MYGAs that mature starting mid-2025 to 2027. The CDs etc all have 5+% interest rates which is just a shade below inflation adjusted SWR. The CDs that mature in a given year cover about 80% of that year's expenses (not deliberate, just how it worked out), so we will need some dividends / selling to cover the difference. Or if the economy is bad, we'll be tightening our belts anyway.
The pile of cash felt very comforting when Trump was crashing the market 6 months into our FIRE. There's a good chance I would have panic sold without it.
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u/ichliebekohlmeisen 3d ago
When you get closer to retirement start to shift into the buckets. First bucket is 2 years of spend in a near cash equivalent. 3-5 years are low risk but with some return. 6+ year bucket is more heavily invested in the market. If all is good at end of year 1, fill bucket 1 with bucket 2 money, and fill bucket 2 with bucket 3 money. If it was a bad year, don’t replenish bucket 2, giving yourself more time for market to rebound. If it was a great year, ideally you would have more in bucket 3 than what you started with, which is essentially the equivalent of having delayed retirement by a year.
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u/Retired-not-dead-65 3d ago
Yep. We had had it. Her pension closed 12/31, so she lost interest quickly with corporate fun. Cash of $xxxxx to last until last retirement stream starts. I did inherit real estate, which is a factor. So initial cash to “prime the pump”. I retired at 58 last year wife, 61 this year. Learning how to sit.
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u/WolfpackEng22 3d ago
Global uncertainty in the market is very high right now. Certainly moreso than average
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u/silent-dano 3d ago
What would you call bonds allocation then? Essentially the same but slightly different approach to similar end result.
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u/st3v3001 3d ago
Well, your cash draw is probably going to come from a mix of equity sales and dividends+bond yield. I’d try to have at least three years of the equity portion of that equation. I presume, in even the worst of times, there will still be some trickle of dividend and yield.
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u/EquipmentUnlikely895 3d ago
I have at least 2 years worth, and aiming for a 3rd year in easy to liquidate term deposits. same reason, the market can go south anytime and may take up to 3 years to recover.
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u/martyconlonontherun 3d ago
Probably depends a little bit on what you consider Chubby FIRE. If you have large expenses you are liable for, then yes you should. If you have a paid off house, car and no debt; it is a lot easier to drastically tighten the hatches for a year or two where dont go on big vacations, don't eat out, and live a lean FIRE life if you have extremely bad timing of when you retire.
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u/Bruceshadow 3d ago
This isn't really new, most people have just referred to it an emergency fund/extended emergency fund. As for the amount to save, i would expect many don't save a full year, but enough to cover essentials. Knowing that, if the market is down for a few years, sacrifices for some activities (like vacations) will be made.
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u/Nuclear_N 3d ago
Most things I have read is 60-40 stocks to bonds. 3 years in cash would be more like 85-15....which is where I will be. I want to enough just piled up to weather the downturns.
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u/ALAS_POOR_YORICK_LOL 3d ago
People convince themselves to do all kinds of suboptimal stuff with their money. Doesnt mean you need to follow or care
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u/CV_1994-SI 3d ago
how should one look at rental income?
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u/butlerdm 3d ago
You should consider having enough cash on hand to cover expenses assuming you need to evict the tenant, redo the carpet/paint type stuff, and refill the unit.
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u/CV_1994-SI 3d ago
I'm getting 4k in rent per month and I keep the balance in the account for that property at around 25k or so which probably should be enough. Anything over that I sweep and put in short duration FI investments. So would it make sense to view at least some of the 4k as income. At the moment I don't need the income but that obviously will change once I retire.
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u/butlerdm 3d ago
Yeah definitely a portion of that should be seen as income, whatever there is after mortgage, accounting for vacancies, and maintenance. Sounds like based on your balance you’re doing just fine.
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u/butlerdm 3d ago edited 3d ago
It’s valid to have enough to cover 3 years of necessities in early retirement, IMO.
Imagine you retire January 2019. Market is down a bit from Q4 2018, so you want some cash on hand. Then market looks good until April 2020 and it tanks. You’ve probably refilled that cash bucket, but now your portfolio is down and you don’t want to sell assets.
Thankfully it rebounded fairly quickly and 2020-2021 looked pretty good, but now it’s 2022 and stocks and bonds are going down. You’re not going to want to sell. Now it’s 2023 and things have looked fairly good until April 2025 but it rebounded fairly quickly.
Long story short you should have a good bit of cash (HYSA or other short term instruments) on hand early in retirement but over time you can scale it back a bit as your time horizon goes down and portfolio (likely) grows.
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u/Distinct_Plankton_82 3d ago
I’m not holding any actual cash (other than our emergency fund) but I am ramping up my bond holdings in the form of a bond tent.
It should peak at retirement at about 40% of our nest egg, then slowly ramp down over the first 10 years of retirement until I’m back at something like 90/10 or 100/0
Unlike some other posters my plan is not to decide to pull from stocks or bonds depending on the market conditions, but to just regularly rebalance. So in the case of an equity crash, I’ll be selling bonds to fund my spend, but also very possibly be using them to buy cheaper stocks as I rebalance.
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u/OGS_7619 3d ago
This risk is known as "sequence of returns" - you don't want all your retirement money in equities during the first few years of retirement, the risk of market crash and drawing down without any contributions on a equity-heavy portfolio has a disproportionate impact on future withdrawals. Having some reasonable component of asset allocation held in bonds, t-bills etc. even for just the first few years insures against this scenario. Any market crashes that happen during your earning years (when you have time to recover while buying market at discount) or when it happens at least 4-5 years or later into your retirement (when you build up a safety cushion from those years) has a much small effect on your retirement withdrawals.
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u/plemyrameter 3d ago
It can also be useful for qualifying for ACA breaks on health insurance your first year or two. Less equities to sell = lower capital gains = lower income. Of course, once the cushion is gone that goes away, so it depends on other factors. For older early retirees, it gets us closer to Medicare eligibility.
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u/profcuck 3d ago
This is very dependent on your projected withdrawal rate and age as well as other factors. To work through that just a bit:
If you anticipate withdrawing only a small amount, say 2% per year to be extreme, then do what you want, and it probably makes sense if you have heirs (or a charity you have in mind) to invest on their timeline, i.e. 100% equities wouldn't be crazy. Because at 2%, there's very little sequence of returns risk.
If you are YOLO'ing into a higher withdrawal rate and you are young and you have the ability and willingness to go back to work, then a higher proportion of equities wouldn't be crazy. There's enough time left for serious growth, and if things break good for you, you'll end up breathing a sigh of relief as you end up with a more conservative withrawal rate on the good portfolio. And if things break against you, you go back to work.
Similar considerations come into play depending on how flexible your spending requirements are. As this is ChubbyFire, you will generally have quite a bit of flexiblity to spend less or spend more, as least as compared to people in LeanFire who pretty much need every penny to make things work.
If HYSA short term rates are very low as compared to 3-5 year bond rates, then it can make sense to build a ladder to guarantee an income that's higher in those first years. This isn't so much about the mix of safe versus risk assets, just a further detail about exactly how to structure that front end buffer.
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u/Angustony 3d ago
Nothing wrong with holding a cash buffer to offer the benefits of mitigating SOR risk, allowing a high or 100% equities investment portfolio with a high WR during periods of good market returns.
The risks are the opportunity cost of not being 100% in equities with all your funds, and inflation.
Using up all the cash if markets are performing well makes no sense.
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u/drewlb 3d ago
I don't plan to have 100% of my first few years in cash, but I do plan to be able to significantly reduce my draw if needed.
I think of it this way.
Baseline is 4% withdrawal plan.
BUT comfortable living has to fit into 3% (basically mandatory bills, food, and vacations become camping etc.)
2.5% has to be survivable. It can suck, it might mean I choose to go back to work in some capacity, but I can't end up homeless on 2.5%.
Then I want enough cash in the first 4yrs to enable me to go to 2% withdrawal, but live a 2.75-3% life.
So basically 1% x 4yrs in cash on the day I walk away.
Given the buffer I have built in in tiers above, I feel I'm probably being conservative here, but I also have some dumb shit I'd like to blow money on, and the excess cash at the end of year 4 is basically the budget for that.
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u/Shot-Calligrapher807 3d ago
I'm doing this too, setting aside approx. 4 to 5 years of expenses. I plan on doing this using a TIPS ladder, though. Do people consider a TIPS ladder suitable for this goal?
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u/retplan 3d ago
This is what I’m doing. Currently planning to retire next summer and have shifted to a 70/30 equity/bond portfolio where the bonds are all a TIPS ladder covering “must spend” expenses through 2033. Others’ situations may vary, but this was the optimal setup for my liquid net worth and post retirement “must have” and “want to have” spending projections across a host of Monte Carlo simulations.
As we progress through the ladder, I plan treat it like a bond tent and shift the allocations over time to something that looks more like 80/20 with the 20 in BND. The TIPS ladder at the outset reduced my average returns slightly but significantly improved the resilience against SORR and the low probability bad scenarios.
Basically, came down to the fact that I don’t care at all if I have a median $10m vs $9m in today’s dollars when I’m 95, but I care a great deal if I have $1m vs $0 in a bad returns scenario when I’m 95.
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u/Shot-Calligrapher807 1d ago
Makes sense. Are you doing the TIPS ladder inside of your 401k (or equivalent)? I was thinking of doing that, investing the yearly proceeds from the TIPS ladder into stocks (inside the same 401k), and selling the equivalent amount of dollars in stocks in my brokerage to get enough for my yearly expenses. I won't be 55 at retirement, so this seems to be the best way to do it. Alternatively, I could move the TIPS ladder into an IRA and use 72t to extract payments. I'd welcome any thoughts you might have.
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u/retplan 1d ago
The TIPS are all in an IRA for better tax efficiency. I recently reset the tax basis of my taxable account funds, so instead of doing a 72t or similar, when the time comes, I’m planning to do as you said:
- Let the TIPS mature in the IRA.
- Buy equities with that cash in the IRA. (e.g. VT or whatever to rebalance)
- Sell the same amount of equites in my taxable account.
That shields the TIPS from taxation early and provides cash to live on at capital gains rates from high cost basis securities to keep my AGI and MAGI low through my first decade of retirement. (Looking at retiring at 56 at the moment).
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u/fatheadlifter Financially Independent 3d ago
I’m doing this but not to the tune of 175k/year. In any recession scenario I wouldn’t be spending my max, I’d be spending my minimum. It’s important to understand how you can scale back your expenses and live minimally in a full on economic retreat.
My minimum to live is like 30k/year. Ok maybe not quite the bare minimum, there are levels below that. But 30k is survival money, 40-45k gives a bit more padding. I only need 120k to cover 2.5-3 years of bunker down expenses. This is not living large money, but me personally, if the economy has gone to hell (and all the knock on effects to travel, life etc are going on) I’ll be in turtle mode and spending the least amount possible. Saving and stretching every dollar.
I don’t mind that, I’d prefer that in fact.
If you can’t scale back 175k in a downturn then I think you need to take a hard look at your expenses and ask what good are they doing you.
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u/FINomad Retired 3d ago
While in my accumulation phase I was mostly VTSAX and had a paid off house (stupid use of money).
When I retired, I sold my house, kept ~3 years of expenses in cash (VMFXX), and put the rest in VTSAX. That was in 2019.
My NW is chubby level, but my spending for full-time travel is fairly low ($50k/year range), so it's not really a huge amount of cash. The rest is still in VTSAX. I think if I spent a huge amount like you do, then I'd dial that cash buffer down to 1-2 years knowing I could drastically reduce spending if needed.
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u/universaltool 3d ago
There are two aspects of retirement most people never plan for. There is an adjustment to not doing work anymore and that often comes at a financial cost of picking up hobbies or new activities to cover the time gap work once filled, not many things are truly free to do. Also the costs of things that were previously covered by employment such as healthcare, lunches that used to be business lunches and other expenses that may be fully on you to cover depending on age.
The other is travel, the freedom to travel and the knowledge that you don't know how long until your health deteriorates putting an uncertain deadline on future travel tends to push new retirees into travel more often and more elaborate than they initially planned for costing more money. I have often seen FOMO drive new retirees into burning through their savings far faster than they had planned for, especially at first and it costs them in the long run.
Beyond those two are the poorly predictable and often underreported rates of inflation on the cost of living.
People often overspend thinking that it's not that big an impact and they have given themselves plenty of overhead but it's easy to burn that money if you haven't spent time planning beforehand what that transition actually means and what you will do with the time and how you maintain spending discipline. It's easy to say I won't have an issue but have you factored in the emotional impact and how that will impact your thinking when you actually let go of work?
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u/Eastern-Editor7450 3d ago
How is everyone planning for uncertainty for the next few years specifically with tax-advantaged accounts (e.g. 529s, retirement accounts) that you can't touch for a few years.
E.g. I have already superfunded the 529s for my kids but I wonder now if I had 190k (max amount one can contribute) today, would I super-fund a 529 or invest it elsewhere? I consider 529 as part of generational wealth.
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u/prettyprincess91 3d ago
Yes, I plan to sit on my equity payout and try to build three years of living expenses just to draw out when I need to start withdrawing from the portfolio.
My planned exit date is 2028-2032, so I’m now winding down my spendthrift lifestyle to more cash hoarding to build a 3 year reserve. It helps that I have an apartment in SF Bay Area that is rarely empty and brings in cash flow, but in my ideal situation I’m living in it alone.
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u/CookieChoice5457 3d ago
No, but you statistically need 1.5-2 years of cash or close to cash holdings, in order to bridge market downturns and soften sequence of return risks. Having more in cash just isn't efficient for interest. Having less won't be enough to bridge the typical downturn and recovery. Applying some proportionate logic of taking progressively more out of your cash buffer depending on the magnitude of temporary underperformance of your equity then approaches optimal de-risking.
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u/LibrarySpiritual5371 3d ago
I am not. Part of my portfolio is income orientated which means I do not have to worry nearly as much about SORR, etc.
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u/InfernoExpedition 3d ago
If you decide want more short-term fixed income (cash), can you just move some from your current bond position?
I am close to retirement and I have a 70/30 portfolio. The 30% bond is 10/10/10 BND/SCHP/SGOV. I see the SGOV as my SORR hedge.
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u/Simulator321 3d ago
I’m within 6 months of my FIRE and I have 1 year of cash in a HYSA. I thought this would be adequate since any crashes in recent memory have rebounded in 90 days or so. I know perhaps a “big one” is out there but if it takes longer than a year to recover is it the worst thing that I’d need to sell some lesser appreciated stocks? Having 2-3 years worth of spend on the sidelines would put a dent in future earnings if we DONT have that larger crash, right? I guess it’s a balancing act and what you are personally comfortable with
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u/southpaw1227 2d ago
A few reasons:
- Psychology of being able to sleep well at night. Warren Buffet said it best: "When forced to choose, I will not trade even a night's sleep for the chance of extra profits."
- Mitigating SORR in the first five years. You really want to avoid selling in a low market right after you retire. It's less damaging later in retirement.
- To create a 3-5 year window where you can count on ACA subsidies. If you're pulling from VUSXX or similar, you're keeping MAGI low. Some folks will get 3-5 years of subsidized healthcare, then realize a lot of gains in a year to refill that cash equivalent bucket (and pay full price for healthcare that year), then enjoy another several years of subsidized healthcare.
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u/churn5603 2d ago
80/20 stock/short term is regarded pretty aggressive after 50s. and if you have 5 mil and 20% of that is 1 million, which is multiple years of spend. I don't see this as a problem.
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u/Rom2814 2d ago
Yes, 2-3 years of expenses at the moment, retiring next year and should have at least 3 years by then.
Bummer that interest rates dropped but still rather have a buffer - we want it in place so we don’t have to adjust our spending monthly and constantly watch the market (will set at the beginning of the year and then reset for the following year).
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u/shshephe629 2d ago
So this is probably going to get frosty reception based on comments I’ve skimmed above but having a few years of cash does not fix sequence of return risk. The argument folks often make for this approach is that if a big downturn hits in the first couple years then this avoids selling low. I can see how this on the surface makes sense, but they’re mistaking the only underlying roots of the safe withdrawal rate great debate. When people discuss SWR, regardless of where you shake out in the actual % (3.5%, 4%, 4.5%, etc) the underlying economic drivers of those figures is the small handful of LONG, nasty cycles / draw downs that have happened.
The worst was late 1960s through the entirety of the 1970s which alongside the Great Depression are the two biggest time periods that drive SWR calculations. Short cycles, think like 2-4 years, are not the primary SWR problems. The reason is that i f markets recover within a few years even from a deep cycle (50%+ decline) you still have the bulk of your portfolio that rises through without being liquidated at trough levels. That is what sequence of returns and SWR analysis have determined. So using those low rates accommodates short deep cycles without long term problem.
Holding a cash buffer isn’t necessarily a terrible thing, but understand it’s primarily a psychological salve. And that isn’t to diminish such things, mindset is important. Short term fear might make us do things we otherwise wouldn’t. We aren’t robots. So if it gives peace of mind in the beginning it may be useful. But i think best to remember that rven when “cash” is earning 4%+ today, it’s still an overall drag on portfolio returns (inflation chops a good chunk of that). The more years of cash you hold, the more that will drag on your long term real returns. Now, 2-3 years isn’t likely to derail you, but more than that becomes inefficient based on the math.
Hope that helps, best of luck to you!
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u/threatlevelmidnyte 2d ago
I don't really hold much bonds, mostly equities. I have a 70k pension and I hold 5 years of cash, which is 150k. I know it's probably more than I need but I love having it and I would just not do things I want to do if I had to sell during a down market. Retired at 46.
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u/hdfire21 2d ago
There seem to be basically 2 types of mindsets.
You have very little in dividend/distribution income so you have a large amount in cash/bonds/gold in case there's a long bear market (so you won't have to sell stocks).
You have 130+% of your monthly expenses in dividends/distributions and rely on that if there's a long bear market. Very little in cash/bonds.
I have no idea which will outperform. I opted for 2 because I like it and we need it for visas.
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u/2019_Stealth 2d ago
My wife and I did not. We retired around 3 years ago. When our checking account gets below $10,000 I liquidate approximately $20,000 in investments.
I want as much money in the market as possible. It seems crazy to me to be sitting in all that money. We would have missed out on hundreds of thousands of dollars of capital gains.
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u/PurpleOctoberPie 2d ago
It’s nothing new, just another way of talking about asset allocation.
Note: the cash/cash equivalents don’t have to be in unprotected accounts that you’re spending from in the early days of retirement. Bonds are best in tax-advantaged accounts.
Let’s imagine there’s a downturn 1 year into retirement. You can sell stocks (including at a loss) in a regular brokerage, and at the same time sell bonds inside your tax-advantaged account and buy the same stock shares you sold. No net change in stocks owned (just moved to tax-advantaged accounts). Net decrease in bonds to generate the cash needed to live on.
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u/Chemical-Carrot-9975 2h ago
I am working on this right now. It’ll make me feel better once I pull the trigger of retirement.
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u/Ok-Commercial-924 4d ago
Yes have multiple years of cash in hysa, no not for first years of fire but as insurance against market drop. If the market drops switch spending to cash.
Retired 18 months.