Five Years of Cash





Ok, the title is a little misleading, but the truth is that the more liquid assets you have available to you for the short to mid-term time frame, the less likely you are to be subject to the vagaries of Mr. Market.  Most financial advisers will tell you that you need to make sure you have at least 6 months expenses in an “Emergency Fund”.  This is especially important in the accumulation phase of your plan.  If you hit an income bump (a layoff or unexpected job change) you want to make sure that you do not have to access your retirement savings in order to eat or pay the rent.  But when you are late in the accumulation phase, or in retirement, the calculation is different.  A big drop in the market can materially affect your plan, or your ability to soldier on if you are not sufficiently liquid at the time of the drop.

Because of where I am in the continuum, the calculation is a little different.  I will have all of my retirement funds either in the broad market (or other similar investment that has a reliable long term prognosis – think peer to peer, or real estate) or in cash or cash equivalent, with the latter being what I propose to use to pay ongoing living expenses going forward.  In evaluating my planned cash (really, liquid asset – some bond funds will be involved here, I looked at two numbers:  First, what my necessary expenses in retirement would be (those I cannot live without like housing, taxes, insurance, food, medical etc.); Second, what my desired living expenses would be in retirement (all of the first ones, plus what I’d like to do such as travel, eat out more often, movies and theatre, etc.).  The evaluation of these two numbers resulted in the second being about double (175% actually) of the first.  My goal is to have 5 years for the necessary expenses which would translate to about 3 years of  my desired expenses.

Why those numbers?  We all know that markets go up and markets go down.  Sometimes they stay sideways for extended periods of time.  But, at least so far, the general direction of Mr. Market is up.  After a big sell off the market most often begins to come back in 1 to 2 years at the most.  What I want to do is to protect my investments so that I don’t have to sell them at the bottom of the market.  By having the cash, or easily liquidated and reliable investments, on hand to meet necessary expenses for a couple of years, I keep from having to sell equities at a fire sale price in order to meet current requirements.  I’m giving myself the breathing space I need for the market to recover, should there be a downturn (and there almost certainly will be).

As a part of this process, when times are good, or at least not too bad, I plan to sell what assets I need to in order to replenish my cash supply every year.  If I have to wait a year to two for things to get better, my cash hoard will allow me to do that.  This should allow me to sleep a bit more soundly.  At least that is the theory.  We’ll see what happens when the inevitable recession comes calling.

As to what I will do with 5 years of cash.  I will keep one year in the bank in good old American money, and the other 4 I will stagger in a bond ladder of sorts by buying defined maturity ETFs that mature each year.  I’ll get some interest on those (even in today’s low rate environment), and loss of principal is extremely unlikely.  Defined maturity bond ETFs are funds that invest in bonds that all mature in the same year.  So you could buy a fund that matures in 2020 and it will be comprised of bonds that expire in a tight time frame in 2020.  I’ll write more about this concept in the near future.

The ability to ride out the ups and downs of Mr. Market gives me the best chance to be able to maintain my desired standard of living, and keeps me from having to cannibalize investments that have been temporarily disadvantaged by Mr. Market’s whimsical ways.

Until Next Time, FIRE On! – Oldster

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2 Responses to Five Years of Cash

  1. John R says:

    Interesting post, something I can relate to & BTW, being in your 50’s is not old, at least that is what my 98 year old FIL keeps telling me. Outside of the investing or dividend income discussion, we are 70 year old seniors both born in 1947, married at age 20, that retired twice in our lifetime, first in our early 40’s (to go do a graduate degree while having two small children) returning to the workforce 3-years later then final retirement at age 63 – I really enjoyed my work life & yet within 90 days after retiring it was all a blur. We had our children late, the youngest had just finished College/University when I retired from the daily grind at age 63. Both children paid their own way through college … is there any other way!

    Term life insurance till either the children leave home or reaching final retirement. I stopped the life insurance at age 63.

    Our claim to financial fortitude was being mortgage free at age 27 from having a ‘hacker property’ [rooming house] that we also lived in bought when we were 21

    On the “emergency fund” [cash reserves/real cash] – our’s is that for every year in retirement since age 63, we have one year added to the previous year for each. It’s been 7-years now and therefore have 7 years of the ‘all-in’ living expenses based on the previous year expenses. Since our expenses are running in the 31% to 33% average, we cash flow/save 67-69% of our income, should there be a economic devastation, meltdown, depression or whatever – then I think we’d be survivors.

    As long as we stay healthy (planning on living to age 100) at some point, likely age 80 we shall stop putting aside the [real] cash reserve.

    On the cash, that I call ‘cash reserves’. This is pure cash & I mean dollar bill type, it’s not in a bank (what if there is an overnight ‘meltdown’ or run on the banks’ we wouldn’t have access to that cash if it was tied up in bonds, brokerage account or the bank. No metals, diamonds, nothing that we could sell that would give us cash. In a meltdown the home we live in is useless value, the 15 year old SUV we drive has 3rd party liability insurance. We have a panty/freezer of food that would last us one-month.

    Could we move somewhere else, another location, maybe another country – yes we could, we have that option because we (wife & myself) each have three different passports.

    So what are our expenses living in this Metropolis just outside downtown Toronto, Canada where in 2016 the property taxes 25% , utilities 20%, medical/dental 4% of our monthy expenses in 2017. Up here in Canada we have government medicare plus most prescriptions paid for. Dental is pay as you go

    Excluding vacations capital expenses, we will be under $2000/mth. 2016 was $1882/mth average, throw in the other that was travel, the final tally all in every possible expense dollar was $2050.38

    Based on our relatively not so rich joint income in our golden years I think we are doing just fine. Should we or could we increase or income, yes & no, but with a better than 67% cash flow after expenses we manage to give cash gifts to our two adult children twice a year. Equally divided, one each on their birthday & Christmas the total amount combined in 2016 was $20,000, will be the same in 2017.

    Given the period prior to having so much information available on the internet, I started planning the future years when we first reached FIRE in 1992. It set the stage for the eventual golden years post age 63. We are not introverts, we have travelled lots, lived & worked in several countries along the way. Life has been great.

    Different strokes for different folks. Each finding their own FIRE.

  2. Oldster says:

    Thanks for the comment John. Sounds like you guys are pretty well set. I’m impressed that you have tracked income/expenses as well has you have. I always knew that was something I should be doing, but it wasn’t until I started participating in the online community that it really took hold. I imagine that, when I was younger, if I had access to the information out there today, my “now” would look different.

    Also agree on paying for college. My wife and I bootstrapped our way through and it didn’t hurt us a bit. I worry that education has become so expensive that kids won’t be able to afford it the way that I did it, but where there’s a will . . .

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