Author Topic: All Money In Cash, Market at All-Time Highs, Just Entering "Retirement"  (Read 1972 times)

investor2019

  • 5 O'Clock Shadow
  • *
  • Posts: 3
I'm 40 years old, recently left full-time employment having saved enough money ($1.25 million) to cover my monthly expenses ($4k/month) at a 4% withdrawal rate. I've read in many places I should be financially free, since my income from a 4% withdrawal rate on my investments exceeds my monthly expenses, but I don't feel quite "free" yet.

Here is my dilemma, all of my money is currently in cash, including $1,050,000 in my brokerage account and $200k in my IRA account. A good portion of my savings to date, roughly 65% of it, came in the form of RSUs (restricted stock units) from my previous employer which appreciated greatly over the past 5 years. I had so much of my net worth in those RSUs, all other income went into a money market fund earning nominal interest. I have since sold all of my RSUs and now all of my money is in cash.

I have some self-employment income which ranges from $5k to $10k each month, but not sure how long that will continue until I need to find something else to make a little side money each month (if needed). I've paid my house off in full, and my largest expense each month is COBRA at ~$1,700/month, followed by housing expenses at ~$1,300/month (e.g., property tax, HOA, insurance, etc.). There are expenses I know I can reduce, like insurance from COBRA to ACA and will do so once that runs out.

I read a post by MMM about entering "retirement" at the beginning of an economic cycle, say in 2009, vs. being 10 years into it (or some would say at the end of the cycle). Given we are at all time highs in the stock market, what is the most prudent way to get back into the market? Is it still recommended to own 100% VTI at all-time highs or would you allocate a portion of money into BND (if so, how much)? If there are other alternative investments too, that would be of interest.

Please let me know your thoughts on how you would recommend proceeding. Any guidance and advice would be greatly appreciated based on where I'm at and the current economic climate. Thanks for your time!

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 1907
  • Location: Seattle, WA
Portfolio construction is a very complicated topic (can be, anyway), and there are a number of valid, but differing viewpoints.   However, very few people would recommend 100% VTI in the first years of retirement.   The reason is called "sequence of returns" risk.  Basically, a bad series of returns early in retirement could deplete your portfolio before a good series of returns can restore it.  The SOR of returns is actually more important than the total rate of return over your retirement.   So you likely be more bond heavy than you would be in the accumulation phase.    This article has some insights: 

https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

You do have a hedge against the SOR risk already in that your self-employment income that exceeds your expenses.   


GoCubsGo

  • Stubble
  • **
  • Posts: 179
  • Location: Chicago Burbs
I've spent hours reading this blog. Extremely well thought out comparisons of various Sequence of Returns risk ideas:

earlyretirementnow.com

TheHardenedInvestor

  • Stubble
  • **
  • Posts: 101
All Money In Cash, Market at All-Time Highs, Just Entering "Retirement"
« Reply #3 on: June 08, 2019, 03:55:44 PM »
Sequence of return risk is a very real thing, but ultimately, you should never be out of the market completely, because insufficient return risk is also a very real thing that will make 4% unsustainable over the long term (30+ years). Essentially, it boils down to a stock allocation between 50% and 75%. I personally wouldn’t be below 50% so young. Would I drop 100% tomorrow into a VTI in your position: no. Would I do 50% into VTI: I would. This is such a personal thing and so situationally dependent. Congrats on your net worth, but invest you must.

marty998

  • Walrus Stache
  • *******
  • Posts: 6490
  • Location: Sydney, Oz
Keep 2 years of expenses in cash, invest the rest equities.

Go sleep soundly at night.

MaaS

  • Stubble
  • **
  • Posts: 152
I see this as more of a psychology question than a numbers one. You'll probably get a number of "invest it all tomorrow" type responses. It's an option, but I'd drive myself crazy watching the market.

Sure, it's "market time-y" but I'd ease in and DCA it. More because I'd sleep better at night.

Body Surfer

  • 5 O'Clock Shadow
  • *
  • Posts: 30
AA 50% S&P 500/ 50% cash will do well. Start entering market now and dollar cost average through x-mas

Trevor Reznik

  • 5 O'Clock Shadow
  • *
  • Posts: 78
5 to 10k of 'side income' each month.  Hardly retired, at least in terms of income.

Classical_Liberal

  • Handlebar Stache
  • *****
  • Posts: 1148
  • Age: 43
I don't have it in front of me, but can link later if you're interested.  The research shows that with CAPE at this level DCA'ing over a long period will beat a lump sum total market investment. Your biggest risk with cash in the short term is missing out on potential returns or sudden inflation.  Over the long term this level of cash is a bad idea for almost every reason, however, it's not an emergency. Take your time, figure out how you want to invest. This forum has amazing amounts of  in depth, intelligent discussion regarding various strategies and passive allocations, use it.

Maenad

  • Pencil Stache
  • ****
  • Posts: 515
  • Location: Minneapolis 'burbs
Also, if you look at a graph, the market spends a lot of time near "all time highs" when you can only see the past. So that's your psychology working against you.

dayzero

  • 5 O'Clock Shadow
  • *
  • Posts: 12
Not sure why you think the 4% rule applies to you. 4% does not provide a safe perpetual income stream, it gives a 65 year old an 85% chance of not running out of money by 95. If you want to really educate yourself on safe withdrawal rates, read this whole series:

https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/

Ynari

  • Pencil Stache
  • ****
  • Posts: 527
  • Age: 27
DCA or put in 50% while you research and write an investment plan (either with or without the help of a financial advisor). As simple as "X% stocks, Y% bonds" or as complicated as a glide path with thought for what happens if the market absolutely tanks in the next year or two when your risk is highest - make this decision after reading everything you can about the topic, balancing the risks and benefits, etc. Once you have that, hopefully you are psychologically ready to lump-sum into your chosen plan. Rebalance annually to stay on your plan.

Sequence of returns risk is a tradeoff with inflation risk. The goal is to find a balance that optimizes your scenario and helps you sleep at night. But more than 50% in cash for too long is a pretty risky thing to do.

pecunia

  • Handlebar Stache
  • *****
  • Posts: 1192
This is a good post.  I'm going to retire at the end of the year.  I'm OK with the stock market as it is, but I look at that 100 year Dow Jones curve and man it just looks like it is ready to take a tumble like 1929 or 1965,

https://www.macrotrends.net/2324/sp-500-historical-chart-data

Just look at the chart.  This isn't logarithmic.  The only correction factor is inflation.

So - I've been saving cash and contributing very little to the equities lately.  It's been sort of flat anyway.  I figure when it takes a dive, I can live on the cash and wait for it to recover.  However, it took 30 years to recover from 1929 and 1965.  The average correction is 18 months.  I can take 18 months, but in 30 years I'll most likely be pushing up daisies.

Would bonds be better than cash?

Classical_Liberal

  • Handlebar Stache
  • *****
  • Posts: 1148
  • Age: 43
Just look at the chart.  This isn't logarithmic.  The only correction factor is inflation.
It also doesn't include dividends, which used to be a much larger portion of total returns (more importantly provided cash flow for withdrawals without selling), so don't let that chart fool you.  Although there have been a few, far between 20 year periods where a total US equity portfolio still did not quite beat inflation.
Would bonds be better than cash?
Decide for yourself.  This is an excellent primer on why bonds still work at low rates.  This is some good info regarding bond tents/equity glidepaths.

If you are afraid now, you will be more afraid when you're retired.  You need to change something.

vand

  • Bristles
  • ***
  • Posts: 343
  • Location: UK
Some smart posts on this thread.

Current valuations are the single biggest factor in long term (10-15yr) future return, so ultimately the more expensive a market is, the less exposure I want to it, but that said there it would have to be exceptionally expensive for me to get out completely. I'm about 1/3 in general equities, and if markets continue to rise and doubled from here and went to a P/E that exceeded dotcom peak, I could see myself scaling back to 2-3% of total portfolio value.

Over time my view has come to be that investors most likely to reach their goals are not those who can stomach the most risk, but almost exactly the opposite... those who the understand the importance of asset allocation in mitigating risk. The research shows that the biggest factors in successful retirement planning are the saving rate and asset allocation.

https://supplychenmanagement.com/2017/08/11/savings-rate-crash-course/



pecunia

  • Handlebar Stache
  • *****
  • Posts: 1192
Just look at the chart.  This isn't logarithmic.  The only correction factor is inflation.
It also doesn't include dividends, which used to be a much larger portion of total returns (more importantly provided cash flow for withdrawals without selling), so don't let that chart fool you.  Although there have been a few, far between 20 year periods where a total US equity portfolio still did not quite beat inflation.
Would bonds be better than cash?
Decide for yourself.  This is an excellent primer on why bonds still work at low rates.  This is some good info regarding bond tents/equity glidepaths.

If you are afraid now, you will be more afraid when you're retired.  You need to change something.

I'm not lying awake at nights thinking about it.  I just don't want to go back to work.  I'm old enough where Social Security should be there.  The pendulum is swinging away from those folks who wanted it gone.  Good answers.

jeroly

  • Stubble
  • **
  • Posts: 135
Not sure why you think the 4% rule applies to you. 4% does not provide a safe perpetual income stream, it gives a 65 year old an 85% chance of not running out of money by 95. If you want to really educate yourself on safe withdrawal rates, read this whole series:

https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/

Based on the Trinity study you should have a 95% chance of having money left after thirty years, not 85%.

That having been said, you're looking at about a fifty year horizon, not thirty, so the 4% "rule" isn't really appropriate.
« Last Edit: June 10, 2019, 06:43:11 AM by jeroly »

jeroly

  • Stubble
  • **
  • Posts: 135
.A good portion of my savings to date, roughly 65% of it, came in the form of RSUs (restricted stock units) from my previous employer which appreciated greatly over the past 5 years.

I trust that you've set aside the $$$ you're going to need to pay in taxes on those shares? You're likely in for quite a hefty tax bill which will significantly reduce your NW if you haven't already netted it out.

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 1508
If you will be allocating half your portfolio to stocks anyway, you could today sell 21 put option contracts on SPY at the $285 strike for about $7,070. In 30 days you’ll either be holding the same cash you’re holding today, plus $7070, or you will have bought your $589k allocation of stock for retirement at a few dollars per share cheaper than today’s price, plus collected $7070.

If the former occurs, you can repeat the cycle next month and earn another $7k. Basically you’re earning 14% annualized until you succeed at finally buying stock at a small discount.

Just an idea of the possibilities for you.

SimpleLifer

  • 5 O'Clock Shadow
  • *
  • Posts: 58
.A good portion of my savings to date, roughly 65% of it, came in the form of RSUs (restricted stock units) from my previous employer which appreciated greatly over the past 5 years.

I trust that you've set aside the $$$ you're going to need to pay in taxes on those shares? You're likely in for quite a hefty tax bill which will significantly reduce your NW if you haven't already netted it out.

Great thread!

@jeroly - some employers sell x shares when the RSUs vest (sell-to-cover) to cover taxes.  With ISO shares, stock could be exercised, but not sold, therefore postponing a big tax bill, but RSUs explicitly prevent employees from using that as a way of building equity while avoiding tax.

OP may be in that situation, where taxes have already been paid.  Depending on when RSUs were sold after vesting, there may still be CG, but if the OP sold at vesting time, tax was already deducted.

investor2019

  • 5 O'Clock Shadow
  • *
  • Posts: 3
@jeroly @SimpleLifer Taxes were paid when RSUs were sold as you described. You only pay additional tax on additional capital gains if the stock appreciated from the time the stock was vested to when it was sold. Luckily, all taxes have been paid in full.

@ChpBstrd Thanks for the idea of selling puts as a way to take ownership of stock, whether SPY or VTI.

Started a new thread about current holdings and asset allocation to keep things separate.