Before you FIRE, you should have a drawdown plan for how you plan to access your funds. If your plan includes having a large cash buffer, then you should start building it as your approach your date. If your plan just includes your normal cash buffer, there is no reason to build a bigger one now.
The cons are always the inflation and growth drag of cash. The pros are that if there happens to be a crash, you don't have to sell stocks (but you should have bonds, anyway, which generally don't crash as hard). Also, a bigger cash buffer may be helpful in controlling taxable income if you are looking to hit a sweet spot, such as for ACA subsidies.
Yep! I've got the drawdown plan
here. I'm planning to take the dividends first, sell shares for the rest of my normal living expenses, and do Roth conversions each year up to the standard deduction.
I wasn't intending to build up a large cash buffer - 1 to 2% of my total NW should be plenty. In general, I agree with the MMM philosophy that every dollar should be put where it earns the highest expected return. I'm keeping some cash on hand in an HYSA solely as a source of emergency liquidity just in case any big unplanned expenses come up in the first year or so of retirement. If none do, I'll gradually spend it down on decadent vacations. :)
My thinking was more along the lines of, given that stocks aren't recommended as a place to park money you'll need in the short term, is it worth investing cash now that I'll just have to pull out again in a few months? Should I be building a cash runway for myself now, to smooth out any market swings at the beginning of retirement?
Given your 3% WR, I might consider buying some put options with this year's cash flow to protect yourself from a first-year SORR event that wouldn't matter anyway at a 3% WR, but could be emotionally stressful. If the puts end up worthless, they'll be handy as tax write-offs anyway, which would allow you to move more assets into a Roth acct.
That's a very interesting idea. I've never looked into options in detail, I thought they added a lot of complexity to a portfolio for only a small expected reward. But I didn't realize you could claim an unexercised option as a capital loss. That does change the picture somewhat.