Author Topic: How Much In Cash Savings Leading Up to FIRE?  (Read 1526 times)

iluvzbeach

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How Much In Cash Savings Leading Up to FIRE?
« on: December 28, 2018, 12:28:01 PM »
Hi everyone, I have a question I wanted to run by the group.

I'm right at 18 months from my planned FIRE date and DH FIREd shortly over two years ago.  However, I may FIRE in the summer of 2019, depending on how I feel about my job at that point.  Future RSU vesting is what keeps me doing the daily grind.

My question is how much (in terms of months or years) cash, non-retirement, most people think is a good idea to have on hand vs. in the markets.  I ask because, today, we have one year of living expenses in a high-yield MMA and in the past six months have transferred another two years' worth of expenses up to Vanguard.  Now with the markets being down, I am second-guessing myself on having moved the other two years' worth into the market.

I am interested in how others handle this and whether you keep just one year of non-invested savings on hand, or more.  Part of me thinks we have time for the markets to recover before the second and third year of funds would be needed and that losing out on potential gains would be foolish, but the more emotional part of me would rather that the cash be available and not subject to the fluctuation of the markets.  I am not currently losing sleep over this but if the markets were to go down another 20% or so, I might.

I am not doing a case study here, but will mention that we have zero debt, own our house free and clear, and have no dependents outside of the two of us.  In the event we needed to, we could certainly cut back and make the current cash on hand last more in the range of 18-21 months - 24 months might be a bit of a stretch.  Our retirement accounts are very healthy and we're continuing to max my 401K, our HSA, DH's IRA contribution (+ catch-up) and DH's HSA catch-up contribution.  Of course, this would change if I were to pull the plug on working.  We do not plan to tap into DH's retirement funds until at least 2020, preferably 2022 or beyond.

So, back to the question, how much non-retirement, cash savings do you FIREd folks keep outside of the markets?

Thanks for your input.

frugaliknowit

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Re: How Much In Cash Savings Leading Up to FIRE?
« Reply #1 on: December 28, 2018, 01:03:45 PM »
What is your withdrawal plan once you FIRE?  What is your non-cash/MM invested in (100% equities?  50/50 stock bond, etc....)?

One year of cash reserves drawing 4% from 100% stocks sounds freagin' scary to me...!

S&P return 2000-2009 was NEGATIVE.

iluvzbeach

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Re: How Much In Cash Savings Leading Up to FIRE?
« Reply #2 on: December 28, 2018, 01:16:19 PM »
Beginning in 2022, we will do a mix of retirement distributions and DHís SS, along with cash, to keep taxable income low enough to get favorable ACA subsidies, provided itís still around. In the years leading to 2022, weíll do primarily cash (non-retirement).

Investments in the market are 75% VTSAX and 25% bond funds.

slow hand slow plan

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Re: How Much In Cash Savings Leading Up to FIRE?
« Reply #3 on: December 28, 2018, 01:43:44 PM »
Not scary at all really.

If you pulled 4% of your balance from a broad market index starting in 2000....You would still have more money than you started with today. with no year cash buffer at all

Abe

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Re: How Much In Cash Savings Leading Up to FIRE?
« Reply #4 on: December 28, 2018, 06:04:11 PM »
Keep in mind that the withdrawal rate is not binary. You are allowed to withdraw less than 4% and no retirement police will arrest you. Withdraw at 2% and get the other half from cash - now your reserve time has doubled with minimal loss to your long term solvency. Itís extremely unlikely  that 2% in one year or 4% in two years will make or break your retirement.

Freedomin5

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Re: How Much In Cash Savings Leading Up to FIRE?
« Reply #5 on: December 28, 2018, 06:49:19 PM »
Basically, it sounds like you want to reduce sequence of returns risk and ensure you have enough to cover your living expenses, at least for the first few years in a bear market without decimating your stash.

One of the ways to mitigate the risk is to make sure that you are sufficiently diversified. Millenial Revolution does a decent job explaining waht they call the "Yield Shield" as a way to generate stable income by shifting funds into different asset classes, so you don't actually have to hold everything in cash. The link is: https://www.millennial-revolution.com/yield-shield/

Also, look through the pre-FIRE checklist on this forum, if you haven't checked it out already. It might help with your planning. Link: https://forum.mrmoneymustache.com/post-fire/pre-fire-checklist/


lhamo

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Re: How Much In Cash Savings Leading Up to FIRE?
« Reply #6 on: December 28, 2018, 07:57:31 PM »
Another factor to consider -- which is a bit outside but not totally disconnected from a pure optimization strategy -- is how you reacted both emotionally and practically to this latest market downturn.  For me, even though I had direct experience of NOT selling and actually throwing more money into both the stock and real estate markets during the 2008-09 crash and having it pay off, I would have found this latest dip to be unsettling EXCEPT that we have a very large cash stash at the moment so I actually welcomed it.  I know that I shouldn't sell on dips, but knowing and doing are two different things.  I have a pretty aggressive/bossy Inner Bag Lady so for us having at least 2-3 years of base expenses in cash is probably my minimum.  Yes, I know that is not financially optimal.  But it keeps both me and IBL calm, and that is worth a lot to me.

DreamFIRE

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Re: How Much In Cash Savings Leading Up to FIRE?
« Reply #7 on: December 28, 2018, 08:19:46 PM »
So, back to the question, how much non-retirement, cash savings do you FIREd folks keep outside of the markets?

My timeline is 6 to 18 months to FIRE.  I don't keep much in actual checking/savings cash, but I have a few years in money market funds now plus another few years in a fixed interest fund in my work retirement account.  I have about 60% in stock funds.

If I was under 45, I would be more allocated towards stocks, and in fact, I was just a few months back when I reallocated from 80% to 60% stocks.  I've already got enough stash to FIRE, so I'm being more defensive now.

Arbitrage

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Re: How Much In Cash Savings Leading Up to FIRE?
« Reply #8 on: December 31, 2018, 10:18:03 AM »
So...this is asset allocation.  Cash is part of your asset allocation.  It's incongruous when people state, "I'm 100% stocks, but I have 3 years of cash buffer."  Money is fungible.  Cash is providing the stability that bonds are often advocated as providing.  It's even more stable, but produces a lower long-term return than high-quality bonds. 

Some studies (Pfau in published literature, and bigERN's work) have concluded that the best way to reduce sequence-of-returns risk in a long retirement (market crash early in retirement) is to have a big helping of fixed income (cash/bonds/money market/CDs) early in retirement, then to increase your allocation to stocks over time. 

That's distinct from saying that you need a lot of cash in leading up to FIRE; really this latter situation depends upon your flexibility and risk tolerance.  Can you tolerate waiting another few years for FI if your 100% stock stash is halved?  Do you mind the opportunity cost of a chunk of fixed income?  Would you stick to your chosen asset allocation when markets do X?  People unfortunately tend to buy more stocks when the market is riding high, and consider portfolio only after the downturn has hit, which is exactly the wrong timing.  This is one reason it's great to have a written plan, an Investment Policy Statement, that you're supposed to stick to through thick and thin.

MrThatsDifferent

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Re: How Much In Cash Savings Leading Up to FIRE?
« Reply #9 on: December 31, 2018, 11:48:25 AM »
My plan, which isnít very sophisticated because I find all of this challenging, is to have 3 years of expenses in cash and try to stretch that as long as possible while the rest of my invested money grows. Money in my non taxable retirement account stays untouched until I reach the age I can access. So after the cash ends, I then start taking from the taxable investment account. Someone above wrote about taking 2% plus cash, which I never thought about before. I know there are more clever ways to manage this stuff, but Iím not quite adept at being this clever, so I need simple and basic.

iluvzbeach

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Re: How Much In Cash Savings Leading Up to FIRE?
« Reply #10 on: December 31, 2018, 10:28:21 PM »
Thank you so much for the thoughtful replies, I sincerely appreciate it. Iíll be digging in further to what everyone has written over the next few days and into the weekend as I wrap up my 2018 records and launch in to 2019. Iím eager to pull the plug on work as soon as possible and the info provided in your responses will help me to validate that weíre truly prepared for me to do so.

Car Jack

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Re: How Much In Cash Savings Leading Up to FIRE?
« Reply #11 on: January 01, 2019, 06:35:52 AM »
It seems that there are lots of "rules of thumb" for emergency fund.  Some people think 6 months is enough and I cringe when I hear someone talking about that little saved in cash.  I think a year is ok.  Something you might consider is to start buying US Savings Bonds.  Why?  You avoid tax while they accumulate interest and if you're in a state with income tax, they're exempt when cashed.  For me, savings bonds are my second level of emergency fund after cash.  I have all paper bonds which now can only be bought with a federal tax refund.  When I do cash one in at my local credit union, there is no hold on the funds, so I can bring it in and literally walk out with cash if I want to.