Author Topic: Preparing for FIRE - cash allocation?  (Read 1797 times)

ZiziPB

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Preparing for FIRE - cash allocation?
« on: January 26, 2017, 07:56:27 AM »
Planning to FIRE about 14 months from now.  I read some recommendations for going into retirement with 2-3 years worth of annual expenses in cash. 

Can anyone offer suggestions on how to structure those cash holdings?  All in a savings account?  How about CDs and I Bonds?  Any other suggestions?  Should these cash holdings be replenished annually? (in other words, should I have a permanent cash allocation in my portfolio at all times?)

Car Jack

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Re: Preparing for FIRE - cash allocation?
« Reply #1 on: January 26, 2017, 08:59:42 AM »
I'm not far behind you and I'll give you my set up.

About a year in savings at Ally and Redneck (1% and 1.25%) with a 5 year CD at Ally at 2% (no longer offered....180 day interest penalty for early withdrawal).
7 years spending in iBonds (been buying them since the early 90's.
Almost a year in my taxable account at Schwab

With this setup, I can stay out of my tax advantaged accounts for quite some time.  Yes, I do have a good % of my portfolio tied up in iBonds.....that's sort of an accident that built itself from the days when iBonds could be bought online with a credit card for no fee and be cashed in 6 months.  Lotsa free 1st class upgrades to Aruba out of that.

Long term cap gains can become either zero of 15% taxed when I sell those taxable ETFs.  Since I'll have son #2 heading to college, iBonds will be cashed with zero tax on the earnings.  Of course, I can start in on the IRA since that will be at a low tax rate and will reduce RMDs in the future.  Social security......all depends if my income counts against me.  Maybe take it at 62.....maybe wait and let it build.  I'm old enough that I'll be able to collect a few years before it's drained to zero (please don't kill me and make me into Soylent Green).

2Birds1Stone

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Re: Preparing for FIRE - cash allocation?
« Reply #2 on: January 26, 2017, 09:00:40 AM »
I would imagine that too much cash will cause drag on a portfolio.

If you think it will help you stay the course and help you sleep at night in the event of a market downturn shortly after retirement it can be beneficial. I see 1 year of cash recommended over on the Bogleheads forums, but largely for psychological reasons over financial ones.

ZiziPB

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Re: Preparing for FIRE - cash allocation?
« Reply #3 on: January 26, 2017, 09:21:49 AM »
Thanks for your thoughts.

My planned FIRE budget is $36K per year.  I currently have $30K in IBonds and $26K in savings and a CD at Ally (which is my EF).  Planning to buy another $20K of IBonds before I FIRE.  So I guess that would be 2 years worth.

2Birds1Stone

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Re: Preparing for FIRE - cash allocation?
« Reply #4 on: January 26, 2017, 10:08:11 AM »
Thanks for your thoughts.

My planned FIRE budget is $36K per year.  I currently have $30K in IBonds and $26K in savings and a CD at Ally (which is my EF).  Planning to buy another $20K of IBonds before I FIRE.  So I guess that would be 2 years worth.

I think that is plenty, you might be giving up long term growth for peace of mind. Not a bad trade in my opinion.

ZiziPB

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Re: Preparing for FIRE - cash allocation?
« Reply #5 on: January 26, 2017, 10:30:36 AM »
Thanks 2Birds - I tend to be very conservative with my investments :-)

Just ran my numbers and it looks like my current asset allocation is 43.1% US Stock, 18.3% Int Stock, 38.63% fixed income (a mix of bond funds, stable value and cash).  Planning for 3% withdrawal rate in retirement.  I'm thinking of upping my International stock allocation to about 20% once I get my RSUs in early March.

2Birds1Stone

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Re: Preparing for FIRE - cash allocation?
« Reply #6 on: January 26, 2017, 11:49:57 AM »
Thanks 2Birds - I tend to be very conservative with my investments :-)

Just ran my numbers and it looks like my current asset allocation is 43.1% US Stock, 18.3% Int Stock, 38.63% fixed income (a mix of bond funds, stable value and cash).  Planning for 3% withdrawal rate in retirement.  I'm thinking of upping my International stock allocation to about 20% once I get my RSUs in early March.

I would recommend writing an Personal IPS and sticking to it.

A lot of the research shows that portfolios with 75% allocation to stock have a better survival rate over the long term. 3% is incredibly conservative, unless inflation erodes returns.

ZiziPB

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Re: Preparing for FIRE - cash allocation?
« Reply #7 on: January 26, 2017, 12:05:00 PM »
I don't have a formal IPS but have decided a few years ago that I'm comfortable being anywhere between 60/40 and 70/30, and I have been sticking to it since then.

I basically am at 3% now so there's not much I can do about it :-)  The market has been crazy and it makes me very nervous retiring at the top of a potential stock bubble.

2Birds1Stone

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Re: Preparing for FIRE - cash allocation?
« Reply #8 on: January 26, 2017, 12:10:41 PM »
I don't have a formal IPS but have decided a few years ago that I'm comfortable being anywhere between 60/40 and 70/30, and I have been sticking to it since then.

I basically am at 3% now so there's not much I can do about it :-)  The market has been crazy and it makes me very nervous retiring at the top of a potential stock bubble.

If you adjust for inflation the S&P500 is just starting to break over where we were in 2000 before the .com bust.