The Ultimate Guide to Safe Withdrawal Rates – Part 12: Six reasons to be suspicious about the “Cash Cushion”

When we read about withdrawal strategies in early retirement, the cash cushion is often one crucial ingredient. Simply keep a little bit of cash sitting around on the sidelines, dig into that cash during an equity market drawdown and avoid selling equities until the next recovery. How much cash? Well, the Global Financial Crisis raged for “only” 18 months and the average garden-variety recession should last a year or even less. Thus, even if we assume that the equity market takes a little bit longer to recover it will take only very little cash and very little opportunity cost to achieve this. The whole issue of Sequence of Return Risk is solved! Who knew this was so easy? This is almost too good to be true! Well, unfortunately, it might be just that; too good to be true.

Here are our top six concerns about the cash cushion:

1: Funny accounting: We can’t keep our dividends and eat them too!

One tripwire to avoid is the following funny accounting mistake: For this example, let’s assume a 3.5% withdrawal rate and a 2% dividend yield. Great! We need only 1.5% to supplement our dividend income. So, a cash cushion of around 7.5% insures against a 5-year equity drawdown, right? Yes, but here’s one pitfall. We have to pick one of these two options:

  • Either we assume that we eat the dividends but then we need insurance against a longer event because without reinvested dividends the drawdown will take longer.
  • Or, we assume we don’t eat the dividends and they help us recovering faster from the drawdown. But then we’d need a bigger cash cushion because now we need 3.5% in cash for each year of drawdown we want to insure against.

Sorry for pointing out something so trivial, but you’ll be surprised how often we see folks making the mistake of double-counting the dividend yield, i.e., design the annual cash cushion size as withdrawal rate minus yield (i.e., assuming consumption of dividends) but then using the equity drawdown length of the Total Return Index, i.e., with dividends reinvested. As we show in the chart below, without reinvesting dividends the drawdowns can be painfully long (top chart). Several decades long, so good luck keeping enough cash around for that! When reinvesting dividends, the drawdowns are shorter (bottom chart) but also require more cash cushion per year, i.e., the whole 3.5% in our case, 4% per year for with a more aggressive withdrawal rate. There’s no free lunch!

S&P500 index: Price Index (top) vs. Total Return Index (bottom). Red shading = drawdowns lasting 36 months or longer. Pick your poison: Consume Dividends but face longer drawdowns (top), or face shorter drawdowns but we need more cash cushion per year (bottom chart)!

2: Drawdowns can last even longer when taking into account inflation

Another pitfall: The length of the drawdown can be substantially longer than some people assume. We need to reach not just to the previous equity market peak, but that peak plus inflation if we assume that we make cost-of-living adjustments in our withdrawals. That doesn’t make much of a difference, you think? Think again! Most drawdowns in the past have lasted substantially longer when taking into account inflation, see chart below.

S&P500 index: Nominal Total Return Index (top) vs. Real Total Return Index (bottom). Red shading = drawdowns lasting 36 months or longer. Drawdowns are longer when adjusting for inflation!

The bottom panel plots the real S&P500, with drawdowns of 36+ months shaded in red (nominal chart in the top panel for comparison). Since 1910, there were seven major drawdowns in the real S&P500 index. Some of them were back to back with a short reprieve in between, and each time it was too short to restock the cash cushion in preparation for the next bear market. So we might as well interpret them as one single event, which means that in the last 107 years there were four major drawdown events:

  • 6/1911 – 8/1924: 13 years and 2 months comprised of two drawdowns with a short 13 months of reprieve in between.
  • 8/1929 – 12/1950: 21 years and 4 months comprised of two drawdown periods with a short 13 months reprieve in between.
  • 11/1968 – 1/1985: 16 years and 2 months comprised of two drawdown periods with a short 1-month reprieve in between.
  • 8/2000 – 5/2013: 12 years and 9 months

In other words, over the last 107 years, we would have spent 60+ years in major, decade-long drawdown phases. Over the last 50 years, we would have spent almost 29 years in the red. So, pronounced drawdowns that require 10+ years of cash cushions are not the exception but the norm! Multiply the drawdown length above with our desired withdrawal rate (3.5%) and we get completely unrealistic, downright preposterous cash cushions of somewhere between 42% (12 years) to 73.5% (21 years). Ain’t gonna happen!

3: Don’t expect much help from consuming the dividends

What if we had consumed the dividends? As we said above, it’s a tradeoff. Consuming the dividends will lower the amount needed per year of drawdown but also create longer drawdown periods. Let’s plot how long the drawdowns last when we plot the real, CPI-adjusted price return only (without reinvested dividends), see below:

S&P500 index: Real Price Return Index. Red shading = drawdowns lasting 36 months or longer. Drawdowns last longer when dividends are consumed rather than reinvested!

The most recent drawdown would have lasted 14.5 years (2000 to 2015). During those 14+ years, the cash cushion would have to support the shortfall between a withdrawal rate of 3.5% and the dividend payments. Those dividends were, on average, only 1.5% of the index level in 2000, so we’d have to compensate for the remaining 2% with the cash cushion: 2% times 14.5=29% cash cushion. 36% cash cushion when using a 4% withdrawal rate. Good luck with that!

The 1970s recessions would have been very unpleasant for the cash cushion as well. A 24-year drawdown coupled with a drop in the real dividend (more on that below). We won’t even mention the multi-decade drawdowns between 1900 and 1960 because this cash cushion myth is pretty much busted!

4: When do we replenish the cash cushion?

Now assume we have just dug out of a multi-year equity drawdown and thanks to the cash cushion we never had to touch our equity stash. Great job! But now the cash cushion is zero! The equity portfolio has to do double-duty now: It has to generate enough returns to cover the 3.5% withdrawals, 2% or so inflation plus all excess returns to refill the cash cushion. How long will that take? It looks like there have been bull markets long enough to achieve that eventually: 1951-1969 and 1985-2000. But we won’t have any illusion that this is feasible after every single drawdown.

5: More funny accounting: Cash has a low expected return!

Let’s use the following example where we keep 5 years worth of withdrawals on the sidelines, 17.5% of the portfolio. But that means a $1,000,000 portfolio will have only $825,000 in productive assets and $175,000 in zero or even sub-zero expected real return (current return in a money market account or short-term CD is less than the 2% expected inflation rate). So, a $35,000 annual withdrawal is 3.5% of the overall portfolio but 4.24% of the equity portion. That’s getting dangerously high. One alternative would be to keep $1,000,000 in equities and save an additional $175k for the cash cushion. But now the effective withdrawal is not really 3.5%. It’s 35,000/1,175,000=2.98%. If the withdrawal rate is so low we might as well invest the entire $1,175,000 in productive assets (80-100% equities) and have a withdrawal rate of just under 3%, which seems pretty darn safe, even for a cranky old pessimist like yours truly, see our previous research on the topic. Specifically, in that post, we showed that a 3% withdrawal rate and a 75-100% equity share had a 100% success probability even for capital preservation, not just capital depletion, over 60 years.

6: Dividends can be cut!

Let’s assume we do withdraw the dividend income. In the past, there have been numerous occasions where dividends have been cut significantly during the recession and/or were eroded by inflation. Professor Shiller has a nice long time series on S&P500 dividends as part of the spreadsheet to construct his CAPE (even though dividends aren’t even used in the CAPE calculation). Don’t let the experience from the 2000s with only short and shallow dividend cuts fool you. There have been some nasty long drawdowns for the real dividend income in the past, see charts below. And those drawdowns in dividend income, you guessed it, coincide with the bear past markets.

Real Dividends in the S&P500. Not a straight line!
The 1999-2004 and 2008-2012 drawdowns were shallow. Dividends have suffered much more dramatic multi-year, even decade-long drawdowns in the past!

What are the alternatives?

Ideally, we’ll just stick with a simple dynamic withdrawal strategy, see Part 11. Also, check out Part 18 for a deep dive into the CAPE-based withdrawal rule. Rules based on the Shiller CAPE seem to check all our boxes: a) we don’t run out of money, b) muted volatility in withdrawals, and c) moderate drawdowns in consumption levels.

One could also keep a very small cash cushion knowing full well that during a big drawdown it will not last through the entire bear market. We did a case study in a blog post a while ago that assumed we have a 3.5% withdrawal rate, consume the dividends to stretch out the cushion even longer and keep 12-36 months of expenses in the cash cushion (3.5-10.5%). In each case study, we ran out of money before the market came back. When we started the exercise in December 1997, a little over two years before the market peak with a $1,000,000 portfolio, the equity portfolio without a cash cushion came back to $956k in 2016. With the cash cushion, the different parameterizations would have beat the equity portfolio by $3k to $17k. Not really that much. If we had started the exercise in December 1996 or before, the cash cushion portfolios would have all lagged behind the no-cash portfolio. Opportunity cost!

Cash Cushion Time Series during the 2000s: 3.5% Withdrawal Rate, consume dividends, keep 3.5%/7.0%/10.5% in cash. We’d exhaust the cushion in each recession. (From our post in October 2016)

Another solution would be to use the dynamic withdrawal scheme, called “Prime Harvesting” proposed by a fellow called Michael McClung (see nice summary here). Instead of cash, you hold safe government bonds (10 years maturity) with a higher yield and some diversification potential. Simply draw down the bond portfolio before touching the equity holdings when there’s a drawdown. Thus, as we pointed out in Part 13, the McClung method is very similar to a rising equity glidepath (see Part 19 and Part 20).

Some folks suggest to “juice up” the expected return of that cash cushion with higher-yielding assets. That might lower the opportunity cost but also increase the risk. I am not making this up but I read suggestions for keeping the “cash” in Preferred Stocks, Junk Bonds and REITs. Of course, all of them had nasty drawdowns in the 2008/9 recession. Not much of a help as drawdown protection!


The Cash Cushion approach is really caught between a rock and a hard place. Either the drawdown is so long that you can’t possibly have enough cash to make it through or the drawdown is short enough that the cash cushion likely wouldn’t have made a big difference. We are not convinced!

Thanks for stopping by today! Please leave your comments and suggestions below! Also, make sure you check out the other parts of the series, see here for a guide to the different parts so far!

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92 thoughts on “The Ultimate Guide to Safe Withdrawal Rates – Part 12: Six reasons to be suspicious about the “Cash Cushion”

  1. Intriguing post! Very though-provoking! I had no idea that it took the market so long to recover in the past.
    Just one question: is the chart “Real Price Return Index” accurate? Looks like it increases very little in 145 years (1->20 in 145 years = 2% real per year).

    1. That chart is accurate. It’s because in the early preiod stocks made hardly any return through price appreciation but offered much larger dividend yield. So, in other words, $1 invested in the stock market in 1871 would have grown to $12,000 (inflation-adjusted!!!) with dividends reinvested but only a little more than $20 without dividends. Crazy, isn’t it?!
      Thanks for stopping by!

  2. That alarming (nearly all red) chart showing real drawdowns when dividends are consumed reminded me of Robert Frey’s “180 years of market drawdowns” (

    The tl;dl is: markets are usually down. Just like your bleeding charts show.

    An summary of the talk at claims we’re in a 20%+ drawdown nearly 1/4 of the time!

    Which leads to the real question is: how do we ever manage? We’re constantly losing money!

    1. Thanks for the links! These are great!
      Well, the good news is that stocks are still the way to invest. $1 invested in 1871 would grow to over $12,000 in 2016. Adjusted for inflation (in nominal terms >$200,000).

  3. Great post. This reinforces my thought that a very extended true (no work) retirement is not possible without significantly more assets than people usually assume.

  4. I just read the book Asset Dedication last night, which underneath it all, is largely about having a cash cushion. It was frustrating to read because they don’t address any of the problems that you identify. And they are problems that seem so obvious to me (and you and others)!

    Having a cash cushion is one of those ideas that “sounds great on paper” but the people who suggest seem to have never once tried actually backtesting it. Sure, backtesting doesn’t guarantee anything…but it is a hell of a lot better than some vague handwaving bullshit.

    The whole “when do you refill the cash cushion” is so poorly addressed by most proponents it is crazy….

    1. Thanks, Justus! Exactly my thinking: The cash cushion mostly works when you have the cushion available right at the perfect time before equities take a nosedive. And then the cushion protects you against only one bear market if we don’t address the issue about when to replenish it. A whole lot of handwaving out there, as you say. 🙂
      Many thanks for commenting!

    2. ‘The whole “when do you refill the cash cushion” is so poorly addressed by most proponents it is crazy….’

      Isn’t that a moot point? The whole purpose of a reserve fund is to diminish sequence of returns risk. Once you’ve depleted the fund, you are perhaps a decade into retirement. Sequence-of-returns is a smaller worry once you’ve made it that far, and if the market performs poorly during that decade, you’ve meanwhile protected your equities from selling off at bargain prices. At that point, you start living off of your equities and bonds, just like the no-reserve retiree who probably took a harder hit over the same period. So the answer to “When do you replenish?”, at least from this cash reserve holder, is a very simple “Never!”.

      I’d be interested in seeing someone who agrees with me on holding a cash reserve, yet thinks it needs to be replenished at some later point in retirement. Perhaps they are out there, but their lack of understanding on this particular point would be an argument, not against cash reserves, but rather for better education on the subject of how they are to be managed.

      On back-testing, I’ve done that, and I’m aware that you don’t see any significant difference in portfolio longevity by changing the reserve amount, using purely historical data (early 20th century through present). Most of us reading this blog have tuned our strategies (chiefly the withdrawal rate) to already work well with the historical data set, so naturally, the benefit would not show up when running those strategies with that data. You need to incorporate black swan events (outside the historical range) to see the benefit. I’m not promoting reserves as a way to improve average or modal longevity. For me, they are a protection against those outside events, and nothing more. The caveat that you need to balance this need against the diminished returns from having part of your assets in cash definitely applies (i.e., some cash is good, but don’t assume more cash is always better). I’m at a little less than 10% cash, and am very comfortable with that, even if there’s a bear market in the near future.

      Labeling the approach “vague handwaving bullshit” seems unjustifiably dismissive.

      1. I can hear you both. But the one cash cushion only approach (i.e. never replenish) is likely not always successful. The period 1965-1982 was way too long. You would have depleted your cash cushion before the really big drops, 1973/4 and 1980-82.
        Likewise, your cash cushion would have hedged the 2001bear market but then the 2007-2012 drop would have eventually wiped out your portfolio because you didn’t have enough time to replenish the cash.

  5. You are my favorite economist for a reason! And you actually may be more of a cranky pessimist than me!

    Help me get my head around this though, because aren’t the bleeding charts reflecting the impact assuming we retire at the peak? Not that we can time it perfectly, and sequence of return risk is real, but is this basically the worst case scenario?

    1. Ha, thanks Green Swan!
      100% correct, these are worst case scenarios of retiring at the peak. But: Even retiring years before the peak can wipe out your cash cushion. That’s when the growth before the peak was subpar. For example, in the charts you notice that the pre-1970 peak was in 1968/69. But between 1965 and that peak the stock returns were so low, they hardly compensated for the withdrawals. So, any retirement year between 1965 and 1969 would have gotten your cash cushion in trouble.

      Sorry for being so cranky! 🙂

      1. Gotcha, I’m on the same page as you regarding the cash cushion. You converted me on that point a while ago. I just wanted to make sure I was tracking with you as the charts paint a bleak picture.

        My plan is to retire after a massive downturn… 🙂

        1. The problem with retiring after a massive downturn is that your portfolio probably isn’t high enough to retire anymore. Or it was so big you could’ve retired before the downturn!

  6. I came across your blog a few weeks ago and really appreciate your perspective, I’ve found some great new insight here. I started reading up on safe withdrawal rates a while ago, and convinced myself that 3% for a retirement anytime before 65 (and perhaps after 65) is a number I’m comfortable with. I arrived at that number by haircutting returns and running monte carlo simulations with these reduced returns and historical volatility, as well as really studying historical periods where the 4% rule failed or came close to failing (1929…, 1905…, 1966). I’ve read articles correlating Shiller CAPE with SWR’s, but your work is the most in depth of what I’ve found. I’m a CPA by trade, and have had some involvement with the financial reporting function at a Fortune 500 company for the past 20 years, and I understand (because I have lived) changes in accounting standards, as well as higher scrutiny by auditors and regulatory authorities. I’ve seen good articles where people argue that a true “apples to apples” CAPE is lower than what is indicated. However, absent a massive (and probably impossible) project to actually go back and restate S&P 500 earnings on a consistent basis, these are just educated guesses. My gut tells me we’re not in doomsday territory, but we’re still at the high end of historical valuations, so here is one more great reason to lower expectations and plan accordingly. Just curious, are you planning to explore the CAPE of other asset classes in future posts? I know that MSCI EAFE, emerging markets, and small cap value all have a lower CAPE than the S&P 500, but it would be interesting to see your perspective applied to a portfolio diversified across these asset classes. I’m probably not going to see anything to convince me to increase my initial withdrawal rate from 3%, but I view a diversified portfolio as a way to make my 3% rate a little bit safer.

    1. Thanks for sharing your thoughts!
      Agree: Today’s market sustains higher a CAPE (lower CAEY) than in history. So, we’re not in “doomsday territory” but merely in “lower expected return” territory.”

      I haven’t looked at other than SP500 CAPE data recently. But I definitely agree that some “diversification” away from U.S. Large Cap might be a good idea. Both in the backtest and going forward. For example, I added the Fama-French Small and Value factors in the Google sheet (see part 7) for people to experiment. I found that small stocks and/or value would have sustained higher SWRs in the past.

      Thanks for stopping by!

  7. Big ERN,
    You are slowly but surely destroying any semblance of productivity when I am at w*rk. Your posts have triggered an unrelenting OCD WRT withdrawal rates. Maybe I need help withdrawing from withdrawal rate research. But, how can something so wrong feel so right?!?!?!?

    McClung, McClung, McClung. What a book to feed the soul of a devout econometrician. Good stuff, counterintuitive stuff, lots of “What you talkin’ bout Willis” stuff. In case you haven’t run across it, he has a website for his book (cleverly named where you can get the down-low on some of his ideas by a simple download of a spreadsheet. It lets you calculate your initial withdrawal rate as well as see Prime Harvesting in action. I still need his book to properly navigate the genius McClung has immortalized in workbook format, but someone of your financial perspicacity may be able to deftly maneuver through its rows and columns without the assuaging support of such trivialities as ink on paper.

    McClung also has some interesting links on his website. Arguably the best IMHO, EREVN has blog that further feeds my SWR OCD ( and are just 2 juicy exemplars). These along with other EREVN entries provide very tasty food for thought. Good stuff.

  8. Thx for showing the need for good planning…

    Have you ever considered a dGI approach where you live solely of the dividends? That way, you risk is the sustainability of the dividends.

    My personal plan runs more along the line of keeping a job – half time or so – and use the portfolio to fund travel. That drastically lowers my needs. Agreed, it means work till pension age. Thing is: I do not hate my job right now; I fact, I really like it. Ideally, I am home whne the kids have vacation. that means work about 65%

    1. I am intrigued by the DGI strategy, for sure. But my concerns are that a) currently the yield in the S&P500 is much lower than my required withdrawal rate b) high-yielding dividend stocks had a pretty nice run and potentially look a bit expensive and c) dividends have been cut and have stagnated in the past and have been eroded by inflation.
      The solution would be to diversify, just like your plan: keep multiple sources of income. I’d like to add more to rental investments, too!

      1. Our strategy is very diversified. For rentals, the interest is really nice now, house prices have gone through the roof. And I dislike the unstable extra work they require.

        1. Ha, I heard that too: because interest rates were so low people were trying to buy property and drove prices through the roof. And rental yields are really low now. In the U.S. rental yields are still OK.

  9. Ok, so if you were about to retire, what would your strategy be? I’ve got the 3.25% SWR locked down… so I’m somewhat confident but I’m trying to find that sweet spot – do I just revert back to old personal finance rules and have 3-6 months of cash on hand?

      1. I agree with that sentiment. I just can’t help but think I’m retiring at the very worst moment for sequence of returns risk but hoping my 3.25% withdrawal rates makes that moot. I don’t want to work for money anymore, blog or otherwise, so I’m trying to think things through as carefully as possible to prevent me from activating any back up plans. The good news is you already thought this whole thing through and have data to back it up and addressed all my concerns plus several others I hadn’t even considered. Thanks for sharing all your awesome observations, data and analysis.

  10. This is a wonderful series of articles. I am recommending in my own blog that people definitely need to read all of these posts. I think my biggest nit to pick is with your cash criticisms. Three of your concerns have to do with how dividends are spent and accounted for over time and whether those dividends could be cut in the future. I don’t see this as a problem particular to holding cash. A miscalculation of this type will cause a problem with any mixed asset portfolio analysis that includes stocks. Maybe I am missing your point? Your concern that inflation erodes the value of cash and the low return of cash also seems to hold cash to a different standard than the other asset classes. Inflation subtracts from the real returns of all assets. I am posting an article tomorrow that uses FIREcalc (I cross checked with cFIREsim too) to show that holding something like 20% cash has little impact on portfolio success. I found very similar results for holding 20% intermediate bonds instead. I think if you swap cash for bonds in your 30 year scenarios you won’t see much difference, which indicates the inflation/low return concern is not unique to cash. (I have not looked at a 60 year scenario, so I defer to you on that.) Finally, I agree that replenishing the cash cushion should not be a goal. My view is cash should be used to buy more stocks if/when the stock market crashes in the early part of retirement (the most vulnerable period), and that cash reserve should not be replenished after that. Importantly, I am talking about a severe crash (e.g., in excess of a 30%), not minor variations where one would attempt to time the market, which is essentially impossible. Thanks for the great analysis throughout this series.

    1. We both seem to be in agreement on most issues:
      Keeping too much cash/bonds throughout your retirement would hamper your success rate. But I can endorse an initial bond/cash allocation that you slowly reduce. Either through a glide path to 100% equities (or close to 100%) or through something like Prime Harvesting (see part 13).
      Whether bonds or cash works better depends on the time period. In the 1930s and the 2000s, bonds offered great diversification benefits. In the 1970s it was the other way around: Because of the inflation shock bonds got hammered, cash did better. Going forward, if you believe that bonds can keep their negative correlation with stocks and bond yields move up only very slowly, you’d be better served with bonds. If bond yields go up too fast, you’d be better served with cash (see last week’s post on bond diversification)

      I am most definitely not holding cash to a different standard. I’m holding it to the exact same standard. All returns I use are total returns (dividends, interest included) adjusted for inflation.

      Thanks for stopping by! Let me know when your post goes online. Would like to take a look!

    2. I agree with Karl. If the goal of a cash bridge fund is to weather out an early stock market downturn, then ERN’s point about replenishment is moot. If you do spend it all during the first downturn, and there is a second one 15 years later, the bridge fund already served its purpose during the first event. The whole point of sequence risk is that success probability is very sensitive to early downturns but not as sensitive to later ones. If your portfolio can’t already handle the later downturn without the cash bridge, you probably aren’t ready to retire.

      Yes, having such a fund dilutes the real returns of the portfolio as a whole, but it also dilutes the risk. That is always the trade-off, and the challenge is to find the right balance between risk aversion and return rate.

      If I am hit by a market correction or a bear market shortly after retirement, I want to spend from that part of my retirement savings that isn’t affected by (or is least affected by) that event. Having cash in addition to stocks and bonds means I have one more resource to choose from. The cash will be from conversions made during the last year or two *before* retirement, so those funds will represent stocks that I already “sold high” and protected from the decline. If the downturn is large enough that my chosen withdrawal rate (3%) doesn’t supply my spending needs, then I can supplement it by drawing out of the cash funds. So, during that downturn, I would be withdrawing 3% of my shares, not 3% of some (arbitrary, when you think about it) initial portfolio value (which, after the downturn, might turn into 4 or 5% to generate the same planned cash flow). Thus, the damage is greatly limited. If I don’t see a downturn in, say, the first 15 years of retirement (lucky!), and then there’s a correction or bear market, then I would do the same kind of calculation, but using the now-higher safe withdrawal rate that corresponds to however many years I anticipate are left. Again, I only need the bridge to get me through this first downturn, and replenishment isn’t a requirement.

      Sure, there are other ways to alleviate sequence risk, but this one seems particularly easy to implement. And sure, I might get hit by a bear market early in retirement and a second one later, and not have a bridge fund remaining to get me through the second, but this is a different category of risk than sequence of returns.

      If I’m really lucky and don’t need the bridge funds, I can start spending them down at some point (when I am comfortable with the resulting level of risk), leaving stocks for my legacy or in case of unanticipated longevity.

      The point about dividend spending vs. reinvesting sounds like a straw man. If one has calculated the duration of a bridge fund based on spending the dividends, then it’s already assumed they won’t be reinvested. There’s no double-counting in that. Of course you have to pick one or the other. But that’s just a warning against double-counting, not a warning against having cash on hand. (Counting the same point as a warning against both *is* double-counting :-).

      The other work ERN has done here is excellent, but for me, this particular article falls flat for those reasons.

        1. True, if you are simulating with historical data, you won’t see any problem with 3% — in the simulations.

          But I tend to keep black swan events in mind and prepare for those. This means that a worse case scenario than even the 1929 event could occur during my lifetime. (I tend to see such a possibility as a longer-duration, i.e., decade-plus, rather than necessarily a deeper, crisis.) And so, it won’t show up in simulation, but that doesn’t mean that it’s impossible in real life during my first decade of retirement — though it may only be on the order of a one percent probability (and who really knows?).

          With a 3% withdrawal rate from my stock-bond portfolio producing sufficient cash flow for my anticipated lifestyle, maintaining a cash reserve for the first several years won’t hurt, but it reduces that slight possibility of catastrophic failure to near zero — a more-than-fair trade-off, from my way of looking at it. This aspect of my strategy is based (qualitatively) on the Kelly Criterion (

          Side note — Since writing that original comment, I am now retired (age 59). While not as early as many of your readers are planning, my long-time target of retiring before age 60 was achieved! I appreciate the efforts of you and others in researching and blogging this topic; it’s been very helpful.

  11. Very nice article! I’m holding much more cash/bonds than I’m comfortable with right now. As karlsteiner1 mentioned, your analysis is pretty much the same for bonds vs cash at this point with such low returns on bonds. You need business ownership (stocks) over many decades to beat the real retirement risk of inflation. But in the comments I see you mention a “cash cushion” is something you’d support for sequence of returns risk with a rising equity glide path. That would be an interesting future post for you to write (hint hint).

    This is my strategy. Have a larger cash position going into retirement (early retirement lifestyle expenses plus covering potential moving costs and a new vehicle). I’m well aware that from a purely investment return perspective I will likely suffer but it manages the sequence of returns risk. 5 years after retirement I expect to be 90-100% stocks and real estate again. Although if the market hits a 20% drop before or right after I retire, I probably won’t be able to resist putting the cash back into the market so it could end up being beneficial. Who knows what will happen though. The market could easily go up a lot in the next few years.

    Regardless, I agree cash is about 100% the wrong move looking at long term investment returns, but I do think it plays a critical role in the period right before and right after retirement (especially after years of good market returns) to manage sequence of returns risk. We just need to remember to reduce our cash holdings over the next few years instead of trying to always have a cash cushion in our portfolio. A dynamic cash cushion approach.

    1. Agree! As long as folks don’t hold the excessive cash cushion forever and jeopardize the long-term sustainability I’m ok with that. But even then I’d hold 80% equities (or equity-like investments) in the beginning and transition to 100%.

      1. ERN,

        [primarily for those who like me are rereading the SWR series not just the posts but the comments as well – since I’ve found plenty of insight there too…]

        At first I was having trouble understanding why so many people commenting on your site have it in their heads that they should get to 100% equities, even as an early retiree, given that you have been *so* eloquent on the problems of SORR, and including Part 38 (we can never stop worrying about sequence risk…)

        And then I realized that at least early on, they were getting this idea from you!

        I’m guessing you no longer hold this particular view. certainly not in the context of your recent comments about wanting to increase consumption over time.

        But even absent that, since 1926, for a 75% final value target over 30 years, 100% equities has a 2.44% SWR, while 90% equities, 10% cash is 2.65%, and the gap is similar for higher FV targets. [Obviously other allocations offer even higher SWRs than this one]. And that’s for holding 10% cash permanently, not just “initially”, which I know you have now basically endorsed.

    2. That matches my thinking, except that buying in a downturn equates to market timing. I avoided market timing even when I had a salary, and now that I don’t have one, it seems that would be even riskier. Yes, I would invest some of my cash during a downturn, but only in an amount that would restore my cash/bond/stock allocation ratios to their pre-crash levels. Instead, I will spend down my cash reserve during the initial years, regardless of market performance (it will happen more rapidly if the market does take a steep dive, of course).

      If you get through the first 20 years of retirement with no major market setbacks, the shortened horizon means you have a greater tolerance for what might be coming, so at that point, the benefit of the cash reserve is gone, or nearly so. And if you did face a bear market during that first 20 years, you will almost certainly have spent down those funds, so either way, a cash reserve doesn’t play a role after the early stages.

      What you don’t want is to retire with a withdrawal rate of (let’s say) 3%, and have your portfolio plummet by 20% a month later, without a cash reserve. Then you would be looking at a 3.75% withdrawal rate to generate the same cash flow, so you’d need to cut back on your planned lifestyle right away, or face a higher risk of depleting your funds early. (Yes, you’d still be in good shape at 3.75%, provided the recovery doesn’t take too long, but see my comment above about black swan events. What if the recovery takes 12 years, and/or is very weak?)

  12. Thanks for a very interesting series of articles. I get what you are saying about the futility of using a cash cushion to try and time the market in a downturn, but I think it can have much more use when coupled with a more flexible withdrawal approach to provide smoothing to a variable income. Personally I’m thinking in terms of a fixed percentage withdrawal strategy, but using a cash buffer of 6 to 12 months income to help smooth the ride compared to a basic SWR + CPI model. Using the buffer to make good 50% of any shortfall in withdrawals gives quite a lot of bang for your buck – a 12 month buffer would last out a four year long 50% market fall. I would plan to replenish to the 1 year level if and when markets recover using any excess of the fixed percentage over what the initial SWR + CPI method would be. Yes there are still plenty of scenarios where the cushion runs out, but in others it smooths a lot of volatility without being much of a drain on overall return.

  13. ERN – Love this post. In planning for my retirement, I came to the conclusion not to have a cash cushion. I plan to keep one months of expenses in cash (~0.25% of portfolio) and sell equities each month to cover expenses. Over 95% of my monthly expenses are via credit card. Each month I will withdraw an amount to pay off my credit card statement + the amount to maintain my cash balance. I have a 100% equity ETF portfolio and DRIP all dividends, my dividen yield is pretty low (<2%). My monthly budget is well within the SWR at a 0% failure.

    I expect that this will require 12 annual withdrawals at $6.95 per transaction. I am guessing this amount is insignificant on my annual returns, but over 35-50 years it may add up.

    Anything I am missing where an annual or quarterly withdrawal makes more sense and should I not DRIP?
    Am I being too wreckless with such a low cash reserve?

    1. I also wouldn’t worry about not having a cash reserve, but having 100% equity ETF during retirement sounds reckless to me due to sequence of return risks unless you are already well into your retirement. I would read ERN’s posts on glide paths.

      1. I read the sequence of return risk blogs – great suggestion. I am in early retirement (starting in August), I see that adding some bonds will help with my SRR and actually give me a higher SWR. It got me thinking that if I can keep my withdrawal rates low (~3%) for the first 3-7 years it not only reduces the SRR, a 100% equities portfolio has the potential to really grow allowing for more flexibility in the future.

        My plan is to withdraw 3% or less for the first 5 years. If I am unable to do that, then as you said the SRR will force me to some drastic life changes, including having to go back to work.

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