Less than two years away from early retirement, we wonder how much cash (if any?) we’d like to hold in a money market account. As many of you might have heard, we currently run a very tight ship with our cash management. We have no emergency fund – our entire portfolio is our emergency fund! But that’s easy to do while the paychecks are still rolling in and we maintain a 60% savings rate. Early retirement will be very different. How would we handle the cash withdrawals in retirement? How do we react to market fluctuations?
In the FIRE community, I often read that the solution (maybe even the panacea) for an equity bear market is to keep a certain percentage of the portfolio in cash (money market account) to sustain cash flows through a bear market. And we should point out that we are not the only ones thinking about this, as evidenced by recent popular posts on the PIE blog and on Retirement Manifesto (also check out the really cool infographic) dealing with this subject. Two to three years worth of expenses (presumably 5-10% of the portfolio) seem to be the numbers floating around (examples: 5% cash allocation for the PIE blog, The Retirement Manifesto recommends 2-3 years, ThinkSaveRetire uses 3 years), obviously calibrated to roughly correspond to the length of the average bear market.
How much of a difference does a cash cushion really make?
How big is the opportunity cost of holding cash when there isn’t a bear market?Read More »
This is a follow up from our post last week when we couldn’t fit debunking all the arguments for emergency funds into one post. This is also good place the point out some of the great work other bloggers have done on this topic:
In a past blog post, we pointed out that a $0.00 emergency fund is most useful for us. Lots of visitor traffic came from both Physician of FIRE and Rockstar Finance (thanks for featuring us!!!) and most comments were very supportive. Good to know that others follow a similar approach. To make the case more complete we should also look at some of the standard arguments people normally use in favor of keeping a large stash of cash for emergencies.
That’s because in addition to some of the complaints we got in the comments section, someone we quoted in our post, Scott Alan Turner, is a blogger and podcaster and he dedicated almost an entire 28 minute podcast (transcript included if you don’t want to spend 28 minutes) to our theory and why he thinks we’re wrong. We respectfully disagree!
For full disclosure: I really like Scott’s blog and podcasts in general. I mean no disrespect and like to invite everybody to check out his material. I agree with most of what he has to say, just not the advice on emergency funds! Enjoy!
So, let’s look at some of the arguments in favor of an emergency fund and debunk them. It took us a while to put this together, but better late than never!Read More »
Update: If you’re coming over to this article from Mr. French’s article over at RetirementResearcher, please note the last few paragraphs below where I shoot down his shockingly sloppy analysis.
Bonds diversify your equity portfolio risk. Everybody knows that, right? Well, how much diversification potential is there, really? Much less than we thought! (For full disclosure, though, bonds still serve a purpose, but it has nothing to do with diversification!)
Pop Quiz: Over the last 10 years, a portfolio of 80% stocks (U.S. Broad Equity Market) and 20% bonds (U.S. Aggregate Bond Market) had what correlation with the stock market?
The correct answer is A: the correlation was +0.998, so an 80/20 Stock/Bond portfolio would have been extremely highly correlated with the stock market. We might as well round it up all the way to 1.0 because from a statistical, financial and economic perspective that’s pretty much a perfect correlation. This correlation coefficient is for a broad U.S. stock market ETF (use Vanguard’s US Total Market VTI) vs. a portfolio made up of 80% Vanguard’s VTI and 20% Barclays Aggregate bond index (we used the iShares AGG total returns). Monthly returns are from 07/2006 to 07/2016.Read More »
Ever since we posted our view on emergency funds, we have been thinking about a succinct, straightforward but also scientific way to debunk that bad, bad, bad advice that investors should hold large amounts of cash in a money market account. Here’s one try:Read More »
“Governments are trillions of dollars in debt and are printing paper money at record pace. So, don’t invest your retirement in paper money. Transfer your IRA to a Gold IRA at XYZ Capital. Call now for your free IRA transfer kit.”
I have to cringe every time I see or hear that. What deceptive marketing! Our financial assets (equity ETFs and Mutual Funds mostly) are not invested in paper money, they are merely denominated in paper money. In fact, if people are so troubled by measuring their equity portfolio in USD paper money, they are free to measure it any way they want: ounces of gold, metric tons of copper, bushels of wheat, gummy bears, the choices are endless. And by the way, don’t forget that gold is denominated in paper money USD as well!Read More »
In our financial plan, you will never find the one staple item that every so-called financial planner calls the cornerstone of a responsible financial plan: the emergency fund. We have none. Zilch. Nada. Read More »
Look around in the early retirement community and everybody is raving about the 4% rule. It’s a “safe” withdrawal rate, we are told, by the Trinity Study and some in the early retirement community. Some claims, we found, are downright false but more on that later.Read More »
Retirement is too important to not have a comprehensive plan about what to do if – God forbid – something were to go wrong. Here is our Plan A, as well as our Plans B, C, D, all the way through Plan J. Just in case!