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Discussion Starter · #1 · (Edited)
I'm curious to know what people on this board, especially retirees, think about keeping a large reserve of cash during retirement. I often read that people like to keep a few years worth of expenses in pure cash for when stock/bond markets are having bad years, or for the sleep at night factor. I also know older people around me who keep 100K+ in cash at all times, regardless of if they're also using GICs.

Now, as I near early retirement, I've been going back and forth on the idea of keeping a ~10% cash allocation in my portfolio for those same reasons. On the one hand, it feels like a nice safety net, but on the other hand, I know full well I will lose to inflation and potential market gains. Other safety net alternatives like GICs don't appeal to me, I just can't lock away any money, it just doesn't register with my brain.

Lately I've been backtesting market returns of various asset allocations that include stocks/bonds/cash, and what I've come to realize is that if I take off my short vision goggles and zoom out, the protection offered by cash during downturns is usually offset by the market gains of previous years. Basically, if I had invested the cash in stocks/bonds a couple years before a downturn, I would end up with more money by selling these deflated assets than by having kept the cash and using that instead. Historically, is seems to takes about 2-3 years of market gains before a downturn to make up for the market losses, and any extra years ensures you will greatly outperform. But yeah, it varies and there's no guarantee this will be true for the future.

Anyways, this new perspective make me wonder why I would keep much cash at all, beyond the next few months of expenses. Even right now, the stock/bond markets are both not doing great, yet if I had invested my cash reserve at the beginning of 2020, it would still be about +11% more valuable today, despite the current downturn.

Sorry this was long winded, but I felt I had to explain where my question is coming from. So yeah, I'm curious to know what you guy's opinion is on keeping a large amount of cash in retirement.

cheers!
 

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Cash is comfort food for an investor. Without comfort everything you said, all your backtesting data, etc., will become irrelevant during a stock market famine. If you are comfortable with the amount of cash you have, then that is probably the perfect amount for you.

Each person's cash level will be a combination of their personal circumstances which include their expenses, other income sources like pensions/rental incomes, etc., and their personal comfort level. I have considerable amounts of cash but as far as my portfolio is concerned, I am 100% invested in equities. Obviously I am not. The difference is my perspective. I don't look at my cash as a part of my portfolio. Like an asset allocation strategy. A part of a portfoio that must make a positive return, or even a return higher then inflation. I look at my cash as my income, since it is. I am retired but I have no pension or any government income for that matter. So I keep at least 3 years income in cash and about another 10 years in fixed income of some sort, either GICs or bonds. The rest will always be in equities. This is not an asset allocation thing. It is an income and growth type of thing. One part is for income and the other part I hope grows and the one part has nothing to do with the other part.

That said, I do spend a bit of time trying to get as much interest on that cash as I can. As much tax protection as I can. As much liquidity on it, as I can. For example using laddered GICs, but more importantly, using multi-laddered GICs. Multi-ladder is just a system where instead of one GIC coming due every year, I have a GIC coming due every 3 months, for the next 5 years, etc. Now with that said, I watch the inflation numbers but I don't really react to them. If I make 3% on my cash and inflation comes in at 5%, I figure the cost of my income comfort came in at 2%. If inflation ravages at 7%, then my comfort will cost me 4% that year. Most comforts in life come at a cost, why should your income protection be any different?
 

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Now, as I near early retirement, I've been going back and forth on the idea of keeping a ~10% cash allocation in my portfolio for those same reasons. On the one hand, it feels like a nice safety net, but on the other hand, I know full well I will lose to inflation and potential market gains.
It is a tough call on how much cash to keep on hand. For me I see one year of basic expenses as a minimum but in the early stages I might increase that to 2-3 years for sequence of return risks. Like yourself I'm not completely sold on one way or another yet.

Other safety net alternatives like GICs don't appeal to me, I just can't lock away any money, it just doesn't register with my brain.
That's an interesting perspective but if your fear prevents you from using GICs then that's not an option. Maybe use 1 yr GICs spaced 4 months apart if that time period can work for you and GIC return rate is much better than any available HISA?
 

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I don't quibble with the OP's views with one exception. Backtesting always feels more comfortable because one is dealing with known past data. Hindsight is 20-20 but the future is for the most part unknown. It is the tail end of "bell curve" probabilities that can hurt. The amount of cash reserve should reflect one's personality and whether they feel comfortable racking up CC debt, or tap into an LOC or other sources of 'cash' during a market downturn. Or simply accept that one may have to tap into selling equities in the middle of a 20+% bear market.

I don't have a percentage cash allocation in my portfolio. I have X years of an absolute amount of cash reserve set aside in HISA accounts. I would suggest that if one is holding 1 year of cash reserve, about all one can do is hold it in an HISA account or perhaps 30-90-180 day term deposits. As one extends the amount of cash reserve into 2+ years, then longer term deposits and/or GIC ladders can come into play as well. The primary objective of a cash reserve is to have Return OF Capital, rather than Return ON Capital. If all it earns today is 1.5-2%, that is the price of the sleep-at-night factor.

There are no right answers beyond one's comfort zone.
 

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What I've been doing so far is pulling a year at a time from the portfolio, at the end of December.

I think if we happened to be in a bear market at the end of December (hasn't happened to me yet), I would pull monthly for that year rather than pulling the lump all at once.

I also choose to sell whichever part of my portfolio is farthest out of balance to the up side when I withdraw.
 

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Discussion Starter · #6 ·
What I've been doing so far is pulling a year at a time from the portfolio, at the end of December.

I think if we happened to be in a bear market at the end of December (hasn't happened to me yet), I would pull monthly for that year rather than pulling the lump all at once.

I also choose to sell whichever part of my portfolio is farthest out of balance to the up side when I withdraw.
So, I take it you don't keep much cash beyond the 1 year then? I've thought of doing something similar to you since a good portion of my income will be from RRSP withdrawals, and since there's a deregistration fee and withheld taxes, I'd rather do it once a year in December.
 

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I completely share your point of view. This is a bit of detail on my perspective and cash.

The S&P 500 has roughly quadrupled in the last decade (just under). VFV has just over quadrupled in the last decade.

If you consider the 10 year returns of Couch Potato or really anyone who is diversifying and balancing sectors, they probably made well under half of that return but a few may have come close to half. There is no other approach that has returned anything close to 15% over a decade.

If you consider the worst case market crash to be a 50% value hit, that would suggest that a person with a 10 year horizon would have been best off in VFV with zero cash, bonds, or diversification. If you go beyond 10 years, it is clearly more efficient to always remain in the market during both the saving years and the spending years, regardless of market conditions.

But...

People who have had an investment advisor, trade, do much balancing, try to diversify across stocks they don't really know, etc. have had returns that do not allow them to take the risk of a 50% net worth hit. The problem with being poor is you have to buy insurance which makes you even more poor.

And then there is the notion of a 50% market hit being the worst case. This number is arbitrary and with the market being up in the stratosphere, I estimate it would be possible for the market to crash far beyond 50%.


What I do (not advising this and acknowledge it is not the most efficient way but it is reasonably efficient and lets me sleep at night)....

I keep a bit of cash because it is part of my strategy. I've scooped a couple of stock deals in the last 10 days.

I also hold GICs because I'm retired. The GICs are very, very small and there is a 1 year and a 2 year. When they mature, they will be broken down into a 6 rung, 4 month or 4 rung, 6 month ladder, instead of the current the 2 rung, 1 year. The value of these GICs is just under 3% of our portfolio and that ratio is not fixed. I selected the amount using the thought, "If the markets completely dry up, it might be nice to have a bit of walking around money without abusing our nest egg." The amount will not be increased as the nest egg grows. The plan is to reduce the cash reserve as we get older but that can only happen if the nest egg continues to do well.

Further, a 1 year and 2 year GIC is a 3 year ladder, in my view. 0-12m = HISA, 1-2y = GIC, 2-3y = GIC.

... and then there is the idea that we have a strong distributing portfolio. Only one of our companies, a tiny holding, stopped distributing in 2020. It was a restaurant that was under existential thread due to COVID lock down. It started distributing again last year.

We currently own 7 companies, no indices, and a minuscule amount of GICs. There are three positions I have not grown for two years. The number of companies will probably be 4 or 5 over the next 5 years and ultimately 3. I do not believe anyone can properly follow 30 companies. Buying companies without research is gambling to me. I consider myself a partner in these companies and, as such, I read every report, listen to every earnings call, read all related news, etc. I also do not sell because the price is high or low. I sell because I no longer want to have a partnership with the people managing the business.

As I get older, I expect to lose interest in reading news, reading quarterly reports, and doing value projections. Also, at 55 years of age I can tell I have lost some mental acuity. My parents were sharp until the end but their intellect also tapered off a bit. I plan to get into an index portfolio before Algernon stops being able to complete the maze.
 

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Anyways, this new perspective make me wonder why I would keep much cash at all, beyond the next few months of expenses. Even right now, the stock/bond markets are both not doing great, yet if I had invested my cash reserve at the beginning of 2020, it would still be about +11% more valuable today, despite the current downturn.
Really good questions, and something I've thought about too (I'm pseudo retired, though I do have occasional employment income).

I think that as long as your investment mix contains a reasonable amount of bonds, you'd have enough stability to be able to withdraw during most market downturns. Someone in a balanced fund probably only needs 1 to 2 years of cash. I currently have 2.5 years of cash, and it feels too high.

Like AltaRed, I keep my cash reserve separate from my investment portfolio and don't have a % cash amount within my investments.

@Thal81 you're saying GICs don't appeal to you, but you might want to consider these as part of your bond/fixed income allocation. GICs have some big advantages. My investments hold 50% fixed income which is about half bonds + half GICs. The ladder contains 5 year GICs which mature every few months. Consider this year, where bonds fell sharply in the first few months. If I had to withdraw from my portfolio, I'm still able to withdraw any maturing GICs. So even though my overall portfolio is down a few % this year, I could withdraw money without having to sell any depressed asset.

It takes a while to get a GIC ladder up and running, but now that I have 5 year GICs maturing every ~ 3 months, it's really a beautiful thing. I now have this part of my bond allocation that just about always has cash available -- if I need it -- and it can be withdrawn from my portfolio even in the worst of times.
 

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Discussion Starter · #9 ·
@james4beach I get what you're saying, but my whole argument is, if you had bought a balanced fund instead of that maturing GIC a couple years ago, you'd still be better off selling the depressed asset today. It wouldn't feel good though, I can give you that :)

I appreciate the answers overall. I think keeping 2-3 years in cash/GICs outside the portfolio, rather than a % allocation, makes sense. At least to get over the sequence of returns risk in early retirement.
 

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Now, as I near early retirement, I've been going back and forth on the idea of keeping a ~10% cash allocation in my portfolio for those same reasons.
As discussed already, I wouldn't use percentage allocations for cash. I would decide how much I felt was needed for whatever length of time, and keep that in cash.


I've thought of doing something similar to you since a good portion of my income will be from RRSP withdrawals, and since there's a deregistration fee and withheld taxes, I'd rather do it once a year in December.
Why would you withdraw from an RRSP with its fees? Why not a RRIF?

if you had bought a balanced fund instead of that maturing GIC a couple years ago, you'd still be better off selling the depressed asset today.
And it could have just as easily been the opposite situation depending on a lot of factors. It's all a question of risk at the time you make the decision, and not analyzing it years later.

ltr
 

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Really good questions, and something I've thought about too (I'm pseudo retired, though I do have occasional employment income).

I think that as long as your investment mix contains a reasonable amount of bonds, you'd have enough stability to be able to withdraw during most market downturns. Someone in a balanced fund probably only needs 1 to 2 years of cash. I currently have 2.5 years of cash, and it feels too high.

Like AltaRed, I keep my cash reserve separate from my investment portfolio and don't have a % cash amount within my investments.

@Thal81 you're saying GICs don't appeal to you, but you might want to consider these as part of your bond/fixed income allocation. GICs have some big advantages. My investments hold 50% fixed income which is about half bonds + half GICs. The ladder contains 5 year GICs which mature every few months. Consider this year, where bonds fell sharply in the first few months. If I had to withdraw from my portfolio, I'm still able to withdraw any maturing GICs. So even though my overall portfolio is down a few % this year, I could withdraw money without having to sell any depressed asset.

It takes a while to get a GIC ladder up and running, but now that I have 5 year GICs maturing every ~ 3 months, it's really a beautiful thing. I now have this part of my bond allocation that just about always has cash available -- if I need it -- and it can be withdrawn from my portfolio even in the worst of times.
 

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Discussion Starter · #12 ·
Why would you withdraw from an RRSP with its fees? Why not a RRIF?
Because I will still be relatively young when I leave the workforce, and on the off chance that I find something I love to do and earn employment income again, I want the option to stop withdrawing from RRSPs, which I can't do after I convert to a RRIF. In any case, I think the withdraw fee at TDDI is $25, so not too bad if only once a year.
 

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I believe that there are two variables to consider.

The first is your spend. The second is your total income from CPP, OAS, defined pension, plus any guaranteed income from other annuity sources.

During covid our only drawdowns were for income tax payable and gifting to children.

We go with a conservative number that covers all of our personal bases. We vary between 9-18 months to cover the ‘gap’ (we can cut spending if we have to) and a year of tax instalments and estimated tax payable.
 

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@james4beach I get what you're saying, but my whole argument is, if you had bought a balanced fund instead of that maturing GIC a couple years ago, you'd still be better off selling the depressed asset today. It wouldn't feel good though, I can give you that :)
But I'm not saying the option is between a balanced fund and a GIC.

I'm saying that the balanced fund should contain the GICs. Then you have the same performance as a balanced fund, and you get the additional benefit of being able to withdraw without ever having to sell depressed assets.

Put the GICs inside the balanced fund as part of the asset allocation. The benefits are a total "freebie" and there's no performance loss.
 

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Because I will still be relatively young when I leave the workforce, and on the off chance that I find something I love to do and earn employment income again, I want the option to stop withdrawing from RRSPs, which I can't do after I convert to a RRIF.
You know that you can transfer whatever amount you like (pre-71 yrs old) from your RRSP to a RIFF right?
 

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IIRC, Karsten at Early Retirement Now wrote about a cash wedge strategy and the numbers aren't optimal versus investing the cash. But I frequently fall back to Morgan Housel's comment about it's ok being reasonable versus always being rational. Decisions don't have to always have to be mathematically optimal for it to be the right choice for your life.

Going into retirement this April, I had about a year's worth of cash based on my half of our combined spend. On the plus side, my portfolio is generating enough dividends/yield without immediate risk of cuts that I'm currently not overly concerned about hitting my targeted cashflow numbers for the next 2 years without having to sell shares/units. However, in our current environment, I do wish I had gone into retirement with a little more cash on reserve (1) so that wouldn't have to heavily rely on yield and fear cuts/fluxuations in the back of my mind and (2) for the mental aspect of having cash at the ready. Similarly, I don't think of it from a portfolio percentage persective but annual funding spend perspective. Hindsight being 20/20, I likely could have done so easily by replacing a small amount of my bond allocation in my RRSP to some GIC's.

Because I will still be relatively young when I leave the workforce, and on the off chance that I find something I love to do and earn employment income again, I want the option to stop withdrawing from RRSPs, which I can't do after I convert to a RRIF. In any case, I think the withdraw fee at TDDI is $25, so not too bad if only once a year.
You know that you can transfer whatever amount you like (pre-71 yrs old) from your RRSP to a RIFF right?
I've been trying to wrap my head around how to execute this also. I was considering paying the $25 withdrawal fee for an annual RRSP withdrawal too. Or determining if it worth it to save $25 to migrate a portion of my RRSP into a RRIF every year I want to withdraw from my RRSP/RRIF.
 

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Consider this year, where bonds fell sharply in the first few months. If I had to withdraw from my portfolio, I'm still able to withdraw any maturing GICs.
I wish to point out that you probably mean bond funds, and not bonds. A maturing bond ladder does not lose equity except in a default situation and they pay a damn sight more than a bond fund without anyone absorbing the already low interest income.
 

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I've been trying to wrap my head around how to execute this also. I was considering paying the $25 withdrawal fee for an annual RRSP withdrawal too. Or determining if it worth it to save $25 to migrate a portion of my RRSP into a RRIF every year I want to withdraw from my RRSP/RRIF.
I don't see any drawback to having a RIFF account. For those early in retirement only transfer the money you plan to withdraw that year from your RRSP into the RIFF. No fees doing this from what I've read.
 

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I wish to point out that you probably mean bond funds, and not bonds. A maturing bond ladder does not lose equity except in a default situation and they pay a damn sight more than a bond fund without anyone absorbing the already low interest income.
I hold individual bonds and they fell just the same as a bond fund. Individual bond prices do of course react to changes in interest rates, so they fall in price.

But holding individual bonds does have the same advantage as GICs, that is, you can let an individual bond mature and withdraw it without having to sell.

I hold a mix of individual bonds + GICs in a big ladder that stretches out 10 years. I treat the individual bonds and GICs exactly the same way, holding all of them to maturity. I really like this method and it's proved its worth during this rough time in bonds.

Although the account value (the aggregate price of all them) is down significantly, I haven't really experienced any losses because I never had to sell any at a loss. I just let each bond or GIC mature.

The only downside of this: it's a lot more work than holding a bond fund. You have to deliberately reinvest and roll over maturing amounts. In a few months for example I'll be buying the shiny new 2032 or 2033 Canadian government bond that was recently issued. Hot off the printing press!
 
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