I decided I wanted to cash in a few chips and take some of my profits off of the table. I sold off investments and increased retirement cash holdings in my portfolio. Not just a little bit either. I’m on my way to 20% of my portfolio being cash. My decision had nothing to do with in-depth analysis of the yield curve or stock price to earnings (PE) ratios. Nor inflation threats or claims a lack of available workers may drag down this country’s latest economic growth predictions. Not to mention the possible negative economical impact of trade wars. Nope, it’s simply because of the convergence of my age, life expectancy, and the numbers to cover my nut with less on the table. It’s personal.
Increasing Retirement Cash Holdings – What’s the Right Portfolio Percentage?
We all know we have to accept investment risk if we want decent returns. You have to play to win. Nobody can exactly predict or time the market. Major drops happen when they happen. That means we have to stay in through thick and thin.
Investment history suggests that over the long-term the balance of risk vs returns is generally favorable to the investor. Especially when we are practicing dollar cost average investing through both good and bad markets. But that all turns more into a gamble as the investor’s age vs longevity ratio tightens and we are no longer feeding the portfolio with earned income but instead depending on the portfolio to fund our retirement lifestyle. Market recovery time becomes more critical. A 5 year recovery period is a bigger percentage of your remaining life when you’re 60 than when you’re 45.
Portfolio Rebalance and Re-Running the Numbers
When I retired at the age of 51 I kept a small amount of my net worth in cash. I have different expectations now that I will hit the age of 60 later this year and can almost see my Social Security full retirement age ahead of me. I know how fast my years in early retirement have flown by thus far and will soon no longer be considered an early retiree.
For the most part I use the 110 minus age declining equity glidepath approach to rebalancing my portfolio. Subtract your age from 110 and that is the equity portfolio percentage to consider having. Logically that leaves the rest to bonds and cash. I use 110 instead of 100 for my declining equity glidepath rebalance calculation because Social Security will eventually play a role in the non-equity side of retirement funding. The calculation doesn’t explain how much cash is appropriate in the non equity side of the portfolio. Opinions seem to always be critical of holding too much cash. As far as I am concerned, when you have experienced a good run and have enough, it’s time to set aside some of your winnings.
I settled on 4 years retirement funding in cash plus a $25K emergency fund. My retirement withdrawal strategy uses a bucket approach and the cash is in my IRA’s bucket #1 and a savings account. My portfolio allocation looks like this:
- 18.5% Cash/Cash Investments
- 29.5% Bonds Fixed Income
- 48% Equities
- 4% Alternatives
To determine how much cash I wanted I simply understood my overall goals.
- Not have to worry or sell equities during a rotten market.
- Have my portfolio last as long as I do.
I then ran the numbers through the retirement calculator-FireCalc. I used 35 years of funding, 45% equity investment position, social security provided estimate amount, bumped up my yearly spending amount by $10K to counter higher cash holdings with its lower returns, and let her rip. The results looked great!
Full Proof? Hardly
Cash doesn’t offer anything in earning interest today and I have no idea how hard inflation will hit. Will interest earnings climb enough to offset inflation? Who knows. I also don’t know what will happen with social security, the markets, or the price of tweets in the White House. However, I am comfortable with this level of cash holdings even going to 20%. This is a decent time to take profits and I will continue rebalancing as long as the market continues to climb. I feel that the FireCalc calculation padding I used in my income numbers and longevity (I seriously doubt I will live to 95) that my odds look really good. Aside from all the financial considerations there is also the mental benefits to my increased cash move.
High Retirement Cash Holdings – Cowardly or Courageous?
I do have a healthy fear of another market crash and multi-year recovery. There have been enough of them in my years of investing to know there will be more. I am making some optimistic assumptions when there are plenty of unknowns going forward. But what’s new there, there’s always unknowns when it comes to investing and retirement. I do count on adjusting things as needed.
I don’t see pulling a higher amount of cash to the side as either cowardly or courageous. This is simply wanting to hedge my bets and have options. I can cease selling any assets or taking IRA withdrawals in a down market and take advantage of opportunities to buy investments when they arise.
As far as I can see, taking profits after a historically long running Bull Market to have higher retirement cash holdings provides both downside protection and upside opportunity. At least in my personal situation. What is the perfect percentage of cash holdings to have in one’s retirement portfolio? How much cash is in your portfolio?
Great post! I’m about your age with almost exactly the same allocation. That either makes us both really smart or…well I’m sure we’re smart! The question I ponder is whether to go back into the market after some future drop with some of the cash or not, and if so how much the market needs to drop to signal a good place to get back in with half of the cash? Do you ever see yourself doing that?
Thanks for the comment Steveark. In the spring of 2009 after the market had bottomed and looked like it was done with it’s free fall someone I knew had cash, something I was short of. He took hundreds of thousands out of cash and bought back into dividend paying stocks. He said he didn’t know if the floor was set and didn’t care if the stock price ever rose much because he was locking into a 6% to 8% dividend return based on the stock price to dividend amounts. I wished I could have done that. I liked the idea of not worrying about timing a market floor but instead looking at locked-in future returns along with potential stock price upside. If that scenario presented itself I would certainly jump back in.
Tommy
Cash equals fixed income so you are at 50/50 allocation. Fortunately 1 year CD’s yield 2% so can earn a modest return there. Since rising interest rates could hurt the fixed income piece hedging that with cash seems prudent and helpful protecting against “sequence of return risk”. Two other thoughts about the pile of cash are: Keeping a mortgage if you have low cost debt (but having more liquidity) and if most of your expenses are met is LTC covered? (Always a head-scratcher). Also if rates start rising there is nothing precluding you from deploying the cash for a laddered bond portfolio later. Sounds like your bases are covered.
Thanks for the comment James. I actually look forward to a realistic interest rate environment. I definitely agree with your laddered bond comment.
Tommy
Sounds like a smart plan to me Tommy. You cant predict what the markets are going to do. As you get older, I think its harder to have to wait 5 or 10 years for a recovery or rally. And like you mention, with some extra cash on hand, you can always buy in with some small amounts when the markets are down. I probably have a bit too much cash that I should have invested sooner (still a good problem to have I suppose). I hoping for some better entry points to put more of it to work. Ultimately you have to do whats most comfortable for you. Its hard to look back at the returns and think you’d have x amount more if you were at 80 or 90% stocks. But you also have to consider the risk and volatility that it took to get there and how that could impact your sequence of returns etc if you needed the money during a downturn.
Thanks for the comment Arrgo. As I mature in my early retirement I get better at recognizing the value in being content with having enough instead of concerning myself with wanting more. Portfolio risk management isn’t as sexy as aggressive stock investment strategies but I feel it is really important once you are retired and expecting your withdrawal strategy to support you for the rest of your life.
Tommy
Thanks for sharing the post. The way you narrated the post is well understandable. I will regularly follow this type of blogs to learn some new things. Please let me know for the upcoming posts.
Retirement planning is quite crucial. It is as important as invest in stock market for beginners. Thank you for explaining about it. You explained why and how one should increase the limit of his retirement holding. Several people will certainly find the blog very useful.
Thanks for the comment harshkoli. I am happy you found value in this article. There is an investment arc over one’s lifetime that should begin early when we are young and then adjusted to our life’s realities as they are revealed.
Tommy