How much cash should you keep?

How much cash should you keep?

Inspired by a number of recent reader questions, I thought I would chime in on this subject: how much cash should you keep including our plans for the future when it comes to cash.

Reader questions (adapted only slightly for the post)

Hi Mark,

In a recent weekend reading the following quote caught my eye: “The only time you should be worried about a correction is if you need the money within the next five years and haven’t made an appropriate plan to access the cash.

What did you mean by that?

I am 68 years old and my portfolio has done quite well during the last year. I feel however there is going to be a major market correction (cause unknown at this point) and would like to put a plan in place to access the recent growth (still within my RRSP). I have raised this with my financial advisor who says to stay invested (modest growth profile) however I don’t feel I have a plan in place that addresses my needs in the next 1-5 years.

Thoughts?

Overall I am happy with my financial advisor’s advice but feel that changes are needed.

Related to the email above…

Hi Mark!

You might be on holidays – and if so, I hope you ignore this email until your return. (Mark – I didn’t!)

I just wanted to check in to see if you know when you might cover this. In particular I’m keen on better understanding a “plan” to access the recent growth I’ve had in my RRSP as I don’t think I have the timeline to go through another 2008 type of recovery to my portfolio. I am thinking about it as a “fold and hold” strategy.  I think I would sleep better although my advisor wants me to stay fully invested – however I think this might be to his advantage rather than mine. 

Another one…

Mark,

I know you have talked about having a cash fund to cover 1 years’ worth of expenses. At the same time you mention the importance of being invested. Is that conflicting a bit? 

What I mean is, our rule of thumb is $30k invested, creates $1k of dividend income. So you can quickly figure out how much you need invested to cover your yearly costs.

Back in our student days, we tried to keep a cash balance of $500. That slowly went up to $1k. Now, years later, that fund tends to float around the $5,000 mark. Having two kids, it is amazing how much money flows in and out of the chequing account each month! Stunning really, if you went back in time and told your 10 year old self how much money you would have filter through your hands each month. Damn!

I can see the rationale for wanting a cash safety net, but when do you build it up? And by the time you might build one, you should at that point already have a solid stream of income that covers your expenses. See my rule of thumb above.

Once you punch through to the double coma world, or double dot if you’re European, you might find you don’t need as much cash on hand since the portfolio delivers everything you readily need.

The monthly income growth via dripping takes a life of its own…

I know some of your readers think this way already, which is ideal, since the best thing we did was track income from the beginning. Yes, the capital amount is nice to observe, but that isn’t what we plan to have paying the bills.

The summary: when the income from your portfolio delivers what you need and then some you don’t need as much cash on hand as you think.

Great stuff readers!

A few things to unpack above so I’ll try and tackle various questions and comments in the order they appear above.

First, good on the first reader to take more ownership over their money. To clarify though, that quote was from Boomer & Echo’s site from my post. That said, I do happen to agree with Robb who runs that site with a few clarifications on my end/my perspective:

1. I think any money you absolutely need/absolutely depend on in the next 1-2 years should likely be in cash or some form of fixed income. Cash could be while you’re saving for a house when younger (i.e., you really need that down payment) or cash that is potentially set aside during retirement. I say this for the latter because who knows what the future holds and I think any combination of a basic emergency fund + cash on hand to combat at least a 12-month major market calamity or other should be readily accessible. Cash should be there when you need it or least expect to need it. I just think that’s smart planning.

Other than a few occasions where we dipped into this account, we keep our emergency fund at this level. That money is in a savings account, earning interest, slowly growing the emergency fund over time.

2. I think most people should have a cash/emergency fund. $hit will happen and I think the last thing you want in any financial emergency is more debt. What that emergency fund must be for you, is hard to mandate. I would say however having at least a few weeks if not a few months of basic expenses to be covered by your emergency fund is very smart planning.

Our cash fund plan in the coming years…

We hope to keep one years’ worth of cash as we enter semi-retirement in the coming years. This cash will act as our emergency fund/cash wedge.

Check out the post but the graphic below is our current thinking:

My Own Advisor Bucket Approach May 2019

Creating some form of “bucket approach” for your retirement income stream might work well for you.

Your financial advisor might not be wrong…

I would sleep better although my advisor wants me to stay fully invested – however I think this might be to his advantage rather than mine.”

He/she might not be wrong!

I think any money you might need in years 3-5 should likely be maintained in some form of fixed income and/or in the form of assets that should deliver dependable income. I believe the worst thing you can likely do in any potential market meltdown is sell lots of equities. You do need to stay invested. 

So, that means you need to consider a blend of bonds and stocks (equities) that you don’t panic sell when things get rough. Rather, use of mix of bonds and stocks to stick to a withdrawal plan that mitigates portfolio ruin in retirement.

Some argue the “4% rule” is a good rule of thumb. Others will strongly disagree for some good reasons. 

Here is an early retiree that totally ignores the 4% rule.

Maybe this is a subject you can discuss with your financial advisor. The mix of bonds and stocks to deliver a sensible, variable percentage withdraw plan for your portfolio.

Here are some other posts on my site to help you and others out on that subject:

How to use Variable Percentage Withdrawal (VPW).

The benefits of VPW are here.

I know some readers on this site use the VPW approach for their portfolio draw down approach to a great success. I would further state if your financial advisor does not know about this approach, it might be time to find a new advisor!

Is 1-years’ worth in cash too much?

I know you have talked about having a cash fund to cover 1 years’ worth of expenses. At the same time you mention the importance of being invested. Is that conflicting a bit?”

Great pointed question but I don’t see it that way.

I feel, rightly or wrongly at this point, having ~ $50,000 in cash to cover any emergency when I’m no longer working full-time is likely “enough”.

Will I change my mind when I actually hit semi-retirement in a few years? Maybe!

For now, I feel this cash-level is an appropriate balance between riding out any long-term emergency and/or living through a poor 12-month stock market term while staying invested like I touted above. This will allow my portfolio do most of the work in any market condition via dividend payments along with distributions.

I intend to live off dividends and distributions in the early years of semi-retirement and retirement.

When should I build up my cash wedge?

“I can see the rationale for wanting a cash safety net, but when do you build it up? And by the time you might build one, you should at that point already have a solid stream of income that covers your expenses.”

Honestly, hard to say. I hope you are correct of course. Having a solid income stream is our goal and has been one to start semi-retirement with for many years now. 

We listed our 2020 financial goals here but increasing our cash wedge to help prepare for semi-retirement didn’t make the cut.

Given we believe we’re about 5 years (or so) away from some decision-making to begin semi-retirement, it’s probably wise to start building this cash fund in the coming years. With $10,000 already in the bank, I figure we have less than $40k to go. That’s saving just shy of $10k per year towards this fund or roughly $800 per month.

Of course, we might not need to save even that much money because money that makes some money (via interest) can make more money on its own.

In 2021 I suspect we’ll consider diverting any savings towards increasing our cash fund to start semi-retirement with since both TFSAs and RRSPs should be fully funded early that year. We should have some leftover money to save when we’re no longer saving for retirement any longer. Hard to believe those days are coming!!

The only anchor we’ll have to overcome to declare financial independence with is some small mortgage debt that’s slowly being killed with accelerated bi-weekly payments right now.

I have found “the monthly income growth via dripping takes a life of its own”.

Indeed good reader!

It’s quite remarkable to see my portfolio on autopilot actually. With dozens of stocks DRIPping I can now see the compounding power right in front of my eyes every month – hundreds of stock shares buy a handful of more shares commission-free. The same thing happens next quarter. And the next…

Then there are the dividend increases…

With various companies we own in my taxable account and our tax-free accounts (thanks TFSA!) churning out more dividends coupled with dividend increases (already this year), we’re really starting to accelerate towards our dream-like goal of earning $30,000 per year from just these three accounts.

That income will pay for many of our basic living expenses – for life.

“Once you punch through to the double coma world, or double dot if you’re European, you might find you don’t need as much cash on hand since the portfolio delivers everything you readily need.”

I hope to write about our journey and realization at achieving and passing the double-comma club soon.

Readers, what do you make of having any sort of cash wedge in semi-retirement or retirement?

How much cash should you keep? What do you keep and why?

Do you believe my goal of keeping $50,000 in an interest savings account while I live off dividends and distributions is enough or too much?

Other perspectives? Happy to read them in a comment below! Share your thoughts so others can learn…

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, we're inching closer to our ultimate goal - owning a 7-figure investment portfolio for semi-retirement. We're almost there! Subscribe, join the journey to learn how I'm getting there and how you can get there too! Follow my on Twitter @myownadvisor.

30 Responses to "How much cash should you keep?"

  1. 2 questions….

    1) “1. I think any money you absolutely need/absolutely depend on in the next 1-2 years should likely be in cash or some form of fixed income”. Can that “fixed income” include an amount I would receive from an employer pension or CPP? I am in my very early 50s and my very small work pension is something I can access as soon as I leave work. Can I deduct the amount I will be receiving from that from the amount of cash I need to have? Can I reduce the amount of the cash buffer when I turn 60 and start to receive CPP?

    2) Can I withdraw the dividends from my RRSP monthly and use them to replenish the cash wedge? I know that less tax will be withheld from the bank if I withdraw them in smaller amounts. 10% withholding for amounts less than $5,000 and 20% for amounts over that. I will be a low income retiree and I want to keep all withdrawals from my RRSP, which count as income, steady throughout the years to minimize my taxes.

    Reply
    1. Absolutely. A broader definition of fixed income in my book is anything that is pension-like and therefore dependable, that could be a workplace pension, CPP, OAS, other. Consider an investor who needs and wants to spend ~ $50,000 after-tax in retirement and has $40,000 pension + $10,000 CPP benefits per year + $6,000 OAS benefits per year. In addition, they have considerable RRSP assets. Maybe this investor does need to have a major cash fund because so much of their money is highly dependable/not going to be comprised.

      It really depends. Personally, we have decided ~ $50,000 in cash acting as an emergency fund/cash wedge for a 12-month of so very bad series of events or stock market returns should be enough for us.

      Regarding 2), yes, I know of some retirees that are withdrawing from their RRSP now, spending some RRSP money now and using leftover $$ not spent to fund their TFSA every year and/or increase their cash wedge/savings and put that money in secure investments such as a GIC ladder. There is no need to always spend your RRSP withdrawals completely!

      “I want to keep all withdrawals from my RRSP, which count as income, steady throughout the years to minimize my taxes.” Smart work 🙂

      Reply
  2. We recently concluded that we have enough (or will have in a few months) so we don’t need to strive for gains much over inflation. With this new mindset, we are pivoting to having five years worth of fixed income. The mix is 50% bonds (ZAG), 20% cash, and 30% GICs. On the cash and GICs, I actively seek out the best rates.

    I have two plans in my spreadsheet; Plan A assumes a normal market as we go into retirement, and Plan B assumes a near total market meltdown the day I retire. Seeing a hint of a major market downturn over the coronaviris outbreak, I feel comfortable having Plan B.

    Reply
    1. I think I know of other retirees/investors/near-retirees that are liking ZAG for fixed income as well. Seems like a popular BMO product for many.

      The cash is smart. What GICs do you use? A ladder? Or do you do 1-year rolling terms? Curious since I might get my parents set up in something for them on that note.

      I keep my dividend income spreadsheet updated fairly regularly. I like seeing how the income earned is approaching > expenses. Once we reach our “crossover point” (dividend income + distribution income from all invested assets > expenses) then my wife and I will consider working part-time (assuming no debt of course). I figure that’s a good strategy for us and should be aligned to your plan B.

      Mark

      Reply
    2. It looks very much like I’ll be implementing “Plan B”!

      It was painful watching stocks climb higher and higher while I was building up my cash cushion. I’m glad I did.

      Reply
      1. I think this is an outstanding reminder to highlight keeping some cash is always very prudent. I wish I had more myself but I’m working on my plan!

        Reply
  3. Quote: “What I mean is, our rule of thumb is $30k invested, creates $1k of dividend income. So you can quickly figure out how much you need invested to cover your yearly costs”
    That rule may apply to “Purchases”, but by investing for Income I find that your Yield on invested dollars increases over time. The result is that your income will grow and your yield will rise or you will receive more income for less money invested.

    Reply
    1. True, it should Cannew. Just remember the yield on cost perspective applies to funds and other assets as well.

      Back from vacation and will be looking at doing our post together later this month (March).

      Cheers!
      Mark

      Reply
  4. Hi, we keep approx 8-12 months of cash in our RRSP to either pay for living expenses or deployed if a buying opportunity arises. This amount is largely untouched at this point (we are late 50s) but can be withdrawn and then taxes paid if required. Otherwise we normally supplement our income with the dividends from our non-reg account.

    Reply
    1. Very smart Peter. I probably only keep a few thousand at any point in time. I prefer to have nearly all of my money invested as much as possible.

      That said, I hope to start increasing our cash wedge beyond current emergency fund approaching that $50k in 2021 sometime.

      Thoughts on that? Seems almost aligned with your 8-12 months for future purchases…albeit different account(s).

      Mark

      Reply
      1. Well, we are fortunate that the 8-12 month “reserve” only accounts for approx 4% of total portfolio (maybe more like 5 or 6 after this week?! haha).
        We stopped automatic dividend re-investments about 3 yrs ago to build up a cash reserve, so most of that is dividends that have been paid but not cashed out of our accounts, therefore tax protected/deferred.

        Reply
        1. That makes sense. I’m not sure when I will “turn off” my DRIPs inside my RRSP and TFSA but I suspect once we’re in semi-retirement and we want to spend the dividends and distributions, that will be the time.

          Actually, thinking about it more, will likely turn off DRIPs inside RRSP before TFSA. I’ll keep the stocks DRIPping inside the TFSA for as long as I can 🙂

          Mark

          Reply
          1. That’s exactly what we did. We were DRIPing all along and then when my wife retired, we stopped them to build up this cash reserve. This was only done for our RRSPs, the TFSAs just keep rolling along and will be the “last money out of our portfolio”, sometime in 2055 or thereabouts haha

            Reply
            1. Sounds like a great plan to mimic. We intend to keep TFSA DRIPping “until the end” and use our RRSP dividend + distributions for cash flow/expenses along with our non-reg. account to pay for expenses in the early 10-20 years of retirement.

              Hoping the combination of RRSP withdrawals + non-reg. should cover most expenses (condo fees, taxes, groceries, etc.). Potentially some part-time work can cover our international travel.

              Cheers Peter, keep me posted on any deals next week. I’m looking at MSFT and the low-cost ETF ITOT myself.

              Reply
  5. Your recommendations for $500,000 inside buckets 2 and 3 by age 50 are extremely unrealistic for most people. Your bucket totals over $1,000,000 by age 50! No way Jose!

    Reply
    1. That’s a fair point Joseph but I’ve also been at investing for 20 years now and I should be at where I can with my diligent approach.

      Those folks that have not saved over 20 years like I have, diligently, certainly won’t have this portfolio value. It does take time and effort!

      Reply
    1. Indeed Gary, lots of good deals and maybe next week will bring better deals no one knows 🙂
      this is my second experiment with a drop in the market , in 2008 i didn’t even know what’s bonds and what’s stocks but i just listened to one of the teller at my bank and started investing in mutual funds in my rrsp and the whole roller coaster ride went smoothly today in 2020 I’m following a ccp portfolio and thank God to my 40% Bonds in my portfolio that smoothing the ride and i finally got to test how those boring bonds acts like a safety nets 🙂
      but yeah i agree i think we’re having a black friday sale in February this year .

      Reply
      1. Yes, a second drop but let’s remember we’re just at October 2019 levels 🙂

        We have a LONG way to go before any significant market calamity.

        That said, Gus, you’re wise to follow a lazy ETF portfolio approach and ride this out. 40% bonds will absolutely help that and you don’t invest in bonds for big returns, simply, times like these.

        I hope to buy some more assets in a few weeks once I have more money to invest via 1st of month RRSP contributions.

        Happy investing!

        Reply
        1. welcome back Mark ! Glad you had fun in Belize ( it’s on my list for retirement 🙂
          Thanks for putting the tiny pullback it in this perspective i didn’t think about it this way but seeing the chart made it a lot easier and October 2019 wasn’t that bad at all 🙂
          and yes it was a good test for my balance portfolio so i slept well at night, but I have a bit of cash that i want to add to my etfs but I’m not sure to when do i buy do i wait for Monday and see if the market is still going down ? would that be timing the market ? but then if it’s still coming down why not wait for it ? haha it’s a bit confusing for me i never bought those dips i usually stay put i guess no buying or selling so this is new for me 🙂

          Reply
          1. Yes, I mean, unless we get to 2010 levels not too worried. As long as they don’t cut any dividends on me, I’ll be happy! You never know!

            I’m going to wait another week to buy some ETFs or stocks myself. I need to let my monthly RRSP contributions happen first.

            Otherwise, staying boring here Gus.
            Mark

            Reply
  6. Mark, we use Oaken Financial for our GICs.

    We have numerous 1-year $5K TFSA and RRSP GICs (rolling terms). Their maturity dates are spread throughout the year. The GICs are intended as backup vs the planned source of income. If the markets are up/healthy around November/December I’ll sell units of the equity ETFs. If the values have crashed, I’ll sell some units of the ZAG ETF and/or cash out the GICs as they mature.

    I gave up on maximizing my dividend income a few years ago as it was way too distracting for me – I‘m bad enough as it is now with just four ETFs + some funds overseas. After five years of daily fiddling with my 21 sheet spreadsheet, I’m just about finished. I almost can’t think of anything else to add.

    Reply
    1. “I gave up on maximizing my dividend income a few years ago as it was way too distracting for me – I‘m bad enough as it is now with just four ETFs + some funds overseas.”

      Ya, I hear ya. With 40 stocks to track, I have to keep on top of things a bit but then again, I own the top stocks in a few big ETFs so I simply ride large-cap returns over time.

      You seem to have things well in hand Bob with your GICs and planned source of income when you need it. Smart for times like these 🙂

      Reply
  7. Considering the current market retreat you should have sold all your sharesa month ago and be 100% cash now so you can pick up the bargains.
    Nothing like 20/20 hindsight

    RICARDO

    Reply
    1. Ya, I don’t mind that number but I think in retirement because you can’t easily increase your income, I’m planning to keep about one years’ worth to start semi-retirement with. That’s about $50K for us.

      Reply

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