How much cash should you keep?
Inspired by a number of reader questions over the years, I thought I would chime in on this subject: how much cash should you keep including our plans 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.
And 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!
How much cash should you keep?
There are a few things to unpack above so I’ll try and tackle answers to those questions below.
First, good on any reader to take more control over their money.
Here’s my take on how much cash should you keep!
1. I think any money you absolutely need/will absolutely depend on in the next 1-2 years should likely be in cash or some form of fixed income.
Cash can be king.
Meaning, if you’re saving for a house (i.e., you really need that down payment) or if you have any other major spending item coming up, then your money should not be in stocks, it should not be in real estate, it should not be in any near-term volatile investment.
That’s just me.
Any money you absolutely need/will spend within the next 1-2 years should be maintained in cash.
That includes some of your retirement money.
I say this for the latter because who knows what the future holds. I personally believe any combination of a basic emergency fund + cash on hand to combat at least a 12-month major stock market calamity should be readily accessible for any semi-retirement or retirement.
Cash should be there when you need it or ready even when you don’t think you need it. I just think that’s smart planning.
You’ll read on below we intend to increase our cash buffer beyond our emergency fund when it comes to semi-retirement planning.
2. I think most people should have an emergency fund.
Other than a few occasions where we’ve dipped into this account, we strive to keep cash on hand / our emergency fund at this level and have done so for almost a decade now.
Sadly, $hit will happen to good people.
I believe the last thing you want in any financial emergency for you is to go into more debt (and/or the stress of taking on more debt).
Keeping an emergency fund may not cover the entire financial emergency you have but it will help!
How much cash should we keep?
Passionate readers of this site will know we are approaching semi-retirement in the coming years.
In our “bucket approach” to begin semi-retirement with, we aspire to keep one years’ worth of cash / spending needs at all times.
Beyond semi-retirement or future income from other sources (e.g., CPP, OAS, small workplace pensions, etc.) we’ve divided our personal portfolio into three key buckets to manage:
- Bucket #1 – Cash Savings
- Bucket #2 – Income from dividend paying stocks
- Bucket #3 – Distributions from Exchange Traded Funds (ETFs)
In The Psychology of Money, author Morgan Housel shared:
“The most important part of every plan is planning on your plan not going according to plan.”
How true.
Housel went on to write in his book:
“The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.”
Read more: The Psychology of Money.
When it comes to semi-retirement spending or early retirement spending, I believe the worst thing you can likely do in any potential market meltdown is sell lots of equities.
So, that means you need to consider a blend of bonds and stocks (equities) that you don’t panic sell when things get rough or come up with a sound, rules-based systematic withdrawal plan that mitigates portfolio ruin in retirement.
Some folks might argue the “4% rule” is a good rule of thumb for any retirement drawdown plan. I believe that rule is a decent starting point but hardly a rule to follow.
Here is an early retiree that totally ignored the 4% rule.
Here are some other posts on my site to help you and others out on that subject:
How to use Variable Percentage Withdrawal (VPW).
I know some readers on this site use the VPW approach to drawdown their portfolio. I will likely use some form of this myself.
Is our 1-years’ worth in cash too much?
Reader: “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 question but I don’t see it that way.
We’ve determined our average, basic monthly spend in semi-retirement, excluding any major vacations and excluding major purchases, will be upwards of $4,500 or so per month.
We feel entering semi-retirement with ~ $50,000 in cash to cover any financial emergency when we’re no longer working full-time (instead, working part-time) is likely “enough”.
We will keep this cash inside a higher interest savings account and/or inside my corporation. Likely a blend of both.
We will also keep a few thousand bucks inside each of our non-registered, TFSA and RRSP accounts to make some strategic purchases a few times per year…stocks tend to go on sale from time to time!
That means we probably won’t touch any capital from our portfolios in our 50s as we work part-time.
Instead, we’ll work part-time and largely live off dividends and distributions paid from the stocks and ETFs we own. Part-time income will cover the rest of our expenses. Your mileage may vary!
When should I build up my cash wedge?
Reader: “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!
We believe having multiple income streams in semi-retirement will provide redundancy. We won’t be reliant on any singular income stream to fund our needs and wants.
Again, a reminder:
“The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.”
For any retiree, I believe when you’re about 3-years away from semi-retirement or seeking full retirement is when you need to consider your cash wedge.
Reader: 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.
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 stock shares commission-free.
With various companies we own in my taxable account and our tax-free accounts (thanks TFSA!) churning out more dividends coupled with dividend increases every year we’re really starting to accelerate towards our dream-like goal of earning $30,000 per year to start semi-retirement with.
How much cash should you keep summary
Your personal finance journey will be forever personal.
Our cash journey might be different than yours!
Our decision:
We’ve decided to ramp-up our cash savings beyond our current emergency fund from ~ $10,000 up to ~ $50,000 in cash to start semi-retirement with in a few years.
Our cash wedge will be savings held largely in a higher interest savings account and/or as part of my corporation savings. Keeping that cash balance between these accounts will be readily available if and when we need it.
This cash wedge will be in place before part-time work begins. Once we retire, i.e., stop working altogether, we might revisit our approach including our cash balance. It could be less, it could be more!
Until then, that is how much cash we intend to keep starting and during semi-retirement: 1-year’s worth.
That will cover any key expenses for an entire year.
Readers, what do you make of having any sort of cash wedge or higher cash savings position in semi-retirement or retirement?
How much cash do you intend to keep? Why?
Do you believe my/our goal of keeping $50,000 in cash savings is too much of an opportunity cost?
Happy to read and learn about your cash approach or feedback on mine below! Thanks for your readership.
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
I’m going to call you on this:
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!
Not everyone has the income to save this much money either! Its not all about time and effort!
Call out away, Christina!
Time, effort, living below your means is absolutely key. No question about it.
Sure its important, but i’m single and make 60,000 a year, to suggest i have the same portfolio size as you at age 50 is utterly ridiculous.
Thanks for your blog i enjoy all your articles and good luck on your retirement journey.
Thanks very much.
Yes, true, but it’s also a stretch for me to retire with $2M or $3M invested like many others might. I know plenty of folks that have done far better than me financially. I also know I’m ahead a bit of others. It doesn’t matter. Personal finance is all relative and very personal.
As long as you are meeting your goals, your objectives, on $60k or $600k per year, that’s all that matters.
I hope that provides some context and I appreciate the call outs.
Mark
Thanks Mark. Good advice to focus on your goals. I’m a little oversensitive I think. I just recently realized if i’m supposed to have 70% of what a couple has in retirement i should be saving more and its a little daunting. (I do have a pension that will help.) But this interaction reminds me that i should have a raise coming up and you are supposed to increase what you save when you get a raise so hopefully that will help!
All good, Christina, and yes – if you can find a way to “bank that raise” those types of things will really help!
Mark
How much cash?
Where I’m at today: When combined with regular income, such as, dividends. rent, and pensions, at least enough cash to cover three years of spending from the moment the markets dip by an amount where it starts to feel uncomfortable to be selling equities.
I recall reading, and I wish I could remember where, something along the lines of whatever the number is you’ve come up with for your cash bucket, it isn’t enough!
Sometimes everything goes to pieces at the same time, like today, and sometimes things don’t recover for six+ years. So, do you prepare for the short-lived crashes, average duration crashes, or worst case crashes? Is having cash sat around waiting for such a situation a lost opportunity? With hindsight following a booming market, absolutely, but if you’re reading this, how much money have you put into life insurance premiums (on your own life), and you’ve had zero return! Same goes for any insurance that you never claim on. Perhaps we should be looking at the cash bucket as an insurance policy, and have it just a little bigger than we at first thought it should be.
Just a few thoughts rattling around my head.
Great details.
Well, if assume dividends are guaranteed (not in my book), I will eventually have >$4k per month to spend. We’ll see 🙂
That said, I sleep better with cash in my bank account. I have no worries about spending $5k or $10k as needed on a moment’s notice.
Worse case, I can invest that money from time to time!
I see this cash wedge/larger cash cushion vs. my investments as more like a short-lived crash whereby I need money and do not want to spend a cent from my portfolio, dividends or otherwise. Meaning, I wouldn’t have to withdraw a cent from my portfolio for months if I didn’t need to do so.
Will that be ever needed? I have no idea 🙂 I hope not which is why I have the money just in case.
Hi Mark,
I was surprised to see that no one mentioned using their personal line of credit (secured against a home, so slightly lower interest rate) as an emergency fund. Assuming financial surprises are few and far between, you could have that 50K in cash invested and collecting dividend income, which hopefully would cover any interest you might pay while repaying the loan. If your lucky and never need the emergency fund, you are money ahead.
Howard
Interesting point, Howard. I think the challenge for some folks, is, with interest rates/borrowing costs going higher (as they should IMO – been way too low for way too long….), tapping LOC triggers more debt.
Certainly, if some folks are struggling with debt, now, and they have an emergency – should they really borrow more money?
Back to me, I think $50k will be plenty to start semi-retirement with. Maybe too much?
$50k invested would trigger, what, about $2k-$3k in dividends per year? Not bad really and I see your point in using that income stream to pay off the LOC.
What cash are you keeping on hand?
Mark
Howard, you’re making a lot of sense here. I understand this does not work for everyone, but as a DIY Dividend investor we have dividends to cover all expenses, and more. Why wait for an emergency that may or may not come? Use cash to compound your investments. When retired and in your own home a line of credit is all you need. I can’t remember a time when I needed to access my LOC for an emergency. I’ve used it to invest, to buy cars, any time I had a big expense. Then pay it off in short order with dividends. Now it just sits there just in case. That is the only emergency fund for me.
Very fair, DivInvestor!
Mark
Went into retirement with 2 years of living expenses in cash. Invested fully in market (2/3 XDV 1/3 CPD) with portfolio generating enough to replenish annual spending thereby (hopefully) keeping 2 years living expenses in perpetuity. While I believe a 1 year cushion, with adequate dividend flows to replenish would be sufficient, the 2 year cushion gives me (so I sleep soundly at night) 2 advantages. The first being using some of that 2nd year cushion to fund extra spending (if desired) which seems to come up in the early retirement years, without eating into your capital . Secondly, since your current dividend income will not be spent for 2 years, you have sufficient time to adjust your spending to any income shocks that may occur. Been retired now for 7 years and still have my 2 year cash cushion in place. Spent into cushion in early years for some additional travel but have replenished cushion through reduced spending in other years.
Terry, that’s impressive and well planned for your personal situation.
I think as we enter part-time work/semi-retirement, one year in cash savings should be enough but you never know!
I will consider going 2-years’ in cash/GICs like a more traditional cash wedge when full retirement occurs/not working at all.
I’m not sure when that might be, but full retirement could be 10 years from now.
I do appreciate the fact that when I turn off my DRIPs, the cash can accummulate and I can withdraw that cash for spending from my portfolio. Thoughts on that? Do you still DRIP your stocks or ETFs?
Mark
We let our dividends accumulate in the cash portion of our investment accounts replacing the cash we spend monthly (DRIP not used since we retired). Have not worried about the return on this cash to date, as interest rates have been so low for the last decade, but have been looking at short term rates lately.
Have found that our living expenses in retirement are much lower than before (excluding travel) or what the financial industry states. It surprised me how after several years of retirement my priorities changed. Our discretionary spending has changed considerable from our working days freeing up cash flow and reducing our total income needs. While we did spend more in the first few years of retirement we found we have settled into a comfortable and lower level of spending in general. I personally believed that once your income from investments/pensions exceeds your living expenses then further wealth accumulation is unnecessary from a financial standpoint.
If I could give one piece of advise to those contemplating work retirement is to try living for 1 year (tracking ALL spending) on what you believe you will require in retirement. Use this information to make an informed decision on your retirement plan and adjust accordingly. If everything works out now your only question is when to pull the plug.
Have always found your blog very informative in a common sense approach to retirement planning.
Thanks for the kind words, Terry.
That sounds like my plan, a bit?
1. RRSPs = stop DRIPs in my/our 50s and basically spend the dividends and distributions from the accounts each year/withdraw the cash. This means RRSPs/RRIFs will be depleted in my/our 70s.
2. Non-reg. investment accounts = stop DRIPs in my/our 50s and basically spend the dividends and distributions from the accounts each year/withdraw the cash. Slowly sell the stocks in taxable over decades.
3. Leaving TFSAs intact until my 70s or 80s.
You: “Have found that our living expenses in retirement are much lower than before (excluding travel) or what the financial industry states. It surprised me how after several years of retirement my priorities changed. Our discretionary spending has changed considerable from our working days freeing up cash flow and reducing our total income needs.”
Very interesting…I have a budget spreadsheet to know what we need, now, and basic expenses (food, shelter, transportation) equate to about $4,000 or so per month. Fun, entertainment and travel will be another $2k or so per month.
I figure any target spend of about $6,000 per month, on average, in retirement, will be very good. If I can “live off dividends and distributions” in retirement, first 5 years, with the portfolio churning out $6k per month (excluding CPP, excluding OAS, etc.) then I know my wife and I will be more than fine without any debt on the books.
I’ve learned/continue to learn from others that:
You: “I personally believed that once your income from investments/pensions exceeds your living expenses then further wealth accumulation is unnecessary from a financial standpoint.”
Love it.
Mark
Terry,
I also allow the dividends to mount up prior to pulling them out in December, but I buy Horizon’s High Interest ETF (CASH.TO) each month. I earn interest that is greater than the transaction fee (in Questrade there’s only a sell fee). Better than the cash doing absolutely nothing.
Dear Mark,
I am a senior whose husband recently died, and “my” income will be quite dramatically reduced. I am grateful for my significant cash wedge which has spared me at least money anxiety as I deal with paperwork delays over his reduced pension income.
I was the one interested in investing, and I made all the mistakes one could, but some of them were mistakes I’m okay with. Despite my extreme home bias, triggered by my earlier loses in a US mutual fund, I have made “enough” in investments. Another person would be frustrated by the money I’ve left on the table. Some of us are biased towards sleep well at night, and others towards not leaving money on the table. An investor’s personality plays a huge role in what’ s best for them.
I am a long term reader and enjoy your blog. I suspect I am inclined towards a “what I think myself” bias, much like a home country bias. Thanks for the enjoyable reads.
Sharon, I am very sorry for your loss. My condolences.
On the investing side, I suspect your cash wedge has served you well and seems very smart in hindsight. Kudos for that level of catastrophe planning.
I too have made a number of investing mistakes. I’m simply trying to limit them as I move along my journey. I suspect we don’t learn unless we make a few mistakes in life along the way…
I fully appreciate the sleep-at-night factor. I know I feel better with some cash savings in the bank to go along with my dividend income and low-cost ETF journey. I’m far from perfect when it comes to investing but I figure if I can continue to do a number of good things right, that’s all I need.
Best wishes to you and thanks for your readership Sharon. Stay well.
Mark
Good topic with well thought out options for yourself and for others to consider. Its very personal and probably varies a lot by person and all circumstances, needs etc.
We have about a years spending worth in a HISA for easy accessibility, and about another 9-10 years of spending in FI accessible both if we didn’t want to rely on dividends/distribution for income, or to reinvest that, or finally to rebalance if markets dropped significantly.
Wow, that’s great. I have a new post out today about bonds. I look forward to your comments 🙂
Funny on that timing!
Ha, just posted 🙂
https://www.myownadvisor.ca/why-would-anyone-own-bonds-now/
I look forward to your reply.
That’s impressive: “We have about a years spending worth in a HISA for easy accessibility, and about another 9-10 years of spending in FI accessible…”
I figure once any/all dividends and distributions cover basic expenses (excluding CPP, excluding OAS and excluding any TFSA withdrawals) that should be “enough” as we work part-time. The real question for us will be when we stop working even part-time. I suspect we’ll want a bit more of a cushion.
Thanks. It’s not for everyone but so far is ok for us. There is a financial cost to it. Ideally I’d continue on our current path and bring that FI down by a years worth each year until CPP (~7+ yrs) by spending from it, and then hold maybe ~2-3 yrs worth of FI/cash at age 70+. Loosely my plan.
Great plan Mark. I agree.
I believe you’ll know when is the right time to stop work. I was always highly motivated for work and I felt that wane a bit from 100% and decided right then for my employer, customer and myself it was best to call it a day. I had been earning a lot more even working PT then than before, so it took thought to leave.
I suspect you will too. I believe the hardest thing you’ll face in semi or full retirement by far is letting go and spending even remotely close to your possibility. Switching to that after being so focused on accumulating will be tough and I think you’ll want to build that pile for a long time! But maybe you want that.
Should CPP and OAS and some pension almost cover all expenses (at ages 70+), and then you have your portfolio value by which you can live off 2-3% withdrawals if necessary for life (i.e., the ETF or stock distributions), then I don’t see the need of keeping a decade or more worth of FI.
A couple of years (2-3 years), for sure in cash or with GICs but not more.
It will be interesting to see how my views will change with time. I remain motivated by work and I enjoy my current team. I have a feeling I know when the time will be right! 🙂
You may find that your need for a huge chunk of cash changes over time. When I first stopped working fulltime, I kept 2 years of expenses in cash plus had a lot of bonds. Now, 2 decades later and fully retired, I have about 4-6 months of expenses in cash– mostly to smooth out the lumpy dividends that I live off, and zero bonds. So your comfort factor may increase over time as you get used to living primarily off your investments, reducing your need for “sense of security cash”
That’s some great perspectives Ed. I’m going with 1-year to enter semi-retirement with – other than that – 100% equities across my portfolio. Maybe too risky for some but if I’m still working that’s a good buffer I think. I will know more in a few years! 🙂
Happy New Year!
Thank you for re-posting this article Mark, very useful! All the best to you and your family in the new year!
Glad it helped! Again, just my plan and I’m also trying to align my ETF % up to about 50% at the start of semi-retirement in a few years.
Happy New Year back!
Most financial experts end up suggesting you need a cash stash equal to six months of expenses: If you need $5,000 to survive every month, save $30,000.
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.
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
LOL. Not that smart 🙂
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.
“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 🙂
Well, well, well it’s finally happening. I wish I was still in the saving mode — lots of good deals out there people — grab some everyone!
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 .
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!
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 🙂
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
I hope I can Gary!
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!
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!
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.
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
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.
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
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
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.
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.
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
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.
I forgot to mention that our five years worth of fixed income includes dividend income.
I think you’re in a great place then Bob with that much fixed income as a buffer.
Very well done.
Mark
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
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.
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!
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.
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 🙂