If you want to withdraw income from your portfolio, how much do you take out and when?
With the stock market up or down at any given time, how can you predict how the market will perform and how much you can take out?
This is where your cash wedge comes in – to help manage market volatility.
What is a cash wedge? How can it help you manage your portfolio?
Read on, including how I’m using cash in our portfolio and a cash wedge approach myself!
The Cash Wedge – A history lesson for any time
You might already know from a popular investing book entitled The Four Pillars of Investing (by William Bernstein), there are some fundamental investing concepts to understand to be a successful investor. I’ve leveraged those concepts for today’s post.
- Pillar 1 – Investing Theory and Risk. Whether you invest in stocks, bonds, real estate or more speculative plays like Bitcoin, you should know that you’re mainly rewarded with returns for your exposure to just one thing— risk. This means the risk you take on, for the potential of higher returns, is related. That said, you should have a plan to weather any stock market or specific investing risk in the near-term if you ever need money from your portfolio in the coming years.
Source: The Four Pillars of Investing
- Pillar 2 – Investing History and Returns. By investing history, what we mean is, from time to time the stock market and investors that invest in it go just bonkers. Yet, we see time and time again from investing history largely “this too shall pass”. So, over time, while any stock market returns might seem hard-pressed in the near-term, we see long-term equity returns trend upwards – if you hold on.
Source: Google
Source: Google
- Pillar 3 – Investing Psychology and Your Returns. Knowing risk and return are related, understanding that stock markets are unpredictable and volatile usually over a period of weeks and usually months, yet largely predictable and stable when we look at multi-year investing history, it therefore makes sense that investing success will probably come down to your long-range behaviour. That includes when you decide to invest and when you decide to drawdown your portfolio.
- Pillar 4 – Be Wary of the Entire Investing Industry. Banks will bank. Businesses will thrive when they make money. I believe the more you understand these basic concepts the better off as a consumer and investor you will be. The financial industry overall is part of a massive marketing machine designed to make money. This means, as a consumer and investor, you must be wary of the entire industry and their incentives. For sure, there are some great companies doing great things, delivering some value-added products and services for consumers, but never discount any of their motives. This makes your decision to invest in any financial product or pay for any financial service of utmost importance to your financial health.
The Cash Wedge – An approach for any time
Now that you understand the framing of where I am coming from, when it comes to holding cash, employing some sort of cash wedge in your asset accumulation years or your asset decumulation years can be a powerful tool when it comes to wealth creation or wealth preservation.
Let’s explore.
The cash wedge to support asset accumulation
You might not really think about it this way, but any cash set aside for near-term expenses while you are saving for retirement and building your wealth is really a cash wedge. It’s as hedge against known or unknown risks.
We read above that market volatility can be both an investor’s friend and foe.
If you are in your asset accumulation years, you should consider market volatility and any market declines a dear friend.
Lower equity prices can be a great chance to buy your stocks on sale – at lower prices! Think of it this way: would you rather celebrate a sale at the grocery store or higher prices?? I know my answer!
For investors that have some cash set aside, when markets decline, you can rejoice and put that “dry powder” to work. I’ve learned to train my investing brain to invest when my favourite stocks or ETFs decline in value. It is my hope by reading my site you’ve learned to do the same over time.
Further reading:
How I invest in dividend paying stocks is always found here.
Why I invest in low-cost ETFs – along with dozens of articles about ETFs can be found here.
By keeping cash / your cash wedge in any asset accumulation years, you’ve essentially got money ready to deploy in a liquid, highly accessible way to pounce on any stock market declines. Buying your equities when they go on sale is a GREAT way to fatten your investment portfolio for the future.
The cash wedge to support asset decumulation
For investors building wealth, while tanking markets are favourable for owning more stocks at lower prices, the inverse is true for folks decumulating their portfolios in semi-retirement or retirement. For anyone drawing down their portfolio, a bad set of market returns can be a admirable foe to fight. Any portfolio down in value, without a cash wedge, may also be a double-whammy if you consider inflation:
- You are forced to withdraw from your portfolio when asset values are down, and/or
- You are forced to withdraw from your portfolio when inflation could be higher – eating into any purchasing power.
(#1 is bad enough but when combined with #2 it can be disastrous.)
What we are really talking about here is sequence risk or sequence of returns risk. That’s really a way to say there is a risk that comes from the order in which your investment returns occur in any retirement drawdown. During the accumulation phase, regardless of whether a portfolio experiences poor or strong returns early on, the market value will be the same in the end assuming you stay invested. In your asset decumulation years, timing is everything. If the market is down and you must drawdown your retirement assets the longevity of your portfolio might be in question.
In asset decumulation, the sequence of investment returns is a major concern for those individuals who have just retired. Consider this: if the initial returns are positive, it’s clear sailing ahead for the retiree: capital can grow and gains can be taken as withdrawals as planned. But an investor who experiences a series of negative early returns in retirement must confront at least two issues if not three:
- capital must be sold for income needs,
- the smaller capital account that remains will compound less, and depending on inflation,
- you have less aforementioned purchasing power.
Let’s look at an example using two different worst-case 10-year market scenarios.
Under both scenarios, the returns are identical, except in reverse order.
Take notice of the negative returns in years 1 and 2 at the start of retirement in Scenario B.
Under scenario B, even though the average returns are the same as Scenario A over time, the portfolio for Scenario B lasts 5 years less.
Check out this great, detailed post on managing sequence of returns risk in retirement including a case study.
However, it’s not all doom and gloom. If you develop a cash wedge for your retirement needs you can better navigate market volatility, in a very simple way. This cash wedge won’t cost much although there could be some opportunity costs. Yet the cash wedge will help you preserve some wealth during any market downturn, and help you stick to the long-term plan you’ve been building all along.
The Cash Wedge – Building it now or later
Whether you decide to build your cash wedge now (to help you in your asset accumulation years), or later, as you enter semi-retirement or retirement, I believe it’s an important approach to consider to navigate uncertain market waters that will always persist.
Whether you are saving for retirement or in retirement, consider adding a cash wedge approach to your portfolio arsenal.
In your asset accumulation years, it could simply be a few thousand bucks (or more!) in a high-interest savings account. It’s basically your emergency fund. 🙂
In your asset decumulation years, a typical construction could be:
- Year 1 – a year (or so) of expenses in cash and/or in a combination of cash and a money market fund that is highly accessible. This is the bucket where you draw your retirement income from.
- Years 2 and 3 – this is a portion of your retirement portfolio that is allocated into short-term investments, such as a 1- or 2-year Guaranteed Investment Certificate (GIC), some bonds or some fixed-income funds. On maturity when using GICs in this example, these investments are used to replenish your cash wedge (Year 1).
- Years 4+ – the rest of your portfolio is left to grow, as a diversified equity portfolio, providing growth for future years. Hopefully by years 4 or even 5, the equity markets have rebounded a bit.
Check out this post about various Cash Wedge construction approaches here.
I’ve included a good visual for you below:
You can download this simple 1-pager for your reference too!
What is my cash wedge approach? What is my cash wedge?
I’m likely to keep about (or just slightly more?) than 1-years’ worth of expenses in cash as I enter semi-retirement in a few years. Semi-retirement means I will still work just not full-time.
Many readers have asked me after reading this post when to start building their cash wedge. Well, as you can appreciate in this post I believe you should have a cash wedge as an investor – ideally – at all times!
However, owning your cash wedge becomes critical at the time of retirement.
So, if you’re planning to retire or semi-retire in the coming 2-3 years, you should consider building your cash wedge now.
I am for a few years ahead.
In fact, when I consider full-on retirement, I’m very likely to own GICs or some cash ETFs at least in my porfolio for Year-2 and Year-3 when I’m no longer working at all…
The Cash Wedge – Managing market volatility summary
As a prudent investor at any age, thankfully, there’s an option to manage market volatility in your asset building years or asset drawdown years: use the cash wedge.
The beauty of the cash wedge is that unlike other strategies, it is easy to implement, it costs next to nothing, it avoids any deep thought or any flawed decision-making about market timing, you certainly don’t need to pay fees to a financial advisor for it, and most importantly a cash wedge helps you with your other investment goals.
So much to love!
This is a good reminder to all of us that the perfect portfolio only exists in hindsight. Every retiree is going to face some sort of unique market conditions, spending needs, tax and withdrawal circumstances that are special to them. Therefore, the best way to hedge any sequence of returns risk is to have a flexible financial plan that allows for the occasional course correction. Consider this flexible spending approach to help you adjust to the realities of what the stock market and/or life could toss your way!
Use a Variable Percentage Withdrawal approach for retirement spending.
Your approach should likely consider holding enough cash (or some fixed-income) in the form of a cash wedge to see you through a prolonged bear market so you avoid becoming a seller of equities at the worst possible time.
Thanks for your readership and I look forward to your comments about the cash wedge!
Further reading:
How much cash should you really keep?
Here are some overlooked retirement income planning considerations.
This is how you can generate retirement income.
Mark
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. 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.
Hello Mark ; Thank you for your post and the following discussion.
I have been retired for 18 years now. We have always had a significant cash wedge and will continue to maintain these funds at a sustainable , fairly large level, well into the future. A growing margin of of income safety (as dividends come , are reinvested, used, or accumulated ) is a comforting benefit. It also helps to be mortgage free and have strong pensions and some government benefits. I feel we are well covered for emergency expense needs and able to assist younger family members as needs arise ( particularly grandchildren)
I see no need to sell well chosen ,quality equities , rather there are opportunities, from time to time, to put capital to work at extreme value points.I use limit orders to add to core positions at opportune times. For example, last week , we added to Fortis (FTS) , a core holding, at $50 and a yield of 4.7% ( this is at the high end of its longer term yield range) We anticipate holding this equity for a long time regardless of market volatility. Regards Mike
Great stuff, Mike.
From the clients I see/support/hear from and many emails from MOA that I don’t publish here, I can say for a fact that even if they don’t call it a “Cash Wedge” many successful DIY investors consider the following:
1-year (or more) in cash/cash ETFs/GICs in addition to their retirement income streams (dividends, cap. gains, pensions, etc.) let alone CPP and OAS.
They sleep very, very well at night with no debt. Seems like a simple and effective formula but I know it’s not for absolutely everyone.
Back to you…yupper: with a “growing margin of of income safety (as dividends come , are reinvested, used, or accumulated )” I have no doubt that is a very comforting benefit.
Successful retirees have a lot to teach others and I hope your family listens well. 🙂
Have a great weekend,
Mark
PS – always adding to FTS via my DRIP. 🙂
We funded our cash wedge in our “practice retirement” year by living off of our investments and allocating all work income to another account that we did not touch. It worked great and gave us peace of mind that we could pull the plug on full time work!
Love it. I know many semi- and full-on retirees that enjoy keeping an emergency fund in retirement.
Mark
I use ZMMK for my mid term cash. (TD will not let me use PSA, HISA, CSAV etc, and yes they are really starting to annoy this customer) but will allow the BMO etf ZMMK…
I also utilize the “Yield Shield”, where my annual Yield is set up to be greater than my needed spend so I do not have to sell to maintain a steady state. (it is good for the psychology of investing)
Readers should be aware of the big lump sums in their future, Vehicle Loans are running close to 10%! so be prepared for large Cash purchases.
Yes, great point on the large purchases/expenses – good to save up in advance.
Mark
Great stuff.
I’ve heard of ZMMK but don’t use it yet.
Yes, “Yield Shield” is very helpful whereby essentially income > expenses/outflow. Probably ideal for any age/timeperiod whether that is asset accumulation or asset decumulation since you can be very strategic with latter, when to sell assets 🙂
I should be there soon: part-time work + live off dividends = income > expenses. That’s the plan for 2024 or 2025.
Mark
Sorry BK, I just lost your last comment. Please feel free to re-post for others!
Thanks,
Mark
Watch the tax planning for lump sum purchases, you need a rolling three year tax plan and awareness to the possibility that your vehicle may die catastrophically in the near future…..
Tax becomes a huge retirement expense, and you do not want to pay 10% interest on a vehicle loan.
Own the banks, do not borrow from them!
Why TD allows ZMMK and not the others….I assume some sort of oligopoly collusion scheme between the big 5.
Got it back, thanks very much. Yes, although I think the big banks might open up some of those cash ETFs – just not all of them yet?
From 2022:
https://www.theglobeandmail.com/business/article-banks-block-etfs/
From the article:
Mark Noble, executive vice-president of ETF Strategy at Horizons ETFs Management (Canada) Inc., said the company has never been able to get clear answers about why its HISA ETFs have not been listed to trade on the discount brokerages at some banks.
Canadian ETFs: The latest launches and terminations
“Historically, we have never seen a discount brokerage in Canada choose to not have an ETF listed on their platform,” Mr. Noble said. “Investors can buy an inverse bitcoin fund, a cannabis fund or two-times leveraged funds without any barriers. But then are being told they are not able to purchase a cash ETF. It is as low risk as you can get.”
I asked Horizons about some of their ETFs of late, seem like great products to be honest:
https://www.myownadvisor.ca/are-cash-alternative-etfs-right-for-you/
Cheers,
Mark
RBCDI has.
Excellent.
The only accounts I really use this type of process (Cash Wedge) is in the RRIF and LIF. But rather than a single cash wedge I use an HISA (TDB8150) and a five year GIC ladder.
Like a few people, I turned off the DRIP around a year prior to conversion to build up some cash in a HISA. After conversion, dividends exceeded the minimum withdrawal so I swept those excess amounts into the HISA. Last year there was sufficient cash to justify a GIC ladder so I built a 5 year ladder with maturity/renewal on January 10th of each year. When TDDI posts the minimum withdrawal in the first week of Jan (first withdrawal on the 15th), I will compare expected dividends to the minimum withdrawal required. If the expected dividends cover the minimum withdrawal, I will sweep any amount over $3600 from the HISA into the renewing GIC and extend to five years.
The hope is that it will be a while before the dividends received, exceed the minimum withdrawal. But if the market for some reason goes on a heck of a rise (or the dividends get cut), it is conceivable that the minimum withdrawal will exceed the dividends received plus the maturing GIC.
I know a few retirees that use a full 5-year GIC ladder. Rates are now pretty attractive!
Nice work. 🙂
Mark
I don’t get the mechanics of the wedge. You have to replenish the bucket 2-3 years from the bucket 4+. This means selling equities from the 4+ bucket. So you are still selling equities at the same rate as your expenses. Conversely, if you just let bucket 1 and bucket 2-3 run dry then there is an enormous amount of equities to sell to replenish the earlier buckets and who knows what the market will be like in three years.
I sort of feel the same way. I don’t expect to save a “Wedge”, per se, but I do expect to turn off the DRIP on most, if not all of my dividend paying stocks somewhere between 3 and 12 months before retiring. That will build a cash reserve that is automatically replenished. Other than melting down our RSPs I don’t expect to sell any holdings in retirement unless there are large, unplanned expenses for which I have no other choice.
Part of the plan will include making sure we’ve planned the timing of vehicles and other potential purchases in advance of our date of retirement.
I know of many investors that really don’t care about the wedge (especially Years-2 and 3) and instead just turn off DRIPs and let cash accumulate and spend that cash; essentially live off some dividends and distributions. That is absolutely an approach too. The only challenge there is you will likely have a very large estate if you don’t sell anything but that’s potentially a “problem” some investors want to have – i.e., share estate with children, etc.
Allowing the cash portion to accumulate also helps for those strategic, larger, capital purchases. No question. Avoids debt at 6-7% borrowing costs which is good.
Mark
Thank you for the informative article, Mark. At age 60, I’m in year four of retirement. We have a 1-year emergency fund. We live off dividends and distributions, without touching the capital, so haven’t thought about a 2-3 year wedge. Something to think about. A vehicle replacement in a few years is on my mind, so hope to grow the emergency fund. We hope to never touch the capital in order to fund retirement care later in life. As always, appreciate your insights!
Thanks, Laura.
I know many investors that sleep very well at night given they are living off dividends, and then keeping ~ 1-year in cash/emergency fund/GICs, etc. Really a personal risk-based decision.
Our plan is very similar. We hope to avoid touching the capital in the first 5 or so years of retirement/semi-retirement, while we work part-time. We hope to have our 1-year emergency fund/cash wedge established by January 2024.
I thank you for your kind words!
Mark
Well, the idea of wedge is to shelter your portfolio from equity market shocks. You can do that in many ways, a cash wedge provides a few years of “safety” per se – a form of porfolio asset allocation.
It’s not a must. Just what works for some.
You are correct in that this approach includes selling equities, over time, in Year-4+ and moving assets to Years-2 and 3, and then shifting things to cash for Year-1. It’s too many moving parts for some which is why some dividend investing tends to appeal to many but pros and cons of that as well.
Thanks for your comment!
Mark
Hi Mark: Yes, the unit’s keep dripping into my account. I started with 7433 in 2009 when it was made into a closed end mutual fund and now I have over 18550 units. Each month more go in, but at the end of the year on my T3 it is all marked down as capital gain or ROC. If it is capital gain, then that should be a sale, but the units don’t change. If it is ROC than my base cost will lessen which it has at times, but it is the capital gains which have me puzzled. Thanks for your reply.
Hi Ronald,
Given how long you have held the units, and you have been receiving ‘ROC’ in the past, the likely reason for the distributions being categorized as capital gains is that your ACB has been reduced to below zero. Once the ACB for a holding drops to, or below zero, the distributions are subsequently categorized as capital gains.
I double-checked and found this link to explain what I am suggesting and you can see if it might apply to you:
https://www.td.com/ca/en/asset-management/documents/investor/pdf/news-insight/return_of_capital_salestool_en.pdf
That’s a very good explanation James, thanks for digging that up.
Mark
Hi Mark: In case you missed it SNC LAVELIN has been dropped from the major index to make room for the new Brookfield company.
Oh, nice. That’s meaningful!
Mark
SNC did a name change to AtkinsRéalis and the new trading symbol is ATRL.
Just search SNC name change, this is all about public image.
Hi Mark: The record date was to be 2 DEC./2022 and the shares of BAM.A will trade on 12 DEC./2022. The parent will be called Brookfield Corp. with the symbol of BN. Yes, I have lots of money in my cash account and my brother thinks I’m crazy and should spend it, but I refuse to spend it on high priced stocks. the reason is because you can buy more stocks at $20.00- $30.00 than you can buy at $90.00- $130.00. That is why I won’t buy WCN or the banks at their present price. BAM.A should trade at $12.00- $15.00 and if it is the entity that pay’s out the dividends than that looks like a good one to invest in as I will receive 3046 shares from BN and could buy 3000 more shares of BAM.A. I have a question for you. I am not into high finance; I can just make money. At the turn of the century, we got into trusts as we saw the high yields they had. One was Sentry Select and we made out well with it. In 2009 they changed to a closed in mutual fund and later on was bought by CI Investments. Every month more unit’s drip into my account and at the end of the year I get my T3. The last few years have me puzzled as the unit’s increase in the portfolio, but they mark it down as all capital gain or return of investment. It is good in a way, but usually capital gain means a sale and return of investment means that all investments made through the year would be returned. My unit’s keep increasing but these two works in reverse. I wonder if you have an answer to this.
Great stuff.
Yes, via T-slip, investments could have ROC (return of capital = getting your money back (not ideal)), dividends, interest, capital gains and more. I have a bias to dividends and capital gains myself. Are you DRIPping your units at all/reinvesting units and you’re not aware of that? Could be something to check out.
Mark
Hi Mark: I hope you are enjoying your holiday. Asset accumulation should be a lifelong goal and asset decumulation should only occur when the government extracts from your RRIF. Cash is always king, but I have excess dry powder, but one never knows when it could come in handy. 2020 was a great time to deploy some as I evened up on some odd lot shares that I had. One was TELUS and I had 2000 at home and 1330 in Waterhouse. The company split the shares so that gave me 4000 at home and 2660 in Waterhouse, so I bought 1340 and that gave me 4000 in Waterhouse and 4000 at home. I also am in the property business as I have some REITs and in 2015 one nephew wanted a down payment on a house which cost $230,000.00. I said instead of paying the bank why don’t I loan you the money. He thought That was great. A year later his brother wanted a loan also, so I gulped but lent him $260,000.00, so within a year $490,000.00 disappeared from my cash account. It was nice to have the cash on hand to do this. It has since built up again and I am waiting to deploy it. One may be BAM.A, the Manager when it is spun off from Brookfield Corp.
Jeepers, lots of money there Ronald!
What’s the split date for BAM.A, do you know?
Mark
Mark. We also have a 1-2 year cash wedge but am conflicted when it comes to reverse rebalancing our RRSPs as we begin early withdrawals in our late 50s. In our 75 equity 25 bond portfolio, wouldn’t rebalancing by withdrawing more bonds in a down stock market accomplish the same protection from sequence of return risk and maybe some cash if reverse rebalancing doesn’t provide enough income until stocks rebound? Not many online articles that speak to reverse rebalancing as a strategy for withdrawals from a simple couch potato portfolio.
Hi Carl,
Great stuff re: 1-2 year cash wedge. Seems very smart and I hope to start building mine as I start thinking about semi-retirement in the coming years….
I know when it comes to Couch Potato investing, different people do different things….
Some sell bonds when equities tank, use money for expenses, and then wait until equities rise again to sell off those to fund expenses.
The idea of the traditional cash wedge is to use equities to fund the bond/fixed income bucket and then use the sale of bonds to fund the cash bucket. This way, equities are always working, bonds/fixed income is there when you need it, and cash is now available to fund day-to-day expenses. If that is your approach is seems rather reasonsable to me.
Turned off drips several years before retiring as there were now sufficient divs to re-invest/diversify every one or two months.
Recently sold off my IPL. Didn’t make much money but if I were to include the divs over the years they helped me diversify.
Now in decumulation phase. Figure out how much money I need in the account for Dec 31st and re-invest the rest within the RIF
Yearly payout from the RIF/LIF is partially held as cash wedge for ongoing expenses above government programs and the rest invested in nonregistered account which in turn provides divs for monthly expense. Started 2021 with $9.80 per month and am now at approx $100 per month of extra money. Figure that some time next year it will be paying me maybe $200 per month. So my “cash” wedge is paying me rather than just sitting there for me to look at. Yes I do hold some cash as stated but if divs keep increasing every year then things will snowball eventually as the RIF/LIF decumulate.
Usual tax implications of OAS clawback but that is a “good” problem to have.
RICARDO
Yes, everyone has a different tolerance for risk – to make the cash wedge work.
As I always say on this site, having any OAS clawback to navigate in retirement is a GREAT problem to have 🙂
Yes, a cash wedge always depends on your temperament for risk. If it let’s you sleep better it must be good for you. But in the accumulation years it never made any sense for me to wait for equities to go on sale. We always bought them when we had the money and started collecting dividends. This will grow the portfolio faster that sitting on cash and waiting. Now in retirement we have CPP and OAS to look forward to if we need it. (not yet taking) For now a small pension and dividends more than covers all expenses. We are actually now accumulating extra dividend cash that needs to be deployed. I have a problem seeing cash sitting around idle. I realize that not all retirees are in this situation, but if you can structure your income so that CPP, OAS, and maybe a pension along with dividends cover your basics, you don’t have to sell in down markets. Just wait and resume spending more when the markets return.
Yes, everyone has a different tolerance for risk – for sure. I sleep better by keeping some cash, ready to deploy if things go south. They will, eventually! I think a cash wedge is even more important in retirement when your ability to keep earning income is less. Of course, for folks that have millions in dividend stocks or ETFs, part of the portfolio can keep growing. That’s not most Canadians for sure!
If CPP and/or OAS end up being “gravy” per se then some folks don’t need much of a cash wedge.
I have about 15 years to retirement so I’m not thinking about all that at the moment but I can see ourself being more then OK between two rental income that I see it as a fixed income and DB pension for my wife and of course my porfolio with the hybrid index/dividend stocks .
Growing Income is what we’re seeking and slowly but surely we’re getting there.
On a side note congrats to FTS and EMA holders we just got a raise 🙂
Oh really, I missed that today re: FTS and EMA. Own a 1,000 shares of each!! :)))
Yes, same, growing income is what I am seeking now – but you know that Gus!
Mark
Reading the post and comments, it appears there are two very different situations people find themselves in: The dividend income is sufficient to meet their annual expenses, or it is not. I think the former situation warrants a minimal amount of available cash, such as an emergency fund, whereas the latter requires enough to cover several years of a major market downturn. My question is, where the dividends fall short of the expenses, when should you convert your equity (stocks or bonds) to cash? If “time in the market” is part of a winning strategy, should you make that conversion as late as possible, by say, having a buffer of two years, and as one year is used up, top up the two-year cash buffer quarterly, or wait until the end of the year? In the latter case, by the end of year-one you would only have one year’s cash until that equity to cash conversion was made, but you would have had the funds in the market longer. Perhaps there’s some equivalent of dollar-cost-averaging on withdrawals that could work for us – then again, on say $40K, it may not be worth worrying about.
Yes, seeing that Bob too although I would think/guess that most folks cannot “live off dividends” or distributions from their portfolio. Those folks would be in the minority of any retiree sample size. I could be wrong…but….
The cash wedge is very psychological but it is a hedge against an unknown future. Will Bitcoin take over and be just as liquid? Something else eventually? I have no idea. Just like people find comfort in gold or silver in a market downturn I believe some cash on hand to take advantage of opportunities and/or to mitigate risks is prudent.
Dividend income (as much I as love it and report on my own journey with it) is just one way to invest. It’s not everything. There are many ways to invest and grow wealth – so given that – I suspect one must understand their biases, need for diversification and mitigate risks. What can make you wealthy can also make you poor.
I plan to have a plan to slowly withdraw the dividends (with capital) over time. I think any investor focused on stock market investing needs to consider a slight catastrophe of sorts whereby the stock market could go very much sideways or down for many years on end with minimal returns. An investor would need to consider: what now? in advance and prepare for it.
Thoughts?
Mark
In your cash wedge / deaccumulation processes, do you factor in RSP withdrawals?
There may be a tax advantage, before you turn 71, to withdraw funds at a lower tax rate.
Once you turn 71, you are compelled to withdraw your RSP funds, and there may be tax bracket issues.
This may be further complicated by the bump ups for OAS and CPP payments, if you delayed the start of them.
Great question. Nope. 🙂
RRSP withdrawals are not part of our cash wedge. The cash wedge effectively “sits” to be used as needed as a buffer in down markets. In my asset accumulation years, I’ve been using a small cash wedge to pounce when equities are on sale. In retirement, or semi-retirement, I will use my cash wedge to live off of when equities tank and I don’t want to withdraw monies from RRSP in any given year before age 71.
My goal is over my 50s and 60s, to withdraw from RRSP strategically / slow wind down such that there are no tax bracket issues in my 70s. Essentially, I might not have any RRSP assets at all by my mid-70s. Zero.
Hope that helps.
Mark
I didn’t make up my mind yet. After so many years, we finally are fully invested. So for now, we are living paycheck to paycheck. But each paycheck actually increases the cash size in our checking account. As long as both of us working, it should be OK. We also have our HELOC not touched at all. I consider it as our emergency fund.
To prepare for retirement, I think we might need to have half year expenses in cash. We will stop DRIP in RRSP for sure. We also need to transfer group RRSPs to personal accounts and the current plan is using that money to buy dividend growth stock. Once everything is settled, I expect we should be able to survive on dividends and will sell some equities in good years for discretionary expenses if our dividends are not enough for that. I think I probably will always keep at least 2-3 monthes expenses in cash.
I constantly change my mind when we will retire. The newest decision is in three years. So I want to defer the detailed plan a little bit further.
Nice to read how others will approach. I change my mind a bit too 🙂
We’re going to start our cash wedge savings next year (2022). It will be a goal to start saving up….after TFSAs are maxed in Jan. 1, 2022 but I’m saving for that now.
Ultimately, it will take 3-4 years to get to our goal but that’s fine, starting soon.
In the meantime, all DRIPs remain “on” and compounding work will continue. I will continue to keep all DRIPs “on” inside TFSAs for the foreseeable future. Same with RRSPs even in semi-retirement. Likely to sell off some assets in RRSP to start winding down in 2024-2025 as I work part-time. More of the game plan to share!
Once I know our taxable account via dividends can cover our condo fees and all property taxes (with ease), I know we’ll be in a good place.
Mark
I’m not sold on having a cash wedge at this point and agree if I do decide to have one it would be more for psychological reasons. The markets are going to go up and they are going to go down – I’d rather be fully invested in the market with an appropriate split between equities and fixed income. Hopefully, over my 30 years of retirement having 1 or 2 years of cash invested, I believe, should leave me ahead of the game and not trying to time the market. I will have some cash for current expenses but that plan is to deal with this on a month-to-month basis.
That’s a very fair statement Joel: “I’d rather be fully invested in the market with an appropriate split between equities and fixed income.”
Do you have a desired % of cash vs. fixed-income vs. equities in your portfolio? I *might* keep 20% of in bonds when I semi-retire but that’s a big IF. It will really depend if I can live off dividends and distributions like I think I might be able to.
I’m a big believer in the cash wedge myself but I can appreciate not everyone is wired the same!
Mark
I’m at about a 70/30 split with equities at this time. Maybe will approach the 80/20 equities but I’m not sure yet. My plan is just to sell when I need cash for monthly expenses and stay mostly invested. Cheers!
For me the cash wedge is hugely psychological. I have a 2 year cash wedge of expenses and rather than trying to figure out a complicated withdrawal plan, it’s just cash for now. I’ll keep the cash bucket stocked with 2 years of expense, it gives me peace of mind and prevents me from making too many potentially risky or ill timed trades.
Totally. I mean, the ability to deploy cash as needed or preserve it when really needed when you no longer have a steady income stream (i.e., work) seems HUGE to me. Smart work re: “I’ll keep the cash bucket stocked with 2 years of expense, it gives me peace of mind and prevents me from making too many potentially risky or ill timed trades.”
Thanks for your comment!
Mark
I’m still on the fence about the size of a cash wedge, or if I’ll have one at all. There is evidence to support that keeping cash on the side is no more successful than being fully invested.
I do expect my dividends to meet my needs in retirement and I’m confident my investment choices are with companies where the risk of a dividend cut is minimal.
Still, I like the idea of a maintaining an emergency fund in retirement for something exceptionally out of the blue (but not a full year of expenses). I also consider the prospect of turning off my DRIPs ahead of retirement to build what effectively would be a cash wedge anyway.
I like to think that I’m open to the idea. For now, I’ve setup the EQ account and we’re using it for some short term savings goals for a couple of renovations. After that I could see steadily building some dry powder for the next, inevitable correction. Time will tell.
There is absolutely an opportunity cost when it comes to cash vs. investing. I guess though, what you need to think about, is are you at any risk at all….if you must sell any equities during a prolonged market crash or correction?
I would have to think some investors feel there is little risk but the reality is, the risk is there.
So, unless you can exclusively live off dividends or distributions at 2-3% yield indefinitely (most people can’t) then I believe there is a case for cash to be made. Cash and/or a modest cash wedge of cash and fixed income is likely an enabler to many, many retirement plans.
While turning off DRIPs ahead of retirement (to build cash is an option) you are also short-cutting the growth curve too. Pros and cons!
Thanks for your comment.
Mark
For me, there is a mathematical right / wrong answer to this, but that is only part of the total equation. As many have touched on there is a psychological factor to having the cash wedge that, for me anyway, would serve to help me resist selling at depressed evaluations – hence why I will ruminate on this repeatedly – LOL.
Regarding my comment about turning off the DRIP – I think this is more about once I’ve reached my comfort level of total net investments and average monthly dividend income, then I’ll turn off the DRIP, and perhaps I’ll work another few months if the timing of that is after my desired retirement date – or, and wouldn’t this be nice, even before 🙂
Certainly, if one has invested for capital growth, and depends upon continued market growth, then a cash wedge is a must, or they much have a large portion of their holdings in fixed assets.
The alternative is to invest during your accumulation phase, to grow your investment income, and hopefully by the time you are ready to retire, your income will meet most, if not all of your retirement needs. A cash wedge may still be necessary, but it will be much smaller than those relying on capital growth.
I suspect so. As a passionate DIY stock investor, maybe something you can write about and share. If you’re an income investor, how much cash should you keep? I know my answer but others may feel differently!
Mark
Done, https://risingyieldoninvestments.blogspot.com/2021/09/cash-wedge-during-retirement.html
Ha 🙂 Good stuff.