[Nilam]

I am currently 40 years old and hope to retire in ten years.

I’ve read that some people save 2 years worth of retirement income in their savings account when they retire, as a safety net to use when the markets are down.

I plan to live off of 60-70k annually when I retire (I’m in Silicon Valley and my home will be paid off by then). That means I would need to have 120-140k in savings.

To save that much, I would need to put aside about $1083 each month into my savings account for the next ten years. But that doesn’t seem to make sense. I’d rather invest that money. Do I just withdraw a larger sum when I retire and put that into savings? What about the tax implications of doing that?

What am I missing? Please be kind in your responses as I’ve focused so much on saving that I want to start piecing together the next steps.

[Graham]

Your drawdown portfolio in retirement should very likely look different than your accumulation portfolio. It makes sense about 5 years out from retirement to begin allocating new contributions toward asset classes that you want to hold more of in retirement. This can include the cash/short term bonds asset class that you mentioned. In your last few years you probably won’t be buying many equities

[Tara]

Afford Anything’s most recent episode was on exactly this topic, although I found the interviewee extremely annoying and a little hard to follow. But basically his message was save 3 years of expenses in government-backed assets (treasury, HYSA, CDs) and invest the rest. Use the safe stuff when the market’s bad. Fill up that bucket again when the market’s up.

[Chris]

Not a dumb question at all. Thinking through which accounts you will spend from and how money will need to move is really important. This can be accomplished a lot of different ways. We have 1 year cash in a high yield account and pull from it each month. Refill once per year. That’s working for us so far.

[Sevilla]

To clarify… The 2 years cash should be **in addition** to 25x your annual expenses in investments. The 2 years cash is just your available liquid reserves, not the total.

[Mimi]

If you don’t have a regular brokerage yet, you can set that up and invest in there. Then, sell some of your investments before you retire. Seek an advisor to time it well. Some might be sold at a loss to minimize tax implications. Tax-loss harvesting.

[Tara]

I’m curious about your math? I’ve mostly seen a general rule of thumb was the 4% rule. To draw 70k a year from your retirement egg, you would then need 1.75M in savings. The 140K you mentioned would provide 5,600 per year. Maybe you have a different way of calculating or other source of income?

I think maybe what you were reading online was *some* retirees have 2 years of income in more conservative investments cash/bonds, when retired, and the other savings are invested in the market and other assets?

[Michelle]

If you want to have a couple years worth of cash you can just sell investments to get it prior to retiring.

[Priya]

We will be using the 3 Buckets strategy per the Retirement Manifesto blog. We are about 5 years out from retirement and will be focusing on cash the last 2 years or so before we retire.

[Mark]

Think about doing I bonds. It’s only $10k a yr but ensures u have a stash of cash that will never lose to Inflation.

[Bill]

In terms of the mechanics, this is what we did. We had 100% invested in the stock market until about 1 year before we hit FI. We made sure that enough of that investing was outside of retirement accounts that we would have no problem creating a cash buffer + 5 years of expenses to fund a Roth conversion ladder. Once we hit a year out, we sold a big chunk and devoted that years savings mostly to that cash bucket. That’s also the point where we moved to a 70/30 split with all that 30% in the retirement accounts so it didn’t generate a tax bill.

Of course, that is a little risky. If the market tanks right before you intended to retire, you have to be willing to work an extra year. If you aren’t willing to do that, the standard plan is that you start ramping up cash and bonds 5 years out.

[Golden]

Yes. 2-3 years of expenses in cash. You can start building that cash cushion the last few years before retirement. Those last few years, you’re not investing much, just building your cash reserves. I went through the same thing. It can be done.

[John]

The general strategy of having a cash cushion that covers known expenses and isolates one from having to potentially cash out equities or bonds that are below their long term average value is sound.

As you state the details of building that cash position can be tricky and ultimately is a kind of exercise in market timing / portfolio allocation.

The twist of high taxes in some states making this an even more difficult exercise and causes some experts to say it’s better in theory than practice. It also opens the window to some strategies that lead those who hawk annuities to suggest that is a more reliable path, a premise that falls apart under closer scrutiny…

Ideally you should strive to build up some cash cushion through some earmarked portion of your income being kept in very low volatility vehicle like money market but for those who recall the chaos of 2008 and see some parallels with current banking hysteria even money markets did “bust the dollar”. If one wishes to avoid even that remote risk plain old savings accounts are only path, yet the effects of inflation will erode buying power of even those dollars and again you see the futility of trying a execute a plan that as theory seems simple…

The solution, imperfect though it may be, is use less of a exact calculation and go a bit fuzzy. Maybe start with goal to divert half to savings. If some months you sock away $541.50 and others $550 and a few only $530 but you also can tweak your expenditures with a little better deals at Aldi or a little more use of transit / bicycle and little less gasoline / electricity for personal vehicle you’ll be strengthening the flexible frugality needed. And try to “save” the other half (or so…) by dollar cost averaging a fund that is either some variation of total market or classic balanced fund — something like Wellington will be a mix of equities and fixed income that retirees have relied on for decades…

You can backtest this sort of compromise and determine if it will be too variable for the retired life you are envisioning and if so that’s an argument for continuing to work / find additional income…

[Jay]

I went through a somewhat similar situation with my mom when she moved to Portugal. She sold her house in GA (against my strongest protests) and was left with about 215k in cash. She wanted it liquid in case she were to move back to the USA. She now has about half of it in a 1 year cd at somewhere around 4.5 and the other half in a high yield savings (somewhere between 3-3.5 – i can’t quite remember). So, she’s getting just under 4 on the total. Not great but could be worse and she has peace of mind if she ever needs the cash. You could try something similar – the only concern i would have is the ten year timeline.

If you already have six months xp in your EF, you could slowly add to that over the next ten years with the goal of maybe keeping a year’s xp in your ef and just invest the rest. That way you have a full year liquid if you ever needed it. If you went thru that, you could take distributions/dividends from what you invested, and then finally (if you had to) tap the capital itself. For me, i might start a second brokerage and keep that totally separate (but that’s just me).

Either way, you’re doing awesome! Sounds like this is just something to make you more secure in early retirement and i think that’s a good thing. Sometimes sacrificing a little return for peace of mind is worth it.

[Author]

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