[USER]

I’m about 3 years from retirement. Portfolio of $4M. I’m holding about $400k in cash right now. I’m extremely paranoid about the market crashing at retirement and sequence of returns risk. Our annual expenses after taxes is $84k. I know I’m holding a lot of cash and it would be better to have it in VTI. Our allocation is 85% stocks/15% bonds.

Talk me out of my paranoia or am I right to be holding this much cash?

[Jason]

Why wait three years to retire with your numbers? I would have retired long before getting to your numbers.

[Otis]

Keep the 400k in cash in a HYSA or CD’s making 5%.

Have another 400k in bonds for the early part of retirement.

That’s about 9-10 years of conservatively invested money that won’t be volatile with the market.

Keep the remaining 3 million in equities.

In the good years live off the growth of equities and dividends. In the bad years live off cash and bond income.

Never touch the magic goose just take the golden eggs.

Worth a look: Does anyone have a resource for figuring out how to retire early and also draw down your money to near zero?

[Christina]

If that amount makes you feel secure, why not?

[Nalani]

You are just fine holding onto that much cash with your expenses being that low. You have enough money invested to produce what you need for the future, and will be well below the 4% withdrawal rate so hold on to the cash if it makes you feel safer.

[Aaron]

At the moment I think the danger of holding cash particularly a small percentage of your net worth is pretty low . This is due to the hysa rates . If we go back to no interest rate on savings accounts then personally I’d be more concerned about the opportunity cost of not investing it . 400k to me doesn’t sound like a wild amount. Especially if a good chunk of your nw is real estate or you own a business or something .

[Sean]

Your spend is 84k you have either 4 million or 4.4 million. Can’t tell if the cash is included in the first number. Either way you are far far past what you’d need to retire. You have zero chance of running out of money if you retire today.

If you’re single, living in California and pulling exclusively from pretax accounts, and assuming it’s 4 million including the cash, you’d still only be at a 2.75% withdrawal rate.

If anything I would go more aggressive just to have more to give to the next generation, or to the charity of your choice. But regardless you have zero chance of running out of money.

Take a peek at: I would like some advice on moves you would make if you wanted to retire by 50

[Jule]

What factual data makes you think of an absolute market crash? Historically, the average market downturn turn lasts 9 months.

[Elie]

If your annual expenses are $84k, then you need to accumulate $2.1M in your portfolio to be financially free.

But, you’ve already accumulated $4M which is much more than you actually need, so that’s awesome!

What I would do if I were you is switching to a 60/40 allocation as you’ve already won this game and no longer need to be more aggressive.

As for that $400k in cash, why do you want to invest it? If you’re paranoid, just keep it cash or a money market fund and you’ll be able to weather any category 5 financial storm (as you have saved more than you actually need and still have an awful lot in cash).

Moral of the story: don’t take risk more than you need to!

[Frank]

Your burn rate is so low it doesn’t really matter. Even if the stock market crashes you are still on track to die with your highest net worth. You can also afford to hold a portfolio that is only about 30% in stocks, but the rest of it should not be “cash”. Only stocks and cash is not a good portfolio. Something like the Vanguard Wellesley Fund (35/65 with a value tilt) would work fine for you.

At bottom, it sounds like you are really not cut out for investing much, so it’s best to stop pretending that you are. Which is fine in your case, because you are grossly over-saved for your expenses anyway.

This means that it is ridiculous for you to be holding 85% in stocks. You should already be configured in your retirement portfolio and be holding 50-60% in stocks, maximum. And depending on how old you are, using a bond ladder to bridge to social security and then buying a simple annuity or annuities to cover your expenses is really what you should be doing, NOT holding large piles of cash and thinking you can time the market.

Look in the mirror. You are not a race car driver and, in fact, driving makes you nervous. So just take the bus instead.

Have you seen: Do I just withdraw a larger sum when I retire and put that into savings? What about the tax implications of doing that?

[Kevin]

You are fine with that sort of cash when you’re so close to retirement. That’s almost enough for your first four years – solid insurance against sequence of returns risk.

Also, mathematically speaking you have enough to be done now. Get clear with yourself about what “enough money” means for you. Enough is not just math after all, it’s being able to sleep at night too.

[Joel]

Well, taxes don’t just go away when you retire. Your investments still generate income and if you have Traditional, pre-tax / tax-deferred retirement accounts, you still owe taxes on those too. If you and your spouse spend $84,000/year after taxes, you will likely need more than $100,000/year before taxes.

In additional you need about $2.5M in an appropriately diversified investment portfolio to draw $100,000/year for 30 years. You might need $3M if you are retiring at say, 45 or 50.

Also while some expenses might decline, you may not have accounted for the cost of healthcare for an early retirement. What about travel and entertainment? These are items that tend to rise instead of fall.

With a $4M portfolio and assuming you’re retiring around the age of 50, I’d guess you can safely handle a distribution of $133K/year. That’s an increase of $49,000/year over your after-tax budget. $49,000/year should easily cover taxes, healthcare, travel and entertainment for an average couple, so I suspect you generally have enough in your portfolio to retire today.

When I retired at 56 I had an 85/15 portfolio as well. But I counted my cash position as part of my bond / fixed-income. And I had a fraction of the cash you are holding. From my experience with other people, I suspect you are counting that cash as part of your portfolio, but not part of your 85/15 asset allocation. If I’m wrong, your 15% fixed-income is actually 10% cash and 5% bonds. Instead I suspect you’re more like 75% stocks and 25% fixed-income.

This is an acceptable asset allocation. And most cash equivalents have outperformed intermediate bonds in the past couple of years, so this hasn’t been a bad position to hold. Recently. But returns on cash are likely to decline as cash tends to lose value to inflation. Over the long-run bonds at least tend to meet or beat inflation, if not be a lot.

I think you’re being paranoid. You can retire any time you want. But you probably don’t need nearly 5 years of cash on-hand. A year’s worth is more than sufficient. The rest ought to be properly invested if you are seriously expecting to count on it and the associated growth you’ll need to beat inflation.

But if you are serious about working another 3 more years, I suspect any mistakes you might be making will become inconsequential. That’s because you’ll need to cover 3 fewer years in retirement and you will have saved or 3 more years and your portfolio will have grown for 3 more years. That will most likely put you in a position to absorb most financial mistakes you’d make out of paranoia.

[Rick]

Your allocation is not 85/15. It is 76.5/13.5/10. If you want 85/15, you should put the $400k into the 85/15 mix.

So, invest to your desired mix not your mix except this money style. Outside of that, no need to convince you to invest the $400k. You have won the game. I could give you a handful of reasons but they would really just be fomo for you and not something you need to do to materially alter your financial life now or until you die.

You are secure for your lifetime. Go enjoy life. Give up on the fomo of returns on any cash you keep. It’s not worth the mental bandwidth.

[Marty]

Congratulations. Enjoy the peace of mind of having 3-4 years of expenses in cash. And bonus is 4% interest for now is pretty decent. Sleep well!

[Author]

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