I am in the process of having "pre-retirement" discussions with my financial advisor. I have traditionally been very heavily invested into equities, and want to remain doing so. My advisor is telling me I need to build up 3 years worth of expenses in cash or cash equivalent by the time I retire in order to avoid having to sell off stocks and have a capital gains hit, weather through a downturn, etc. In truth, I have never even made much of an effort to determine what my annual spending is, I just invest whatever I don't spend. I am curious as to what others in a similar situation have done themselves, and what most financial advisors recommend. It seems a lot of advice says to build up only two years of cash/cash equivalent reserves.

Knowing your annual spend is important and we just went through that exercise and 6 Sigma'd the crap out of our budget to make it frugal and also what we know what must have without getting too crazy a d still live life and go on vacations..etc

Came out to 74K. That will drop by about 20K once the mortgage is paid but most of it would just go back to Medicare for two of us so were calling it a wash


By retirement I would like to have at least 1 full year of rainy day savings. 3 years seems extreme but thats just risk tolerance

I think the bucket strategy - if your financial planner has discussed this with you - is a solid strategy. In this strategy you have 3 "buckets" of money. bucket 1 is what you are drawing from and living off of - it is very safe, low risk liquid investments and should probably be 2-3 years worth of living expenses. Bucket 2 is mid-range, medium risk investments - think corporate bonds or maybe solid low risk dividend paying company stocks. This should be another 3-5 yrs of expenses. Bucket 3 is long term investment - typically your higher risk investments - probably 100% equities.

About once a year or so you re-balance the buckets - trying to move money from bucket 3 to buckets 1 or 2 when the market is up and avoid pulling out of bucket 3 when the market is down.

Of course, you may have other investments - like real estate that can produce income - and reduce the overall withdrawls from other investments needed for living expenses.

In listening to some of the recent retires discuss this they generally drill down and contrast the length funds to live on in safe and liquid with strategies for how you pull it out of the market. Dollar cost avg out of the market monthly with one year expenses....you have 11 months or so for the market to recover if you decide you don't want to pull anything out for a while while the market is recovering. Going longer potentially lets the market recover more but also potentially gives up some market return vs the safe and liquid account. Those that tend to pull larger sums more infrequently during up markets tend to go longer in the safe and liquid account. 2 or 3 years depending on their risk tolerance and some even longer if they really don't have to worry about having enough money for retirement. I've talked to quite a few recent retirees around the state that decided last Nov/Dec to take more profits out of the market than their 1.5 to 2 year expense target and up their safe and liquid account time frame to 3+ years expenses given the runup in the market and multiple things that might cause the market to pause or contract over the next year or so. When you retire it is interesting seeing yourself become much more conservative than even you thought you might be so you sleep well at night.

A. G. Pennypacker said:

---

I think the bucket strategy - if your financial planner has discussed this with you - is a solid strategy. In this strategy you have 3 "buckets" of money. bucket 1 is what you are drawing from and living off of - it is very safe, low risk liquid investments and should probably be 2-3 years worth of living expenses. Bucket 2 is mid-range, medium risk investments - think corporate bonds or maybe solid low risk dividend paying company stocks. This should be another 3-5 yrs of expenses. Bucket 3 is long term investment - typically your higher risk investments - probably 100% equities.

About once a year or so you re-balance the buckets - trying to move money from bucket 3 to buckets 1 or 2 when the market is up and avoid pulling out of bucket 3 when the market is down.

Of course, you may have other investments - like real estate that can produce income - and reduce the overall withdrawls from other investments needed for living expenses.

---

Thank you. That's an interesting way to look at things. Assuming that the first "bucket" remains the same and isn't difficult to maintain, as you age do you steadily increase the proportion of the remainder in bucket 2 instead of bucket 3, or do you just let the market determine which bucket goes up or down (from which bucket you withdraw to put into bucket 1)?

You do really need to understand your living expense needs. Make a list of essential expenses - things like food, utilities, a mortgage if you have one, property taxes, insurance, medical, basic transportation. Then make another list of non-essential - this is for travel/vacations, hobbies (golf, or whatever), luxury items, what proportion of food will be eating out at nice restaurants vs buying groceries and eating at home, Christmas and gift spending, etc. etc.

Your projected living expenses will need to be increased by 2-3% per year to take into account inflation.

If you're close to retirement now, you probably can count on social security to be there at least for the next decade or so and even after that at some level.

If you've won the race why play the game? I owe my early retirement to being heavily invested in VTI for a long time. Now that I'm retiring I have three buckets as mentioned above. Bucket one is years of expenses in a money market. Bucket two is years of expenses in bonds. Bucket three is VTI.
That's it but you need to know your expenses and decide for yourself how many years you want to keep in buckets one and two to enable you to sleep at night. This is helping me know that a bad sequence of returns the first 3-4 years won't derail my plans.

Also you don't have that paycheck coming in and really ask yourself how would you react with another 2008-2009 type 40% + loss?

I know I would be very mad at myself if that happened because I kept everything in VTI.

And a big loss like that would definitely derail my plans.

I have about 3 years of my current withdrawal rate in cash, short term CDs & T bills which might be a little high but since it's earning 3.9-4.3% it doesn't feel that bad. If you consider the amount of interest and dividends my portfolio generates it's really closer to 5 years.

During the massive drop when the tariffs were first announced I saw my portfolio drop but I wasn't too worried bc I knew I was in a situation where I wouldn't have to sell any stocks.

I think I might reduce it once rates start getting cut, also I have a lot of descensionary spending in my budget so it is probably overkill to have that much in my short term bucket.

He Who Shall Be Unnamed said:

---

I am in the process of having "pre-retirement" discussions with my financial advisor. I have traditionally been very heavily invested into equities, and want to remain doing so. My advisor is telling me I need to build up 3 years worth of expenses in cash or cash equivalent by the time I retire in order to avoid having to sell off stocks and have a capital gains hit, weather through a downturn, etc. In truth, I have never even made much of an effort to determine what my annual spending is, I just invest whatever I don't spend. I am curious as to what others in a similar situation have done themselves, and what most financial advisors recommend. It seems a lot of advice says to build up only two years of cash/cash equivalent reserves.

---

Smart advisor. Listen to him

Once you're at or close to your magic number for retirement, the biggest risk is likely to be sequence of returns risk. Basically having to pull out a significant amount of your nest egg early in retirement when the market is down can really derail your long term plans. I'm still quite far away from having to implement it, but I plan to do some sort of glidepath into retirement with lower risk investments like your advisor suggests. So far, it's been near 100% equities for me.

12thAngryMan said:

---

Once you're at or close to your magic number for retirement, the biggest risk is likely to be sequence of returns risk. Basically having to pull out a significant amount of your nest egg early in retirement when the market is down can really derail your long term plans. I'm still quite far away from having to implement it, but I plan to do some sort of glidepath into retirement with lower risk investments like your advisor suggests. So far, it's been near 100% equities for me.

---

If you have 3 years of withdrawals in cash there's zero reason why you can't be 100% equities.

Maybe. Unless you have a lower risk tolerance? Or if you retired in 1999? Probably not bad idea to have some medium risk part to the portfolio that's not bonds or stocks. Just my .02.

How many yrs of tax paid expenses you need to save b4 retiring would heavily depend on your planned age at retirement as well as some reasonable assumption for your life span . Your personal situation also would be a significant factor ( age of children and wife for example). I feel like 3 yrs of tax paid expenses is very conservative for most situations .

I haven't ever met anyone that said they wish they had less tax paid money to work with at retirement tho.

Seems to me that some portion of that tax paid bucket could be in equities tho but posture to make equity sales long term capital gains vs short term so that if you have to sell some in your early retirement years they get taxed at a lower rate. Jmo, even a 60% equity /40% cash or cash equivalent mix for 3 yrs of expenses isn't ridiculously aggressive. That's about where I am and I retired 6 mos ago.