How Much Cash?

[Humanofearth]

How much cash should an early retiree hold in their portfolio?

I notice that a high earned income significantly increases risk tolerance. As that income dissipates, stress is higher during market crashes so even though less cash may be optimal, it’s not conducive to hold 0 for mental sanity.

There are several options:
1) Hold enough cash to last a full market cycle. If heavily crypto based, would mark this as 4 years (a Bitcoin halving cycle). Every 4 years when you see the greed, sell some again to last another 4 years.

2) Hold enough cash for 6-10 years and get yield on it to last 10 years or indefinitely. This gives one time to test their hypothesis if things don’t work out compared to their shorter time frame hypothesis to work if need be. Also, it gives the chance to live on cash flow. This could also be replaced with eth staking> expenses but lowering crypto exposure seems more prudent for mental health and even if it lowers expected return, seems wise.

3) Virtually 0 cash and invest in something with cash flow unrelated to crypto. Maybe live off dividends from stocks or rental income. But both these options will have high taxes and counterparty risk. One option would be to buy 500k Euro of Portugal real estate and 250k usd if Turkish real estate, aim for a 5% yield on this and get ~40k usd per year to cover expenses while adding a Turkish passport and eventually a Portuguese passport. This covers expenses in a geographically diversified manner while lowering government risk in other ways.

Thoughts on what’s the best way to incorporate cash for retiring early?

[frommi]

Sounds like your "invested" money is in crypto?
Maybe you should read about the story of the dutch tulip mania in 1600 and how it ended.
For you specifically it is probably safest to have 100% of your money in cash until you know how to invest.

[Lemur]

Worth a read:
https://earlyretirementnow.com/2017/03/ ... h-cushion/

[Sclass]

Kind of interesting Bitcoin has been around long enough to define a cycle. I guess it has been awhile.

I keep a year of expenses . My interest and dividends pay about a year of expenses of income. This has worked for the last ten years where market corrections have been short.

I probably wouldn’t do this if I was using crypto. 90%+ of my money is in stocks.

[Scott 2]

Year 1 - We held about 18 months spend. It was too much IMO
Year 2 - We started with about 6 months spend, planning to consume dividends and interest as they arrive. If we need to sell, we'll sell.

Year 3 - When it arrives, I'm torn between selling what I need each month or two, vs. taking the full year in cash at once. Taking an indexing strategy, time in market is my primary path to returns. But thinking about it all the time kind of sucks.

[Michael_00005]

One place to put money assuming you still have a home mortgage is to make prepayments to your home loan. For example you can be paid a year or even two years in advance on mortgage payments. It's better than cash in that you're saving some in smaller interest payments on your loan. I'd recommend the same for anyone still working for FIRE. Having your home payments prepaid is a lot like a cash fund, and it's possible a rentor would offer a discount. I would if I were renting out a home.

Given the ultra low rates many likely opted to keep their mortgage, rather than pay it off.

[Sclass]

That’s a really interesting idea because there is an interest write off on your taxes.

Do you get a payment holiday if you miss a few payments? I don’t know how home loans work. The idea is that you have a bad year where you don’t make any passive income off investments and then you cannot pay your house payments for a few months. Being able to skip a few payments and not get foreclosed on is a big plus. If it works this way…I’m really ignorant I haven’t had a mortgage.

[jennypenny]

IIRC, you need to pay a lot in interest to get a better deal than the standard deduction though. I also remember access to HELOCs and ReFis was very limited during the GFC so it might be hard to get the cash depending on when you need it.

I recommend three years of operating capital (bare bones budget, not your normal budget) in liquid form. Then again, I also recommend at least three weeks of complete self-sufficiency including power needs and three months of food, water, and medicine, so I’m obviously on the more conservative side when it comes to this stuff.

[Riggerjack]

Do you get a payment holiday if you miss a few payments?

Oh, hell no! Nobody is cool with missed payments. There are penalties built into the contract. Many people are deeply afraid of these penalties. To the point they will often use this fear to justify staying a renter.

I am a homeowner, I have been a landlord, and a renter. Each has strengths and weaknesses, none are clearly better than the others in all circumstances. So if someone wants to rent, I have no issue with that.

But, if you rented from me, and you were 5 days late on your rent, expect personal contact to establish why, and to remedy the situation. I built penalties into my rental contract that kicks in at 5 days. Many other landlords do the same. The penalties are usually limited by state law. So a renter has approx 5 days before penalties and consequences kick in.

But as a landlord with a mortgage, I am responsible to make a payment to the bank, regardless of rent payments. I have a 15 day window without any penalty. And a 4% of the monthly payment penalty is added then (that's $60 on a $1500 payment). After 90 days, foreclosure can begin, but often takes 6 months, or more. Until foreclosure starts, that 4% penalty and back payments is all that is owed. Foreclosure proceedings could take years (and will, if the homeowner puts up even minimal resistance). So a mortgage holder has a much longer window of action, with lighter penalties, than the renter. But the interest/penalties/delayed principal payments stack up, and legal fees get tacked onto the debt.

Missing payments is always bad. But if I were about to miss a payment, I would prefer to miss a mortgage payment to a rental payment. Longer grace period, and lighter penalties. And banks take late payments far less personally than landlords tend to.

But it is still better to keep the cash on hand to make the payments. Market gains would have to be pretty big to offset the losses caused by penalties and interest.

[chenda]

One option would be to buy 500k Euro of Portugal real estate and 250k usd if Turkish real estate, aim for a 5% yield on this and get ~40k usd per year to cover expenses while adding a Turkish passport and eventually a Portuguese passport. This covers expenses in a geographically diversified manner while lowering government risk in other ways.

This isn't a great combination for geographical diversification, as you are buying both in areas vulnerable to climate change and with Turkey adding a substantial risk of political and regional instability.

The permanent portfolio recommends 25% cash.

Psychologically I like the option value and security of cash.

[MBBboy]

That’s a really interesting idea because there is an interest write off on your taxes.

Do you get a payment holiday if you miss a few payments? I don’t know how home loans work. The idea is that you have a bad year where you don’t make any passive income off investments and then you cannot pay your house payments for a few months. Being able to skip a few payments and not get foreclosed on is a big plus. If it works this way…I’m really ignorant I haven’t had a mortgage.

You do not get a payment holiday. Most financial circles advice against mortgage prepayments for this reason. You're giving up liquidity for no immediate gain, because you still have to make payments each month AND those payments don't get smaller. The gain is that you either A) have more equity when you sell or B) Save on interest by moving the payoff date up (but not until then).

If you want to save on your monthly payments, you have to prepay enough money to get your lender to agree to "recast" your mortgage, AKA reset the amortization table. This isn't necessarily free - sometimes yes as a courtesy, sometimes there is a fee

[MBBboy]

Worth a read:
https://earlyretirementnow.com/2017/03/ ... h-cushion/

That was a great read, I've been a fan of Big ERN for a while.

Along similar lines, see these articles about emergency funds:

https://earlyretirementnow.com/2016/05/ ... ency-fund/

https://earlyretirementnow.com/2021/05/ ... l-useless/ (2021 update)

I'm not retired, but we currently keep very little cash. Our cash cushion / emergency fund / emergency plan depending on what you want to call it is exists in CDs / Ibonds / interest bearing stablecoin of various maturities. Then of course there's the taxable investments, and the low interest margin loans I can take off of them

[Sclass]

Thanks for the mortgage answers. I guess if you want to give your money to the bank to hold, no sense in giving it to them as a mortgage prepayment (unless you want to hammer down the principal faster) and just put it in a savings account…maybe even at the same bank.

I was kind of naive thinking it was kind of like prepaying your rent.

[jennypenny]

@sclass — Our credit union considers extra payments as prepayments on all kinds of loans, so it does build a cushion if you need to skip some payments. Our bank doesn’t though.

[MBBboy]

@sclass — Our credit union considers extra payments as prepayments on all kinds of loans, so it does build a cushion if you need to skip some payments. Our bank doesn’t though.

That may be because of different regulators (credit unions are HEAVILY advantaged in this space). Banks actually get in trouble for taking extra payments and holding them as prepayments, instead of applying them to principal (which would save the customer money in interest by moving up their payment date).

As a result, most lenders now have a button or something to indicate whether your payment is intended to be applied toward principal or just held.

[WFJ]

Hold all crypto stable coins is my preference. Unless you are remodeling your kitchen and need USD for wallpaper, why would you hold this relic when a digital AI based algorithm stable coin is available with 20% interest?

[MBBboy]

Uhhhhhhh.......

[Nomad]

@WFJ
Which stable coins are you using?

[jacob]

Ehh people, I believe that was sarcasm.

[MBBboy]

Awwww. I was hoping it was just spectacularly terrible timing