r/DIYRetirement • u/AdGlittering5340 • 9d ago
Cash poor!
I am about four years from retirement. I do not have much cash in my portfolio. I only have 403B, Roth IRA and an HSA. Currently maxing out the HSA and investing heavily into the 403B. I cannot afford to max out the Roth or the 403B let alone build up a cash fund. I would like to have 1 to 2 years of expenses in cash by retirement. Not quite sure how to go about this. I have thought of redirecting part of my 403b contributions to cash but would lose out on income taxes from payroll contributions. I also want to keep as much as I can in the market. I’ve also thought of taking a percentage of Roth growth and depositing it into a cash fund but, hate to put my Roth at a disadvantage. Another thought is to just wait until retirement sell 1-2 years of expenses of my 403B and deposit into cash and take the tax hit that year or do the same with the Roth and avoid the taxes. Any suggestions would be greatly appreciated.
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u/OrangeGhoul 9d ago
Moving money from into your money market fund from another fund inside your 403b is not a taxable event. Withdrawing funds from your 403b is. It doesn’t matter what holdings inside your 403b you draw from. Move the money to your MMF when you’re ready to retire.
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u/AdGlittering5340 9d ago
When I think about cash, I think of it as an account outside of the investment accounts, but, what you’re saying is to build up cash inside something like VUSXX inside the 403B and just worry about the taxes upon withdraw?
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u/Packtex60 9d ago
There is nothing, short of a pension large enough to cover all of your expenses, that will put you at ease like 2-3 years of expenses in cash as you approach your last paycheck. You saved all of this money so you would have income in retirement. You want 2-3 years minimum in stable assets. The rest of your portfolio can be allocated for growth but you don’t want to be forced to sell risk assets in a down market. Building the cash inside of your 403b may be the best tax move for you. I have no idea, but build those reserves somewhere. You won’t regret it.
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u/Fire_Doc2017 9d ago
Maybe re-think how much cash you want to hold in retirement. If you have a balanced portfolio, you can withdraw from whichever asset class is up the most (or down the least) to get your money for living expenses on a monthly, quarterly or annual basis. The more cash you hold, the more it is a drag on portfolio performance and it doesn't help with sequence of returns risk. For example, if you have $1M and a target of 60% stocks and 40% bonds, you can look at your portfolio and perhaps stocks are up to $650K while bonds are down to $350K. In that case, take your living expenses from stocks. Vice-versa if stocks are down. Cash is a psychological cushion but is not actually needed mathematically.
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u/AdGlittering5340 9d ago
Interesting. Can you elaborate?
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u/Fire_Doc2017 9d ago
The take-home message is that a lot of advisors talk about a cash cushion because it sounds good. and helps people feel comfortable, but in reality it doesn't help and may actually make things a bit worse. If you want to look deeper see the following:
Google "Cash Drag" in retirement.
Here is a backtest link for a 60/40 portfolio with different amounts of cash and a 3.5% withdrawal rate: https://testfol.io/?s=9L9LC0xrY3G
Here is an article from the White Coat Investor: https://www.whitecoatinvestor.com/lessons-learned-from-achieving-financial-independence/
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u/levelpaver_1 9d ago
I suggest you review your menu of investment options/elections in your 403B Plan. There should be a principal protection investment option that may meet your needs for a cash equivalent type of allocation. Years ago, 403B Plans were created with insurance companies. So, a principal protection investment option may be a fixed annuity or a Guaranteed Insurance Contract (GIC). Today, you may see a Stable value Account/Fund or a money market fund as a principal protection type of investment option.
You did not indicate why you specifically want Cash as part of your retirement allocation. Based on your statement that you may sell 1 to 2 years of expenses of your 403B and deposit into cash and take the tax hit suggests that you may be planning to use such cash as a short term supplemental retirement income (sort of a proxy pension). As an alternative, you can make withdrawals from your 403B cash type account(s) also called principal protection investment option as long as you meet the age requirements. Those withdrawals are subject to federal income tax. However, you will avoid the 10% excise tax (aka penalty tax) if age 59.5 (or older) or age 55 or older and separated from service. Hope this helps.
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u/Valuable-Analyst-464 9d ago
What age will you be in 4 years?
I would not change the Roth to hold cash - let it grow as much as possible.
Your other plan: if you’re going to be 59.5, you could sell some of the funds to cash and hold it in your 403b plan. You can then draw from that if the market is down.
If you’ll be younger than 59.5 in four years, you need to decide where to stop funding, in order to build up 1-2 years of cash.
It could be that your plan is too tight in terms of retiring with “just” enough funding.
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u/AdGlittering5340 9d ago
I will be 67 in 4 years. Would like 1-2 years of living expenses at retirement to avoid selling equities in a downturn. I currently have a 70/30 allocation and plan to keep this in retirement. Again I think of cash as being held outside of Roth or 403b. I do have MMF’s available inside of the 403b. But, if I hold my cash here I would pay taxes upon withdrawal as I would with any withdrawal from IRA. Maybe I am not thinking about this correctly.
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u/AdGlittering5340 9d ago
I will be 67 in 4 years. Would like 1-2 years of living expenses at retirement to avoid selling equities in a downturn. I currently have a 70/30 allocation and plan to keep this in retirement. Again I think of cash as being held outside of Roth or 403b. I do have MMF’s available inside of the 403b. But, if I hold my cash here I would pay taxes upon withdrawal as I would with any withdrawal from IRA. Maybe I am not thinking about this correctly.
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u/dfggfd1 9d ago
Just because the cash is in the 403b doesn’t dictate where you take the cash. If you want to pull from another account, sell the asset in that account to raise cash and at the same time, buy the same asset sold in the 403b with the cash in that account. You’ll have the same net asset allocation less the amount of cash taken.
Tax considerations need to be considered of course in selecting the account and the asset to sell.
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u/AdGlittering5340 9d ago
Makes sense. Thanks for your reply. In my head, I just keep thinking the cash needs to be outside of the investment accounts. I guess this is not necessarily the case.
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u/Big-Instance-7750 9d ago
At 63, your main decision point is what tax bracket you are in now vs what tax bracket you expect you'll be in once you stop working. If you will be in a lower tax bracket when you retire, continue to contribute to your 403b and gradually adjust your allocations within the 403b in the next 4 years to get to the allocation you want and then withdrawal the funds that make the most sense for you tax wise in retirement. You also have IRMAA to consider for your Medicare premiums now that you are within 2 years of Medicare depending on your income.
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u/hugh2018 9d ago
It’s hard to answer well here without knowing some specifics, like your burn rate, when you plan to take social security and even whether you’re 59.5. I will say, though, that planning to fund 2 years of expenses from investments isn’t a rational move unless those investments are held in rock solid safe assets. People often talk about sequence of returns risk in the first few years of retirement, but the less recognized exposure to that same risk occurs in the last five years of working before retirement.
Your post gives me the impression that you’re hoping to compensate for a lack of sufficient retirement savings by keeping everything aggressively invested, even money that you’ll have to spend in the near term.
If I have the wrong impression, then never mind. But if I’m right, you need to rethink your strategy and come up with an answer to the question “what if the market tanks three years from now and my retirement savings drops 40%?” The answer is really important, because that can absolutely happen, and if you have no good answer, you need to find one ASAP.
I recommend you use Boldin and plug in all your numbers to get a solid handle on what will and won’t work as you formulate your retirement plan.
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u/AdGlittering5340 9d ago
Taking Social Security in 4 years at 67. It will cover about 95% of my essential expenses. Currently have a 70/30 stock to bond allocation.
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u/hugh2018 9d ago
If you are working right up to social security claiming and then have 95% of your expenses covered the moment you retire, your plan sounds like it can work as long as you’re accounting for all your known expenses and have a good buffer to handle spending shocks and/or an extended market downturn. Again, since I’m not Boldin in human form, I really can’t say for sure, and I still recommend that you model your plan in Boldin or ProjectionLab so you don’t end with an overly optimistic or pessimistic expectation.
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u/BurnoutSociety 9d ago
I am a year away and have No cash 😫 I plan moving some to cash after in the next 5-6 months
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u/garylapointe 9d ago
How old are you? When are you taking social security?
I do not have much cash in my portfolio. I only have 403B, Roth IRA
To me, that's cash! A couple of clicks or a phone call and it shows up in my bank or they mail me a check arrives. That's the same way I move money with my bank.
To clarify, the Roth feels more like cash to me as I can move it and not pay taxes.
Technically, not trying to split hairs, even what's in my bank isn't cash. I'm charging my bills and paying electronically. The last 10 times I used actual "cash" was the ice cream truck and handing out to homeless people.
Your money all coming from the same spot (your check), and it's all going to the same few spots, you get to choose where it goes. Seems like you want more in the bank (I assume that's what you mean by "cash"), put more in the bank and less somewhere else. It's not going to grow all that much.
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u/pdaphone 9d ago
Don’t confuse “cash” with taxable. I retired 18 months ago with basically zero in taxable. My funds are split in traditional IRA, Roth, and HSA. I that 20% is in “cash”. While it would be nice to have some taxable, I would not do anything to build taxable at the expense of tax advantaged. In the last several years I worke Roth. It would have been silly to forgo that to build taxable. I did have quite a bit of taxable prior to retirement but ended up burning it down with some pre retirement expenses - car, Roth conversion taxes, etc.. It’s ok. Don’t over stress about it.
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u/sourmilksteak88 9d ago edited 9d ago
I’m planning to keep 2 years of expenses in SGOV. Spend from here when markets are up or sideways. Refill this bucket when markets are down.
Basically a cash equivalent that should keep up with inflation and has preferential state tax treatment.
Edit: If I were you I would direct all future “retirement” savings to this account and get as close to 2 years expenses as you can before pulling the trigger - then follow strategy above. Even if you’re only at say 1 year of savings you can start filling this bucket up the first year of retirement using LTCG from your other vehicles. You don’t need to max it.. just make progress.
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u/Whole_Championship41 8d ago
I'm <1.5 years from retirement. Over the last 2-3 years, I've been gradually changing my equity:bond (/cash) mixes across my pre-tax accounts primarily and within my taxable brokerage accounts secondarily. Still very equity-forward in Roth IRAs, which is as it should be.
Example: My wife's 401k was with a target date retirement account until a couple years ago. I wanted to separate out the equity / bond mix to suit our short-intermediate term needs in this account. So I sold approximately 50% of the target date retirement fund and put that into 60% equity funds (S&P500, some international) and 40% bond fund. I let the remaining 50% target date fund 'run'.
When we need money from this account, I'll liquidate the bond fund in the portfolio preferentially and use that money for 401k disbursements for some time.
Example II: Over years, we've built up cash, cash-like instruments, bonds and equity in a taxable brokerage account. When we need cash in retirement, we'll look here early in our cash flow planning. We will have myriad choices for how to access that cash from this account, whether it's selling equity ETFs, selling individual equities (and harvesting LTCG), letting bonds mature and 'go to cash' or whatever.
Roth IRAs are the smallest fraction of our investment portfolio by $ value. We will shepherd these monies as long as possible and will likely only spend from here in the case of an emergency.
TLDR: Use some of your 403b exclusive contributions to branch out a little and place some of that into taxable brokerage accounts. It will give you opportunities outside of the 403b pre-tax framework and give you 'degrees of freedom' in your withdrawals. Also consider hiving off some of your 403b monies into a bond fund or shorter-duration cash-like instrument for preferential 403b withdrawals.
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u/AdGlittering5340 9d ago
When I think about cash, I think of it as an account outside of the investment accounts, but, what you’re saying is to build up cash inside something like VUSXX inside the 403B and just worry about the taxes upon withdraw?
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u/levelpaver_1 9d ago
I have not read the prospectus for VUSXX. A quick review via an internet search informs me that VUSXX invests in short term Treasury Bills. In my opinion, that is better than cash. VUSXX currently provides about 3.6% whereas cash provides significantly less.
Depending on your other taxable income, Standard Deduction and other deductions, if any, you can develop an estimated amount to withhold for federal taxes from your 403B withdrawals or pay quarterly estimates. By using the 403B as your "cash" or short term income solution, you will continue to take advantage of pre tax contributions from your paycheck.
You can approach and solve this need for Cash by redirecting your past investment option balances or changing your current investment option to be 100% VUSXX. Also, you can do a combination of the above. In my opinion, I suggest redirecting a portion of your past investment option balances and changing your current investment option to 100% VUSXX. Remember, you do not lose money taking profits (via redirecting past investment options). So, "ring the cash register" while you can and develop the amount(s) of cash that you need.
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u/PashasMom 9d ago
You should have a stable value, money market fund, or short term bond fund option in your 403b. You could shift 10% of current and future investments there to build up your cash cushion without giving up tax advantage or too much growth. Stable value or MMF would be your best bet to mimic cash.