Cash management in early retirement has turned out to be a rather stressful endeavor.
When I first left negotiated my severance and left corporate America it was easy to know that I still had money coming in for awhile.
But eventually all gravy train runs dry, and then I was left figuring out an action plan.
For those who have never withdrawn from their portfolios, it can get complicated fast when trying to determine the best approach for selling, managing capital gains, taxes, estimating dividends, figuring out which assets to sell, etc.
At the end of the day, we all want to sleep easy at night, but to do that you need a solid plan.
As we all know, “personal finance is personal…”
What that really means is that your comfort level and mine are not the same.
By the time you have retired you are likely looking at one of the following scenarios:
- You have cash flowing assets that fully cover your expenses
- Your portfolio is large enough to adhere to the 4% rule in which you can live off a set percentage to comfortably fund your retirement
- A combination of both
The holy grail of early retirement would be accomplishing both #1 AND #2, whereby your portfolio can continue go grow without any cash management issues to worry about.
But for many early retirees, myself included, we have achieved early retirement with a weird and ever changing combination of both.
Retirement Withdrawal Strategies
Unless your cash flowing assets cover your expenses as with scenario #1, you are going to need to pick some sort of strategy to withdraw your money and ensure that you can remain solvent even during the worst of times.
There are various withdrawal strategies. They include, but are not limited to:
- A Cash Cushion/Cash Wedge
- The Bucket Strategy (Bucketing Cash, Fixed Income, and Long-term Investments)
- The 4% Rule
- Dynamic Withdrawal Strategy (dynamic withdrawals based on market fluctuations)
For a thorough analysis of all the potential withdrawal strategies, I recommend Early Retirement Now’s SWR Series.
He has run numerous scenarios on many (if not all) of the withdrawal strategies and analyzed their impact on sample portfolios.
No matter which withdrawal strategy you pick, you still have some work to do – you’ll need to figure out when to sell, how much to sell, and what to sell.
AND You Also Need to Sleep at Night
When it comes down to it, no withdrawal strategy, no matter how financially sound will be bulletproof.
EVEN if it is financially sound, you still need to be able to sleep well at night.
Your job is to figure out what you can and cannot sleep with.
I am with Morgan on this one – I’m not as concerned with maximizing my returns, I want to maximize my happiness!
Our Cash Management Plan (Right Now)
So in order for me to get the best sleep at night, I have come up with the following cash management plan:
- We purchased a cash flowing website
- We’ve allocated between 1-2 years worth of expenses in cash and we periodically rebalance our portfolio using this spreadsheet
- We set up monthly automatic deposits that move cash from our investment account to our checking account
Website Cash Flow
Anyone who has been following some of my articles on purchasing the website knows that it has been more volatile than expected.
So while our plan intended the website to cover many months worth of expenses, the volatility has changed the plan.
Instead of attempting to live off cash flow from the website, we are now shifting to reinvesting back into the business, with quarterly reviews to see if any distributions make sense.
This also brings more clarity to our cash management plan, because instead of relying on the business to pay our expenses some months, we can are simply running the business as a business.
Cash Allocations & Rebalancing
In line with our initial early retirement withdrawal strategy, we are continuing to hold between 1-2 years worth of cash.
Cash continues to be a defensive position in our portfolio and despite inflation, I sleep better at night by having it.
Now that we’ve removed the website from the equation (cash management wise), it’s been easier to try to predict future dividends and handle for rebalancing.
Monthly Automatic Deposits
And that brings us to monthly automatic deposits. This is largely what sleeping well at night is all about.
When you are no longer relying on a paycheck, and don’t have any cash flow coming in, this is the key IMO to sleeping well.
If you have a year worth of expenses, would you rather? a) Watch your bank account slowly deplete every month? b) Get paid every month “as if” you were working?
For us, we prefer option (b).
I would rather get a paycheck every month from myself, than watch my savings account deplete for an entire year (again it is all psychological).
I know for a fact, that for us, the monthly automatic deposit is a key component of the plan.
It helps you to sleep at night, and keeps you in a psychologically safe place.
The monthly automatic deposit works for us, because it simulates a paycheck, and allows you to continue to manage your budget as if you were working.
Our cash management plan likely has its flaws, but the ability to sleep at night cannot be understated.
Setting up automatic monthly deposits has been huge in creating comfort and helping to adhere to our budget.
Sure, we could do something else that would likely maximize our investments, but I prefer to maximize my happiness – plus I love my sleep.
More from Accidentally Retired
- Family vs Work: The Everlasting Struggle for Balance
- After Disappointment Comes Clarity
- Happiness Revisited: did early retirement have an impact?