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How close are you to retirement? Only have a cash bucket if you are ready to retire.
be very careful with the timing if you are selling assets to raise cash .
not only may you get caught in a down market if you wait to long but you better sell those assets if sizable at least by 63 years old . otherwise you may have a whopper of a medicare premium if you sell within 2 years of medicare age
Also don't forget people really have no clue when their maker will come a calling so save but enjoy life because if you don't someone else will with what you leave behind.
If inheratence is a deep consideration get a life insurance policy and let the kids pay for it. Live before a health crisis or death hits the front door. We all come in the world with nothing and leave with nothing.
Retirement? Ha... Live now while your young enough to enjoy life. Save and invest what you can.. Just look around at some of the elderly in your town. One day if we live long enough that's us. Now do the same with a cemetery. One day that is 100% to be us. You work 40 plus years at a job you may not like sacrificing family time or getting up at unholy hours with a crazy commute to kick off and someone else enjoy the fruits of your labor?? Go to Jamacia Mon...
I don't think there is any magic. To save, expenses need to be less than income.
Financial advisors recommend that every employee should build a cash reserve. Even very young employees need this to handle a job loss or unexpected expenses. If there are matching employer contributions, then the first savings should go to the 401k. Beyond that a cash account is next even if that means greatly cutting back on expenses. As we age the account should get bigger. I try to maintain 2 years in cash. By cash I mean highly liquid and highly safe investments including bank accounts, or CDs, or very short term bond funds. I am not strict about maintaining 2 years of cash. In fact this past year, my investment returns and overall investment portfolio dropped. I am spending cash to avoid selling equities when they are low. When I get down to a year or certainly 6 months of cash, I will take another hard look. If the markets are still down, I may still do some selling to avoid selling if they drop even more. If the markets go up, I will slowly rebuild my cash values.
I take issue with your characterization of a cash account being second priority. Here is where the OP has noted the Roth IRA as an important place to park taxed income. Why put it in any kind of account that can incur further taxes when the Roth will appreciate tax free? If cash is ever needed for an emergency it can be borrowed from the Roth.
Set up a separate bank account or mutual fund account. Have a part of your paycheck directly deposited into the account. Don't touch the account and the money will build up and you won't even notice it. Do that until you have what you need and then enroll in your 401k program.
Way off base. The 401k match is FREE MONEY! Most companies offer a match of some or all employee payroll deductions and in recent years the most common math formula is 100% of employee contribution up to 6% of the salary. Even without a match the 401k is advantaged by having untaxed funds deposited into the account. In your scenario income taxes would be incurred on the funds deposited and appreciation would be taxed on withdrawal.
Thanks guys....I put a total of 22% of my salary into my 401(k) and my Roth and have done so for years. My thoughts are that even so, I haven't maxed them out. So by putting CASH aside I am losing any tax benefit on that which makes it harder for me to want to do it! If you're already doing your max contributions then sure, you have no choice if you want to save MORE.
The question I have is whether it makes more sense to forego the tax benefit and put money into a regular account (NOT AS AN EMERGENCY FUND) as 2 years of expenses getting ready for when I retire. Or can I stop worrying about that now and once I retire just take out a couple years of expenses then from my 401(k)?
No need to take out cash and limit its appreciation. If your 401k does not allow a wide range of investment opportunities just transfer it to a standard IRA and keep some in more liquid assets. Another option would be to move some to a Roth IRA if you would be paying taxes on the withdrawal from the 401k anyway and let it appreciate tax free while still keeping it available for emergencies.
So once retired, it seems that many people follow a loose "bucket strategy" with part of that including a large "cash" account that may be a couple years (or more) of expenses. This is not an emergency fund but just the most conservative bucket of several that make up the entirety of their retirement funds.
It seems relatively easy to fund this if you're currently maxing out your 401(k) and Roth accounts but I may never actually get to that point. So my question is, to achieve this objective I'll have to forego putting some money in a tax advantaged account in order to build it up?
That's tough to do! Or do you wait until you're actually retired and then make a large initial withdrawal that covers the first couple years, or whatever portion you want to have on hand to prevent needing to later have to take money out at a potentially bad time, marketwise? Of course THAT might be a bad time, itself.
All this is easy if you have more than enough money to cover it all, but if you don't, what's the smartest way to accomplish it?
We have a cash bucket of several years income. Here's how we established it:
*...ALL of our income went into a money market account. All of it.
*...The first of every month we would draw out what we were going to use, and left the rest in the account. So the account grew.
THAT'S IT! That's the way we did it. We have done it that way for over 25 years. We retired in 2010 with no change in spending habits.
People have it backwards. They take their paycheck, spend some (or all) and then try to save. Doesn't work. We saved first and then spent.
So financially, we have made a wedding cake;
Top layer has 1 months money
Second layer (the bucket) has many months money. (ALL income goes in here)
Third layer (house, 401K, rental property, etc) has 10 years money.
I take issue with your characterization of a cash account being second priority. Here is where the OP has noted the Roth IRA as an important place to park taxed income. Why put it in any kind of account that can incur further taxes when the Roth will appreciate tax free? If cash is ever needed for an emergency it can be borrowed from the Roth.
i would never waste space in a roth putting in low yielding cash nor sell anything from it as a first place to hit up for cash by selling assets .. it has to much tax free value to waste space on anything that does not appreciate much in in it
Basically if you want to set up a cash reserve you just need to spend less than you take in. Save that over time and you have your cash reserves. You need discipline to not spend it. No amount of tricks are going to fully protect you from spending it. Simple as that. Spend less than you take in. What is left over put into a savings account or checking account or a CD with easy terms. That money is really at the mercy of interest rates so do not expect it to grow with the exception of what you put in.
we just kept some cash over the years out of each real estate sale we did pre-retirement , accumulating enough to cover two years withdrawals and an emergency fund of 50k .
while we are still reinvesting the dividends in all the retirement money that will stop in january and we will channel them in to building up the 3rd years cash .
we still have 1-1/2 years of money left before we decide how to fund things once we have to sell some assets .
i would never waste space in a roth putting in low yielding cash nor sell anything from it as a first place to hit up for cash by selling assets .. it has to much tax free value to waste space on anything that does not appreciate much in in it
So the assets in your Roth accounts are not necessarily the same as in your IRA or taxed investment account?
I see your point---My Roth has some funds same as my husband's but his has short-term bond fund and more cash (his Roth is larger too) and lacks sector funds I have added that my FA didn't necessarily recommend...
Part of this OP's question is about how to HAVE enough money to fund a cash reserve as well as her tax-advantaged accounts...
Is it possible she could consider part-time second job to add extra income to use for cash reserves---
That might not be good idea if it is too difficult or the extra earnings would move her into new tax level...
And it is easy to say and difficult to do---especially in a family situation where there are children who might suffer but for a single adult...maybe there are jobs to work from home in the evening online or part time work on weekends...
Or maybe consider cutting back on expenses---again easy to say and often difficult to put into practice
The OP seems to want to be better prepared for retirement and majority of people understand the benefit of having cash/assessable reserves w/o selling portfolio assets....
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