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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 always had a cash reserve of about 75% of one year's income. It has fluctuated over the years but really never went below 6 months income and if it did we always had income coming in so it was replenished. Having a cash reserve does not have to be too hard. Just pay yourself first and start it. Once you have the start it becomes easier. Oh an in retirement I think we will do 1.5 year's income. That is what our FA has in our plan.
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.
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.
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)?
Remember when you do reach the point of withdrawing from your 401k, the taxes are due. For separate savings you pay taxes on the interest and/or cap gains each year. I am reaching the point where I need to start withdrawal from my qualified accounts and the amount of taxes I will pay will be substantial.
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)?
How close are you to retirement? Only have a cash bucket if you are ready to retire.
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?
The purpose of the cash bucket is so you do not have to sell investments in a down market to cover your living expenses. No reason the cash can not be in the 401k or ROTH.
Thinking of 70 1/2 when you have to take a MRD out of some retirement accounts you would want at least some of that cash in the retirement account.
I would plan on starting to fund the cash bucket about 5 years out. First stop automatic investing of dividends. Direct new cash into the cash bucket. If you want more funds look to selling some investment with maybe a trailing stop loss. Depending on the market and your resources you can still be funding the cash bucket once you are retired.
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