A retiree who is mainly using his or her portfolio to generate the cashflow needed for living expenses maintains a 3 to 5 years cash cushion. What are the best vehicles to maximize the cash yield when waiting in cushion?
The money could be placed in money market or a high interest CD but the rate is fairly low. Is there any suggestion of how to maximize the yield for the cash without taking much risk?
tj
How much risk you are willing to take is the key. For me, it would have to be no risk, because the 100% most important thing for me would be to ensure that money is there for me when I need it. CDs and money market accounts may not be sexy rate-wise, but they get the job done.
Fuskie
Who notes both bonds and equities carry risk of losing your principal and that’s not a risk he’s willing to take…
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FDIC insured CD are probably safest.
Dividend paying stocks can give better yield, but you have to choose wisely. Solid companies that are way down from their highs might be reasonably safe–if you can tolerate paper losses and the dividends are secure. But this would fit best in a diversified portfolio where your core is in CDs but for better yield you are willing to put some in dividend stocks.
Here’s a resource - https://www.depositaccounts.com/checking/reward-checking-acc…
How much you get depends on how hard you want to work. I have changed accounts at various times to pick up more interest.
How much risk you are willing to take is the key. For me, it would have to be no risk, because the 100% most important thing for me would be to ensure that money is there for me when I need it. CDs and money market accounts may not be sexy rate-wise, but they get the job done.
I took it a step further. My broker offers the choice of having cash spread around multiple FDIC insured accounts at different banks. Enough different banks to stay within the FDIS’s $250k insurance limit. So my cash, all inside my IRA, couldn’t get much safer. And, clearly, it returns essentially nothing.
I set that up when interest rates were so low that nothing was paying much for cash. Perhaps I should re-think it, but I probably won’t.
My broker offers the choice of having cash spread around multiple FDIC insured accounts at different banks. Enough different banks to stay within the FDIS’s $250k insurance limit. So my cash, all inside my IRA, couldn’t get much safer. And, clearly, it returns essentially nothing.
Didn’t your broker at least discuss laddering CDs ?
Didn’t your broker at least discuss laddering CDs ?
Not that I recalled, and I’d never looked at them. Your question caused me to start looking. Thanks!
Yes, my broker offers tools to set up such a ladder. I played with the 1-year option a bit. The first time through, one of the banks was Bank of China (or some such name). The second time it appeared again, but so did Bank of India (or some such, I didn’t take notes). I don’t doubt that the FDIC insurance, as noted on both of those, is real. They were, however… unexpected.
Obviously I have more homework to do.
Thanks again for the prodding!
Treasury Direct is where I’m moving for my cash cushion beyond immediate needs…
Max out the value of I-bonds given today’s rate of 9%. You can buy $10k per tax id annually (and defer $5k of tax refund money as well). You have to hold the bond at least a year and forfiet 90 days of interest if you redeem in less than 5 years. Given the rate, it felt better than available CD rates.
26-week Treasury bills. You can buy them at auction via Treasury Direct and build a short term ladder. I’ve bought the last few months with increasing rates…again better than CD rates I’ve seen. July 7 auction was 2.56%.
26-week Treasury bills. You can buy them at auction via Treasury Direct and build a short term ladder. I’ve bought the last few months with increasing rates…again better than CD rates I’ve seen. July 7 auction was 2.56%.
I’ve wondered about T bills for a while. The auction thing is new, but I suppose it is simply bidding an interest rate that does not vary too much much from contract to contract?
Also, do you ladder these at one month intervals, three month intervals, or something else?
Thanks,
Pete
The other way to approach cash flow management in retirement is to use your investments to produce only dividends. But this requires that the retired household does not need to sell anything for a long time. It also requires a lot of work, as the dividend paying stocks must be carefully selected and there is no 3rd party assistance in going thru the selection process with the exception of David Fish’s (now Justin Law’s) CCC Excel SS, and this is very helpful but only as a first-level screening tool. The process of measuring a company’s ability to cover their dividend and tracking this cash flow information over time is a lot of work.
Diversification across industries and limiting a single stock’s dividend to no more than 3% of portfolio income must, in my view, be followed, as this is the only defense against unexpected market catastrophes, such as the sudden onset of the SARS-CoV-2 viral pandemic.
Dividend growth is the inflation hedge
Stock price, other than at initial purchase, is a non-factor that I do not track. If a company is able to cover with net operational cash flow their dividend and so grow it regularly over the years, the stock price will follow…I don’t need to monitor it.
BruceM
The other way to approach cash flow management in retirement is to use your investments to produce only dividends.
Difficult to start a ‘4% rule’ withdrawal just with dividends.
2.5% would be closer to what’s doable, I expect.
The other way to approach cash flow management in retirement is to use your investments to produce only dividends.
Difficult to start a ‘4% rule’ withdrawal just with dividends.
2.5% would be closer to what’s doable, I expect.
This is what I plan to do in a few years at age 65 when I retire. Live off the dividends and interest of a 50/50 portfolio (about 2.5%). I can live off of this. For those requiring 4%, perhaps that 2.5% can provide the basics and they can sell assets for “lumpy” expenses as needed up to 4%.
BruceM: "The other way to approach cash flow management in retirement is to use your investments to produce only dividends. But this requires that the retired household does not need to sell anything for a long time. It also requires a lot of work, NO KIDDING
"as the dividend paying stocks must be carefully selected and there is no 3rd party assistance in going thru the selection process with the exception of David Fish’s (now Justin Law’s) CCC Excel SS, and this is very helpful but only as a first-level screening tool. The process of measuring a company’s ability to cover their dividend and tracking this cash flow information over time is a lot of work.
Diversification across industries and limiting a single stock’s dividend to no more than 3% of portfolio income must, in my view, be followed,"
Your 3% diversification rule implies owning at least 34 dividend paying stocks, which probably means monitoring more like 4 stocks, the 34 you own and the most likely replacements if one of the 34 dips and needs to be sold.
Sounds more like a full-time job to me than what most people want in retirement, and also causes me increased concern with respect to cognitive decline as one ages.
If you run your portfolio in this manner how much time are you devoting to monitoring/reviewing your existing portfolio and analyzing potential replacement stocks.
Regards, JAFO
This is what I plan to do in a few years at age 65 when I retire. Live off the dividends and interest of a 50/50 portfolio (about 2.5%). I can live off of this. For those requiring 4%, perhaps that 2.5% can provide the basics and they can sell assets for “lumpy” expenses as needed up to 4%.
Something like the Vanguard Value Index Fund (VTV) might be a good holding - diversified, large companies, yielding about 2.5%.
on buying Treasury bills and notes…
Can your bank or financial institution buy for you? what kind of fee if any do they charge?
Have you considered Treasury Direct Series-I bonds? https://treasurydirect.gov/indiv/research/indepth/ibonds/res…
3-5 year cash cushion is pretty steep though. I’m aiming for 2-3 years myself.
Difficult to start a ‘4% rule’ withdrawal just with dividends.
The “4% rule” has to do with safe withdrawal rates for portfolio survivability through retirement. Investing for dividend income has to do with providing household cash flow need without depleting savings, whatever percent of savings that may calculate to be. The higher the required portfolio yield required, the higher the income risk, where income income risk is the risk of a reduction in cash flow (dividend cut)and/or a risk of dividend growth below expectation.
BruceM
Your 3% diversification rule implies owning at least 34 dividend paying stocks, which probably means monitoring more like 4 stocks, the 34 you own and the most likely replacements if one of the 34 dips and needs to be sold.
I began accruing dividend paying stocks for a pure income approach in the late 90s. Today I hold 62 individual dividend paying stocks, 3 Dividend ETFs 1 bond open end mutual fund and a MMF.
The work is on the front end, screening and selecting. Beginning with dividend history analysis, gathering 10 years (40 quarters) of cash flow and other needed company data, compiling it and charting trends in operational cash flows and then reviewing its industry’s future and the company’s place in it, can take hours. There is no 3rd party that does this. Monitoring future cash flows is something I do only if the company is running into problems, usually showing up in its share price or a slowing in its dividend growth, which I do follow.
If one is not interested in doing this, then my advice is easy…don’t go there.
BruceM