A person I know, who is retired, has their money in a trust. I am concerned for them because not much of it is in cash. Out of $800,000 only $20,000 is in cash. The $800,000 is spread into three accounts. One account has $330,000 in it, and only $2300 of it is in cash. Another account of $280,000; has only $7000 in cash in it. Only 2.5% of the trust is in cash, the rest in stock and bond mutual funds. Shouldn’t it be closer to 20% cash? With more cash not as many of the mutual funds will have to be sold for distributions when the market price is down, right?
2.5% in cash seems a bit low, but....Is this $800,000 their entire savings?Are the non-cash holdings stable and generating cash, or are they invested in Groupon, Zillow, Tesla, etc?The holdings would only need to be sold when the market price is down IF the market price is down - if I were retired right now I wouldn't be too upset about having to sell my holdings at today's levels.
What is the withdrawal rate on the trust? If it is not greater than the yield on the trust assets, it is unclear why the trust would need to hold much cash.
The withdrawal rate is kind of high about 8%. It seems like the accounts loose money much of the time.
The money is invested in various mutual funds.
The bank must have to sell a lot of the funds when prices are low, like during the recession. If there was more cash, they could have taken the distributions from the cash instead of the selling the funds; correct?
It seems like the accounts loose money much of the time.You need to examine the record closely. If that is true, then something needs to be done.A successful market strategy requires timing (when to be in and when to be out) and selection (what to be in when you are in the market).
A bit OT, but as a reference point, note that Motley Fool would usually suggest putting 5 yrs of living expenses in a laddered maturity bond portfolio. Then you have the interest from the bonds and the maturing bond each year to cover expenses when the market is down and you don't want to sell equities. Five years is usually enough according to the experts.Of course other strategies such as dividend paying stocks can also help cover short term expenses while the market is down.As others have noted, cash is not the only way to cover expenses provided other investments have predictable payouts.
You really havn't given enough information to give a definative answer. If more than 50% of the funds were in stock funds and only a little in bond fund I'd say there was a problem. The exact ratios are debatable but being in retirement most should be in bonds or other stable cash generating investments. Even if a lot of money was in bond funds, if the bonds were all long-term bonds and/or high yield bonds which experience wide principle fluctuations due to interest rates and/or credit risk there would be a big problem. If 10-20% were in short term bonds (prefferably muni bonds being a trust) this would be a near cash equivalent. During down times these very stable bonds could be sold to pay expenses while during good market years the stocks could be sold to pay expenses and replenish the short-term bond fund. 8% withdrawl rate is unsustainable. Your friend is going to run out of money if they live a couple of decades unles we hit another 80's style bull market. Budgeting and/or another income source is needed badly. Hopefully this helps but you need to understand that there are a lot of variables involed that you havn't supplied.
The trust has about 67% in stock funds, 30% in bond funds. I'm don't know if any of the bonds are short-term.What if the the price of bonds and stocks are down at the same time. Wouldn't be good to have cash in the portfolio so you don't have to sell the funds at a low price? According to an article on Charles Schwab's website you should have cash equal to about one year of living expenses: "...set aside enough cash to cover your expenses for one year... Place this cash in a relatively safe and accessible account, such as a checking or savings account, a money market fund or an extremely liquid cash investment."http://www.schwab.com/public/schwab/resource_center/expert_i...
The 8% withdrawal rate is written into the trust. Apparently it would not be easy to change it.
The 8% withdrawal rate is written into the trust. Apparently it would not be easy to change it. There's no reason to change it. The point is not to use more than 4% a year. You could invest the rest in a taxable account.
What if the the price of bonds and stocks are down at the same time. Wouldn't be good to have cash in the portfolio so you don't have to sell the funds at a low price? According to an article on Charles Schwab's website you should have cash equal to about one year of living expenses: "...set aside enough cash to cover your expenses for one year... Place this cash in a relatively safe and accessible account, such as a checking or savings account, a money market fund or an extremely liquid cash investment."I think you are interpreting this statement incorrectly. They don't say that this money is in cash so that you can live off it during bad years and avoid selling. Granted, that sounds good in theory but the point they are trying to make is to have an emergency fund. The very last thing you want to do with an emergency fund is to start to spend it during economically troubling times before an emergency occurs. Does your friend have an emergency outside the trust fund? See that last sentence of the paragraph you started to quote (my bold):Ideally, this cash cushion is outside your retirement portfolio, but you may include it within your portfolio as the table Suggestions for structuring a moderately conservative portfolio suggests. While I disargee with your interpretation with the quote, I agree that having cash or at least cash equivalents is a good decision. It's exceedingly rare for government bonds and the stock market to both be down significantly at the same time (Though it can happen, look at Greece). More often when stocks tank, there is a flight to safety into governemnt bonds and they will increase in value temporarily. Take a look at how stable these two short term bond funds have been:https://personal.vanguard.com/us/funds/snapshot?FundId=0041&...https://personal.vanguard.com/us/funds/snapshot?FundId=0032&...
I think you're right about me misunderstanding the article, but I think I have read some articles that did recommend having cash to draw on when the market is down. Thanks to everyone for the advice.
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