investing

My Plan B (C, D and E) to Raise Cash

I have several contingency plans for a down market, none of which require tons of sacrifice. So I’ve opted to hold less cash.

Some months ago, I mentioned that I fund my cash needs about six months in advance. A Kiplinger’s reader admonished me for taking on too much risk. Someone who is retired—or semiretired, like me—should have far more ready cash, he chided.

This reader is absolutely right, and the advice Kiplinger offers backs him up. But financial advice is sometimes given in a vacuum, creating a false impression that there’s a single “right” formula. In reality, there’s a wide range of acceptable strategies that should take more than your investment portfolio into account.

To explain: Experts suggest that retirees use buckets to allocate their assets, and put enough cash in the near-term bucket to handle a few years’ worth of expenses. That’s because it can be financially devastating to pull money from a retirement account when stock prices are falling sharply. We know that bear markets happen roughly once every three or four years and typically last between six and 21 months. Thus, if you had two years’ worth of living expenses in cash, you’d be able to ride out most bear markets without touching your invested assets (Read more on the bucket strategy and other ways to make retirement income last here).

But what if you could pay living expenses even longer without pulling from your portfolio? Would you need as much cash? The answer might depend on where that cash was coming from and what you had to sacrifice to get it.

Contingency plans. I have several contingency plans, none of which require tons of sacrifice, so I’ve decided to hold less cash. My options include:

1. Working more. I call myself “semi­retired” because I launched a side business that is not yet profitable. I also do a few paying projects, which cover about half of my bills. The rest of my living expenses are normally funded from my investment portfolio.

If the value of my portfolio fell sharply, I could simply accept more paid work, putting my side business on a temporary hiatus.

2. Taking my pension early. I am not old enough to claim Social Security. But I have a small corporate pension that allows me to tap benefits as early as age 55. I’d get less each month by taking payments early, but I’d be getting benefits for more months.

Incidentally, pension plans are required to do heavy math to determine how much retirees will get if they claim benefits at any age acceptable in the plan. The point of those calculations is to ensure that you would get the same amount—assuming you lived an average life span—whether you take benefits early or late. (Social Security does more or less the same thing.)

Taking benefits late is really gambling that you’re going to live longer than average. If taking benefits early saved me from savaging my investment portfolio, I would consider it a fine trade-off.

3. Putting the house to work. I married a guy who has a beach house, but we also kept my home in the mountains. We could rent or sell one of our properties if we needed to. Sites like Airbnb and Silvernest make it possible to rent all or a portion of your home for weeks or months at a time. (Even if it were permanent, the sacrifice of living full-time at the beach wouldn’t kill me.)

4. Spending less. There’s plenty of give in my normal spending. If I found myself suddenly strapped, I could cut some excess without much pain.

Almost everyone has some option that doesn’t rely solely on investment returns. If those other options are attractive, taking a slightly riskier investing approach might not seem as risky.

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