Benchmarking: Cash / CD Buffer

Someone recently asked online how much cash or other ‘safe/liquid’ investments did people carry into early retirement as a buffer against a market downturn.

It’s an important decision to make heading into retirement and it was the final financial preparation we put into place ourselves. About 3 years before I left MegaCorp, we started accumulating a pile of cash equal to 3 years of spending. It formed our ‘short term bucket’ for managing portfolio risk …

Related: Bucketing Strategies

Looking at the responses of about 40+ people online (and tallying them) made me surprised at how differently other early retirees had approached the same decision:


– 21% – 1 year or less

– 18% – 2 years

– 24% – 3 years

– 5% – 4 years

– 32% – 5+ years

As you can see, we fell in the middle of the range. A surprising share (21%) went into retirement with less than a year’s spending in cash, while almost a third (32%) had more than 5 years spending protected. That’s quite a range. One person said they had 30 years spending in cash!

I’ve read that the average market downturn typically takes 30 months to recover. For us, having the security we need against a big market downturn is important, so our 3 year buffer covers us for that. In our situation it is more important to PROTECT what we have, rather than GROW it.

How many years of ‘safe’ cash / cds are you comfortable with?

Image Credit: Pixabay

15 thoughts on “Benchmarking: Cash / CD Buffer

  1. I don’t thinks there is one good answer. Really based on the individual’s factors:

    -Other income streams (dividends, pension, rent from real-estate investments)
    -Plans for retirement (travel, flexible spending, able to return to work etc..)
    -Comfort level with market risk and being able to sleep at night.

    Not retired yet, but I am planning to have less than 1 year in cash.

    With inflation costs and low interest rates, I can’t justify holding much cash. I am also invested in 100% equity so my risk tolerance is very high(or appears to be). I would not recommend that asset mix to everyone. I have a pension to fall back to cover basic expenses. So in my situation having cash or bonds doesn’t make sense. I treat my pension as if it was a bond portion of a portfolio.

    Liked by 1 person

    1. Good points. Now that I am beginning to tap into my pension, I guess I could carry less cash at this point. If the market suddenly plunged, I would probably take a year’s cash and stick it into equities. S&P 500 still looks too high for me.

      Liked by 1 person

      1. I screen for safe dividend growth stocks and back in 2010 it was a raining good deals where you could find stocks such as Home Depot yielding more than 4% with a dividend that was raising slightly over 20% per year and had not cut the dividend during the 2008 to 2010 timeframe. There were many others. Today I am not seeing the same values.


      2. Home Depot has been a very well run company. I see Bernie Marcus on Fox News now and then and sometimes I agree with him, and sometimes I don’t!

        Liked by 1 person

      3. Home Depot wasn’t so well run back in 2008. They had a CEO named Robert Nardelli who was an alum of GE. He was putting Home Depot through the GE financial engineering process of thinning the stock on the shelves and firing lots of people. To a consumer it looked like going into a store and trying to grab something you need and the shelf was bare and it you were looking for help, there was not one around to help you.

        I bought when Nardelli got fired. He went to Chrysler which subsequently went bankrupt. The new CEO stocks the shelves and hires ample staff for the store. They also seem to cater more to the guy who drives a pickup truck than Lowes.

        Nardelli’s time at Home Depot was the cause of the bargain price. Replacing the CEO was a big fat buy sign.

        I think the GE financial engineering model has been debunked to be a load of crap. The accountants drove a good company into the ground while screwing over a bunch of loyal employees with outsourcing and offshoring.


  2. I have three buckets in my retirement income plan:

    1) The first bucket is a Deferred Comp Plan that is paying out quarterly over the next eight years that is currently 100% in a very low yielding Money Market Account. Right now this covers around 75% of my income. If the market crashes, I may redeploy some of these funds in a 60% Stock – 40% Fixed Income blend fund.

    2) The second bucket is investments in Growing Dividend paying stocks. I started this in 2010 and screened for a combination of attractive current yield, fast growth and not cutting their dividend over the 2008 to 2010 timeframe. There were some great names available including HD, MSFT and ACCN which had a greater than 4% current yield and were growing their dividends 11 – 22% per year. Today my screens provide me with an average yield of 4.8% that is growing 5.7% annually and tests for no dividend cuts during 2008 to 2010 and since 2020. My observation is that the account values bounce around as a function of what people are willing to pay for stocks, but the dividend payout stream is smooth and seems to be predictable. My grandfather retired on dividends at age 50 and lived to 96 without running low on funds.

    3) The third bucket is Social Security which my wife and I are holding off claiming until we reach 70 to take advantage of the 8% annual increases for waiting. If the government keeps their promises this will operate like a cash equivalent investment. This bucket will almost entirely replace the Deferred Comp Plan when it has fully paid out.

    Liked by 1 person

    1. It sounds like you have it very well thought-out. We’ve never made dividend stocks a specific focus, but many retirees do. I should ask my financial advisor why he hasn’t ever suggested we look at those specifically.


      1. You will be looking for stocks that offer the following attributes:
        1) Long term history of rising dividends. 25+ years
        2) Did not cut there dividend in 2008 – 2010 or 2020 timeframes, or ever.
        3) Look for the best combination of current yield and grow.
        4) These will be mundane businesses that offer goods and services that people must have.
        5) There are only around 200 stocks that meet these criteria.

        If you look at them over time, you will see that the price bounces around according to how people feel about the stock at that particular moment. However, the dividends are smooth, well behaved and predictable.

        The plan is to live on the dividends and let dividend increases keep you ahead of inflation.

        There are only two times you sell. The first time to sell is if the price gets bid by the market too high and you have an opportunity to reinvest the funds in another stock that offers a higher current yield that offsets any capital gains taxes. The other time is if the business has degraded and is no longer sustainable.

        If stock goes down simply because it isn’t popular, but the underlying business is sound and the dividend keeps increasing, you keep that stock and enjoy the higher dividends. Especially nice for funds you reinvest, because it will push you yield higher.

        A good way to think of this process is that the dividend is equivalent to and it actually rental income in some cases. You would not sell a rental property that is paying you well just because someone knocks on your door and makes a low ball offer, below market offer on the property. If some fool with cash on hand shows up and offers you much more than what the property is worth, then you might want to take advantage of the foolish offer.


      2. Both of the Megacorp so that I worked for would fit your definition of good dividend stocks. Although, they are a bit under your average at 3.5% and 3.7%. Still, both are classic blue chip companies.


      3. Here are some example MN companies.
        Ticker Yield Growth Raised Note
        BBY 2.56% 27% 17 Years 3% off 5Y yield, 5Y growth 19%
        TGT 1.56% 32% 49 Years 49% off 5Y yield, 5Y growth 4%
        GIS 3.31% 0% 31 Years 7% off 5Y yield, 5Y growth 3%
        MMM 3.31% 0.7% 62 Years 15% over 5Y yield, 5Y growth 7%

        Within the past ten years.
        BBY was available with a greater than 4% yield because people were worried Amazon was going to put them out of business.

        GT was available with a greater than 4% yield when they had the credit card breach, the bathroom controversy and were making pronouncements that angered the religious.

        GIS and MMM are very steady, so people are willing to pay a premium for not very fast growth. They are looking at 3.31% as being better than treasure yields. You will only see these rates higher if the make a big mistake or treasury yields go much higher.

        Right now, I put my new money to work and redeploy IRA money in stocks where I can get greater yields. Right now the bargain basement corner includes oil stocks, some utilities, a couple insurance companies, one pharm, cigarettes and REITs.

        The reason you buy these is to beat treasury interest now, with increases in the future to keep up with or beat inflation.

        Liked by 1 person

  3. We retied just over a month ago and have two years of cash to live off of and three years of taxable brokerage funds after that. This will allow time for our Roth ladder to mature which we will use until 59 1/2 when our pretax accouts can be tapped.


  4. I have a more unique situation in that at age 58.9, I have a pension which pays more than our spending. My wife age 66 also has a small amount of social security income and I earn about one third of our annual spending on consulting about 12-15 weeks per year. Our home was mortgage free prior to retirement.

    We keep about six months of spending in cash.

    We also have about two month of spending income from an inherited IRA and annuity from late father’s pension.

    Yes, we are fortunate but at the same time we are frugal people.

    Liked by 1 person

    1. That sounds like a great situation. Being frugal pays off in so many different ways. As our pension kicks in, our ability to keep less cash will make a big difference for us too.


  5. Chief, If you worked at three of the four blue chip MN companies I listed throughout your career, it would explain a great deal about how your FIRE plan worked. They probably offered employee stock ownership plans or a 401K that matched your contributions with company stock. All of these stocks would have made good returns if bought at a discount throughout your career.

    Considering the period from 1992 to 2021:
    MMM increased from $12.07 to $176.28 for 9.69% Annual Return
    BBY increased from $1.96 to $108.88 for 14.86% Annual Return
    GIS increased from $5.33 to $61.69 for 8.81% Annual Return
    TGT increased from $3.40 to $228.72 for 15.62% Annual Return

    My bet is the difference between you and your coworkers is that you kept your funds invested instead of liquidating to buy houses, toys and higher education?

    Liked by 1 person

  6. I’m currently comfortable with about 70k USD in cash. If it gets any more than that, I feel like I’m not doing enough in investing. And if it’s less than that, I feel like I’m not saving too much.

    My expenses per year is probably about 50k/yr, so I’d say my watermark is about 1 year and change.


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