Early Retirement - Financial Freedom (Investing, Tax Planning, Retirement Strategy, Personal Finance)

How Much Should I Have In Bonds/Cash/etc. In Retirement?

• Ari Taublieb, CFP®, MBA • Episode 242

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We explore how much safe money you should maintain throughout retirement for financial security and peace of mind without sacrificing long-term growth potential. Instead of using cookie-cutter rules, we break down a personalized approach to balancing safety and growth in your retirement portfolio.

• Start with your annual spending needs to calculate your safe money base
• A good starting point is having 5 years of living expenses in safe assets
• Your safe money requirements should decrease as guaranteed income sources (Social Security, pensions) begin
• The 60/40 portfolio rule doesn't work for everyone - your allocation should reflect your specific situation
• As your portfolio grows, the percentage allocated to safe money typically decreases
• Too much safe money risks losing purchasing power to inflation over time
• Consider your emotional "sleep number" - how much safe money you need to feel secure
• Factor in upcoming expenses like healthcare, travel, and home renovations
• Cookie-cutter planning fails because everyone's situation is unique and dynamic

Submit your financial questions at earlyretirementpodcast.com for a chance to have them answered in a future episode.


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Ari Taublieb, CFP ®, MBA is the Chief Growth Officer of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.

Speaker 1:

How much safe money should you have throughout retirement? That's what we're gonna talk about in today's podcast episode, and I'm gonna tell you how this came about. So I was at home with my parents and my aunt came over and my aunt said hey, you're like the finance guy, right? So like, how much safe money should I have? And is it like literally safe money, like do I put cash underneath the mattress, do I have bonds? Or like there's inflation protected stuff? And so naturally I want to say a thousand different questions, not say I want to ask them. I want to say well, what does safe mean to you and what does it mean to have enough income throughout retirement? How much is enough? That's what I'm thinking. But in this case she's just looking for a quick kind of answer, like how much safe money should I have? She's looking for a rule of thumb, and I think that's the reason these rules of thumb exist, because if they don't, and I start asking questions. Well, now we've talked for three hours, so today should be a 10 minute episode, which is what I'm going for, and I've got my timer on. We can even put a timer right here, so if you're watching on YouTube, I'm putting this little clock down timer here so that you guys can make sure that I am sticking to that. Now, some of these episodes I'll do. Yeah, I'll do 15, 20 minutes if I'm really wanting to go deep on a certain case study, but for this it should be simple and I'm going to break it down for you and walk you through the logic.

Speaker 1:

Now, with this being said, if you are unfamiliar with my content, I do videos and podcasts on Roth conversions, healthcare, social security, withdrawing income, meaning which account do you pull from umbrella insurance, anything you could think of financially. I'm going to try to make a video on it and hopefully I can explain it in a way that resonates. Now, if there's a video that you go I don't think you've made one yet on this, or could you please do this Put it in the comments below. I will certainly be the one looking at those comments and my team will notify me. Hey, we haven't done a video on this. Could you please make one? More than happy to do it. I'm also going to be doing my first giveaway, so if you're listening on the podcast, awesome, please continue to listen. I am a podcast fan myself, as a listener, and I know sometimes the podcaster will do content via video, but sometimes I just like listening via audio, and so if you're listening via audio, that's never going to change.

Speaker 1:

If you are watching this right now and you are on YouTube, you can obviously see me, but there's a book called Simple Wealth Inevitable Wealth and this is my favorite book in the financial space. I'm going to be giving this away to one of you who has the best financial story for me, and it's going to be based on a comment that you leave on YouTube. So if you are watching and leave a comment and this could be any story I had someone recently say look, no one had asked me when I, like, can retire emotionally versus financially, and I thought financially I could do it, but emotionally I don't know if I'm really ready. What am I going to do? Other people go look, I'm so like my best financial story is I bought an rv 100 000 over what I initially thought and it's the greatest thing ever. And I'm not traveling internationally because that's not important to me, and now my family and friends can come with me on trips. So I don't need you to have like some magical story, but I'm just going to pick one with my team and say, hey, here you get my favorite book. So if you're listening on the audio, on the audio, that sounds like I'm a total boomer there. If you're listening on the radio, no, through iTunes or Spotify or some other podcast app go to YouTube to drop a comment if you want to be in that giveaway.

Speaker 1:

Now let's hop into today's episode. So we have a phrase here at Root that's called Root Reserves and what that is is saying how much money should you have on hand at all times so you don't have to worry? So that's called root reserves and I'm going to break it down through an example. So let's assume you want to spend if we were all on a live show together, I would ask you guys to interject here. But in light of time, I'm going to say 80,000 a year. You want to spend 80,000 a year and I'm going to pretend you're 50 years old Okay, I'm doing this with you right now, I did not prep this and you're going to spend 80,000 a year. After taxes adjusted for inflation, you're 50 years old. I'm going to say you want to retire at 55.

Speaker 1:

Okay, now, 80,000 a year, that's good, but that's not like you're, you know, luxuriously traveling or anything Like, imagine you have no mortgage. Maybe there's a little bit of a mortgage, but it's 80,000 a year. That's kind of just your expenses. Okay, it's not perfect. Not cars, not weddings. Keep it simple.

Speaker 1:

Now, let's assume you have a million dollars. If you have a million dollars, you're trying to figure out how much safe money should I have throughout retirement. And what if my one becomes 1.2 and then 1.5 and then two? Then social security starts helping out and that's where it starts to become complicated. So the short answer to how much safe money should you have is it should always be changing and it should be broken down in two ways. Number one what is your sleep number? This is the easy one, because there's no math involved. This is gut check. How much money do you need in your checking account? So you're okay. That's not really this root reserves, that's not really like an allocation. That's what I'm going to talk about in a second, but I start with everyone with what's your sleep number, because some people will go 500,000.

Speaker 1:

If I have a million bucks, I want 500,000. I don't get that often, but some people are like look, I just feel better. Markets are going to go up and down. I don't want to worry the next three years if markets don't do well, if I have to, like, go back to work and social security is going to come on in a few years so, like, I just want a ton of super safe assets, in which case I go, awesome, love that. I'll show something on my screen that you guys can all see right now, unless you're, of course, listening. But basically it is a chart showing if you had $100 in 1927, in 2025, it would be worth $2,300. Versus if you had the S&P 500, it's worth $982,000, a $980,000 difference.

Speaker 1:

Now, a lot of you are like hey, I get it, I get it. That's why we invest. We're into the S&P 500 and small caps down. I forget, I want to pay for something travel related. I just, yeah, could I be optimizing it in a high yield savings account? Sure, but I don't want to transfer that and have to deal. I call that return on hassle. It's just not worth the hassle to me for that return, that's the sleep number. Then there's the root reserves, and the root reserves is saying how much safe money should you have have? So you at all times don't have to worry about hey, if markets do this, am I not gonna be okay. So here's how you do it really easy. I've got a few minutes left on my timer here. So if you have a million dollars and you wanna spend $80,000 on every single year, I'm going to do it really easy for you Ready $80,000.

Speaker 1:

For my clients, I like to have five years of living expenses set aside so that, no matter what happens, you're okay, because the average market downturn for your assets to recover is about two and a half years. So I just double that and go. What if you get really unlucky? So the most any of my clients have is five years of living expenses. So it's 80,000 times five, that's $400,000, which means I need 400,000 in some type of safe thing Could be bonds, could be cash, could be inflation protected securities, could be a laddered CD. There's a gazillion different. That's not what I want you to focus on, but that's the framework, ok. So that means $400,000. That's 40 what I want you to focus on, but that's the framework, okay.

Speaker 1:

So that means $400,000. That's 40% of a million, which means, right off the bat, a 60, 40 portfolio. Maybe that makes sense 60% equities, 40% fixed income. But guess what guys this couple? They also have $20,000 coming in from rental income, so they don't need their portfolio to actually have 400,000. That's unnecessarily conservative. That might be like seven or eight years of safe money and some of you are like, ooh, what's wrong with like more safe money? Well, the risk is it's actually losing money over time because that's so much money not growing at a rate of return that's going to be able to pay for future you, future long-term care, future travel, future giving.

Speaker 1:

So if we now say not 80,000 but 60,000, 60,000 is what we really need and we still want five years of living expenses, that's 300,000, which means, right off the bat, now we're at a 70-30 portfolio 70% equities, 30% fixed income. But what if, all of a sudden now let's fast forward this person's? Now they're 55, now they're 62, they want to turn on Social Security and $40,000 is coming from Social Security. Just hypothetical, okay, they only need $20,000. Now. Well, what's 20,000 times 5? That's $100,000. Now, well, what's 20,000 times five? That's $100,000. Theoretically, maybe their portfolio grew from $1 million to $2 million. Yeah, I might recommend to a client they have $100,000 of safe money, five years worth of living expenses. That might only represent 5% of a $2 million portfolio or 10% of a $2 million portfolio. Now, it doesn't have to be five years of living expenses exactly. You might go ah, I'm more comfortable with four, I'm more comfortable with six. Yeah, we can have that conversation.

Speaker 1:

But the root reserves just to kind of summarize the timing here on this clock. And then I have a few things I'm going to summarize. Of course, root reserves should be customized. You might go nope, I don't have a million dollars, I have $2 million. Should I still have a 60-40 portfolio? No, that doesn't make any sense at all. And the reason it doesn't make any sense at all which sounds a little petty when I say that, but the reason I'm trying to get this point across is that's so much money that you work so hard for not working as hard as it should be.

Speaker 1:

If you have a million dollars and you want to spend 80,000 a year, five years, that's 400,000. Okay, so that's 40%. But if you don't have a million, but you have 2 million, your living expenses didn't change. You still want 80,000 times five years, that's four hundred thousand. So now, 20 percent. I don't need 40 percent, I need 20 percent.

Speaker 1:

And also which I think this is something that we often think about is hey, I'm getting older, shouldn't I be more conservative. Shouldn't I be more safe? I don't want to run out of money, of course, but that's one risk. The other risk is you're so safe that your purchasing power decreases, meaning the cost of those goods, if you have $100 today. A lot of you guys know eggs cost $10 today, which is wild. If you want to go buy eggs in the future, do you think it's going to cost more or less than $10? It might come down for a little bit, but over time, eventually it will increase. So if your money is not keeping up with inflation, that's the real risk here. So I'm trying to protect future you.

Speaker 1:

So, from a root reserves perspective, you first step. One is determined before even this is how much would you love to spend? So I'd want to go to my aunt and say hey, aunt, so you say you want safe money, how much would you love to spend? And she might be like 20,000 a month. I go. Great, your plan would show you running out of money at this time if you did that. And she might be like ah, maybe not 20. How about 10? I go okay, 10 is fine. Is that you dreaming? Or is that you like eh, I could get by? She's like oh, actually I'd rather 12. You're right, maybe 12 is the right number. So we'd have a deep conversation about that before I ever give a hey, here's exactly how much safe money you should have.

Speaker 1:

But from there we're having a deeper conversation about okay, what about cars? What about vacations? What about weddings? What about downsizing? What about really go? Okay, what are any potential things that might come up?

Speaker 1:

And the reason for that is let's assume someone's on track for retirement. I mean, the retirement looks good, but they've got kids' college expenses and one of their kid wants to go to grad school and another kid isn't going to be in dental school. And so now it's like hey, you said five years, but is that still right? Because I've got, like healthcare and other, like I have some expenses that are not going to be here forever. Like healthcare, it's from now until Medicare at 65. I got a plan for that. But then, in addition, I'm going to do a home remodel and I'm going to travel probably more when I have my energy and my health. So is it still five years? No, no, no, no, no, no, no. It is not.

Speaker 1:

That is cookie cutter stuff. People, these rules of thumb, this cookie cutter of, have three years of expenses, have five years of expenses. Part of this is I need people to take action and so I start with five years at a minimum, but it's a dynamic, moving thing. If you're 50 years old and you go, I'm going to retire. Well, yeah, I might want you to have extra safe money, because if markets don't do well, we need to still somehow pay for something called a Roth conversion. Guess, I don't want to have to go sell something at a loss so that we can pay taxes. That defeats the purpose of good planning. So certain situations will call for me to go hey, I actually want more buffer here, and here's why Other situations I'll go look, you're currently 68 years old, social Security's meeting nearly all of your needs, plus you have a pension, plus there's rental income, plus inheritance, and so theoretically and I've shared this example before theoretically, your asset allocation could be 100% equities in 0% safe money, and I think I've told you this before.

Speaker 1:

I know I just said that, but I have a client I'm trying to remember. If they said I could say their name, so I'm just going to assume. No, we're going to call him John. John came to me and there's a client we work with today. And John said, ari, you're going to freak out.

Speaker 1:

I said I don't freak out that easily, but try me. He's like well, I have 100% equities and I'm in my 70s. So like, aren't you kind of worried? Isn't that too risky? Now I didn't know if he's testing me or anything, but I don't. I just speak the truth, no matter what. So I said I don't think that's crazy, but like I need to know more. How much do you needs? My pension is 10 a month, 10,000, and I want to spend eight a month.

Speaker 1:

So I said, theoretically, if your $3 million portfolio went to zero, you would be okay. You wouldn't like me, but you'd be okay. Is that right? He's like yeah, that was kind of my logic. My logic is, like I have a pension, so like my investments can fluctuate and the ups and downs don't really bother me because I don't even look, because I have a pension. So like, why would I have any safe money? I said I don't think you should. And he's like well, you're the first advisor to say like I shouldn't get more conservative. I said if you had no pension, I'd be freaking out because, like, then we have to go sell things at a loss and if markets are down, I don't know if you're going to make sure you have enough money the rest of your life, and so it needs to be custom.

Speaker 1:

So the point here I have a lot of silly things. People have given me cool things, let me say, not always silly, but this is one. I'll explain it for those who are listening as well. It says anti-cookie cutter jar. Love the pod. I don't believe in cookie cutter planning. Yes, I do like cookies, which is why this person, I think, got me this as well. Cookie cutter planning yes, I do like cookies, which is why this person, I think, got me this as well. But the cookie cutter plant.

Speaker 1:

What's your risk tolerance? On a scale of one to 10? I'm a two, I'm an eight. That doesn't help someone retire. You have to go a lot deeper with financial planning, and so this kind of root reserves that.

Speaker 1:

How much safe money should I have on hand throughout my portfolio? I don't know. Are you going to work? Is there part-time income? Is your spouse still going to do something? What Roth conversion strategy are you executing? Is there a need for tax strategy about healthcare subsidies, by the way? Do you sleep better by having more, or what about your spouse? Do they sleep better?

Speaker 1:

If you want to go travel, are you, you know, up? Are you, I was gonna say, upfronting the cost, but that's not real English. Are you fronting the cost to that? I have people that book travel six months in advance. Well, imagine they were to be like we're just going to dictate. Whatever markets do, that's going to dictate our travel. What if markets are down because they're trying to optimize to the nth degree and now they're like I know we want to spend 80, but markets are down, so our portfolio could only allow for like 65. So, like, let's not travel this year. Like, no, don't do that. That's over optimizing.

Speaker 1:

So hopefully, this was a helpful, quick-esque video on how much safe money you should have, and so you can think through it properly. It's not an exact science, so some of this is I want you to pick something that works for you, what makes sense on a gut level. Oftentimes it's, for example, you're going to go get surgery. To some extent, you have to trust the doctor that's going to execute the surgery. That's like a Roth conversion. A Roth conversion is something very tactical. You do it incorrectly. It's a big deal. You want to get it right this how much safe money you should have. This is also very important because if you go too conservative and then 20 years later you go, wow, what was I doing? I should have had more working for me, or the opposite, it's a big deal. So I'm not discounting that.

Speaker 1:

But what I'm saying is a lot of you guys can figure it out. Okay, on a gut check kind of a thing, you go, look, I'm going to sleep better if I have 2 million. Yeah, I want 200 to 400,000, super safe. Just make sure it's doing what it needs to do. Okay, cool, I like CD ladders. I like inflation protected securities. I like bonds with different maturities to protect against credit and interest rate risk. That's what I like. A lot of you might go you know I get that but like, look, it's just, I want 0% bonds. I don't like bonds. Other people are going to be like you know I also.

Speaker 1:

Oddly, I think I get you're saying all of this, but I understand the volatility, but my partner they don't, and I don't want them to worry when they check the account. Now, if they don't ever check the account, then like different conversation. But my point here is I don't want you to feel like oh, I didn't do it the exact right way. There is no exact right way. Any advisor that's like this is the way. They don't know what they're talking about. They are trying to make it so you take action, which, by the way, is what I'm trying to do. I'm trying for you to go okay, I do have the right amount. I have 200, I have 300 or 400, whatever it is. I have the right amount for me and I see when my income changes, I'm going to change that number, I'm going to update my plan, which is why I say I don't do financial plans. I do planning, because life changes. It's dynamic, it moves, it's fun. That's how you do good planning. So, hopefully, this was helpful episode. If so, please like this video, share it with those that you want to retire early with, and I'll see you guys next time.

Speaker 1:

Thank you all, as always, for listening to the Early Retirement Podcast. I love getting to host these shows and make different content for you guys every single week. I've not missed a single week in years, and that is because I love getting to do this. Now, please be smart about this, before you actually execute any strategy that you see me talk about or hear me talk about. Should I say Please talk to your financial advisor, your tax preparer, your estate attorney. Please be smart about this. None of this should be construed as financial advice. This is for fun, educational, informational purposes only. Once again, just quick disclaimer here. Guys, please be smart about this. Appreciate you listening, as always, and you can, of course, submit a question on my website, earlyretirementpodcastcom. If you, of course, want me to address a specific case study or topic. I will not promise I can get to it, but I respond to every single person and if I find it will be helpful for a lot of people, I will absolutely make an episode on it, at the very least give you some insight. That's it. Thanks, guys.