Strategies for Safe Money All Stages of Life

In this video, Chris and Matt discuss the topic of safe money management throughout different life stages. Starting with the accumulation phase, they outline essential rules of thumb for maintaining a secure financial foundation. From establishing emergency funds equivalent to six months of expenses to setting aside funds for upcoming opportunities, viewers gain practical insights into structuring their finances for stability and growth. Transitioning to retirement, the discussion shifts to distribution strategies tailored to individual needs. Rather than prescribing a one-size-fits-all approach, the experts emphasize the importance of context, considering factors such as income sources, expenses, and risk tolerance. Through a detailed example, they illustrate how retirees can calculate their ideal allocation of safe money, ensuring sufficient liquidity while optimizing long-term growth potential.

Video Transcript


Today we’re going to talk about safe money, specifically, how much should you keep in safe money while you’re accumulating versus in retirement whenever you’re distributing from assets? So a completely different ballgame, Matt. So what are some rules of thumb when looking at this with safe money?


Yeah. Well, I’ll take care of the accumulation, you take care of the distribution. So in the accumulation stage, we find that if you in safe money, we want to have two categories. One is emergency and second is opportunity. So emergency would really be six months of expenses. So this doesn’t mean six months of income if you’re bringing home 10,000 a month of after tax income, but you’re only spending 5000 a month of it. And we want six months times five. We want $30,000 so that you want to keep an emergency fund, something that’s extremely safe, it’s liquid. We don’t want to tie that up in the volatility of the market. The stock market is great for long term.


It’s essentially gambling in the short term, if there’s a likelihood that you’re going to need money in the next three years, that brings us to bucket number two, that emergency fund we just want to have in cash or something accessible, like treasuries, etcetera. The second category would be an opportunity fund. So this would be any known purchase you have in the next three, sometimes up to five years, depending on how good your cash flow is. If you need a down payment on the house, if you need a new car, if you’re going on a vacation that you can’t cash flow, establish different buckets for those opportunity funds and keep those in different cash accounts, not talking physical cash, but actual bank accounts or high yield saving accounts because those are meant to be spent accounts.


And if you don’t set those up, then you have to end up picking the pockets of some of your long term accounts, such as iras or brokerage accounts or 401 ks, which you definitely do not want to do. So that’s what we recommend for someone accumulating money for someone that is retired and now in the distribution mode, that completely changes. So break. Give us a quick synopsis of, you know, if I’m retired, how would you engineer how much safe money I have versus, you know, what is kept in the market? Yeah.


So there’s a lot of ways you can look at it. I’m sure if you google it, you get like a dollar amount, most likely just for just in general, like somebody who’s 60 or 65. Like how much cash should I have? The way that we approach it is looking at your need kind of like you were hitting on with, are you saving for a house vacation?


What is it like?


What’s the context of your situation? So no different with retirees. So if we look at, say, an example of a couple that’s retired now and they’re receiving, say, Social Security payments, keep it simple, with no pensions or anything else, say, spouse one is getting 30,000 per year, spouse two is getting 40, so 70,000 total, and this couple needs 120,000 per year to meet their expenses. So we have to come up with 50,000 in some form, whether it’s portfolio distributions, cash. So that’s our income need, assuming no other big purchases. So we want to keep our rule of thumb, seven years worth of that distribution need. So seven years times 50,000 would be our baseline of safe money. But a lot of our clients will carry above that just for peace of mind.


So maybe ten years or twelve years worth, but that seven years comes from just looking back. Historically, if you’re in a diversified portfolio, what’s the length of time that we’ve had to weather storms knowing that we could pull from large cap, mid cap international, et cetera, that seven years, usually a good buffer to be able to withstand any volatility.


And just put that in context. The diversified portfolio in 2008, it took less than three years to go back to even where it was before the drop of 2008. That seven years is really stress tested over the last 100 years. And again, this is not saying you’re adjusting the s and P 500, this is in, you’re in seven different asset class, well, asset allocated, diversified, et cetera. Then, furthermore, what do we keep in that seven years?


It’s usually a mix of cash bonds with the correct durations, because worst case, you don’t want to be in 2022, interest rates have skyrocketed to the bond that you purchased years before is now at a, we saw like a twelve to 15% not loss, but if you sold it that day, a loss because someone’s not going to buy your bond when they can go buy a bond that’s paying a higher interest rate. So you have to ride that duration out. So you have to have your safe money layered immediately available, no risk, and then layered where there’s some time at degrees attached to it as well. So typically we see a lot of clients will veer towards that more sleep well at night, ten years.


So in that example, if someone had a $3 million portfolio, you google and you’d want to be a 60 40 investor. That’s not true at all. If you have a pension and Social Security, and the gap of your portfolios that you’re pulling is 50,000 a year. Well, let’s say that person wants to sleep all night, it’s ten years. That’s half a million out of 3 million. Half a million is less than 20%. So technically, that investor, even though they’re retired, could be 80% in equities, 20% in safe money. So it’s really a case by case analysis. There’s no one size fits all when you retire. It’s having the ability to pull out. And number one rule of money is don’t lose money. So having the ability to never pull out at a loss, which that approach really does well.

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