(PUB) Investing 2016

211 / 708

17 Morningstar FundInvestor May 2016
leave the long-term portfolio components undisturbed
and in place to recover. That makes sense from an
investment standpoint and can also provide valuable
peace of mind in turbulent market environments
like 2008. The retiree can spend from bucket one on
an ongoing basis, periodically refilling it with income
distributions or rebalancing proceeds. Alternatively,
the retiree can leave the cash undisturbed, to be
spent only in catastrophic situations when income
distributions and/or rebalancing proceeds are insuffi-
cient to meet living expenses in a given year.
But holding too much cash in bucket one can drag
on a portfolio. Thus, I’ve typically recommended
that investors hold anywhere from six months’ to two
years’ worth of living expenses in cash instruments;
in my recent discussion with financial planner Harold
Evensky, the architect of the “bucket” approach
to portfolio planning, he suggests that holding one
year’s worth of living expenses in cash is a good
rule of thumb.
Step 3 | Identify Next-Line Reserves
In addition to lining up cash to serve as your emer-
gency fund and supply living expenses in case of a
downturn in your long-term portfolio, it’s also valuable
to identify “next-line reserves” in case your cash
runs dry. In my model bucket portfolios, for example,
I’ve stairstepped the portfolios by risk level: In addi-
tion to cash, I’ve maintained exposure to a high-quality
short-term bond fund. If, in a catastrophic market
environment the cash in the portfolio runs dry, the
short-term bond fund could be tapped in a pinch;
even in a terrible market environment, such a fund is
unlikely to incur steep losses. For retired investors
who forgo cash/bucket 1 as part of their investment
portfolios, identifying next-line reserves is essential.
Retirees might also consider home equity as a source
of liquidity in a pinch. This article discusses the idea
of maintaining a “standby reverse mortgage” to help
a retiree limit the opportunity cost of cash while also
maintaining access to liquidity during a downturn in
the investment portfolio.
Step 4 | Maximize Yield—to a Point
True, it’s hard to get excited about earning 1% on
anything, and that’s about as high a yield as you’re
apt to get on cash accounts today. But look at it
this way—1% of $100,000 is $1,000, whereas 0.25%
(the yield on some lesser-yielding cash accounts)
is just $250. That $750 differential could be a month’s
worth of groceries, or a two-night stay in a luxury
hotel. Depending on the amount of cash you’ve set
aside, it’s worth your while to shop around for the
best yield you can find. Today, online savings banks
will tend to offer the best combination of decent
yields and FDIC protections. And the more you invest,
the more attractive your yield is apt to be. Thus,
it can be a good idea to consolidate your cash hold-
ings into a single receptacle, if practical.
Stable-value funds, discussed here, are another
way to earn a higher yield than true cash instruments
and may prove especially valuable when there’s a
more meaningful yield differential between cash and
intermediate-term bonds. While stable-value funds
court more risks than true cash instruments, they’ve
historically been quite safe. You can only find stable-
value funds within company retirement plans, though,
so to maintain access to them, you’d need to leave
assets behind in your plan rather than rolling them
over to an IRA .
Retirees will want to be careful about reaching too far
for yield, however. While some cash alternatives do
promise a higher yield than does true cash, they might
give up something in exchange—liquidity, stability,
or both. K
Contact Christine Benz at