Family of Four Taking Flight to Financial Independence

Financial Update and The Importance of Cash

It’s been a while, but we’re back!  Today I’ve got some updates I’d like to share in regard to our financial journey towards ER (early retirement).  This is an exciting time because we are FINALLY transitioning from talking about ER to actually living it.

First, let’s go back about a year to when things started getting crazy and our original plan had to be changed.  As you may or may not remember, our original plan was to retire in July 2020 and head to Spain in August 2020.  It wasn’t until April 2020 that we realized this pandemic wasn’t going anywhere any time soon so we decided to switch gears. 

It was at this time that we changed my retirement date from July 2020 to April 2021.  There was nothing magic about picking April 2021; it was honestly just a guess based on what we were hearing at the time on vaccines, etc.  Thankfully, it looks like it was a pretty good guess because the vaccines have begun to roll out (we both will be fully vaccinated before we leave), and it appears that in the coming weeks and months the light at the end of the tunnel will be getting brighter and brighter.  

As we have talked about, we ended up staying in Houston during this time, and rather than resigning from my job in July of 2020, I have continued to work (my last day is set for April 1).  As far as our investing strategy goes, that hasn’t really changed. 

Before the pandemic hit, we were set to reach our FI number around May of 2020, and even though the markets were extremely volatile at that time, we stuck to that time frame.  Our last actual deposit into our Vanguard Taxable Account was around May 31, 2020.  It was at this time that I decided to continue working through March of 2021 and turn our financial focus on building up our cash account (note, even though we stopped depositing into our Vanguard Taxable Account, we still maxed out my 401k).  Since I now had an additional 8 months (August 2020 – March 2021) of work to look forward to I was able to restructure our budget to allow for us to add an additional $30,000 to our cash account.

Side note: This entire experience over the last year has been a great example of the flexibility that we always talk about being put into practice.  By changing our plans on the fly and changing my resignation date by 8 months, we were able to weather the storm from the market downturn that originally occurred due to the pandemic.  And we came out of it better than ever.  Knowing that this is our mentality going forward, this makes me extremely confident in our early retirement (ER) plan.

All that being said, let’s turn our attention to our Cash Account.  Do we need it?  Why do we have it?  How do we plan to manage it?  Note, we have gone into this topic before, and you can look back here.

Do you really need a cash account in ER?

Some people who reach ER decide to put all of their money into their investments and then live off of their withdrawals (usually around 4%) from year to year without worrying about having a cash account.  I believe this strategy is fine and makes sense in that it puts all of your money to work for you in the stock market.  As long as you can stomach the volatility that comes with being invested and you have a good deal of flexibility in your ER plan (you are willing and able to lower spending at a moments notice), this strategy will more than likely leave you with the most money at the end of your days.  So ... do we really need a cash account in ER?  No.

Then why have a cash account at all?

The simple answer is having a cash account gives me piece of mind.  I completely understand and accept the fact that I am missing out on market gains by having cash.  That being said, I always knew that having some cash on hand would be a part of our ER plan.

For me the main purpose of a cash account is to help lower your withdrawal rate during the years when the stock market is down.  With that in mind it has always made sense to me to have enough in our cash account to cover 3 - 5 years of withdrawals during down markets.  This is because the worst downturns in the stock markets history tend to last 3 - 5 years.  

To illustrate what 3 - 5 years of withdrawals from a cash account looks like, let’s use the example of a family with $1,000,000 in investments who are living off 4% per year (or $40k).  On a typical year when the stock market is marching ever higher as it usually does, this family would simply withdrawal the full 4% from their investments.


Now you may be thinking initially that for this family, an acceptable cash account balance would be their annual withdrawal multiplied by 3 - 5 years.  Something like this:

3 years cash cushion = $40,000 x 3 years = $120,000 needed to cover 3 years

5 years of cash cushion = $40,000 x 5 years = $200,000 needed to cover 5 years

In reality (as I mentioned above), the purpose of our cash account is NOT to cover 100% of our withdrawals in down years.  Rather it is to cover a small % of our withdrawals.  For example, (taking the same example above) rather than lowering their withdrawals from 4% to 0% during economic downturns, this family can simply use their cash cushion to lower their withdrawal rate temporarily from 4% to 3%.  Something like this: 

3 years of cash cushion = $10,000 x 3 = $30,000 needed to cover 3 years

5 years of cash cushion = $10,000 x 5 = $50,000 needed to cover 5 years

Using this strategy, a year of withdrawals when tapping your cash cushion would look something like this: 

Withdrawal 3% from Investments = $30,000

Withdrawal 1% from Cash Cushion = $10,000

Total Withdrawal for 1 year = $40,000

Note, this family is comfortable withdrawing 3% regardless of what the market is doing because historically a 3% withdrawal rate has a 100% probability of allowing your investments to continue to grow over the long term.  100%!

How do we plan to manage our cash cushion?

Our cash cushion is a little unique because we needed to have a certain amount in it just to prove to the Consulate of Spain in Houston that we had enough in cash to live off of for 1 year in Spain (due to the fact that our Visas are Non-Lucrative).  The amount that Spain deems to be enough for a family of 4 is roughly $50,000 (read more specific information on requirements here).  Right off the bat that was the starting point for our cash cushion.  

Along the way, we sold our houseworked an extra 8 months (as mentioned above), and received a few stimulus checks from Uncle Sam.  Taking all of those things into consideration, our cash account has ended up with approximately $130,000.  

How we choose to manage this amount will vary over time.  To make managing our cash simple, we will break it down into 2 categories. 

1. Cash to lower withdrawal rate during economic downturn ... = $25,000
2. Cash to use for miscellaneous happenings (this can be an unforeseen emergency or an unplanned vacation) ... = $105,000


This amount represents 5 years of cash that we can pull to lower our withdrawal rate.  It is less than the $50,000 that I illustrated above because the example I gave takes into account a 4% withdrawal rate to make the math easy.  In reality our withdrawal rate in ER is going to be 3.5% for the first 5 years so we already have a safety margin built into it, and that leads to needing less in our cash cushion to lower our withdrawal during an economic downturn.


The only goal I currently have for this amount is that it lasts us at least through the first 10 years of our ER.  How would we do that?  We could spend $10,500 per year for the first 10 years if we so choose.  That said, we don’t need this money to live a REALLY high quality of life with our investment withdrawals alone and so we aren’t going to touch it unless it’s for a really good reason.  (For example, a once in a lifetime trip opportunity!).

I believe after the first 10 years of ER that our net worth will have increased substantially, and at that time we can re-evaluate how we treat this part of our cash account.  I also believe that along the way we will earn income doing something, somewhere (who knows what or where at this point).  (Note, we will not be working in Spain on the Non-Lucrative Visa).

That’s where we are at and how we are planning to handle our cash account.  Next time, I’ll go over our investment withdrawals in year 1 (which we made in January of this year) and how we are treating my salary in the first quarter of 2021 as a side hustle that will give us even more flexibility through year 1 and into year 2 and beyond.

What do you think?  What does your cash cushion look like ...?  Did your cash cushion change at all during the global pandemic?  How?  Read more about how I may help here.  




No comments