Disclaimer – I have a pension that will cover all my expenses at first. Otherwise I would probably plan to have two years worth of expenses (+ or – one year, based on market conditions) saved in cash.

That said, I would like to know the best place to keep cash as well, especially at a time when interest rates are minimal.

Are you asking about the most efficient place to keep cash holdings? Or are you asking whether cash holdings should be included for purposes of calculating your overall asset allocation and withdrawal rates?

If the second question is what you’re asking, I’d say “yes, consider cash balances to be part of your portfolio.”

As to safe withdrawal rates, I’m reluctant to go much over 4% if the plan is to take withdrawals for 30 years (if we’re assuming no annuitizing–more posts on that topic coming soon). However, from the numbers you quoted, withdrawing $20k per year from a $600k portfolio would only be a 3.33% withdrawal rate.

I’ve written a bit on my site about the method, which is basically to either buy and potentially manage a portfolio of higher yielding shares (I say potentially manage because there is some thought you’re best off leaving well alone once you’ve bought the shares – long story) or else buy something like closed end investment trusts that pay a high income (possibly by using gearing or similar).

With patience as to when you buy it’s very possible to generate an income of around 5% pa from pretty big UK stocks or trusts, with theoretically the prospect of inflation beating income growth.

I say potentially because the whole method has been severely challenged by the dividend cuts of the past two years, which were much deeper than the UK market usually experiences (especially as because stalwarts like banks blew up).

One safety net is a margin of safety on your initial income, which you reinvest when years it isn’t needed, to hopefully build a big portfolio ahead of years where it is. Cash and/or bonds and/or annuities can also be used. (The investment trusts I mentioned frequently hold reserves, too, to make up for bad income years).

I plan to follow something like this method, partly because I like how once you’ve got the (admittedly as you say) big portfolio required, you can effectively switch on and off living off it without doing anything!

Hmm, long rambling comment. Should probably have done a post and linked instead!

Do you feel this should be kept in the retirement portfolio or does it matter? Example: say I have $600,000 in retirement, $20,000 in after-tax FDIC-ensured cash, and expect $20,000 a year in Social Security if I claim benefits starting at 66. In today’s dollars, I need another $15,000 after tax to live and I expect to pay 25% federal+state. (These are not my actual numbers, but that’s besides the point.) Let’s say I keep $60,000 of the portfolio in the money market fund, which gives me about 3 years plus money for taxes. Just as a ballpark estimate if you could: Do I have enough saved so that I don’t run out of money in 25-30 years? will a 4-5% withdrawal rate let me meet my goal or do I have to either scale back or save more? Thanks.

Regarding how much of the portfolio should go into an annuity, that depends on the withdrawal rate that you need in order to fund your expenses. (The higher your necessary withdrawal rate, the more should be in an annuity.)

As to when to buy the annuity, that’s a question I’m still working on myself. (Specifically: Does it depend only on age? Or does it also vary as a function of current yields on TIPS as well as market valuation levels.)

Regarding the NYT article: Yes, PE 10 has been shown to have reasonably meaningful predictive power. Personally though, if I were to put PE 10 to use, I’d be more inclined to use it to adjust asset allocation within a given range than to use it to determine withdrawal rates.