Should Your Retirement Plan Include a Cash Wedge?

Adam Bornn explains why many retirees should keep a few years of cash outside the market.

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Markets are very expensive by any measure now? We’re at historically high valuations. Do you factor that in at all to how they design their portfolio? Or you just say, “Look it, as long as we know we’ve got the 10 to 15 years with that part of the component, we’re not gonna worry too much about that”?

Yeah, and again, going back to that cash flow wedge. If I know what you need for the next three to five years and we protect that, history has shown that if the market drops, typically it, you know, it’s back to where it was in two to three years. So now we have that, that timing on our side, and that’s where, like, there, there’s argument online all day long about does a cash flow, like the cash wedge or cash flow wedge, does that actually make sense financially?

And, you know, you can argue it. I more go through, like, what I’ve seen clients live through for 20 years of doing this. You wanna protect a few years of income. So yeah, we have clients, like, well into retirement that, you know, they have 80% of their portfolio in pure equities because they don’t need it for over five years.

And so, uh, it, it’s, it’s… I, I think we need to move away from this, like, 20/80, you know, 70/30, 60/40s or whatever you want to… Just figure out what you need for the next three to five years, and the rest, you know, it, it should fit your risk criteria essentially.

Don’t you think some clients it’s a good idea to have a cash wedge just because psychologically it’s so important to them? Like, if they had 100% or 90% of their monies in the markets, even if it made sense in their particular scenario, I think it’d be overwhelming to them in terms of sleep.

Not everybody. Some people can take that. I can take a very high risk level. I’ve always been like that. I invest in private companies, for heaven’s sakes. But a lot of my friends and colleagues, it’d be crazy if they didn’t have a cash wedge. It would drive them nuts.

It’s all psychological. Yeah. And again, for most Canadians, you have about 10 years of go-go years. So in those 10 years, we’ll probably have two to three of down markets. So now you’re taking 20 to 30% of your good retirement years and throwing them away because you’re probably not gonna sell as much as you should and draw as much income as you should in those down years.

So again, now, okay, we’ve paid the bills, but we haven’t traveled, we haven’t done what we want to do. You’re gonna look back and be like, “Man, those… Like, I wasted 30% of my good retirement years because I didn’t build up this cash wedge because I read an article somewhere that that didn’t make sense.”

Like, to me, that, that doesn’t make any sense. It, it blows my mind a little bit. So I, I’m a strong proponent to build out a cash flow wedge, protect that income. You can do all the financial data behind it. It does come down to psychological and making sure you enjoy your retirement. Like, you’ve worked 40 years to get here.

Don’t throw it away.