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Managing Cash in Retiree Portfolios

Christine Benz

Benz: For retiree clients, what's the role of cash within their overall strategy? Do you urge them to raise cash at a time like this? How much in terms of living expenses do you want them to have in cash on hand?

Stevens: It's a great question, and it is something that we spend a lot of time thinking about. Cash deserves just as much attention as every other part of the portfolio, and our philosophy has always been to be fairly conservative, especially with retirees, when we talk about cash.

So typically what we would do is we would keep three to four months expenses readily available in a money market, and we have a lot of people that are taking distributions, and we want to make sure we always have plenty of cash flow to cover those distributions. We have recently looked at all the money markets that our clients are in and made some changes because of what's going on in Europe.

So, in particular, what we have done is switch to money markets that are either FDIC insured or Treasury-backed, because they have less exposure to what's happening in Europe. So I think that's just a little bit safer. They are all paying nothing. So it's not a consideration what they are paying.

But then beyond the three and four months, we try to keep at least one or two years expenses in some sort of safe type of investments. It really could be more like five years in most cases. With our portfolios, it is more like five or six years that we would have in what I would consider safe types of investments, and again safe is a tricky word to use right now because everything has risks.

Benz: So you are talking about a short-term bond fund?

Stevens: Short-term bonds funds--although so there are some changes with that in the last couple of months because of Bernanke's announcement that rates are going be kept closer to zero for the next couple of years. So, one thing we have been doing is moving a lot of the short-term bond fund money to intermediate-term bond funds. That won't be able to be sustained long-term, but we think in the short-term, we might pick up a percent or two of interest by going a little bit more to intermediate. In intermediate, I am thinking like the 6- to 13-year range.

Benz: And so your thinking is that you won't court a lot of interest rate sensitivity at least in the near term?

Stevens: Not in the next 18 months, theoretically. This is the kind of market where critical thinking is incredibly important right now, and you have to be able to think on your feet and make changes as new restrictions happened. Normally we have efficient markets but when we have these constraints--whether it's Bernanke or whether it's the Swiss pegging the Swiss franc to a euro--these are unusual things that kind of throw the markets off and you have to think on your feet.