The Cash Wedge Retirement Income Strategy

by Jeffery A. Keill, CFP, CIM, FMS, FCSI, Portfolio Manager and Senior Wealth Advisor Keill & Associates- Advisory Team

The “K&A Cash Wedge” is a retirement strategy that Keill and Associates will implement to manage a clients investments portfolio to mitigate risks associated with market volatility and drawdown risk. This strategy involves creating a “wedge”, or basket of short term securities that will cover one to two years of planned retirement income needs. This reduces the need to sell longer-term investments during market downturns.

Establishing the cash wedge:

To establish a Cash Wedge for a client, we first determine the amount of planned income that would be required over the next one to two years. This amount of capital is then separated, or segregated, to a special basket (inside or outside the account) holding short term investments, such as the Keill Short Term portfolio. The remaining assets are held in the main mandate with a much longer time horizon, be it the Conservative, Balanced, or Growth Portfolio.

How it Works:

During Retirement-Using the K&A Cash Wedge:

Regular Withdrawals: Retirees draw from their Cash Wedge holdings to cover living expenses and planned retirement spending. This provides a stable source of income regardless of market conditions and can reduce the anxiety or market fear that many retirees face.

Refilling the Cash Wedge: Periodically (e.g., annually, semi-annually, or as market activity permits), K&A replenishes their K&A Cash Wedge by selling a portion of their longer term mandate holdings to top up their Cash Wedge. This ensures that the K&A Cash Wedge remains sufficiently funded to cover future withdrawal requirements.

Benefits:

Reduced Sequence of Returns Risk (Draw Down Risk): By avoiding the need to sell long-term investments during market downturns, retirees protect their portfolio from the adverse effects of withdrawing funds during unfavorable market conditions.

Liquidity:

Maintaining a K&A Cash Wedge ensures that retirees have immediate access to funds to cover their living expenses.

Peace of Mind:

This strategy provides retirees with a sense of financial security through knowing they have a buffer to weather market fluctuations.

Disadvantages:

Efficiency of capital is a disadvantage of using a Cash Wedge as well as the tendency to carry too much in a Cash Wedge sleeve. As the Cash Wedge contains shorter and lower risk assets, the expected return over a long period of time will be less. This exposure of capital to lower yielding securities can impact the over all longevity risk of a portfolio, which is to say how long capital may last during retirement.

Steps to set up a K&A Cash Wedge:

Step 1. Calculate Income Need: K&A will work with the retiree client to calculate annual Essential and Lifestyle Expenses, the amount pre-tax income that is required to meet the retiree’s needs.

Step 2. Set up K&A Cash Wedge Sleeve/ Account: Set up the amount to be used as a Cash Wedge and allocate one to two years of annual retirement income to the sleeve.

Step 3. Invest Funds: Once the Cash Wedge Account is established, the funds should be invested in the short-term lower risk portfolio. Like wise, the non-Cash Wedge Account(s) should also be invested in their longer term mandates.

Step 4. Systemize: Once the K&A Cash Wedge is established, a systematized approach to income payment to the retired client is established to match their income needs.

Step 5. Monitor and Adjust: Regularly review the portfolio and cash wedge, adjusting the allocations and withdrawal amounts as needed based on changes in expenses, market conditions, and investment performance.

Example of a K&A Cash Wedge Strategy:

Let’s say a retiree needs $50,000 per year for living expenses and has $1 million in investments:

• Cash Wedge Account: $100,000 (2 years of expenses in short term low risk investments)

• Long-term investments: The rest of the retirement assets ($900,000) are held in the longer term portfolio mandate.

  
  

In this example, the retiree has a 2-year cash wedge ($100,000) and can draw from it during market downturns, replenishing it from the long-term investments during favorable market conditions. In one year, a replenishment of the Cash Wedge account is done by a fund transfer from the longer term mandate accounts taking into to account taxation.

The Keill and Associates Cash Wedge strategy is a practical approach for many retirees seeking a balance between growth and stability, ensuring they can meet their financial needs while protecting their investment portfolio from market volatility.

To learn more about how a K&A Cash Wedge Strategy would benefit your retirement income needs, please contact one of our Wealth Advisors.

Disclaimer and Notice to Reader: This Discussion Paper should not be construed as legal or tax advice but rather only as a general statement and explanation of the topic matter. Professional tax and legal advice should be obtained for the readers own personal situation. For more information on this topic or how it applies to your family, please contact our Wealth Advisory team.

Last Edit Feb 4, 2025