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Today's question for retirees is the classic, "How much of my retirement account should I leave in cash so I won't have to sell income-producing assets in a down market?" Like so many answers regarding money, "It all depends."

While I'm happy to review a spectrum of alternatives in a minute, I've always thought that my own answer to the question was the best. My pat solution calls for a 50/50 mix of bond funds and dividend-rich stock funds that can be expected to churn out combined earnings of about 5 percent per year. The bond funds, in recent years, would have to include some with higher volatility like high-yield corporate or emerging markets government bond funds that can be expected to generate around 6 percent in interest per year. Dividend-rich stock funds can be found that generate dividend income of 3 percent currently. Value index or high dividend yield funds fit this category.

In either the stock or bond fund investments, annual expenses (expense ratios) must be kept to a minimum because these annual fees chew into the dividends and interest that make up the regular monthly deposit into a checking account. For the stock side, just a collection of individual stocks from the higher-yielding section of the Dow Jones industrial average can serve part of this purpose and will involve no ongoing management cost once they have been purchased. The so-called "Dogs of the Dow" (the 10 highest-yielding of the 30 Dow stocks) currently pay almost 4 percent.

Nobody needs to be reminded that stocks and bonds can both drop in capital value as a consequence of market forces, but interest and dividends, as a general rule, hold up reasonably well. Downturns in bond fund values are usually the result of increases in market interest rates, so over time, interest payments will increase as old bonds are replaced with new bonds paying higher rates. Just sit tight and things will be fine.

As for stocks and their implosions, those that pay hefty dividends continue to pay the same dividend rate per share regardless of what fluctuations the share price may be experiencing. Again, just sit tight and things will be fine. Bottom line: Interest and dividends will keep flowing into the checking account, and while the total principal may fluctuate in value, its income-producing attributes will remain relatively constant.

If a goal of the account is to produce a 5 percent rate of income from a retirement portfolio, we're almost there given the expected flows of dividends and interest outlined above. However, in times when interest and dividend income falls short of expectations, it can make sense to carve out a little of the principal to make up the difference. If interest and dividends amount to 4 percent, take an additional 1 percent from the stock portion that should be appreciating in a typical year. What's left of the stock fund appreciation helps insulate the entire account from the ravages of inflation.

An alternate universe of financial adviser's suggests that retirees are better served by having the entire account in stocks but that an amount equal to three years of net living expenses (beyond Social Security and other income) should be kept in cash. The idea is that market downturns rarely last more than three years before experiencing a complete recovery. Having a cash reserve allows the retiree to avoid taking money out of the account when the market is down.

Here's how that would have worked in 2007-09. Someone with $500,000, spending 5 percent or $25,000 per year of interest, dividends, and a little bit of principal in an all-stock portfolio, would later have been spending at a rate of 10 percent of assets when the market plunged by 50 percent ($25,000 of income would have been 10 percent of that decimated $250,000 portfolio). By keeping even a year of cash, to meet income needs beyond what the regular dividends and interest were continuing to provide, the portfolio would have remained intact to experience the full benefit of the inevitable snapback in 2009 and 2010.

The choice is yours -- a 50/50 mix of stocks and bonds or heavily weighted (perhaps 90 percent) stocks buttressed by a cash side fund to weather periodic crashes. Either approach offers a vast improvement over the mindless annuities and target date retirement funds routinely foisted on retirees by the financial services industry.

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