The cash wedge, as the name may imply, is a chunk of cash (i.e. liquid assets that are safe to withdraw at any time, in any market, the cash under the mattress being the 0% interest option¹) that allows you to survive market downturns. The concept comes up again and again in reading the personal finance blogs and media. Here’s a typical treatment²: https://www.sunlifeglobalinvestments.com/content/dam/sunlife/regional/canada/documents/slgi/810-4986-10-20-cashwedge.pdf

And the article linked above has some quite specific recommendations, which is typical. The details will vary a bit from source to source, but let’s keep rolling with Sun Life.

• Put about one year of expenses in a money market account (I would add: or HISA)
• Put another two years of expenses in something slightly less liquid (e.g. GICs, bond funds)
• Invest the rest “to match your individual investment profile”. This, I think, is supposed to imply some percentage of things that aren’t cash (e.g “equity”), but here is where the vagueness begins…

I have some issues with this first bit, which you may find surprising. After all, doesn’t my own retirement allocation strategy have a “cash wedge”? It does have cash, and it’s true — until I actually stopped earning a salary, I had NO cash in my retirement savings. It was strictly 80/20 (equity/bonds). Once I decided to use VPW³ for my decumulation strategy, I saw I would need to have what they called a “cash cushion”. I formalized it by adding 5% cash to my overall retirement asset allocation.

What I have in my retirement portfolio is 5% “cash” (actually, ultra short term bond funds, but close enough), 15% “bonds” and 80% equity (with targets by geographic region for USA, Canada, and everywhere else). But this 5% cash position isn’t a cash wedge since the amount of cash I hold will vary with my net worth. It’s a fixed percentage. If times are good, I add cash. If times are bad, I subtract cash. Mostly I’ve been adding cash in retirement, since my net worth has also increased. The wedge strategy suggests you keep the amount fixed, regardless of net worth.

This downside of keeping a static amount of cash set aside is that it could become either a vanishingly small portion of your savings (which means more limited downside protection), or a very large portion (which means limited growth opportunities) of your retirement savings over time.

This is, in the end, not the main objection I have. The big problem I have with the “wedge” idea is that too many questions are left unanswered and unaddressed:

• If you are paying yourself from the wedge, when do you top it up?
• Some variations of the wedge idea suggest that you pay yourself from the wedge “when markets are down”. “Down” compared to what? How far is “down”. When does “down” become “up” again?
• In any case, the wedge should be replenished. How frequently? From where?

Maybe some people have figured out rules and procedures to answer these questions. My fear is that new retirees set up the wedge but then are left on their own to make decisions about when, where, and how much to draw down. And this sort of decision making is what I would call “timing the market”. Which, if you’ve been reading this blog for a while, is something that I strongly believe simply cannot be done⁴.

My retirement methodology, based on VPW, takes all the potential for bad behaviour out of my hands:

• My cash position is always a fixed percentage of my net worth
• How much I withdraw every month is based on my net worth. If markets are bad, I spend less. Same as when I worked in sales and had a bad quarter/year: less quota bonus means less spending..
• There is no temptation to time the market, since every month is more or less the same
  • Sell XGRO from my RRIFs⁵
  • Sell additional non-registered assets⁶ to reach my recommended monthly salary
  • Augment or subtract from my cash cushion as needed⁷
  • Make additional trades to pull my asset allocations back into line if needed⁸

The longer I live my retired life using VPW, the more I find to like about it. But happy to hear from you if you think you’ve found a way to use cash effectively without trying to guess where the market is headed. Hit me up at comments@moneyengineer.ca!

1. Or like most big banks ↩︎
2. And although Sun Life and their financial products are not something I would wish on my worst enemy, the ideas expressed in this article can be found in lots of sources. ↩︎
3. “Variable percentage withdrawal” which is a methodology that considers age, future pensions and current asset allocation to generate a sustainable income flow. ↩︎
4. For about 2 years now, I’ve been reading about the imminent market crash. I’m still waiting, now worth 20% more than when the first rumbles started, and so now I can survive a 20% decline in the market and be exactly where I was 2 years ago, except that I’ve been drawing a generous salary the whole time. I’m not saying that there isn’t a crash likely coming at some point, but no one can say when that will happen. If you stay invested, you tend to be rewarded. Leaving money sitting idle means that you have to guess right twice: once that the crash is imminent, and once when the bottom is reached. ↩︎
5. Which reduces all the asset classes I track except cash. Cash grows rather slowly so every once in a while I have to buy a little more to keep the 5% in line. ↩︎
6. Here I do exercise some discretion over what asset(s) are liquidated, but normally I just sell the asset class that is the most overweight in my portfolio. ↩︎
7. The full monthly workflow is described in The Mechanics of Getting Paid in Retirement: 2026 Edition. The VPW methodology tells me exactly how much to manipulate my cash cushion. ↩︎
8. Trading is free on the platforms I use, but I don’t obsess; as long as the assets are within 1% of targets, I don’t make additional changes. ↩︎