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Old 02-19-2015, 11:54 AM   #41
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[QUOTE=Cobra9777;1559345]This might be easier to model with cFIREsim, which has a cash category. I ran the same scenario as you... all default, $1M portfolio, $40K/yr spend, and 2 scenarios:

60/40/0... 90.43% success
60/34/6... 89.57% success
----

thanks for running this. Isn't 6% 1.5 years of cash?

I've been mulling how much I want in cash as well. Using cfiresim ...

Using the $1M portfolio and $40K withdrawals; rebalancing on.

a) 5 years of cash - 60% equities; 20% bonds; 20% cash (40K x 5 years)

b) 1 year of cash - 60% equities; 36% bonds; 4% cash (40K/1M)

a) 80% success rate; $633K median ending portfolio value
b) 90% success rate; $841K median ending portfolio value

did I get something wrong here?
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Old 02-19-2015, 12:02 PM   #42
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You talk about "real" security, but models show that 100% stocks portfolios have poorer survival statistics over long periods than at least 20% fixed income. Just sayin'.....

Of course, if someone is close to 100% stocks because they are living off the stocks dividends and otherwise not selling investments in their portfolio, and they can survive a little dividend shrinkage during rough times, than the point is moot.
Eh, not a big deal really. I took a look at a 3.5% withdrawal rate ($35,000/yr on $1 million). 75% stocks/25% bonds = 99% survival rate, 100% stocks/0% bonds = 98% survival rate.

I'm losing 1% survivability in exchange for having roughly twice as much at the end of 50 years (I'll only be 84 at that point). $5 million bucks for a 1% difference in portfolio survivability? A calculated risk I'm willing to take.

Part of my rationale is that we won't follow the standard "spend 3.5% of initial plus annual CPI increases". It'll be some variation of a variable spending rate based on portfolio value each year. I'd rather have a standard of living that increases slowly over time (due to appreciation of equities). That comes at the price of risking some years of limiting spending to a bare bones budget if we see a Great Depression (a plight somewhat mitigated by our cash reserves).
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Old 02-19-2015, 12:05 PM   #43
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Of course, if someone is close to 100% stocks because they are living off the stocks dividends and otherwise not selling investments in their portfolio, and they can survive a little dividend shrinkage during rough times, than the point is moot.
The problem with living off the dividends is that financial stock dividends were all but eliminated in 2008 - 2010 and they haven't fully recovered. A "dividend portfolio" in 2007 would have been heavy in financial stocks including the now all but worthless Fannie and Freddy common and preferreds.
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Old 02-19-2015, 12:10 PM   #44
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OK, I want to know how people who are doing this X years of expenses set aside actually handle this....

IOW, say you have 3 years of expenses set aside in a MM account or a CD ladder.... now we go one year into the future... do you now only have 2 years If so, does it not worry you that you have spent 1/3rd of your bucket If you have replenished it, then what benefit have you gained

It just does not make sense to me to hold so much out of the market... we just lived through probably the 2nd worse market decline in American history and the market was back in 5 years... so, you might say 'yes, but I did not have to sell when it was down'... but when did you make the decision to fill your bucket back to full

This seems like a backwards way of timing the market.... and that a rebalance would be better....
You withdraw from the portfolio annually. Part of that withdrawal replenishes your short-term cushion. Say after one year, what was three years expenses went down to two, then your withdrawal gets it back to three.

Now if it was a particularly bad market year and the portfolio dropped, you have some options. You can withdraw less from the portfolio and use the cash cushion to make up part of the difference if you like. You have flexibility in how you approach it. Those of us using the % of remaining portfolio withdrawal method will occasionally have to deal with a substantially lower $ withdrawal from the portfolio after a bad market year.

People for whom "It just does not make sense to me to hold so much out of the market" are looking to increase their long term return. Some of us don't care about that, and aren't looking to increase their portfolio volatility. We'd rather have some cash available for spending in the short term. These are simply different goals.
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Old 02-19-2015, 12:12 PM   #45
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The problem with living off the dividends is that financial stock dividends were all but eliminated in 2008 - 2010 and they haven't fully recovered. A "dividend portfolio" in 2007 would have been heavy in financial stocks including the now all but worthless Fannie and Freddy common and preferreds.
Perhaps why I have never been comfortable taking that very tax efficient approach, but a lot of people do take that approach and feel comfortable with it. And I thought stock dividend ETFs like VIG and VYM did just fine recovering from that period. Maybe not DVY.
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Old 02-19-2015, 12:27 PM   #46
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thanks for running this. Isn't 6% 1.5 years of cash?

I've been mulling how much I want in cash as well. Using cfiresim ...

Using the $1M portfolio and $40K withdrawals; rebalancing on.

a) 5 years of cash - 60% equities; 20% bonds; 20% cash (40K x 5 years)

b) 1 year of cash - 60% equities; 36% bonds; 4% cash (40K/1M)

a) 80% success rate; $633K median ending portfolio value
b) 90% success rate; $841K median ending portfolio value

did I get something wrong here?
Your 5-year scenario used the default 0.25% return on cash. That's not realistic as most people holding 5 years cash would have some kind of CD ladder or ST bond fund. Substituting 1.5% in that scenario increases the success rate to 87%... still not radically different from the 1-year scenario at 90%.

Also, you have to consider other sources of cash such as pensions, SS, etc. If nothing else, $600K in equities will spin off ~$12K dividends. So your "years of cash" and the resulting AA seem a little high to me. In my case, 5% cash covers about 3 years.
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Old 02-19-2015, 12:41 PM   #47
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Originally Posted by Texas Proud View Post
OK, I want to know how people who are doing this X years of expenses set aside actually handle this....

IOW, say you have 3 years of expenses set aside in a MM account or a CD ladder.... now we go one year into the future... do you now only have 2 years If so, does it not worry you that you have spent 1/3rd of your bucket If you have replenished it, then what benefit have you gained

It just does not make sense to me to hold so much out of the market... we just lived through probably the 2nd worse market decline in American history and the market was back in 5 years... so, you might say 'yes, but I did not have to sell when it was down'... but when did you make the decision to fill your bucket back to full

This seems like a backwards way of timing the market.... and that a rebalance would be better....
In my case at least and many others I suspect, I'm not holding money out of the market because my stock portfolio is still 60% of the total. What I am doing is holding a portion of my fixed income portfolio in cash.

I concede it is suboptimal. IIRC Vanguard says that the 10 year treasury is a reasonable proxy for the next 10 years bond returns, so let's say that is 3% and I earn 0.9% on my cash. The overall affect on the portfolio is roughly (3% - 0.9%) * (6% + 4%)/2 or 0.1%. The second part of the equation reflects that over the course of a year my cash declines from 6% at the beginning of the year to say, 4% at the end of the year because of withdrawals during the year.

I also concede it is a bit silly but having that cash at my beck and call makes me comfortable, sort of like an emergency fund and costs me very little.

I replenish the 6% annually when I rebalance.
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Old 02-19-2015, 01:16 PM   #48
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I'm still holding cash for now as I'm only 1.5 years into ER and still learning the ropes. But I'm definitely warming up to the arguments against holding cash.
I currently have 6 years in cash and short term bonds (3 years cash, 3 years ST bonds). I'm always questioning myself on this. When I calculate my WR, or use FIRECalc or some other calculator I totally ignore the cash portion (in other words, I pretend the money just doesn't exist).

While I claim to not be a market timer I am looking for a clear buy signal to put 3 years in either intermediate bonds or equities.

Clearly I am hopeless.
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Old 02-19-2015, 02:43 PM   #49
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While I claim to not be a market timer I am looking for a clear buy signal to put 3 years in either intermediate bonds or equities.

Clearly I am hopeless.
Honestly, I don't think those clear buy signals exist. Of if they do occur, the market has already run up in anticipation.
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Old 02-19-2015, 04:42 PM   #50
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People for whom "It just does not make sense to me to hold so much out of the market" are looking to increase their long term return. Some of us don't care about that, and aren't looking to increase their portfolio volatility. We'd rather have some cash available for spending in the short term. These are simply different goals. [Emphasis Added]
+1
It's easy to ignore the psychological/behavioral aspect of PF management during a bull market, particularly one like we've been in for the past several years. It was Bernstein (among others) who said people discovered how much they had vastly underestimated their risk tolerance during the 2008 downturn. If others, with decades more investing experience either capitulated or came *this* close to capitulating at that time, what makes me think I wouldn't? AFAICT, in investing we are our greatest enemies and nothing is more dangerous to PF survival than ignoring behavioral risks.

I like SWAN portfolios. Count me in the reduced volatility/short term cash camp.
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Old 02-20-2015, 11:04 AM   #51
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Sounds like your goal is maximizing the size of the portfolio say 10 years down the road? Or maximizing what you leave to heirs?

For some folks, having a larger portfolio is their goal, so they are willing to make sacrifices - lower withdrawals today, belt tightening during market downturns, etc., to accomplish that goal.

Some of us are more interested in spending (and gifting) more in the early years and don't plan to leave a lot after we pass. We just want the portfolio to survive during our lifetime, and prefer to live with less year-to-year volatility.

It really depends on your goals.
I'm not entirely sure how you derived that from what I wrote. Actually, my goal is very similar to yours, as stated in the quote above. At this early stage of ER, legacy considerations are a distant secondary objective for us.

More to the point, I'm just questioning why I'm holding a 5% cash reserve, given the performance hit and other issues I laid out. I'm pretty sure it's because I read dozens of posts on this site and elsewhere suggesting I need to "protect myself against having to sell when equities are down." Turns out, with rebalancing, that's just a kind-of bucket mirage. I'm embarrassed to admit that I had not previously thought this through. Anyone who does will inevitably reach the same conclusion.

I totally "get" the emotional calming effect that cash has, and I am certainly not immune from those effects. As I've said before, I'm still learning the ER ropes and largely untested in rough seas. And yes, it doesn't cost an arm and a leg if one is reasonable about the number of years of cash. I may decide to continue holding 5% cash for AA reasons and the emotional comfort that it provides, similar to an emergency fund. But I'm glad I finally read the Kitces material and have a more rational foundation to evaluate this question going forward.
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Old 02-20-2015, 11:33 AM   #52
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I'm not entirely sure how you derived that from what I wrote. Actually, my goal is very similar to yours, as stated in the quote above. At this early stage of ER, legacy considerations are a distant secondary objective for us.
Simply because you expressed concern using the phrase "drag on performance". And I was asking the question.

Glad you found the Kitces and other material.

And I recognized long ago that my asset allocation already satisfied the needs of any "bucket" strategy, so I never used that approach on my retirement portfolio which uses the straight AA with occasional rebalancing method. Well, I do have a minimum on how low I'll let my fixed income drop in $ terms. This limit was actually hit in Jan of 2009 when I rebalanced my portfolio by buying stocks.

However, I do still keep up to two years of cash for living off of outside my retirement portfolio, plus other funds earmarked for short-term plans.
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Old 02-20-2015, 03:18 PM   #53
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What yield was Kitces assigning to cash in his study from 1926 to 2009? One year treasuries were paying nearly 8 percent in 1990. What did they assign for cash that year?
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Old 02-20-2015, 04:31 PM   #54
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What yield was Kitces assigning to cash in his study from 1926 to 2009? One year treasuries were paying nearly 8 percent in 1990. What did they assign for cash that year?
Good question, Gatordoc50. lol The research used the SP 500 as equities, Lehman Brothers long term treasury index for bonds and rolling 1 month treasuries for cash in a 60/30/10 allocation. At today's rates VBLTX yields 3.45% compared to the one month treasury at .02%. The conclusion of the paper was that a cash allocation was a drag. Boy, you have to be careful whose research you follow. I like Bernstein who advises a large allocation to riskless assets for those not lucky enough to be able to live off dividends.
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Old 02-20-2015, 05:32 PM   #55
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Good question, Gatordoc50. lol The research used the SP 500 as equities, Lehman Brothers long term treasury index for bonds and rolling 1 month treasuries for cash in a 60/30/10 allocation. At today's rates VBLTX yields 3.45% compared to the one month treasury at .02%. The conclusion of the paper was that a cash allocation was a drag. Boy, you have to be careful whose research you follow.
What's wrong with Kitces' assumptions? The below chart shows the one-month Treasury yields (nominal and real). Right now they are low, but if Kitces used the "then year" stats for his series starting in 1964, that seems fair enough. Sometimes CDs and other forms of "cash" do better than one-month Treasuries, , sometimes they don't.

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Old 02-20-2015, 06:12 PM   #56
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What's wrong with Kitces' assumptions? The below chart shows the one-month Treasury yields (nominal and real). Right now they are low, but if Kitces used the "then year" stats for his series starting in 1964, that seems fair enough. Sometimes CDs and other forms of "cash" do better than one-month Treasuries, , sometimes they don't.
Exactly. Sometimes cash is a drag sometimes it is not. The OP stated he wanted to have 2 years cash at 1% with safety being his priority. The OP had a sound strategy. It was suggested that the OP forego his cash buffer to increase his returns. Maybe it will, maybe it won't. It will definitely increase his risk of loss. Regardless, Kitces paper used different investments, over a different time frame and enjoyed a 30 year bond bull.
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Old 02-20-2015, 07:01 PM   #57
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I found this from Kitces in his research on rising equity glide paths in retirement.
"However, even with an accelerated rising equity glidepath, there is still significant exposure to bonds in the early years, and the results also show that in situations where rates are low and there is an elevated risk of rising interest rates (and associated price declines in bonds), it doesn’t pay to take interest rate risk. As a result, safe withdrawal rates in the worst inflation/rising rate environments are better with Treasury Bills than bonds, even though Treasury Bills may pay “almost nothing” at the beginning of such time periods. This suggests that in the end, while it’s appealing to generate a better return from bonds if available – and higher returns will lead to higher safe withdrawal rates – in the worst environments, compounding bond risk on top of equity risk doesn’t pay. Instead, if there’s risk to bond – e.g., equities may be volatile, and interest rates may rise – the better outcome is to own the (less volatile) bonds, dollar cost average into equities, but don’t take interest rate risk in the process. In essence, the first function of bonds is simply as ballast to stocks, and should only be a return driver when there are appealing bond returns already on the table (or to hedge truly deflationary scenarios). In fact, there is actually a negative correlation (of about -0.25) between short-term bond yields and the outperformance of rising equity glidepaths using Treasury Bills; in other words, the lower interest rates are, the better it is to use low-yield Treasury Bills (due to the risk of rising rates!)."
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Old 02-20-2015, 09:43 PM   #58
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Gatordoc50 - your post and point is really good, but the Kitces quote as pasted is really hard to read as a bunch of special characters were added with the paste. Here is an attempt to clean it up:

From Gatordoc50:

I found this from Kitces in his research on rising equity glide paths in retirement.
Quote:
However, even with an accelerated rising equity glidepath, there is still significant exposure to bonds in the early years, and the results also show that in situations where rates are low and there is an elevated risk of rising interest rates (and associated price declines in bonds), it doesn't pay to take interest rate risk. As a result, safe withdrawal rates in the worst inflation/rising rate environments are better with Treasury Bills than bonds, even though Treasury Bills may pay "almost nothing" at the beginning of such time periods. This suggests that in the end, while it's appealing to generate a better return from bonds if available — and higher returns will lead to higher safe withdrawal rates — in the worst environments, compounding bond risk on top of equity risk doesn't pay. Instead, if there's risk to bond — e.g., equities may be volatile, and interest rates may rise — the better outcome is to own the (less volatile) bonds, dollar cost average into equities, but don't take interest rate risk in the process. In essence, the first function of bonds is simply as ballast to stocks, and should only be a return driver when there are appealing bond returns already on the table (or to hedge truly deflationary scenarios). In fact, there is actually a negative correlation (of about -0.25) between short-term bond yields and the outperformance of rising equity glidepaths using Treasury Bills; in other words, the lower interest rates are, the better it is to use low-yield Treasury Bills (due to the risk of rising rates!).
Wow - that's quite a gem you dug up there, Gatordoc! It really calls into question some of the earlier Kitces statements made. We may be headed for one of those deflationary environments - but who the heck knows!
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Old 02-21-2015, 05:00 AM   #59
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while ray lucia used to promote 7 years of money i think that is a big excessive drag on things for the small odds of protecting against a total long term failure in the market.

my origonal plan was rays buckets, but it really was over protective over kill.

we went with a 40/50/10 mix which is about 2 years cash. after we spend down the cash we will glide up to 50/40/10 as a pretty permanent allocation.
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Old 02-21-2015, 08:18 AM   #60
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Since I retired, I converted 6% of my assets from fixed income to an online savings account and that covers 3-4 years of expenses when combined with taxable account dividend income and the liquidity allows me to sleep well at night.

I like this approach. Dividend income and top off with cash for x years. I think 3-4 years is reasonable too ...7 feels like s long duration and probably missing out on some alpha / beta in equities.
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