Join Early Retirement Today
Reply
 
Thread Tools Display Modes
Old 02-19-2015, 10:54 AM   #41
Recycles dryer sheets
 
Join Date: Nov 2013
Posts: 475
[QUOTE=Cobra9777;1559345]This might be easier to model with ********, 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 ******** ...

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?
jabbahop is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 02-19-2015, 11:02 AM   #42
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Nov 2007
Posts: 7,746
Quote:
Originally Posted by audreyh1 View Post
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).
__________________
Retired in 2013 at age 33. Keeping busy reading, blogging, relaxing, gaming, and enjoying the outdoors with my wife and 3 kids (8, 13, and 15).
FUEGO is offline   Reply With Quote
Old 02-19-2015, 11:05 AM   #43
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,337
Quote:
Originally Posted by audreyh1 View Post
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.
__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
2B is offline   Reply With Quote
Old 02-19-2015, 11:10 AM   #44
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,008
Quote:
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....
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.
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 02-19-2015, 11:12 AM   #45
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,008
Quote:
Originally Posted by 2B View Post
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.
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 02-19-2015, 11:27 AM   #46
Thinks s/he gets paid by the post
Cobra9777's Avatar
 
Join Date: Jul 2012
Location: Texas
Posts: 3,024
Quote:
Originally Posted by jabbahop View Post
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 ******** ...

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.
__________________
Retired at 52 in July 2013. On to better things...
AA: 85/15 WR: 2.7% SI: 2 pensions, SS later
Cobra9777 is offline   Reply With Quote
Old 02-19-2015, 11:41 AM   #47
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,266
Quote:
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.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56
pb4uski is offline   Reply With Quote
Old 02-19-2015, 12:16 PM   #48
Thinks s/he gets paid by the post
Live And Learn's Avatar
 
Join Date: Feb 2012
Location: Tampa Bay Area
Posts: 1,866
Quote:
Originally Posted by Cobra9777 View Post
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.
__________________
"For the time being no discipline brings joy, but seems grievous and painful; but afterwards it yields a peaceable fruit of righteousness to those who have been trained by it." ~
Hebrews 12:11

ER'd in June 2015 at age 52. Initial WR 3%. 50/40/10 (Equity/Bond/Short Term) AA.
Live And Learn is offline   Reply With Quote
Old 02-19-2015, 01:43 PM   #49
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,008
Quote:
Originally Posted by Live And Learn View Post
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.
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 02-19-2015, 03:42 PM   #50
Thinks s/he gets paid by the post
 
Join Date: Jan 2008
Posts: 1,495
Quote:
Originally Posted by audreyh1 View Post

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.
Options is offline   Reply With Quote
Old 02-20-2015, 10:04 AM   #51
Thinks s/he gets paid by the post
Cobra9777's Avatar
 
Join Date: Jul 2012
Location: Texas
Posts: 3,024
Quote:
Originally Posted by audreyh1 View Post
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.
__________________
Retired at 52 in July 2013. On to better things...
AA: 85/15 WR: 2.7% SI: 2 pensions, SS later
Cobra9777 is offline   Reply With Quote
Old 02-20-2015, 10:33 AM   #52
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,008
Quote:
Originally Posted by Cobra9777 View Post
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.
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 02-20-2015, 02:18 PM   #53
Full time employment: Posting here.
 
Join Date: May 2011
Location: Marco island
Posts: 815
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?
Gatordoc50 is offline   Reply With Quote
Old 02-20-2015, 03:31 PM   #54
Full time employment: Posting here.
 
Join Date: May 2011
Location: Marco island
Posts: 815
Quote:
Originally Posted by Gatordoc50 View Post
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.
Gatordoc50 is offline   Reply With Quote
Old 02-20-2015, 04:32 PM   #55
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
samclem's Avatar
 
Join Date: May 2004
Location: SW Ohio
Posts: 14,404
Quote:
Originally Posted by Gatordoc50 View Post
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.

samclem is offline   Reply With Quote
Old 02-20-2015, 05:12 PM   #56
Full time employment: Posting here.
 
Join Date: May 2011
Location: Marco island
Posts: 815
Quote:
Originally Posted by samclem View Post
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.
Gatordoc50 is offline   Reply With Quote
Old 02-20-2015, 06:01 PM   #57
Full time employment: Posting here.
 
Join Date: May 2011
Location: Marco island
Posts: 815
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!)."
Gatordoc50 is offline   Reply With Quote
Old 02-20-2015, 08:43 PM   #58
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,008
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!
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 02-21-2015, 04:00 AM   #59
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 6,115
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.
mathjak107 is offline   Reply With Quote
Old 02-21-2015, 07:18 AM   #60
gone traveling
 
Join Date: Oct 2007
Posts: 1,135
Quote:
Originally Posted by pb4uski View Post
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.
papadad111 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Work dilema regarding Megacorp request to plan long term when I only have short term Al in Ohio FIRE and Money 32 07-05-2013 03:10 PM
Retiring as planned A study indicates that retirement goes largely as expected for th JustCurious FIRE and Money 1 05-14-2012 11:40 AM
Short term vs Long term Bonds bank5 Active Investing, Market Strategies & Alternative Assets 17 03-24-2009 03:40 PM
Short Term vs. Intermd Term Bonds TromboneAl FIRE and Money 35 07-21-2006 07:58 AM
Building a short-term bond portfolio for 20+ years Nords FIRE and Money 3 02-12-2004 07:54 PM

» Quick Links

 
All times are GMT -6. The time now is 08:27 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.