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Re: Anyone else retire in 1999/2000?
Old 03-15-2006, 07:12 AM   #21
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Re: Anyone else retire in 1999/2000?

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Originally Posted by Rich_in_Tampa
Do you think that by splitting off the cash piece from the bond piece you can better respond to years when both stocks and bonds are lackluster (i.e. by digging a little deeper into your cash for a couple of years, and letting stocks and/or bonds recover, kind of like a shock-absorber)?
Not quite.* Different duration bonds behave very differently over time.* I think what is prudent is to have some of your bond funds be high-quality short-term instruments - say with 2 to 3 years average duration.* Say you have at least 2 years expenses (withdrawal needs) in cash, then you have at the next 3 years expenses in short duration bond funds.* In this scenario the bond funds have time to recover from a correction.* In most cases they should outperform cash during this time frame.* So at 4% for 5 years of withdrawals we're talking about at least 20% of the portfolio in cash and short-term bond funds.

Personally, I tend to keep ALL of my bond funds on the short-to-intermediate side (in other words I avoid long duration bonds) because asset allocation theory shows that the shorter duration instruments make a better diversifier for rebalancing against equities over the long run.* [Reference - Frank Armstrong "Investing for the 21st Century"]

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Re: Anyone else retire in 1999/2000?
Old 03-15-2006, 07:28 AM   #22
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Re: Anyone else retire in 1999/2000?

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Originally Posted by audreyh1
Not quite. Different duration bonds behave very differently over time. I think what is prudent is to have some of your bond funds be high-quality short-term instruments - say with 2 or 3 year average duration. Say you have at least 2 years expenses (withdrawal needs) in cash, then you have at the next 3 years expenses in short duration bond funds. In this scenario the bond funds have time to recover from a correction. In most cases they should outperform cash during this time frame. So at 4% for 5 years of withdrawals we're talking about at least 20% of the portfolio in cash and short-term bond funds.
Thanks. That's helpful, and a bit less paranoid than my initial model. 2 years in cash + 3 years in short-duration bonds (gov't, corporate or blend?).

So, is your overall allocation (stocks:bonds) incidental, as long as you have 5 yrs in bonds? Or do you add additional bonds above these needs to shoot for your 70:30, 60:40 or whatever?
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Re: Anyone else retire in 1999/2000?
Old 03-15-2006, 07:46 AM   #23
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Re: Anyone else retire in 1999/2000?

My current allocation is 55% equities, 45% cash and bonds.* This is pretty conservative.* *I would be comfortable with a 60:40 split, and I will probably allow my portfolio to gradually drift to that ratio over time.

So - yes, I am obviously holding well more than 5 years of needs in the cash and bond portion.

Another function of the cash/bonds portion is to rebalance the portfolio when equities take a hit.* Unless you have more than say 5 years of expenses in that portion, you won't have any cash/bonds left over to take advantage of buying more equities when they are lower.

BTW - Frank Armstrong recommends his clients hold 7 years of expenses in cash/high quality short-term instruments (his stuff is all on the net), and to rebuild that portion of their portfolio from equities only in years when equities go up in value.

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Re: Anyone else retire in 1999/2000?
Old 03-15-2006, 07:53 AM   #24
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Re: Anyone else retire in 1999/2000?

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Originally Posted by audreyh1
BTW - Frank Armstrong recommends his clients hold 7 years of expenses in cash/high quality short-term instruments (his stuff is all on the net), and to rebuild that portion of their portfolio from equities only in years when equities go up in value.
Yes, I noticed that. Sounds great if your bundle is pretty large, but 28% in cash seemed high even to me, assuming your holdings are in the "25 x expenses" range.
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Re: Anyone else retire in 1999/2000?
Old 03-15-2006, 08:01 AM   #25
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Re: Anyone else retire in 1999/2000?

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Originally Posted by Rich_in_Tampa
Yes, I noticed that. Sounds great if your bundle is pretty large, but 28% in cash seemed high even to me, assuming your holdings are in the "25 x expenses" range.
No - that's not 28% in cash.* That 28% includes bonds [high quality short-term instruments includes short duration bond funds that hold government and top-rated corporate debt].* If you are looking out at a 7 year time frame, then the last few years of expenses can be in bonds with even a 3 to 5 year average duration and you should be fine.* Think of it more as maintaining a "ladder" of various durations:* cash, ultra-short (or low duration) bond fund, short-term bond fund, intermediate-term bond fund.* Something like that.

Theoretically you could hold as little as 4% in cash and still do this.

Audrey
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Re: Anyone else retire in 1999/2000?
Old 03-15-2006, 08:28 AM   #26
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Re: Anyone else retire in 1999/2000?

I know there's probably a better way to phrase this, but I've heard that the best way to set up your investments is to have it in three "pots". The first pot is cash or something easily accessible, such as a money market account. This is what you'd actually spend money from. The second pot would be stuff like CDs and such, things that usually earn a bit more than just a savings/MMA account, but are not quite as easily accessible. As these mature, they get cashed in and feed the first pot.

The third pot would be longer-term investments, with more rapid growth and more risk, but these would only be touched when the second pot gets depleted.

If you have enough in each pot, theoretically you shouldn't have to sell your longer-term investments when the prices are down, and would be able to weather the rough spots better.

Of course, having these various pots would always guarantee that several years worth of money would be tied up in lower-yield investments.
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Re: Anyone else retire in 1999/2000?
Old 03-15-2006, 10:00 AM   #27
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Re: Anyone else retire in 1999/2000?

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Originally Posted by REWahoo!
But a wuss who sleeps well, unlike certain people who require chemical assistance :.
Swell...a well RESTED wuss!
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Hmmmmm. Did you consider your problem might actually be "asset allocation induced insomnia"?
It was worse 20 years ago when I didnt have any money, still pretty lousy 10-12 years ago when I had too much and wasnt investing much...so.......NO!
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Re: Anyone else retire in 1999/2000?
Old 03-15-2006, 07:51 PM   #28
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Re: Anyone else retire in 1999/2000?

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Originally Posted by Rich_in_Tampa
Even with 5 yrs of anticipated income tied up in cash?
Keep in mind that "anticipated income" is just like the mythical "six months' expenses in an emergency fund".

No one loses a job and starts digging into their emergency fund at their current spending rate.* Instead, while the job search revs up, the "spending" part slams to a halt for everything but mortgages, car payments, & food.* So although you may need an emergency fund, even three months' current expenses may last for six months in a period of fiscal austerity.

Same with retirement spending.* NO ONE would whistle through a recession, merrily spending the same amount of money that they just spent during the final year of a bull market.* Instead we'd all start cutting back here & there.* We'd skip our weekly Thai massage, start flying coach again, maybe even delay that second trip to Disneyland.*

So keeping five years' expenses in a money market may be 20% of your investments, but it may take a few years longer to deplete than one might expect.

Speaking of expenses, next time we put a years' expenses in cash

***WARNING*** TH, put down all nasal-aspiration liquids and swallow now.* ***WARNING***

I'm beginning to wonder if we should do it in an I bond instead.*
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Re: Anyone else retire in 1999/2000?
Old 03-15-2006, 10:00 PM   #29
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Re: Anyone else retire in 1999/2000?

Ick!

What happens if the CPI publishes below 3% and you start taking on water, skipper?
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Re: Anyone else retire in 1999/2000?
Old 03-16-2006, 10:14 AM   #30
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Re: Anyone else retire in 1999/2000?

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What happens if the CPI publishes below 3% and you start taking on water, skipper?
Yeah, good point.* I knew I'm not a bond investor.

I guess I have interest-rate envy; 5% seemed pretty high a year ago.* Not that there's anything grossly wrong with it today, but I'm going to have to start comparing current rates to the penalty for early cancellation...
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Re: Anyone else retire in 1999/2000?
Old 03-16-2006, 10:26 AM   #31
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Re: Anyone else retire in 1999/2000?

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Originally Posted by Nords
5% seemed pretty high a year ago.
Might be a lot less than that http://news.yahoo.com/s/ap/economy

Good News Everyone! Everything stopped getting more expensive last month!

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I'm going to have to start comparing current rates to the penalty for early cancellation...
You lose 3 months interest if you sell in the first 5 years AFAIK.

I wouldnt touch the things with an eleven foot pole. I'm sticking with MM's until rates on long cd's peak, and then locking a few of those in.
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Re: Anyone else retire in 1999/2000?
Old 03-16-2006, 10:57 AM   #32
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Re: Anyone else retire in 1999/2000?

Emigrant-direct just bumped up their "American Dream" MMA account to 4.5%. I took out a $5000 I-bond last August, and its rate is currently at 6.93%. I figured I'd just try the I-bond and see what happens, but I'm not going to go hog-wild with them.
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Re: Anyone else retire in 1999/2000?
Old 03-16-2006, 02:31 PM   #33
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Re: Anyone else retire in 1999/2000?

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Originally Posted by Cute 'n Fuzzy Bunny
Might be a lot less than that http://news.yahoo.com/s/ap/economy

Good News Everyone! Everything stopped getting more expensive last month!

You lose 3 months interest if you sell in the first 5 years AFAIK.

I wouldnt touch the things with an eleven foot pole. I'm sticking with MM's until rates on long cd's peak, and then locking a few of those in.
I agree with you but I meant with the CD. We have I & EE bonds in our kid's college account (four years & counting!) but we don't hold bonds in the retirement portfolio.

I think the NFCU CD's early-withdrawal penalty is probably three or six month's interest. Maybe they just forgot to mention the details on their website...

Quote:
Originally Posted by Andre1969
I took out a $5000 I-bond last August, and its rate is currently at 6.93%.* I figured I'd just try the I-bond and see what happens, but I'm not going to go hog-wild with them.
Yeah, it'll be interesting to see what February's inflation data does to the next I bond base rate & interest adjustment. A five-year CD seems to be a better long-term deal... so far.
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