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Old 10-25-2015, 01:10 PM   #21
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Got it... makes perfect sense. I'm a long way from having my tax-deferred be less than 34% of the total and having that issue.
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Old 10-25-2015, 01:11 PM   #22
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I started retirement with about 3 years in cash, though DW decided to keep working so it turned out to be unnecessary. However, that was 2007, so the cash eventually came in handy.

A relatively large amount of cash at the start won't hurt your gains too much as long as you spend it first and don't replenish it. However, I have my doubts as to its average usefulness.

At a 3% initial withdrawal ratio you should be relatively safe already for any historical portfolio disaster, even a recession just as you retire. FIRECalc doesn't show any failures at 3% IIRC. So if things turn bad the cash will be nice, but you should be OK anyway. If things go great the cash will be a drag and you'll be a little worse off than if you had stayed with your AA. The extra cash ends up being just kind of a market timing effort.

The 4% initial withdrawal rate does have a few historical failure scenarios. To my mind, what you want is to reach about a 3% actual withdrawal rate (100% safe historically) as soon as you can. This could be via a nice bull market at the start of retirement, a steadily rising market, or saving cash at the start of a market bear, buying in near the bottom, and riding it back up.

However, holding a lot of cash would slow the drop from 4% to 3% withdrawals in a bull or steadily rising market. Maybe the bear market comes just after your cash runs out, forcing you to sell low. So holding a bunch of cash at the start could hurt, depending on what the market does. Or it might help if the market tanks soon after retirement. So what do you think, will the market tank now, in five years, or more? Will there be a big rise first or will it be flat until it drops? That's what you need to know, and it's basically just market timing.

Nonetheless, it may be prudent to hold significant cash if you are really sure the market will crash soon and your withdrawal rate is high enough that portfolio failure is a concern. I think the down side is not too bad and the up side is avoiding portfolio failure. However, I'm not sure you remain protected if the market stays flat while you burn your cash and then collapses just when the cash is all spent. Still some risk there.

In my case I had a pretty good cash balance built up in early 2007 and watched the market continue to rise 10% more. I needed a 10% drop just to get back to break even. Combined with buying back into the market mostly well before the final bottom, I did pretty well but I don't think it had a big portfolio impact.

You won't raise your cash right at the market peak, you won't add it back in right at the market bottom, and you're only playing with a fraction of you entire portfolio (hopefully). That tends to mute the beneficial effects.

I haven't seen a study, or tried it myself, that shows a benefit or harm to holding extra cash at the start of retirement. The closest would be Dr. Pfau showing that rising equity allocations during retirement helps portfolio survival a little bit, for the conditions that he assumed.
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Old 10-25-2015, 01:51 PM   #23
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Forgot to add that you look like a prime candidate for Roth conversions while your income is low.
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Old 10-25-2015, 01:58 PM   #24
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Forgot to add that you look like a prime candidate for Roth conversions while your income is low.
With $4.4M in after tax accounts is the OPs taxable income going to be low? We need to know how the $4.4M is invested to get an idea of the OPs tax bracket.
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Old 10-25-2015, 02:12 PM   #25
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I have studied and read a bit about buckets and decided that it is no more than a way to make my own plan more complicated. Messing with unloading and reloading fictitious buckets may give you a nice picture of your stash, but in reality it seems needlessly complex.
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Old 10-25-2015, 05:09 PM   #26
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The bucket strategy is a form of insurance, and like all insurance it costs something -- until you need it.
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Old 10-25-2015, 05:13 PM   #27
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not really , i have a 50/50 mix . i still have cash instruments , bonds and equity's . i am giving up nothing if i choose to spend cash and bonds first and later refill from equity's or systematically maintain the same allocation by drawing equally from the pie .

it is only the mechanics that differ , result will be pretty much the same . in both cases how much cash you start with will be the same .
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Old 10-25-2015, 05:20 PM   #28
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I've concluded that buckets vs conventional asset allocation with rebalancing is a distinction without a difference, especially where the AA includes an allocation for cash (rather then solely stocks and bonds).
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Old 10-25-2015, 07:06 PM   #29
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With $4.4M in after tax accounts is the OPs taxable income going to be low? We need to know how the $4.4M is invested to get an idea of the OPs tax bracket.
with 4.4MM and assume 2% divident/cap gain, most likely say goodbye to ACA subsidy unless he has kids at home too.... and then maybe not that much of a subsidy, if at all.
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Old 10-25-2015, 09:15 PM   #30
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That much cash seems too high to me too.

Another source of taxable income you will be reporting is realized long and short term capital gains. When you pull out $750K all at once, you may find about $250K in cap gains you need to report. I
I forgot to mention that right now I have $1M sitting is pure cash. Not the smartest move in the world, I get that, but I am in cash, so I can avoid any capital gains. In fact, from the 1999 bubble, I am still sitting on $400K in losses to be able to counter against...

I am very good at making money, very bad at managing it

I will call my Vanguard manager this week and get this straightened out.

I love all the posts and wisdom - you guys are rockstars - thank you!!!
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Bucket Question
Old 10-25-2015, 09:32 PM   #31
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Bucket Question

I am only throwing this out there because it really hasn't been mentioned. Is part of the reason you have so much cash is because you are fearful of losses in the market during retirement? If so you have plenty of money to buy piece of mind. Just to put in perspective not a recommendation at all, but you could generate $143,000 a year by dumping it all into 10 year CDs.
Tossing in social security and draw downs, you could probably go into the ol 4 corner offense and run out the clock and still have money left over.
Once again, I am not recommending anything, just be comfortable with what you want to do as you certainly seem to have the financial flexibility to do so.


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Old 10-25-2015, 10:32 PM   #32
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I am only throwing this out there because it really hasn't been mentioned. Is part of the reason you have so much cash is because you are fearful of losses in the market during retirement?
Honestly, it sounds crazy, but I have been so incredibly busy with my job that I just accumulated $1M in cash and with the market going downwards (ie. China etc.) i just held onto it and didnt put it to work. Also, being as busy as I am, I also missed the runup.

I am not a market timer - the truth is that my job is all consuming and it sounds like a weak excuse, but I just blinked and the time flew by and maybe psychologically, I sleep at night with enough cash around (I was raised very poor - hard to shake)

This entire FIRE thought process came out of an out of the blue compelling event at work coupled with a visit to my doc with my BP at 160/90 (I am on BP meds, it went down to 135/80 and it is all just alot of stress). Something has to give, so even though I would like to keep working, all roads are pointing to a warning shot that it is time to call it a day. Been a long time coming I guess, just all came to a head at the same time (funny how that works huh?)

So, 10 year CDs huh? I have never heard of anything like that. I am actually not that conservative and I think the best course of action is to set aside $300K in cash to live 2 years and put the rest to work in a 50/50 Vanguard portfolio....
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Old 10-25-2015, 10:42 PM   #33
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Honestly, it sounds crazy, but I have been so incredibly busy with my job that I just accumulated $1M in cash and with the market going downwards (ie. China etc.) i just held onto it and didnt put it to work. Also, being as busy as I am, I also missed the runup.

I am not a market timer - the truth is that my job is all consuming and it sounds like a weak excuse, but I just blinked and the time flew by and maybe psychologically, I sleep at night with enough cash around (I was raised very poor - hard to shake)

This entire FIRE thought process came out of an out of the blue compelling event at work coupled with a visit to my doc with my BP at 160/90 (I am on BP meds, it went down to 135/80 and it is all just alot of stress). Something has to give, so even though I would like to keep working, all roads are pointing to a warning shot that it is time to call it a day. Been a long time coming I guess, just all came to a head at the same time (funny how that works huh?)

So, 10 year CDs huh? I have never heard of anything like that. I am actually not that conservative and I think the best course of action is to set aside $300K in cash to live 2 years and put the rest to work in a 50/50 Vanguard portfolio....

The 10 year CDs are brokered CDs you can buy through Vanguard and other brokerages. Some people choose to use longer CDs as replacement of bonds due to low interest rates. That is good that you are comfortable with your decision. It appears to me there are more than one successful financial strategies for retirement. So to me, the most successful one of those that are sound is the one you have the most confidence in.


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