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nico08 · 07-04-2013, 05:44 PM

I have about 10 percent of my net worth in a secure investment earning nominal interest. This is my emergency money, that would become my short-term living expense money when I am able to retire early.

I was just wondering if you use the amount that you have as emergency money/short term living expense money in the total investment amount that you use to estimate your four percent rate of return.

Thank you for your feedback.

Meadbh · 07-04-2013, 05:59 PM

My financial plan estimates a 2% real rate of return, net of inflation, for my whole portfolio.

W2R · 07-04-2013, 06:41 PM

Quote:

Originally Posted by nico08

I have about 10 percent of my net worth in a secure investment earning nominal interest. This is my emergency money, that would become my short-term living expense money when I am able to retire early.

I was just wondering if you use the amount that you have as emergency money/short term living expense money in the total investment amount that you use to estimate your four percent rate of return.

Thank you for your feedback.

Personally, I don't. That money is what I withdraw once a year for my year's living expenses. It is in my local bricks 'n' mortar bank account along with a few thousand that I just leave there as a minimum balance, for end-of-the-year emergencies. In my case, the money in my bank account is much smaller than 10% of my entire portfolio, though. It varies depending on the time of year, from maybe 1%-3%.

I only include what I have in the TSP and Vanguard when I compute my withdrawal rate.

I also only include the TSP and Vanguard money when I am rebalancing to my planned asset allocation (55% fixed, 45% equities).

In my case, since I only withdraw once each year (withdrawing the entire year's spending money in January), my bank account balance is fairly low at that time anyway, at perhaps 1% or so. So, it doesn't really affect my withdrawal rate much either way.

GrayHare · 07-04-2013, 07:16 PM

Those dollars are fungible, so, yes.

youbet · 07-04-2013, 07:29 PM

Quote:

Originally Posted by GrayHare

Those dollars are fungible, so, yes.

Yes, agree.

The only money I don't count is the wad of cash in the jar at the back of a workbench drawer in my shop. DW doesn't know about that............

Ed_The_Gypsy · 07-04-2013, 07:41 PM

Good question.

Let's start with some clarification.

The "4%" sounds like the 'magic number' for how much can be withdrawn safely from a pot of 60% S&P 500 index fund and 40% bonds/bond fund and not run out of money after, say, 30 years. (All before taxes--we are talking portfolio survival here. What you do with the money--pay taxes, eat, etc.--is up to you after you take the 4%/year out.) You called it "4% rate or return". Well, if you can get 4% consistently on average from all of your portfolio (whatever it is made up of), then they are the same thing. It makes 4%/year and you take out 4%/year and you do not outlive your money. You have won the game!

Now, if you already have 10% of your pot in a fixed investment yielding "nominal interest", say, 1.5%, then the rest of your portfolio (the other 90%) would have to earn an average of 4.28% to come up with an overall rate of return of 4%.

Will the other 90% earn 4.28%? What is it invested in (asset allocation)? Different asset categories have different long-term historical performance (we are always looking in the rear-view mirror here; nobody can read the future). The details matter. An S&P index fund with a high annual fee company will hurt you. (Say, 6% average annual returns minus 2% management fees = 4% average annual return, which is less than the 4.28% you need to not run out of money.)

I hope this helps.

obgyn65 · 07-05-2013, 05:21 AM

Yes.

**MichaelB** · 07-05-2013, 07:08 AM

Quote:

Originally Posted by nico08

I was just wondering if you use the amount that you have as emergency money/short term living expense money in the total investment amount that you use to estimate your four percent rate of return.

Thank you for your feedback.

We have funds set aside for emergencies and big expense items and I am certain the funds will be spent (new roof, wedding gifts, etc) but no, we don't count that as part of the portfolio.

It probably doesn't matter how the money is counted, as long as all the expenses are included in the projections.

Amethyst · 07-05-2013, 08:54 AM

You think.

Quote:

Originally Posted by youbet

Yes, agree.

the wad of cash in the jar at the back of a workbench drawer in my shop. DW doesn't know about that............

haha · 07-05-2013, 12:29 PM

I include all money except that which I don't.

Ha

pb4uski · 07-05-2013, 03:22 PM

I include everything except my main day-to-day savings and checking accounts which I pay my bills from. They typically have less than $10,000 in them combined and would not affect my WR if rounded to the nearest 1/10th of a percent.

mickeyd · 07-05-2013, 04:39 PM

I have never included emergency money (cash reserves) in my asset allocation (AA) or any investment results that I may calculate. Since that $ is cash (or equivilvient) it will be part of the next dollar that I spend, whereas the investments in my AA are long-term assets that I will not spend for many years, if ever.

truenorth418 · 07-05-2013, 06:15 PM

I set aside a few years living expenses for future years spending and emergencies in CDs and checking accounts. I include this in my Net Worth against which I apply my annual withdrawal rate, but I do not count it as part of the AA of my investment portfolio. I count what limited cash I have in my investment portfolio as "dry powder" with the specific objective of reinvesting it soon.

obgyn65 · 07-06-2013, 06:24 AM

Just curious about this comment ... So if you have say 10k or 20k in your bank checking account to cover for big expenses items, you are not including these 20k in your portfolio ? I include everything as I plan to keep some cash in my current account, for which I will not have any income - therefore reducing MAGI.

Quote:

Originally Posted by MichaelB

We have funds set aside for emergencies and big expense items and I am certain the funds will be spent (new roof, wedding gifts, etc) but no, we don't count that as part of the portfolio.
.

**MichaelB** · 07-06-2013, 06:46 AM

Pretty much. Our portfolio is to fund future expenses, and our bank account is to fund current expenses, emergencies, commitments made (kids) and major one time expenses that are certain to happen in the next few years. It is just one way to project, it makes it easier to quantify the future withdrawal rate, and adds a bit of safety. There is no "right way" to project, just the way that works for each of us.

Quote:

Originally Posted by obgyn65

Just curious about this comment ... So if you have say 10k or 20k in your bank checking account to cover for big expenses items, you are not including these 20k in your portfolio ?

pb4uski · 07-06-2013, 10:10 AM

Quote:

Originally Posted by obgyn65

Just curious about this comment ... So if you have say 10k or 20k in your bank checking account to cover for big expenses items, you are not including these 20k in your portfolio ? I include everything as I plan to keep some cash in my current account, for which I will not have any income - therefore reducing MAGI.

If you withdraw $35k on a $1 million your WR is 3.5%, if you then include $20k of operating cash/emergency funds your WR is 3.43%. So unless you side fund is significant, it doesn't make much of a difference.

veremchuka · 07-06-2013, 11:31 AM

My cash is 2% of the portfolio so it doesn't matter but I do count it. That cash is at Ally and I use it to cover bills that my pension and SS wouldn't cover. But since I typical bank part of the pension/SS, it isn't an emergency fund as my expenses are met by them.

audreyh1 · 07-06-2013, 08:20 PM

Quote:

Originally Posted by nico08

I have about 10 percent of my net worth in a secure investment earning nominal interest. This is my emergency money, that would become my short-term living expense money when I am able to retire early.

I was just wondering if you use the amount that you have as emergency money/short term living expense money in the total investment amount that you use to estimate your four percent rate of return.

Thank you for your feedback.

No (and I think you mean withdrawal rate)

Ed_The_Gypsy · 07-06-2013, 08:56 PM

Hmm. I see that there are two ways to look at it.

On second thought, it is smarter to leave the emergency money out of the calculations. It needs to be a separate concept.

obgyn65 · 07-07-2013, 05:56 AM

please can you explain why it needs to be a separate concept ? I am not trying to be contradictory or argumentative, just would like to understand your viewpoint better. Thanks.

Quote:

Originally Posted by Ed_The_Gypsy

On second thought, it is smarter to leave the emergency money out of the calculations. It needs to be a separate concept.