How many years expenses in cash/bonds if the rest is 100% stock?

[43210]

I'm approaching retirement and am at over 90% stock, and am planning how to glide down to a more sensible figure for when income stops. But I'm not looking at a pure percentage based asset allocation, but rather, I want to have a sensible amount in safe holdings like cash/bonds to cover a certain number of years expenses while putting the rest in stocks (for upside risk).

So the question is: How many years expenses should be in cash/bonds? (There are many complexities and variables, but I'm just looking for a broad brush ball park figure.)

For example, suppose you retire with initially 30 years expenses, how about
2 years in cash
4 years in bonds
the rest (initially 24 years) in stocks?

You could say that this is an 80% allocation to stocks, but this is not meant to be a target percentage that is rebalanced to, but rather, you maintain the cash+bonds bucket at roughly a size in terms of years expenses, not as a percentage of portfolio, while the stock portion is free to grow or shrink.

The cash+bonds bucket may vary as you spend it down and top it up as needed, (and depending how the stock portion is doing) but you let the stocks boom or crash without rebalancing to predetermined percentages.

I realize "expenses" is ambiguous (needs? wants? emergencies? luxuries?) and you could vary it depending on portfolio performance. And if you have other income then change "expenses" to "expenses minus income".

But without pinning down a bunch of definitions of terms, what's the rough general picture of a sensible amount in safe holdings?

 

[wmc1000]

This really depends on many factors, how many years before different income streams are available, ie, IRA and 401K withdrawals without penalty, is a pension in play, how many years until you will take SS, etc. Also the allocations would most likely be different between your tax advantaged account(s) vs your taxable investment account(s).

 

[GrayHare]

I'm at 5 years expenses in cash and short term bonds. I don't feel the need to take on more risk by setting aside fewer years of covered spending.

 

[hesperus]

Three years in pure cash, and 2.5M in laddered bonds, which is something like 30 years. But that's just how it works out with my 65/35 allocation, which has now been stretched closer to 70/30.

 

[43210]

This really depends on many factors, how many years before different income streams are available, ie, IRA and 401K withdrawals without penalty, is a pension in play, how many years until you will take SS, etc. Also the allocations would most likely be different between your tax advantaged account(s) vs your taxable investment account(s).

Personally I'll have no SS or pension, but in general, as I said (very conventionally) `if you have other income then change "expenses" to "expenses minus income" ' in other words, the expenses that are not already covered by income streams like SS/pension (as opposed to using your assets like 401k/IRA).

To keep discussion simple, I'm disregarding all the account types, accessibility, taxation etc. They're all important, but I'm just talking about how much to put in cash+bonds.

 

[43210]

I'm at 5 years expenses in cash and short term bonds. I don't feel the need to take on more risk by setting aside fewer years of covered spending.

That's the kind of numbers I'm thinking. It seems sensible for any retiree, regardless of approach, to have this kind of "safe floor".

I'd try to start with this kind of floor, and maintain it with top-ups from the stock side, except in a protracted bear, I'd have to be prepared to spend down the safe assets and avoid selling low as long as it can be put off.

There is the question of whether to reinvest dividend, or take them as cash towards spending.

 

[street]

It really is a personal decision what you feel comfortable with having in high risk and a low risk investments. I personal have ladder CD's and love off of those accounts and don't touch my stock/bonds investments.

I have enough in low risk accounts to live my whole life with SS and can live very well. I don't want o cash in my investments if the market goes south and stays there for year. For my cash is a safety and security tool I feel is the best for me to weather any storm in the future.

 

[97guns]

Zero!!! I keep no cash and a $2,000 bank account balance, no bonds and very minimal stocks(about 1%)

 

[pb4uski]

I think of it this way.

Our spending is ~3.4% of our retirement assets. My pension is ~0.7%. Our taxable account dividends that we take in cash is ~0.4%. So our net withdrawals are ~2.3%.

So if my AA is 60/35/5... I have a little over 2 years of withdrawals in cash and over 17 years of withdrawals in bonds and cash.

Perhaps I could prudently increase our allocation to stocks.

If that isn't enough then there will be a lot of people suffering a lot more than me.

 

[jollystomper]

My simple it-lets-me-sleep-at-night strategy is to keep enough in cash/bonds to not be forced to sell equities for my target SWR during a market downturn or before I choose to take SS. With my current plan of taking SS no earlier than age 63 (a little more than 3 years), I have around 4 years. If I did not have SS coming I would have around 5 years. I have heard from different independent sources is that your equities are unlikely to take a hit over a 5 year period that cannot be recovered during that time. But again, you have to choose your personal level of comfort based on your circumstances.

 

[43210]

I guess another tacit assumption I'm making is that this is for a retiree with "enough" to cover "moderate" spending (more than survival, less than luxury). This is also typical for an early retiree who stops working at this point instead of building a bigger pile. In this case, the stock portion is needed, and is there to be consumed to the extent necessary.

 

[43210]

I think of it this way.

Our spending is ~3.4% of our retirement assets. My pension is ~0.7%. Our taxable account dividends that we take in cash is ~0.4%. So our net withdrawals are ~2.3%.

So if my AA is 60/35/5... I have a little over 2 years of withdrawals in cash and over 17 years of withdrawals in bonds and cash.

Perhaps I could prudently increase our allocation to stocks.

If that isn't enough then there will be a lot of people suffering a lot more than me.

So this is standard percentage based asset allocation (presumably you rebalance it occasionally, though maybe in a huge crash, you might hold the safe assets and spend from them).

Obviously this works, as do a whole bunch of allocations, and many other strategies, since the spending rate is supportable by the portfolio size.

It's really a question of how much or how little risk one wants, as long as one is not seriously risking portfolio failure.

 

[capjak]

10 years cash short term bonds, 55 YO as I will retire in a few months and 50x expenses total (capacity to take risk, Capable of taking risk, But NO NEED to take risk).

 

[43210]

My simple it-lets-me-sleep-at-night strategy is to keep enough in cash/bonds to not be forced to sell equities for my target SWR during a market downturn or before I choose to take SS. With my current plan of taking SS no earlier than age 63 (a little more than 3 years), I have around 4 years. If I did not have SS coming I would have around 5 years.

This could be viewed as a "liability matching" strategy where you are earmarking which assets cover which year's spending (in your case, filling in the gap years until a known income stream starts up).

The approach I describe, which is a kind of "bucket" approach, but also a "liability matching" approach, also covers the next 5 years (or so - not sure of the right length) with safe assets, but after that it's just covered by the portfolio generally, and is continuously updated.

I have heard from different independent sources is that your equities are unlikely to take a hit over a 5 year period that cannot be recovered during that time. But again, you have to choose your personal level of comfort based on your circumstances.

It would be good to look at the data (though it doesn't guarantee the future), but this is presumably part of what goes into the decision of what minimum amount of safe assets is enough to get through most stock crashes.

 

[43210]

10 years cash short term bonds, 55 YO as I will retire in a few months and 50x expenses total (capacity to take risk, Capable of taking risk, But NO NEED to take risk).

That sounds reasonable.

 

[Ready]

I have 21 years of living expenses in fixed income (bonds, CDs, savings accounts). This represents 43% of our portfolio.

I don't think it makes sense to purely look at number of years of living expenses and ignore total assets. If I only kept five years of living expenses in fixed income, I would have 90% of my holdings in equities. There is no way I'm going to do that now that we are retired.

 

[43210]

I have 21 years of living expenses in fixed income (bonds, CDs, savings accounts). This represents 43% of our portfolio.

I don't think it makes sense to purely look at number of years of living expenses and ignore total assets. If I only kept five years of living expenses in fixed income, I would have 90% of my holdings in equities. There is no way I'm going to do that now that we are retired.

I definitely agree that total assets matters, but when it really matters is when it's not enough to support spending. On the other hand, when the assets are more than needed, then there is a lot of flexibility in how it is allocated and managed, including the option of a very high stock allocation.

 

[OldShooter]

... I don't think it makes sense to purely look at number of years of living expenses and ignore total assets. If I only kept five years of living expenses in fixed income, I would have 90% of my holdings in equities. There is no way I'm going to do that now that we are retired.

Well, why not? I think it depends on the purpose of the portfolio balance. From your numbers, my guess is that you will be leaving a pretty good estate. For kids? For charities? In either case wouldn't you think it wise to invest that money more aggressively than you would if you saw it as being needed to keep you from running out of money?

OTOH, I have a friend who inherited at least high 7 figures from his father, who owned a string of banks. My friend has it all in bonds. His psychology is that this money will be passed to his kids and he doesn't want be a bad steward and lose any of "Dad's money." He has plenty of money of his own, so this is purely a mental accounting issue. I don't understand the reasoning but he is comfortable with it. IMO it's an extreme example of the psychological fact that we find losses to be more painful than similar gains are pleasurable. Nobel Prize winner Daniel Kahneman's "Thinking Fast and Slow" includes discussion of this and is a pretty good read.

Our situation is different still. At age 70 I have already taken enough wild rides in race cars, in airplanes, and in the market, including 1987. So, I scoped back our equities to 50% a couple of years ago. When the correction comes, I have plenty of dry powder that I can use to take advantage if I so choose. I've missed some potential growth to be sure, but I'm happier with that than I would have been at our former 70/30 in a 20-30% correction. YMMV of course.

IMO most of the chatter about % ratios misses the point that one size fits none. It's fine to do the calculation for reference but there are too many other variables for any % number to be gospel for anyone.

To the OP's question, I agree with others in that I look at the recovery times following major corrections. For that, five years seems like a good number. And if in year 4 I want to sell some stock, even if the recovery hasn't reached 100% I have still missed most of the downside. In a way, this can be described as trying to call tops and bottoms but it is a very laid-back and low-risk version IMO.

 

[Target59]

I'm not retired yet, so this is all projections. In a correction, I know I'll adjust my spending down by about 15% even though I probably don't need to. I take that lower spending and subtract my small pension, 60% of expected dividends, and 85% of expected SS to account for what the government might steal. To cover remainder for 5 years, I need about 10% in safe money. It holds pretty steady when I project it out, so I'm comfortable that my targeted 80/20 AA will hold me through a major correction and slow recovery. I'm 95/5 right now and plan to start transitioning about 5% a year until I hit 80/20.

 

[audreyh1]

Many folks use an AA that keeps the same percentage in fixed income as the portfolio grows and shrinks. Say at 50/50 AA, if you started with 25x annual needs the portfolio (a benchmark for retirement with the 4% rule), then by definition you would already have 12.5 years needs in bonds and cash.

Much higher than a goal of 2-4 years in cash/bonds and the rest in equities.

I am of the school that as long as I have a large enough portfolio invested say 50/50 to 60/40 to meet long term goals that’s good enough. This by definition will have many, many years in fixed income. I’m not looking to maximize long-term return for when we are dead, and we have no direct heirs. I prefer to have the lower volatility to keep me invested. We also have quite a bit of cash/short-term investments accumulated outside the retirement fund, and I’m happy with that as our long-term investments have already grown so much we don’t feel the need to add to them.

Knock on wood.

 

[Dd852]

I originally was at 10 years cash/bonds but am now at 12, which seems too conservative even for me! In other words, I could go until 69 without selling a stock at our current spending level. We ended the year with a spend rate of 2.6% of liquid assets. Again, conservative and low but when we discussed it didn’t really feel like making any big changes! Happy and healthy - and wishing the same to all of you for many more years

 

[43210]

I was just playing with this Vanguard retirement calculator,
https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf
which doesn't model the scenario I'm describing (it does fixed percentage based asset allocation, and fixed inflation-adjusted spending, and a fixed time horizon, and you choose all these as inputs) but the upshot is that the "4% rule" is very robust for a fixed 30 year horizon, over a wide range of allocations, including 100% stock. So modifying that with a minimum "floor" of safe assets should reduce the risk of portfolio failure to very little.

But the main big way to reduce the risk of portfolio failure is to be prepared to adjust spending according to portfolio levels, and especially avoid selling too much stocks low in a crash. (After all the "4% rule" is really about calculating a sufficient nest egg to support a certain level of spending. It was never intended as an actual strategy to be followed.) Some variation in spending may be due to circumstance, but some variation is discretionary, so there is plenty of chance to make course corrections as long as you don't let assets drop to a level where you can't recover. If you're prepared to vary spending, you can spend more on average.

In the situation I describe in the OP, "expenses" is not a fixed amount. If your baseline spending budget is $X per year you could have different spending levels, e.g.
0.67X spartan survival spending
X regular baseline spending
1.5X comfort spending
2X luxury spending

So if your floor/bucket of safe assets is 5 years worth of luxury spending, then it is 10 years worth of regular baseline spending, or 15 years worth of spartan survival spending. Some size of safe floor/bucket needs to be chosen, but the number of years spending that equates to depends on the type of spending level.

No matter what, the initial average spending level should be consistent with assets and time horizon, but a higher stock component gives a better chance of increasing assets which will support more spending. I don't want to work an extra bunch of years to pile on assets to be extra safe. I'm prepared to take the risk to try to grow assets after retirement, while minimizing chance of failure.

 

[OldShooter]

Yes. A couple of thoughts:

1) When we get in the car and start driving we are constantly making adjustments based on events and conditions. Why would be not expect to do the same as we manage our retirement lives?

2) Much of the concern about sequence of returns seems to me to be unnecessary with this fantastic market we have. Anyone concerned should just sell a few years worth of equities right now and squirrel it away. Ergo, no more worries about being forced to sell into a down market.

 

[43210]

Also people should remember that for a 30 year horizon
1/30=3.33%
so plain old return of capital already gives you 3.33% you can withdraw. Just a little bit of (real) returns gets that to 4%.

 

[grasshopper]

We have 16 years of expenses in cash and bonds, since I an already collecting SS, I have a little more buffer in my spending. Retired in January for 13 years now, I believe I have a pretty good handle on spending and expenses.