How much cash to keep??

[cardude]

Let's say a guy has a 2M portfolio, and he wants to safely suck 70K per year out of it for retirement. Let's say the portfolio looks like this:

10% real estate
10% cash
80% stocks (non dividend paying for the most part)

Is that enough cash to keep around to fund 70K in annual living expenses? If not, how much cash should you keep in the portfolio for the 70K per year living expenses, or do most of you sell stock to fund expenses when you feel the price is good, or what

 

[teejayevans]

Let's say a guy has a 2M portfolio, and he wants to safely suck 70K per year out of it for retirement. Let's say the portfolio looks like this:

10% real estate
10% cash
80% stocks (non dividend paying for the most part)

Is that enough cash to keep around to fund 70K in annual living expenses? If not, how much cash should you keep in the portfolio for the 70K per year living expenses, or do most of you sell stock to fund expenses when you feel the price is good, or what

Thats only about 3 yrs worth of living expenses in cash. If you
retired in 2000, you would have had to start selling your stocks
just before the comeback. I think you need more, might want to
search forums for past discussions on "bucket theory".
TJ

 

[Nords]

Is that enough cash to keep around to fund 70K in annual living expenses? If not, how much cash should you keep in the portfolio for the 70K per year living expenses, or do most of you sell stock to fund expenses when you feel the price is good, or what

You have about three years' expenses in cash, which would have taken you from the 2000 peak to the 2003 trough without selling stocks. Of course then it'd be decision time...

Keep in mind that during those years you'd've been unlikely to blissfully continue your spending habits and you'd probably have [-]harvested a few cap gains[/-] rebalanced out of the most ridiculously overvalued stocks in your portfolio. It's not unthinkable that your three years' spending cash would have stretched to four years or even five.

Frank Armstrong puts a few years' expenses in cash and some more in short-term bond funds for a total of seven years' expenses. Of course he implies a portfolio that's never more than 72% stocks.

I think it's mostly a "sleep at night" decision, but 2-3 years' expenses in cash will probably cover 90% of the bear-market situations. We keep two years' expenses in cash: the first year in a money market and the second year in a batch of five-year CDs. If we have to break an occasional CD the penalty is just a few months' interest and over the long term the 6.25% CD rate beats the 5% money market.

We usually replenish the cash stash in December or January. I suppose it could be coordinated around mutual-fund distributions or dividends but I haven't bothered to finesse it.

 

[LOL!]

First off, I would rearrange the portfolio so that it was not so heavy into equities that did not pay dividends. Even the S&P500 and total stock market pay almost 2% in dividends. With a $2M portfolio and the need for $70K in income, you don't need 80% equities. If you cut back to 60% equities and 40% fixed income, and the equities pay dividends at about 2% and the bonds at 5%, then that's $64,000 of portfolio income a year.

Therefore you don't need much cash at all. Maybe $100K for the missing $6K of income and maybe some portfolio rebalanincg.

 

[CyclingInvestor]

I am roughly in the position of Mr Theoretical, 48/retired, and keep
a 98% equity / 2% cash position across all accounts. The equities,
however, all pay healthy dividends (ave 3% currently), which is plenty
to live on, allowing me to keep a minimal cash position.

In your example, where this approach would lead to a 10k/year
shortfall, I would probably keep enough cash around to cover
5 years of shortfall - $50k in your example, in addition to whatever
emergency fund he wants (perhaps another $50k). Of course, this
still requires dumping the non-dividend stocks for GE / JNJ / KIM etc.

 

[Alex]

Somebody here posted this a while back. Sorry - but I don't know who it was:

I am following the same mechanical withdrawal plan. In short, it goes like this:

Fixed Income = 25%
2y living expenses in MMF
2y living expenses in 2y CD (maturing in 1y)
2y living expenses in 2y CD (maturing in 2y)

Stocks = 75%

At the end of the year I sell 4% of the value of my stock portfolio and buy a 2y CD. I let half of the maturing 2y CDs go to MMF and I buy another 2y CD with the other half. I then divide the entire FI balance by 72 and that's my monthly draw for the year. At year end, I repeat the process.

Even with this three year bear market, my monthly FIRE income fluctuates very little thanks to my FI buffer. It's a similar approach to intercst's inflation adjusted withdrawals but slightly different in that I let the long term growth of my stock portfolio indirectly take care of any inflation or deflation in the economy.

This made so much sense to me that I cut and pasted it into a file folder I keep on my hard drive. Maybe someone here knows who wrote this??

 

[SecondCor521]

Somebody here posted this a while back. Sorry - but I don't know who it was:
This made so much sense to me that I cut and pasted it into a file folder I keep on my hard drive. Maybe someone here knows who wrote this??

Was it galeno?

2Cor521

 

[MasterBlaster]

ALEX:

I am trying to understand this withdrwal strategy so please bear with me as I had a few questions ...

1) What exactly is the FI buffer. Is that your cash position or the entire portfolio or some subset of the portfolio ?

2) Where does the 72 divisor come from that determines the monthly draw ?

 

[Ed_The_Gypsy]

Was it galeno?

Yes, that was galeno's strategy. (He may have changed it, by the way. He did un-retire.) I liked it too, but it could be a little simpler.

1) What exactly is the FI buffer. Is that your cash position or the entire portfolio or some subset of the portfolio ?

2) Where does the 72 divisor come from that determines the monthly draw ?

FI = fixed income = 25% of total pot.

Stocks = 75% of total pot.

When he says living expenses, he means he lives off of what comes out of the money market fund.

The '72' thing is a way of smoothing out the draw. He has 6 years of money in the FI pipeline. 6 yrs * 12 months in a year = 72 months. He draws out 1/72 of the total FI pot every month. He draws that amount out of the MMF every month for a year, which almost empties the MMF. At the end of the year, he moves the monies as described and re-calculates the monthly draw.

Does that make sense?

Ed

 

[Alex]

Yes, that was galeno's strategy. (He may have changed it, by the way. He did un-retire.) I liked it too, but it could be a little simpler.

FI = fixed income = 25% of total pot.

Stocks = 75% of total pot.

When he says living expenses, he means he lives off of what comes out of the money market fund.

The '72' thing is a way of smoothing out the draw. He has 6 years of money in the FI pipeline. 6 yrs * 12 months in a year = 72 months. He draws out 1/72 of the total FI pot every month. He draws that amount out of the MMF every month for a year, which almost empties the MMF. At the end of the year, he moves the monies as described and re-calculates the monthly draw.

Does that make sense?

Ed

Great job of explaining it Ed. It seems like a pretty good strategy. I wonder if anyone else here employs this strategy or something similar?

PS- I do not want to take this thread off topic, but, does anyone know why Galeno 'un-retired'?

 

[megacorp-firee]

Sort of the same ... I plan on the following:
A little different in that I have a non-cola'ed pension which makes up about 1/2 of my yearly expenses
1) 60/40 AA
2) money market to cover the balance of my expenses for year 1
3) 1 year and 2 year cds to cover year 2 and year 3 balance of expenses
4) after 1st year I will use money from 1st cd to cover balances for year 2
5) I will take 'earnings' from the balance of my portfolio to fund another 2 year cd
6) wash, rinse, and repeat ...
I will have 3 years of money to live on... if the market tubes I could stretch the mm/cd money to 4 - 4 1/2 years. If it goes longer, then I eat into the principle ... no big deal.

 

[figner]

I'm a bit unclear on what's meant when someone says they keep x years of expenses in cash/FI, and replenish it from equities. If you're keeping the cash to be able to survive an x-year market downturn, do you avoid replenishing it during any down year? Or do you wait until what looks like a major downturn before you skip replenishing?

 

[teejayevans]

I'm a bit unclear on what's meant when someone says they keep x years of expenses in cash/FI, and replenish it from equities. If you're keeping the cash to be able to survive an x-year market downturn, do you avoid replenishing it during any down year? Or do you wait until what looks like a major downturn before you skip replenishing?

And if you do get a downturn of 20%, but the next year it goes up 10%,
so you replenish or wait till you break even? (20+%).
When you do replenish, do you take out of all accounts or just the ones
that are up? Do you try to completely make up the deficit or just add a
years worth? I'm guess there are rules that work best based on past
results?
TJ

 

[megacorp-firee]

I'm a bit unclear on what's meant when someone says they keep x years of expenses in cash/FI, and replenish it from equities. If you're keeping the cash to be able to survive an x-year market downturn, do you avoid replenishing it during any down year? Or do you wait until what looks like a major downturn before you skip replenishing?

In my case, in the event of a downturn, I would 'tighten up' on the expenses and try to stretch out the 'cash'. If I eventually (3 - 4 1/2 years out) had to replenish from portfolio (equities and bonds, by the way), then I would do it ... you have to live.

This is really a carry over from my LBYM habits. According to Firecalc, I could take more each year. Once I am comfortable with this (i.e. seeing portfolio take off higher than my spreadsheet estimates), I will probably stop being so anal about the whole thing and loosen up.

I like the idea of a nice sail boat... hmmm will have to learn to sail.

 

[megacorp-firee]

And if you do get a downturn of 20%, but the next year it goes up 10%,
so you replenish or wait till you break even? (20+%).
When you do replenish, do you take out of all accounts or just the ones
that are up? Do you try to completely make up the deficit or just add a
years worth? I'm guess there are rules that work best based on past
results?
TJ

I do believe you need an overall plan... but as you are all pointing out, it depends upon what the circumstances are. IMO I will need to be flexible and logical. Some years, the market will a) go up more than planned, b) go up less than planned, c) go up as planned, d) go down o).
LBYMs and act appropriately.

I do have the luxury of a pension, so I have a buffer. Worse case I could hunker down and survive on that for a few years if I had to.

For those that don't, you may need to do a recalculation and see where you are, portfolio wise, and may need to reset your spending levels.

In planning these things, I have found that if you plan it down to the last penny and things go wrong you are scr*wed. Your plan needs to have a buffer (and amount depends upon your 'sleep at night' level).

A common sense approach to this stuff is necessary when you implement. I have found that the mathameticians and engineers and financial advisors, on this site, who do the math to the nth degree, do a great j*b when laying out the plan. However, I find that there is a tendency to 'exceed the precision of the model'.
No need to be a sharpshooter ... a shotgun blast will do.

Oh yeah, when taking distributions, I would use this as an opportunity to do some AA at the same time, so take from the big winners in your portfolio (i.e. sell high, hopefully you bought low).

 

[chinaco]

Allocation would be 60/30/10 (S/B/C). The cash would cover about 2.5 years of income (prior to SS and other income streams kicking in). the intermediate bonds and cash would cover 10 years of income needs if the stock market dried up. Before 10 years passes... other income streams (SS for DW and i) would have kicked in. This would actually make the amount last more like 12 or 13 years. That said, if the stock market was off for 5-6 years, I would suspect something different has occurred (abnormal). I suspect that we would begin belt tightening on our spending a bit and the money including the other income streams could probably stretch to about 15 years. If the stock market was still down, we would have to begin drawing down from the stock account. Not quite sure if I would be transferring money from the stock account to a cash account in year 10 or 12 in anticipation of spending it... I might try to hang on hoping the stock market would come back.

Anyway, the fixed assets will cover a minimum of 10 years of income by themselves and adjust themselves for inflation. Oh, by the way... a portion of the bonds are TIPS the others are high grade corporate. All are intermediate term.

 

[megacorp-firee]

Anyway, the fixed assets will cover a minimum of 10 years of income by themselves and adjust themselves for inflation. Oh, by the way... a portion of the bonds are TIPS the others are high grade corporate. All are intermediate term.

What's your mix of TIPS, high grade corporate and gov bonds? Want another opinion... as I am looking at moving my 401k to IRA and adjusting fixed income portion to 2/3 Total Bond Fund and 1/3 TIPs...

Not sure this is a good time to be putting money in bonds ... but it's part of the plan ... and when 2000-2003 repeats, I think I will be glad I did it... see, I have been reading the board and [-]guzzling the kool aid [/-]paying attention.

 

[huutrinon]

Excuse my stupidity. Is it simple enough to get 70K a year just by using 2M to buy safe CDs at 5% that will yield 100000 a year?

 

[cute fuzzy bunny]

At that equity level, i'd keep four years worth of cash.

As far as buying cd's, you'd be fine for a few years, then inflation would eat your pants off.

See Joe Dominguez's book "your money or your life" for a great example of why "safe" investments arent that safe at all.

 

[audreyh1]

Excuse my stupidity. Is it simple enough to get 70K a year just by using 2M to buy safe CDs at 5% that will yield 100000 a year?

The taxes will punish you even before the inflation does.

Audrey

 

[audreyh1]

I'm a bit unclear on what's meant when someone says they keep x years of expenses in cash/FI, and replenish it from equities. If you're keeping the cash to be able to survive an x-year market downturn, do you avoid replenishing it during any down year? Or do you wait until what looks like a major downturn before you skip replenishing?

I have a cash buffer separate from my investment portfolio that keeps 1 to 3 years of income needs. I don't like it to go below 1 year, so I suppose that even if the market were in an extended downturn, I would still replenish it to at least 2 years worth of cash once it got down to 1 years cash. I would simply take from whichever is the highest performing asset class in the portfolio - equities or bonds.

I don't let the cash buffer go above 3 years worth of cash either. So even after some banner years or lower than expected expenses, if it's "full" (i.e. at 3 years), I plow any excess back into the balanced investment portfolio.

I guess I don't let the cash buffer go below 1 year because that's kind of an "emergency" fund. There just in case there is a sudden capital need.

Audrey

 

[youbet]

Fully ER'd, my allocation is about 65/30/5. The 5% cash plus interest from the 30% fixed and dividends from the 65% equities would see us through three or four years of routine expenses without liquidating any positions. If the 5% cash were ever consumed quickly due to an emergency, I'd replace it at the first reasonable opportunity. No separate buffer or bucket labels. It all co-habitates on the same spread sheet.

 

[mathjak107]

id have 500,000 in cash cd's,money markets

400000 in bonds,bond funds, unlisted reits, and annuities

4000,000 growth and income funds

700,000 growth funds,stocks, traded reits, junk bonds

you will never have to liquidate in a down market,

 

[yona]

It depends

Let's say a guy has a 2M portfolio, and he wants to safely suck 70K per year out of it for retirement. Let's say the portfolio looks like this:

10% real estate
10% cash
80% stocks (non dividend paying for the most part)

Is that enough cash to keep around to fund 70K in annual living expenses? If not, how much cash should you keep in the portfolio for the 70K per year living expenses, or do most of you sell stock to fund expenses when you feel the price is good, or what

While most of the posters before me where "statistically" or "academically" correct, I think the answer depends a lot on your personal situation.

What is you age?
What is your historical return in the stock market - is it 8% or 20% a year?
What is your tolerance to risk?
Can you handle a few years with income of less than 70K?
Is it important for you one day to become much richer (decimilioniar), or 2-3 millions are more than enough?
And so on…

If, for example, you are 40 years old and in the last 15 years you averaged more than 15% a year in the stock market and your worse year was down 5%, then I see no reason for you to have more than 50K in cash.
I am still working now and we rarely have more than 2-3K in cash (most of the time we have only 1K or so). We have ~900K in stocks and ~100K in house's equity.

When we retire in 12 months or so, I plan to have only a few months of cash. We plan to spend in the neighborhood of 20K a year in the first 1-2 years and I expect it to grow at least 20% each year.

 

[jIMOh]

Let's say a guy has a 2M portfolio, and he wants to safely suck 70K per year out of it for retirement. Let's say the portfolio looks like this:

10% real estate
10% cash
80% stocks (non dividend paying for the most part)

Is that enough cash to keep around to fund 70K in annual living expenses? If not, how much cash should you keep in the portfolio for the 70K per year living expenses, or do most of you sell stock to fund expenses when you feel the price is good, or what

It would be REAL close.

1.75 M could possibly generate 4% dividends (70k) per year.

I would put the 1.75 M in a portfolio of something which resembled:

1/3 money market (yielding 5%??)
1/3 REIT's (should yield >3%)
1/3 dividend paying stocks (should yield 3%)

I would diversify the stock portion into 3 buckets. 50% in blue chip companies which pay a dividend approaching 2%. PG, JJ, C types. 25% into small cap stocks which pay out a dividend. These should yield closer to 3%. These should also grow in value more than other equity buckets. 25% should be in utilities. Because you have REITs as a different bucket, I did not include them here (2/3 or money split 40-20-20-20 might be a good alternative).

As money market yield's decline, shift more into the equities (find a method to rebalance based on yield).