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How much cash to keep??
Old 06-19-2007, 11:14 AM   #1
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How much cash to keep??

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
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Old 06-19-2007, 11:28 AM   #2
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Quote:
Originally Posted by cardude View Post
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
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Old 06-19-2007, 11:38 AM   #3
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Originally Posted by cardude View Post
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.
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Old 06-19-2007, 02:56 PM   #4
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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.
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Old 06-19-2007, 05:37 PM   #5
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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.
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Old 06-19-2007, 05:56 PM   #6
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Somebody here posted this a while back. Sorry - but I don't know who it was:
Quote:
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??
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Old 06-19-2007, 07:12 PM   #7
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Originally Posted by Alex View Post
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?

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Old 06-19-2007, 07:25 PM   #8
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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 ?
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Old 06-19-2007, 08:19 PM   #9
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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.

Quote:
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
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Old 06-19-2007, 09:15 PM   #10
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Originally Posted by Ed_The_Gypsy View Post
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'?
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Old 06-20-2007, 12:16 AM   #11
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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.
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Old 06-20-2007, 12:47 PM   #12
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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?
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Old 06-20-2007, 01:11 PM   #13
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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
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Old 06-20-2007, 01:14 PM   #14
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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.
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Old 06-20-2007, 01:28 PM   #15
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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 ().
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).
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Old 06-21-2007, 04:56 AM   #16
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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.
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Old 06-21-2007, 11:19 AM   #17
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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.
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Old 06-21-2007, 02:00 PM   #18
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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?
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Old 06-21-2007, 02:19 PM   #19
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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.
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Old 06-21-2007, 03:11 PM   #20
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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.

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