Length of cash buffer for ER's

[Telly]

Going through some newspapers before I recycled them, I found some info of interest in a Scott Burns column.

According to Ibbotson, since 1926 the equity market has:

1 Year period - 71% of single-year periods had positive equity returns.

5 Year Period - 86.8% of five-year periods (66 of 76 ) had positive returns.

10 Year Period - 97% of ten-year periods (69 of 71) had positive returns.

Which gives some numbers to think about for a cash/CD/MM/bond buffer to avoid selling off equities in a down market.

 

[audreyh1]

Search on the term "buckets" and you'll find lengthy discussions of buffers used in ER to wait out equity downturns.

Here ya go: http://early-retirement.org/forums/index.php?topic=2695.0

Audrey

 

[Telly]

Yeah, but Scott Burns never once mentioned the word "buckets". And as he looked up the info from Ibbotson, I feel reasonably confident that the info is real.

 

[audreyh1]

Huh? I didn't say the info wasn't real.

Audrey

 

[Nords]

Yeah, but Scott Burns never once mentioned the word "buckets".

We keep two years' expenses in cash. After that we sell the best-performing funds...

 

[magellan_nh]

We keep two years' expenses in cash. After that we sell the best-performing funds...

That's about where we are too. It's laddered in CDs paying 5+%. Also, these funds aren't considered as part of our overall asset allocation.

As far as selling assets once the cash runs out, I'm new at this so I don't have any real experience. My current plan is to replenish the cash reserves as part of rebalancing each year. I expect that I'll do some minor market timing and skip replenishing the reserves after a really bad year or two as long as we have enough cash to survive for the year.

In any case, I still have lots to learn on this front...

Jim

 

[mathjak107]

The most conservative would be about 7 years including all the accumulated interest so maybe its 4 or 5 years of your initial cash going in.

another 7 years in bonds ,unlisted reits and income funds


the rest in stock funds....

with 14 years of time until you need to liquidate stocks you got plenty of time and an almost 100% chance you will never sell into a lower market than you started.

see the ray lucia discussion for more ideas and info so we dont re-hash

 

[donheff]

We keep two years' expenses in cash. After that we sell the best-performing funds...

I have about that much. Right now its academic since DW continues to work. But I can't see myself to putting 7 years of cash and 7 years of close to cash in buckets. I may come to regret that but what the hey...

 

[mathjak107]

actually it worked out for us to a 60/40 mix overall .

 

[astromeria]

I can't see myself to putting 7 years of cash and 7 years of close to cash in buckets. I may come to regret that but what the hey...

IIRC donhoff, you have a large and secure Federal pension. Maybe this can replace bucket 1 or even bucket 2--I forget what Ray Lucia said about that since it didn't apply to me.

 

[astromeria]

actually it worked out for us to a 60/40 mix overall .

IIRC mathjak, I have a somewhat smaller stash, and mine worked out to 55/45. Suits my conservative (investment) nature.

 

[Nords]

But I can't see myself to putting 7 years of cash and 7 years of close to cash in buckets. I may come to regret that but what the hey...

What astro said. My federal pension covers the mortgage, groceries, utilities, and a bit more.

Both our pensions are pretty secure so you can probably carry a little less cash. If your pension covers more than half of your current spending then you'll have plenty of time to ride out a down market.

 

[Mysto]

I'm the Mr. Conservative of this group I guess. I am using more of a Swenson two bucket approach.

I have current 1 year cash with 10 years of laddered CDs with about a 6% mean interest rate (so 11 years of self annuity) and the rest slowly going into a 60/40 mix of diversified Vanguard with a Value/ Small Cap tilt. I'm about 60 invested at this point.

Based on runs in Firecalc there is an advantage to letting the portfolio run for 11 years with only rebalancing.

 

[youbet]

Fully retired. Allocation roughly 60-35-5. No buckets. No hidden "outside of the portfolio" stashes. Take strictly a "one portfolio view." Could avoid any need to sell equities during a downturn for a minumum of eight years by utilizing interest from fixed positions (primarily AAA), maturing bonds/CD's and cash reserves.

 

[magellan_nh]

... and the rest slowly going into a 60/40 mix of diversified Vanguard with a Value/ Small Cap tilt. I'm about 60 invested at this point.

You may be interested in the recent FPA journal article titled "Mathematical Illusion: Why Dollar Cost Averaging Does not Work" at http://www.fpanet.org/journal/articles/2006_Issues/jfp1006-art8.cfm

It's a provocative article that tries to upset the conventional wisdom on the value of DCA. Personally, he got my attention and I'm interested, but I'll let the debate play out a bit more before forming an opinion on this one.

Based on runs in Firecalc there is an advantage to letting the portfolio run for 11 years with only rebalancing.

Although the future is unknowable, I think there's a pretty strong body of evidence that suggests waiting 11 years to rebalance may be leaving some money on the table.

Of course, maybe in a year or two there will be a new paper titled "Mathematical Illusion: Why rebalancing does not work"

Jim

 

[Mysto]

Hi Magellan

I'm aware of the DCA vs. Lumps Sum argument. Having said that I find it hard to invest all of my funds during record highs in many areas. The math says I should, my gut just won't let me commit 100% plus some funds are still being xfered from other sources and I'll invest as that finishes. Remember the arguments against DCA state that only if you invested right before a major market turndown (well I am good at getting in just before a major market turndown) I don't ER until next year (I may still do some part time w**k if it is avail)

As far as rebalancing - poor explanation on my part. The "only" meant rebalancing was the only thing I had to do to the funds - no withdrawals. I expect to rebalance every year or so. (I think it was Bernstein that suggested some advantage to waiting a bit longer than a year)

Thanks for the feedback. This group has been a strong influence on my decisions over the last year. Although my plan is a little different from what many here are doing - I learned how better to reseach my options and have tried to build a plan that fits my goals - risk tolerance - and financial/tax/personal situation. And in the final analysis I think that what it is about - the plan not only must work - but work for the individual.

 

[Nords]

Having said that I find it hard to invest all of my funds during record highs in many areas. The math says I should, my gut just won't let me commit 100% plus some funds are still being xfered from other sources and I'll invest as that finishes. Remember the arguments against DCA state that only if you invested right before a major market turndown (well I am good at getting in just before a major market turndown).

You have to decide whether you're an asset allocator or a dirty market timer. One or the other-- not both.

Sea story time.

At the end of April we sold Tweedy, Browne Global Value-- bloated, high expense ratio, seemingly at the top of the market-- to purchase an international ETF (PID). When Jim Cramer the market discovered that we'd sold, Tweedy immediately zoomed from $29 to $29.50. When the market discovered that we were getting ready to buy PID with the proceeds, PID also zoomed from $16.50 to over $17.

Because PID doesn't have a lot of daily share volume and we were doing it among four different IRA accounts, every trading day or so I'd buy a tiny fraction of its daily volume. We were steadily buying it for most of May as the price dropped from $17 to below $16.50. So clearly our tactic of buying a little every day wasn't driving up the share price!

By the middle of June Tweedy was at $26.57, 8% below our selling price. We were brilliant! Unfortunately by the end of June PID was at $15.67, also 8% below most of our purchases.

Last Friday, only three months later, all of that was irrelevant. Tweedy closed at $29.51 and PID closed at $17.22, both a couple percent higher than our sale/purchase prices. What's really important is that we exchanged a 1.38% expense ratio for a 0.6% expense ratio, which is paying off quite well this year and every year afterward. We've already made back our transaction costs and, with a low-cost asset allocation plan in place, we don't have to worry what those bozos the market is going to do next.

You could do a lot worse than plunking everything into Wellington & Wellesley. You might kick yourself for a few weeks after you make the purchase, but a few months from now it won't be relevant.

If it's just going to bug the heck out of you then do it over a few months-- but just do it.

 

[Mysto]

Nords,

I'll only be a dirty market timer until I'm completly invested and then I'll be an asset allocator (in other words until I need glasses )

I will continue to increase my exposure and should be fully invested within the next 6 months. Thanks

Mysto

 

[haha]

Based on runs in Firecalc there is an advantage to letting the portfolio run for 11 years with only rebalancing.

Think that might have anything to do with 1982-2000?

Nah, impossible.

 

[tednvon]

Hello,
I guess I am doing the lazy person's cash buffer plan right now...

I have about 75% stocks and 25% cash. On phased retirement for 3 more years at 1/2 time so drawing some cash out of post tax account. The 25% represents about 5 years of annual budgeted money. By Lazy, I mean that the post tax money not in 403B is at Emigrant Direct at 5.25. It is about 2 years of cash. I could have done CD's but looked at 5.25 vs. 5.50 and just was too close to start moving money and buying CD's...The non stock money in 403B is all in Money Market which is doing about 4.5 these days, so again I am too lazy to try and move that money somewhere with less risk and maybe a percent or two difference. I am happy at this time with these two returns just doing MM and Emigrant...other opinions welcome as this board has been the BEST!!!

Ted

 

[education]

Hi Ted--

Professsor here. You struck a chord. You talk about 2 years cash and I'm curious what you think your yearly take will be. I'm looking at 3 years before SS kicks in so I'm kicking in about $30,000 a year for living expenses (with my lifestyle it is more than ample) before I draw SS or on my retirement portfolio. Am I too low or too high-- in your opinion?

 

[deserat]

Wow - my cash buffer(cket) is larger than most of what you all have and I'm not retired yet! Guess I'm fairly conservative....

 

[haha]

I have a 30 year cash buffer, which exceeds my actuarial lifespan. I must be conservative too.

But so much has happened in my life that there isn't much that I am willing to rule out.

Ha

 

[rs0460a]

Also, these funds aren't considered as part of our overall asset allocation.

Take strictly a "one portfolio view."

These seemingly different views (cash as part of the total portfolio/mix; cash not part of the total portfolio/mix) struck a chord with me. Had my Vanguard portfolio review today and the subject came up. I count my cash as part of the total portfolio (currently at 3 years income). Vanguard rep said that they view cash for "direct/immediate-short term income" outside of the portfolio mix. I ran a few tests on M* X-Ray against the two scenarios, and yes it does show that I'm way beyond my 55/45 target mix (closer to 75/25) when I take cash out of the picture.

- Ron

(Note to moderator: If this should be moved to another subject/string, please feel free to do so).

 

[mathjak107]

I dont really count short term cash in my long term portfolio although i do count it in my short term one. I run 3 totaly different models each geared for a specific time frame. eating today is a short term obligation,eating in 20 years is a long term one and i handle my portfolio accordingly.

counting everything together using ray lucias 3 bucket planning im at 40 stocks /60 everything else. pulling out bucket 1 my cash bucket puts me at 60 stocks /40 everything else