Length of cash buffer for ER's

[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]

Originally Posted by magellan

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

Originally Posted by youbet

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

[tednvon]

Hi, to Professor

Right now because I am working 1/2 at the U of Iowa I am pulling out about 28Kcash/year out of post tax account that is at about 85K to supplement salary for two more years until I retire at age 63. At 63 I will start Soc Sec and spouse who is fully retired will start SS in 2008 at age 62. The UofI will let me purchase my Insurance for 2 years until MC at 65. This will cost a bit, but not enough to keep us from retiring...I figure it about a housepayment that we no longer make for a couple of years...
When I ran Firecalc, ( and if you haven't done this, do it now!!)I always come out 100% looking at 65K a year, combination of SS for both of us and rest from rertirement funds. It is half of our previous gross but with no debts, we honestly cannot spend 4k a month no matter how hard we try, so future looks good and we are having a ball.
I swear by the 4% safe withdrawal rate and with SS and 5 years always in cash and the rest in a broad Index Fund (broader than S&P) and some scattered in International Index and Real Estate I feel very comfortable not tweaking much and just moving money from Index to Money Market for the last of the 5 year cushion once a year.

If Money Market goes down below 3-4%, I might think more about Bond Funds at CREF but right now Money Market at 4-5% is fine for my plan...As I have said before, I really know very little about the ins and outs of bonds, TIPs, stocks. I have stayed with all Index Mutual Funds as discussed on this board...I do plan to move all my TIAA-Cref to Vanguard at full retirement unless they bring thier fees back down to compete with Vanguard. We have already moved spouses to Vanguard because their total stock index fund is about .19 vs. now .43 at CREF...that is good chunk of change over 20 years with a million plus dollars...

Hope this helps...it really is like shopping for groceries...stay with basics and if Campbell's Soup is 1.00/can in Isle 1 and .89/can in Isle 3, why in the world would you buy the the soup in Isle 1. I meet so many people that have $$$ with Merrill Lynch, TD Waterhouse, Baird and others who are being sold on the need for 80% post retirement income and paying up to 2% for the insights!!!

Love this board...Ted

[kcowan]

Originally Posted by tednvon

...I meet so many people that have $$$ with Merrill Lynch, TD Waterhouse, Baird and others who are being sold on the need for 80% post retirement income and paying up to 2% for the insights!!!

I agree. Most of my friends use the 2% solution and are not interested in discussing alternatives. Meanwhile we can travel more and live better. But unless they are receptive, you might as well be discussing the technology for space travel.

[Mr._johngalt]

Originally Posted by kcowan

I agree. Most of my friends use the 2% solution and are not interested in discussing alternatives. Meanwhile we can travel more and live better. But unless they are receptive, you might as well be discussing the technology for space travel.

My experience exactly.

JG

[Rich_in_Tampa]

My take on this is that there are really two philosophies toward "short term" cash buffer. One is to have enough to get you through emergencies or other setbacks -- financial or otherwise -- without having to sell shares during a dip in the market. Typically, I hear 3 months to 3 years recommended.

A second approach is designed to get you through more profound and long-lasting stock market calamaties. Historically, the market rarely if ever stays down in value more than about 7 years, and that has been infrequent. To me, the latter represents a more severe threat to my financial stability in retirement.

I choose to build a 7 year buffer, but it will be only partially in cash (maybe 2-3 years) with the remainder in fixed income investments perhaps no longer than 5 years (e.g. intermediate bond funds). This keeps the buffer earnings up higher than cash or MMF, at the cost of slightly more volatility though even that can be questioned.

[Nords]

Originally Posted by Rich_in_Tampa

I choose to build a 7 year buffer, but it will be only partially in cash (maybe 2-3 years) with the remainder in fixed income investments perhaps no longer than 5 years (e.g. intermediate bond funds). This keeps the buffer earnings up higher than cash or MMF, at the cost of slightly more volatility though even that can be questioned.

Sounds like Frank Armstrong.

[unclemick]

After the 12/30 payable date -- sometime in January take 5% of my Target Retirement 2015 balance and deposit in Prime MM and spend as required durung the year.

Try and spend it all during the year.

heh heh heh heh heh heh

[Rich_in_Tampa]

Originally Posted by Nords

Sounds like Frank Armstrong.

Yep. Or, dare I say it, bucket 1.

[d]

Or, dare I say it, bucket 1

i keep waiting for someone to say "buck-off" ...

[Rich_in_Tampa]

Originally Posted by unclemick2

After the 12/30 payable date -- sometime in January take 5% of my Target Retirement 2015 balance and deposit in Prime MM and spend as required durung the year.

Sounds pretty wise to me.

Are you able to keep the "percent of assets" thing going even in a downturn of a few years duration? I really like percent-of-assets SWR since it assures infinite solvency, but not I find it hard to figure just how happy we would be giving ourselves a paycut year after year in a downturn.

I guess if you have substantially more than you "need," it's a non-issue.

[audreyh1]

That's where Bob Clyatt's 95% rule comes in handy. It's also nice and simple. I know somewhere there was a post about how this scheme improved survivability.

Personally, I think I'd be more comfortable pulling back after a bad year or two. It's human nature.

I've never actually been a fan of the SWR with inflation adjustment every year - I much prefer fixed percent of assets. I just don't have a psychological "need" for some fixed inflation adjusted "salary". This means you have to deal with "fat" years and "lean" years, but in my mind that's just a matter of not spending all the money you withdraw in a fat year, and setting some aside for a lean year. This is where having a separate cash account covering just a few years living expenses comes in handy.

I like this idea too, because after a really hot year in the stock market, chances for a correction seem higher, so taking a chunk off the table seems prudent. You don't have to spend it all in one year.

FWIW - our living expenses have been all over the map, but generally trending down over time. We spent the most money by far during the first two years of our retirement.

But drawing a certain % out of your portfolio really doesn't say WHERE it has to come from - i.e. which asset class you have to sell to meet the withdrawal. It's natural in an asset allocated portfolio to pull the withdrawal from your winners - thus avoiding selling equities after a sharp down year or two.

Again, I guess the trick is within your asset allocation to have a large enough % allocated to low-risk bonds/cash to cover several years.

Audrey

[youbet]

Originally Posted by audreyh1

This is where having a separate cash account covering just a few years living expenses comes in handy.

I agree totally that having cash or cash equivalents to cover a few years of expenses in retirement is the right thing to do. I just can't bring myself to separate that money from the balance of my portfolio. So, I have roughly a year in MM and about a year in a CD and a couple of years in an ultra-short bond fund. But, not separate from my portfolio....... mixed right in there, on the same spread sheet even.

What do you mean by "separate?"

[haha]

Originally Posted by youbet

I agree totally that having cash or cash equivalents to cover a few years of expenses in retirement is the right thing to do. I just can't bring myself to separate that money from the balance of my portfolio.

This whole discussion baffles me. Money is money- if it is exposed to minimal price risk and it is quickly available, how couild it matter what one names it?

More seeing how many angels could fit on the head of a pin.

From your post, it seems that this is similar to how you see it.


Ha

[audreyh1]

Originally Posted by youbet

What do you mean by "separate?"

My retirement portfolio is in a brokerage account. My 2 to 3 years of cash is in a different mutual fund account and is pretty much all in cash reserves. Every month I have money sent to my bank checking from this cash mutual fund account to cover my monthly expenses.

When I do the computation to rebalance my retirement portfolio, I only use the numbers from the brokerage account. This is perhaps the most important reason for the separation.The money in the cash account never influences rebalancing computations. I also only use the value of the brokerage account to compute my SWR.

This is just what has worked for me for several years. Yes, theoretically, I could compute a higher SWR if I included the short term cash account, but I don't. This is slightly more conservative.

Audrey

[youbet]

Ha........ Yep, you and I seem to be in the same camp in this regard.

Audrey........ I can't see any issue with the way you are handling things. And, who knows, I'm only a few months into this RE thing. Perhaps I'll change my outlook as time goes by.

For now, I'm most comfortable looking at all my financial assets on one piece of paper regardless of what brokerage, bank, credit union or piggy bank they're in. I do keep real assets off the table, and that's another fiesty subject to discuss and was done so at length a few months back.

My approach to sourcing month-to-month spending money isn't as structured as yours, and right now doesn't need to be. But, like you, I give myself wiggle room with cash, cash equivalents and short term fixed assets to cover a substantial timeframe should there be a lengthly period where I have no equities I'd consider trimming.

I calculate SWR using my entire financial asset base. My actual WR is below the SWR Firecalc spits out, so that's another source of wiggle room.

Just in case DW reads this.......... No Honey, I don't include your stash of quilting supply money you have hidden at the bottom of the cedar cabinet where you store fabric. Uh.....I don't know.....just happened to look in there one day.....