Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Length of cash buffer for ER's
Old 10-09-2006, 10:45 AM   #1
Thinks s/he gets paid by the post
Telly's Avatar
 
Join Date: Feb 2003
Posts: 1,448
Length of cash buffer for ER's

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.
__________________

__________________
-- Telly, the D-I-Y guy --
Two fools dancing on the hands of time
Telly is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Length of cash buffer for ER's
Old 10-09-2006, 10:53 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,471
Re: Length of cash buffer for ER's

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/i...p?topic=2695.0

Audrey
__________________

__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is online now   Reply With Quote
Re: Length of cash buffer for ER's
Old 10-09-2006, 11:14 AM   #3
Thinks s/he gets paid by the post
Telly's Avatar
 
Join Date: Feb 2003
Posts: 1,448
Re: Length of cash buffer for ER's

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.
__________________
-- Telly, the D-I-Y guy --
Two fools dancing on the hands of time
Telly is offline   Reply With Quote
Re: Length of cash buffer for ER's
Old 10-09-2006, 11:29 AM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,471
Re: Length of cash buffer for ER's

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

Audrey
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is online now   Reply With Quote
Re: Length of cash buffer for ER's
Old 10-09-2006, 11:46 AM   #5
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,617
Re: Length of cash buffer for ER's

Quote:
Originally Posted by Telly
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...
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Re: Length of cash buffer for ER's
Old 10-09-2006, 01:13 PM   #6
Recycles dryer sheets
 
Join Date: Sep 2006
Posts: 142
Re: Length of cash buffer for ER's

Quote:
Originally Posted by Nords
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
__________________
magellan_nh is offline   Reply With Quote
Re: Length of cash buffer for ER's
Old 10-09-2006, 06:05 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,412
Re: Length of cash buffer for ER's

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
__________________
mathjak107 is offline   Reply With Quote
Re: Length of cash buffer for ER's
Old 10-09-2006, 06:44 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
donheff's Avatar
 
Join Date: Feb 2006
Location: Washington, DC
Posts: 8,643
Re: Length of cash buffer for ER's

Quote:
Originally Posted by Nords
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...
__________________
Every man is, or hopes to be, an Idler. -- Samuel Johnson
donheff is offline   Reply With Quote
Re: Length of cash buffer for ER's
Old 10-09-2006, 06:45 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,412
Re: Length of cash buffer for ER's

actually it worked out for us to a 60/40 mix overall .
__________________
mathjak107 is offline   Reply With Quote
Re: Length of cash buffer for ER's
Old 10-09-2006, 06:58 PM   #10
Thinks s/he gets paid by the post
 
Join Date: Aug 2005
Posts: 1,375
Re: Length of cash buffer for ER's

Quote:
Originally Posted by donheff
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.
__________________
You can't always get what you want, but if you try sometimes, you might find you get what you need.
astromeria is offline   Reply With Quote
Re: Length of cash buffer for ER's
Old 10-09-2006, 07:00 PM   #11
Thinks s/he gets paid by the post
 
Join Date: Aug 2005
Posts: 1,375
Re: Length of cash buffer for ER's

Quote:
Originally Posted by mathjak107
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.
__________________
You can't always get what you want, but if you try sometimes, you might find you get what you need.
astromeria is offline   Reply With Quote
Re: Length of cash buffer for ER's
Old 10-09-2006, 07:19 PM   #12
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,617
Re: Length of cash buffer for ER's

Quote:
Originally Posted by donheff
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.
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Re: Length of cash buffer for ER's
Old 10-09-2006, 07:43 PM   #13
Recycles dryer sheets
 
Join Date: Mar 2006
Posts: 206
Re: Length of cash buffer for ER's

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.
__________________
I'm trying to find myself.* Have you seen me anywhere today?
Mysto is offline   Reply With Quote
Re: Length of cash buffer for ER's
Old 10-09-2006, 10:48 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Re: Length of cash buffer for ER's

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.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Re: Length of cash buffer for ER's
Old 10-10-2006, 12:25 PM   #15
Recycles dryer sheets
 
Join Date: Sep 2006
Posts: 142
Re: Length of cash buffer for ER's

Quote:
Originally Posted by Mysto

... 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/articl...p1006-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.

Quote:
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
__________________
magellan_nh is offline   Reply With Quote
Re: Length of cash buffer for ER's
Old 10-10-2006, 12:56 PM   #16
Recycles dryer sheets
 
Join Date: Mar 2006
Posts: 206
Re: Length of cash buffer for ER's

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.
__________________
I'm trying to find myself.* Have you seen me anywhere today?
Mysto is offline   Reply With Quote
Re: Length of cash buffer for ER's
Old 10-10-2006, 01:31 PM   #17
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,617
Re: Length of cash buffer for ER's

Quote:
Originally Posted by Mysto
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.
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Re: Length of cash buffer for ER's
Old 10-10-2006, 04:19 PM   #18
Recycles dryer sheets
 
Join Date: Mar 2006
Posts: 206
Re: Length of cash buffer for ER's

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
__________________
I'm trying to find myself.* Have you seen me anywhere today?
Mysto is offline   Reply With Quote
Re: Length of cash buffer for ER's
Old 10-10-2006, 05:11 PM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,385
Re: Length of cash buffer for ER's

Quote:
Originally Posted by Mysto
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.
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Re: Length of cash buffer for ER's
Old 10-11-2006, 09:46 AM   #20
Recycles dryer sheets
 
Join Date: May 2005
Posts: 57
Re: Length of cash buffer for ER's

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
__________________

__________________
Ted
tednvon is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Tax Efficent Cash Investments Culture FIRE and Money 4 05-02-2007 07:09 AM
Cash value taxable? Rich_by_the_Bay FIRE and Money 42 08-22-2006 04:18 PM
Cash Flow (Spendable Income) in Retirement robert FIRE and Money 15 11-21-2005 08:26 AM
Put some spending cash in CDs or in I bonds? Nords FIRE and Money 60 03-15-2005 05:37 AM
Where to put cash? billystu FIRE and Money 1 12-17-2004 06:40 AM

 

 
All times are GMT -6. The time now is 10:46 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.