Managing Near-Term Assets

[chinaco]

I am considering my options for managing asset that will be spent in the next several years.


I intend to use a quasi-buckets of money approach to manage our portfolio in FIRE.

Please comment on how you actually manage the money you intend to spend in the next 2-5 years... and why you handle it the way you do.

For example: Do you use MM and Short-term bond funds? CD ladders? Treasury ladders?

 

[LOL!]

I manage the money without regard to time frame. Everything is one big bucket. It just doesn't matter whether I spend it tomorrow, next week, next year, a few years from now or whatever. After all, what I spend in the next year is going to be less than 4% of the total. The total portfolio has gone up or down by more than 3% on some days, so anything less than about 10% is really just lost in the noise.

Of course, the whole portfolio has bonds and stocks in a ratio that suits my tolerance for risk. There will always be enough bonds to last several years of typical expenses and even many big purchases. Even if I need a big chunk of cash in a week or so, I will have to sell a stock fund to get my hands on it because I believe in the ultimo in tax efficiency: Placing Cash Needs in a Tax-Advantaged Account - Bogleheads

 

[rescueme]

DW/me each have a retirement income cash bucket that is targeted to contain 2-3 years of gross income (includes taxes due). Current holdings for me is equal to 2.6 years of expenses; DW has a balance equal to 2.65 years.

I funded my bucket 12-18 months before retirement, with gains harvested from many years of investments. While DW is still employed, her bucket was funded about two years later, in anticipation of her retirement.

The reason we keep separate cash buckets (rather than plan for liquidation of stock/bond fund holdings) is that the market is always in flux, for both stock/bond holdings (as you well know) and we don't want to get into a position of selling when funds are at a point lower than purchase price (e.g. not paper, but actual loss). As profits (in both equity & bond holdings) are shown throughout the year, a portion of these funds are sold off and added to cash, if needed to maintain our target. If it's a down year (e.g. 2008), we just sit tight (but sleep well).

BTW, we don't adhere to the 4% "rule". Since all our income sources are not yet online (but will be at various times, over the next 7.5 years) and I'm retired (DW may be, tomorrow - it's her choice), our current draw rate is much higher than 4%. However, in 7.5 years that will drop to much less than 4% and projected to not exceed it till our 90's (assuming we're still alive).

Our cash buckets are held in TIRA MM funds at both FIDO and VG.

While we currently hold more cash than most in funds that accrue little interest, it's the idea of reduction/elimination of risk to current income that is most important in retirement, to us. As our additional "income sources" (e.g. 2-SS, 2-small pensions) come "on-line", the actual amount of cash held will be greatly reduced. For instance, since my wife does not currently draw from her bucket and assuming she works till FRA age of 66, her current actual cash will cover 11.58 years of gross income needed rather than the 2.65 years currently, since her SS and pension income will be available at that time, with no further contributions to cash.

Anyway, that's what we do.

 

[Rich_by_the_Bay]

Online savings type accounts, short term federal mutual fund, mm mutual funds.

I could probably sqeeze another .25% with more effort but found that it's just not worth it.

 

[chinaco]

Online savings type accounts, short term federal mutual fund, mm mutual funds.

I could probably sqeeze another .25% with more effort but found that it's just not worth it.

This is one of the decisions I am mulling over.

I agree there is a cost/convenience trade-off.

I was wondering if there was even that much (.25%)...

VG index bond funds (admiral shares) fees are .12%

FIDO's short-term Spartan Bond fund is .1%

 

[Free To Canoe]

Right now I sell something for 6 months to a year of income a few months before I need it. I am also interested in better ways to do this.

Free to canoe

 

[Alan]

I keep several years of "money I need next year" in a combination of cash securities. I have I-bonds, CD's, a short term bond fund (VBISX), MMF's and bank savings accounts. I also don't make too much effort to chase the last 0.25%, although currently the MMF's are empty as the rates are so poor.

I'm hoping (expecting) that I won't be forced to sell stock funds to provide cash.

 

[LOL!]

Rather than keep "money I need next year" in cash securities, I estimate how much my bonds could lose in a year, then I keep "money I need next year" + "how much my bonds could lose in a year" in bonds. That way, I will always have at least "money I need next year" easily available.

And I love to sell stock funds to provide cash even if stocks are down. That way, I get other taxpayers to pay for my losses. I'll just use my bonds to buy replacement shares of my stock funds, so I'm even-steven except for the gain I get my stiffing other taxpayers.

 

[harley]

This is one of the decisions I am mulling over.

I agree there is a cost/convenience trade-off.

I was wondering if there was even that much (.25%)...

VG index bond funds (admiral shares) fees are .12%

FIDO's short-term Spartan Bond fund is .1%

At those levels I would park the cash in a 1 year CD, around 1.4%. If you had to get to the money you could pull it out and pay the penalty and still come out ahead of the bond funds. I just did that with a bunch of cash I've had sitting in the VG MM account. I'm pretty sure I won't need it for a year, and I if I can make 10 times as much it would be foolish not to.

 

[chinaco]

At those levels I would park the cash in a 1 year CD, around 1.4%. If you had to get to the money you could pull it out and pay the penalty and still come out ahead of the bond funds. I just did that with a bunch of cash I've had sitting in the VG MM account. I'm pretty sure I won't need it for a year, and I if I can make 10 times as much it would be foolish not to.

The VG Bond funds... that was the fee, not the yield.

 

[audreyh1]

I am considering my options for managing asset that will be spent in the next several years.

I intend to use a quasi-buckets of money approach to manage our portfolio in FIRE.

Please comment on how you actually manage the money you intend to spend in the next 2-5 years... and why you handle it the way you do.

For example: Do you use MM and Short-term bond funds? CD ladders? Treasury ladders?

I usually keep 1 to 3 years of cash to cover living expenses separate from my investment portfolio. Over a decade now, this has just helped my feel psychologically isolated from market ups and downs, plus I won't be distracted by near-term needs when I rebalance my investment portfolio.

I usually keep this cash in MMs for the convenience, but since early this year I put about half of it in municipal bond funds. During the credit crisis of 2008/2009 I put a large chunk in short-term CDs for the FDIC guarantee.

Audrey

 

[Katsmeow]

For these funds that are kept in money markets or CDs, etc., how do you count them as part of your asset allocation.

That is, lets say my asset allocation is to be 50% equities/50% bonds and I have $1,000,000, and I have decided that spending will be $200,000. (Numbers selected for ease of calculation). Some of that could be immediate -- next month's living expenses. Part of it might not be for a couple of years. Let's assume that all of the $200,000 is going to be kept in money markets, CD, etc. and is not being held in bonds.

In that situation, would you put $400,000 in equities, $400,000 in bonds and $200,000 in cash? Or do you put $500,000 in equities, $300,000 in bonds and $200,000 in cash?

If the latter does it matter if it is the money needed next month or if it is the money that will be needed in 2 years?

 

[Alan]

For these funds that are kept in money markets or CDs, etc., how do you count them as part of your asset allocation.

That is, lets say my asset allocation is to be 50% equities/50% bonds and I have $1,000,000, and I have decided that spending will be $200,000. (Numbers selected for ease of calculation). Some of that could be immediate -- next month's living expenses. Part of it might not be for a couple of years. Let's assume that all of the $200,000 is going to be kept in money markets, CD, etc. and is not being held in bonds.

In that situation, would you put $400,000 in equities, $400,000 in bonds and $200,000 in cash? Or do you put $500,000 in equities, $300,000 in bonds and $200,000 in cash?

If the latter does it matter if it is the money needed next month or if it is the money that will be needed in 2 years?

My current AA is 35/50/15 (Stocks/bonds/cash) Your example is too extreme for me to comment on as it is a 20% withdrawal rate.

 

[Nords]

For the first year of our cash stash we use a money-market account.

For the second year of our cash stash we use a five-year CD ladder, with the idea being that we hopefully won't have to break into it but once or twice a decade. As you can imagine, we re-started this system in 2009...

 

[WilliamG]

We keep a cash/short term bucket of 5-10% of our portfolio. It is used for spending from as well as emergency reserve & big ticket items. We do not try to maintain x years in withdrawal here, but it is enuf for several years if necessary.

We are retired and currently take a monthly "paycheck" from a rollover IRA; from one money market to another. We route all dividends in taxable and IRA to their respective money markets. Quarterly we review this bucket's status and add money only if pushing the 5% basement or feel we have an opportunity from gains elsewhere in the portfolio.

We currently have CDs supplementing the money markets but are thinking about using short term bond fund. Can conceivably eke out a little more return, but mostly like this bucket being liquid.

 

[WhoDaresWins]

I use a combination of a checking account, a short term bond fund and a money market fund.

 

[Katsmeow]

My current AA is 35/50/15 (Stocks/bonds/cash) Your example is too extreme for me to comment on as it is a 20% withdrawal rate.

As I indicated, I wasn't trying to use real numbers. The $200,000 is meant to reflect several years of withdrawals (actually including a non-recurring house related expense). The actual overall portfolio is larger as well but I used $1,000,000 for ease of rounding. That said, the $200,000 was meant to reflect several years of withdrawals not an annual withdrawal rate. So, 4% of $1,000,000 is $40,000 and times 5 years is $200,000. That doesn't seem all that extreme to me...

The question wasn't meant to be about withdrawal rates just whether cash that is set aside to be consumed over a period of a few years is part of the 50/50 allocation or if the cash is considered to be outside the allocation.

 

[Alan]

As I indicated, I wasn't trying to use real numbers. The $200,000 is meant to reflect several years of withdrawals (actually including a non-recurring house related expense). The actual overall portfolio is larger as well but I used $1,000,000 for ease of rounding. That said, the $200,000 was meant to reflect several years of withdrawals not an annual withdrawal rate. So, 4% of $1,000,000 is $40,000 and times 5 years is $200,000. That doesn't seem all that extreme to me...

The question wasn't meant to be about withdrawal rates just whether cash that is set aside to be consumed over a period of a few years is part of the 50/50 allocation or if the cash is considered to be outside the allocation.

In that case I would have it $350k stocks, $500k bonds and $150k cash, moving money from bonds to cash in the near term to meet the target of $200k income over several years.

 

[audreyh1]

For these funds that are kept in money markets or CDs, etc., how do you count them as part of your asset allocation.

That is, lets say my asset allocation is to be 50% equities/50% bonds and I have $1,000,000, and I have decided that spending will be $200,000. (Numbers selected for ease of calculation). Some of that could be immediate -- next month's living expenses. Part of it might not be for a couple of years. Let's assume that all of the $200,000 is going to be kept in money markets, CD, etc. and is not being held in bonds.

In that situation, would you put $400,000 in equities, $400,000 in bonds and $200,000 in cash? Or do you put $500,000 in equities, $300,000 in bonds and $200,000 in cash?

If the latter does it matter if it is the money needed next month or if it is the money that will be needed in 2 years?

I don't count the money in my short-term account as part of my asset allocation. I have cash in my investment portfolio that is part of my asset allocation, and that may be used when I rebalance. I don't like to mix the two.

Audrey

 

[FIREd]

I don't count the money in my short-term account as part of may asset allocation. I have cash in my investment portfolio that is part of my asset allocation, and that may be used when I rebalance. I don't like to mix the two.

Audrey

Same for me. I have CDs in both my short term accounts (earmarked for car replacement for example) and investment portfolio (part of my AA and used for income generation), but I keep them separate for accounting purposes.

My short term reserves are stashed in savings account, short term CDs, and money market funds.

 

[jayc]

I have a 5 year CD ladder with annual maturity amount 4x my expenses in a taxable account. They mature every 3-4 months. This is my money market and I keep nothing short term(APR too low). I pay my expenses on the interest + divy. Because I always try to obtain highest FDIC insured APR and thanks to this forum have found Penfed, I will probably stretch it to 7 years.

 

[sheehs1]

I have 10% in cash in money market funds. Managed to get 1.4% on these funds for 3 months after threatening to take my money out. (call the customer retention department for your bank). When 3 months are up, I will either try to negotiate with the bank again or move it elsewhere still keeping it in cash.

I have 65% in Certificates of Deposit paying between 4% - 5% having placed the funds there back in 2008 and 2009 locking it up for anywhere between 2 to 7 years. Most comes due before 2013 which is the year I ER.
I figure I can pay the penalty if rates EVER go higher than that (which they won't). As they come due...and depending on what is going on then, I will probably route some to tax advantaged vehicles.

I have 25% with a broker. These funds are my tax deferred accounts plus 1 small taxable account. Taxable account is in NOTAX funds and IRA funds are a mix of bond funds and equity funds. Just routed some to equity funds as ....am thinking we might get a pop in the market before November elections (could be wrong). Am up about net 5% YTD with these accounts. Also in these accounts I have 3 equity positions that are pure speculation (BAC,C and LVS) that may pay off in the long run.
These monies are there for the long run...and hopefully won't touch it until I am 70 1/2.
After this crisis, I don't trust the market that much and felt I needed to make sure I could live for 15 plus (starting in 2013) years regardless of what the market does....hence the conservative plays. If inflation becomes a problem, I'll readjust.

 

[dex]

Currently, all my expenses are paid out of investments. Let's ignore that I am 100% in cash. I plan to move the bulk of my money into High yield corp bond funds and that will supply the money for my expenses.

At 62 I will need very little from my investments - if my projections are correct.
Budget
-Pension
-SS
= $ from investments (401k distribution &
taxable accounts)

The cash flow is positive for 2 years (not a large pension or SS but a small expense budget) So, I am anticipating having very little in cash; probably only an emergency fund and I think HYCB MF is fine for that.

 

[harley]

The VG Bond funds... that was the fee, not the yield.

That's a sure sign of how bad things are, when I couldn't tell the difference.

Actually, I think I was thinking about the VG MM yield and wasn't paying enough attention to your post.

 

[ERD50]

I manage the money without regard to time frame. Everything is one big bucket. It just doesn't matter whether I spend it tomorrow, next week, next year, a few years from now or whatever. After all, what I spend in the next year is going to be less than 4% of the total. The total portfolio has gone up or down by more than 3% on some days, so anything less than about 10% is really just lost in the noise.

+1

I think people get way too hung up on the concept of 'short term money. It's all money, people.

It would be different for someone who needed exactly $X in one year, and $X was the only liquidity they had at the time. Yes, then you need to be super-conservative with it. OTOH, are you really planning to spend your last liquid dollar within the next year? Sounds like a bigger problem needs to be solved.

-ERD50