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The buffer fund and accounting
Old 05-29-2014, 07:24 AM   #1
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The buffer fund and accounting

So we've got the amount firecalc says gives us good enough odds for portfolio survival with our monthly budget. Said budget already has about $500/month extra built in that we'll throw into savings account every month until needed for unexpected bigger expenses.

Outside of that we're currently in the process of accumulating an additional buffer outside of the safe withdrawal calculations that we're calling the vacation fund, should end up seeded with about 120k-200k depending on how market does and when we stop working. Figure can also be used to smooth the ride if bad market downturn in crucial early years of withdraw phase, maybe pull part of our annual expenses from it to make happy sleep at night.

What I'd like advice on is how to account for it. Our portfolio will have both taxable and tax deferred, split up for tax efficiency with intl stock fund and stock funds on taxable side, stock funds and bond funds on tax deferred.

I've got four options in my head so far:

1. Put it in a mutual fund in taxable side, something like Wellesley. So when need/want to sell shares sell 'em and I'm done, doesn't impact rest of asset allocation.

2. Put in mutual fund on tax deferred side for tax efficiency. When need/want sell shares sell from stock fund on taxable then do musical funds in deferred side with transfers to make wash.

3. Split into two funds for a poor man's Wellesley, with a stock index fund on taxable side and bond index fund in deferred.

4. These are all accounting silly gimmicks you dumbass, just keep entire portfolio locked into asset allocation and account for the amount in the buffer virtually.

Any advice is appreciated, and as always thanks in advance for your wisdom.
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Old 05-29-2014, 07:26 AM   #2
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Also = having similar dilema on car fund, planning on starting with newish car then throwing $200/month into a pot to buy another every 8 years or so. Not sure if should make a separate distinct conservative mutual fund or just keep it virtual as part of entire asset allocation.
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Old 05-29-2014, 07:31 AM   #3
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4. These are all accounting silly gimmicks you dumbass, just keep entire portfolio locked into asset allocation and account for the amount in the buffer virtually.
This would be my choice.
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Old 05-29-2014, 08:10 AM   #4
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If you use an application like Quicken, you can set up multiple accounts even though the funds are merged in reality. It's pretty easy to maintain these, and really helps with the mental accounting.

That said, we so have a separate physical account for our short term funds - different from the retirement fund which is in our brokerage account. It was partly historical, as we started with a simple joint Fidelity cash reserves/mutual fund account and later opened a brokerage account. So the Fidelity mutual fund account eventually became our short-term funds account.

Having the retirement fund accounted separately is useful for rebalancing and calculating annual withdrawals as well as tracking portfolio performance.

I have to admit that our short term funds are now split over 3 physical accounts: checking which just covers one months expenses; an FDIC insured high yield account that Fidelity does not offer; and the Fidelity mutual fund account where the bulk of the money is in short-term bond funds. So to really see where our short term funds are I run a Quicken report which also subtracts out any credit card balances. And I still have bits of our short-term funds earmarked for certain purposes.

In the past I have pigeonholed money with different in "virtual accounts" in Quicken. For example, when we sold our house to RV full time, I set up a "house fund" and accounted for and invested the money separately so that we we did eventually buy a house again, it would apply to the new house. That worked well.
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Old 05-29-2014, 08:41 AM   #5
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No right answer, just choose what works for you. For me I don't count cash savings accounts used for short term spending targets in my AA for retirement accounts. I also have a long term account with money invested for LTC that I don't count in my AA for retirement accounts.
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Old 05-29-2014, 08:53 AM   #6
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No right answer, just choose what works for you. For me I don't count cash savings accounts used for short term spending targets in my AA for retirement accounts. I also have a long term account with money invested for LTC that I don't count in my AA for retirement accounts.
Yep, you can do whatever you like with this.

I don't have any separate accounts choosing to lump everything in my AA and account for all spending - including major expenditures like the new roof I'm about to purchase - as an expense item hitting this year's budget. I do it this way because I want to track my annual spending (withdrawal rate) as accurately as possible. This method is 'lumpy' and can have big swings from year to year, but it is what it is.
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Old 05-29-2014, 09:58 AM   #7
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Although I wouldn't call you names, I'd also opt for #4. But, do what makes you comfortable.

I have also built in a travel buffer into my numbers, but I just added it as an expected expense item in retirement each year. I started at $25K a year for the first 10 years, and lower it after that. I seriously doubt we will spend that much, but, like you, we love to travel and I consider it additional buffer in the projections if things go south.
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Old 05-29-2014, 11:11 AM   #8
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I agree with Alan and REWahoo - - do what you feel most comfortable doing with that money.

Like Audreyh1, I do not consider my short term funds as part of my portfolio. I don't have a travel fund, but I have started a "house fund", setting aside cash outside my retirement portfolio for possibly buying a more expensive house in cash sometime in the next few years.
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Old 05-29-2014, 11:43 AM   #9
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I prefer to keep things simple. No separate buckets, no emergency fund.
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Old 05-29-2014, 02:43 PM   #10
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Thanks all, all in one pile is what I was leaning towards.
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Old 05-29-2014, 03:11 PM   #11
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We've included it in our allocation and haven't worried about segregating it. Given the size of the fund you are building I assume this would be a yearly expense for you. We're planning quite a bit of travel to and are assuming it will happen each year. We've just added it to our expenses.

A way we thought about it...what if the market were to turn for a few years after the fund was in place? Would we leave this alone because it was earmarked for vacations? We wouldn't necessarily do that so leaving it all in one pot made sense for us.

YMMV
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Old 05-29-2014, 03:36 PM   #12
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120-200K seems like one hell of a vacation.

I'd either stick with your allocation, or set up a CD ladder. Admittedly 2-3% CDs are pretty pathetic but if the purpose is buffer against market events, I don't think Wellesley is the answer.

There have been periods of time when both stocks and bonds performed badly..
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Old 05-29-2014, 05:11 PM   #13
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I do not include my "bucket list vacations" and my "LTC contingency" in my portfolio when I calculate WR%s and when entering numbers into retirement calculators. Therefore, like OP, I consider them to be contingencies.

My desired AA is 50/40/10 with the 10 being in short term bonds / short term CDs (generally 3 - 5 year duration). My contingencies are about equal to my 10% short term number so when I enter my AA into retirement calculators I reduce the short term number, and my AA looks more like 56 / 44 / 0.

Oddly my results in FIRECalc with a 50/40/10 AA are better than with a 56/40/10 AA (I have a big 3k more at the end of 35 years with the former).
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Old 05-29-2014, 06:17 PM   #14
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120-200K seems like one hell of a vacation.
We like traveling a lot, would probably be a couple international trips per year until (or if) we shot our proverbial wads.
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Old 05-31-2014, 08:14 AM   #15
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#4 for sure. This conforms to reality -- the fact is that you have one giant pot of money, known as "net worth". Just make sure you have a reasonable asset allocation, and adequate liquidity to handle short-term lumpiness of expenses.
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Old 05-31-2014, 08:36 AM   #16
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Whatever would be the easiest....which seems to be #4.
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