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What to include in "cash/fixed income"
Old 06-27-2007, 06:15 PM   #1
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What to include in "cash/fixed income"

I am coming up on my rebalance date soon -- once a year whether I need to or not. I do have some questions.

I have been way over in equities for almost forever. I am currently 90+% in my true, personal money. I am saying that now that I am on the short path to retirement and pretty much FI I am still anguising to keep a higher amount in equities. That pretty much sums up what I am evaluating.

My intent is to go to 40% fixed/cash but I'm wonder how the forum would respond to including these "exceptions" I'm considering counting in my "cash" pile.
  • I have a modest fixed/non-COLA pension that I could "annuitize" and consider the annuity value as part of my fixed. I'm not considering SS since it's inflation adjusted and "that much less" I need for my expenses.
  • A modest, but not insignificant, inheritance is expected to DW when my in-laws depart this world. The amount I'm considering is the net of an extremely optimistic outlook on their continued existence.
  • My father's unbelieveably stupid variable annuity will "pay off" and that is invested rather conservatively. I "know" what I'll get and how it's currently invested.
Well? Comments?
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Old 06-27-2007, 07:25 PM   #2
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I would not count any of these three as assets of mine.

An "annuitized" pension and SS is not really the same as cash.

I never consider an possible inheritance as mine until it is in my bank account and the check has cleared the bank. Too many things can happen to upset that apple cart (mostly bad).

If I ever get some kind in inheritance, I count it as "found money" and spend/invest it depending on my needs at the time that I receive it.
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Old 06-27-2007, 08:08 PM   #3
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Cash is usually considered to be what you can get your hands on with very little or no penalty for selling the instrument.

Of course you know what you are trying to accomplish, so you could define it any other way that you would like.

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Old 06-27-2007, 08:36 PM   #4
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Cash is usually considered to be what you can get your hands on with very little or no penalty for selling the instrument.
Yes, it depends on what role you are looking for "cash and fixed income" to play. If you're looking for liquidity to cover predicitable upcoming purchase, emergnecy fund, etc., then clearly the value of your pension doesn't apply. But if you're talking about the value of cash or fixed income for providing stability to help ride out market bumps during withdrawal without selling depreciated equities, and if you are confident about the security of your pension, then I'm with the camp that includes pension value in overall portfolio mix so that you can be more agressive with your remaining investable assets. As you mention being on the short path to retirement, I suspect you're thinking along those lines. If your pension can be counted on to provide a sizable portion of your retirement expense needs, clearly then you are not as exposed to short term down market risk during withdrawal as you would be if all of your living expenses had to be drawn from your invested assets. I think that counts for something in your asset mix.

Not sure I'd count inheritence until it was in my accounts, however. Or at least until seeing the death certificate and the will.
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Old 06-27-2007, 09:11 PM   #5
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2B,

I calculate my asset allocation two ways. Ignoring my pension, I am 78% in equities, which many here consider too high for someone FIRE'd. However, if I include the annuity value of my pension as fixed income in the calculation then I am only 39% in equities. Looked at that way, I am comfortable with my allocation.

In considering my need for cash to fund living expenses I do not treat my pension as a cash or fixed income equivalent. I keep 5 years worth of living expenses (what I need to live on over and above my pension income) in a money market fund.

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Old 06-28-2007, 03:56 AM   #6
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the problem in counting a pension is suppose stocks fell 50%. you couldnt rebalance most likely because you dont actually have the cash, only the gradual income stream.
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Old 06-28-2007, 10:11 AM   #7
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Some of us have held higher equity percentages than is typically recommended because we have substantial COLAd pensions that reduce our risk. But the real question is how much income do you need/want from your portfolio and how much volatility can you tolerate. It doesn't really matter why you want a certain income level from the portfolio, what matters is whether you would be prepared to scale back in a downturn. If the answer is yes, then you can go heavily to equities and accept the volatility that brings. If the answer is no, you should aim for a more conservative mix and that means real fixed income in your real portfolio.
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Old 06-28-2007, 11:17 AM   #8
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Along the lines of what sparkyTWD said, I would count the pension as part of your bond portfolio for AA purposes. Minor issues for you are the fact that it is non-COLA'd which will affect your AA slightly every year, and what multiple to assign to it -- I would consider prevailing bond rates for credit risks similar to your pension. If your pension is from a publicly traded company, you might consider the bond rate on what they're paying now on their bonds; if it's a government pension you could use long term Treasury rates.

Like others, I wouldn't count any inheritance or your father's VA payoff until the check was in the bank. As long as your parents and in-laws are alive they can change beneficiaries or write you out of the will, or any number of other things could happen.

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Old 06-28-2007, 05:41 PM   #9
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Like others, I wouldn't count any inheritance or your father's VA payoff until the check was in the bank. As long as your parents and in-laws are alive they can change beneficiaries or write you out of the will, or any number of other things could happen.

2Cor521
Thanks for all the responses.

The inheritances are well defined and nothing can be changed short of a legal judgement which isn't very likely. My father's dead so his VA is to be split 5 ways in January of 2009. The mutual funds are set until then so it's just a question of time. I'm pretty sure I'll count that as "mine" for AA purposes

My in-laws are both no longer capable of making their own decisions. My MIL has dementia and is in a nursing facility. My FIL has Alzheimers' and is in assisted living and not too far from the Memory Care Unit. Neither will be changing their wills. My DW has the POA and their money is totally under her control.

The "burn rate" of their savings is minimal. My MIL is not too much longer for this world. Once she passes, my FIL's pension and SS will cover his costs without any savings being used. It's just too tempting to use this expected inheritance to cover a bit of my fixed/cash since DW is keeping most in that area.

I'm looking at an effective 40% in cash and fixed. All of this together would still have me at close to 30% of "my" money. I'm just an equities junky at heart but I know I need to become more conservative.
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Old 06-29-2007, 11:19 AM   #10
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Cash is usually considered to be what you can get your hands on with very little or no penalty for selling the instrument.

Of course you know what you are trying to accomplish, so you could define it any other way that you would like.

Ha
So you consider Roth IRA and stock holdings to be cash?
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Old 06-29-2007, 11:28 AM   #11
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This doesn't exactly answer the question, but in a similar vein:

I simply plugged our numbers into Advanced Firecalc and looked at the results, then started inputting different allocation percentages and different "success" precentages. The results helped me pick an allocation balance that's right for us.

We also keep about one year's of money (NOT counting the fixed pension) in a CU savings account with a decent rate.
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Old 06-29-2007, 11:31 AM   #12
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So you consider Roth IRA and stock holdings to be cash?
They both carry a penalty known as paying CG tax.
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Old 06-29-2007, 11:54 AM   #13
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They both carry a penalty known as paying CG tax.
Stock, yes, but Roth IRA?

Actually, this is quite a serious subject with me as I have told my husband that if he were ever faced with needing emergency money to use the taxable first, Roth second and stocks third. In actual fact there is even a slight penality with the taxable CDs before full maturity.
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