Another safe withdrawal rate question

[jIMOh]

If I understand your comment, that strategy puts about 28% of assets in cash and 40% of 72% (the remainder in your "allocation") or 29% of total assets in bonds. That puts you at 57% in fixed income overall. Sure that's what you want? Its certainly a hedge but you will be allocated pretty heavily in fixed income for an early retiree.

Perhaps you'd be better off just carving out a total of 8-10 yrs expenses in cash and the rest in stocks. Gives you a lot of waiting power and still keeps you well in the game.

The cash is "outside the allocation" in some respects... I would not be less than 50% equity for sure.

The cash is not part of allocation because if market dropped, I would not take cash out of CDs and put it into market.

For example- 70% equity with 10% bond position and 20% "cash" allocation.

Assume portfolio of $1.4 M ($1 M equity, $142k bond, $285k cash). If market crashed (10%) such that the equity position was only $900k (67%), I would not liquidate 100k of cash to rebalance this. Therefore the cash is not part of allocation. It is a risk hedge, part of my net worth, but not used for allocation purposes in the truest of sense.

 

[Nords]

The cash is "outside the allocation" in some respects... I would not be less than 50% equity for sure.

Having had this conversation before, if you're going to persuade yourself that the cash is "outside the allocation" then it's necessary to build an ER portfolio of a size giving you the survival rate you want and then to pile up enough additional cash to give you the seven years of padding.

Or you could adopt a flexible spending system like ESRBob's 95% rule. Or an iterative feedback system like Bud Hebeler.

Groucho Marx used to have a portfolio built mostly on Treasuries. When it was remarked that you can't live off Treasuries for an entire retirement, his response was "You can if you have enough of them." Nothing wrong with being so conservative in cash, but it's necessary to have a larger portfolio to limit the end-game erosion of inflation-- and most ERs would rather not delay their ER to accumulate the cash.

Here's the challenge with a conservative asset allocation. You mention 3% inflation, which is a century's annualized data. Inflation for the last 30 years (including the woo-hoo 1970s) has actually annualized closer to 5%. But maybe it'll be different this time!

 

[jIMOh]

Having had this conversation before, if you're going to persuade yourself that the cash is "outside the allocation" then it's necessary to build an ER portfolio of a size giving you the survival rate you want and then to pile up enough additional cash to give you the seven years of padding.

Or you could adopt a flexible spending system like ESRBob's 95% rule. Or an iterative feedback system like Bud Hebeler.

Groucho Marx used to have a portfolio built mostly on Treasuries. When it was remarked that you can't live off Treasuries for an entire retirement, his response was "You can if you have enough of them." Nothing wrong with being so conservative in cash, but it's necessary to have a larger portfolio to limit the end-game erosion of inflation-- and most ERs would rather not delay their ER to accumulate the cash.

Here's the challenge with a conservative asset allocation. You mention 3% inflation, which is a century's annualized data. Inflation for the last 30 years (including the woo-hoo 1970s) has actually annualized closer to 5%. But maybe it'll be different this time!

Because I am 20+ years out (maybe even 30+) I have a plan... nothing is in stone. I know the 7 years cash requires me additional savings beyond normal ER. I am researching how to build this up "efficiently" without holding back the returns of the real allocation.

The thoughts which I have:

don't pay down mortgage and invest the difference (this gives me 3X current income if I get a 9% return)
downsize house (this give me between 2-3X income)
I already have 4 months expenses in cash now... so I need a way to expand this to 12 months over next 20 years...
I could probably stop 10% to 401k a few years short of ER to supplement this.
I also have a side business which nets around 3-9k per year in cash, so I can find ways outside of normal budgeting to do this as well.