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A review of basic withdrawal stratagies in retirement.
12-13-2015, 10:51 AM
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#1
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Full time employment: Posting here.
Join Date: Mar 2011
Location: Mpls
Posts: 586
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A review of basic withdrawal stratagies in retirement.
I recently had a discussion with a friend about financial advisors. He knows that I don't have one.
A comment: He loves having a FA, because he can just forget about money, and feel like his FA is taking care of everything. He also feels the FA will more than make up for his fees with improved gains in his investments.
I believe he may have mentioned me to his advisor, and he relayed the following comment from him: Anyone can accumulate the necessary money to be FI, it is much more difficult to devise a successful withdrawal strategy in retirement. The obvious conclusion from this statement is that it is too complex for the average person (me), and a FA is needed.
Here is a summary of my planned withdrawal strategies. Possibly too simplistic, but I think I have the basics covered. I would very much appreciate your comments and recommended changes to my plans.
Starting point:
- No pensions.
- No debt.
- Paid off home.
- We tend to have a LBYM lifestyle, but we also plan on doing some extra travel and splurging.
- Planning on FIRE at 58.
Retirement withdrawal strategy:
- Keep 2-3 years worth of planned annual 401K/IRA withdrawals in a money market account. This is the money we will live on, and hopefully it will allow us to ride out a market correction without selling a bunch of funds at low levels.
- Keep the remainder in a 60/40 allocation in low cost Vanguard mutual funds.
- Live on 4% of the invested amount, plus SS. Note: We may go up to 5% during the first four years of retirement, prior to receiving SS.
A comment: A 4% withdrawal rate plus our SS will give us more monthly income than we live on right now factoring in taxes.
- I wasn't planning on an annuity. Possibly something to consider moving forward.
- I might do some 401K to Roth conversions if our income is lower than 72K for that year.
- I'm going to let the market decide if I collect SS at 62. If it is a good year prior to this, I will use those gains to delay SS for another year. If the market is way down, I'm going to take SS at 62. Possibly a silly SS plan, but I kind of like it for some reason.
Thanks in advance for your comments.
JP
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12-13-2015, 02:52 PM
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#2
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Thinks s/he gets paid by the post
Join Date: Mar 2015
Location: philly
Posts: 1,219
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Is he comfortable with his and his financial Advisors decisions? If he is, then I've got no problem.
I have a FA. A few years ago I lost my dh at a young age (he was 53, I was 50). talk about a black hole of grief. I still had 2 kids to raise and it was all I could do to get out of bed in the morning. I had inherited a wad of cash and still had the electricity turned off due to non payment and had it not been for my sister paying my mortgage probably would have lost my house.
Anyhoo to cut to the chase, I found a competent FA who I still like so I am a minority here in that I don't think he's evil out to take all my money.
just one thing I haven't seen mentioned is how long you have until you collect SS and have you taken into account health care cost until medicare
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12-13-2015, 03:03 PM
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#3
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Dryer sheet aficionado
Join Date: Jan 2015
Posts: 40
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Quote:
Originally Posted by bclover
Is he comfortable with his and his financial Advisors decisions? If he is, then I've got no problem.
I have a FA. A few years ago I lost my dh at a young age (he was 53, I was 50). talk about a black hole of grief. I still had 2 kids to raise and it was all I could do to get out of bed in the morning. I had inherited a wad of cash and still had the electricity turned off due to non payment and had it not been for my sister paying my mortgage probably would have lost my house.
Anyhoo to cut to the chase, I found a competent FA who I still like so I am a minority here in that I don't think he's evil out to take all my money.
just one thing I haven't seen mentioned is how long you have until you collect SS and have you taken into account health care cost until medicare
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sorry for your loss...money means little in comparison
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12-13-2015, 03:10 PM
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#4
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Dryer sheet aficionado
Join Date: Jan 2015
Posts: 40
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Quote:
Originally Posted by JP.mpls
I recently had a discussion with a friend about financial advisors. He knows that I don't have one.
A comment: He loves having a FA, because he can just forget about money, and feel like his FA is taking care of everything. He also feels the FA will more than make up for his fees with improved gains in his investments.
I believe he may have mentioned me to his advisor, and he relayed the following comment from him: Anyone can accumulate the necessary money to be FI, it is much more difficult to devise a successful withdrawal strategy in retirement. The obvious conclusion from this statement is that it is too complex for the average person (me), and a FA is needed.
Here is a summary of my planned withdrawal strategies. Possibly too simplistic, but I think I have the basics covered. I would very much appreciate your comments and recommended changes to my plans.
Starting point:
- No pensions.
- No debt.
- Paid off home.
- We tend to have a LBYM lifestyle, but we also plan on doing some extra travel and splurging.
- Planning on FIRE at 58.
Retirement withdrawal strategy:
- Keep 2-3 years worth of planned annual 401K/IRA withdrawals in a money market account. This is the money we will live on, and hopefully it will allow us to ride out a market correction without selling a bunch of funds at low levels.
- Keep the remainder in a 60/40 allocation in low cost Vanguard mutual funds.
- Live on 4% of the invested amount, plus SS. Note: We may go up to 5% during the first four years of retirement, prior to receiving SS.
A comment: A 4% withdrawal rate plus our SS will give us more monthly income than we live on right now factoring in taxes.
- I wasn't planning on an annuity. Possibly something to consider moving forward.
- I might do some 401K to Roth conversions if our income is lower than 72K for that year.
- I'm going to let the market decide if I collect SS at 62. If it is a good year prior to this, I will use those gains to delay SS for another year. If the market is way down, I'm going to take SS at 62. Possibly a silly SS plan, but I kind of like it for some reason.
Thanks in advance for your comments.
JP
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Seems like a good plan but I would hate to take the ss so early and be stuck with such low ss income, but if you have plenty of supplemental income maybe you don't need the bigger ss payouts. But if the market goes way down in will your portfolio be able to pay you enough when you are then stuck with low social security payments?? That would be my concern
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12-13-2015, 06:43 PM
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#5
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2004
Location: SW Ohio
Posts: 14,404
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Your plan looks fine, especially if there's enough "fat" in your spending budget that you could accommodate a dip of 25-40% for a few years (tightening the belt without true suffering) if the market takes a dive. Some comments:
Quote:
Originally Posted by JP.mpls
- Keep 2-3 years worth of planned annual 401K/IRA withdrawals in a money market account. This is the money we will live on, and hopefully it will allow us to ride out a market correction without selling a bunch of funds at low levels.
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Take a look at this article, I think you'll find it interesting:
https://www.kitces.com/blog/managing...ncing-approach
If you plan to rebalance your funds periodically/every year, then it turns out that having a "bucket" of cash/MM funds to spend in down years is almost identical to just including the cash/MM funds in with your portfolio and not thinking of them as a distinct "bad weather" bucket. It makes sense when you think about it, and Kitces does a good job of illustrating it in the article.
Quote:
Originally Posted by JP.mpls
- I'm going to let the market decide if I collect SS at 62. If it is a good year prior to this, I will use those gains to delay SS for another year. If the market is way down, I'm going to take SS at 62.
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With no COLA'd pension or annuity, SS could turn out to be an important foundation for your long-term spending. It's especially important as "longevity insurance" in case you wind up living a long time and your investments don't keep up. So I'd be very reluctant to dip into them early--in fact I'd try to wait until 70 and let those monthly benefits keep increasing at 8% per year. Moreso if there are two of you depending on the single SS earnings record. I can see the attraction of taking SS early if the markets have been down, and maybe it will work out for you (it did for some folks here). Still, I'd think long and hard before weakening one leg of the traditional three-legged retirement income stool--esp since yours only has two legs.
If your investments do poorly, you (or most of us) might eventually find yourself in Otar's "red zone", where buying an annuity makes sense. If so, it would have been far cheaper to have delayed SS, since that's a cheaper way to buy a lifetime inflation-adjusted monthly check than any commercial annuity.
Roth transfer: A good idea for many people, but I come down on the side of doing it only up to a fairly low level, The "was it smart to do that" question will be answerable only in retrospect, and is highly sensitive to the investment returns you get. If the markets do poorly, then maybe you'll be in the same or even a lower tax rates with RMDs, and you'd wish you'd kept the money in your account rather than paying it in taxes. If the market does better than you expected, then you might have to give an extra 10 >of your extra gains< to Uncle Sam--so what, you've still got more money to last you to the finish line than you thought you'd have, it is a great problem. So, I don't plan to go crazy with these Roth conversions.
Avoid shelling your money over to an FA, you've got this under control.
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12-13-2015, 09:18 PM
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#6
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,361
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Good plan. When I retired i just changed from 60/40 AA to 60/34/6 with the 6% cash being a few years of withdrawals given taking dividends in cash.
4-5% WR is a little high but it sounds like you have a lot of flexibility in your spending to dial down if you need to.
Once you get to 62, you have the option to start SS if your portfolio goes below the level you are comfortable with but defer as long as you can especially if there is a large difference in your benefits based on your work records.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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12-13-2015, 09:38 PM
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#7
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Full time employment: Posting here.
Join Date: Nov 2009
Posts: 592
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Quote:
Originally Posted by JP.mpls
I recently had a discussion with a friend about financial advisors. He knows that I don't have one.
A comment: He loves having a FA, because he can just forget about money, and feel like his FA is taking care of everything. He also feels the FA will more than make up for his fees with improved gains in his investments.
I believe he may have mentioned me to his advisor, and he relayed the following comment from him: Anyone can accumulate the necessary money to be FI, it is much more difficult to devise a successful withdrawal strategy in retirement. The obvious conclusion from this statement is that it is too complex for the average person (me), and a FA is needed. We got here by ourselves, and our withdrawal strategy isn't rocket science. Don't see where a FA would do anything, but share in my retirement income.
Here is a summary of my planned withdrawal strategies. Possibly too simplistic, but I think I have the basics covered. I would very much appreciate your comments and recommended changes to my plans.
Starting point:
- No pensions. Same
- No debt.Same
- Paid off home. Same
- We tend to have a LBYM lifestyle, but we also plan on doing some extra travel and splurging. Same
- Planning on FIRE at 58. Retired at 58 - 6 years now
Retirement withdrawal strategy:
- Keep 2-3 years worth of planned annual 401K/IRA withdrawals in a money market account. This is the money we will live on, and hopefully it will allow us to ride out a market correction without selling a bunch of funds at low levels. Keep 2 years of cash (supplemental to expected SS) and only draw dividends off taxable accounts for base retirement income. Cash is also used for large purchases rather than resorting to selling any investments. Have taken CGs to replenish cash - to avoid inopportune selling.
- Keep the remainder in a 60/40 allocation in low cost Vanguard mutual funds. Keep portfolio at 52/48 allocation at Vanguard (52% IRA, 14% Roth, 34% Taxable).
- Live on 4% of the invested amount, plus SS. Note: We may go up to 5% during the first four years of retirement, prior to receiving SS. Took SS @ 62. Portfolio continues growth by that amount annually not taken for income - break even s/b +85 and growth of funds not taken should easily pay out SS difference +85.
A comment: A 4% withdrawal rate plus our SS will give us more monthly income than we live on right now factoring in taxes. Same
- I wasn't planning on an annuity. Possibly something to consider moving forward. Same - w/b SPIA only and only if things looked bad (don't see that happening).
- I might do some 401K to Roth conversions if our income is lower than 72K for that year. Will do Roth conversions +65 due to ACA subsidy now.
- I'm going to let the market decide if I collect SS at 62. If it is a good year prior to this, I will use those gains to delay SS for another year. If the market is way down, I'm going to take SS at 62. Possibly a silly SS plan, but I kind of like it for some reason. SS at 62 per above comments.
Thanks in advance for your comments.
JP
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Your plan is pretty much our reality.
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12-14-2015, 07:08 PM
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#8
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Thinks s/he gets paid by the post
Join Date: Oct 2006
Posts: 4,629
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Quote:
Originally Posted by JP.mpls
- I'm going to let the market decide if I collect SS at 62. If it is a good year prior to this, I will use those gains to delay SS for another year. If the market is way down, I'm going to take SS at 62. Possibly a silly SS plan, but I kind of like it for some reason.
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It seems to me that if you're going to connect investment returns to your SS start date, the relevant returns are in the future, not in the past.
That said, you could say that a "big enough" drop in the market is a predictor of higher than average future returns. An expectation of high future returns is a "pro" in the start-early column.
Of course, you need some rule for determining whether the drop is "big enough" to trigger your early start. That's probably a good thing to think about in advance.
As already mentioned above, retrospective studies don't find much pure financial benefit from holding cash. Some people know that, but still feel it has a psychological benefit. If you are going to have a cash bucket, again it's worthwhile to think about the rule you'll use to draw it down, and the rule you'll use to refill it, in advance.
It may seen that long term care isn't related to withdrawal strategies. But, if you plan to have a substantial fund if/when you need expensive care, that fund is kind of "off the table" for income planning.
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12-14-2015, 07:15 PM
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#9
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2005
Posts: 10,252
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Instead of 2 years of cash (I have no cash), I just use some of that 40% in bond funds and rebalance back to 60/40 (approximately) as needed. That is, I believe cash is a drag on portfolio returns, so I don't have a need for it.
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12-14-2015, 07:51 PM
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#10
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2005
Location: Chicago
Posts: 13,183
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Quote:
Originally Posted by Independent
It may seen that long term care isn't related to withdrawal strategies. But, if you plan to have a substantial fund if/when you need expensive care, that fund is kind of "off the table" for income planning.
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I'm self-insuring for LTC and I really don't see the need to partition off separate funds for that eventuality. I'm running about 56/41/3 right now and have gone through a number of hypothetical cases where one of us goes into long term care and our WR needs to increase for 3 - 4 - 5 years to account for that. I think we'd be OK, even with an unfavorable market.
For example, a five year bond ladder where each year's maturing bonds is enough to cover most of the LTC expense would do it. In the mean time, that bond ladder is part of your FIRE portfolio and the interest part of your income.
Quote:
That said, you could say that a "big enough" drop in the market is a predictor of higher than average future returns. An expectation of high future returns is a "pro" in the start-early column.
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Good point. I started my SS at 62, shortly after the Great Recession bottom (that was a pretty big drop!) and increased my equity allocation with those funds over the past 6 years. It's been sweet. I wouldn't recommend that strategy for folks who are concerned about "longevity insurance" though.
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
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12-14-2015, 07:57 PM
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#11
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,361
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Quote:
Originally Posted by LOL!
Instead of 2 years of cash (I have no cash), I just use some of that 40% in bond funds and rebalance back to 60/40 (approximately) as needed. That is, I believe cash is a drag on portfolio returns, so I don't have a need for it.
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I used to think that way too. I went from 60/40/0 to 60/34/6 a few years ago. My 6% in cash earns 1%. For discussion purposes, let's say that prospectively bonds return 3.5%. So the drag is 15 bps [6% *(3.5%-1.0%)=0.15%]. IMO not a huge price for peace of mind and that 3.5% for bonds is generous.. at 2.5% the drag is only 9 bps.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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12-14-2015, 08:15 PM
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#12
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Recycles dryer sheets
Join Date: Feb 2010
Posts: 293
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After reviewing every SWR study I could find, using historical returns, and every period I could find, I determined that I feel very confident I could live forever on a WR of 3.2%.
That is what I'm using. YMMV.
Sent from my iPhone using Early Retirement Forum
__________________
FIREd at 46, 8/31/11
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12-14-2015, 08:25 PM
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#13
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Thinks s/he gets paid by the post
Join Date: Jul 2007
Posts: 1,085
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Quote:
Originally Posted by pb4uski
4-5% WR is a little high but it sounds like you have a lot of flexibility in your spending to dial down if you need to.
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+1
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12-17-2015, 08:58 PM
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#14
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Thinks s/he gets paid by the post
Join Date: Nov 2013
Location: Twin Cities
Posts: 3,941
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Quote:
Originally Posted by samclem
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That is a GREAT article. Thank you, samclem. That is one of the rare articles I want to print out and refer to forever because it makes the whole SWR matter very simple, persuasively. I like simple.
Sent from my iPad using Early Retirement Forum
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12-17-2015, 09:36 PM
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#15
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,139
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Quote:
Originally Posted by pb4uski
I used to think that way too. I went from 60/40/0 to 60/34/6 a few years ago. My 6% in cash earns 1%. For discussion purposes, let's say that prospectively bonds return 3.5%. So the drag is 15 bps [6% *(3.5%-1.0%)=0.15%]. IMO not a huge price for peace of mind and that 3.5% for bonds is generous.. at 2.5% the drag is only 9 bps.
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Exactly! Cash as a part of fixed income is not much of a drag compared to bonds. And as an asset class it moves independently of bonds and stocks so sometimes it really comes in handy for rebalancing.
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Retired since summer 1999.
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12-17-2015, 11:55 PM
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#16
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Full time employment: Posting here.
Join Date: Feb 2011
Posts: 852
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Quote:
Originally Posted by audreyh1
Exactly! Cash ...as an asset class...moves independently of bonds and stocks so sometimes it really comes in handy for rebalancing.
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Actually doesn't cash move with bonds in general? In fact isn't cash just a bond with a very very short maturity. (Zero)
Sent from my iPad using Early Retirement Forum
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12-18-2015, 12:43 AM
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#17
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2014
Location: Spending the Kids Inheritance and living in Chicago
Posts: 17,087
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Quote:
Originally Posted by urn2bfree
Actually doesn't cash move with bonds in general? In fact isn't cash just a bond with a very very short maturity. (Zero)...
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Cute view of cash, but really cash is a separate category.
If the Feds raised interest rates by 2.5% instead of .25% you would have probably seen all bond funds drop by something. However your cash would have remained exactly the same, but it's potential would have just increased as you could earn more interest in a CD on it.
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12-18-2015, 03:51 AM
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#18
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,139
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Quote:
Originally Posted by urn2bfree
Actually doesn't cash move with bonds in general? In fact isn't cash just a bond with a very very short maturity. (Zero)
Sent from my iPad using Early Retirement Forum
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No. There is no interest rate sensitivity with cash, nor credit rate sensitivity. So the value of cash does not change. While bond values do change. Future interest earned can vary, but not current value.
CDs may trade on a secondary market and thus people see CDs as being more bond like with some interest rate sensitivity, but your checking, savings, and money market accounts are immediately liquid and thus experience no change in value when interest rates change.
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Retired since summer 1999.
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12-18-2015, 04:58 AM
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#19
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Recycles dryer sheets
Join Date: Feb 2015
Posts: 296
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Quote:
Originally Posted by bclover
Is he comfortable with his and his financial Advisors decisions? If he is, then I've got no problem.
I have a FA. A few years ago I lost my dh at a young age (he was 53, I was 50). talk about a black hole of grief. I still had 2 kids to raise and it was all I could do to get out of bed in the morning. I had inherited a wad of cash and still had the electricity turned off due to non payment and had it not been for my sister paying my mortgage probably would have lost my house.
Anyhoo to cut to the chase, I found a competent FA who I still like so I am a minority here in that I don't think he's evil out to take all my money.
just one thing I haven't seen mentioned is how long you have until you collect SS and have you taken into account health care cost until medicare
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I agree. Most FA are honest and work for the benefit of their clients.
But here is the other side. Most FA charge about 1% for total AUM (assets under management). This is in addition to the expense ratios , commissions for any trades they make on your behalf.
If you have $3 million AUM with your advisor this amounts to $30,000/year in your advisor's pocket. After 10 years probably a lot more than a quarter of a million dollars IF your portfolio has increased in value. I don't know about you; but I would prefer that money in my pocket. A quarter of a million buys a lot of vacations over a 10 year period.
No one will care more about your money than you.
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12-18-2015, 06:59 AM
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#20
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,361
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Quote:
Originally Posted by samclem
....Take a look at this article, I think you'll find it interesting:
https://www.kitces.com/blog/managing...ncing-approach
If you plan to rebalance your funds periodically/every year, then it turns out that having a "bucket" of cash/MM funds to spend in down years is almost identical to just including the cash/MM funds in with your portfolio and not thinking of them as a distinct "bad weather" bucket. It makes sense when you think about it, and Kitces does a good job of illustrating it in the article.....
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Good article. Thanks for posting. I recall a couple years ago watching a M* Christine Benz video where she spent some time explaining a bucket strategy and then did an analysis of how my 60/34/6 portfolio would look in a bucket world and it lined up pretty well.... I concluded that it was one of those six of one, half-dozen of another distinction without a difference things. The article also reinforces my policy on regularly rebalancing.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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