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A safe dollar amount vs AA
Old 07-01-2020, 10:09 AM   #1
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A safe dollar amount vs AA

What do you folks think about a dollar amount, or perhaps a bucket of 12 years' spending amount, in safe/safer assets vs an allocation percentage?

i.e. if you wanted $75k/year, you'd set 12 years aside of $900k (or maybe a round million to offset some inflation) and let the rest in the market vs say 75/25 on a $4MM base?

The reason I ask is that assuming the market does offer some returns, the assets will grow and rather than rebalancing back to a 75/25, that keeping something like that cool mil is "enough" on the safe side?

Ultimately I'm looking to write an IPS for those that follow after me once I'm gone and would prefer to keep it somewhat comforting as well as simple. Knowing so many are less fortunate than we are, it's hard to say (out loud) that "a million" isn't enough (in the given example) to cover you for a decent amount of time. Granted, if the assets grew to $10MM and market really tanked, it's hard to swallow losing 5MM vs "only" 3.

Perhaps there's a bucket amount that changes from one choice vs another? If you had $500k, you better stay AA vs if you had $5MM, you could choose one strategy over the other. With the lesser amount, you're really hurting out of a needed income vs with the higher amount, you would have to do some serious downsizing but it could be manageable.
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Old 07-01-2020, 10:16 AM   #2
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I keep to my AA but it includes cash. I set the numbers to include spending of 4 years in cash, then rest in equities and bonds. Cash is part of my fixed income part of AA. I'm at 65% stocks and 35% fixed income. Fixed income is 15% cash, 15% US bonds and 5% international bonds. I tried to set up a bucket plan but ended up back with cash as 15% of my overall AA (minus rental property). Separate from AA or part it is what works for you. IMHO
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Old 07-01-2020, 10:32 AM   #3
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The bucket vs AA debate has been well hashed and re-hashed here. Search is your friend. Truthfully, I don't think it matters a lot. To me it's more like the blind men and the elephant. You describe the elephant depending on what you're holding.

For example, we have been running 75/25 and the 25 is at least 6 years of spending. With the recent market drops, that 25 is looking a lot like a bucket to me. We'll spend from that side of the AA for a while here until things settle down. Then we'll calculate a current AA number and consider whether we should look at replenishing the fixed income side.

My only real comment on your question is that 12 years sounds like a very long time to stay out of equities. Market dips and recoveries have almost always spanned less than 5 years. Also, during the recovery equity prices are rising, so even if you have to sell some equities before 100% is reached, it may not hurt too much. So to me a 5 year number sounds fairly conservative. IIRC some of the bucketeers here talk about 1-2 years in the nearest bucket.
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Old 07-01-2020, 10:40 AM   #4
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I think the AA/Bucket debate I'm presenting is less for overall return than it is for "peace of mind" and simplicity. Most of us are into the finances. What about those who are not? My Mom, for instance, won't let me buy anything for her, only CDs. So what's my wife or younger kids going to do? Particularly considering a grieving process is usually long.
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Old 07-01-2020, 10:42 AM   #5
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Originally Posted by OldShooter View Post

My only real comment on your question is that 12 years sounds like a very long time to stay out of equities. Market dips and recoveries have almost always spanned less than 5 years. Also, during the recovery equity prices are rising, so even if you have to sell some equities before 100% is reached, it may not hurt too much. So to me a 5 year number sounds fairly conservative. IIRC some of the bucketeers here talk about 1-2 years in the nearest bucket.
12 years isn't out of the market, it's only the "safer allocation" of a mil that's out, the other 3 are still riding on (in my example).
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Old 07-01-2020, 10:46 AM   #6
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Originally Posted by I am He View Post
I think the AA/Bucket debate I'm presenting is less for overall return than it is for "peace of mind" and simplicity. Most of us are into the finances. What about those who are not? My Mom, for instance, won't let me buy anything for her, only CDs. So what's my wife or younger kids going to do? Particularly considering a grieving process is usually long.
I have the opinion that all should have basic financial understanding, including how AA works. But aside from that, I have instructions to DW or Son should I pass here is how to manage the funds left behind. Includes a simple description of rebalancing and how to take RMDs or desired withdraws. When I rebalance I have Son sit down with me as I do it so he can understand. Another way to make it easier is find a lifecycle fund that matches desired duration and put the funds there.
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Old 07-01-2020, 10:48 AM   #7
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I think the AA/Bucket debate I'm presenting is less for overall return than it is for "peace of mind" and simplicity. Most of us are into the finances. What about those who are not? My Mom, for instance, won't let me buy anything for her, only CDs. So what's my wife or younger kids going to do? Particularly considering a grieving process is usually long.
All of these things are very personal. All any of us can do in this thread is to comment from a personal perspective. In our case, DW's career was in investments & trust; she is well qualified to run a heavy equity portfolio. When we are gone DS's money goes into an irrev trust that will be at Schwab. So we don't have to worry that he is quite financially naive. YMMV. It depends on personalities, heirs' personal assets, and on how much total $$ you are talking about. Only you can decide what's right for you.
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Old 07-01-2020, 10:48 AM   #8
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IMO, it works out to be the same thing... with a 60/40 AA and a 4% WR you effectively have 10+ years of spending in bonds.

What the OP outlines is starting at 60/40 overall and having a rising equity glidepath that would ultimately land at 75/25.
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Old 07-01-2020, 11:06 AM   #9
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I considered an approach like this, with some sliding scale of cash for some market predictors, like holding a little more cash after a bull market (expecting a correction), and vice versa. You might check out https://www.early-retirement.org/for...ds-101005.html

When I actually modeled it, I decided against this and just went with 60/40.
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Old 07-01-2020, 11:17 AM   #10
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IMO, it works out to be the same thing... with a 60/40 AA and a 4% WR you effectively have 10+ years of spending in bonds.

What the OP outlines is starting at 60/40 overall and having a rising equity glidepath that would ultimately land at 75/25.
^^This.
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Old 07-01-2020, 12:10 PM   #11
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Originally Posted by I am He View Post
What do you folks think about a dollar amount, or perhaps a bucket of 12 years' spending amount, in safe/safer assets vs an allocation percentage?

i.e. if you wanted $75k/year, you'd set 12 years aside of $900k (or maybe a round million to offset some inflation) and let the rest in the market vs say 75/25 on a $4MM base?

The reason I ask is that assuming the market does offer some returns, the assets will grow and rather than rebalancing back to a 75/25, that keeping something like that cool mil is "enough" on the safe side?

Ultimately I'm looking to write an IPS for those that follow after me once I'm gone and would prefer to keep it somewhat comforting as well as simple. Knowing so many are less fortunate than we are, it's hard to say (out loud) that "a million" isn't enough (in the given example) to cover you for a decent amount of time. Granted, if the assets grew to $10MM and market really tanked, it's hard to swallow losing 5MM vs "only" 3.

Perhaps there's a bucket amount that changes from one choice vs another? If you had $500k, you better stay AA vs if you had $5MM, you could choose one strategy over the other. With the lesser amount, you're really hurting out of a needed income vs with the higher amount, you would have to do some serious downsizing but it could be manageable.
I do both. I have an AA, but I also make sure the fixed income portion will cover X years of after-tax expenses. It is usually double that.

Only when rebalancing in a severely down market do I need to make sure the fixed income doesn't go down below the threshold.
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Old 07-01-2020, 12:41 PM   #12
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What do you folks think about a dollar amount, or perhaps a bucket of 12 years' spending amount, in safe/safer assets vs an allocation percentage?

It does not to be a "vs"... it can be both.

Going into retirement, two key questions I focused on were:

1. How many years of planned expenses do I keep in cash, to avoid being forced to sell equities during a market downturn? For me, this contributed to the "sleep well at night" feeling.

2. With my desired AA, how will I feel about the impact to my assets if the stock value of that AA falls by 50, 60, 70%? It is one thing to say "I will keep 40% in stocks", another to say "keeping 40% in stocks means that my assets will fall by $500K if the market falls 50%".

Not optimal strategies, but balancing potential risk to be comfortable.
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Old 07-01-2020, 02:28 PM   #13
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Funny you brought this up. I'm in the process of doing pretty much the same thing. I'm building up an account that's cash/ultrashort bonds and CD's that will cover baseline expenses for about 20 years. The rest will be in equities and longer term bonds.
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Old 07-02-2020, 10:55 AM   #14
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I do both. I have an AA, but I also make sure the fixed income portion will cover X years of after-tax expenses. It is usually double that.

Only when rebalancing in a severely down market do I need to make sure the fixed income doesn't go down below the threshold.
+1

You also have to be aware that the SWR studies assumed an AA or 40-70% equities. So, if you drop below or above that equity allocation, the ~4% SWR may not work for you.
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Old 07-02-2020, 11:03 AM   #15
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+1

You also have to be aware that the SWR studies assumed an AA or 40-70% equities. So, if you drop below or above that equity allocation, the ~4% SWR may not work for you.
More importantly, much more importantly, ~4% SWR may not work for you because your future does not turn out to be exactly like the past data that was used in the estimating calculations.

This is all based on inductive reasoning, which can be very dangerous.
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Old 07-02-2020, 12:45 PM   #16
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More importantly, much more importantly, ~4% SWR may not work for you because your future does not turn out to be exactly like the past data that was used in the estimating calculations.

This is all based on inductive reasoning, which can be very dangerous.
Yes - you're absolutely right. But, in the absence of certainty, it is a good tool to determine if you have enough. I also monitor closely and don't follow it blindly.
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Old 07-04-2020, 08:09 AM   #17
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I sort of track parallel estimates SWR in terms of % and specific dollar amounts. My expenses track to specific dollar amounts so itís convenient to do so. When I get nervous Iíll move a fixed amount representing a yr or two of expenses into lower risk investments. Then I calculate my AA percentages afterwards. Iím trending towards the lower bounds of a broad target range (60-75% equities).
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Old 07-04-2020, 03:07 PM   #18
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Finance guru Dr. William Bernstein pretty much advocates the concept of a bucket but he doesn't call it that. He advocates having a "safe" liability matched portfolio (LMP) of government bonds, CDs and cash to cover your retirement needs through a ripe old age or a significant number of years (like 20 or 30, depending on your age). With the remainder of your money you invest in a "risk" portfolio consisting of whatever you want - stocks, real estate, pork belly futures, etc. Even if the "risk" portfolio is totally wiped out, you are still able to live on the "safe" portfolio.

In our case, we expect to be in good shape as long as I remain among the living and continue to draw my pension and SS. If I'm the first to go, the SBP for my wife is only 1/3 of my pension and, of course she loses her SS and draws mine. We have constructed a "safe" portfolio that will supplement her diminished guaranteed income streams for 20 years (until her early-mid 90's) without risk (there is, of course some inflation risk). The remainder is all in a "risk" portfolio of equities and corporate bonds. For us, this turns out to be roughly a 50/50 AA that can drift 5% either way.
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