Cash holders withdrawal rate?

[Florida]

I remember reading a post where many members said they had the majority of their portfolio in cash instruments.

What withdrawal rate is suitable for cash?
4% may be to high with low interest rates and inflation concerns.

 

[kcowan]

They are doing that to preserve capital so that is a smaller loss than say a 20% decline in equity.

 

[OAG]

Cash/Interest makes up about a third of our "income" (Military Retired Pay/SS (coming back in 2 years at age 70)). I just divide the principal by remaining life expectancy to see how much I "could spend". BTW I just bought a 1 year CD for 5.1%. The ladder goes out over 6 years and is "paying" an average rate of 5.77% (thanks PENFED).

If life expectancy is 15 years the "withdrawal" rate "could" be 6.67% PLUS interest. Inflation is not a MAJOR concern, at least to me it is not!

 

[Gardnr]

BTW I just bought a 1 year CD for 5.1%.

Where oh where did you get 5.1 on a 1 year??!! Let us in on that one. I'd love to partake.

 

[OAG]

Kind of tricky way to do it as it took some forethought. Two years ago I purchased a small 3 year, 5.6%, adjustable rate CD from Navy Federal Credit Union. The rate adjusts every year BUT had a maximum down for the entire 3 years of .5%. So on my last adjustment date (8/1/2008) the rate hit it's minimum of 5.1%. This CD has a clause that allows you to ADD new funds on each adjustment date in any amount and get that rate for the remainder of the term of the CD on all of the money. So I added money to this CD on each adjustment date. I guess technically it was not really a NEW CD but it gets the 5.1% rate on the new money I deposited.

 

[rmark]

4% initial portfolio + annual inflation is premised on a roughly 60% stock, 40% bond market weight portfolio - if holding mostly cash, it doesn't apply. You won't have the late life growth needed to offset inflation.

 

[Rich_by_the_Bay]

4% initial portfolio + annual inflation is premised on a roughly 60% stock, 40% bond market weight portfolio - if holding mostly cash, it doesn't apply. You won't have the late life growth needed to offset inflation.

Sounds like a 30 second job for FIRECalc.

 

[rmark]

Or a perusal of the early research

http://www.afcpe.org/doc/Vol1014.pdf

 

[UncleHoney]

4% initial portfolio + annual inflation is premised on a roughly 60% stock, 40% bond market weight portfolio - if holding mostly cash, it doesn't apply. You won't have the late life growth needed to offset inflation.

You don't need late life growth when you have it in the beginning. A pension goes a long way to surviving till the end. All you really need is preservation of capital.

I didn't get on the retirement train till I was sure I could pay the full fare when it reached the end of the line 25-30 years later. Any excess earnings just make the trip more fun, I might even get to ride in the Club Car and sip a little brandy.

 

[Koolau]

UncleHoney

Without giving any personal info, would you please explain:

"You don't need late life growth when you have it in the beginning. A pension goes a long way to surviving till the end. All you really need is preservation of capital."

I completely agree with the pension part. I have a pension which covers a good amount of my current living expenses (though not all). It isn't COLA'd, so 25 to 30 years (I hope) of inflation could be an issue to me.

Back to the OP, I too have a large portion of my NW in "cash" (Stable Value fund and SPDAs, etc.) and have been trying to move more into equities which most on this board would highly recommend.

My "druthers" would be to have so high a NW that it could be in cash under the mattress and I still wouldn't run out of money even if inflation continues to be an issue.

The obvious downsides to such an approach would be 1) There may be no such thing as a high enough NW never to run out since inflation could go hyper. 2) the 60/40 s/b ratio more or less guarantees a higher WDR - IOW a higher standard of living - given a particular NW. 3) I don't have that high NW at this time!

Any thoughts would be appreciated.

Koolau

 

[UncleHoney]

UncleHoney

Without giving any personal info, would you please explain:

"You don't need late life growth when you have it in the beginning. A pension goes a long way to surviving till the end. All you really need is preservation of capital."

I completely agree with the pension part. I have a pension which covers a good amount of my current living expenses (though not all). It isn't COLA'd, so 25 to 30 years (I hope) of inflation could be an issue to me.


Any thoughts would be appreciated.

Koolau

Koolau

My plan is to offset the declining value of my pension with money from the stash. In 20 years if the value of my pension is 50% of today's value I will be able balance that with money from the stash. Currently the income from the stash equals ~80% of my pension. Even with 0% interest it will work if you don't mind burning the capital but there isn't much room for error.

Here are some ratios that should give you a good starting point. This is for for two people, me 62 DW 67, one noncola pension, 2 SS incomes, and one stash.

Annual spending = X (day one of retirement)
Pension = .75 X (non Cola day one of retirement)
2 SS = .68 X (current value) SS values are split 60/40
Stash = ~14 X (current value)

The current annual spending is set by the value of my pension + DW SS which makes a nice income for us. I'm waiting on my SS until FRA or later. No mortgage or car payments.

The stash is split about 40/60 taxable CD/tax deferred IRA CD. APR ~ 5+%

This should give you a good start with some rough calculations. Try $40K-$60K as a starting value for X. With FireCalc you can bump up the annual burn rate and watch the success rate fall till you get to your threshold of pain. IIRC you should be able to bump up the burn rate to 1.3X or better before things go up in smoke, or down in flames.

 

[cute fuzzy bunny]

Hmm, well lets see...whats a good withdrawal rate for cash, which should fall somewhere between the tbill and the long treasury...?

 

[Koolau]

UncleHoney

Thanks for the great explanation! I'm going to run through some calks similar to yours and see if I can increase my confidence or at least reduce my anxiety.

Only question I would have (and this is more for me than for you 'cause it's clear you've already answered it for yourself and DW): What's the balance between survivability and life-style. IOW I could probably spend more in ER if I balanced my port with more equities, but then the sleep-at-night factor could get out of whack.

Thanks again.

 

[Koolau]

Cute Fuzzy Bunny

No argument with your post. Clearly, you address my question of life-style.

I AM moving more toward equities but I doubt I'll ever arrive at the vaunted 60/40 split recommended for the 4% WDR. Bottom line question is whether a cash-heavy port is survivable over the time left to me. Gotta get back to FIRE/Calc as well as running UncleHoney's scenario with my numbers.

 

[REWahoo]

Koolau, when you say "I AM moving more toward equities but I doubt I'll ever arrive at the vaunted 60/40 split recommended for the 4% WDR", what split do you think you can tolerate? At your (our) age, FIRECalc says a 40/60 split will likely work for a 4% SWR over 30 years. Is that something you could live (sleep) with?

 

[UncleHoney]

UncleHoney

Thanks for the great explanation! I'm going to run through some calks similar to yours and see if I can increase my confidence or at least reduce my anxiety.

Only question I would have (and this is more for me than for you 'cause it's clear you've already answered it for yourself and DW): What's the balance between survivability and life-style. IOW I could probably spend more in ER if I balanced my port with more equities, but then the sleep-at-night factor could get out of whack.

Thanks again.

Koolau

I've run numbers so many times to prove to myself that it works and there is ample room for error. Our lifestyle isn't extravagant but it's also far from frugal. One thing I like to keep in mind it that the extras are flexible and if times get rough they can be turned off in an instant.

I've played the what-if game in my mind many times to see what would happen, if say for instance I lost my pension or the stash goes up in smoke because of a bank crashes. We would be able to survive, but just have to watch the budget.

Being retired just one year I've got a better feel for the money flow and my comfort level. We don't really have a strict budget but we do plan expenses as money is available. So far we haven't even dipped into the stash once.

 

[cute fuzzy bunny]

I AM moving more toward equities but I doubt I'll ever arrive at the vaunted 60/40 split recommended for the 4% WDR. Bottom line question is whether a cash-heavy port is survivable over the time left to me.

Thats easy. Divide how much you have by the number of years 'left to you' and if thats your annual budget, you're good.

Then you just need to die on schedule.

Basically if your portfolio doesnt include at least 25% equities, you're going to lose buying power and perhaps find yourself a little short on cash when you can least mitigate the situation. Something like Wellesley that runs 35% in equities offers cd-like dividends with low volatility and principal maintenance.

I think I've said a few times that if a 25-35/75-65 portfolio provides too many scares, it may be best to continue working until you've got enough cash to make the ride through with zero worries.

 

[Koolau]

REWahoo,

I'm currently at about 25% equity, but as stated elsewhere, that contains way too much residual old-co. stock. That stock is so beaten down that I don't have the heart (no, thats not "sentimental" heart) to dump it at this point. I'd actually be tempted to buy it if I didn't already have way too much.

But, yes, I think I could see myself at 40/60, so maybe there is hope for me after all!

Uncle Honey

Sounds like our situations are somewhat similar. I've obsessed over "The Number" and run endless calcs. in the past. I think what I'm trying to do is arrive at a point I can finally say "There! Now I'm all set and don't have to run any more of these calculations. I've got plenty, now just enjoy, already!"

But... Then I start to wonder, what if...

I've been retired almost 3 years, but the life (and life style) I'll be leading is still not at all clear since I moved 4000 miles and several culture zones away from my old home about 8 months ago. I hope within a year to have a much better picture of my spending. Right now, I've had to dip into the stash for moving and home upgrades at the new place. But that should settle down soon.

Like you, I don't doubt that I could survive even with multiple financial set-backs. Frugal is something I do well. (Just ask DW, heh, heh.) But now, I do want to "live" a little without questioning every $.

I also do not have an official budget (never have) but have a pretty good idea of what I can spend right now. I guess it's 20 or 30 years down the line I'm stewing over. Thanks for your thoughts. They help (at least they make me feel better!)

Cute Fuzzy Bunny

Funny you should mention it. I've actually done that calculation and it says I'm fine, even to 101. But... What if...

I do like Wellesley and have a chunk. Indeed, I hope to consolidate all my non-401k money at Vanguard, eventually.

I agree with working until zero worries. Thought I'd done that and then...
What if... I know, I know, sounds like a psychological problem. Probably is.

Thanks to all for listening/responding.

 

[Finance Dave]

UncleHoney

Thanks for the great explanation! I'm going to run through some calks similar to yours and see if I can increase my confidence or at least reduce my anxiety.

Only question I would have (and this is more for me than for you 'cause it's clear you've already answered it for yourself and DW): What's the balance between survivability and life-style. IOW I could probably spend more in ER if I balanced my port with more equities, but then the sleep-at-night factor could get out of whack.

Thanks again.

One thing you could try is what I call "success spending". It works like this:

Determine your expenses in two buckets. One is necessities, one is luxuries. Then each year look at your NW and see how much you have compared to what you need to support the necessities only for the rest of your life (think 4% SWR). If you have more than enough, take the vacation or buy the artwork. If not, forego the luxuries that year. Re-evaluate each year. This way you always guarantee you will have what you need, and in years that your investments do well you can also have what you WANT.

Dave