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Old 01-27-2020, 06:25 PM   #1
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How many years of cash reserves would you recommend to someone before they retire? This would be money set aside not in stocks and easy to liquidate during a down economy. I read an article a few years ago about the bucket method and recommend 5 to 7 years. Thoughts?
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Old 01-27-2020, 06:58 PM   #2
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It varies. Per article here: https://fourpillarfreedom.com/heres-...er-from-drops/
"In 7 of 11 historical drops, it only took one year for the S&P 500 to recover to its previous all-time high."
"In the most extreme drop, it took 8 years for S&P 500 prices to recover after the dot-com bubble burst in 2000, which was immediately followed by the crash of 2008. Following that crash, it took about 6 years for prices to recover to their previous all-time highs."

So, your quoted 7 years would have almost taken care of the "most extreme drop" of 8 years .... at least to date!
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Old 01-27-2020, 07:09 PM   #3
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Here is a good read on a bucket strategy and how many years to have in each group of assets. There is even a good worksheet to use and examples of investments for each time period.
https://www.theretirementmanifesto.c...ment-paycheck/
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Old 01-27-2020, 07:17 PM   #4
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So, your quoted 7 years would have almost taken care of the "most extreme drop" of 8 years .... at least to date!

I wonder if that approach would be too conservative 7 years, but than again during that 8 year extreme drop you would be a genius.
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Old 01-27-2020, 07:21 PM   #5
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Here is a good read on a bucket strategy and how many years to have in each group of assets. There is even a good worksheet to use and examples of investments for each time period.
https://www.theretirementmanifesto.c...ment-paycheck/


Interesting article, it does seems 1 to 3 years as a cash bucket would be risky with FIRE. Surprised it was so low. Thoughts?
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Old 01-27-2020, 07:32 PM   #6
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Interesting article, it does seems 1 to 3 years as a cash bucket would be risky with FIRE. Surprised it was so low. Thoughts?
Not with bucket 2 going out 8 years. I think itís a good balance between safe funds, 1-3 years, and funds that can earn a somewhat decent return out to year 8. I think too many people over stash cash and give up returns that are still relatively safe in quality income producing assets in bucket 2.
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Old 01-27-2020, 07:42 PM   #7
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Not with bucket 2 going out 8 years. I think itís a good balance between safe funds, 1-3 years, and funds that can earn a somewhat decent return out to year 8. I think too many people over stash cash and give up returns that are still relatively safe in quality income producing assets in bucket 2.


I see what you are saying. You could go extremely save with long term CDs in the second bucket, which is basically cash.

Do you think the bucket method is a good approach? Would you use it?
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Old 01-27-2020, 08:13 PM   #8
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Don’t forget that high quality bonds/bond funds can help bridge the needs during bear market periods. You aren’t limited to cash and CDs.
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Old 01-27-2020, 08:26 PM   #9
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I see what you are saying. You could go extremely save with long term CDs in the second bucket, which is basically cash.

Do you think the bucket method is a good approach? Would you use it?


Now youíre getting it! I use a combination of money market and short term CDs to provide ~3 yrs of expenses and longer term CDs going out to 7 yrs. for bucket 2. The longer term CDs are a substitute for bonds. I acquired the CDs when rates were better. If you have other reliable income sources (pension or SS) you might find shorter term buckets will work OK. I expect to do away with bucket 2 when I start SS.
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Old 01-27-2020, 09:22 PM   #10
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I bucket 3 to 5 years cash in CD ladders. When stock prices are high, I sell enough to cover 5 years expenses. When stocks are low, I let the cash bucket slip to 3 years before reupping.
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Old 01-27-2020, 09:33 PM   #11
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Donít forget that high quality bonds/bond funds can help bridge the needs during bear market periods. You arenít limited to cash and CDs.
Does the holding in Vanguard Limited-Term Tax Exempt considered high quality?
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Old 01-27-2020, 09:37 PM   #12
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I hven't looked at their portfolio recently.... I used to own that ticker.... but off-the-cuff I would say yes.
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Old 01-27-2020, 09:41 PM   #13
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I see what you are saying. You could go extremely save with long term CDs in the second bucket, which is basically cash.

Do you think the bucket method is a good approach? Would you use it?
I use it along with some homemade spreadsheets.
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Old 01-27-2020, 09:41 PM   #14
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Donít forget that high quality bonds/bond funds can help bridge the needs during bear market periods. You arenít limited to cash and CDs.
+1
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Old 01-27-2020, 09:42 PM   #15
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Does the holding in Vanguard Limited-Term Tax Exempt considered high quality?
Yes
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Old 01-27-2020, 10:58 PM   #16
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Personally my plan was to have at least 5 years in cash, adjusted based on when I choose to take SS (at that point pension + SS covers expenses). I retired at 60 and started with 6 years of expected withdrawals until I hit SS FRA. Our spending is so far turning out to be less than planned so adjustments are in order.
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Old 01-27-2020, 11:49 PM   #17
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Personally my plan was to have at least 5 years in cash, adjusted based on when I choose to take SS (at that point pension + SS covers expenses). I retired at 60 and started with 6 years of expected withdrawals until I hit SS FRA. Our spending is so far turning out to be less than planned so adjustments are in order.
Great thread. This post is golden at least for me.

I've been managing my income for subsidies and have closely watched those funds. Next year I'll begin hitting tax deferred assets in earnest haven't consciously managed for short term cash. Yeah I have, seven years expenses in CD ladder, short term bond fund, and a 2023 term etf. Wasn't by plan but turning 63 in a couple weeks and 7 years "cashish" gets us to my SS. Combined our SS covers 80% of required income and I'll change back to a 3 year "cashish" funding

I've been meaning to review this, thanks.
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Old 01-28-2020, 12:12 AM   #18
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I don't like the bucket approach.

I do track how much I have in different types of investments, because I think my AA is relevant to my portfolio survivability.

I have 0.3 years of expenses in cash. I have 3.6 years in bonds. I have 52.5 years in stocks. My SS NPV is 14.6 years equivalent.

My general plan is to spend from my cash bucket, refill from stocks/bonds every few months, and reallocate stocks/bonds to my target AA periodically. The next time the market drops "quite a bit" I'll shift my allocation even more towards stocks. (I'll probably also get a queasy feeling about then as well. But I am a steely eyed missile man.)

I am 50 and have a net WR of 0.46%, which gives me a great deal of safety margin and enables me to have a high stock allocation and a low cash buffer.
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Old 01-28-2020, 12:39 AM   #19
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My plan is that I'll get dividends from my stocks, so I don't need to hold an entire 5 years worth of cash to have 5 years worth of cash.
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Old 01-28-2020, 05:30 AM   #20
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My plan is that I'll get dividends from my stocks, so I don't need to hold an entire 5 years worth of cash to have 5 years worth of cash.
One thing to consider about cash - and fixed income in general - is that some of it will be spent buying stocks if you rebalance when stocks are down. So you actually need more than 5 years, not less. You will be rebalancing from fixed income at the same time as you are drawing it down for annual income.

So I wouldnít be counting on dividends to supplement withdrawals under that scenario. Unless I didnít plan to rebalance.
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