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Old 09-11-2017, 08:24 AM   #21
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Originally Posted by mathjak107 View Post

buckets are a mental mirage
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Old 09-11-2017, 09:29 AM   #22
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Originally Posted by OldShooter View Post
Using the bucket approach, I have enough cash and near-cash assets (the short term bucket) to fund our lifestyle for at least five years. The rest of the portfolio is in a "long term" bucket and may even be 100% equities. During a five year time span, the market can be up, down, or sideways. When it's up and maybe when it is sideways, I sell from the long-term bucket keep the short-term bucket topped off. When the market is abysmally down, aka sequence-of-returns risk event, I do nothing. So, just before the crash I will have 4-5 years of spending in my short term bucket. Even if the crash and recovery spans 4 years, I am a happy guy and remain highly confident that I will eventually be able to replenish my short term bucket by selling assets that have recovered from the crash.
Assuming that a person is rebalancing regulalry, do they stop rebalancing when the market goes down and just spend from the (cash? ST bonds?) bucket? If so, and as they continue to spend down the "bucket," they are playing a game of chicken, hoping the markets rebound before the bucket runs dry. Meanwhile, they are not rebalancing (i.e. buying more stock shares as their prices go down). This seems like a bit of market timing, and in a situation where emotions will likely be running high.
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Originally Posted by mathjak107 View Post
buckets are a mental mirage . . .

interesting interview with kitce's on buckets
Cashing Out of the Bucket Strategy
Right, and Kitces does a good job of showing it (I liked his piece here . It changed my thinking on buckets). Now, if a person isn't going to rebalance when the market has a multi-year decline, and is just going to spend down the bucket and bet that stocks recover before the bucket runs dry, then it's a different situation.
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Old 09-11-2017, 09:38 AM   #23
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Things that cost $1 in 1999 when I retired, cost $1.45 now. And that's for less than 20 years. That's a lot of belt tightening already. 30-35 years is going to be a lot worse. I don't get the shrinking budget approach to dealing with long-term inflation.
Sorry. Maybe I shouldn't have quoted your post. I was trying to make the bigger point that the seemingly-popular notions around here that withdrawals will be level and spending will be level are clearly impossible. Re inflation, looking back 30 years we see a dollar then will buy 45 cents worth of stuff now. Probably one cannot completely accommodate that with spending changes, but IMO for most people there is more flexibility than they will realize unless they get crunched. But maybe the portfolio has had a nice ride with inflation. Then they can simply increase their withdrawal rate to one that is still safe but which is more comfortable.

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Interesting. Does that mean your short term bucket is 16-20% of the total? I think I've stumbled into a similar approach that I need to refine.
Well, in my case I really don't think in terms of percentages very much. Assuming one has a portfolio size that can be reconciled to lifetime spending needs, then those needs (in dollars) and a bucket horizon decision (3 years, 5 years, ... ) give you a short-term bucket size. The rest of the portfolio is in the long term bucket. If you are lucky enough to have a very large portfolio or parsimonious enough to have a small spending rate, then the short term bucket might be only 5% of your portfolio! For a scenario where the whole portfolio might be needed and growth is only moderate, the % in the long term bucket will decline over time. When you're 94YO, you may have nothing left in the long term bucket!

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you are not doing anything with buckets that spending directly from stocks and bonds directly does not do . in fact not using buckets does it better . in a down market you are not selling stocks with a portfolio of stocks and bonds with little cash .. you would be rebalancing taking your spending money from bonds and even buying stocks to build your allocation back up with the extra in a bad down turn . .

buckets are a mental mirage . i use a bucket system but it is a mental thing . nothing really changes because you put some of the bond budget in cash except you get a lower overall return because cash rarely produces what bonds do.

in reality that is all you are doing , you are just taking some bond money and putting it in a lower returning investment rather than use the bonds directly. with buckets you rebalance by number of years of money left in the buckets vs rebalancing by performance like a convention spending plan does .

don't be fooled by your thinking . conventional rebalancing is doing the same thing without buckets . you are are really just rebalancing using different criteria .


interesting interview with kitce's on buckets
Cashing Out of the Bucket Strategy
Hard to take all of that on. Start here: Both you and Kitces are basing your arguments a false premise: That the short term bucket is cash. Certainly there is some, for the next few months of spending maybe, but the rest can be in (for example) a 5 year bond ladder or CD ladder. Or maybe a floating rate/bank loan fund. For me any of that is "near cash" because it is easily turned to cash, albeit possibly at a small penalty. So whether that 5 year Aaa corporate bond is in the first bucket or the second bucket, it's still the same bond with the same YTM and the same low risk.

Re "mental mirage" all of anyone's retirement planning really boils down to mental accounting. So no x-ring with those bullets.

Re rebalancing, it is not at all like rebalancing. Consider this scenario:

My average spend rate is $50K/year. I have $200K in my near bucket and $5M, all equities, in my long bucket. I do this because I believe 4 years is probably long enough to ride out any market storm I might encounter. The long bucket is 100% in equities. My AA is 200/5000.

At the end of next year, the market has been fairly calm so I sell $50K of equities and top up the short bucket. My AA is now 200/4,950.

The following two years the market takes a huge hit, my $4,950 goes to $3,000 in the first year. I won't sell anything so my AA is 150/3,000. The second year, the market has recovered a little but I'm still not going to draw, so my AA is 100/4,000. At the end of the third year I'm a little nervous about my small near-in pot and the portfolio is back to $4,000, so I draw $150K. Now my AA is 200/3850. So I think you can see that these AA changes look nothing like rebalancing. Because it is not a rebalancing strategy.

A less aggressive investor might not be 100% in equities in the long bucket but rather have a more traditional mixture. That changes the numbers at each juncture but the AA still waves around, completely uncontrolled.

A second false premise in your argument is that the long term bucket must contain bonds. IMO that's not necessary due to the short-term bucket being large enough to ride out most unpleasantness, but there's nothing wrong with it either. If you have both fixed-income and equities, then you may well want to be looking at AA ratios either solely in the long bucket or for the whole portfolio. That's a sort of second-order effect due to your decision to hold bonds. It has nothing to do with the bucket strategy.

Whew! Can I go for my second cup of coffee now?
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Old 09-11-2017, 09:54 AM   #24
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Originally Posted by samclem View Post
... Now, if a person isn't going to rebalance when the market has a multi-year decline, and is just going to spend down the bucket and bet that stocks recover before the bucket runs dry, then it's a different situation.
Yes.

Re "betting that stocks recover before the bucket runs dry" IMO that is a bit alarmist. After a big hit, stocks recover over a period of a few years, so while the need to replenish a short-term bucket may not permit waiting for 100% recovery the scenario is hardly all-or-nothing. And, if the long term bucket contains bonds, then the risk is even lower. Never zero, of course.

And again IMO, a bucket strategy fits well with a 100% equity allocation in the long bucket.
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Old 09-11-2017, 10:34 AM   #25
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Hard to take all of that on. Start here: Both you and Kitces are basing your arguments a false premise:
No. It's that your description is just playing word games. The true fact is that your aaset allocation is how your total assets are allocated. Choosing to declare a chunk of your assets to be a near-cash bucket doesn't make that disappear from your asset allocation. Playing word games does not change the reality of the situation.


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A second false premise in your argument is that the long term bucket must contain bonds.
There is no "long-term bucket". There is no "short-term bucket". There is just you deciding to change your asset allocation implictly instead of explicitly.

Stocks are real. Bonds are real. CD's are real. They all exist. Buckets are not real, they are just a mental construct.

I think it was Kitces that pointed out a fallacy with this line of thinking: A person sets up a large cash bucket (short-term bucket) because they prefer an AA with a smaller stock allocation. But spending money from the cash bucket in a bear market, they are shifting to a *higher* stock allocation. Worst case, if the bear market goes so long that they've spent all the cash bucket, they are 100% in stocks.

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Re rebalancing, it is not at all like rebalancing. Consider this scenario:
Indeed, that's not rebalancing as it is commonly understood. That's just changing your mind at whim, doing whatever your emotions tell you do do.


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Re "mental mirage" all of anyone's retirement planning really boils down to mental accounting.
That's not what mirage means.
Mirage means: "something illusory, without substance or reality."

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I have $200K in my near bucket and $5M, all equities, in my long bucket.
You're kidding, right? This is a 96/4 AA. 96% stocks and 4% bonds/cash.
So after tapping your near-bucket for 4 years, your AA is now 100/0. I would submit that there is no substantive difference between a 96/4 AA and a 100/0 AA.
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Old 09-11-2017, 10:55 AM   #26
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Yes.
Re "betting that stocks recover before the bucket runs dry" IMO that is a bit alarmist. After a big hit, stocks recover over a period of a few years, so while the need to replenish a short-term bucket may not permit waiting for 100% recovery the scenario is hardly all-or-nothing. And, if the long term bucket contains bonds, then the risk is even lower. Never zero, of course.
Yeah, that's what everybody thinks. That's what I thought, but after reading a few articles about cash buckets I decided that I needed to model it using actual historical data, so I created a spreadsheet. https://www.dropbox.com/s/xf4ma5blug...cket_rules.xls

Was a big surprise. Turns out that handwaving about "replenish the cash bucket" doesn't translate so well to the real world.

I could not find a single method of refilling the cash bucket that worked -- and I tried all of the common suggestions.

That spreadsheet is set up for automatic annual rebalancing, but I think it would model your scenario if you set the S&P500 allocation to 100% and the # of years in the cash bucket to 4. That would be the equivalent of long-term bucket 100% stocks and short-term bucket in 1-yr T-bills.




Oh. And $50K withdrawal from a $5M portfolio is a 1% SWR. So why worry? That low of a SWR will last forever.
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Old 09-11-2017, 11:07 AM   #27
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My initial AA choice was based on a tradeoff between annual volatility and long term portfolio survival in real terms. Pretty much anywhere between say 40% and 75% equities would get the job done long-term according to the studies, so I then picked a fixed income % in the range that I thought I could handle the volatility and looked for a sweet spot along the curve. Pretty much anything in the 50% to 60% equities would be OK for me I decided.

In addition to my selected AA, I selected a lower bound on my cash/bonds portion of 10 years after-tax expenses in fixed income. The point was not to go below that when rebalancing and selling bonds/cash to buy stock during equity market meltdowns.

I actually hit that limit in early 2009. In fact, I chickened out a bit and sold down to 12 years expenses in fixed income, which meant my equity allocation was just slightly under target. I just wasn't quite ready to take it all the way down to 10 in the face of the financial crisis.

But I did sell a bunch of fixed income and buy a bunch of equities. I believe that having that fixed income minimum limit was what allowed me to do it. It was very, very scary to sell fixed income and buy equities at that time.

It paid off quickly, but what if the recovery had been much slower, or the stock market had gone down even more? My set fixed income minimum allowed me to invest rationally and sleep at night during a very very difficult time.
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Old 09-11-2017, 11:08 AM   #28
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No. It's that your description is just playing word games. The true fact is that your aaset allocation is how your total assets are allocated. Choosing to declare a chunk of your assets to be a near-cash bucket doesn't make that disappear from your asset allocation. Playing word games does not change the reality of the situation....
You're missing the point. The idea of "asset allocation" can refer to two different things. One is a calculation, one is a management strategy. Certainly you can calculate an allocation percentage for any group of assets. So what? I agree with other posters that asset allocation as a management strategy base on age is severely flawed and I don't, in general, find it to be very useful even without the silly age-based rules.

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You're kidding, right? This is a 96/4 AA. 96% stocks and 4% bonds/cash. ...
That was just an example designed for simplicity. Our investments are, for other reasons, not deployed quite according to the model. If they were, however, we would be about 15% fixed income. Said another way, 15% of our assets are enough to sustain us for 5 years. Most of our asset will end up being distributed in our estate in trusts for the kids, so leaving them nearly 100% equities makes sense and that is what we will be doing. They will get the "leftovers" in the long term pot regardless of what % they may be of the total.

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... I would submit that there is no substantive difference between a 96/4 AA and a 100/0 AA. ...
True enough. And your point is?

@rayvt I don't know why you are so excited about this. Is an idea that doesn't agree with yours really that threatening?
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Old 09-11-2017, 12:09 PM   #29
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Quite an impressive project. I played around with it a little bit, but a UI tends to be intuitive only to the guy that designed it. For example, both C3 and C8 are marked "SWR" but have different effects.

It seems quite sensitive to withdrawal rate. Setting S&P to 100% and SWR to 3% makes the two strategies identical. Not sure why this would be.

Changing from 1 year on 3 year T-note rate doesn't have much effect. No big surprise there but IMO the 3 year rate is closer to real world bucket management.

Changing the bucket-filling rules seem to have little effect on results. Not sure why this would be. I'm generally not for mechanistic approaches like this, though. Re your "That's just changing your mind at whim, doing whatever your emotions tell you do do." comment, maybe that's how you make decisions. It's not the way I make decisions. When I am cleared to taxi across a runway, I still look both ways for landing or takeoff traffic.

The model, apparently, only runs a 54-year scenario, which is really too long to be relevant to anyone. There are 22 twenty-year scenarios in there. It would be interesting to see what those looked like. A lot of work, though.

But, regardless, your model confirms what you believe so you can be a happy guy.

For me, what I know for sure is that the next 20 years are going to be different from any backtesting model. I also know that our spending will not be level and will probably not rise as fast as inflation. Finally, I know that investment returns cannot be predicted. So, we'll just keep driving forward trying discern as much as we can by looking through the windshield, while largely ignoring the rear view mirror. We may all end up being Taleb's turkey, after all.
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Old 09-11-2017, 12:21 PM   #30
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you can do strategic rebalancing in both cases . only difference you rebalance buckets based on years of spending money left and the conventional portfolio is based on performance .

but in the end spending down is the same mechanics .

spending down 50/50 vs 50 /35 /15 will end up with the same riska pretty much , same sequence risk pretty much and close in performance .

traditionally the 50/50 would have done a bit better without the piece broken off bonds and going to cash .

the differences become more apparent as the buckets are on a rising glide path until you rebalance .
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Old 09-11-2017, 12:49 PM   #31
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Originally Posted by OldShooter View Post

@rayvt I don't know why you are so excited about this. Is an idea that doesn't agree with yours really that threatening?
I don't see how rayvt has appeared 'threatened' at all, based on his reasoned and thoughtful response to your post. In fact, in this and other threads I've seen you post in, it's YOU that appears to have a hard time when someone runs counter to your thinking.
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Old 09-11-2017, 01:09 PM   #32
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buckets are a mental mirage.
That's my feeling about them too. These sorts of analogies seem to work well for some folk and if they work for you, more power to you. I find that trying to think in terms of "buckets" greatly complicates things for me.

It was the same with my electronics and radio hobby. As a kid hanging out at the local radio club some of the older members, unaware that I already had a good grasp of the basics of electricity, tried to explain the concepts of voltage and current using the analogy of a hose with water flowing through it. Then they tried to explain how there is a limit to how hard you can drive an amplifier with an analogy of a ball bouncing up and down in a room where the height of the ceiling represented the voltage on the power supply line. I found all these analogies a bit silly and very confusing, because I already had a good intuitive understanding of all these concepts. Voltage was particularly easy, because I was familiar with the older term of potential difference, and that's what a voltage is - a difference in potential. But they were very attached to their analogies involving hoses, water, and bouncing balls and, as a quiet kid, I didn't know how to tell them they were confusing me, because I already "got it".

If the concept of "buckets" works for you, that is totally fine, but they confuse me, because I already "get" the underlying concept.
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Old 09-12-2017, 01:53 PM   #33
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Me excited about this? Nah, methinks you are projecting.

Mostly, the reason I talk about this stuff is the same reason why I created that spreadsheet and made it public. When I first heard of this cash-bucket technique, it seems so obvious that it would be a GREAT way to allocate your portfolio in retirement. The more I read, the more it sounded good. But long ago I learned (at large financial cost) that before you put your money into some {new thing}, you should do some further research and google "problem with {new thing}". Because the proponents will not tell you -- maybe because they do not know -- about the potential pitfalls and downside.

Me, threatened about an idea that isn't mine? Nope. Following an idea that sounded logical and good cost me over $100,000 once, so now I look closely. And when possible, try to make a spreadsheet model of the idea using ACTUAL HISTORICAL data, to see exactly how it would have worked in the past. Yeah, sure, maybe an idea that failed in the past will be an astounding success in the future. But my $100K was gone, gone, gone, and I don't care to repeat the experience.


Yes, indeed, the next 20 years may be completely different than any previous 20 year period. But so far, everytime people have said, "It's different this time!", they wind up losing their shirt.

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I find that trying to think in terms of "buckets" greatly complicates things for me.
That incentivized me to look into my file of quotes, whereupon there were a couple on point.

"In the end, the reality is that while cash reserve strategies appear psychologically appealing, their actual benefits as an enhancement for retirement income sustainability appear to be a mirage upon closer inspection.
These bucket gimmicks are just a way of skewing your asset allocation in a more conservative direction. There's no magic to it. However, if you're pulling withdrawals from the cash reserve during a declining market, you're making a tactical decision to reallocate toward riskier assets." -- M. Kitces


"if indeed you experience a poor initial sequence of investment returns so that you have been forced to liquidate all your cash investment--you might find yourself with a 100% equity exposure well into retirement and possibly deep into a bear market. This is in contrast to the non-bucketer... who is maintaining the same exact asset mix and hence the same risk profile over time. Sure, the market may recover by the time you have to tap into the equity portion or it may not.

Either way, you have neither reduced nor mitigated financial risk but simply taken a bet on scenarios you believe will not happen. Safety is just a mirage."

Another author & financial advisor said that he sometimes found it necessary to "construct a client's portfolio to reduce the emotional impact of volatility by dividing the client portfolio into a portion to meet short-term needs and a portion to build long-term wealth. The short-term portfolio is built with little or no volatility. ... Sadly, the current infatuation with short-term volatility mitigation has us forgetting about returns, the most important driver of long-term wealth."


==========
BTW, OldShooter, I don't really care to convert you. I don't know you and don't particularly care about you, per se. Do what you wish and God Bless. After the 2nd go-aorund on a topic thread, my intended audience is not so much the "opponent", but new people with an open mind who may start reading the thread for information.

I always appreciated it when I read a long thread about an idea that sounded good, and was able to read the pro & con arguments and be warned off of something that worked badly even though it sounded good.

And being retired, noodling around on the internet for amusement and entertainment and education is a fun way to spend my day.
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Old 09-12-2017, 02:22 PM   #34
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.. Sadly, the current infatuation with short-term volatility mitigation has us forgetting about returns, the most important driver of long-term wealth."
for many retirement is not about growing wealth , it is about not growing poorer.

but i do agree with all of kitces points .
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Old 09-12-2017, 02:46 PM   #35
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Once one is already wealthy enough to be retired, then it's more of a balancing act between short-term survival and long-term keeping up with inflation.

There are lots of ways to solve the problem. And a lot of them come down to personal comfort level/psychology.

IMO as long as you have enough allocated to investments that keep up with inflation over the long term, you can be as aggressive or conservative as you like with the remainder.

I never adopted buckets per se, I just made sure I never went below a certain $ amount in fixed income in my retirement portfolio when rebalancing during down market times.

But I also keep a lot of short term cash around in non-retirement accounts. Because I can - i.e. my retirement portfolio should already be more than enough to meet my long-term needs. (Knock on wood)
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Old 09-12-2017, 03:37 PM   #36
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... my file of quotes ...
Wow. And I'll be that every one of them supports one or another of your beliefs. To avoid the "naked link" situation I"ll provide this first paragraph:
"Confirmation bias, also called confirmatory bias or myside bias,is the tendency to search for, interpret, favor, and recall information in a way that confirms one's preexisting beliefs or hypotheses.[1] It is a type of cognitive bias and a systematic error of inductive reasoning. People display this bias when they gather or remember information selectively, or when they interpret it in a biased way. The effect is stronger for emotionally charged issues and for deeply entrenched beliefs."
-- https://en.wikipedia.org/wiki/Confirmation_bias

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... After the 2nd go-around on a topic thread, my intended audience is not so much the "opponent", but new people with an open mind ...
Wow again. Bringing truth and light to the internet must be a tremendous burden.
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Old 09-13-2017, 03:15 AM   #37
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Once one is already wealthy enough to be retired, then it's more of a balancing act between short-term survival and long-term keeping up with inflation.

There are lots of ways to solve the problem. And a lot of them come down to personal comfort level/psychology.

IMO as long as you have enough allocated to investments that keep up with inflation over the long term, you can be as aggressive or conservative as you like with the remainder.

I never adopted buckets per se, I just made sure I never went below a certain $ amount in fixed income in my retirement portfolio when rebalancing during down market times.

But I also keep a lot of short term cash around in non-retirement accounts. Because I can - i.e. my retirement portfolio should already be more than enough to meet my long-term needs. (Knock on wood)

kind of my feeling too. i already have all the volatility and money in equities and bonds i need or want . so anymore cash that comes in will likely just be held as cash for now .

we were holding a lot more cash but decided to get a new car and book an expensive cruise . to bad i think that cruise may be cancelled , it was to the keys and cuba and we only have 7 weeks left .

anymore cash that comes in that is excess will go towards buying a co-op we are interested in moving to .

so i guess you can say at this point excess cash is not going to be invested , it is going to be held as cash and spent for extra's we want but don't need

i lost track of the time but either this year or next year we are due a final payoff for a lease rights sale we did a few years ago . they paid us up front for 90% but the last 10% they only pay us interest on until the end of the 4th year when they pay everything due .
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Old 09-13-2017, 07:29 AM   #38
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so i guess you can say at this point excess cash is not going to be invested , it is going to be held as cash and spent for extra's we want but don't need
Yeah - we have been accumulating excess cash for several years now. Our "excess cash" is due to underspending our annual withdrawal. Since it has already been earmarked for spending I keep it in short term funds for spending in the near future on extras, etc. and for down market years.
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Old 09-13-2017, 08:27 AM   #39
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This WARM thing isn't really anything fundamentally new is it? It sounds to me like it's the same AA discussion, this author is just advocating for one logical extreme of the spectrum, near 0/100 stocks/bonds (or cash rather than bonds in this case). The costs and benefits are all the same, stocks perform better over the long term allowing a higher withdrawal rate, and protect against inflation, but are highly volatile. Bonds and cash suffer less volatility allowing better sleep, but perform worse and suffer more from inflation, meaning a lower WR is mandated. People move the slider left or right to try and balance these to their preference, this author just went all the way to one end. Is there more to this that I'm missing here?

Of interest to me in this article was the mention of the study reporting expenditures of retirees as they age, I hadn't seen such statistics. Belt tightening also struck me as a bad method of dealing with inflation, but maybe if expenses tend to decline like this it's acceptable. That could bring great comfort knowing I'm going to need less and less every year BUT, the stats cited are based on household expenses, just tracking what was spent, not what people wanted to spend. Are older folks spending less because they just don't want to spend more, or because they are running out of money and can't afford to? I'd bet there's a lot of the latter in the population. I shamefully admit I didn't read through the entire paper to see if my criticism was addressed.

Also didn't love that the author punted on Social Security and while kind of admitting that inflation was a problem with this method, just waved the SS wand over the problem without any math or consideration for how much SS a person may or may not be getting.
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Old 09-13-2017, 09:42 AM   #40
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Originally Posted by mrWinter View Post
] Are older folks spending less because they just don't want to spend more, or because they are running out of money and can't afford to? I'd bet there's a lot of the latter in the population.
The latter aren't reading F.I.R.E. message boards or any other financial sites.

As for the former, the time to travel the world and the country (USA) is when you are younger and abler. It's much easier to visit Machu Picchu or climb to the top of Hong Kong's Big Buddha when you are 65-70 than when you are 85-90. And once you seen all the 30 or so standard world tourist destinations, and then work you way down to the lesser known, lesser traveled spots (what Holland America cruise lines calls the "collector's voyages", there's little reason to spend 10's of thousands of dollars on overseas trips/cruises anymore.

Paris & Rome? Sure, let's go see them.

Gabes, Tunisia & Malta? Heck, why not? How many times do we need to visit Venice?

Drive the USA and visit every state? Sure, let's go. Stay in nice hotels and eat in nice restaurants -- no Motel Six's or Mom's Greasy Spoon's - this is for fun not for endurance.


Now where? Mumbai slums? Um, no thanks.

For people who have (had?) enough money to do all that, once you'd been there and done that you don't particularly want to do it again, so your spending will naturally decrease.
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