Length of cash buffer for ER's

[tednvon]

Hi, to Professor

Right now because I am working 1/2 at the U of Iowa I am pulling out about 28Kcash/year out of post tax account that is at about 85K to supplement salary for two more years until I retire at age 63. At 63 I will start Soc Sec and spouse who is fully retired will start SS in 2008 at age 62. The UofI will let me purchase my Insurance for 2 years until MC at 65. This will cost a bit, but not enough to keep us from retiring...I figure it about a housepayment that we no longer make for a couple of years...
When I ran Firecalc, ( and if you haven't done this, do it now!!)I always come out 100% looking at 65K a year, combination of SS for both of us and rest from rertirement funds. It is half of our previous gross but with no debts, we honestly cannot spend 4k a month no matter how hard we try, so future looks good and we are having a ball.
I swear by the 4% safe withdrawal rate and with SS and 5 years always in cash and the rest in a broad Index Fund (broader than S&P) and some scattered in International Index and Real Estate I feel very comfortable not tweaking much and just moving money from Index to Money Market for the last of the 5 year cushion once a year.

If Money Market goes down below 3-4%, I might think more about Bond Funds at CREF but right now Money Market at 4-5% is fine for my plan...As I have said before, I really know very little about the ins and outs of bonds, TIPs, stocks. I have stayed with all Index Mutual Funds as discussed on this board...I do plan to move all my TIAA-Cref to Vanguard at full retirement unless they bring thier fees back down to compete with Vanguard. We have already moved spouses to Vanguard because their total stock index fund is about .19 vs. now .43 at CREF...that is good chunk of change over 20 years with a million plus dollars...

Hope this helps...it really is like shopping for groceries...stay with basics and if Campbell's Soup is 1.00/can in Isle 1 and .89/can in Isle 3, why in the world would you buy the the soup in Isle 1. I meet so many people that have $$$ with Merrill Lynch, TD Waterhouse, Baird and others who are being sold on the need for 80% post retirement income and paying up to 2% for the insights!!!

Love this board...Ted

 

[kcowan]

...I meet so many people that have $$$ with Merrill Lynch, TD Waterhouse, Baird and others who are being sold on the need for 80% post retirement income and paying up to 2% for the insights!!!

I agree. Most of my friends use the 2% solution and are not interested in discussing alternatives. Meanwhile we can travel more and live better. But unless they are receptive, you might as well be discussing the technology for space travel.

 

[Mr._johngalt]

I agree. Most of my friends use the 2% solution and are not interested in discussing alternatives. Meanwhile we can travel more and live better. But unless they are receptive, you might as well be discussing the technology for space travel.

My experience exactly.

JG

 

[Rich_by_the_Bay]

My take on this is that there are really two philosophies toward "short term" cash buffer. One is to have enough to get you through emergencies or other setbacks -- financial or otherwise -- without having to sell shares during a dip in the market. Typically, I hear 3 months to 3 years recommended.

A second approach is designed to get you through more profound and long-lasting stock market calamaties. Historically, the market rarely if ever stays down in value more than about 7 years, and that has been infrequent. To me, the latter represents a more severe threat to my financial stability in retirement.

I choose to build a 7 year buffer, but it will be only partially in cash (maybe 2-3 years) with the remainder in fixed income investments perhaps no longer than 5 years (e.g. intermediate bond funds). This keeps the buffer earnings up higher than cash or MMF, at the cost of slightly more volatility though even that can be questioned.

 

[Nords]

I choose to build a 7 year buffer, but it will be only partially in cash (maybe 2-3 years) with the remainder in fixed income investments perhaps no longer than 5 years (e.g. intermediate bond funds). This keeps the buffer earnings up higher than cash or MMF, at the cost of slightly more volatility though even that can be questioned.

Sounds like Frank Armstrong.

 

[unclemick]

After the 12/30 payable date -- sometime in January take 5% of my Target Retirement 2015 balance and deposit in Prime MM and spend as required durung the year.

Try and spend it all during the year.

heh heh heh heh heh heh

 

[Rich_by_the_Bay]

Sounds like Frank Armstrong.

Yep. Or, dare I say it, bucket 1.

 

[d]

Or, dare I say it, bucket 1

i keep waiting for someone to say "buck-off" ...

 

[Rich_by_the_Bay]

After the 12/30 payable date -- sometime in January take 5% of my Target Retirement 2015 balance and deposit in Prime MM and spend as required durung the year.

Sounds pretty wise to me.

Are you able to keep the "percent of assets" thing going even in a downturn of a few years duration? I really like percent-of-assets SWR since it assures infinite solvency, but not I find it hard to figure just how happy we would be giving ourselves a paycut year after year in a downturn.

I guess if you have substantially more than you "need," it's a non-issue.

 

[audreyh1]

That's where Bob Clyatt's 95% rule comes in handy. It's also nice and simple. I know somewhere there was a post about how this scheme improved survivability.

Personally, I think I'd be more comfortable pulling back after a bad year or two. It's human nature.

I've never actually been a fan of the SWR with inflation adjustment every year - I much prefer fixed percent of assets. I just don't have a psychological "need" for some fixed inflation adjusted "salary". This means you have to deal with "fat" years and "lean" years, but in my mind that's just a matter of not spending all the money you withdraw in a fat year, and setting some aside for a lean year. This is where having a separate cash account covering just a few years living expenses comes in handy.

I like this idea too, because after a really hot year in the stock market, chances for a correction seem higher, so taking a chunk off the table seems prudent. You don't have to spend it all in one year.

FWIW - our living expenses have been all over the map, but generally trending down over time. We spent the most money by far during the first two years of our retirement.

But drawing a certain % out of your portfolio really doesn't say WHERE it has to come from - i.e. which asset class you have to sell to meet the withdrawal. It's natural in an asset allocated portfolio to pull the withdrawal from your winners - thus avoiding selling equities after a sharp down year or two.

Again, I guess the trick is within your asset allocation to have a large enough % allocated to low-risk bonds/cash to cover several years.

Audrey

 

[youbet]

This is where having a separate cash account covering just a few years living expenses comes in handy.

I agree totally that having cash or cash equivalents to cover a few years of expenses in retirement is the right thing to do. I just can't bring myself to separate that money from the balance of my portfolio. So, I have roughly a year in MM and about a year in a CD and a couple of years in an ultra-short bond fund. But, not separate from my portfolio....... mixed right in there, on the same spread sheet even.

What do you mean by "separate?"

 

[haha]

I agree totally that having cash or cash equivalents to cover a few years of expenses in retirement is the right thing to do. I just can't bring myself to separate that money from the balance of my portfolio.

This whole discussion baffles me. Money is money- if it is exposed to minimal price risk and it is quickly available, how couild it matter what one names it?

More seeing how many angels could fit on the head of a pin.

From your post, it seems that this is similar to how you see it.


Ha

 

[audreyh1]

What do you mean by "separate?"

My retirement portfolio is in a brokerage account. My 2 to 3 years of cash is in a different mutual fund account and is pretty much all in cash reserves. Every month I have money sent to my bank checking from this cash mutual fund account to cover my monthly expenses.

When I do the computation to rebalance my retirement portfolio, I only use the numbers from the brokerage account. This is perhaps the most important reason for the separation.The money in the cash account never influences rebalancing computations. I also only use the value of the brokerage account to compute my SWR.

This is just what has worked for me for several years. Yes, theoretically, I could compute a higher SWR if I included the short term cash account, but I don't. This is slightly more conservative.

Audrey

 

[youbet]

Ha........ Yep, you and I seem to be in the same camp in this regard.

Audrey........ I can't see any issue with the way you are handling things. And, who knows, I'm only a few months into this RE thing. Perhaps I'll change my outlook as time goes by.

For now, I'm most comfortable looking at all my financial assets on one piece of paper regardless of what brokerage, bank, credit union or piggy bank they're in. I do keep real assets off the table, and that's another fiesty subject to discuss and was done so at length a few months back.

My approach to sourcing month-to-month spending money isn't as structured as yours, and right now doesn't need to be. But, like you, I give myself wiggle room with cash, cash equivalents and short term fixed assets to cover a substantial timeframe should there be a lengthly period where I have no equities I'd consider trimming.

I calculate SWR using my entire financial asset base. My actual WR is below the SWR Firecalc spits out, so that's another source of wiggle room.

Just in case DW reads this.......... No Honey, I don't include your stash of quilting supply money you have hidden at the bottom of the cedar cabinet where you store fabric. Uh.....I don't know.....just happened to look in there one day.....

 

[audreyh1]

What do you mean by "separate?"

Well now that I look back at my original post where I mention how a "separate" account can be handy....

When you do an annual withdrawal, you supposedly remove the amount from your investment portfolio and put it somewhere. So it's kind of "standard practice" to remove one year's worth of living expenses, pay the taxes and put the remainder in a separate place since this money is no longer available to invest with but is rather expected to be spent.

My original point was that by not spending all the money after a "fat" year (with larger withdrawal amount due to a major market run), you can let the excesses accumulate in this separate account so that you have some left over for the years when you might have to accept a reduced withdrawal.

If you are using a fixed initial % + annual inflation adjusted SWR method, there is no need to do the above. It's only helpful for the fixed % SWR (not adjusted for inflation) method where you will likely encounter other years where your retirement portfolio shrinks or does not keep up with inflation.

Audrey

P.S. The fact that I happen keep as much as 2 to 3 years cash in a separate account has nothing to do with the above.

 

[mathjak107]

Its all a matter of convience as its all a means to an end. I like the 3 buckets .. The reason i like doing it that way is i subscribe to 2 newsletters,fidelity insight and fidelity monitor.

By using a dedicated very diversified mix utilizing their model portfolios im able to use fidelity insights growth mix for bucket 3, i use fidelity monitors income and preservation model for bucket 2 and their growth and income model for bucket 3 . nice and simple with a well concieved plan for each time frame. When i want to make a change as instructed by the newsletters its easy to adjust.

Its easy to see the returns on each time frame to make sure you are at goal.

No point counting my cash in bucket 1 which is for eating now and the next few years and counting that into how i invest bucket 3 which is for eating in 30 years. Ones a short term liability the other a long term one.

At this point my investments are all very easy to manage as far as anything i need to do or think about. we have a few fine tune trades a year which the newsletters do but pretty much the course is set and full steam ahead.

I like to think of it as clothes, if you get a job that requires you to wear suits to work you need to count how many suits you have, the fact that you have a crap load of jeans and tee shirts and they are all called clothes dosnt really matter, you need to know only about your suit part of the "clothes you own"

If you need more suits you buy the required amount of suits you own regardless of all the other clothes you have.

 

[Mysto]

Just for the record. In keeping with the subject of this thread and in recognizing all of the disdain for buck*ts - I now have a buffer. (Besides I'm not doing it like Mr. Lucia and I wouldn't want to be sued.)

In answer to early questions about the difference of a separate buffer from one single portfolio - the answer would be in rebalancing. Normally you rebalance your entire portfolio - in buffer theory because the buffer is a separate piece it would not rebalance so your cash/bonds ratio could change during time as opposed to remaining a fixed total ratio. So there is a difference.

I am not arguing merits just explaining one difference.

 

[mathjak107]

thats exactley the idea!.... by having dedicated models for short meduim and long term investments you can balance independently.

why do i find that better ?

as an example the growth model for bucket 3 right now has a fund called fidelity strategic real return. its made up of tips,real estate,floating rate loans and commodities. normally that would be a bucket 2 investment as its basically a bond /income fund geared for a higher inflation enviornment.

However its used right now in the growth model more as a storage place for extra money and inflation protection should they be wrong about the other 75% of the portfolio investments which count on lower inflation. this money will eventually end up as all stock funds in the growth model when the newsletter feels the inflation threat has subsided somewhat and we can get a little less defensive.

I can keep this totaly seperate from my bond/income bucket with out effecting my safety net in bucket 2.

 

[audreyh1]

Yes, I think that's what it comes down to. If you are running more than one investment model, then you need a separate bu***t for each one since you can't very well commingle investment models.

I would claim that normal withdrawal requires at least two. You have to take that annual withdrawal and put it somewhere to spend it. Even if it goes to 0 after one year, it's separate from the investment portfolio. Some of us have just padded that annual one so that it covers more than one year at a time and call it a "buffer".

Audrey

 

[youbet]

Normally you rebalance your entire portfolio - in buffer theory because the buffer is a separate piece it would not rebalance so your cash/bonds ratio could change during time as opposed to remaining a fixed total ratio. So there is a difference..

No, not necessarily. I rebalance between asset classes on a personal judgement basis, no firm timelines or rules. I have some general goal levels (which will change from time to time) and try to strategize moves over time to meet these goals within varying market conditions. Besides, your "separate" buffer isn't really all that separate. You flow dollars from your portfolio to that buffer to refill it from time to time!

Apparently, Ray fans refer to cash buffers or reserves as "bucket 1." I refer to them as "cash/near-cash assets" in my portfolio. Ray fans think of bucket 1 as "separate." I choose not to as I have my cash allocation linked to the other allocations and money flows between them from time to time.

I think this is mostly semantics. Labeling my cash/near-cash assests as "seperate" would not cause any difference in the way I manage my portfolio or, specifically, handle rebalancing.

I have no problem with the Ray Lucia jargon. My only regret about it is that all the things people say they are doing with the so-called "bucket system," could be done without the jargon. Therefore, the new jargon just seems to add a layer of complexity to discussions.

Again, as mentioned in an earlier post, I do not include DW's quilting supply stash of $$$ in the portfolio. This would get me involved in the "financial impact of divorce" thread which is going on concurrently!

Additionally, DW hasn't always been all that interested in managing our finances but, nevertheless, I keep her well informed. I've explained what the different classes of assets are, why we need a diversity of asset classes and the pros and cons and risks and rewards of our current allocation. Going back and relabeling cash as bucket one, fixed as bucket two and equity as bucket three just ain't gonna happen!

 

[rs0460a]

I think this is mostly semantics. Labeling my cash/near-cash assests as "seperate" would not cause any difference in the way I manage my portfolio or, specifically, handle rebalancing....

Going back and relabeling cash as bucket one, fixed as bucket two and equity as bucket three just ain't gonna happen!

Agreed... I just finished Ray's book and I can't believe I spent time reading 298 pages that describes what I already do, although not in the "copyrighted terms"...

- Ron

 

[audreyh1]

Well I never read Ray's book either and had my two-tier system with no idea about his particular terms.

But assuming that all cash/near-cash is one "bucket" is not a correct assumption. I have cash in each of two bu***ts and they have entirely different roles. The cash allocation in my main portfolio is there for rebalancing the portfolio. The cash in my short-term account is for spending, not investing. They don't mix.

Sure money is withdrawn from the investment portfolio from time to time since I am in the drawdown part of my life, but it doesn't flow the other way! So the fact that it "moves" in one particular direction from one account to the other because it happens to be withdrawn is a non-issue.

Audrey

 

[astromeria]

kinda like...pouring money...from...a bucket...<where's that innocently whistling smilie?>

 

[bosco]

I heard his next book is coming out with a 4th bucket...

it's called the f**kit bucket....

I just call it "mad money"....