Now Retired: We need 3% yield on a $1.1 mil nest egg

[marko]

What's the difference, what's the advantage to cash? And the downside of holding all that cash, all the time, just in case you want it for a downturn, is that the cash isn't earning as much as fixed all that time. We know that cash is described as a 'drag on performance'. But I also just don't see what benefit it provides in a downturn.

-ERD50

For me, the cash isn't earning anything substantial (1%-2%) but it is also not dropping in value as the downturn hits. In a bad downturn, even my fixed income (bond funds) dropped a bit.

In the end however, I think it's about mental comfort, real or perceived.

I'm not trying to squeeze every last nickel out of every one of my holdings.

 

[audreyh1]

Some of us just prefer to let cash build outside the retirement portfolio during the good times, and don’t worry about whether our short-term funds are underperforming in the long-term, as long as we have a large enough retirement portfolio to provide our annual withdrawal needs.

I know many folks treat it all as one pile, or one pile less checking, but others of us keep retirement and short-term funds segregated and only apply withdrawal rules, AA and rebalancing to the retirement portfolio.

We actually don’t care about the long-term performance of our total pile. We’ll be dead then. I figure as long as the retirement portfolio is big enough and I keep a reasonable AA, rebalance regularly, and maintain a reasonably conservative withdrawal rate, we’ll be fine. Our retirement portfolio has grown so much over the past few years that I’m not motivated to expose even more of our net worth to the volatility of long-term investments.

 

[ERD50]

... In the end however, I think it's about mental comfort, real or perceived. ...

I think this really gets down to the 'brass tacks' of why I post and question these things.

Shouldn't we always be trying to identify which things bring us real comfort because they really make a financial difference, versus those things which give us perceived comfort, but might not be helping us, and may actually be hurting us (even if the difference is kind of small - small things can add up over time)?

I prefer to live in a world where my perceptions match reality, well, at least when it comes to finances. I just don;t see where a misplaced level of comfort is serving me, especially when the alternative is simple (maybe simpler?).

I see discussions like this on this forum as a real resource, a sounding board to attempt to separate the wheat from the chaff.

For me, the cash isn't earning anything substantial (1%-2%) but it is also not dropping in value as the downturn hits. In a bad downturn, even my fixed income (bond funds) dropped a bit. ...

And that's why I'd love to see some studies. Yes, the fixed can drop a bit in a downturn as well. But is selling a few % enough to offset all those opportunity costs over the years?

... I'm not trying to squeeze every last nickel out of every one of my holdings.

Some of us just prefer to let cash build outside the retirement portfolio during the good times, and don’t worry about whether our short-term funds are underperforming in the long-term, as long as we have a large enough retirement portfolio to provide our annual withdrawal needs.

We actually don’t care about the long-term performance of our total pile. We’ll be dead then. ...

Well, if you don't care, there's no point to any discussion of it. But it seems odd to me that there are debates on how to rebuild that cash, etc - a basic XX/YY AA seems simpler than working through maintaining a cash bucket, thinking about when/how to draw on it, how to refill it, etc. Why complicate things, if it doesn't matter?

I can certainly understand not wanting to jump through hoops for nickels and dimes. But I don't think we are talking about that here, it seems almost to be the opposite (in a small way).

-ERD50

 

[Bigdawg]

Well, maybe six years ago

https://www.usatoday.com/story/mone...lif-gas-prices-spike-at-5-per-gallon/1616773/

A bit of misremembering and a bit of exaggeration on my part. I had 2 stints in SoCal. 92-96 and 2000-2009. The higher gas prices (just over $4/gal-not $5) were from the 2000-2009 stint not the earlier 92-96 timeframe.

Loving this thread regarding inflation. Paying much more attention to that issue as my plan evolves. Thanks everyone.

 

[daylatedollarshort]

Inflation really hurts retirees with fixed income streams, like non-COLA pension income where the funds are needed to pay inflation adjusted expenses. For investors with asset classes like mutual funds or bond /CD ladders that may lag but still have returns that go up or down with rates, isn't it real returns that matter the most? If inflation is 10% but interest rates are at 15%, isn't a 5% real return better than a scenario like 3% inflation and 2% rates with a -1% real return? It seem like real rates are more key than just inflation alone.

 

[ShokWaveRider]

Please Riddle me this one. Why, if one has "won the game" would they risk overly in the market? OK I know...… please refrain from the inflation/equities response to this.

For us we invested heavily in the market till we reached our goal and ER'd 10 years ago, and then went to fixed income virtually 100%. OK we missed out on the great bull run but lost nothing (Zero) in 2008/9 either.

Please understand our logic. I will use the OP's $1.1m as a base, we did have a little more than that in our case but that is moot.

Assuming No Debt, home owned no mortgage. 25 year time horizon (We used 35 years when we retired).

$1.1/25 = $44k per year. = 4% WR. Let us assume the $1.1 is invested in fixed income at 3% PA. There is the inflation hedge. Add $25k+ SS to the mix and one should be OK. All right if one's annual Expenses are $100k+ then it will not work.

This is what we did 10 years ago and honestly we are no worse off than we were then, in fact we have more money as we under spent.

Other than wanting as much cash as one can muster off one's stash even if one does not need it, or one likes the investing hobby with all it's associated risk, or one could not ER without the extra income, or sheer greed (Not trying to be rude), why would one not enjoy retirement without the hassle?

When we ER'd we knew exactly what our expenses were, paid cash for a home in a not so low COL area, invested for the long haul in fixed income that has returned ~3.23%, kept enough cash out to get use over the first 2 years. Only in one year did we need to take extra out (taken from interest from the stash not capital) to buy a new car (Lease) in year 2, all other leases were covered.

Sorry to be a Donny downer on Market investing. But if one does not need it, why bother?

As a side note, we fully realized that if our plan failed for whatever reason that we would need to re-evaluate and consider stock investing, but to date after 10 years we really have not had too.

 

[Dtail]

Please Riddle me this one. Why, if one has "won the game" would they risk overly in the market? OK I know...… please refrain from the inflation/equities response to this.

For us we invested heavily in the market till we reached our goal and ER'd 10 years ago, and then went to fixed income virtually 100%. OK we missed out on the great bull run but lost nothing (Zero) in 2008/9 either.

Please understand our logic. I will use the OP's $1.1m as a base, we did have a little more than that in our case but that is moot.

Assuming No Debt, home owned no mortgage. 25 year time horizon (We used 35 years when we retired).

$1.1/25 = $44k per year. = 4% WR. Let us assume the $1.1 is invested in fixed income at 3% PA. There is the inflation hedge. Add $25k+ SS to the mix and one should be OK. All right if one's annual Expenses are $100k+ then it will not work.

This is what we did 10 years ago and honestly we are no worse off than we were then, in fact we have more money as we under spent.

Other than wanting as much cash as one can muster off one's stash even if one does not need it, or one likes the investing hobby with all it's associated risk, or one could not ER without the extra income, or sheer greed (Not trying to be rude), why would one not enjoy retirement without the hassle?

When we ER'd we knew exactly what our expenses were, paid cash for a home in a not so low COL area, invested for the long haul in fixed income that has returned ~3.23%, kept enough cash out to get use over the first 2 years. Only in one year did we need to take extra out (taken from interest from the stash not capital) to buy a new car (Lease) in year 2, all other leases were covered.

Sorry to be a Donny downer on Market investing. But if one does not need it, why bother?

As a side note, we fully realized that if our plan failed for whatever reason that we would need to re-evaluate and consider stock investing, but to date after 10 years we really have not had too.

As stated previously, I am in the market coz I need to be. I don't see anything wrong with your strategy. Our overall expenses are on the higher side, even though our WR is under 3% and will eventually be 3%, but I wouldn't be comfortable for myself at a 3.23% expected return right now.

 

[Dtail]

Inflation really hurts retirees with fixed income streams, like non-COLA pension income where the funds are needed to pay inflation adjusted expenses. For investors with asset classes like mutual funds or bond /CD ladders that may lag but still have returns that go up or down with rates, isn't it real returns that matter the most? If inflation is 10% but interest rates are at 15%, isn't a 5% real return better than a scenario like 3% inflation and 2% rates with a -1% real return? It seem like real rates are more key than just inflation alone.

I would agree, so what % of the time do CD's keep up with inflation? Plus one's own personal inflation rate I would think comes more into play.

 

[audreyh1]

And that's why I'd love to see some studies. Yes, the fixed can drop a bit in a downturn as well. But is selling a few % enough to offset all those opportunity costs over the years?

Well, if you don't care, there's no point to any discussion of it. But it seems odd to me that there are debates on how to rebuild that cash, etc - a basic XX/YY AA seems simpler than working through maintaining a cash bucket, thinking about when/how to draw on it, how to refill it, etc. Why complicate things, if it doesn't matter?
-ERD50

Yes, there have been studies and they show higher terminal portfolio values if you don’t set aside an initial cash buffer.

What doesn’t matter to me is the long term opportunity cost of having plenty of cash on hand. Maybe folks with heirs care. Or maybe folks who want a larger income when they are older care.

The only thing we care about is whether we set aside a big enough pile for our retirement portfolio, and apparently we did [knock on wood]. What we do with the funds outside our retirement portfolio - we have a great deal of flexibility, which is what we wanted.

 

[haha]

Not an attempt to talk anyone out of stock and bond mutual funds, but a big part of the reason we are heavy on TIPS and light on equities are all the freakout posts here and Bogleheads whenever there any kind of market drops. I saw words like nerves of steel, gut punch and white knuckling it and I personally would like to avoid those feelings in my retirement plan, even if it means lower total returns.

This is so true. I have been on this board since 2003. I can say that many of us perhaps have little emotional reality of what a gut punch large downturns can be. We can say, "it will come back", but that is a little like when you are upstairs in your bed and you think you hear someone moving around on the main floor. It's probably just the house creaking, but we may worry that perhaps not. I feel that likely any overall large diversified equity index losses will come back. Mostly because governments will just start any manipulations that they please to directly control stock performance. Remember what Andrew Mellon supposedly said to Herbert Hoover after the '29 crash:

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.” According to Hoover, Mellon “insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse” and that “even a panic was not altogether a bad thing.”

We will not hear this from any politician, in any large economy, anywhere during the next stress. Still, it is unlikely to be a pleasant experience for us retired people.

Ha

 

[daylatedollarshort]

I would agree, so what % of the time do CD's keep up with inflation? Plus one's own personal inflation rate I would think comes more into play.

One guide is the TIPS yield. When we retired 30 year TIPS were at around 2% on the 30 years. However, both real and nominal rates have generally been dropping worldwide since the 19080s (interesting chart in the link below):

https://obamawhitehouse.archives.gov/blog/2015/07/14/decline-long-term-interest-rates

Current TIPS yields are at .68 to .90%. My spreadsheet retirement focus is on real rates. We are not likely to be hurt by inflation because we don't have any inflation impacted expenses funded by non-COLA income. However we would be impacted by persistently lower long term real returns. To be conservative I use .5% real returns these days. Which at our ages still gives us a higher than 3.33% safe withdrawal rate (100 / 30 years remaining = 3.33%).

 

[ERD50]

Please Riddle me this one. Why, if one has "won the game" would they risk overly in the market? ...

Sorry to be a Donny downer on Market investing. But if one does not need it, why bother? ....

As stated previously, I am in the market coz I need to be. I don't see anything wrong with your strategy. ....

+1 to Dtail. For ShokWaveRider, I don't understand the defensive position you are taking. Did anyone say you are 'wrong' to do what you are doing? If you went through your numbers and have decided that 100% fixed income will meet your needs, fine. Who's arguing that?

I haven't gone through your numbers in detail, so I don't know, don't care. I only try to keep myself (and others, since this is a public forum) informed of what the calculations and risks are of any strategy.

But to answer your question, and I have in the past, once you have "won the game", it really means you can afford to take the 'risk' of a volatile 100% equities position, and you can afford to take the 'risk' of a low performing 100% fixed portfolio. So just take your pick. Since historically, the market does tend to rise over long time periods, most people will want to keep some equities. No need to be all or nothing. Some think it would be nice to have a good chance of leaving a pile for heirs or charity. Others won't care. So each can do as they please. Really.

edit/add: And what "bother"? It sounds like more work to keep a CD ladder, and/or investigate fixed income opportunities over time, than it is to go 50/50 a total stock market fund and a total bond fund, and forget about them.

-ERD50

 

[Chuckanut]

After I spent down a slug of my cash cushion in 2008/09 I used the recovery that followed to top my cash cushion up again. I harvested some of the equity growth for cash along the way rather than do a pure rebalancing by selling equities and buying bonds. I did the refill gradually over a 2-3 year period.

I haven't experienced a big downturn since I retired, but I am certain it is only a matter of time. Having lived through the crash of 73-74 and the recent 2008 debacle, I know what a bad Bear Market can do.

My plans are to do what Mr. ReWahoo did. It's hard to argue with the voice of experience.

 

[daylatedollarshort]

+1 to Dtail. For ShokWaveRider, I don't understand the defensive position you are taking. Did anyone say you are 'wrong' to do what you are doing?

Sure, there are plenty of posts in this thread alone about $15 loaves of bread, cautions about inflation, needing stocks for inflation protection and even "The mantra here had always been "stay the course, keep your AA and don't panic". Now it's "I can't handle a correction!" What's changed?"

 

[ShokWaveRider]

ShokWaveRider, I don't understand the defensive position you are taking.

What makes you think I am taking a defensive position? Just stating a case. Fact in our case. Why take ANY risk if you do not have to?

I would like to hear of how many people check the stock market regularly these days? I only look at it when it pops up on the TV and when the Talking heads make a big deal of it when it is going down. Simply out of curiously. (I do check CD and MYGA rates daily... LOL) OK, so I am just as bad.

"The mantra here had always been "stay the course, keep your AA and don't panic". Now it's "I can't handle a correction!" What's changed?"

I think because there are a lot of nervous nellies in the stock market now, and the reality that after 9 years, a big one can really happen. JMHO

 

[RobbieB]

I'm 63 and my new AA is 68 / 25 / 7, equities, bonds, cash. Used to be 80/15/5

I like making more dough in the market. More dough to blow -

 

[brokrken]

Check out the Preferred Stock Thread here on ER.org. Lots of good ideas from the fine folks who post there.

 

[Corporateburnout]

I think because there are a lot of nervous nellies in the stock market now, and the reality that after 9 years, a big one can really happen. JMHO

So what? it's not a revelation that stock market corrections and downturns happen and if people get nervous they should not be invested in the them in the first place.

For people with pensions, SS and a very low WR the 100% fixed income may work but for the rest of us it's necessary to stay invested with a reasonable stock allocation.

 

[daylatedollarshort]

For people with pensions, SS and a very low WR the 100% fixed income may work for them but for the rest of us it's necessary to stay invested in a reasonable stock allocation.

But if you don't want to leave an estate, even at a zero percent real return and 30 years to go one could withdraw 3.33%. Do you have a higher withdrawal rate, want to leave an estate, more years to plan for than 30, think a 0%+ real return is unrealistic or ? I can see why people want to invest in equities for the good odds at big gains, but I am curious about the necessary part.

One of the posts on Bogleheads in the past pointed out that about 10% of the time or so, stocks aren't going to return more than bonds over a retirement span anyway - "Statistically, stocks may not return much more than that over an individual investors' retirement-savings period. The great thing about stocks versus bonds is that historically the distribution of outcomes over long holding periods has been almost all upside. But the thing stock enthusiasts continually miss is that the lower end of that distribution is about the same as bonds. Not just the worst-case scenario, but the lower tenth percentile or something like that.

What this means is that you need to save about the same amount no matter what your asset allocation is. You cannot use the fact that you're investing in stocks to justify a lower savings rate.....2) The amount you need to save is the same no matter what your asset allocation is. To say "it's very hard to save enough to retire just using Treasury bonds and TIPs" is just to say that it's very hard to save enough. If you aren't saving enough to retire just using Treasury bonds and TIPs, you aren't saving enough if you add stocks. You're counting on luck, and luck is not a strategy."

Source:
https://www.bogleheads.org/forum/viewtopic.php?t=93245

 

[ERD50]

What makes you think I am taking a defensive position? Just stating a case. Fact in our case. Why take ANY risk if you do not have to? ...

I just got that impression. Maybe I'm missing it, but I don't see anyone 'objecting' to a fixed income position for anyone with a big enough stash to cover expenses in that way. But you keep asking 'why not, if fixed income covers your expenses?'. It just seems to me, if it wasn't defensive, it would just be a simple statement, like ' if you have an x.x% WR, and are not concerned with leaving a stash for heirs/charity, and keep a pile on the side for emergencies, it looks like you could your portfolio should survive for YY years.'.

Maybe I'm just reading that into it. If so, I apologize (if you found it offensive in anyway).

.... I would like to hear of how many people check the stock market regularly these days? I only look at it when it pops up on the TV and when the Talking heads make a big deal of it when it is going down. Simply out of curiously. (I do check CD and MYGA rates daily... LOL) OK, so I am just as bad. ...

Since it is so convenient, I do check it throughout the day. Not to act on it, just so I know, if someone asks "Did you see what the market did today, OMG!", and my response will be the same - market goes up, market goes down, yawn. But at least I know what they are talking about. I also use it as a 'news feed'. If the market does make a big jump, I wonder what's going on, and check the news. ICBMs coming my way?

.... I think because there are a lot of nervous nellies in the stock market now, and the reality that after 9 years, a big one can really happen. JMHO

There are always (thankfully) nervous nellies in the stock market. Yawn again.

Sure, there are plenty of posts in this thread alone about $15 loaves of bread, cautions about inflation, needing stocks for inflation protection ...

Well, all those things are true, aren't they? And as I've said before, you seem to have thought this through and are prepared, so what does it matter what 'they' say?

... and even "The mantra here had always been "stay the course, keep your AA and don't panic". Now it's "I can't handle a correction!" What's changed?"

Has anything changed? I'll suggest it is your perception, or perhaps selective reading. Are you saying that a significant portion of the "stay the course" crowd is now saying (the same people, not a new crop of them?) they can't/won't? Geez, 2008 wasn't that long ago. Many stayed the course, many were somewhat panicked. I'm not sure we can make generalities.

One thing that has changed among the 'old crowd' is time. Many of us have had our stash grow. We are all older, so fewer years to support with that stash. Some us may find that our SS/pension is actually covering more of our expenses than we thought. Medicare might be reducing the health care cost unknowns. That reduces some of the 'need' for equities, so some may just be deciding that a lower volatility route is appropriate at this stage. I think that makes sense. I wouldn't try to read anything more or less into it.

-ERD50

 

[RobbieB]

I never check the market. I look at my paper statements when they come in every month. Look at them and replace last month's statement in the 3 ring binder.

 

[daylatedollarshort]

Has anything changed? I'll suggest it is your perception, or perhaps selective reading.

-ERD50

I didn't make the post about what changed. I quoted Marko's post from earlier in this thread about a stock bond portfolio being "the mantra" in response to you asking ShokWaveRider about "Did anyone say you are 'wrong' to do what you are doing?"

 

[Corporateburnout]

Do you have a higher withdrawal rate, want to leave an estate, more years to plan for than 30, think a 0%+ real return is unrealistic or ? I can see why people want to invest in equities for the good odds at big gains, but I am curious about the necessary part.

Yes to all of the above. Our WR for the last 5 years of retirement has averaged 5% and will continue for the next 5 until SS comes online. We plan to leave a legacy and before we retired we planned on a 40 year retirement.


As for "stay the course crowd" getting nervous I have not seen many of the long time posters going to a 100 fixed allocation, they may have reduced their exposure to equities as they get older but not completely abandoned stocks.

 

[ERD50]

....

One of the posts on Bogleheads in the past pointed out that about 10% of the time or so, stocks aren't going to return more than bonds over a retirement span anyway - "Statistically, stocks may not return much more than that over an individual investors' retirement-savings period. .... But the thing stock enthusiasts continually miss is that the lower end of that distribution is about the same as bonds. Not just the worst-case scenario, but the lower tenth percentile or something like that.

What this means is that you need to save about the same amount no matter what your asset allocation is. ...
Source:
https://www.bogleheads.org/forum/viewtopic.php?t=93245

FIRECalc sure doesn't show that. I entered a $1M portfolio $30,000 spend, 35 years, then the best fixed income choice available (Corp paper and 5 yr treasuries gave the same 'success' number).

https://goo.gl/1RuiAp

100% fixed income success was 83.9% ( 16.1% FAILURE)

70/30 was 100% and a minimum ending stash of $796,709.

Now maybe their fixed income choices are not optimal, but that's a big delta to overcome, especially if you want to keep some buffer for emergencies.

Can you point out the actual data from your link, I didn't roll through all 3 pages, but only saw conversation. And I gotta run for now...

-ERD50

 

[daylatedollarshort]

FIRECalc sure doesn't show that. I entered a $1M portfolio $30,000 spend, 35 years, then the best fixed income choice available (Corp paper and 5 yr treasuries gave the same 'success' number).

https://goo.gl/1RuiAp

100% fixed income success was 83.9% ( 16.1% FAILURE)

70/30 was 100% and a minimum ending stash of $796,709.

Now maybe their fixed income choices are not optimal, but that's a big delta to overcome, especially if you want to keep some buffer for emergencies.

Can you point out the actual data from your link, I didn't roll through all 3 pages, but only saw conversation. And I gotta run for now...

-ERD50

There are at least two threads in the Bogleheads discussion on Nisprius comments with various links. Here is one I found on my own from 2011:

Bonds Beat Stocks Over 30 Years - Larry Swedroe
https://www.cbsnews.com/news/bonds-beat-stocks-over-30-years-so-what/

"For the period October 1981-September 2011, the S&P 500 Index returned an annualized 10.8 percent, compared to the 11.5 percent annualized return on long-term (20-year) Treasury bonds. Should you be surprised? Yes. It certainly shouldn't have been the expected outcome. However, the right perspective is that it should have been a possible outcome... In other words, the fact that stocks have provided a risk premium of about 8 percent is because stocks are risky, even over long periods. And while it's true that the longer the period the more likely it's that stocks will outperform bonds because there's a large equity risk premium, there must be the possibility that they'll underperform, no matter how long the horizon."

I have pointed out logic flaws in Firecalc before, so it is not a tool I personally use for planning.