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Old 01-13-2017, 07:57 AM   #21
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While still a few yrs from RE, I wonder where I will fall on this. Intellectually, I would think if you believe in your AA then your once/twice a yr rebalancing would produce your needed funds for the coming yr. OTOH, I see where the defensive gene will start to potentially override some of this by playing "what if" mind games... what if the market craps out for 2, 5, 7 yrs? I suppose this is where we start to argue with ourselves that we should create a 2 - 7 yr cash balance to buffer a market collapse? However, unless this was part of your real AA plan, the larger the cash balance being held, the more you potentially negatively affect your long term planned returns. So here are my questions, particularly for those that hold more than 2 yrs in cash... How/when are you replenishing the current yrs cash you are spending? In other words, if you are a 2 yr guy you are spending now 1 of those yrs worth of cash. At the end of 2017 do you rebalance and replenish the 2 yr balance regardless of market performance or do you make a personal judgement of letting your securities ride and spend the 2nd yr of cash? Of course, if you did the ladder, you are now potentially creating the anxiety that I would think you were trying to avoid by keeping the cash balance. Curious as to how those of you who practice keeping a balance in RE actually implement your use/replenish of the cash.


When the market is down I still sell mutual funds and buy CD's but in smaller increments. If the market was way down I might skip a purchase and make up for it later. I keep 6 months cash in an Ally savings account at 1% and 3 more years in CD's inside my Traditional IRA. I have been retired one year. I expect this is more conservative than I will be five years from now.
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Old 01-13-2017, 11:31 AM   #22
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What we do now:

I take out the money for 2017 spending and bunch it with the unspent "spending" monies from 2015 and 2016. This money is in short term investment grade bonds (VFSUX at Vanguard). Some of it is in a Roth and some in an IRA.

It takes only about 2 days to cash some out and get into our Chase checking. At the beginning of each year I compute (using Turbo Tax) what the max withdrawals should be from the IRA. The Roth money is spent first and towards the end of the year we withdraw the IRA calculated amount.

I think over many years the short term IG bonds will do fine and better then actual cash (MM or Tbills). Even in a very bad recession I think this strategy holds up. But one could always do short term Treasuries if nervous.
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Old 01-13-2017, 11:41 AM   #23
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My simple plan is sell to cash out investments when the market is OK or high, keeping my 4-5 yrs pile of cash.
Should the market tank (down 20% or more from highs) I won't sell, and just keep spending from the cash pile.
Should market crater 75% , I might even invest a up to 1 year worth of cash, knowing prices probably won't fall farther so little risk.

I sold some things that were up in Nov/Dec so all set for 2017.
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Old 01-13-2017, 12:29 PM   #24
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While still a few yrs from RE, I wonder where I will fall on this. Intellectually, I would think if you believe in your AA then your once/twice a yr rebalancing would produce your needed funds for the coming yr. OTOH, I see where the defensive gene will start to potentially override some of this by playing "what if" mind games... what if the market craps out for 2, 5, 7 yrs? I suppose this is where we start to argue with ourselves that we should create a 2 - 7 yr cash balance to buffer a market collapse? However, unless this was part of your real AA plan, the larger the cash balance being held, the more you potentially negatively affect your long term planned returns. So here are my questions, particularly for those that hold more than 2 yrs in cash... How/when are you replenishing the current yrs cash you are spending? In other words, if you are a 2 yr guy you are spending now 1 of those yrs worth of cash. At the end of 2017 do you rebalance and replenish the 2 yr balance regardless of market performance or do you make a personal judgement of letting your securities ride and spend the 2nd yr of cash? Of course, if you did the ladder, you are now potentially creating the anxiety that I would think you were trying to avoid by keeping the cash balance. Curious as to how those of you who practice keeping a balance in RE actually implement your use/replenish of the cash.
First of all, your asset allocation needs a SANF (sleep at night factor). So, your comfort level with equities v bonds is important. In terms of steady value, bonds act to smooth the variability of equities.

Second, if the market is good and your allocation is out of whack, your bring it back in alignment with re-balancing - which means taking gains and putting them in bonds/cash/CD/etc.

To answer your question: I know how much cash I need from my portfolio, I rebalance annually to create the cash needed, which means repositioning from stocks to bonds, or vice versa. At the end of the rebalancing, my cash amount boosts existing cash to a total of two years.

AT THE SAME TIME, I also look at total bonds in terms of the number of years income it provides. If I need $40k annually from my portfolio and I have $400k in bonds, I know I have 10 years of income I can draw on if the equities are badly affected in a downturn. HTH
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Old 01-13-2017, 12:36 PM   #25
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Okay, good info, as usual.

I'm going to move 1-2 years of expenses from the Roth bond (VG Total Bond) to either a short-term bond or MM fund in the same Roth.

I'm complication-averse, so I'm willing to give up some return to keep things simple and stupid.

Thanks, guys.
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Old 01-13-2017, 12:39 PM   #26
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I think the best approach for cash reserves is CD ladders. You can renew if the cash is not needed, or obviously cash in when they come due. Meanwhile, you are maximizing the return; Money Market and straigh savings instruments yield so little, CD ladders at least pay somewhat more.
What are you seeing for CD rates out there? I'm getting 1% in a money market and could get 1.75% on a 4 year CD. So there's a little extra yield potential but not a lot.
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Old 01-13-2017, 12:56 PM   #27
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What are you seeing for CD rates out there? I'm getting 1% in a money market and could get 1.75% on a 4 year CD. So there's a little extra yield potential but not a lot.
DW is VERY conservative, so to assuage her concerns we have a lot of CD's. This way, one is maturing somewhere between every month to every 3 months. These CD's are all 2 and 3 years terms, with rates of 1.35 to 1.6%, all at Ally. We also keep funds for "regular" savings at Ally at 1%. As I originally wrote, just trying to squeeze a few extra points for idle money. I want to go longer term, but cannot convince DW of that wisdom.
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Old 01-13-2017, 01:04 PM   #28
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DW is VERY conservative, so to assuage her concerns we have a lot of CD's. This way, one is maturing somewhere between every month to every 3 months. These CD's are all 2 and 3 years terms, with rates of 1.35 to 1.6%, all at Ally. We also keep funds for "regular" savings at Ally at 1%. As I originally wrote, just trying to squeeze a few extra points for idle money. I want to go longer term, but cannot convince DW of that wisdom.
Gotcha. Makes sense if you're talking real money. I'm "only" playing with about 40,000 in cash and I sometimes need 20,000 to make financial moves so don't fight to hard to squeeze out the extra 0.25-.75% I could get from CDs.
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Old 01-13-2017, 02:23 PM   #29
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Originally Posted by DawgMan View Post
While still a few yrs from RE, I wonder where I will fall on this. Intellectually, I would think if you believe in your AA then your once/twice a yr rebalancing would produce your needed funds for the coming yr. OTOH, I see where the defensive gene will start to potentially override some of this by playing "what if" mind games... what if the market craps out for 2, 5, 7 yrs? I suppose this is where we start to argue with ourselves that we should create a 2 - 7 yr cash balance to buffer a market collapse? However, unless this was part of your real AA plan, the larger the cash balance being held, the more you potentially negatively affect your long term planned returns. So here are my questions, particularly for those that hold more than 2 yrs in cash... How/when are you replenishing the current yrs cash you are spending? In other words, if you are a 2 yr guy you are spending now 1 of those yrs worth of cash. At the end of 2017 do you rebalance and replenish the 2 yr balance regardless of market performance or do you make a personal judgement of letting your securities ride and spend the 2nd yr of cash? Of course, if you did the ladder, you are now potentially creating the anxiety that I would think you were trying to avoid by keeping the cash balance. Curious as to how those of you who practice keeping a balance in RE actually implement your use/replenish of the cash.
The cash buffer just sits there earning interest as long as market conditions are good. Our annual spending stash gets replenished with each annual withdrawal. That part is simple.

What happens after bad years when we might need to draw on the cash buffer to supplement a lower income from our retirement portfolio? When the portfolio recovers and our income rises again, some of increased income will need to be siphoned off to replenish the buffer if we feel that it has gotten too low.

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However, unless this was part of your real AA plan, the larger the cash balance being held, the more you potentially negatively affect your long term planned returns.
This is honestly not a concern. Our retirement fund is large enough that it way more than supports our lavish spending at our current withdrawal rate. And the AA is appropriate to our long-term and short-term goals. We don't care that it could grow even larger if we kept more invested in stocks. We are focused on having plenty to spend in the next 10 years. We don't care that we will have less left over when we die. We just don't want to run out before we die.

So we are perfectly happy allowing cash invested in CDs and high-yield savings accounts to build up outside our portfolio as it's available to spend at any time on whatever we choose.
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Old 01-13-2017, 09:00 PM   #30
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What are you seeing for CD rates out there? I'm getting 1% in a money market and could get 1.75% on a 4 year CD. So there's a little extra yield potential but not a lot.


I have a very lumpy CD ladder that I am working to smooth out. I'm finding the credit unions offer specials frequently like 2% for 17 or 49 months. Best deal I bought is 3% for 84 mo with 6 mo early withdrawal penalty. It beats just about everything else even after the penalty.
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Old 01-13-2017, 09:23 PM   #31
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... However, unless this was part of your real AA plan, the larger the cash balance being held, the more you potentially negatively affect your long term planned returns. So here are my questions, particularly for those that hold more than 2 yrs in cash... How/when are you replenishing the current yrs cash you are spending? In other words, if you are a 2 yr guy you are spending now 1 of those yrs worth of cash. At the end of 2017 do you rebalance and replenish the 2 yr balance regardless of market performance or do you make a personal judgement of letting your securities ride and spend the 2nd yr of cash? ...
Right now our "cash" balance is really only 0.7%. The rest is in 2yr duration short term IG bonds that can be cashed in a few days. I don't think this reserve money will get any larger then about 10% of assets. Currently it is 8% of assets. In the sense that this reserve pool is expected to have lower returns then intermediate bonds (which get the term premium over many years), yes it will lower portfolio returns. But that is real life spending.

This is why when I create a benchmark (example is Wellesley fund) to check against, I include these short term reserves in the benchmark too.
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Old 01-14-2017, 04:47 AM   #32
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AT THE SAME TIME, I also look at total bonds in terms of the number of years income it provides. If I need $40k annually from my portfolio and I have $400k in bonds, I know I have 10 years of income I can draw on if the equities are badly affected in a downturn. HTH
This is actually a good point I have not thought about. If you subscribe to say a 60/40 AA and generally carry a 2 yr supply of cash and the market hits 5 yr+ skid, I suppose you could make the argument that you really have 2 lines of defense to keep you from cashing in falling stocks... 1) cash, 2) bonds. I suppose this naturally happens thru rebalancing as your bond balance in theory would be higher at the end of each year, but I can see how you could sleep better at night knowing you have X years in bonds before you would ever have to cash in a stock in a falling market.
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Old 01-14-2017, 06:37 AM   #33
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"Always" having cash reservers is a debatable topic. At best, it buys you peace of mind. In practice, your returns go down over lifetime. Simply because there is no "right" time to replenish the cash reserve to avoid losses. It is mentally hard to "pay" yourself from your dwindling portfolio in loosing years but that is the right thing to do for the long term health of your portfolio.

PS: The initial cash reserve of few years expense can help you with sequence of event risk.
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Old 01-14-2017, 07:46 AM   #34
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I think keeping cash around is just a mental crutch and a behavioral finance trap nowadays. You know that's the case when terms like "sleep at night" and "peace of mind" or even "piece of mind" are being used.

If you need money when stocks go down, then sell bonds. You are going to be selling bonds to rebalance anyways.

If you need money when bonds go down, then sell stocks. You are going to be selling bonds to rebalance anyways.

If both stocks and bonds go down, they are going down by different degrees anyways. Then you will come to the forum and see the thread where everybody is saying, "Oh, I'm so glad I have cash, but I am worried, so I am cutting back and not spending any of it. And I'm glad I got those gold coins in my safe deposit box, in the safe behind the painting of Uncle Waldo, and buried in the back yard at the base of the mulberry tree."

So we don't have any cash to speak of. OTOH, we have a little bit of money in a fully liquid TIAA traditional annuity paying 3% or so as part of our fixed income (bond) allocation. It's like a stable value fund paying 3% except it is guaranteed. Maybe I should bury it under the mulberry tree?

And finally, for all the folks who had "cash" during 2008-2009, did you really use it? Did you rebalance into stocks? What really happened back then?
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Old 01-14-2017, 08:37 AM   #35
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My simple plan is sell to cash out investments when the market is OK or high, keeping my 4-5 yrs pile of cash.
Should the market tank (down 20% or more from highs) I won't sell, and just keep spending from the cash pile.
Should market crater 75% , I might even invest a up to 1 year worth of cash, knowing prices probably won't fall farther so little risk.

I sold some things that were up in Nov/Dec so all set for 2017.
I suspect that just rebalancing to a fixed equity/fixed income AA and within fixed income allowing bonds and cash to flex does a good portion of what you described.... so my plan is similar but I only hold a couple years of cash.
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Old 01-14-2017, 08:48 AM   #36
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There was the poll on how much cash people had. The average seemed to be quite a bloated amount: http://www.early-retirement.org/foru...ash-84288.html
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Old 01-14-2017, 08:52 AM   #37
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I think keeping cash around is just a mental crutch and a behavioral finance trap nowadays. You know that's the case when terms like "sleep at night" and "peace of mind" or even "piece of mind" are being used.

If you need money when stocks go down, then sell bonds. You are going to be selling bonds to rebalance anyways.

If you need money when bonds go down, then sell stocks. You are going to be selling bonds to rebalance anyways.

If both stocks and bonds go down, they are going down by different degrees anyways. Then you will come to the forum and see the thread where everybody is saying, "Oh, I'm so glad I have cash, but I am worried, so I am cutting back and not spending any of it. And I'm glad I got those gold coins in my safe deposit box, in the safe behind the painting of Uncle Waldo, and buried in the back yard at the base of the mulberry tree."

So we don't have any cash to speak of. OTOH, we have a little bit of money in a fully liquid TIAA traditional annuity paying 3% or so as part of our fixed income (bond) allocation. It's like a stable value fund paying 3% except it is guaranteed. Maybe I should bury it under the mulberry tree?

And finally, for all the folks who had "cash" during 2008-2009, did you really use it? Did you rebalance into stocks? What really happened back then?
All excellent points, those
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Old 01-14-2017, 08:58 AM   #38
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I think keeping cash around is just a mental crutch and a behavioral finance trap nowadays. You know that's the case when terms like "sleep at night" and "peace of mind" or even "piece of mind" are being used.

If you need money when stocks go down, then sell bonds. You are going to be selling bonds to rebalance anyways.

If you need money when bonds go down, then sell stocks. You are going to be selling bonds to rebalance anyways.

If both stocks and bonds go down, they are going down by different degrees anyways. Then you will come to the forum and see the thread where everybody is saying, "Oh, I'm so glad I have cash, but I am worried, so I am cutting back and not spending any of it. And I'm glad I got those gold coins in my safe deposit box, in the safe behind the painting of Uncle Waldo, and buried in the back yard at the base of the mulberry tree."

So we don't have any cash to speak of. OTOH, we have a little bit of money in a fully liquid TIAA traditional annuity paying 3% or so as part of our fixed income (bond) allocation. It's like a stable value fund paying 3% except it is guaranteed. Maybe I should bury it under the mulberry tree?

And finally, for all the folks who had "cash" during 2008-2009, did you really use it? Did you rebalance into stocks? What really happened back then?


LOL, my strategy is now like yours. I am fully invested, with just enough cash laying around to cover my health insurance deductible (My HSA is not for my health, it is for tax savings and investing).
So, I get what your saying....But my caveat is I have a pension that I only spend 60-70% of each month. So I am not nearly as brave as I sound.
Substitute my pension for a solo self sustaining retirement portfolio and I would be wearing out the words "sleep at night" "peace of mind".
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Old 01-14-2017, 09:50 AM   #39
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I think keeping cash around is just a mental crutch and a behavioral finance trap nowadays. You know that's the case when terms like "sleep at night" and "peace of mind" or even "piece of mind" are being used.
....
I very much agree the true cash should be kept to a minimum. Cash is very short term liquid monies like money in a checking account. It is not short term investment grade bonds or longer term CD's.

This thread was about short term reserves. Short term reserves would include cash and money tagged for spending. What I am calling short term reserves is composed of spending for this year, and unspent money from the past few years. Yes, it is just an accounting gimmic. The reason for this gimmic is to be a very clear reminder that this is fun money to be spent and not squirreled away for fear of a bad future.

Put in short term bonds (VFSUX, 2.6 yr duration) one would have earned about 1.5% less in the last 5 years then intermediate bonds (VFIDX, 5.5 yr duration). But VFSUX did earn 2.3% over those last 5 years so not so bad. And that was when rates declined. The differential returns situation might be better in a rising rate environment.

I figure my whole portfolio would take a hit of about 0.1% in performance with these short term reserves in a declining rate environment. Less of a hit in a rising rate environment.
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Old 01-14-2017, 10:40 AM   #40
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We are secure with 4-5 yrs worth of cash earning 1% interest.
Obviously missing out on some gains, but sleep pretty easy.
Sunset: I agree with your plan. We have 4-5 years worth in Stable Value earning 2%. Never have to sell stock funds if market goes down for a few years.Miss some gains, but sleeping well is good for your health .
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