I got tired of guestimating the amount of dry powder I should have and so I created a spreadsheet to more accurately calculate the gap between our annual spending (for the preceding 12 months) and our current regular income.
First, I calculated our annual spending needs. I simply took our annual spending for the preceding 12 months. I keep very good records of our expenses and have for decades. so I am very confident in this amount. I did not get so precise as to factor in any expected increases in the expenses from the past year, but I could easily apply a multiple. I did exclude some one-time expenses incurred last year related to the sale of a residence and the purchase of a new residence. I did not include any lumpy expenses.
Second, I calculated our annual regular income for 2025. I included as current regular income the amounts from my spouse's pension, my spouse's social security and our estimated investment income (per Schwab) from our current securities that generate dividends and interest (for 2025). I only included the estimated investment income from our two taxable brokerage accounts. (One of the taxable brokerage accounts is primarily used for investments. The other taxable brokerage account, and the smaller of the two, basically used as a hybrid savings account with SWVXX and short term US Treasuries. I try to move the shorter term fixed income into the "savings" account. I created it as an attempt to make it easier to deal with the negligible interest that Schwab pays on a cash account.).
The spreadsheet shows a gap between our annual spending and our annual income of about $29,500. In other words, each year we need to come up with $29,500 from our dry powder assets.
Third, I calculated our current dry powder assets. I did not include all cash and near cash assets because I specifically excluded any assets held in a tax free or tax deferred account. I just included cash and near cash assets held in the taxable brokerage accounts. I included all checking and savings account balances. I also included all US Treasuries and other bonds maturing in 2025 or 2026, but, again, only those held within the taxable brokerage account. So basically I included any fixed income asset withing the taxable brokerage account maturing within the next 18 months.
In the back of my mind, I have been aiming to have about 3 years of the "gap" covered with cash or near cash assets. I was surprised to see that the spreadsheet showed we have 8.61 years covered by my pretty narrow definition of dry powder assets. The amount of excess dry powder would be that much greater if I had included the short term fixed income positions in the Roth IRAs and the traditional IRA.
I am about a year away from drawing social security. If I simply inserted next year's social security amount ($55,260) into my dry powder spreadsheet as current income, the gap between our annual spending and our annual income ($29,500) would disappear. So the gap is really only going to be there for about another year. In a couple of years, in addition to dealing with the excess income from social security we will also have to deal with required minimum distributions for my spouse. But creating the spreadsheet was anything but a waste of time. If nothing else, I love creating spreadsheets.
Currently our asset allocation for our main investment and retirement accounts is 70/30. My spouse also has a separate 403(b) account which is set at a 60/40 AA and so I do not look at it as frequently as I do the other accounts. Putting the two asset allocations together, the overall AA would be slightly lower, about 68.5/31.5.
I know that the asset allocations for the people in this forum are all over the board. A a 70/30 or 68/32 AA might be fairly high given our ages (69 and 71). I don't usually look at our situation as having "won the game" because things can change in a blink of the eye. But I am not laying awake at night, at least not because of financial concerns. I am not in the camp that thinks when you have won the game, you should get out and put all your assets into fixed income. Nonetheless, our retirement is very well funded, at least for our needs.
I tend to lean towards a higher AA because I consider ourselves to be holding and investing a decent portion of our assets not for ourselves in the short run but instead for our children in the long run.
I want to reduce the 8.61 figure (the number of years of excess expenses covered by our dry powder assets), or at least I think I should. I have nothing against being conservative. But 8.61 years seems excessive to me. Right now, many short term interest rates exceed longer term interest rates. But if you select a term of five years on many fixed income assets, even though the interest rate might be less, you at least reduce the risk from lower interest rates when you have to reinvest the principal.
I am trying to determine a good way of reducing the amount of excess dry powder and bringing down that 8.61 number. Generally, I think I need to move some of the short term fixed income to longer terms but I am reluctant to go beyond a 5 year term.
Most of my shorter term fixed income is in US Treasuries held in the two taxable brokerage accounts. I'm not concerned about the short term Treasuries in the smaller brokerage account which I use as a juiced up savings account because one or another of those Treasuries is maturing fairly frequently. Even so, they total about $160,000 which is more dry powder than I need.
Our primary taxable brokerage account has a variety of US Treasuries maturing between 2026 and 2034 with some municipal bonds maturing between 2030 and 2048. (Gees, I just realized I'm not likely to be alive when that last one mature in 2048!).
Neither of the two Roth IRA accounts holds any fixed income.
The traditional IRA account holds a variety of fixed income. Thanks to some past posts and helpful information from pb4uski and others, I have acquired some positions in various target date corporate bond funds, specifically, iShares IBONDS funds running from 2025 though 2030. So those are more intermediate fixed income positions. There are also various CDs maturing over the next 4 years.
Some random thoughts...
Like many others, I have a knot in my stomach when it comes to bond funds. But I do hold some bond funds. I have a small position in SGOV (simply to lessen the hassle of maturing individual US Treasuries) and the corporate bond funds mentioned above (iShares IBONDS).
I am pretty comfortable buying US Treasuries through Schwab. I do like the short term US Treasuries in our taxable accounts for the income tax savings. Having said that, we are in a relatively low tax bracket (at least for now) so the savings might be more in my head than on paper. (But who doesn't like saving 3 cents a gallon on gasoline even if you are only needing 5 gallons of gas? Just don't drive more than a few block out of your way for those savings.)
I know how to buy individual corporate bonds via Schwab but I am not that experienced or comfortable selecting corporate bonds or the ratings to go with. Schwab only seems to list AAA, AA and A rated bonds.
If I am understanding the principals regarding asset location correctly, it would be better to hold the corporate bonds in the Roth IRA accounts and the traditional IRA account instead of either of the two taxable accounts. Currently the fixed income assets in the traditional IRA account are mostly intermediate term CDs and the corporate bond funds. So I can just keep reinvesting those assets in similar assets as they mature.
I have a few remaining individual stock positions in the T-IRA which I will eventually liquidate and probably convert to fixed income to help keep the AA from creeping above 70/30. (It had crept up to about 73/27 recently before I brought it back down.) Those aren't significant positions so I am retaining them more or less to have some toys to play with.
There are some individual stocks held in the main taxable brokerage account which I hope to eventually liquidate. I have held those stocks a long time. The unrealized gains on most of them is between $20,000 and $70,000 each, so there will be some LTCGs to deal with when they are sold. I am still learning how to estimate how much those LTCGs will affect our taxes. But I know, as others have pointed out in the past, you just need to get a start and start selling a few each year. As for the Microsoft and Apple stock, and a few other positions, I don't have any concerns about the quality of the stock.
So, I would appreciate your general thoughts and comments, especially from some of you who are more heavily invested in and experienced with fixed income.
Am I right to start changing my shorter term Treasuries to intermediate term Treasuries as they mature?
Am I right to try to keep the Treasuries in a taxable account and not in a Roth IRA or in a traditional IRA?
There seem to be so many more factors to consider with corporate bonds than US Treasuries. And right now, at least from looking at Schwab's website, most of the US Treasuries for terms of 3 years or less, are paying slightly greater interest than a AAA rated corporate bond. The corporate bonds start to beat the US Treasuries in the 4-5 year range which is a term I need to expand into in order to reduce the amount of short term and ultra short term bonds I have.
An in between choice (between US Treasuries and corporate bonds) would be government agency bonds. I've looked at some in the past. It seems you really have to do your homework on those bonds before buying any. Right now the interest rates on many government agency bonds exceeds the interest rate on US Treasuries (which I would expect) and on corporate bonds (which I would not expect). That makes me think there is more to government agency bonds than I understand right now.
Thanks.
" I explain to unlock cash I have to sell assets and pay capital gains. If they get that far I tell them in general, all of our liquid assets are invested. In order to pull out cash I need to sell an asset and pay capital gains. Lastly, if they persist I tell them if I need to sell an asset in order to raise cash to hand to them I have to pay 38% on the capital gains. While this is a gross exaggeration I do have some founders' shares that were acquired pre-IPO for fractions of pennies so those are mostly 100% capital gain, so I'm not really lying, just using a corner case to prove my point and get rid of them.
