How to rebalance to increase safe money bucket

[FedExCourier]

I am a fairly new retiree and I want to end up with 5+ years of very safe money. I started out with 3 years in a MM but want to add a few more years to that safe money. If I skim profits each month that I have a profit from my mutual funds to fund this safe bucket would this be a good strategy? For example, I have had a $12000 increase and would potentially move this $12000 to a CD or MM within my IRA.

 

[dallas27]

why not just sell the 2 additional years worth of stock, add it to your cash, and call it a day. what do you gain by dragging it out? If you that that is your preferred or "right" allocation, I suggest you adjust to it immediately and stick to your plan.

I strongly advise about leaning this way or that without committing and being wishy washy about knowing what you want to do, this will lead to second guessing and regrets. Pick an allocation, balance to it as quickly and efficiently as possible, and re-balance on some set schedule or threshold.

 

[nun]

You might want to consider some MM alternatives like I-bonds, CDs etc for the extra 2 years of safe money.

 

[FedExCourier]

I do have a set allocation and it is very diversified but the only area I am rethinking is increasing my years of safe money. I was just looking at different options of selling high as the market allows to get to my goal of a few more years of safe money for when the market turns down. I won't be able to take SS for 6 years so it would be nice to have those years fully funded. I know I should have had that taken care of before rolling over to the IRA but I am just now rethinking it.
My personality can ride through the craziness of market turmoil since I rode out the 2000 and 2008 crashes with no problem.

 

[dallas27]

I do have a set allocation and it is very diversified but the only area I am rethinking is increasing my years of safe money.

Sooooo........you are thinking of changing the allocation, hence, not set.

 

[ERD50]

I also think it is more useful to think in terms of AA. If you want to keep five years cash flow, at least also consider it in terms of AA as well.

I'd also say that when you calculate your 5 years cash 'bucket', don't just base it on 5 years expenses, base it on an estimate of the next 5 years expenses, minus the sum of an estimate of the next 5 years (interest + dividends + distributions). Those distributions are providing cash flow, you don't really need a pile of cash to cover expenses to avoid any sales, you need just enough cash to cover the cash flow shortfall. That probably won't be much.

I personally like to just stick to an AA view, if I really would need to sell a bit, so be it. But some people seem to be more comfortable with that cash sitting idle instead of working for them. The above approach should keep that cash bucket small enough that it won't hurt much log term, so if it feels good do it. But I don't think you are really helping yourself.

-ERD50

 

[audreyh1]

I do have a set allocation and it is very diversified but the only area I am rethinking is increasing my years of safe money. I was just looking at different options of selling high as the market allows to get to my goal of a few more years of safe money for when the market turns down. I won't be able to take SS for 6 years so it would be nice to have those years fully funded. I know I should have had that taken care of before rolling over to the IRA but I am just now rethinking it.
My personality can ride through the craziness of market turmoil since I rode out the 2000 and 2008 crashes with no problem.

Would you consider funding some of those years with high quality fixed income? If you have a three years funded in cash, the remaining two could be with short-term high quality bond funds and some intermediate. By high quality I mean NOT investment grade (all corporate) or high yield or emerging market bond funds. But rather a diversified bond fund that has a good chunk in US govt-backed debt. Those funds tend to appreciate during times or crisis like 2000-2002 and 2008.

For the "cash" - MM is paying almost nothing. If you have access to a stable value fund, that may be better. Also check out the CD options. Personally, I don't use brokered CDs, so I don't know what the hidden costs might be.

 

[audreyh1]

Sounds like he wants to spend down that 5 year set aside, and then leave his original allocation in place until he starts drawing SS. So the allocation would essentially change each year until SS draw.

 

[pb4uski]

I am a fairly new retiree and I want to end up with 5+ years of very safe money. I started out with 3 years in a MM but want to add a few more years to that safe money.

In my first year of retirement I tried to "not count" my online savings account as part of my retirement stash in an attempt to keep that "safe money" off to the side. Finally gave up and just change my AA from 60/40/0 to 60/34/6 and that approach has proven more comfortable for me. I did some gains taking at the end of the first year so the transition was easy.

One thing to consider though in having x years of safe money is income. My taxable portfolio throws off about 25% of what we spend annually so the 6% in cash covers more than what it would seem to at first blush. YMMV.

 

[REWahoo]

In my first year of retirement I tried to "not count" my online savings account as part of my retirement stash in an attempt to keep that "safe money" off to the side. Finally gave up and just change my AA from 60/40/0 to 60/34/6 and that approach has proven more comfortable for me. I did some gains taking at the end of the first year so the transition was easy.

One thing to consider though in having x years of safe money is income. My taxable portfolio throws off about 25% of what we spend annually so the 6% in cash covers more than what it would seem to at first blush. YMMV.

+1

I see no reason to try to play a financial shell game with myself and do the same. Our AA is in the 45/45/10 range (the 10 was closer to 5 until PenFed rolled out their 3%/5yr CDs in late 2013 ). Dividends and SS account for ~65% of our required annual income, so like you, my cash will cover the remaining 35% for several years.

 

[OrcasIslandBound]

I prefer 45/55/0 stocks /bonds /cash. If one maintains a cash position, it requires continuous decisions to be made whether or not the market is going down enough to justify consuming only the cash and leaving the rest invested. Then decisions have to be made about when to begin again to move money from the investments into cash. Plus, cash performs poorly. My investment mix is focused on dividends to the point that nearly enough dividends are generated to live off of, nearly 3% of the investment total. This is simpler and has a higher probability of portfolio survival.

Sent from my Nexus 4 using Early Retirement Forum mobile app

 

[pb4uski]

I prefer 45/55/0 stocks /bonds /cash. If one maintains a cash position, it requires continuous decisions to be made whether or not the market is going down enough to justify consuming only the cash and leaving the rest invested. Then decisions have to be made about when to begin again to move money from the investments into cash. Plus, cash performs poorly. My investment mix is focused on dividends to the point that nearly enough dividends are generated to live off of, nearly 3% of the investment total. This is simpler and has a higher probability of portfolio survival. ....

I'll agree to disagree with you. I think you misunderstand... the cash is what we are living off, I'm not trying to time the market. The only decision I need to make is what to sell to rebalance at the end of the year to bring the cash from whatever it is back up to 6% of the total. The 6% cash just adds some stability and peace of mind compared to having the same 6% in bonds. The yield lost is on that huge... if bonds return 4% and my cash returns 0.9% and my average cash balance for the year is 5% of my total then overall I'm giving up 0.16% for peace of mind. And 60/34/6 has a much higher survivor rate than 45/55/0.

 

[2B]

I have brokered CDs in a 5 year ladder. Each year has about two years of spending maturing. I look at this as just part of my AA that will be rebalanced annually when I set aside the coming years spending. Once I put money into the current year's spending account, I do not count it as my AA. I don't consider this playing games with anything. It's just that over the course of the year it gets spent down.

 

[audreyh1]

I prefer 45/55/0 stocks /bonds /cash. If one maintains a cash position, it requires continuous decisions to be made whether or not the market is going down enough to justify consuming only the cash and leaving the rest invested. Then decisions have to be made about when to begin again to move money from the investments into cash. Plus, cash performs poorly. My investment mix is focused on dividends to the point that nearly enough dividends are generated to live off of, nearly 3% of the investment total. This is simpler and has a higher probability of portfolio survival.

Sent from my Nexus 4 using Early Retirement Forum mobile app

Not at all. Cash is simply rebalanced, just like any other asset class. The decision is no different.

I don't care about the long-term performance of cash. I only care that it is uncorrelated to both stocks and bonds.

The OP, on the other hand is trying to set aside funds to spend down until SS comes online. He won't be "replenishing" that set aside.

 

[samclem]

Please take the below as an attempt at constructive criticism:

I was just looking at different options of selling high as the market allows to get to my goal of a few more years of safe money for when the market turns down.

We don't know that the market is near a "high"--it might be, or it might keep heading up for years. You are now considering changing the asset allocation that you'd previously set, apparently because you believe stocks have become overvalued and you'd like to take money off the table. If you rebalance back to your original %ages because stocks have gone up--then that's one thing. If, however, you want to try to time the market by changing your allocation because you think stocks are "high"--then realize you are trying to outguess the market, and that seldom ends well.

I won't be able to take SS for 6 years so it would be nice to have those years fully funded.

What's the yield of your present bonds? What is the dividend yield of the stocks you own? If your holdings are typical, maybe the divs and interest will go a long way to funding your short-term requirements without even needing to sell anything if the market goes down.

My personality can ride through the craziness of market turmoil since I rode out the 2000 and 2008 crashes with no problem.

So, what's different about now? You could handle the market swings before, you believe you'll be able to handle them again--but just not right now. If you can't take the volatility today, will you be able to take it in 6 years? Why not just change your allocation, if it needs to be done.
And--what happens in 6 years if you still feel in your gut that stocks are "high"? Keep more cash--still? And if stocks do go down over the next 6 years and you just spend your cash and don't rebalance (incl selling bonds to buy more stocks), then you'll own fewer shares when they do rebound--and you'll be worse off than if you'd bought them all along.

If having 6 years in a "cash bucket" helps you sleep, then I'd recommend that you take a close look at your rationale. If it still makes sense after considering everything, then go ahead.

This is a good read: Kitces: Buckets vs total return with rebalancing. Buckets vs no buckets: Makes no difference if a person will be rebalancing. And if they aren't rebalancing--hmm.

But, back to your question: If you want to increase your cash allocation (or call it a bucket if you like), since we are talking about your IRA, there's no particular reason to just use dividends to do it over time. There's no tax implication to just selling whatever you want to sell right now (stocks, bonds) and making the cash allocation just what you'd like it to be. If you'll be fretting every day that the market could fall and you'll miss your chance, then do it today and stop thinking about it.

FWIW, I used to be a bucket fan.

Best wishes.

 

[OrcasIslandBound]

...And 60/34/6 has a much higher survivor rate than 45/55/0.

I ran a couple sims using the Vanguard Retirement Calculator: 98% probability of success with 45/55/0 plan, 97% probability with 60/34/6 plan.

 

[OrcasIslandBound]

Other picture:

 

[ERD50]

I ran a couple sims using the Vanguard Retirement Calculator: 98% probability of success with 45/55/0 plan, 97% probability with 60/34/6 plan.

And I'll explain why that is so, once you explain to me every factor used in that Monte Carlo analysis.

Concise version, you can find longer ones on a search - I don't use Monte Carlo, it is dependent upon the programmers decisions. I use historical reports for a baseline.


-ERD50

 

[OrcasIslandBound]

As requested, Monte Carlo methods and inputs from the Vanguard website:



"When determining which index to use and for what period, we selected the index that we deemed to fairly represent the characteristics of the referenced market, given the available choices. For U.S. stock market returns, we use the Standard & Poor’s 90 from 1926 to March 3, 1957; the Standard & Poor’s 500 Index from March 4, 1957 to 1974; the Wilshire 5000 Index from 1975 to April 22, 2005; the MSCI US Broad Market Index through June 2, 2013; and the CRSP US Total Market Index thereafter. For U.S. bond market returns, we use the Standard & Poor's High Grade Corporate Index from 1926 to 1968, the Citigroup High Grade Index from 1969 to 1972, the Lehman Brothers U.S. Long Credit AA Index 1973 to 1975, the Barclays Capital U.S. Aggregate Bond Index from 1976 to 2009 and the Spliced Barclays U.S. Aggregate Float Adjusted Bond Index thereafter. For U.S. cash reserve returns, we use the Ibbotson U.S 30-Day Treasury Bill Index from 1926 to 1977, and the Citigroup 3-Month Treasury Bill Index thereafter."


"For each year of each simulation, we randomly select one year of stock, bond, and stable-value returns from the database. Using those values, we calculate what would happen to your portfolio—subtracting your spending, adjusting for inflation, and adding your investment return. We repeat this process, one year at a time, until the end of your retirement or until your portfolio runs out of money. The next simulation starts the whole process from the beginning. After 5,000 independent simulations, we've tested a broad range of possible scenarios, and clear patterns begin to emerge. By keeping track of the number of simulations in which your portfolio lasts for the duration of your retirement, we're able to estimate the probability that your plan will be successful. For example, if your portfolio survives in 4,000 out of 5,000 simulations, we can estimate that the probability of success is 80% (4,000/5,000=0.80)."