Nest Egg Management

[ERD50]

....

Portfolio 1 is a simple 60/40 allocation that is rebalanced annually. The Compound Annual Growth Rate (CAGR) was 3.44%(Remember, we’re taking out 5% to spend each year.)

Portfolio 2 is 60/20/20 (20% cash) allocation rebalanced annually. CAGR was 3.2%

The Balanced Index Fund is 60/40 and rebalanced almost daily. CAGR was 3.32%
... And the one with the 20% cash is consistently the laggard.

Thanks, had to probe around a bit, but I see you can use a ticker symbol of "CASHX" to simulate cash.

Is there a way to simulate 1 year CDs? I'll see if I can find a long running bond fund with 1 year duration.


-ERD50

 

[OldShooter]

... buckets are a form of mental accounting, although there can be some utility there (or not). ...

Not to pick on @RobLJ, but just as a general comment:

Using AA is mental accounting, as are things like household budgeting, segregating retirement savings from day-to-day cash flow, and the concept of preserving "capital" vs "income." Mental accounting is central to much of our financial activities.

I don't think there is anything wrong with any of this. The places where I see mental accounting to be unhelpful are situations where it is happening without being noticed. For example, there are frequent posts here where the OP has received a chunk of money via inheritance or other windfall and is asking how it should be managed. The response they always get (correct, IMO) is that it should go into the overall investment pot and the whole pot should be managed regardless of the source of funds.

Edit: Richard Thaler's example of pernicious mental accounting is "house money" where a gambler is more aggressive betting with money he has just won vs the money he brought to the casino. Thaler says: "... the fact that some of your money has been made recently should not diminish the sense of loss if that money goes up in smoke."

There are other easy examples, too, but when people say "that's just mental accounting" as if it was some kind of accusation IMO that is just to not understand the concept.

Personally, I apply two mental accounting frameworks when planning: bucket and AA. Each framework provides a different view of the same situation and each can be useful. Right now I am a little more bucket oriented because we are building a lake home that will be partially funded from IRAs. So I am watching the near-in bucket so that the IRA cash flowing into it does not bump us into higher tax brackets and so that the cash flowing out of it covers our obligations to the contractor. This problem is not an easy one for me to view using AA.

 

[Markola]

Thanks, had to probe around a bit, but I see you can use a ticker symbol of "CASHX" to simulate cash.



Is there a way to simulate 1 year CDs? I'll see if I can find a long running bond fund with 1 year duration.





-ERD50

Thanks. I originally used Vanguard Federal Short Term fund as the cash proxy for Portfolio 2. Using your CASHX suggestion as the much better proxy, the CAGR was just 2.89%. That strengthens my resolve not to hold cash and instead stay fully invested. Other’s MMV.

I don’t have any experience modeling CDs on that site.

 

[mrfeh]

Just a quick note on why some may have 3 years of cash, which is not driven by bucket methodology:

• if you can't drawn on SS or tax-advantaged accounts for many years (ie. retiring at 50)
• if your taxable accounts are all equities for tax efficiency

You'll want cash reserves to draw on if the market crashes so you aren't selling equities at a loss. The vast majority of recessions are less than 3 years, which is why that is such a common number of years in cash to keep.

Now, if you have massive taxable account balances, this probably isn't necessary. But if taxable accounts are the only source of funds and they could possibly run dry before age 59.5, having that cash buffer seems perfectly reasonable to me.

 

[zekeboz]

Here are three $1,000,000 portfolios over time from 1992 to present, i.e. the last 29 years:
-Domestic allocation for simplicity
- 5% withdrawn annually
- dividends and interest reinvested

Portfolio 1 is a simple 60/40 allocation that is rebalanced annually. The Compound Annual Growth Rate (CAGR) was 3.44%(Remember, we’re taking out 5% to spend each year.)

Portfolio 2 is 60/20/20 (20% cash) allocation rebalanced annually. CAGR was 3.2%

The Balanced Index Fund is 60/40 and rebalanced almost daily. CAGR was 3.32%

 

[ERD50]

How accurate is Port. 2's results? How can you specify in Portfolio Visualizer to only use cash when the market is down an extended time (month+)? I believe that is the purpose of holding 20% in cash to avoid selling equities and as a result they (equities %) would be in a better position to take advantage of the market upswings given none were sold (cash only for exp.).

I would think that the rebalancing would simulate this, but probably only partially?

I don't see where they give the details of withdrawals versus rebalancing. I'm wondering if it makes a difference which is done first, or if it comes out in the wash? Hmmm.... no, I did a little spreadsheet, and it looks to be all commutative property of multiplication.

For a 60/20/20 portfolio, and say stocks are down, bonds are flat. If I take a $1M portfolio, that starts (in $K) 600/200/200, and ends the year at 500/200/200. Withdraw $40K, and either way, you go from 500/200/200 to 516/172/172, so you didn't sell stocks, you added to them. The WD came from bonds/cash.

Not perfect, as it won't all come from cash (unless you use cash to replace all bonds), but probably gives a pretty good picture.

It would not be too hard to simulate this in a spreadsheet, there must be some out there with the basic data that could be tweaked.

-ERD50

 

[ncbill]

Just a quick note on why some may have 3 years of cash, which is not driven by bucket methodology:

• if you can't drawn on SS or tax-advantaged accounts for many years (ie. retiring at 50)
• if your taxable accounts are all equities for tax efficiency

You'll want cash reserves to draw on if the market crashes so you aren't selling equities at a loss. The vast majority of recessions are less than 3 years, which is why that is such a common number of years in cash to keep.

Now, if you have massive taxable account balances, this probably isn't necessary. But if taxable accounts are the only source of funds and they could possibly run dry before age 59.5, having that cash buffer seems perfectly reasonable to me.

This is the cash bucket strategy I'd use to protect against SORR:

https://earlyretirementnow.com/2018...hdrawal-rates-part-25-more-flexibility-myths/

Note that the cash bucket is never refilled once depleted.

 

[mrfeh]

Note that the cash bucket is never refilled once depleted.

Correct, which is why it is not a bucket strategy. Using that term implies 3 years in cash always.

 

[OldShooter]

Correct, which is why it is not a bucket strategy. Using that term implies 3 years in cash always.

Is that official doctrine somewhere? If so I haven't seen it. My view is that the near-in bucket is refilled opportunistically.

My whole point of SORR insurance is to use the cash bucket when equity times are bad. To sell equities to keep the bucket topped off makes no sense. However, after every dip there is a recovery. It is a mild form of market timing to be sure, but as the equities recover and as the bucket level goes down, at some point I will sell and refill. But even if the recovery is not complete I am still selling at better prices than at the bottom. Will it be the best price? Probably not. But as is true in many cases, better is the enemy of good.

I have seen various scenarios argued in order to prove that a bucket approach doesn't work. Uniformly, that is the scenario writer's objective and any number of mechanistic refill strategies can be conjured up to prove the point. Personally, I think the signal may be too noisy for a mechanistic to ever work.

 

[ncbill]

Correct, which is why it is not a bucket strategy. Using that term implies 3 years in cash always.

To you, obviously not to ERN.

Maybe call it a "one-time cash hedge" instead.

 

[ERD50]

This is the cash bucket strategy I'd use to protect against SORR:

https://earlyretirementnow.com/2018...hdrawal-rates-part-25-more-flexibility-myths/

Note that the cash bucket is never refilled once depleted.

Thanks - that looked pretty interesting. I didn't do a deep dive, but I think the gist of it that you can (obviously) avoid a failure in the bad periods (1929 and 1966) by staring with a larger portfolio. And his study shows that a cash buffer worked better than a portfolio buffer. So I guess the cash just makes a better buffer in bad times, even though it is a drag for more normal times. Considering inflation was the killer in 1966, that's a little surprising.

But yes, they key to this is he uses the cash if needed, he doesn't refill it.

Is that official doctrine somewhere? If so I haven't seen it. My view is that the near-in bucket is refilled opportunistically. .... Uniformly, that is the scenario writer's objective and any number of mechanistic refill strategies can be conjured up to prove the point. Personally, I think the signal may be too noisy for a mechanistic to ever work.

To you, obviously not to ERN.

Maybe call it a "one-time cash hedge" instead.

Yes, probably good to use a name other than bucket, that's got a lot of connotations and lots of interpretations (many which are pretty fuzzy, IMO).

-ERD50

 

[Markola]

This is the cash bucket strategy I'd use to protect against SORR:



https://earlyretirementnow.com/2018...hdrawal-rates-part-25-more-flexibility-myths/



Note that the cash bucket is never refilled once depleted.

The problem I have is this sentence: “What I assume here is that the cash bucket doesn’t reduce the stock/bond investment but it’s in addition to the $1m portfolio.”

It’s a logical fallacy, because one can’t just have a meaningful pile of cash sitting around and pretend that it is not part of one’s portfolio. That cash could have been compounding in the good years were it invested like the rest of the portfolio. People think they are getting a free lunch and avoiding SORR with a pile of cash. Rather than a free lunch, they are guaranteeing less portfolio growth through the large opportunity cost of cash-drag.

I’ll stay fully invested, thanks.

 

[ERD50]

The problem I have is this sentence: “What I assume here is that the cash bucket doesn’t reduce the stock/bond investment but it’s in addition to the $1m portfolio.”

It’s a logical fallacy, because one can’t just have a meaningful pile of cash sitting around and pretend that it is not part of one’s portfolio. That cash could have been compounding in the good years were it invested like the rest of the portfolio. People think they are getting a free lunch and avoiding SORR with a pile of cash. Rather than a free lunch, they are guaranteeing less portfolio growth through the large opportunity cost of cash-drag.

I’ll stay fully invested, thanks.

I think you are misinterpreting what he is doing (or I am!).

Following, he explains this is the amount extra needed to survive 1929 and 1966 (rather than become one of those 5% failures).

We needed about $226k of additional savings in 1929 to make the portfolio last the entire 50 years, and $146k in 1966. But for today’s exercise, let’s assume the money is not invested in the same 80/20 portfolio but instead held as cash in a money market account (returning just the 3-month T-Bill interest rate).

How much extra money [cash] do we need to make ends meet? Not that much! Only about $100k to $115k in the two worst-case scenarios!

So yes, he is setting the WR to less than 4% with that extra cushion. I'd put it another way, and say a portfolio of:

$1M 80/20 plus $226K @ 80/20 ($1,266K) would survive 50 years in 1929. 3.15% WR
$1M 80/20 plus $100K cash ($1,100K) would survive 50 years in 1929. 3.64% WR

and

$1M 80/20 plus $146K @ 80/20 ($1,146K) would survive 50 years in 1929. 3.49% WR
$1M 80/20 plus $115K cash ($1,115K) would survive 50 years in 1929. 3.59% WR

Does that sound right?

-ERD50

 

[Markola]

^^^^^ I dunno. I’m not equipped to go toe to toe with his charts, at least until I have more coffee! ️. But with apologies for filling the page with nitpicks, his strategy just doesn’t mesh with my remain-fully-invested thinking:

- He doesn’t account for the investment opportunity cost of cash-drag. I feel my Portfolio Visualizer models above did a better job at that. He is not working with an actual 80/20 portfolio but with something less aggressive, like 60/20/20 or 70/20/10. Calling the cash component of an investment portfolio “extra” doesn’t fly with my understanding of portfolio allocation theory. An asset either exists in the portfolio or it doesn’t exist at all.

- The one-time cash injection/emergency parachute is novel. However, spending the one-time cash in a downturn leaves an investor with a more aggressive portfolio as one ages, from 60/20/20 to 80/20. Michael Kitches modeled something similar. OK, but we don’t often see that happen in real life here, do we? Folks tend to get more conservative as they age.

- I’d prefer to see a comparison model between his (honestly) approx. 60/20/20 initial portfolio with a 60/40 fully-invested one, in which one simply spends down the bond funds side instead of stocks (which are likely growing in value due to Fed interest rate cuts to get out of any corresponding recession and stock price swoon.) And I’d like to see a comparison with my models above, which assume spending proportionally from all asset classes. I believe it makes no difference in the long run.

Regardless, if one’s plan is to rebalance back to the initial allocation, I’m convinced for myself that it doesn’t matter when one does it. The portfolio value ends up about the same in the long run, whether the rebalancing happens daily, yearly or randomly in slow motion, e.g spending down cash and bonds while stocks crash and recover, then selling stocks to rebalance.

However, ERN isn’t doing that. He’s going from less aggressive prior-crash to permanently more aggressive post-crash, because the cash component is never refilled. That’s an altogether different strategy, as mrfeh noted in #33 above.

Finally, what if the big crash doesn’t happen during his retirement? His pile of cash earns virtually nothing for several decades, in fact, losing ground due to inflation. Instead, that cash might have tripled or quadrupled, and downside protection results from growing a larger portfolio.

 

[ERD50]

^^^^^ I dunno. I’m not equipped to go toe to toe with his charts, at least until I have more coffee! ️. ....

I'm also on my first cup, and am unlikely to dig as deep as would be needed to evaluate this anyhow. And w/o that, I am willing to accept that he did this correctly, it would not be that hard (but not so easy either), to simulate all this in a spreadsheet, and he probably already has the framework for doing it.

... But with apologies for filling the page with nitpicks, his strategy just doesn’t mesh with my remain-fully-invested thinking:

- He doesn’t account for the investment opportunity cost of cash-drag. I feel my Portfolio Visualizer models above did a better job at that. He is not working with an actual 80/20 portfolio but with something less aggressive, like 60/20/20 or 70/20/10. ...

I'm not sure he shows his work, but why wouldn't the cash drag be included? I'd assume he only calculates gains/losses on the invested amount.

And Portfolio Visualizer isn't doing the "withdraw the cash only in a downturn" thing is it? Though as I think I figured, it would be drawing the cash/bond side and buying stocks in a rebalance, which should be close.

Hmmmm, on my first cup still, but I guess you could do a sequence of 1966 out a few years, starting with that cash instead of bonds, take the value/year when the cash is depleted, then start another series going forward from that date with the reduced portfolio amount and the 'normal' AA?

...
- Does he account for dividends post-crash? Dividends never stop in a stock index fund and 2 or 3% dividends over ten years is real money.

- The one-time cash injection/emergency parachute is novel. However, spending the one-time cash in a downturn leaves an investor with a more aggressive portfolio as one ages. OK, but we don’t often see that happen in real life here, do we? Folks tend to get more conservative as they age. ....

Why would you think he isn't accounting for dividends? That is straightforward, I don't get the impression that this guy would make that kind of a newbie error (but I haven't really read much of his work).

Isn't he rebalancing? Yes, if the downturn happened and you spent the cash, you'd go from a more conservative overall AA to a less conservative one, but... since I believe he compared it to a larger buffer with the same AA, you'd be going from more conservative to your 'regular, planned AA' - so you're not getting less conservative than your original plan, right? You just slide in (up) to it over time.

...

- I’d prefer to see a comparison model between his (honestly) approx. 60/20/20 initial portfolio with a 60/40 fully-invested one, in which one simply spends down the bond funds side instead (which are likely growing in value due to Fed interest rate cuts to get out of any corresponding recession and stock price swoon.) ....

Isn't that what he did? Maybe with different Eq/Fixed/Cash ratios, but that concept?

...
Regardless, if one’s plan is to rebalance back to their initial allocation, I’m convinced for myself that it doesn’t matter when one does it. The portfolio value ends up about the same in the long run, whether the rebalancing happens daily, yearly or randomly in slow motion, e.g spending down cash and bonds while stocks crash and recover, then selling stocks to rebalance.

However, ERN isn’t doing that. He’s going from less aggressive prior-crash to permanently more aggressive post-crash. And what if the crash doesn’t happen during his retirement? His pile of cash earns virtually nothing for several decades, in fact, losing ground due to inflation.

I'm also rather agnostic about rebalancing, based on the research I've seen/done.

For the bold part, I assume you mean early in the retirement (the usual SORR worry), and I share that concern. Crashes happen after run ups. If I hold a lot of cash early in my retirement, and that crash comes along after, say 5 years, I am less prepared as I did not share so much in the run up.

I dunno, but I wonder if using his approach just makes a different year the worst year in the database? Maybe it just shifts it from 1966 to some other starting year? Are we getting into data mining? This approach would need to be run on every cycle to determine that.

So as is usual, I will do nothing but think about it, and spend too much time typing! Actually, the deltas aren't really all that great, and history won't repeat exactly, so who knows? But it is kind of fun to think about, and I want to keep an open mind to alternate ideas.

-ERD50

 

[Markola]

I definitely agree with your last paragraph, ERD50. “Stand there and do nothing!” Navel-gazing over coffee is especially enjoyable on a Wednesday morning (at least I think it’s Wednesday). [emoji81]

 

[SecondCor521]

As we get closer to our 'number', I'm exploring ways to manage our nest egg in FIRE. I have two questions. First, how to organize our accounts to minimize the sequence of returns risk? I'm thinking of building up a large reserve of cash (1-3 years of expenses) to buffer against extended down markets as this seems to the approach most folks take. To choose the source of our 'salary' per (year? Quarter? Month?), sell from the best performing asset class; if all are down, pull from the cash reserve to fund our 'salary'. At the end of each year, rebalance. I'm not clear on the trigger to replenish the cash reserves, however. Or, do you simply consider the cash reserves as the 'bond' AA, and let rebalancing refill?


The second part I'm not settled on is - how to manage after-tax and tax-deferred accounts since I won't be able to touch the tax-deferred accounts for close to 10 years (FIRE before 50 based on current trajectory). Do I treat them as two separate AA, or as one big pile of money as I have been? The risk of two separate is I'll have a larger investment in bonds in my after tax accounts than I would like. However, the risk of one big pile of money is I won't be able to rebalance as easily as I withdraw down from my after-tax funds. Seem like two different piles with their own AA.

How did others approach these?

I'll give you my answers.

1. I FIREd in 2016, before SORR became a thing the cool kids talk about. I thought about the issue, and realized that I had addressed it to my satisfaction by having a 2% WR. The reason SORR is a thing at all is if you're using a WR% that is slightly unsafe. The analogy is sometimes made to playing Russian roulette: play the game enough times and you're very likely to lose. To me a 2% WR is playing Russian roulette with no bullets in the revolver.

2. I personally don't like the bucket methodology. If one refills the bucket every year, then it is really no different than just having an AA with some cash. If one refills opportunistically, then it gets complicated to determine when/how much to refill. It also seems hard to back test the strategy properly. Plus it's more complicated than just having an AA and rebalancing to it occasionally.

3. Because of 1 and 2 above, I hold very little cash - currently about 0.17% of my portfolio. Just enough to pay my next few months of expenses. I think I'll come out ahead in the long run by keeping my money invested (pretty much the argument that @Markola is making I think).

4. I refill as needed from savings to checking, and from taxable to savings. Usually it's every six months to a year, but depends on what is going on. My last four sales were:

6/9/2021
2/16/2021
12/14/2020
12/3/2019

5. I also rebalance whenever I get outside my rebalance bands. The last time this happened was last spring during the COVID meltdown. I rebalanced numerous times from bonds to stocks on the way down. I always rebalance inside my traditional IRA, so no tax consequences.

6. I treat all of my investment accounts as one big pile of money for AA purposes. I have what some would consider a very aggressive AA of 97/3 and follow the Bogleheads asset placement advice. So my taxable is 100% stocks, my Roth is 100% stocks, and my traditional IRA is mostly stocks with a small chunk of bonds.

7. I'm doing a Roth conversion ladder, which enables access to tax deferred money prior to 59.5, so I pretty much don't worry about the problems you describe in your second paragraph. I FIREd at 46 almost 47 and am now 52.

The one drawback to my approach that I could see when I was contemplating my FIRE plan and FIRE itself was the SORR risk to my Roth ladder itself. I retired with 5 years of spending available to me in taxable and Roth contributions that I was planning on spending as I filled my Roth ladder on the other end. Since my available funds were fully invested, there was the risk of a market pullback shrinking that 5 years of spending down to 2 years or whatever.

My solution to this was to establish a contingency plan of going back to work if that happened. In actual fact, I had other non-portfolio income coming in (gifts, side gigs, refunds, etc.) that stretched my Roth ladder out, *and* the market ended up going up over the last five years instead of down.

My Roth ladder only has to last until 11/26/2028, and it looks like I probably won't even tap into any of my original 5 years of available funds, much less my Roth conversion ladder funds themselves.

HTH.

 

[ncbill]

^^^^^ I dunno. I’m not equipped to go toe to toe with his charts, at least until I have more coffee! ️. But with apologies for filling the page with nitpicks, his strategy just doesn’t mesh with my remain-fully-invested thinking:

- He doesn’t account for the investment opportunity cost of cash-drag. I feel my Portfolio Visualizer models above did a better job at that. He is not working with an actual 80/20 portfolio but with something less aggressive, like 60/20/20 or 70/20/10. Calling the cash component of an investment portfolio “extra” doesn’t fly with my understanding of portfolio allocation theory. An asset either exists in the portfolio or it doesn’t exist at all.

- The one-time cash injection/emergency parachute is novel. However, spending the one-time cash in a downturn leaves an investor with a more aggressive portfolio as one ages, from 60/20/20 to 80/20. Michael Kitches modeled something similar. OK, but we don’t often see that happen in real life here, do we? Folks tend to get more conservative as they age.

- I’d prefer to see a comparison model between his (honestly) approx. 60/20/20 initial portfolio with a 60/40 fully-invested one, in which one simply spends down the bond funds side instead of stocks (which are likely growing in value due to Fed interest rate cuts to get out of any corresponding recession and stock price swoon.) And I’d like to see a comparison with my models above, which assume spending proportionally from all asset classes. I believe it makes no difference in the long run.

Regardless, if one’s plan is to rebalance back to the initial allocation, I’m convinced for myself that it doesn’t matter when one does it. The portfolio value ends up about the same in the long run, whether the rebalancing happens daily, yearly or randomly in slow motion, e.g spending down cash and bonds while stocks crash and recover, then selling stocks to rebalance.

However, ERN isn’t doing that. He’s going from less aggressive prior-crash to permanently more aggressive post-crash, because the cash component is never refilled. That’s an altogether different strategy, as mrfeh noted in #33 above.

Finally, what if the big crash doesn’t happen during his retirement? His pile of cash earns virtually nothing for several decades, in fact, losing ground due to inflation. Instead, that cash might have tripled or quadrupled, and downside protection results from growing a larger portfolio.

If that's your concern then you stay fully invested, probably with a 100/0/0 allocation.

But to avoid SORR you must accept what will almost certainly be a sub-optimal WR...~3%.

Your heirs will be happy.

 

[Markola]

If that's your concern then you stay fully invested, probably with a 100/0/0 allocation.

But to avoid SORR you must accept what will almost certainly be a sub-optimal WR...~3%.

Your heirs will be happy.

Sorry, I can’t make sense of your comment. Try again please?

 

[TheWizard]

If that's your concern then you stay fully invested, probably with a 100/0/0 allocation.

But to avoid SORR you must accept what will almost certainly be a sub-optimal WR...~3%.

Your heirs will be happy.

Well that depends.
My retirement income of pension/annuity + age 70 SS exceeds my expenses most months, so I invest the excess, beyond around $10k in my checking account, into my taxable account, which is 95% stock funds.

So I guess my WR is zero or negative, until I take out $40k or so for a new Mustang soon.

Situations vary...

 

[ncbill]

Well that depends.
My retirement income of pension/annuity + age 70 SS exceeds my expenses most months, so I invest the excess, beyond around $10k in my checking account, into my taxable account, which is 95% stock funds.

So I guess my WR is zero or negative, until I take out $40k or so for a new Mustang soon.

Situations vary...

Sure, but many ER are relying just on a portfolio since they retired before becoming eligible for SS.

 

[RobLJ]

Is that official doctrine somewhere? If so I haven't seen it. My view is that the near-in bucket is refilled opportunistically.

I think some of this debate is over fuzzy semantics. I never assumed a cash pile leading to the SS draw would be filled either yearly, nor after SS claim, but that's my bucket.



My view is

 

[FireDreamer]

1. <snip> by having a 2% WR. The reason SORR is a thing at all is if you're using a WR% that is slightly unsafe. <snip>

I'm planning on a 3.5% WR. Not exactly unsafe, but not fully safe either for my time horizon. I think there is a lot of pad in my budget so it may be safer than I'm letting myself believe.

2. I personally don't like the bucket methodology. If one refills the bucket every year, then it is really no different than just having an AA with some cash. If one refills opportunistically, then it gets complicated to determine when/how much to refill. It also seems hard to back test the strategy properly. Plus it's more complicated than just having an AA and rebalancing to it occasionally.

I intentionally avoided the term bucket because I don't want to use that strategy. The bucket strategy involves a more complicated 3-bucket approach with different goals for each. I read one article that basically said, rebalancing is all that is needed and the bucket strategy is merely a mental organization. It seems everyone else is calling my plan a bucket strategy, so maybe it is.. Your alternate description is more accurate to what I was thinking - AA with a cash buffer (bucket?).

3. Because of 1 and 2 above, I hold very little cash - currently about 0.17% of my portfolio. Just enough to pay my next few months of expenses. I think I'll come out ahead in the long run by keeping my money invested (pretty much the argument that @Markola is making I think).

I hadn't thought of the %of my portfolio that would be cash with my plan until now.. it would be ~10% cash! Seems too much and now I understand the cash drag others have mentioned.

I'm a bit uneasy about the possibility of a market crash while FIRE and taking money out of the market in that time. Perhaps its not as bad as I think it will be because my bond/fixed income assets won't be as affected and will sustain us during those times?

Thanks for your and others inputs.

 

[street]

^ My strategy is very similar to yours. I hold about 10% cash and that is enough to last me my life time, plus using my SS. My cash percentage was 17% at the start of ER but with so much growth with my investments the percentage has gone down but not in the amount that is in cash. The actual amount is about the same. My plan going into ER was to have enough liquid (savings account, CD's) to hold me over through my life, without having to sell any investments. RMD would be the only time I would have to touch those investments. Then that also, would just go back into investments again. So far, in 5 years of ER I have had one year where I actually had a negative WR. My WR is less then .5 now and that comes from savings account which doesn't make enough money in a year to buy a cup of coffee.

As far as your second question goes. I do nothing when it comes to rebalancing and just ride the waves in the past 40 plus years. My AA is 80/20 in what I have invested. I feel doing nothing has been safer for me then trying to rebalance and play the game.

My meaning of rebalancing is myself actually changing my AA and adjusting my investments. Some will say, that rebalancing is being done with reinvesting of those gains etc. and the change that is does to your AA. So, when I say I have never rebalanced I'm referring to my actually me adjusting my accounts not what happening without my control. So, for me rebalancing is a action I don't totally understand.

 

[SecondCor521]

I'm a bit uneasy about the possibility of a market crash while FIRE and taking money out of the market in that time. Perhaps its not as bad as I think it will be because my bond/fixed income assets won't be as affected and will sustain us during those times?

I understand and have the same concern. I address it for myself with the following points:

1. For all the times that the market isn't crashing - which is much more often than when it is - I'm gaining ground by having that cash invested rather than on the sidelines.

2. If or when I do have to withdraw during a downturn, I'm not withdrawing my entire portfolio at once. I'm just withdrawing enough to live on for the next several months. So if I have a net WR% of about 1% (*) and there is a 50% bear market for two years - pretty much the worst we have seen in the last fifty years, then I'll lose 1% * 2 * 50% = 1% of my portfolio. Not that bad.

3. I personally could probably avoid withdrawing from my portfolio at all during a bear market just by getting any job for a few years. Not great, but not the end of the world either.

4. The back testing in FIREcalc that I do is based on 97/3/0. It's mostly mental and theoretical, but the closer I actually am to 97/3/0, the more I feel like the back testing has relevance. Yeah, "past returns are no guarantee" and all that, but at the very least matching my actual behavior to my back tests is better than back testing 97/3/0 and being, I dunno, 85/5/10 or something like that. (Unless one doesn't include cash at all in the FIREcalc runs, which would be more conservative than my approach.)

(*) I started with a WR% of about 2% back when I retired, and due to a variety of things it has been cut in half.