Strategy: Having enough low risk savings to cover spending needs for most statistically likely market downturns...

[Koolau]

Thanks for your response.

I guess what I need to sleep at night, is enough years in my "low-risk investment/savings" bucket so that I can continue to live the same life style and be confident that my ""retirement savings in index funds,"" bucket will be able to recover from most any "statistically" likely market downturn.

I don't think I have a HELOC, GIF or Stable Value Fund or at least I do not know what those things are..


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Sorry. A HELOC is a relatively short term cash loan from the equity in your house. It could tide you over when equities are depressed. (HELOC = Home Equity Line of Credit).

GIF = Guaranteed Income Fund. It's basically a group of insurance contracts held by a fund (usually in a 401(k)) It's also called a Stable Value Fund. The idea is that you put in a certain amount of money and the value (in theory) never goes down - only up with the proceeds of the insurance contracts. It's not always even as good interest as a CD but does often beat CDs. It's "interest" ups and downs typically lag the markets.

 

[mrfeh]

2022 taught us it’s a mistake to own bond index funds.

No, it didn't.

If a decrease of 14% is a deal breaker, then obviously nobody should own any equities either.

Total bond funds are still a cornerstone of investing. People need to have their time horizon for when they need to sell a holding aligned with the attributes of the holding.

Money that is needed near term (ie. less than 5 years) shouldn't be in a total bond fund. For longer term fixed income, it is still an excellent option.

 

[Al18]

Bond fund performance has been bad for a decade, relative to CD’s. Look it up if you don’t believe me.

 

[mrfeh]

Bond fund performance has been bad for a decade, relative to CD’s. Look it up if you don’t believe me.

I don't care about the last 10 years. I care about the future.

And as I haven't been selling any total bond fund shares, I don't care what the NAV has done lately.

"Past performance is not a guarantee..."

 

[VanWinkle]

2022 taught us it’s a mistake to own bond index funds. The past 10 years of bond fund performance is typically just under 2% per year. Instead of bond funds, I recommend purchasing CD’s at 1, 2, 3, 4 and 5 years. All are currently paying about 4.25% APR per year. Some folks prefer Treasury’s instead, and they have the advantage of no state taxes on the interest.

It's a mistake for you to buy bond index funds, not us. Each person has a different time requirement for their money. Your time requirement is much shorter than mine. Generalities of don't buy this or that are not helpful to everyone.

 

[VanWinkle]

In addition to having 3-5 years of fixed income to cover downturns, you also have to be honest about your ability to stay the course with equities when they are getting hammered. Asset allocation is about more than years of fixed income. It can help you sleep at night knowing that your portfolio will lose a maximum amount in line with your allocation. 100% equities can decrease 50% while a 50/50 allocation will likely decrease 20-25% in the same downturn.

 

[Surewhitey]

We have 5+ in CD's and Treasuries (some 7&10 yr). We're Def overweight on fixed and average ~4.75% overall. Most of this is for DW's peace of mind, but we are playing with the house monies now, so I'm indifferent from here.

 

[Palmtree]

I don't know if this will help but I've been thinking along those lines for several months. We're in our early 60's and never had high incomes, but we've been savers/investers for a long time. Over decades the market has been very good to us. We're also early retirees with a pension that covers over 50% of our needs.
We were 60:40 in investments basically between VTI (Total stock) and BND (Total bond) funds. I've not been happy with BND as of late, and looking back 10 years, it's return has not warmed my heart. Still I'm not bailing on it. Two things prompted a change. I remember years ago, a financial advisor saying "Don't risk money you do need, to chase added money you don't need" Also, my wife of 35 years expressed that she was worried about our investments, even after showing her our 95% chance of dying rich on several online popular retirement spreadsheets. So to make us both happy I decided to make a course correction. First, take our yearly spending, add 20% and subtract out the pension to get the yearly amount we needed to draw from our assets. Take That number and multiple by 10 then add in some estimated inflation. (SWAG) Just last Friday I set aside 10 years of required funds in the FDIC or government insured investments as follows.
Year 1&2 - Money market account.
Year 3&4 T-bills that mature in January of each year.
Years 5-10 TIPS ladder. (Give us inflation protection)
We still have a large amount equity & bonds but
having 10 years of reserve works for us and lets us both sleep well at night.

 

[wmc1000]

In a severe downturn SS would cover all of our routine expenses with a cushion of about 5%. Having said that we still keep about a 1 yr cushion in high yield mm accts.

 

[TheWizard]

All these various strategies and disagreements make me happy that I chose to "pensionize" a good portion of my tax-deferred accumulation back in 2013 rather than retain everything in my portfolio.

Especially after starting age 70 SS a few years ago, I now have excess retirement income almost every month, which I invest into various stock index funds. Cheers...

 

[DJRR]

Simple math - $1M portfolio $40k annual expenses 4% withdrawal rate.

This is usually considered "safe" for 30 years based on history with a 60/40 portfolio so:

$600k stocks
$400k non stocks = 10 years expenses

You then have choices. Based on history, 40% cash allocation is a drag on total performance and does not maintain spending capacity after inflation in the long term.

I think most people keep a few years in cash to maintain current living standard and put the rest in some combination of bonds/tips to have a better chance of keeping up with inflation.

If you have another source of income like a pension or SSA you can keep more in stocks if you want a chance to maximize your terminal value or hold fewer stocks if you want to have more certainty of having a specific income.

You can also spend less, borrow from your home equity, etc. which means more years of expenses.

The big issue, of course, is no one knows what the future will look like. This is why you will see answers ranging from 120% stock on margin is the way to 0% in stocks is the way and everywhere in between. Everyone has to settle on a place based on how fixed their expenses are and how comfortable they are with potential losses. Failure almost always results from panic selling out 100% at the low and never buying back in.

 

[glasswave]

If you are of a more traditional retirement age of 62+, another strategy that I personally use is to manage for enough guaranteed income to cover your base budget. Things like deferring SS, having a pension and/or purchasing a SPIA. If those add up to cover your necessary expenses, it makes it a lot easier psychologically to stay the course with equities. IMO that reduces the size of a cash bucket needed. "Spending from bonds" while deferring SS is one method to get towards that point. JMO, but now is a favorable interest rate time to shop a SPIA, if you're the correct age age and financial status to benefit from one.

Thanks for the advice.
I will be 62 in April. I plane to take early retirement in the end of June '25 or '26. They'll pay me 20.5% of my salary until I am 67 y.o. and keep me on the health plan until I qualify for Medicare. Then, I will have the added expense of paying for Medicare and a Medicare supplemental insurance. Right now, I plan to defer SS until age 67. In 07/2025, I should have about $185k in liquid savings. If I wait until 07/2026, I should have about $210-215k in liquid savings. I was hoping to live off my liquid savings when I retire, allowing my "tax deferred" account (currently at $1.24m) to grow.

Annuities have sounded interesting to me, but part of me starts to think they are a scam. OTOH, according to an online annuity calculator, if I put it all into an annuity, I'd receive about $7,5K/mo. That would be enough to keep me well fed for life. Add my SS to it and I'd be high on the hog given my spending habits..



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[timbervest]

A good exercise is to stress test your portfolio. Look at your guaranteed income (pension, SS, etc) vs essential needs and then take your portfolio and assume a X% decline (choose your number but make it meaningful) and then calculate your withdrawl rate or what your income is off it that fills the gap. Some may find the worse case scenario is not as bad as you think.

 

[glasswave]

2022 taught us it’s a mistake to own bond index funds. The past 10 years of bond fund performance is typically just under 2% per year. Instead of bond funds, I recommend purchasing CD’s at 1, 2, 3, 4 and 5 years. All are currently paying about 4.25% APR per year. Some folks prefer Treasury’s instead, and they have the advantage of no state taxes on the interest.

Thanks.
Bonds have never seemed all that tasteful to me, but I've always had a bad impression.
I have been considering a CD ladder for my liquid savings. Rembrandt's suggestion of a high yield saving account also seemed interesting, but I have little idea how they work.


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[SnowballCamper]

When you put your numbers in Firecalc, what does it say? Are you comfortable with that? Would you "let it ride" in a downturn? If you are comfortable with it, and confident that you would let it ride, then you just rebalance regularly and when you make an annual withdraw for the year's expenses. This is the simple solution.

If you want to avoid the sequence of returns risk for the first few years, then you have to decide how many years and how much to keep out of the market.

 

[rembrandt]

Thanks.
Bonds have never seemed all that taseful to, but I've always had a bad impression.
I have been considering a CD ladder for my liquid savings. Rembrandt's suggestion of a high yield saving account also seemed interesting, but I have little idea how they work.


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Check out Ally Bank online. They are very user-friendly.

 

[walkinwood]

The 4% SWR studies are based on withdrawing funds in a way that leaves the asset allocation unchanged.

Are there studies that calculate SWR based on taking money on from fixed income in down (stock market) years & only from stocks in the up years - and not rebalancing to the original AA?

In practice, even when keeping AA constant, you end up taking money from fixed income first in down years in order to restore the AA. For very large drops in the stock market, you may, in addition, sell fixed income in order to buy stocks. For small drops in stock markets, you could end up taking money from both bonds & stocks.

 

[MarieIG]

I probably had more years of expenses set aside than most, but I tend to be a worrier and did not want to sell equities in a down market. I also wanted to be able to fund tax payment on higher Roth conversions (in kind) out of a taxable account in a down market.

We also had some pension and annuity income from DH the option to skip conversions, therefore lower our tax bill. As a last resort we could start one or both SS income, but especially did want to leave DH's until age 70.

When interest rates went up, most of the funds were moved into treasuries, CDs, taxable MM funds and municipal MM funds.

 

[DJRR]

In practice, even when keeping AA constant, you end up taking money from fixed income first in down years in order to restore the AA. For very large drops in the stock market, you may, in addition, sell fixed income in order to buy stocks. For small drops in stock markets, you could end up taking money from both bonds & stocks.

True, which is why many people say just pick an asset allocation and rebalance with any sales/distributions/downturns, etc. Buckets is just a mental accounting that helps many people understand their asset allocation in an easier way. I think the more relevant buckets are taxable/tax deferred/tax free because how you pull from those can impact your tax liability quite a bit.

 

[imjustawarrior]

ERN SWR contains so much helpful information.

There are many different systems as you can see from this thread. After many years of study, I have concluded this is what is best for me.

I have a three fund portfolio with a set asset allocation (AA). If stocks tank, then I would need to spend from bonds to pull my portfolio back to my desired AA. It is just naturally how it works. I don't have buckets. I don't have cash beyond 1-2 months of expenses.

All the retirement calculators support this portfolio model so I can easily analyze it. If the calculators say I am fine, then I just stay the course.

No system is perfect except for a pensioned indexed to your personal rate of inflation.

I think a lot of people create overly complex systems because it makes them feel better. The most important things are have enough money when you retire, stay the course, have a reasonable AA (80-20 to 20-80) and be flexible with spending. These are my rules of thumb.

 

[Al18]

There are many types of annuities, and some types are a better deal for the salesman than for the buyer. MYGA are similiar to CD’s, only they are sold by insurance companies, and last from 3-10 years. Most allow you to withdraw up to 10% per year with no penalty. Be aware they are not guaranteed by the government, but by state guarantee that ranges from 100K to 250K.

 

[UpQuark]

How many years worth of spending expenses should one have stashed away in their "low-risk investment/savings" to cover most any statistically likely market downturn?

I've heard 2 and a half years to recover from a bear market, but, in my lifetime it took 7 years for the dot.com downturn to recover, and 6 years for the 2008 thing to recover, and I've seen charts where in my lifetime there have been two sideways markets, one for 13 years and one for 11 years. At those times I was oblivious to all of that because I was still working and ignored (regretfully) investing.

With luck, I should live another 17 to 19 years, so all those past statistics make me feel insecure (because now I realize it isn't enough to get thru down markets, I need an all-weather portfolio that can handle any combination of inflation, recession, and sideways-ness, while still able to get some gains in good years).

When I retired 3 years ago the Fidelity advisor told me to have 2 years of cash (or equivalent) when I retire, and since I retired in early 2022 and the market had a downturn that took 23 months to recover, his advice was perfect.

Since my bonds are mostly in my IRAs and the higher taxes would make me reluctant to really use only them in down markets, in the taxable account I have cash and short term Treasury bills for current 1 year spending, then a small Treasury (or other type) bond ladder for year 2 plus part of a year 3, then I have teased out some of the broad index funds into tiny holdings of conservative sectors (like consumer staples and healthcare indexes) that I would be comfortable selling to fund year 3 (because supposedly although they have pitiful performance overall, they fall less and recover sooner).

 

[Koolau]

I don't know if this will help but I've been thinking along those lines for several months. We're in our early 60's and never had high incomes, but we've been savers/investers for a long time. Over decades the market has been very good to us. We're also early retirees with a pension that covers over 50% of our needs.
We were 60:40 in investments basically between VTI (Total stock) and BND (Total bond) funds. I've not been happy with BND as of late, and looking back 10 years, it's return has not warmed my heart. Still I'm not bailing on it. Two things prompted a change. I remember years ago, a financial advisor saying "Don't risk money you do need, to chase added money you don't need" Also, my wife of 35 years expressed that she was worried about our investments, even after showing her our 95% chance of dying rich on several online popular retirement spreadsheets. So to make us both happy I decided to make a course correction. First, take our yearly spending, add 20% and subtract out the pension to get the yearly amount we needed to draw from our assets. Take That number and multiple by 10 then add in some estimated inflation. (SWAG) Just last Friday I set aside 10 years of required funds in the FDIC or government insured investments as follows.
Year 1&2 - Money market account.
Year 3&4 T-bills that mature in January of each year.
Years 5-10 TIPS ladder. (Give us inflation protection)
We still have a large amount equity & bonds but
having 10 years of reserve works for us and lets us both sleep well at night.

How ironic. I never made the calculations that you did but I still have about 10 years of 401(k) withdrawals available in my Guaranteed Income Fund (aka Stable Value Fund). So far, it's how I've taken what we need to supplement SS and modest pension - oh, and meet RMD requirements for my 401(k). With that "fixed" or "cash-like" money available, I've not needed to take from taxable equities or bonds, nor from my Roths. I've been able to just let everything else ride while I rebalance between funds (bonds and equities).

Amazingly, though the growth of a GIF isn't guaranteed nor has it been particularly robust, it has almost kept up with my withdrawals. As I've spent more and more, the GIF has all but stabilized in value - growing almost as fast as I've been taking from it. It's sort of a "moving" 10-year stash for routine yearly withdrawals.

The "cost" to do this has been "high." I have forgone significant equity growth that I could have had with more "risky" stock and/or bond mutual funds. I'm okay with that because I sleep well and I do have plenty of equities for growth. Considering my other cash-like (fixed income) investments (like MYGAs), I've never gone over 50% equities (more like 40%) yet since I retired almost 20 years ago, my stash has roughly tripled. Most here have had a lot more growth than that. Doesn't bother me because (as I always say): "I have enough."

I don't recommend my path, but it has w*rked well for me - even at the cost of out-sized growth so YMMV.

 

[Montecfo]

2022 taught us it’s a mistake to own bond index funds. The past 10 years of bond fund performance is typically just under 2% per year. Instead of bond funds, I recommend purchasing CD’s at 1, 2, 3, 4 and 5 years. All are currently paying about 4.25% APR per year. Some folks prefer Treasury’s instead, and they have the advantage of no state taxes on the interest.

Bond funds are just tools to facilitate investing.

I think what 2022 SHOULD have taught folks is that if you own bonds with duration, whether directly, in funds, indexes or ETFs, those bonds are going to decline in value as interest rates rise. And the longer the duration, the greater the decline.

The villains were duration and not understanding what you own, in my opinion.

 

[street]

Bond funds are just tools to facilitate investing.

I think what 2022 SHOULD have taught folks is that if you own bonds with duration, whether directly, in funds, indexes or ETFs, those bonds are going to decline in value as interest rates rise. And the longer the duration, the greater the decline.

The villains were duration and not understanding what you own, in my opinion.

Yes, this would be me.