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

[wolf]

OP. IMHO this works for me. Keep it simple.

"low-risk investment/savings" = CD's, Treasuries, individual bonds (no bond funds !). The income they
produce, plus Social Security, covers all my daily expenses.
Do not plan on redeeming these securities early.

"retirement savings in index funds," = Total Stock Market mutual fund. Investment money left over goes
here. Vanguard has very low fees.
Do not plan on touching. Let it ride. If in good times, the dollar
amount gets high. Sell a portion and put into
"low-risk investment/savings".

Your life style, where you live, determines, if you can follow my plan. You may have to work longer, or down size, etc. Good Luck.

 

[wolf]

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

Agree with you 100%. When ever one discusses Investment. Bond funds are always brought up.
I too, in my early years, purchased Bond funds. I quickly learned. The do not work.

Now, fixed income investing is = Treasury's, CD's, and Agency's. Individual securities.
No bond funds.

 

[HFWR]

The data the 4% rule is based upon purports to include the worst years. YMMV

In my case, last year the div/int from my IRA covered most of my yearly withdrawal.

I have slightly less than two years’ estimated withdrawals in cash, and will be nearly 3x with 2025 div/int.

 

[Sunset]

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..



~~~~~~

Annuities are a whole separate topic, an important factor is many are not indexed to inflation, so the $7.5K/mo. of purchasing power looks like a lot now, but will be worth 1/2 that or less in 20 yrs.
Also locks up your $$$ in various ways.
We don't have any annuities but are planning on taking SS at age 70 as it is basically an inflation indexed annuity.

We are migrating to a higher cash (bonds/Treasuries/TIPs/CDs/MM) allocation in our retirement account as there is no tax implication from selling nicely appreciated stock and turning it into interest earning investments.

During the big downturns, stocks went down a lot, but most continued to pay the dividends, so that income from index funds is pretty dependable and reduces the need for fixed income allocations.
Example: Person has $600K in mixed stocks, earns 2% divs overall per year = $12K income.

 

[reneeh63]

I 'stayed the course' with 80-90% equities up until maybe 4 years before getting ready to retire. Now that I'm on the cusp of making that move I plan to delay SS until age 70 and live on my pension and investments for the interim. I've been accumulating my cash bucket but I really think 5 years worth of expenses or even 3 is pushing it. Sure, down markets can last that long. But I don't need to outlast EVERY down market through its entirety. I want to take the sting out of it but not have that drag down my total returns to such a great degree. It is still a matter of balance and nothing is 100% - if I had 10 years worth in some kind of savings vehicle that would put me at risk on the other end of having too little in higher-returning buckets. I don't need THAT level of security that I risk running out at the end of a long retirement.

As to the problem with bonds, I'm still trying to come to a better solution because bonds...well...they su*k and have for a long time now.

 

[street]

As I mentioned in my post earlier, I have enough cash to last into my 90's.
The reason for me to have that much is to be able to invest in land or any opportunity investment that may come along. The larger amount on liquid assists doesn't work for most here but it has been very beneficial for me.

 

[jj]

Author Bill Bernstein has something interesting to say about changing your asset allocation at or before retirement to reduce risk. This article from the Whitecoat Investor WCI sums up his thinking well, and very much makes sense to me. The Bogleheads site seems to be down for me right now. The phrase 'liability matching portfolio' might be useful to search.

Bernstein Says Stop When You Win the Game | White Coat Investor

 

[Gotadimple]

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.

~~~~~~

You are asking if there is a standard rule of thumb for setting aside low-yield investments to hold you through a statistically likely downturn.

Forget about 'statistically likely.' This phrase assumes that there is some known series of events that repeats itself on a routine basis. Did you factor in a world-wide pandemic with resulting lapses in supply chain? What about some newish technology that grabs the attention of market makers? Or, political events that disrupt economies? There are no statistics for this that show that events like this happen on a routine basis.

There are statistics that tell you how long it takes for the equity and bond markets to recover after 'downturns.' Those can be the basis for any amount you set aside to avoid sequence of returns risk.

It's mostly about your asset allocation. A bucket strategy is asset allocation. You want to avoid having to sell longer term assets to fund current expenses. To that end you need a three-part allocation: stocks - bonds and short term investments - cash.

The last part holds enough to keep you from selling the other two to fund your lifestyle. So how much do you spend in a year (net of any annuities, pensions, etc.)? You may want to keep two or three times that amount in cash, high yield savings accounts, and/or 1 year CDs (or Treasuries if the interest rates are upside down).

This is the same equation you do today while you are working: if I lose my job tomorrow how much cash will I need to hold me until I find a new job and get the first paycheck.

Everything else can be divided between equities and bonds and you can decide what percentage to put in each and how to slice/dice within the allocations.

HTH,
Rita

 

[TickTock]

OP,

In a traditional AA/rebalancing strategy, during a market downturn you'd pull from the FI portion of the portfolio for both that year's living expenses and to bring the equity portion back to the target AA. So in that year you're not selling equities in a down market, you're doing the opposite - buying them (at a lower price). Which helps you recover more quickly than not rebalancing.

The question becomes what do you do next year. Say equities outpace FI but are still lower than their previous high. Traditionally you would sell equities for living expenses and to rebalance. That would mean selling equities lower than their former highs.

If that's what you mean and you don't want to sell any equities until they've regained their former high, then you set aside funds (and possibly don't rebalance the rest of the portfolio until equities regain their former high) for living expenses. How much, I don't know. It's like moving the portfolio more to the FI portion, which is a drag on overall performance. So set aside enough for you to sleep comfortably.

 

[Koolau]

Author Bill Bernstein has something interesting to say about changing your asset allocation at or before retirement to reduce risk. This article from the Whitecoat Investor WCI sums up his thinking well, and very much makes sense to me. The Bogleheads site seems to be down for me right now. The phrase 'liability matching portfolio' might be useful to search.

Bernstein Says Stop When You Win the Game | White Coat Investor

Yes "Stop when you win the game" seems totally applicable.

 

[pjigar]

The only sensible role of "safe bucket" is as a "once and never filled again" bucket. i.e. so start with let's say 3 years of expense in a safe bucket. You use it up in first 3 years of retirement and never refill it. This helps you address the dreaded SORR risk. Trying refill it on an ongoing basis will not work in real life (someone mentioned earliretirementnow article, read that to understand why).

 

[SnowballCamper]

Yes "Stop when you win the game" seems totally applicable.

But what does winning the game mean? Having enough so that I can live on the 4% withdraw rule? That assumes that I remain invested in something like a 70/30 asset allocation.
Does it mean having thirty years of expenses, and to put it all in TIPS? Then what happens when I reach my 35th year of retirement?

I know I'm just some guy on the internet, but the "game" isn't over until you die. Some sort of risk continues like longevity, or inflation, etc. I think TickTock's answer is on point.

 

[RetiredHappy]

The only sensible role of "safe bucket" is as a "once and never filled again" bucket. i.e. so start with let's say 3 years of expense in a safe bucket. You use it up in first 3 years of retirement and never refill it. This helps you address the dreaded SORR risk. Trying refill it on an ongoing basis will not work in real life (someone mentioned earliretirementnow article, read that to understand why).

Safe bucket is not just for SORR. It is to safeguard against any downturn of market in your lifetime. You do not keep refilling it because you don't generally dip into it. You only use it during downturn.

 

[jollystomper]

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?

Is there a rule-of-thumb/formula for this? Is this a viable strategy? Is there a name for this sort of strategy?


~~~~~~

I kept it simple, not optimal . Though past performance is not indicative of future results, its seems that the market has had very 5 year periods were it was down for that period. I went into retirement with about 5 years of expected expenses beyond my pension (which of course made it easier) in cash, so that, worse case, I would not be forced to touch my investments in that time and avoid having to sell in a down market. I reevaluate that stance every year. I took a little out to "reward" myself for retiring , and have bought/sold just to rebalance and maintain my desired AA.

It has worked for us. In addition, overestimating expenses and underestimating income (both unexpected occurrences) made things better. In 6.5 years of retirement I have yet to sell equities to have to cover our spending. Our current cash is projected to last beyond my planned taking of SS at 70 in a little more that 3 years. Until then we will balance off sleeping well and night and BTD .

 

[audreyh1]

After retirement I’ve been through some pretty bad bear markets: 2000-2002, 2008/2009, 2015, 2020, 2022. Even rebalancing I’ve never sold equities when down (other than tax loss harvesting and immediately reinvested). It just doesn’t work that way.

Of course, as I mentioned above, I have a large enough fixed income allocation that I have room for both withdrawals and buying more equities when they are down.

 

[street]

But what does winning the game mean? Having enough so that I can live on the 4% withdraw rule? That assumes that I remain invested in something like a 70/30 asset allocation.
Does it mean having thirty years of expenses, and to put it all in TIPS? Then what happens when I reach my 35th year of retirement?

I know I'm just some guy on the internet, but the "game" isn't over until you die. Some sort of risk continues like longevity, or inflation, etc. I think TickTock's answer is on point.

Just my thought what it means is that you have expenses covered till ~100 years of age. A well thought out expense data for you LTC and any incidental expenses added into long range look.

Each person's years of expenses will vary depending on your lifetime expenses against your investments and anticipated growth over that time period.

 

[treeofpain]

There are a lot of ways to approach this. Everyone will have his/her own comfort level and preferences.

I plan to retire the end of this year at 62. Not that early compared to many here.

Between SS and pension, I can cover basic expenses plus some wiggle room. I keep about 6 months of base expenses in a money market.

My $1.3M in retirement investments will be for extra travel and generosity to non-profits and family - more discretionary than need. So I plan to keep those funds pretty aggressively invested.

 

[Exchme]

Safe bucket is not just for SORR. It is to safeguard against any downturn of market in your lifetime. You do not keep refilling it because you don't generally dip into it. You only use it during downturn.

Looking at monthly data going back to 1871 reveals the first problem. On an inflation-adjusted basis, we've been in drawdowns over 77% of the time! We are only at all-time highs the other 23% of the time. The percentage of time we are drawdowns gets worse as the timeframes shorten, on a weekly basis we've been in drawdowns multiple times this year.

Since 77% of the time clearly can't be an emergency, the first task is to set the time period we're going to use to define when a drawdown has gone on long enough to use the bucket. Maybe it's ridiculous to check monthly, perhaps we should use annual data, but then we wouldn't have used the bucket through all of 2022. Or maybe we should base the bucket trigger on a percentage drawdown, we only use the bucket after the market has gone down x%? Or maybe a combination of time and severity?

If it's a refillable bucket, we also need rules about how to refill. Do we check for a new all-time high at the same frequency we decided on to tap into the bucket or do we watch moment by moment and if the decision is different than the bucket drawdown, why?

And how big is the bucket anyway? Many of the longest downturns look like mostly separate events that just happened to occur so close in time that recovery didn't happen in between. (1929 panic, Smoot Hawley tariffs, WWII stormclouds, WWII) or (Vietnam, Arab Oil Embargo, runaway inflation, Iranian Revolution) or (dot.com crash, financial crisis). If there is an element of randomness, then there is no optimum bucket, for every bucket size that worked in one downturn, there was another possible downturn that it would have made worse.

So I agree with the ERN findings that it's random chance as to whether any particular bucket strategy will help or hurt.

 

[Koolau]

But what does winning the game mean? Having enough so that I can live on the 4% withdraw rule? That assumes that I remain invested in something like a 70/30 asset allocation.
Does it mean having thirty years of expenses, and to put it all in TIPS? Then what happens when I reach my 35th year of retirement?

I know I'm just some guy on the internet, but the "game" isn't over until you die. Some sort of risk continues like longevity, or inflation, etc. I think TickTock's answer is on point.

It's true that we all have to make the decision ourselves as to whether we have won the game or not.

In my case, I don't need 4%. I'm more in the 2% range. My retirement plan runs out at age 99 and that's 21 years from now. So, yes, I consider that I've won the game. But I still have about 30 to 40% in equities and all my fixed income makes 4% or more.

 

[pjigar]

Safe bucket is not just for SORR. It is to safeguard against any downturn of market in your lifetime. You do not keep refilling it because you don't generally dip into it. You only use it during downturn.

So when do you refill after a downturn? These are the kind of challenges addressed in the SWR series article.

Retirement Bucket Strategies: Cheap Gimmick or the Solution to Sequence Risk? – SWR Series Part 48 - Early Retirement Now

September 14, 2021 – Welcome to a new installment of the Safe Withdrawal Rate Series, dealing with Bucket Strategies. This is one approach that’s often considered a viable solution to the dreaded Sequence Risk Problem. Simply keep buckets of assets with different risk characteristics designated...

earlyretirementnow.com

 

[FREE866]

Author Bill Bernstein has something interesting to say about changing your asset allocation at or before retirement to reduce risk. This article from the Whitecoat Investor WCI sums up his thinking well, and very much makes sense to me. The Bogleheads site seems to be down for me right now. The phrase 'liability matching portfolio' might be useful to search.

Bernstein Says Stop When You Win the Game | White Coat Investor

"Bernstein recommends a rule of thumb, based on annuity payouts and spending patterns late in life, that you should have 20-25 times your residual living expenses (after pensions and Social Security) invested solely in safe assets. No stocks at all."

I'm sorry, this is really misguided. Overwhelming majority of people would never be able to retire if they used this advice.

 

[audreyh1]

"Bernstein recommends a rule of thumb, based on annuity payouts and spending patterns late in life, that you should have 20-25 times your residual living expenses (after pensions and Social Security) invested solely in safe assets. No stocks at all."

I'm sorry, this is really misguided. Overwhelming majority of people would never be able to retire if they used this advice.

After retirement.

 

[FREE866]

After retirement.

That still sounds uber conservative and assuming a multi decade retirement would, in most cases, require a serious boatload of money.

 

[TheWizard]

"Bernstein recommends a rule of thumb, based on annuity payouts and spending patterns late in life, that you should have 20-25 times your residual living expenses (after pensions and Social Security) invested solely in safe assets. No stocks at all."

I'm sorry, this is really misguided. Overwhelming majority of people would never be able to retire if they used this advice.

It's basically just the 4% rule stated a bit differently.
And yes, folks with higher risk tolerance might easily choose to keep 50% in stock index funds to fight inflation rather than all in "safe assets".

And my Residual Living Expenses are zero, so I'm not impacted by that methodology...

 

[audreyh1]

It’s not no stocks at all. You can have excess assets in stocks.