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

[RetiredHappy]

I use 90 yo as end of life for both of us, but when we extend the age, the pile gets bigger and bigger. I think it simply means that we are not spending fast enough.

 

[Montecfo]

Actually I think it is pretty simple. Spend from stocks when market is up. Spend from debt when it is down, spend from both when in between.

No big cash buffer to drag down returns (as it does historically). Rule 1: Stay Fully Invested.

And as Audreyh1 said, if you rebalance annually this can guide your decision since you are selling what is up to get back in balance. Or if no change take 60% from.stocks, 40% from bonds or whatever your AA happens to be.

 

[street]

Actually I think it is pretty simple. Spend from stocks when market is up. Spend from debt when it is down, spend from both when in between.

No big cash buffer to drag down returns (as it does historically). Rule 1: Stay Fully Invested.

And as Audreyh1 said, if you rebalance annually this can guide your decision since you are selling what is up to get back in balance. Or if no change take 60% from.stocks, 40% from bonds or whatever your AA happens to be.

What do you do when you have a large purchase you want to make? Do you sell investments then? Just wondering what path people do in a case like that.
I'm talking 100K or more or a 60K vehicle.

 

[TheWizard]

Actually I think it is pretty simple. Spend from stocks when market is up. Spend from debt when it is down, spend from both when in between.

No big cash buffer to drag down returns (as it does historically). Rule 1: Stay Fully Invested.

And as Audreyh1 said, if you rebalance annually this can guide your decision since you are selling what is up to get back in balance. Or if no change take 60% from.stocks, 40% from bonds or whatever your AA happens to be.

Yes, I would recommend this approach vs one that fools with significant cash buckets...

 

[Murf2]

Actually I think it is pretty simple. Spend from stocks when market is up. Spend from debt when it is down, spend from both when in between.

No big cash buffer to drag down returns (as it does historically). Rule 1: Stay Fully Invested.

And as Audreyh1 said, if you rebalance annually this can guide your decision since you are selling what is up to get back in balance. Or if no change take 60% from.stocks, 40% from bonds or whatever your AA happens to be.

I like this way of thinking. It’s a simple rule I could easily understand.
My only question is, “with MM & CDs basically paying the same as Treasuries, would they be considered cash or bonds?
Please excuse me if this is a dumb question.

TIA
Murf

 

[GrayHare]

What do you do when you have a large purchase you want to make? Do you sell investments then? Just wondering what path people do in a case like that. I'm talking 100K or more or a 60K vehicle.

It depends on whether the riskier assets have been down or up during recent years. If down, I pay from the cash bucket. If up, I'd still initially pay from the cash bucket but then soon refill it and lock in gains by selling whatever has had a big run up.

 

[robnplunder]

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?
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Presently, I keep 3 years of my retirement budget in low-risk investments. DW & I are 63 years old and plan to withdraw from SS at age 66. Hence, "3 years" makes sense to us.

 

[Montecfo]

I like this way of thinking. It’s a simple rule I could easily understand.
My only question is, “with MM & CDs basically paying the same as Treasuries, would they be considered cash or bonds?
Please excuse me if this is a dumb question.

TIA
Murf

Not a bad question at all. Answer depends on how YOU are viewing it. Right now there is little penalty for holding cash (MM) as part of your "bond" allocation.

But a better plan in my view is to use rate spikes to ladder into bonds or whatever equivalent vehicle you are using for longer term funds.

Why? Because for now at least we are in a declining rate environment. And when the Fed cuts your MM fund interest rate Will be cut right along with it. But your bonds or funds should become more valuable, since they're at a higher rate.

Now if you view that we are in a rising rate environment, then you can just hold cash. But I'm an investor more than a rate speculator, so I believe in laddering into bonds or funds. Then you are being methodical and you don't have to be "right" about the right direction.

 

[mrfeh]

I like this way of thinking. It’s a simple rule I could easily understand.
My only question is, “with MM & CDs basically paying the same as Treasuries, would they be considered cash or bonds?
Please excuse me if this is a dumb question.

TIA
Murf

It's all fixed income. No need to categorize anything separately.

 

[swakyaby]

Thanks for your response but I am having a difficult time understanding it.

In one case you say 3 to 5 years is enough, then you say have 5 - 10 years income in bonds. Then you mention a 3rd bucket "for long term growth."

If "bucket 1" is ""retirement savings in index funds,"" and "bucket 2" is ""low-risk investment/savings"" why the need for a 3rd bucket? Which is it to weather most statically likely down turns "3-5 years" or "5-10 years?"

Is my ""low-risk investment/savings"" what you are calling your "bond bucket?"

¯\_(ツ)_/¯


~~~~~

Forgive me for my lack of clarity. I was trying to describe what some people call the 3-bucket strategy. The first bucket is the “low risk investment/savings” which is typically the asset class comprised of stable market funds like money market funds, CDs, treasuries, all the assets that tend to maintain their value during prolonged market downturns. It’s what a retiree might depend on to spend from when stocks and bonds are doing poorly. This amount varies greatly, depending on whether there is a steady source of income, and how much one needs to sleep well at night.

The 2nd bucket is for the intermediate term, about 5-10 years or 5-15 years, broadly speaking. The asset that historically had intermediate volatility were bonds. Lately, bonds have been disappointing as an asset, losing value while equities were rising and falling. As a result, many people have reduced or even eliminated their exposure to bonds, including me. My portfolio probably has no more that 20% in bonds in contrast to the 40% - 60% that was often recommended for retirees.

The third bucket is the asset that has the greatest potential for long-term growth but also the most volatility over the short-term—equities. I like to liquidate from this asset category when the stock market is up, and save my stable assets for when the market is depressed. So while this asset is intended for the long term, I do spend from it opportunistically. I started retirement with 60% of my portfolio in this asset class.

These amounts are simply what made sense for my circumstances.

 

[RunningBum]

I never considered buckets until I hit around age 61 and saw the end of my ACA subsidy in sight. So along with expected dividend and income distributions I'm keeping enough cash to get me there, to the end of 2027. Cash is MM + CDs and T-Bills that are basically a ladder that mature in time for my spending needs.

That made me look at buckets in general. Partly because I wrestle with using a fixed AA. I'm not fully committed, but I've come up with at a bucket strategy to see how it compares to my 65-70% equity plan, as follows:

Now that I'm closer to 65, keep 3 years in cash. Again, that's not 3 full years of spending, it's 3 years of (spending - distributions) in fixed income.

That prompted me to look at a second bucket to get to age 70, when I expect to take SS. I made a spreadsheet to see how it looks to have a 40/60 stock/cash+bond allocation to get to age 70, or an additional 7 years beyond my 3 year cash bucket.

Beyond 10 years, I have a much more aggressive 90/10 split for a bucket to age 100. And no, I'm not confidently saying I'll make it to 100, but I plan for it in case I do.

Since that doesn't project to use all of my money, I have a 4th bucket for my heirs, that I invest in equities at 150-my age. My main heir is 29 years younger than me so that's kind of a 120-his age plan. I know age based AA is not used all that much here, but I don't know what else to use there and it makes sense to try to grow my estate for them aggressively, for now.

I don't recall if I played with this numbers until I made them close to a 65-70% equity AA, but it comes pretty close. For now I'm trying to keep my actual equity holdings between the two plans.

As I get into my 70s, SS+distributions+small pension and SPIA should pretty much cover my needs so my bucket plan will allow me to be very heavy in equities, which is good because they are almost all in taxable and I'd rather let my heirs get stepped up basis than pay LTCGs myself. But maybe I won't want to have that high of an AA. And I guess the age based bucket AA for my heirs will keep me from being too high in equities. TBD.

So I'm kind of using buckets, but only as a rail with a fixed AA. Or maybe my fixed AA is a rail to my bucket plan. I haven't yet read those links that say buckets aren't good, but I will do so and maybe it'll turn me around. But right now I can't make sense out of a fixed AA because I don't know what the AA should really be. Buckets make sense out of it for me.

Shoot holes in my plan. I'll listen to opposing views that have meat to them, but not "buckets are stupid" statements.

 

[HFWR]

I chose to not have dividends or interest reinvested, so aside from a small portion being allocated to cash, the inflow helps top off after my yearly withdrawal. I’m about 45/45 right now, with the rest being a REIT and cash. I’m not totally convinced bonds are safer than stocks; maybe less volatile, but, for instance, correlations went to one during the housing crash. The only thing in my portfolio that didn’t tank was a long-term bond fund, partly because NAVs had smooth sailing from the rates in the eighties to near zero in the oughts and beyond.

 

[youbet]

I don't use "years of withdrawals" in any way in managing my FIRE portfolio. Currently, I'm 77 and DW is 78. I've been fully retired for 19 years and DW for 23 years. Our portfolio is currently sitting at an AA of 67/28/5. That allocation is what I'm personally comfortable with in regard to the associated returns, risk and liquidity. I feel I have various paths I can follow to accomplish withdrawals during market fluctuations whatever happens outside of some extremely lengthy and deep pullback.

We do have a modest "emergency fund" at our credit union to cover unplanned events so I wouldn't have to dabble with the FIRE portfolio and it's AA on short notice.

 

[ncbill]

I don't recommend bucket strategies at all. Take a look at a couple articles at EarlyRetirementNow where he explains that the result of any particular size of bucket and refilling rules look a lot like random chance as to whether it helped:
Retirement Bucket Strategies: Cheap Gimmick or the Solution to Sequence Risk? – SWR Series Part 48 - Early Retirement Now

Discussing Retirement Bucket Strategies with Fritz Gilbert - SWR Series Part 55 - Early Retirement Now

January 25, 2023 – Welcome to another part of my Safe Withdrawal Rate Series. Today’s topic: Bucket Strategies in retirement. As you know, my blogging buddy Fritz Gilbert has written extensively on this topic at his Retirement Manifesto blog, for example: And likewise, I have written about my...

earlyretirementnow.com

I think expecting your future self to really keep increasing your stock percentage in a bad downturn is not very realistic unless you've been able to grit your teeth and do that your whole investing life. Most folks find it hard enough to simply rebalance in market downturns.

He tested a "never-refilled" bucket strategy here, see the "cash bucket" section.

It works just fine by saving an extra 10% in a cash bucket, so 25X becomes 27.5X.

 

[youbet]

It works just fine by saving an extra 10% in a cash bucket, so 25X becomes 27.5X.

Help me here........ I'm trying to think of ANY withdrawal plan that doesn't work better by saving extra.

 

[TickTock]

Actually I think it is pretty simple. Spend from stocks when market is up. Spend from debt when it is down, spend from both when in between.

This what I actually do. Looking for total return on portfolio, rebalance one a year to target AA. But I understand the sleep well at night factor of having a separate bucket in short-term FI.

 

[youbet]

But I understand the sleep well at night factor of having a separate bucket in short-term FI.

And that "sleep well at night factor" costs folks money in most cases. There's an opportunity cost associated with holding cash. You have to find a balance you're comfortable with.

I'm most comfortable with my "outside the portfolio AA" cash being only an emergency fund which is trivial in size compared to the main FIRE portfolio. Others may feel a need to have relatively large sums of cash on the side in order to "sleep well at night."

My thinking substantially follows yours.

 

[Chuckanut]

Taking interest and dividends I cash is one way to generate spending cash. If your traditional IRAs have a good chunk of money in them and you are of RMD age, that’s another source of spending cash. Just be careful to withhold some for the taxman. And maybe for Aunt IRMAA.

 

[ncbill]

Help me here........ I'm trying to think of ANY withdrawal plan that doesn't work better by saving extra.

It's simpler than other strategies for managing SORR.

The cash bucket of 2.5X expenses never gets refilled once empty...one and done.

 

[Koolau]

"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.

Keep in mind that "...your residual living expenses (after pensions and SS)..." Could be (wait for it) "zero." Many here have mentioned that they don't need to take from their investments to cover the difference between their "income" and spending.

I haven't calculated it, but my fixed/cash is very likely 20X or more of what I have to take each year. YMMV

 

[GrayHare]

There's an opportunity cost associated with holding cash. You have to find a balance you're comfortable with.

This is true. I view my cash bucket instead as a "won the game" bucket. There's no longer a need for me to risk everything. It's now insurance against my selling assets at depressed prices and, like all insurance, it has a cost, at least until you need it.

 

[glasswave]

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.

Ahh, I do have a HELOC. It's for $150k. I've never used it.

I am probably going to get my liquid funds into a CD Ladder pretty soon.


~~~~~~

 

[glasswave]

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.

I've never been able to get meaningful information from fireCalc. I can't seem to understand if or when it's giving me pretax or post tax info. I probable need to study some tutorials.

 

[Gumby]

I've never been able to get meaningful information from fireCalc. I can't seem to understand if or when it's giving me pretax or post tax info. I probable need to study some tutorials.

FIRECalc does not do taxes - at all. The spending that you input to the model needs to include the taxes. And something like the max allowable spending it calculates is gross. You need to deduct the taxes that will be due in order to get the net amount you can use to buy stuff.

 

[tmm99]

OP, I don't even know what the experts recommend, but I used to have about 2 years' worth of cash I could gather (CDs, savings, iBonds), etc. I ended up spending a lot of it when we bought our current house and when the market turned unfavourably during COVID, but I have accumulated back some in the last few years.

I started my SS last December and with my non-COLA small company pension along with SS, it's currently enough to cover my living expenses, so I just need to come up with enough money to cover the taxes and that can be taken care of by dividends plus a small withdrawal from my brokerage account or savings, so I think I will be okay even if the market goes down for several years, although I hope that won't happen.