Testing my "sleep factor" with a 10% dry run

[Roman]

Hi,

I’ve been reading a lot here lately and noticed how much of the retirement game is actually about psychology, not just math.

For my own plan, I’m thinking about a 3-bucket setup. My idea is to keep about one year of expenses in cash and a bond buffer of maybe 3 to 4 years of withdrawals. The rest would go into broadly diversified, worldwide ETFs.

But to be honest, I’m not sure yet how I’ll really feel when the market eventually drops and later I have a small monthly pension coming in.

So, I started a little experiment: I’m currently running a "live test" with about 10% of my savings. I’ve put it into these buckets and I’m following my own rules for refilling the cash part. Good market > refill Cash with ETF, Bad market > refill with Bonds.

It sounds a bit silly since it’s only 10%, but even this small step helps me sleep better. It’s a totally different feeling than just looking at a spreadsheet without a value behind. When I retire, I don't want to impatiently watch the charts, but rather replenish my capital once a year with investments that are currently performing well.

I’m curious—did any of you do a "dry run" before you fully retired? Or did you just jump into the deep end and adjusted your strategy as you went?

Roman

 

[Gallaher]

Or did you just jump into the deep end and adjusted your strategy as you went?

This is me. Didn’t retire on my schedule

 

[rk911]

We had always planned to RE, no later than 55 in 2005. The only long-term debt we had in 1990 was our mortgage which we re-fi'ed from a 30-yr fixed to a 15-yr fixed. We expected and worked to pay it off prior to retiring and we did just that.

I created a few spread sheets to track expenses against our expected income from pensions and SS and they consistently showed positive cash flow without touching our investments. So when we put in our papers we were confident we'd be fine. And we were and have been.

 

[jebmke]

no dry run.

 

[Palmtree]

No, I just initially followed the 4% rule and hoped for the best. That was 10 years ago. (geesh, time flies) During that time we drew 3% or less as it met the needs of our lifestyle. That included several trips a year. Now here we are 10 years later and with a portfolio that has increased larger than our initial amount. (Thank you Mr. Market!)

 

[audreyh1]

Having a couple of years of spending money in short term funds makes it very easy to ignore market news and associated volatility.

We just decided to do this before retiring, so we didn’t have a dry run. It worked out well for us though, since we retired in 1999 and made it through the dot com bust without panicking.

 

[Koolau]

Never used any "buckets." Just always have tried to keep cash or cash-like investments close at hand - just in case. We did run short of cash early on because of moving and rehabbing. Now, we keep even more ready cash (cash-like) on hand. I'll take the "hit" on growth to always have as much cash as could be expected to be needed. And I DO sleep well. YMMV

 

[street]

No dry run. It was my plan to have enough money to live off for life without selling any investments. My plan was to take SS as soon as I can to supplement my money in CD's to life off of for life. After 4 months shy of 10 years in retirement it has been working out as planned.

The plan was to have enough to never have to touch long term investments. I see it working even with many large expenses in my first ten years of ER. Just bought my 3rd new vehicle and an expensive old classic, bought land, and have given 6 figure amount to charity and gifting.

I wanted a plan that was as bullet proof as I could make it. No guessing or trial run it was a plan and I felt that this plan would be the best way to be sustainable though the toughest times.

 

[RetiredHappy]

No dry run but we did set aside $1M after selling our business to fund our early retirement and that was essentially a bucket strategy for us.

 

[Roman]

Thanks for your feedback. I should probably add that here in Europe, and especially in Switzerland, "our generation" (50 - 60) is only just starting to discover alternatives to the classic savings account. The real driver is the fear of losing purchasing power because of this disproportionate inflation—something Americans know all too well themselves. Young people hardly have anything left to save anyway, as they’re mostly busy chasing the latest gadgets and trends.

The older generation, however, still has that "post-war" mindset of always setting something aside. But this group is now realizing that traditional savings accounts offer almost zero interest.

Even investing in government bonds yields very little. When I tell Americans that even Swiss government bonds offer hardly any return, it probably sounds unbelievable to you. Over here, anyone investing in Swiss bonds is basically just "parking" their money to avoid the limits of the Swiss bank deposit insurance, which is quite strictly capped.

Personally, I had no prior investment experience. I forced myself to start with small amounts just to get a feel for the market and to learn the ropes of things like "rebalancing" and "transaction costs."

That said, since our children are still in the middle of their education, we’re planning to retire in about five years. By then, I want to have the majority of our capital moved into bonds and ETFs.

Greetings from the Swiss Alps,
Roman

 

[Koolau]

Thanks for your feedback. I should probably add that here in Europe, and especially in Switzerland, "our generation" (50 - 60) is only just starting to discover alternatives to the classic savings account. The real driver is the fear of losing purchasing power because of this disproportionate inflation—something Americans know all too well themselves. Young people hardly have anything left to save anyway, as they’re mostly busy chasing the latest gadgets and trends.

The older generation, however, still has that "post-war" mindset of always setting something aside. But this group is now realizing that traditional savings accounts offer almost zero interest.

Even investing in government bonds yields very little. When I tell Americans that even Swiss government bonds offer hardly any return, it probably sounds unbelievable to you. Over here, anyone investing in Swiss bonds is basically just "parking" their money to avoid the limits of the Swiss bank deposit insurance, which is quite strictly capped.

Personally, I had no prior investment experience. I forced myself to start with small amounts just to get a feel for the market and to learn the ropes of things like "rebalancing" and "transaction costs."

That said, since our children are still in the middle of their education, we’re planning to retire in about five years. By then, I want to have the majority of our capital moved into bonds and ETFs.

Greetings from the Swiss Alps,
Roman

Are you particularly concerned by exceeding the amount covered by Swiss Bank Deposit Insurance? IOW are the banks under pressure such that they might actually fail? Bank failures do happen in the USA but it's relatively rare. How about in Switzerland?

 

[Roman]

Are you particularly concerned by exceeding the amount covered by Swiss Bank Deposit Insurance? IOW are the banks under pressure such that they might actually fail? Bank failures do happen in the USA but it's relatively rare. How about in Switzerland?

In Switzerland, deposit insurance for every bank is regulated by law and covers up to approximately USD 130,000 (CHF 100,000) per depositor. While a bank failure is highly unlikely, it’s not impossible—just look at what happened with Credit Suisse due to real estate speculation in their US business. Ultimately, UBS stepped in to take them over. This makes UBS a powerful but also dangerous giant due to its enormous volume.

In the improbable event of a bank bankruptcy, the state essentially guarantees those funds, but only up to that deposit insurance limit. Just as a hypothetical: if you had $1 million, you’d technically need 8-9 different banks to fully protect your cash, which obviously no one wants to manage. That’s why some investors park their money in things like CHFON (SARON Overnight, ISIN: CH1415798458). It offers very little interest, but the money is considered safer because it’s a synthetic ETF.

For those wondering why Swiss interest rates are so low: The Swiss Franc (CHF) is so strong that the SNB (Swiss National Bank) frequently buys up "cheap" Euros to keep the exchange rate in check and protect the Swiss export industry.

 

[mrfeh]

No dry run.

• know your expenses
• estimate your lifetime(s)
• choose an AA

That's pretty much it. Can't speak to how this approach would need to change for Switzerland; everything I've read/learned over the last 15 years is very US-centric.

 

[Aerides]

No dry run. Back when we were first getting into serious planning, our FA suggested "3 years cash" as a hedge against having to sell at a bad time. That's our sleep-at-night plan.

Though, 9 years in, I have let that slip to 2 years, and the actual spend has grown a bit so it was more like 1.5 at a point last year. I've brought it back up to 2 and will look for opportunities to keep it at 3 going forward.

 

[mystang52]

I'm a conservative investor. I already knew what my sleep-at-night mix for my funds should be. Based on market changes the ratios have sometimes changed, but I did not tweak the numbers. It's worked for me.

 

[Steelpony]

Hi,

I’ve been reading a lot here lately and noticed how much of the retirement game is actually about psychology, not just math.

For my own plan, I’m thinking about a 3-bucket setup. My idea is to keep about one year of expenses in cash and a bond buffer of maybe 3 to 4 years of withdrawals. The rest would go into broadly diversified, worldwide ETFs.

But to be honest, I’m not sure yet how I’ll really feel when the market eventually drops and later I have a small monthly pension coming in.

So, I started a little experiment: I’m currently running a "live test" with about 10% of my savings. I’ve put it into these buckets and I’m following my own rules for refilling the cash part. Good market > refill Cash with ETF, Bad market > refill with Bonds.

It sounds a bit silly since it’s only 10%, but even this small step helps me sleep better. It’s a totally different feeling than just looking at a spreadsheet without a value behind. When I retire, I don't want to impatiently watch the charts, but rather replenish my capital once a year with investments that are currently performing well.

I’m curious—did any of you do a "dry run" before you fully retired? Or did you just jump into the deep end and adjusted your strategy as you went?

Roman

Before computerization I had about 5 trial portfolios arranged in a looseleaf along with an investing “diary” where I wrote “feelings” about each.

I already had a real portfolio so this was pretend minor league stuff looking primarily for my risk limits and improvements in what mentors already directed me to.

This was done way before retirement and I settled on a final plan, income investing instead of spend down investing, about 8 years before retirement. For me this psychologically dulls the effect of the daily wall of woe because cash flows monthly no matter what.

I also learned from personal experience dealing with parents and in laws to have a set aside (VTI for us) beginning way before retirement also which is a backup plan for what we do. It’s another pacifier to prevent endless tinkering.

Your plan should be set way before retirement and for sure there is no holy grail of portfolios for your highly personal and unknown future.

As a final note if everything tanks the money is going to cash. Eventually it has to come back in because of inflation. Also non economic swoons are usually short lived and V shaped. Economic swoons are longer and average 2.5 years in duration.but always felt like 4 years to me. I think the average retirement is 15-20 years for most. A 4 year chunk has to be planned for way ahead of retirement.

 

[Gumby]

My plan was always that I would not retire unless and until we could could enjoy the same or better financial lifestyle as we had while working. Since we didn't plan on cutting back, we didn't need a dry run. And, with the exception of having more glorious free time, our standard of living has not changed.

 

[Roman]

My plan was always that I would not retire unless and until we could could enjoy the same or better financial lifestyle as we had while working. Since we didn't plan on cutting back, we didn't need a dry run. And, with the exception of having more glorious free time, our standard of living has not changed.

I really like your approach, and my wife and I essentially share the same goal. A large portion of our expenses will likely decrease once our children (at least partially) start working—especially education costs and health insurance.

We also keep a very close eye on our budget. But as you mentioned, there's a new factor that doesn't really exist with a 50-hour workweek: "time". We envision spending that "time" on extended stays in Greece. And I’m trying to clearly separate our quality of life here in Switzerland from “extras” like trips to Greece—our key word being scalability.

Please excuse any awkward phrasing—I'm not a native speaker.

 

[Roman]

No dry run. Back when we were first getting into serious planning, our FA suggested "3 years cash" as a hedge against having to sell at a bad time. That's our sleep-at-night plan.

Though, 9 years in, I have let that slip to 2 years, and the actual spend has grown a bit so it was more like 1.5 at a point last year. I've brought it back up to 2 and will look for opportunities to keep it at 3 going forward.

Totally agree—that’s very much in line with how we’re thinking about it too.

In our model, we assume a 3–4 year withdrawal buffer as bonds. By “bonds,” I mean ultra-conservative government bonds that don’t really generate much or any return, but can be converted into the cash bucket quickly to refill it when needed (once per year to refill cash for the next year).

My wife and I know our spending very well—including what we expect it to be in retirement. We’ve tracked it meticulously and built in reserves. I then ran multiple drawdown scenarios and found that with a 3–4 year buffer, we’re on the safe side (at least from today’s perspective).

One more thing that feels critical is factoring in real-world inflation: I only follow this from the sidelines, but it seems like in the U.S. (at least in some states) costs have jumped a lot, and here in Europe as well—especially for energy and health insurance, the kinds of expenses you can’t really opt out of, particularly as you get older. The old “2% per year rule" assumption feels pretty far away right now.

 

[Gumby]

If you use FIRECalc for planning, the default future inflation rate is 3%. You can specify a different rate if you like. I always used the default.

 

[old medic]

I’m curious—did any of you do a "dry run" before you fully retired?

We kind of did, and doing a test run. Both worked towards state pensions, figured what our pension amount would be and put above that into 401Ks... 3 years before I retired, DW now at 5 years retiring in Oct. Haven't needed to touch any of the nest eggs ..

 

[MarieIG]

I didn't do a dry run, but I did "prepare" which included beefing up cash "bucket" and taxable account, selling one (of two) houses, which did not effect our lifestyle since it was across the street, calculating "guaranteed" income (including when it would ripen to have the ability to avoid selling when I didn't want to sell), diversification. Our spend is not less than pre-retirement.

 

[COcheesehead]

I had and still have investments that produce realible cashflow, enough to cover our base expenses so I never felt a need for a large or even moderate cash position. The rest of the assets can then be targeted towards other goals.

 

[jollystomper]

The main dry run we did was expense related - seeing if we could live off our pension amount and what the withdrawals for our spending would look like. That helped determine the 3-5 year cash buffer we built up before I retired, to cover our expenses beyond my pension and not have to worry about selling our equities.

The "sleep well at night" factor was just calculating how much actual impact a 30-50% market drop would have on our equities, and what our emotional reaction to that would be. Many people consider just the percentage, but when they see what that means in dollars they often panic. We set our AA to be comfortable with that. When that did happened during the pandemic, we were mentally fine, in fact I felt more like investing some of our cash back into the market.

 

[DJRR]

My dry run was on the expenses side. I set my desired retirement budget and when my paycheck hit I transferred excess money to a savings account so that I only had my retirement budget to live on. That let me know I could operate on my planned budget.

On the investment side I had a small inherited IRA and that has helped me get comfortable with taking money out and seeing how the balance went down or came back. Almost back to the starting point of 4 years ago even though I took $30k out. Just takes some anxiety out about fluctuations once you see how it can work.