How many years of expenses to keep in safe assets?

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HomerJ
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Re: How many years of expenses to keep in safe assets?

Post by HomerJ »

KlangFool wrote: Sat Jun 05, 2021 8:54 pm
duffer wrote: Sat Dec 26, 2020 2:16 pm
roth evangelist wrote: Sat Dec 26, 2020 1:19 pm I would keep 2 to 3 years in retirement.
This is exactly what I am thinking. There are relatively few major downturns that exceed this period, and the drag on growth is not too large.
duffer,

What if you are wrong and the coming major downturn lasted 10 years? Then, you are wiped out and there is no do-over for you.

10 years is the minimum.

KlangFool
Yeah, relatively few is not zero, and you don't get do-overs in retirement.

Once you retire by choice, by definition, you have enough... "drag on growth" is not that important if you ALREADY HAVE ENOUGH.
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namajones
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Re: How many years of expenses to keep in safe assets?

Post by namajones »

duffer wrote: Sat Dec 26, 2020 1:06 pm Safe assets have a cost because they function as a drag on long-term growth.
That's assuming there is long-term growth--long-term meaning the amount of time you have left on this earth.

So there *may* be a cost associated with keeping x number of years in safe assets, but that is the cost of your insurance against a protracted downturn.
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Re: How many years of expenses to keep in safe assets?

Post by namajones »

HomerJ wrote: Sat Dec 26, 2020 1:18 pm If you already have enough, you just need minimal growth, not maximum growth.

So giving up some growth for safety is a good trade-off.
This is correct.
rockstar
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Re: How many years of expenses to keep in safe assets?

Post by rockstar »

Right now, I'm maxing out electronic I Bonds, which I consider a safe asset. I'll probably keep buying the max to retirement now. My original goal was for emergency fund, but with the buy limit, I can see this as a practical safe asset going into retirement.
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Re: How many years of expenses to keep in safe assets?

Post by abuss368 »

duffer wrote: Sat Dec 26, 2020 1:06 pm During retirement, how many years of expenses should one keep in safe assets to fund withdrawals during a downturn? The question is posed as a general case, because individual circumstances will vary. Assume that one has in invested savings 25X to 30X the amount of planned annual withdrawals.

Safe assets have a cost because they function as a drag on long-term growth. A common behavioral error is to weight the loss of current assets more than the loss of future gains. Individuals who keep too much in safe assets are likely committing this error. (Or, as Peter Lynch wrote, "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.")

EDIT: for the sake of this discussion, assume that one wants the portfolio to continue to grow (for inflation, for bequest motivations, because one anticipates medical breakthroughs that extend longevity, etc.)
Hold enough cash that allows you to sleep at night.

This is different for everyone as facts and circumstances are different.

Tony
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Re: How many years of expenses to keep in safe assets?

Post by namajones »

J295 wrote: Sat Dec 26, 2020 4:29 pm Will be interesting to ask this question and compare threads at some point in the future when the equity market has declined 20 or 30% over a couple of down years.
Indeed.
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Re: How many years of expenses to keep in safe assets?

Post by MnD »

duffer wrote: Sat Dec 26, 2020 1:06 pm During retirement, how many years of expenses should one keep in safe assets to fund withdrawals during a downturn?
That's a suboptimal withdrawal strategy. With a reasonably balanced portfolio you have plenty of safe assets.
By also rebalancing, you are accomplishing in an automated and unemotional fashion everything you think you might be accomplishing by bolted on cash buckets to utilize during downturns.

https://papers.ssrn.com/sol3/papers.cfm ... id=3274499
https://www.marketwatch.com/story/do-bu ... 2019-02-12
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
hudson
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Re: How many years of expenses to keep in safe assets?

Post by hudson »

duffer wrote: Sat Dec 26, 2020 1:06 pm During retirement, how many years of expenses should one keep in safe assets to fund withdrawals during a downturn? The question is posed as a general case, because individual circumstances will vary. Assume that one has in invested savings 25X to 30X the amount of planned annual withdrawals.

Safe assets have a cost because they function as a drag on long-term growth. A common behavioral error is to weight the loss of current assets more than the loss of future gains. Individuals who keep too much in safe assets are likely committing this error. (Or, as Peter Lynch wrote, "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.")

EDIT: for the sake of this discussion, assume that one wants the portfolio to continue to grow (for inflation, for bequest motivations, because one anticipates medical breakthroughs that extend longevity, etc.)
It sounds like you would like to be 100% equities if possible.
How many years of expenses to cover downturns? I would want one year for every year of retirement...W. Bernstein (Ages of the Investor) style.
I can tell that would give you heartburn.
If you are going to be high equity and low fixed income, maybe you should go with 50 times expenses?
Inflation? Stocks may or may not cover inflation; TIPS are the only investment that I know that covers inflation. Maybe the safe money would go into a non-rolling TIPS ladder?
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Re: How many years of expenses to keep in safe assets?

Post by JBTX »

To th extent you start years ahead you can build up an ibond liquid reserve. They don't drag on your portfolio to the extent you have bonds, and they are highly liquid after the first year.
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Re: How many years of expenses to keep in safe assets?

Post by jbinpa59 »

reworked / reposted to streamline and be more on topic
Last edited by jbinpa59 on Tue Oct 12, 2021 2:57 am, edited 3 times in total.
Wannaretireearly
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Re: How many years of expenses to keep in safe assets?

Post by Wannaretireearly »

My 2cents: Assuming I'm getting some income via taxable dividends (although more like 0.2 or 0.3X), I think 2 or 3 years expenses in cash/muni funds is what I'm thinking in ER. Perhaps 4 or 5X if there isn't much dividend income? I feel much more comfortable getting close to 0 cash today, while working. But that's not a great position to be in if my job is lost.

If AA is at 80/20 or 70/30 why not just hold the majority of the bond/cash/safe position in the taxable account (acting as a big EF) and be stock heavy in the retirement account?
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Re: How many years of expenses to keep in safe assets?

Post by jbinpa59 »

Wannaretireearly wrote: Tue Oct 12, 2021 12:52 am My 2cents: Assuming I'm getting some income via taxable dividends (although more like 0.2 or 0.3X), I think 2 or 3 years expenses in cash/muni funds is what I'm thinking in ER. Perhaps 4 or 5X if there isn't much dividend income? I feel much more comfortable getting close to 0 cash today, while working. But that's not a great position to be in if my job is lost.

If AA is at 80/20 or 70/30 why not just hold the majority of the bond/cash/safe position in the taxable account (acting as a big EF) and be stock heavy in the retirement account?

Stock Heavy in which retirement account? Trad or Roth?

I'm planning to :
keep such FI as we hold except the I-Bonds/Ca$h in Tax deferred rest stocks
to limit Tax-deferred growth while doing Roth Conversions of the Stocks in tax deferred which lower's eventual rmds
on us or heirs but still allows rmds to be taken from FI ,
so I'll keep the LMP bridge funds to age 70 there as FI
then drop to 3-5yrs rmds at a min in FI there plus a EF buffer which will shrink as I build up I-Bonds in Taxable

Have the Roth be close to if not 100% Stocks
since I Bonds/Ca$h in Taxable could be tapped if needed in a down market for non medical expenses greater than rmds cover
or which would otherwise push us into an undesired tax bracket if drawn from Tax Deferred
which maximizes tax free growth while limiting tax impacts for heirs since the stretch IRA is gone

Taxable Account would be mostly Stocks plus the I-Bonds and a bit of E-fund cash from dividends not reinvested
Heirs should get a stepped up basis cost on Stocks held here and thus limited/no tax impacts

so all up I'll start with 10-11 yrs expected expenses in FI, total portfolio is ~40x those after pension expenses
I have a cola'd federal pension coming which will cover 75% of expenses
we live in a low cost area
and we only need to bridge 8 or less years till Pension and SS combined will be 2x expenses
leaving portfolio as play/legacy/medical EF so i can be aggressive in AA
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Re: How many years of expenses to keep in safe assets?

Post by cockersx3 »

firebirdparts wrote: Sat Dec 26, 2020 2:55 pm The question basically answers itself if you see retirement as a case to apply boring ideas. If you have a boring 60/40 stocks/bonds portfolio, and you have an equally boring 4% withdrawal rate, that means you have an amazing 10 years of expenses in bonds. That is amazing to me. And that's just the boring case of somebody who didn't even try.

So you gotta ask yourself if you can have 10 years without trying, why would you not just be satisfied with that?

The future may be very different, but as you all know in the past much data was churned to look at the effect of portfolio construction on worst case withdrawal rates, and that's kinda what they came up with. Using 100% equities helps the best case, but it doesn't really help the worst historical case.
Yep. This is what I'm doing as well, after seeing KlangFool's past posts on this same topic. I'm at approx 30x overall expenses, with an AA of 60% equities and 40% bonds / cash. The bonds / cash reflects 10 years of net expenses (ie portfolio withdrawals), which also includes expected near-term college expenses. As the kids move through college and as I continue to add savings, I expect my AA to skew up slightly as the "10 years of expenses" bucket gets a bit smaller. Also expecting it to move even higher once my "10 years of expenses" drops when my wife and I someday start receiving social security. But I don't ever expect to drop it below 10 years of expenses, at least until I'm much older.

I believe there are studies out there that show that there are (slightly) more efficient ways to manage my portfolio, but that's fine. This approach makes it easy for me to understand why my AA is where it is, and it helps me sleep well at night in the face of market swings. That's enough for me :-)
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Re: How many years of expenses to keep in safe assets?

Post by Dandy »

So you gotta ask yourself if you can have 10 years without trying, why would you not just be satisfied with that?
Of course when we talk about having X years of expenses we are talking not total yearly expenses just the expenses not covered by your retirement income i.e. your draw down dollars.

Most times you probably could. Retirements can last 30 years or more and all or most with no real earning opportunity. So, the pot is basically all ya got. If early on the equity market plunges 50% or so and stays down for a few years are you taking your 4% from fixed income? and rebalancing? If so, that 10 years worth of fixed income drawdown might be coming up a bit short.

To me for those that reach their number at a normal retirement age --60ish. I think the priority shifts from growth to making sure you don't outlive your assets. Inflation, health expenses and a extra long life span are some of the usual threats to coming up short. Equities, inflation protection bonds and delaying taking SS as long as possible, help address inflation to some extent, taking the best care of your health and making sure you have good health insurance addresses the health issue to some extent. A moderate to somewhat conservative overall allocation and possibly an annuity purchase later in retirement should help should you lead an exceptionally long life.

I think having more than 10 years of "safe" fixed income is also a good idea a la Bernstein --he suggests at least 20 years for those who have "won the game" / reached their number. If that leaves you with around 35-40% in equity allocation I think you would be in very good shape. In my case I picked the age of 90 and had "safe" fixed income to match my wife's draw down needs if I die first. (loss of 1/2 my pension, her SS and filing taxes single vs joint.) I sleep well.
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HomerJ
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Re: How many years of expenses to keep in safe assets?

Post by HomerJ »

Dandy wrote: Tue Oct 12, 2021 12:44 pm
So you gotta ask yourself if you can have 10 years without trying, why would you not just be satisfied with that?
Of course when we talk about having X years of expenses we are talking not total yearly expenses just the expenses not covered by your retirement income i.e. your draw down dollars.

Most times you probably could. Retirements can last 30 years or more and all or most with no real earning opportunity. So, the pot is basically all ya got. If early on the equity market plunges 50% or so and stays down for a few years are you taking your 4% from fixed income? and rebalancing? If so, that 10 years worth of fixed income drawdown might be coming up a bit short.
(1) Even the stock side would be paying out some dividends, and the bond side too of course, so shouldn't have to really drawdown a full 4% from the bond side each year

(2) Me, I won't rebalance into stocks in retirement... So I'd have the full 10 years (plus a bit more because of dividends) to let the stock side recover.

To me for those that reach their number at a normal retirement age --60ish. I think the priority shifts from growth to making sure you don't outlive your assets. Inflation, health expenses and a extra long life span are some of the usual threats to coming up short. Equities, inflation protection bonds and delaying taking SS as long as possible, help address inflation to some extent, taking the best care of your health and making sure you have good health insurance addresses the health issue to some extent. A moderate to somewhat conservative overall allocation and possibly an annuity purchase later in retirement should help should you lead an exceptionally long life.
Agreed.
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cockersx3
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Re: How many years of expenses to keep in safe assets?

Post by cockersx3 »

namajones wrote: Sun Oct 10, 2021 3:02 pm
J295 wrote: Sat Dec 26, 2020 4:29 pm Will be interesting to ask this question and compare threads at some point in the future when the equity market has declined 20 or 30% over a couple of down years.
Indeed.
LOL - go back and look at the posts that originated during the "COVID crash" in late March 2020. It felt like everyone was losing their minds. To someone like me that looks at the people in this forum as the role models for restraint when the world goes to ....wherever....it was pretty unnerving to read the sheer panic back then. And that was only for a few months. I can't imagine how bad it would be if we had a sustained multi-year drawdown. (Yet another reason why I keep 10 years of spending in cash and bonds.)
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Re: How many years of expenses to keep in safe assets?

Post by cubfan »

Marseille07 wrote: Sat Dec 26, 2020 4:32 pm
J295 wrote: Sat Dec 26, 2020 4:29 pm Will be interesting to ask this question and compare threads at some point in the future when the equity market has declined 20 or 30% over a couple of down years.
Tbh I don't think most folks do the math on what it really means to go -30%. With EF, it's not that big of a deal.
I plan on 3yrs cash 3yrs fixed income the rest equities
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Re: How many years of expenses to keep in safe assets?

Post by iamblessed »

KlangFool wrote: Sat Jun 05, 2021 8:54 pm
duffer wrote: Sat Dec 26, 2020 2:16 pm
roth evangelist wrote: Sat Dec 26, 2020 1:19 pm I would keep 2 to 3 years in retirement.
This is exactly what I am thinking. There are relatively few major downturns that exceed this period, and the drag on growth is not too large.
duffer,

What if you are wrong and the coming major downturn lasted 10 years? Then, you are wiped out and there is no do-over for you.

10 years is the minimum.

KlangFool
It took about 5 years to recover for 08-09.
ROIGuy
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Re: How many years of expenses to keep in safe assets?

Post by ROIGuy »

It depends on how you want to use your safe assets. Are you talking about needing a new roof (emergency fund), or transitioning from working into retirement and having to spend down your savings to get to where you start collecting your social security and/or pension? If we spend $120,000 a year (including taxes) and have to wait 5 years to get our Social Security payments, I would want $600,000 in bonds/cash to draw down on for those 5 years.
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Re: How many years of expenses to keep in safe assets?

Post by carminered2019 »

I keep 20X in FI(safe assets) or never more than 30% in FI for the over all portfolio during retirement.
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Re: How many years of expenses to keep in safe assets?

Post by secondopinion »

cockersx3 wrote: Thu Oct 21, 2021 10:04 am
namajones wrote: Sun Oct 10, 2021 3:02 pm
J295 wrote: Sat Dec 26, 2020 4:29 pm Will be interesting to ask this question and compare threads at some point in the future when the equity market has declined 20 or 30% over a couple of down years.
Indeed.
LOL - go back and look at the posts that originated during the "COVID crash" in late March 2020. It felt like everyone was losing their minds. To someone like me that looks at the people in this forum as the role models for restraint when the world goes to ....wherever....it was pretty unnerving to read the sheer panic back then. And that was only for a few months. I can't imagine how bad it would be if we had a sustained multi-year drawdown. (Yet another reason why I keep 10 years of spending in cash and bonds.)
I could have waited; if anything, the sustained drawdown would have let me bought plenty of stock. Obviously, that did not happen.

Of course, I am far from retirement.
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Re: How many years of expenses to keep in safe assets?

Post by cubfan »

I plan on doing a bucket system 3 years cash 3 years fixed income the rest equities. Spend 120000 per year adjusted for inflation anyone else doing anything similar?
secondopinion
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Re: How many years of expenses to keep in safe assets?

Post by secondopinion »

iamblessed wrote: Thu Oct 21, 2021 12:01 pm
KlangFool wrote: Sat Jun 05, 2021 8:54 pm
duffer wrote: Sat Dec 26, 2020 2:16 pm
roth evangelist wrote: Sat Dec 26, 2020 1:19 pm I would keep 2 to 3 years in retirement.
This is exactly what I am thinking. There are relatively few major downturns that exceed this period, and the drag on growth is not too large.
duffer,

What if you are wrong and the coming major downturn lasted 10 years? Then, you are wiped out and there is no do-over for you.

10 years is the minimum.

KlangFool
It took about 5 years to recover for 08-09.
Depending on the size of the portfolio, one could pull from stocks. Of course, what one has in retirement does not equal what one should be in ready access. All safe and/or short-term fixed income is in my taxable (as is most of my portfolio, since Roth IRAs only allow for so much).

10 years is excessive unless one is in retirement.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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vanbogle59
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Re: How many years of expenses to keep in safe assets?

Post by vanbogle59 »

HomerJ wrote: Sat Jun 05, 2021 10:04 pm
KlangFool wrote: Sat Jun 05, 2021 8:54 pm
duffer wrote: Sat Dec 26, 2020 2:16 pm
roth evangelist wrote: Sat Dec 26, 2020 1:19 pm I would keep 2 to 3 years in retirement.
This is exactly what I am thinking. There are relatively few major downturns that exceed this period, and the drag on growth is not too large.
duffer,

What if you are wrong and the coming major downturn lasted 10 years? Then, you are wiped out and there is no do-over for you.

10 years is the minimum.

KlangFool
Yeah, relatively few is not zero, and you don't get do-overs in retirement.

Once you retire by choice, by definition, you have enough... "drag on growth" is not that important if you ALREADY HAVE ENOUGH.
Sure.
But the number of "safe" years is not the key for me. At least not the ONLY key.
It all comes down to what you do in a "down" sequence.
Do you reduce X? Do you only spend from the safe bucket? Do you rebalance? ....
I mean, if you have 10X safe, and spend ONLY that when equities are down, do you allow your AA to just spike to 100/0? Then what???

Depending on the personal circumstances (WR, AA....), I could get behind a wide range of "safe years". In fact, my plan does precisely that.

Full disclosure: My plan is to retire with more than 10X. 5 years later, when SS kicks in, I will completely ignore the safe years idea, and just rely on AA, because my WR will be much lower.
At least that's the plan.
If the world misbehaves, I may need to change the plan. At least I will have 10X to give me time for that. :beer
dbr
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Re: How many years of expenses to keep in safe assets?

Post by dbr »

The fact that safe withdrawal rates for about 30 year time lines tend to max at 4% at maybe 60/40 AA says that a portfolio that holds 25x expenses to start would probably optimally support withdrawals through all conditions at about 10 years in FI. It is hardly likely that there is much difference if one holds only 8 years or one holds 12 years, etc.

It is a different discussion if one does not need to maximize safe withdrawals but prefers rather to grow the portfolio as much as possible for legacy reasons. For low or no withdrawal rate and an objective of maximum growth the years in fixed income could be zero.

It is probably better to be explicit about what consequences one wants or fears in what situation and then talk about that in terms of asset allocation than to try to state the condition as years in fixed income. The other side of that is that very often one ends up in about the same place anyway, except for extreme objectives and situations. Note that part of the idea of having an AA is that one would also rebalance when one asset or the other is up a lot or down a lot. Schemes that allow the asset allocation to vary a lot are harder to understand.
Zhuang
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Re: How many years of expenses to keep in safe assets?

Post by Zhuang »

Marseille07 wrote: Sat Dec 26, 2020 1:41 pm The key is to have some cash and treat that as $0 plus minus, then go aggressive on the AA side. Also, building up EF by setting aside some money from withdrawals is a good way to preserve AA growth.
:beer This is what we have been doing. Looking back 25 years It has worked out great! Have the cash on the side to cover the downturns and Invest aggressively in VTSAX.
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Re: How many years of expenses to keep in safe assets?

Post by jsapiandante »

I'm not retired but I am financially independent and have 10 years expenses in bonds/cash. Until something changes, my IPS from the very beginning was to hold no more than 10 years in fixed income and the rest would go to stocks. So all new contributions goes 100% to stocks until I decide to retire (I'm 39 and shooting for age 50). My reasoning is that 10 years was one of the longest time it took the US stock market to recover from one of the worst periods in US history. Whenever I decide to retire, I might be nearing sub 2% withdrawal with the ability to adjust my spending even lower if it ever takes longer than 10 years to recover from a prolonged downturn.
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Candor
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Re: How many years of expenses to keep in safe assets?

Post by Candor »

cockersx3 wrote: Thu Oct 21, 2021 10:04 am
namajones wrote: Sun Oct 10, 2021 3:02 pm
J295 wrote: Sat Dec 26, 2020 4:29 pm Will be interesting to ask this question and compare threads at some point in the future when the equity market has declined 20 or 30% over a couple of down years.
Indeed.
LOL - go back and look at the posts that originated during the "COVID crash" in late March 2020. It felt like everyone was losing their minds. To someone like me that looks at the people in this forum as the role models for restraint when the world goes to ....wherever....it was pretty unnerving to read the sheer panic back then. And that was only for a few months. I can't imagine how bad it would be if we had a sustained multi-year drawdown. (Yet another reason why I keep 10 years of spending in cash and bonds.)
I don't remember many, if any, established regular posters "panicking or losing their minds". In fact, my recollection is they were frequently a voice of reason and moderation to less seasoned members.
The fool, with all his other faults, has this also - he is always getting ready to live. - Seneca Epistles < c. 65AD
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Re: How many years of expenses to keep in safe assets?

Post by sailaway »

jsapiandante wrote: Thu Oct 21, 2021 1:19 pm I'm not retired but I am financially independent and have 10 years expenses in bonds/cash. Until something changes, my IPS from the very beginning was to hold no more than 10 years in fixed income and the rest would go to stocks. So all new contributions goes 100% to stocks until I decide to retire (I'm 39 and shooting for age 50). My reasoning is that 10 years was one of the longest time it took the US stock market to recover from one of the worst periods in US history. Whenever I decide to retire, I might be nearing sub 2% withdrawal with the ability to adjust my spending even lower if it ever takes longer than 10 years to recover from a prolonged downturn.
We have just reached the point where our 70/30 allocation leaves 10x in bonds and cash. Current plan is to stick with the allocation, in part because it will allow us to rebalance in the next crash and still have a cushion left if things take a while to recover. Mostly, though, we just don't have the energy to re think our IPS until DH at least downshifts, and so we stick with what we know, knowing it to be a good enough plan.
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vanbogle59
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Re: How many years of expenses to keep in safe assets?

Post by vanbogle59 »

sailaway wrote: Thu Oct 21, 2021 1:37 pm We have just reached the point where our 70/30 allocation leaves 10x in bonds and cash.
So, 30X, right?
Nice. :beer
phxjcc
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Re: How many years of expenses to keep in safe assets?

Post by phxjcc »

To me, there are two "spending" numbers

1. Essential (non discretionary)
Housing (Incl maint, taxes and util) , health, transportation, food, computer, clothing

2. Essential + Discretionary
Above, plus
Discretionary home improvements
Entertainment
Dining out
Vacation
Gifts (incl. to Self)...
New Cars, jewelry, Armani Suits, Couture fashion, golf, whatever

To answer the OP's question....


I like to have 5 years of 1 and 3 years of 2 whichever is greater.
I did 1 during the GFC--for 4 years--and it was not terribly bad once you go used to it, but I prefer not to repeat the experience.
I had to do it, because of *things*.
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Sheepdog
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Re: How many years of expenses to keep in safe assets?

Post by Sheepdog »

In retirement, most of my expenses are covered by SS and SPIAs. However, I do usually will withdraw from other assets, but not usually stock containing assets.
I keep at least 3 years of "safe" assets available so that I do not have to sell any stock containing mutual funds for at least 3 years during a downturn. (I learned that in 2008-09.) For me, that "safe" money is mostly in money market funds and a little bit of short term investment grade bond fund.

I should not have to sell any stock containing assets for 3 to 5 years.

Woof Woof
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Re: How many years of expenses to keep in safe assets?

Post by Marseille07 »

Zhuang wrote: Thu Oct 21, 2021 12:54 pm
Marseille07 wrote: Sat Dec 26, 2020 1:41 pm The key is to have some cash and treat that as $0 plus minus, then go aggressive on the AA side. Also, building up EF by setting aside some money from withdrawals is a good way to preserve AA growth.
:beer This is what we have been doing. Looking back 25 years It has worked out great! Have the cash on the side to cover the downturns and Invest aggressively in VTSAX.
My approach has changed slightly since I posted the above.

I'm now planning to simply maintain the same allocation (like 90/10 for example) and the 10% in fixed income is essentially my EF. With this approach, I don't really have to rebalance anything; if my AA becomes 91/9, I sell equities; if it becomes 89/11, I don't do anything and keep spending fixed income.
KlangFool
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Re: How many years of expenses to keep in safe assets?

Post by KlangFool »

iamblessed wrote: Thu Oct 21, 2021 12:01 pm
KlangFool wrote: Sat Jun 05, 2021 8:54 pm
duffer wrote: Sat Dec 26, 2020 2:16 pm
roth evangelist wrote: Sat Dec 26, 2020 1:19 pm I would keep 2 to 3 years in retirement.
This is exactly what I am thinking. There are relatively few major downturns that exceed this period, and the drag on growth is not too large.
duffer,

What if you are wrong and the coming major downturn lasted 10 years? Then, you are wiped out and there is no do-over for you.

10 years is the minimum.

KlangFool
It took about 5 years to recover for 08-09.
Unless you can predict the future, how do you know that the next recession would recover in less than 10 years?

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Wannaretireearly
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Re: How many years of expenses to keep in safe assets?

Post by Wannaretireearly »

KlangFool wrote: Thu Oct 21, 2021 4:30 pm
iamblessed wrote: Thu Oct 21, 2021 12:01 pm
KlangFool wrote: Sat Jun 05, 2021 8:54 pm
duffer wrote: Sat Dec 26, 2020 2:16 pm
roth evangelist wrote: Sat Dec 26, 2020 1:19 pm I would keep 2 to 3 years in retirement.
This is exactly what I am thinking. There are relatively few major downturns that exceed this period, and the drag on growth is not too large.
duffer,

What if you are wrong and the coming major downturn lasted 10 years? Then, you are wiped out and there is no do-over for you.

10 years is the minimum.

KlangFool
It took about 5 years to recover for 08-09.
Unless you can predict the future, how do you know that the next recession would recover in less than 10 years?

KlangFool
Klangfool, I like the clarity of your posts and concern about risk management. Looking at your signature, I kind of get your AA and funds. Why split across 3 fund, Wellington, mini Larry etc?

Cos of tax reasons? If you could make changes without tax impact where would you be & how are you allocating new $ today?

Sorry if this is a bit of a derail. It’s kinda related by knowing how you manage safe assets today vs. forecast next few years, and if there is any difference at all.
“At some point you are trading time you will never get back for money you will never spend.“ | “How do you want to spend the best remaining year of your life?“
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Re: How many years of expenses to keep in safe assets?

Post by KlangFool »

Wannaretireearly wrote: Thu Oct 21, 2021 4:40 pm
KlangFool wrote: Thu Oct 21, 2021 4:30 pm
iamblessed wrote: Thu Oct 21, 2021 12:01 pm
KlangFool wrote: Sat Jun 05, 2021 8:54 pm
duffer wrote: Sat Dec 26, 2020 2:16 pm

This is exactly what I am thinking. There are relatively few major downturns that exceed this period, and the drag on growth is not too large.
duffer,

What if you are wrong and the coming major downturn lasted 10 years? Then, you are wiped out and there is no do-over for you.

10 years is the minimum.

KlangFool
It took about 5 years to recover for 08-09.
Unless you can predict the future, how do you know that the next recession would recover in less than 10 years?

KlangFool
Klangfool, I like the clarity of your posts and concern about risk management. Looking at your signature, I kind of get your AA and funds. Why split across 3 fund, Wellington, mini Larry etc?

Cos of tax reasons? If you could make changes without tax impact where would you be & how are you allocating new $ today?

Sorry if this is a bit of a derail. It’s kinda related by knowing how you manage safe assets today vs. forecast next few years, and if there is any difference at all.
Wannaretireearly,

I do not trust passive indexing totally. DotCom Bust and Telecom Bust shown me that the market can go crazy. So, 40% passive index, 40% active management (Wellington Fund), and 20% mini-Larry portfolio.

I am diversified across 3 strategies.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
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Re: How many years of expenses to keep in safe assets?

Post by Wannaretireearly »

KlangFool wrote: Thu Oct 21, 2021 4:45 pm
Wannaretireearly wrote: Thu Oct 21, 2021 4:40 pm
KlangFool wrote: Thu Oct 21, 2021 4:30 pm
iamblessed wrote: Thu Oct 21, 2021 12:01 pm
KlangFool wrote: Sat Jun 05, 2021 8:54 pm

duffer,

What if you are wrong and the coming major downturn lasted 10 years? Then, you are wiped out and there is no do-over for you.

10 years is the minimum.

KlangFool
It took about 5 years to recover for 08-09.
Unless you can predict the future, how do you know that the next recession would recover in less than 10 years?

KlangFool
Klangfool, I like the clarity of your posts and concern about risk management. Looking at your signature, I kind of get your AA and funds. Why split across 3 fund, Wellington, mini Larry etc?

Cos of tax reasons? If you could make changes without tax impact where would you be & how are you allocating new $ today?

Sorry if this is a bit of a derail. It’s kinda related by knowing how you manage safe assets today vs. forecast next few years, and if there is any difference at all.
Wannaretireearly,

I do not trust passive indexing totally. DotCom Bust and Telecom Bust shown me that the market can go crazy. So, 40% passive index, 40% active management (Wellington Fund), and 20% mini-Larry portfolio.

I am diversified across 3 strategies.

KlangFool
Got it. Thanks for sharing KlangFool
“At some point you are trading time you will never get back for money you will never spend.“ | “How do you want to spend the best remaining year of your life?“
59Gibson
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Re: How many years of expenses to keep in safe assets?

Post by 59Gibson »

vanbogle59 wrote: Thu Oct 21, 2021 1:53 pm
sailaway wrote: Thu Oct 21, 2021 1:37 pm We have just reached the point where our 70/30 allocation leaves 10x in bonds and cash.
So, 30X, right?
Nice. :beer
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Re: How many years of expenses to keep in safe assets?

Post by namajones »

cockersx3 wrote: Thu Oct 21, 2021 10:04 am
namajones wrote: Sun Oct 10, 2021 3:02 pm
J295 wrote: Sat Dec 26, 2020 4:29 pm Will be interesting to ask this question and compare threads at some point in the future when the equity market has declined 20 or 30% over a couple of down years.
Indeed.
LOL - go back and look at the posts that originated during the "COVID crash" in late March 2020. It felt like everyone was losing their minds. To someone like me that looks at the people in this forum as the role models for restraint when the world goes to ....wherever....it was pretty unnerving to read the sheer panic back then. And that was only for a few months. I can't imagine how bad it would be if we had a sustained multi-year drawdown. (Yet another reason why I keep 10 years of spending in cash and bonds.)
Agree. I was frankly surprised at the level of panic during March 2020. To me, this was a tragedy but most likely a time-limited tragedy that the world had actually seen before, so in a sense the playbook had been written.

2008 was much scarier. The whole system seemed to be collapsing. Counterparty risk was at the forefront, in the same way that it might be in the future when investors realize that a system built on credit is a system built on counterparty risk. When the guy you're borrowing money from wants his money back because the guy that he's borrowed money from needs his money back, etc., it all comes crashing down, pretty fast and pretty hard. That's similar to Buffet's famous line about seeing who is swimming naked when the tide rolls out.
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Re: How many years of expenses to keep in safe assets?

Post by namajones »

KlangFool wrote: Thu Oct 21, 2021 4:45 pm I do not trust passive indexing totally. DotCom Bust and Telecom Bust shown me that the market can go crazy. So, 40% passive index, 40% active management (Wellington Fund), and 20% mini-Larry portfolio.

I am diversified across 3 strategies.

KlangFool
I have considered this issue myself, but then I ask: What will an "active" manager be able to do to protect the portfolio in a way that the passive portfolio is not protected? And will he do it? And will he do it in time?

In my 30+ years investing, I have seen no evidence that an actively managed fund has in any way protected one's portfolio. The trouble with active management is, essentially, that humans are doing the managing. About the only thing I can be sure of with an actively managed fund is that it will cost more in fees.
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Re: How many years of expenses to keep in safe assets?

Post by JoeRetire »

duffer wrote: Sat Dec 26, 2020 1:06 pm During retirement, how many years of expenses should one keep in safe assets to fund withdrawals during a downturn?
Two years.
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Re: How many years of expenses to keep in safe assets?

Post by iamblessed »

KlangFool wrote: Thu Oct 21, 2021 4:30 pm
iamblessed wrote: Thu Oct 21, 2021 12:01 pm
KlangFool wrote: Sat Jun 05, 2021 8:54 pm
duffer wrote: Sat Dec 26, 2020 2:16 pm
roth evangelist wrote: Sat Dec 26, 2020 1:19 pm I would keep 2 to 3 years in retirement.
This is exactly what I am thinking. There are relatively few major downturns that exceed this period, and the drag on growth is not too large.
duffer,

What if you are wrong and the coming major downturn lasted 10 years? Then, you are wiped out and there is no do-over for you.

10 years is the minimum.

KlangFool
It took about 5 years to recover for 08-09.
Unless you can predict the future, how do you know that the next recession would recover in less than 10 years?

KlangFool
True I was just saying 3 years is on the skimpy side.
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Re: How many years of expenses to keep in safe assets?

Post by r.walker »

duffer wrote: Sat Dec 26, 2020 1:06 pm During retirement, how many years of expenses should one keep in safe assets to fund withdrawals during a downturn?
Three years in HYSA. All equities for the rest, 80%VTSAX/20%VFWAX. Almost 67, still working, but SS at 70 and taxable dividends should more than cover retirement expenses. No changes planned.
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Re: How many years of expenses to keep in safe assets?

Post by DetroitRick »

I use "years of withdrawals" rather than "years of expenses" as my planning benchmark. But that's a personal decision based on the security of those other income streams (such as social security, pension, compensation, etc., etc.).

In retirement, I try to keep between 6 and 7 years of my withdrawal needs in safer assets (cash and bonds, primarily). Based on the nature of the situation that I'm guarding against, at some point I would opt for expense reduction as needed too. Everybody has different risk tolerance and capacity, but this has worked for me and matches my needs.

Pre-retirement, I kept far less. Especially early in life. In my middle age, I was typically in the range of 1 or 2 years (based on specific employment situation and prospects at the time).
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Re: How many years of expenses to keep in safe assets?

Post by Zeno »

We are still in the accumulation phase. I'm 57.

Until age 50, our AA was 100/0/0. Prior to age 50, I didn't fret too much about the various downturns as we were happily DCA'ing all the way. I'm not saying those periods were pleasant. I'm just saying that when I was younger I truly felt that a depressed market was a buying opportunity. And they were.

We started to de-risk the portfolio starting at age 50. We are currently at 65/33/2. We are actually quite happy with how that is performing so, under current thinking, have no plans to de-risk further. That thinking may change, of course. The "33" currently equates to roughly 16x, so if you include the cash, we have 17x in what I would deem "safe assets," though I recognize the inherent risks in even holding cash, for example.

In sum, we have ended up at present (and again we are still accumulating) with 17 years worth of "safe assets" because of our AA, not because of any separate investment goal to achieve a specific number of years' worth of "safe assets."

I recognize that those "safe assets" are a drag on growth, but we don't need equity-like growth now. We just need a durable portfolio that will sustain our needs in the coming decades. I feel as if we have constructed a tiny castle with a moat on the expectation that we will be assaulted repeatedly in the years ahead. We don't need a bigger castle or a bigger moat, however; we just need the walls that we have constructed to not be breached. And if the invaders cut off our access to food and water outside our walls, we have 17 years worth of provisions stored inside our little encampment to withstand the siege.

All this said, I concede that I fret a lot more about SORR, sustained market drops and the like now more than I did when I was 35. The worries never end. It is always possible that tomorrow, for example, the invaders will arrive with a new fangled trebuchet that overcomes our defenses.
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Re: How many years of expenses to keep in safe assets?

Post by bugleheadd »

i only keep cash i f i expect a big expense in the next year, like say i have to replace the roof, i'll set aside 10k. otherwise i keep everything in VTI or equivalent
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Re: How many years of expenses to keep in safe assets?

Post by HomerJ »

namajones wrote: Fri Oct 22, 2021 4:41 am
cockersx3 wrote: Thu Oct 21, 2021 10:04 am
namajones wrote: Sun Oct 10, 2021 3:02 pm
J295 wrote: Sat Dec 26, 2020 4:29 pm Will be interesting to ask this question and compare threads at some point in the future when the equity market has declined 20 or 30% over a couple of down years.
Indeed.
LOL - go back and look at the posts that originated during the "COVID crash" in late March 2020. It felt like everyone was losing their minds. To someone like me that looks at the people in this forum as the role models for restraint when the world goes to ....wherever....it was pretty unnerving to read the sheer panic back then. And that was only for a few months. I can't imagine how bad it would be if we had a sustained multi-year drawdown. (Yet another reason why I keep 10 years of spending in cash and bonds.)
Agree. I was frankly surprised at the level of panic during March 2020. To me, this was a tragedy but most likely a time-limited tragedy that the world had actually seen before, so in a sense the playbook had been written.
No one knew the death rate yet, nor how transmissible it was (Remember using hand sanitizer every time you touched anything outside your house?)

2008 was much scarier. The whole system seemed to be collapsing. Counterparty risk was at the forefront, in the same way that it might be in the future when investors realize that a system built on credit is a system built on counterparty risk. When the guy you're borrowing money from wants his money back because the guy that he's borrowed money from needs his money back, etc., it all comes crashing down, pretty fast and pretty hard. That's similar to Buffet's famous line about seeing who is swimming naked when the tide rolls out.
I don't think most people recognize how close we came to global financial disaster in 2008
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Re: How many years of expenses to keep in safe assets?

Post by Rajsx »

At this point in time, I have around next 10 - 12 months of expenses in Bank Savings,

I have around 15 years of expenses in Bonds,

With the largest to smaller portions in Total Bond Index > Intermediate Term Tax Exempt Fund > International Bond Index > Short Term Bond Index. Although I cannot call money in Bonds totally safe, but I think they are relatively safer than Stocks.

Although the Asset Allocation of the investments are fluid by nature, presently the AA is 65/35.

I just retired at age 65, I hope the above ~~ 15 years of expenses in fixed income keep me safe from the dreaded - Sequence of Return Risk (SORR).
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Re: How many years of expenses to keep in safe assets?

Post by dbr »

Rajsx wrote: Fri Oct 22, 2021 10:08 am At this point in time, I have around next 10 - 12 months of expenses in Bank Savings,

I have around 15 years of expenses in Bonds,

With the largest to smaller portions in Total Bond Index > Intermediate Term Tax Exempt Fund > International Bond Index > Short Term Bond Index. Although I cannot call money in Bonds totally safe, but I think they are relatively safer than Stocks.

Although the Asset Allocation of the investments are fluid by nature, presently the AA is 65/35.

I just retired at age 65, I hope the above ~~ 15 years of expenses in fixed income keep me safe from the dreaded - Sequence of Return Risk (SORR).
So, at 65/35 and the 35 being 15 years of withdrawals (do you mean withdrawals or spending -- it matters) your wealth is about 43 times your annual withdrawal. People in your situation do not even remotely have SORR risk at any asset allocation. Initial withdrawal rates of 2.3% do not fail at any asset allocation. Your concern would logically be with what use you intend to make of the enormous wealth you will have accumulated at death.
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Re: How many years of expenses to keep in safe assets?

Post by Rajsx »

dbr wrote: Fri Oct 22, 2021 10:23 am
Rajsx wrote: Fri Oct 22, 2021 10:08 am At this point in time, I have around next 10 - 12 months of expenses in Bank Savings,

I have around 15 years of expenses in Bonds,

With the largest to smaller portions in Total Bond Index > Intermediate Term Tax Exempt Fund > International Bond Index > Short Term Bond Index. Although I cannot call money in Bonds totally safe, but I think they are relatively safer than Stocks.

Although the Asset Allocation of the investments are fluid by nature, presently the AA is 65/35.

I just retired at age 65, I hope the above ~~ 15 years of expenses in fixed income keep me safe from the dreaded - Sequence of Return Risk (SORR).
So, at 65/35 and the 35 being 15 years of withdrawals (do you mean withdrawals or spending -- it matters) your wealth is about 43 times your annual withdrawal. People in your situation do not even remotely have SORR risk at any asset allocation. Initial withdrawal rates of 2.3% do not fail at any asset allocation. Your concern would logically be with what use you intend to make of the enormous wealth you will have accumulated at death.
Thanks dbr,
Let me put it this way to clarify -
When I divide the present total $ fixed income by our yearly $ expenses, I come to the figure of around 15.

But we just started cashing out ( no more reinvestment) the dividends from our taxable stock funds, so the withdrawals from the Bond Portfolio will be accordingly less, so the Bonds will last us longer than 15 yrs of withdrawals.

We gift yearly $30k to each kid, & to the grandchildren's 529s.
We hope to first exhaust/Roth convert the all Bond IRAs before we pass, then our 2 kids will inherit the remaining taxable accounts with the step up.

We have a Donor Advised Fund for gifting to the religious, education & charitable institutions. Still taking baby steps to increase those donations.

We try to increase our yearly spending if it does not cause any stress in the lifestyle we are used to.
I know a wired problem, but a boglehead is wired in some ways.
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