How many years of expenses to keep in safe assets?

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duffer
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How many years of expenses to keep in safe assets?

Post by duffer »

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.)
Last edited by duffer on Sat Dec 26, 2020 2:11 pm, edited 2 times in total.
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Re: How many years of expenses to keep in safe assets?

Post by Doc »

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

Post by HomerJ »

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.
In retirement, most of us don't need a lot of growth.

Most of us here wait to retire until we have "enough" (i.e. the 25x-30x planned annual expenses)

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.

I will retire with 25x-30x expenses and I will be 50/50 stocks/bonds (So I will have 12-15 years in "safe" assets)

100% stocks is likely to give my heirs more money when I die, yes, but there's a risk with that as well.. A large crash that takes a long time to recover can seriously damage a 100% stocks portfolio. Someone who was 100% stocks in 1929 ended up broke about 19-20 years later. Those with some bonds survived.

I don't need the extra money; I'd rather protect myself from the small chance of a long crash.
Last edited by HomerJ on Sat Dec 26, 2020 1:22 pm, edited 3 times in total.
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Re: How many years of expenses to keep in safe assets?

Post by roth evangelist »

I would keep 2 to 3 years in retirement.
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Re: How many years of expenses to keep in safe assets?

Post by dbr »

I think the idea of "safe assets to fund withdrawals" is a misunderstanding of how a portfolio works under withdrawal.

You can fund withdrawals from no safe assets. In fact the "safer" the assets in the sense of having very low volatility*, the more risk there is the portfolio will decline under withdrawals unless those withdrawals are set at a very low level, depending.

*Volatility is the variability in returns. Even CDs and bank accounts have variable returns because the yield you can get, which is the return, is not fixed, even if it only changes when the term expires. Also for practical purposes one should keep account in real dollars, after inflation, and inflation is variable.

What does determine the fate of a portfolio under withdrawal is the accumulated compound effect of the portfolio constantly growing and shrinking as withdrawals remove money and returns add and subtract money. What the returns delivered by the portfolio might be is driven by the asset allocation, but the effect on how the portfolio will end up is not very sensitive to asset allocation except that very low stock allocations have not typically allowed very high withdrawal rates. One can attempt to time a variable asset allocation, but I don't think there is any good way to be successful at that. A more sensible variation is to time the withdrawal rate relative to portfolio gains as in Variable Percentage Withdrawal.

If you want an example of an "all safe" portfolio it would be a 30 year TIPS ladder. At the current real interest rate of maybe -1.0% such a ladder would provide a real withdrawal rate of about 3% for 30 years and nothing after that. Another "safe" option would be an SPIA for life income, but there aren't any of those anymore that are inflation indexed.

Also, if one rebalances ones allocation and does that partly by withdrawing "from" assets that are "too high" a natural consequence is to sell some bonds when stocks are low and to sell some stocks when stocks are high. If stocks are a lot low, one would sell more bonds to buy some stocks.
Last edited by dbr on Sat Dec 26, 2020 1:36 pm, edited 1 time in total.
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Re: How many years of expenses to keep in safe assets?

Post by rockstar »

What do you consider safe assets?
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Re: How many years of expenses to keep in safe assets?

Post by dbr »

HomerJ wrote: Sat Dec 26, 2020 1:18 pm

In retirement, most of us don't need a lot of growth.

Most of us here wait to retire until we have "enough" (i.e. the 25x-30x planned annual expenses)

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.

I will retire with 25x-30x expenses and I will be 50/50 stocks/bonds (So I will have 12-15 years in "safe" assets)

100% stocks is likely to give my heirs more money when I die, yes, but there's a risk with that as well.. A large crash that takes a long time to recover can seriously damage a 100% stocks portfolio. Someone who was 100% stocks in 1929 ended up broke about 19-20 years later. Those with some bonds survived.

I don't need the extra money; I'd rather protect myself from the small chance of a long crash.
Yes, most attempts to look at this problem would suggest keeping withdrawals in the 3%-4% range and that if there is any optimum in the allocation it is somewhere in the middle and not at high or low stocks. It is still true that many of the outcomes leave lots of unspent money.

It is also true that with those parameters one has 12-15 years of spending in safe assets, but that fact has nothing directly to do with the outcome.
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Re: How many years of expenses to keep in safe assets?

Post by stan1 »

It's a personal choice. Some would say one month. Some would say 2-3 years. Some would have purchased 3.5% five year FDIC insured CDs when they were available in early 2019 and now wish they had bought a lot more.
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Re: How many years of expenses to keep in safe assets?

Post by sergeant »

We are retired and have pensions that supply a bit more than 2x our annual spend. Our portfolio is about 40x our annual spend if our pensions disappeared. When it was about 30x we went to 20x in fixed income. Over the last few years through contributions and growth, equities have brought us to 40x. This has us at about a 50/50 AA.

Most of our FI is in a SV fund with a guaranteed rate of 3.75%

I'm sure our set up is not optimal but it works fine for us.
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Re: How many years of expenses to keep in safe assets?

Post by Marseille07 »

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

Post by dbr »

rockstar wrote: Sat Dec 26, 2020 1:32 pm What do you consider safe assets?
That is usually a "code" word for assets that don't have highly variable returns. That means in practice savings instruments and bonds. The variability of bond returns increases with default risk and with duration. Higher values of those things also generally result in higher expected returns. In practice the variability of returns means that expected is not a guarantee. Mathematically expected returns are the mean value of the distribution of possible returns. As I mentioned before even cash savings has variable return over time and variable real return because inflation constantly changes.

As to orders of magnitude the standard deviation of annual returns for cash might be +/-2%, for intermediate bonds +/-7%, for long bonds +/-11%. Stocks would have a risk of maybe +/-20% standard deviation of annual returns. A TIPS held to maturity still has a small variability of return because there is reinvestment risk, the problem being that as interest is paid out one does not know at what rate that can then be reinvested. This is similar to the risk with CD returns but now has no inflation risk. A difference is that CDs and savings can be redeemed at a known value and a TIPS redeemed before maturity does not have a future known value exactly.
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Re: How many years of expenses to keep in safe assets?

Post by dbr »

Also, in practice no one would not have cash in accounts somewhere. Simply by the process of money received, money spent, and money moving around we have about 1%-2% of our portfolio in cash. By cash I mean checking accounts, savings accounts, settlement funds at brokers, and so on.

You could even count the chargeable amount on credit cards as cash in the sense that it is available to be spent at any moment on most of the things one spends money on, including that one can get a currency cash advance. On that basis a lot of people probably have months and months to years in the resource. Some charge cards, such as an AMEX Platinum don't even have a charge limit, I don't think.
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Re: How many years of expenses to keep in safe assets?

Post by Marseille07 »

dbr wrote: Sat Dec 26, 2020 1:49 pm Also, in practice no one would not have cash in accounts somewhere. Simply by the process of money received, money spent, and money moving around we have about 1%-2% of our portfolio in cash. By cash I mean checking accounts, savings accounts, settlement funds at brokers, and so on.

You could even count the chargeable amount on credit cards as cash in the sense that it is available to be spent at any moment on most of the things one spends money on, including that one can get a currency cash advance. On that basis a lot of people probably have months and months to years in the resource. Some charge cards, such as an AMEX Platinum don't even have a charge limit, I don't think.
I believe those claiming one-month literally do not have cash in accounts anywhere. They would sell AA to generate monies as needed.
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Re: How many years of expenses to keep in safe assets?

Post by ROIGuy »

I think most of your safe assets should be in your social security and pension (if available). After that then you start figuring out your AA for the rest of your stuff that includes cash on hand as part of your AA. It all depends on your comfort level.
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Re: How many years of expenses to keep in safe assets?

Post by Dandy »

If you have 25-30 X your expected withdrawals in retirement and are not an early retiree you are in very good financial shape. Some choose to still invest aggressively some don't. You have probably reached your "number" so what is the need for a lot of risk? The retirement challenge now is to make sure you can fully fund your retirement needs for your whole retirement. That requires more attention to asset preservation than we needed in the quest to reach our "number".

For decades we focus on growing our portfolio -- hard to change that especially when it has been very successful. I roughly follow Dr. Wm Bernstein's idea of keeping 20 or more draw down dollars in "safe" products and invest the rest anyway you want even 100% stocks. For me that approach was to use FDIC products, short term bond funds and money markets to potentially fund retirement drawdowns to age 90 (I'm almost 73).

I use this "safe" portfolio as more insurance rather than an ATM to draw from. My draw is from both "safe" and "risk" assets unless the "risk" assets have a bad year. This withdrawal approach tends to result in excess "safe" funds. The excess can be used to adjust for inflation, invested, spent or gifted. I tend to use the excess as "early inheritance" for my 2 children. The resulting overall allocation is about 45/55. I sleep well and feel confident that our retirement is secure. My heirs are and will do well.
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Re: How many years of expenses to keep in safe assets?

Post by Enzo IX »

I used to use a traditional set percentage stock/bond strategy, but as my net worth has grown as well as the shorter lifespan each day, I moved to a rising glide path method.

I currently am moving to the LMP method of putting aside a set dollar amount based on yearly living expenses times number of years. It's still a work in process and haven't set the number of years in stone yet.

With interest rates so low and a total market dividend yield higher than treasury rates, I'm having a hard time leaving millions of dollars sitting in bonds losing inflation adjusted value just for an imaginary safety.
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Re: How many years of expenses to keep in safe assets?

Post by GerryL »

As others have noted above: It depends.
I choose to keep 3-4 years of expenses (that exceed my SS income) in cash-like assets, plus the current year's RMD in cash in my IRA. But since that all accounts for well under 3% of my portfolio, it's an easy decision. If cash gets too bloated, I move some to a taxable balanced fund.

If you don't need to worry about growth, you can do what makes you most comfortable.
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Re: How many years of expenses to keep in safe assets?

Post by duffer »

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

Post by duffer »

GerryL wrote: Sat Dec 26, 2020 2:15 pm As others have noted above: It depends.
I choose to keep 3-4 years of expenses (that exceed my SS income) in cash-like assets, plus the current year's RMD in cash in my IRA. But since that all accounts for well under 3% of my portfolio, it's an easy decision. If cash gets too bloated, I move some to a taxable balanced fund.

If you don't need to worry about growth, you can do what makes you most comfortable.
I am close to what you are describing. But assume a desire for growth.Pplease see the edit to the original post: 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.)
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Re: How many years of expenses to keep in safe assets?

Post by duffer »

Enzo IX wrote: Sat Dec 26, 2020 2:13 pm I used to use a traditional set percentage stock/bond strategy, but as my net worth has grown as well as the shorter lifespan each day, I moved to a rising glide path method.

I currently am moving to the LMP method of putting aside a set dollar amount based on yearly living expenses times number of years. It's still a work in process and haven't set the number of years in stone yet.

With interest rates so low and a total market dividend yield higher than treasury rates, I'm having a hard time leaving millions of dollars sitting in bonds losing inflation adjusted value just for an imaginary safety.
Yes, the issue is how many years? I think to leave a significant percentage in bonds in your situation is a classic version of the behavioral error I cite in the OP.
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Re: How many years of expenses to keep in safe assets?

Post by stan1 »

sergeant wrote: Sat Dec 26, 2020 1:38 pm We are retired and have pensions that supply a bit more than 2x our annual spend. Our portfolio is about 40x our annual spend if our pensions disappeared. When it was about 30x we went to 20x in fixed income. Over the last few years through contributions and growth, equities have brought us to 40x. This has us at about a 50/50 AA.

Most of our FI is in a SV fund with a guaranteed rate of 3.75%

I'm sure our set up is not optimal but it works fine for us.
You might be outliers (in multiple ways).
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Re: How many years of expenses to keep in safe assets?

Post by duffer »

Dandy wrote: Sat Dec 26, 2020 2:06 pm If you have 25-30 X your expected withdrawals in retirement and are not an early retiree you are in very good financial shape. Some choose to still invest aggressively some don't. You have probably reached your "number" so what is the need for a lot of risk? The retirement challenge now is to make sure you can fully fund your retirement needs for your whole retirement. That requires more attention to asset preservation than we needed in the quest to reach our "number".

For decades we focus on growing our portfolio -- hard to change that especially when it has been very successful. I roughly follow Dr. Wm Bernstein's idea of keeping 20 or more draw down dollars in "safe" products and invest the rest anyway you want even 100% stocks. For me that approach was to use FDIC products, short term bond funds and money markets to potentially fund retirement drawdowns to age 90 (I'm almost 73).

I use this "safe" portfolio as more insurance rather than an ATM to draw from. My draw is from both "safe" and "risk" assets unless the "risk" assets have a bad year. This withdrawal approach tends to result in excess "safe" funds. The excess can be used to adjust for inflation, invested, spent or gifted. I tend to use the excess as "early inheritance" for my 2 children. The resulting overall allocation is about 45/55. I sleep well and feel confident that our retirement is secure. My heirs are and will do well.
I am in good shape for retirement. But assume that I want the portfolio to grow while balancing this with the inevitability of having to withdraw during some down years. I amended the OP as follow: 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.)
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Re: How many years of expenses to keep in safe assets?

Post by arsenalfan »

My plan is for 4 years in VWITX aftertax account.

Rental cashflow and SS income (assuming present caclculations) will cover 95% of our needs.

If I didn't have those, then I'd probably do 10 years in VWITX.
Last edited by arsenalfan on Sat Dec 26, 2020 2:26 pm, edited 2 times in total.
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Re: How many years of expenses to keep in safe assets?

Post by duffer »

Mr.BB wrote: Sat Dec 26, 2020 1:55 pm I think most of your safe assets should be in your social security and pension (if available). After that then you start figuring out your AA for the rest of your stuff that includes cash on hand as part of your AA. It all depends on your comfort level.
Our essential expenses are covered by our soc sec and a pension. But I still want the discretionary spending and I also want growth.
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Re: How many years of expenses to keep in safe assets?

Post by duffer »

stan1 wrote: Sat Dec 26, 2020 1:37 pm It's a personal choice. Some would say one month. Some would say 2-3 years. Some would have purchased 3.5% five year FDIC insured CDs when they were available in early 2019 and now wish they had bought a lot more.
I can easily see keeping 2-3 years in a non-volatile form. but lots of people seem to be keeping half of their investments in such non-volatile form--figure something like 12-15 years worth!
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Re: How many years of expenses to keep in safe assets?

Post by ROIGuy »

duffer wrote: Sat Dec 26, 2020 2:25 pm
Mr.BB wrote: Sat Dec 26, 2020 1:55 pm I think most of your safe assets should be in your social security and pension (if available). After that then you start figuring out your AA for the rest of your stuff that includes cash on hand as part of your AA. It all depends on your comfort level.
Our essential expenses are covered by our soc sec and a pension. But I still want the discretionary spending and I also want growth.
Obviously two different things. Growth will come from the equity side of your AA. Ideally your discretionary spending should be part of your yearly expenses. Money set aside as an EF should not be touched unless it is an emergency.
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Re: How many years of expenses to keep in safe assets?

Post by firebirdparts »

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

Post by dbr »

duffer wrote: Sat Dec 26, 2020 2:30 pm
stan1 wrote: Sat Dec 26, 2020 1:37 pm It's a personal choice. Some would say one month. Some would say 2-3 years. Some would have purchased 3.5% five year FDIC insured CDs when they were available in early 2019 and now wish they had bought a lot more.
I can easily see keeping 2-3 years in a non-volatile form. but lots of people seem to be keeping half of their investments in such non-volatile form--figure something like 12-15 years worth!
One factor that could make a huge difference is how much literally "fixed income" in the form of Social Security, annuity, and pension payments there is. Three fourths or more of your routine spending automatically turning up in your checking account every month on schedule can stand in for an awful lot of "cash." But another way to accomplish the same thing is to arrange for your broker to liquidate and send you a fixed dollar amount from your holdings.

I think there tends to be a lot of confabulation of investment strategy and planning with money management, which is a different thing. In between those two is also tax management.
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Re: How many years of expenses to keep in safe assets?

Post by Rajsx »

3 years of expenses (essential + discretionary) which is 5% part of our Asset Allocation.
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Re: How many years of expenses to keep in safe assets?

Post by 59Gibson »

duffer wrote: Sat Dec 26, 2020 2:25 pm
Mr.BB wrote: Sat Dec 26, 2020 1:55 pm I think most of your safe assets should be in your social security and pension (if available). After that then you start figuring out your AA for the rest of your stuff that includes cash on hand as part of your AA. It all depends on your comfort level.
Our essential expenses are covered by our soc sec and a pension. But I still want the discretionary spending and I also want growth.
It's a difficult question to answer, Some big factors are - will someone have a pension, max SS, rental income, annuity income,and/or future inheritance that covers a large portion of expenses or are they relying on the portfolio to do the heavy lifting..etc. considering the additional info provided above you're fine with your 90/10 portfolio.
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Re: How many years of expenses to keep in safe assets?

Post by dbr »

Mr.BB wrote: Sat Dec 26, 2020 2:52 pm
duffer wrote: Sat Dec 26, 2020 2:25 pm
Mr.BB wrote: Sat Dec 26, 2020 1:55 pm I think most of your safe assets should be in your social security and pension (if available). After that then you start figuring out your AA for the rest of your stuff that includes cash on hand as part of your AA. It all depends on your comfort level.
Our essential expenses are covered by our soc sec and a pension. But I still want the discretionary spending and I also want growth.
Obviously two different things. Growth will come from the equity side of your AA. Ideally your discretionary spending should be part of your yearly expenses. Money set aside as an EF should not be touched unless it is an emergency.
Right. I think this illustrates mixing up money management and investment management.

If you want to withdraw and spend money from a portfolio and also see the portfolio grow, then you have to run a model which shows the range of outcomes for portfolio value at different asset allocations and for different withdrawal rates. The essential determinant of whether or not the portfolio will certainly grow is how large the withdrawal is. To get a near guarantee that number has to be less than maybe 2.5%. At 4% lots of the outcomes will be real growth, but a meaningful fraction will not be growth, and a couple will come near spending the portfolio down to zero. When growth is nearly guaranteed, how much the portfolio grows increases with allocation to stocks, but so also does the range of outcomes.
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Re: How many years of expenses to keep in safe assets?

Post by Jack FFR1846 »

I'm an outlier. I'm starting to plan to retire next year, but am not sure enough to join the class of 21.

Right now, I have about 1 1/2 years in actual cash (checking and high yield savings)
I have 7 years in paper US Savings Bonds

I have a small pension that currently is projected to pay a lump sum in a year and a month from now of a bit over a year spending.

I'll hold off on SS till 70 and it should pay 2/3 my expected spending.

I have 50 times spending saved.

I also plan to spend more in retirement on stupid things like cars and stuff. Probably get the house fixed up a bit.
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Re: How many years of expenses to keep in safe assets?

Post by 59Gibson »

Jack FFR1846 wrote: Sat Dec 26, 2020 3:11 pm I'm an outlier. I'm starting to plan to retire next year, but am not sure enough to join the class of 21.

Right now, I have about 1 1/2 years in actual cash (checking and high yield savings)
I have 7 years in paper US Savings Bonds

I have a small pension that currently is projected to pay a lump sum in a year and a month from now of a bit over a year spending.

I'll hold off on SS till 70 and it should pay 2/3 my expected spending.

I have 50 times spending saved.

I also plan to spend more in retirement on stupid things like cars and stuff. Probably get the house fixed up a bit.
Congrats you're golden. You may as well announce now for 2021, unless you Love your job. :happy
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Re: How many years of expenses to keep in safe assets?

Post by Dandy »

But assume that I want the portfolio to grow while balancing this with the inevitability of having to withdraw during some down years.
If after putting aside X years of "safe" fixed income, withdrawing from both "safe" and "risk" portfolios unless "risk" has a bad year and have an overall 45/55 allocation - you will experience overall growth in retirement in most cases. if not you still have a "safe" portfolio and much of the 45% of your total financial assets (at the time of dividing "safe' and "risk") to draw from. Very little chance of outliving that nest egg.

There is a tendency to think that only aggressive equity allocations grow the portfolio. An equity allocation of 40% or so will usually do fine. Of course a 10 year bull market and decades long bond bull market makes almost anything look good. Agree the future is unknown and for retirees out of human capital always a bit of a concern.
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Re: How many years of expenses to keep in safe assets?

Post by GerryL »

duffer wrote: Sat Dec 26, 2020 2:16 pm
GerryL wrote: Sat Dec 26, 2020 2:15 pm As others have noted above: It depends.
I choose to keep 3-4 years of expenses (that exceed my SS income) in cash-like assets, plus the current year's RMD in cash in my IRA. But since that all accounts for well under 3% of my portfolio, it's an easy decision. If cash gets too bloated, I move some to a taxable balanced fund.

If you don't need to worry about growth, you can do what makes you most comfortable.
I am close to what you are describing. But assume a desire for growth.Pplease see the edit to the original post: 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.)
Not worrying about growth and not growing are not the same things. I am at 60/40 and expecting to remain so throughout retirement. My portfolio continues to grow, especially since I continue to add to my investments in taxable, but I'm not worrying about how much growth is coming my way.

And I am trying to do much of my giving (charitable) now, as long as it fits with my spending plan, rather than leaving it entirely to the end.
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Re: How many years of expenses to keep in safe assets?

Post by abuss368 »

Hard to say as the answer is highly contingent of individual circumstances. High risk job or retired for example can be two answers! A $100,000 portfolio or $10,000,000 portfolio!

Each decision is highly personal.

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

Post by abuss368 »

I also believe that the old saying “Cash is king” is excellent advice and for good reason.

This is sleep well at night strategy!

That is different for everyone.

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

Post by J295 »

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

Post by Marseille07 »

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

Post by abuss368 »

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.
That always changes the ballgame AND the threads on the forum!

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

Post by J295 »

Just one data point… I was in my late 40s and ready for early retirement when the great recession hit. Over 16 months from peak to valley there was a 49% decline. I still have some scar tissue. It was like going through a slow train wreck. Seeing your accounts drop in half and not knowing how or when things might turn around is troublesome.

I remained 100% invested in the equity market, as I had been since college in 1979, with no sense as to whether or when the economy and the markets would turn around. That allocation was more by necessity than any strength of conviction or equanimity on my part. I really have never known anything different. It worked out fine and by January 2013 I was transitioning to out of my firm and then into part-time and then retirement.

We are now age 61 and have more than 15 years expenses in non-equity investments (BND, TIP, CD, I bonds, etc). AA is 50/50. I sometimes wonder if it is “right or wrong,” and then try and drop that dualistic thinking and settle that it’s working fine for our situation
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Re: How many years of expenses to keep in safe assets?

Post by patrick013 »

age in bonds, buy-and-hold, 10 year business cycle
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Re: How many years of expenses to keep in safe assets?

Post by jebmke »

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.
I've been invested since ~1980; what would you like to know?
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: How many years of expenses to keep in safe assets?

Post by J295 »

jebmke wrote: Sat Dec 26, 2020 5:42 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.
I've been invested since ~1980; what would you like to know?
Are you retired without a pension or SS and still 100% stocks?
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Re: How many years of expenses to keep in safe assets?

Post by Marseille07 »

I'm rethinking this and I think I'll settle on 6 months. Let's say I'm doing 4% constant-percentage WR on 2.5M, this would be 100K / 2 = 50K. This is a nice EF runway because it basically gives me the original amount (100K/year) even when my portfolio averages -50% all year (which isn't at all likely, even 2008 wasn't this bad).
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Re: How many years of expenses to keep in safe assets?

Post by namajones »

The (perhaps rather sad and confusing) takeaway from this thread is that there is no takeaway. Almost everyone is answering this question differently.

Phew! My head spins just reading all of the different responses. After a while, it's as though no one is talking to anyone, really.
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Re: How many years of expenses to keep in safe assets?

Post by Dandy »

there are many threats to a safe retirement. Inflation, medical expenses, prolonged equity losses, living to 115, etc. It is hard to have a great set it and forget it approach that could address all these concerns extremely well. There is also some feeling that your equity allocation has to be 60% or higher to get long term growth of assets.

1. Inflation risk can be addressed with a decent allocation to equities, some allocation to inflation protected fixed income mutual fund, waiting to age 70 to collect Social Security. Addressing that risk doesn't mean it will work with super inflation or if you live to age 115.
2. Medical expenses can be addressed with having good medical and dental insurance. No guarantees that your coverage will cover enough of your medical costs over time e.g. some necessary expensive RXs that aren't covered. Also, private insurance premiums could become unaffordable.
3. Prolonged equity losses. If the stock market plunges and stays low for a number of years while you are also withdrawing assets that could affect your prospects in a big way. Not having too high of an equity exposure and being able to at least modestly reduce withdrawals could help. But, hard to address this in a meaningful way if it is extreme. Having much of basic expense needs covered by an annuity, pension or Social Security could help.
4. Living to 115 would certainly strain most retirement funding approaches. Long term care insurance might be useful as would pensions, annuities and Social Security. While LTC insurance makes sense -- in practice it has been a troubled product for insurers and buyers with lots of unexpected high premium increases and coverage not unlimited.

I don't think there is a perfect plan. I don't think having a very aggressive equity allocation is the answer either.
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Re: How many years of expenses to keep in safe assets?

Post by Tattarrattat »

Many of these safe fund set asides, bucket plans and LMP plans are reasonable. But in the end, no matter how you subdivide or mentally allocate the accounts, when you step back, there is a certain percent of assets in equities and a certain percent in bonds/cash. After sifting through a bunch of different bucket approaches, whenever I stepped back and reviewed it, it seemed like I was ending up at around 50/50 AA, ballpark, whatever the scheme that led there. So I think it may be simpler and probably equivalent in the long run, to just say I'm at 50/50, draw what I need to, and rebalance once a year or so. I guess that's what they call the probabilistic approach.
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Re: How many years of expenses to keep in safe assets?

Post by Marseille07 »

I just hold cash for the amount of the largest bill I've ever faced, which happens to be around 3% of my target AA, which is essentially 1 year of expenses if I were doing 3% WR.
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Re: How many years of expenses to keep in safe assets?

Post by KlangFool »

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.

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