Kitces article: A cash bucket in retirement? Nope

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DrGoogle2017
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Re: Kitces article: A cash bucket in retirement? Nope

Post by DrGoogle2017 » Tue Jan 23, 2018 2:37 pm

I’ve always keep a nice size of cash in my checking account earning zero interest. Not sure if that’s the bucket thing but I rather not have a small margin. I think it’s stressful if I don’t have that margin. Small price to pay for healthy living. No panic attack on anything.

Ron
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Re: Kitces article: A cash bucket in retirement? Nope

Post by Ron » Tue Jan 23, 2018 3:05 pm

I retired in early 2007 (at age 59) with just my portfolio for living expenses; no SS, no pension as of the date I retired.

In preparation for this move to another phase of my life, I had accumulated in my VG/FIDO tax-deferred MM accounts an amount equal to four years of expenses (included taxes on withdrawals). Why four years? Simply that since I started investing for retirement in 1982, the longest downturn I had experienced was three years so I just threw in another "just in case" year. Those former downturns were just a slight bump to me, since I maintained employment through all of them.

My wife (same age) was also planning to retire in the same month/year. However, as she came closer to her notification date, she found that she was not emotionally ready to retire. Unlike my overflowing work S--- Bucket hers was not quite full yet. That happened in another five years and she retired at age 64. However, she also had sold off profits over the previous five years in preparation for retirement as I had done and also kept her four year cash bucket in her deferred VG/FIDO accounts.

During the summer of 2007 I purchased an SPIA in an effort to "make" my own pension, with funds from my portfolio. With my monthly SPIA income, I still held four years of cash, but the amount held was lowered to reflect that I was now getting an income stream (in addition to my small VA disability income).

During the downturn of 2008, our joint portfolio lost paper value of over $350K. While it started to recover in 2009, that $350k still represented 3.5 years of retirement income.

Over the next decade, as other income streams came "on-line", we reduced the amount of cash held but did keep with our four-year backup income plan. When my wife started her two small defined benefit income plans, she reduced the amount of cash held. When we did the file/suspend/restricted SS bit at FRA, she further reduced her cash holdings, but again stuck with the four year income plan.

I just did my January withdrawal from my MM account and now have less than one month of cash in my VG/FIDO MM accounts. Why? Simply, because I'll be receiving my first age-70 SS income in less than a month. That income, along with my other income sources will cover more than I need to meet my needs at this time. My wife has reduced her cash holdings to just four months since she also will start her age-70 SS in June. At that time, neither of us intend to have any cash, other than a minimal amount held in our respective bank savings accounts for "what if" situations.

Cash may be looked at as a poor substitute for other "safe" investments to carry you over troubled waters, but for us it worked out well in our long term plan, which now is considered history.

FWIW,

- Ron

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Re: Kitces article: A cash bucket in retirement? Nope

Post by livesoft » Tue Jan 23, 2018 5:29 pm

@Ron, so did your cash ever get depleted from 4 years to 3 years or 2 years of expenses? If not, then does that mean you actually used the rest of your portfolio for expenses through thick and thin and just used the cash for peace of mind?
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Re: Kitces article: A cash bucket in retirement? Nope

Post by itstoomuch » Tue Jan 23, 2018 5:54 pm

@Ron
Our story too.
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Re: Kitces article: A cash bucket in retirement? Nope

Post by GerryL » Tue Jan 23, 2018 6:08 pm

If you've won the game you can stop playing, so the saying goes.
Even though I've won, I prefer to maintain a 60/40 AA in retirement. Winning, for me, means no qualms about losing potential growth by keeping a bucket/pot/pool of cash to carry me to age 70 and SS -- soon to be followed by RMDs. I started gradually building up my money market account when I was within 2 years of retiring at age 67 and then kept all of my severance package in cash when I took a separation package a year earlier than planned. I don't even count the cash as part of my portfolio as it is intended to cover expenses for a specific period of time and not for investing.

I have been living comfortably on my cash stash, along with a "minimal pension" and dividends from a taxable account. The tIRA and Roth have been allowed to grow untouched, and I have not touched the principal in the taxable account. The final CD will mature shortly before the first SS check is deposited to my checking account. The money market account(s) will be unremarkable. With a predictable cash flow, and the ability to top off the money market account(s) with excess from RMDs, there will be no more need for a 4-, 3-, or 2-year pile of cash.

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Re: Kitces article: A cash bucket in retirement? Nope

Post by The Wizard » Tue Jan 23, 2018 6:46 pm

JCE66 wrote:
Tue Jan 23, 2018 7:11 am
Bogleheads:

https://www.kitces.com/blog/weekend-rea ... ary-20-21/

The article in the weekend reading was a real eye-opener. I also read Christine Benz (Mstar), a big proponent of the bucket strategy. Intuitively, the bucket strategy seems to make sense, right? You have money for a couple of years of expenses, and you have less of a reason to make foolish moves in reaction to the market. Not so fast, according to Kitces. The chief takeaway I had is that having a cash bucket with a couple of years of expenses may not be the 'behavioral brake' that people think it is. And that cash is a drag on returns (I know, really basic, but still, a helpful reminder), and may actually lessen the probability of portfolio success (defined as not running out of money in 30 years).

Do you (Fellow Bogleheads) use the bucket strategy?
Has it been a 'behavioral brake' (Example: not selling equities in reaction to a sudden Market decline)?
Does having that cash make you feel more secure?
No, I'm not a Bucketeer.

I have regular monthly income hitting my checking account, almost five complete years into retirement.
Most of my income comes from immediate annuities, some of them variable. A small part of my income comes from Divorced Spouse SS benefit. Another small part comes from systematic withdrawal from my portfolio.

I strive to keep between $5000 and $10,000 in my checking account after most bills have been paid most months. This helps buffer irregular travel expenses, mostly.
That's all the cash I keep.

Additional funds beyond around that $10k get invested in VTSAX in my taxable account...
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Re: Kitces article: A cash bucket in retirement? Nope

Post by J295 » Tue Jan 23, 2018 6:58 pm

I have no aversion to having some cash. We do have an aversion to debt.

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Re: Kitces article: A cash bucket in retirement? Nope

Post by Katietsu » Tue Jan 23, 2018 7:18 pm

So, everybody is different.

But, I can relate to this Kitces Post:
https://www.kitces.com/blog/buying-happ ... ubomirsky/

It essentially discusses a research study showing how one’s bank balance can be more important to ones financial well being and life satisfaction than one’s investment balance. Hence, I probably have a year’s worth of expenses at my local bank.

Of course, I understand that this is like the studies showing people spend more when paying with a credit card instead of cash, just not the way everyone is wired.

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Re: Kitces article: A cash bucket in retirement? Nope

Post by willthrill81 » Tue Jan 23, 2018 7:29 pm

Katietsu wrote:
Tue Jan 23, 2018 7:18 pm
So, everybody is different.

But, I can relate to this Kitces Post:
https://www.kitces.com/blog/buying-happ ... ubomirsky/

It essentially discusses a research study showing how one’s bank balance can be more important to ones financial well being and life satisfaction than one’s investment balance. Hence, I probably have a year’s worth of expenses at my local bank.

Of course, I understand that this is like the studies showing people spend more when paying with a credit card instead of cash, just not the way everyone is wired.
A colleague and I have done an empirical study (currently under journal review) where we found a positive relationship between checking and savings account balances and the degree of risk that investors are willing to accept. There seems to be something about cash that makes us feel good and safe.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Kitces article: A cash bucket in retirement? Nope

Post by victw » Tue Jan 23, 2018 7:34 pm

What struck me about the article was the confirmation of withdrawing bonds first. I've been intrigued with this idea since reading McClung's book. But I have not seen many other sources/articles support this idea. In fact another Kitce's article and a recent thread by willthrill had me thinking there was evidence to support rebalancing. This confusion probably needs another thread.

Thanks to OP - I usually gloss over the Kitce's weekend reading.

Vic

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Re: Kitces article: A cash bucket in retirement? Nope

Post by livesoft » Tue Jan 23, 2018 7:36 pm

@Katietsu, thanks for the link to the additional Kitces article. It shows psychology and behavioral finance in real life.
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Re: Kitces article: A cash bucket in retirement? Nope

Post by Toons » Tue Jan 23, 2018 7:40 pm

I never sell any fund shares in reaction to market moves to raise cash.
I Keep mid five figures in cash "at the ready"
Do I need to ?
No,
I Want To,
I like having options at my fingertips

:happy :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: Kitces article: A cash bucket in retirement? Nope

Post by clown » Tue Jan 23, 2018 7:41 pm

I have a full FIVE YEARS of net spending requirement (difference between annual spending and income) in VG Prime MM and Ultra Short. Zero in bonds. All the rest in broad market stock index funds. This strikes me like going to a tennis match, watching the ball go back and forth with no personal stake in the outcome. I can watch the market go up and down -- knowing that a major correction will recover within the five years I have in cash. So no need to sell when equities are down, no worries about interest rates effecting bond values, and no significant drag on performance. The five years of cash is about 16% of the total portfolio. This gives max dollars available to grow in equities.

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Re: Kitces article: A cash bucket in retirement? Nope

Post by 2015 » Tue Jan 23, 2018 8:08 pm

To each his own.

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Re: Kitces article: A cash bucket in retirement? Nope

Post by WoodSpinner » Tue Jan 23, 2018 8:22 pm

To be honest, I was pretty disappointed with the article and don’t think it did a good job in the analysis or conclusions reached. I know, heresy, it’s Kitces after all-except he didn’t write it or research it himself.

I find it an interesting juxtopistion to review the 2008 lessons learned thread which has recently been revived.

A couple of points:
  • No clear definition of what it means to hold CASH, do CDs count as cash?
  • I can’t imagine anyone holding CASH (or CDs) as part of the Equity allocation in a portfolio, The first part of the analysis is based on this nonsensical premise
  • No analytics that look at the efficacy of a Liabilty Matching Portfolio that is invested in ladders of CDs, bonds, etc.
  • Nothing discussed about the role of Cash ( or equivalnts) during retirement to reduce SoR risk
Nothing in that piece is going to shift my thinking—which is rare since Kitces analysis has really shaped my plans. :annoyed

Perhaps it’s all semantics since I think of CDs and Short Term US bonds as cash equivalents

Just my $.02

WoodSpinner

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Re: Kitces article: A cash bucket in retirement? Nope

Post by willthrill81 » Tue Jan 23, 2018 8:25 pm

WoodSpinner wrote:
Tue Jan 23, 2018 8:22 pm
Perhaps it’s all semantics since I think of CDs and Short Term US bonds as cash equivalents
Most would agree with you that cash does not just mean checking account balances but also MM, T-bills, CDs, SVFs that offer full-liquidity, and related instruments. When examined in this light, historical analysis has shown that there is little/no reason for retirees to hold these vehicles in disdain over bonds in a traditional AA.
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Re: Kitces article: A cash bucket in retirement? Nope

Post by The Wizard » Tue Jan 23, 2018 8:38 pm

willthrill81 wrote:
Tue Jan 23, 2018 7:29 pm

A colleague and I have done an empirical study (currently under journal review) where we found a positive relationship between checking and savings account balances and the degree of risk that investors are willing to accept. There seems to be something about cash that makes us feel good and safe.
Well fine, I won't try to dispute that as regards Other People.

As for me, I look at monthly income vs outgo, even in retirement.
So if my average monthly expenses are $8000 and my average monthly income is $10,000, then I'm good and safe, so to speak.
The fact that I reinvest excess income into the total stock market index fund rather hoarding it in checking or savings account is my personal preference...
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randomizer
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Re: Kitces article: A cash bucket in retirement? Nope

Post by randomizer » Tue Jan 23, 2018 8:45 pm

Haven't read the whole thread here, but https://finalytiq.co.uk/cash-reserve-bu ... portfolio/ is the underlying original article, I think.

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Re: Kitces article: A cash bucket in retirement? Nope

Post by Johnnie » Tue Jan 23, 2018 9:31 pm

I'm not a fan of buckets because it seems like playing a mental game, and just a roundabout way of saying "dial-back your A/A."

However, I have found very helpful two alternative "lenses" to view this through. One is from Kitces himself, "Behavioral Biases And The Hierarchy Of Retirement Needs."

Excerpt:
A growing base of research shows that even though money itself is fungible, the way we think about our various money assets is not; instead, we tend to “mentally account” for money into various buckets of current income, current assets, and (assets for) future income. The fact that we tend to categorize our income and assets into various buckets helps to explain the popularity of so-called “bucketing strategies” for retirement income, whether segmented by time (short, intermediate, and long-term needs) or type of spending (essential vs discretionary needs).

However, the research also suggests that the way we mentally account for income and assets also has an intrinsic hierarchy of priorities – first, we need to cover our current income needs, then our current assets, and finally our savings towards future income needs (ideally, with some potential for further upside and the possibility that our future income could continue to improve over time).
https://www.kitces.com/blog/hierarchy-r ... ccounting/

This relates to some studies last year that found for certain people simply having a big slug of cash in a savings account provides a big happiness-boost.


The other item is "Cut-Throat's famous 'Delay Social Security to age 70 and Spend more money at 62'" post:
viewtopic.php?t=102609

On its face this is a bucketing strategy, but it's really just a method for smoothing-out income in the years between retiring and starting social security at 70, in a way that also reduces one's equity allocation.
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Re: Kitces article: A cash bucket in retirement? Nope

Post by mariezzz » Tue Jan 23, 2018 9:52 pm

livesoft wrote:
Tue Jan 23, 2018 7:29 am
Kitces points to another article on the cash story. That article is similar to one at EarlyRetiremenNow:
https://earlyretirementnow.com/2017/03/ ... h-cushion/

I do not use a bucket strategy. I hate cash and try not to have more than a few weeks of expenses in my checking account. I do not have a savings account. I do not have any CDs. I do not use Ally nor any other high-yield savings. I do have some money in TIAA Traditional Annuity which I treat as a bond fund, but I suppose I could access it reasonably quickly, but not as quickly as I can access the bond and equity ETFs I own.

On a sudden market decline, my IPS says I must buy equities, so there is definitely no selling of equities due to a sudden market decline. As for other behavioral errors, I find that reading books on behavioral errors and behavioral finance helps me avoid many of them.

Having cash makes me feel bad. If I get cash from dividends, I want to use it as quickly as possible to buy more shares of stock ETFs and bond ETFs. I have no regrets when I sell any investment at a loss. Indeed, I sometimes enjoy selling shares at a loss.
As others have pointed out, it's crucial to define what is meant by "cash". Semantics here matter a lot, if the goal is to give people good advice.

Indeed, if you're planning to buy equities if there's a sudden market decline, you need to have some asset with which you will do the buying. That asset will be fairly cash-like: fairly low volatility - unlikely to drop even 5% in a year - something like VBTLX or similar! It may not be FDIC insured (so not a savings account or CD), but it's still pretty safe.

I don't disagree with such an IPS ... but it does amount to market timing. I myself have struggled with the logic behind this. Having enough funds of the kind that you could liquidate in the event of a sudden market decline means you're giving up the opportunity for growth by not having those funds in equities all along.

As an example: If your IPS says your AA is 70/30, how much of the "30" are you going to shift into equities in a downturn?
In part the answer depends on the actual cash value of your"30", how much you need to live on annually (and how much more frugal you're willing to be so you can invest more in equities), and how much you get from other sources like SS or pension.

I ask myself, how much are you giving up by being at 70/30 before the downturn, rather than, e.g., 80/20? In the last few years, the answer would have been "a lot". As a result, I'm at about 78/22. And if there was a sharp market downturn, I wouldn't be able to do much investing in equities, other than putting new retirement money into equities. At this point, I might shift another 5%, to 83/17 - but no more than that, and whether I did that would depend on the actual value of the non-equity portion.

The reality for me is that as much as I'd like to be able to buy cheap equities in a market downturn, all I'll be able to do is fiddle along the edges with a few percent. This is because I'm not willing to risk not being in equities before that market downturn.

The last few years have really underlined that you cannot predict the market, and sitting out, waiting for a downturn, is a very risky strategy. I'm glad, however, I didn't, because now I'm sitting here, expecting there will be downturn. But I'm sticking with my IPS ... because that downturn might happen 2 years from now. We'll be lucky if it holds off that long, though.

But, if the market drops 25%, we're just back to around Jan 2017. Won't be fun, but part of the game. I find it's easier to have this perspective when your portfolio has gotten relatively large (however you define it) than if it's still small. (My portfolio would be considered relatively small by many here, but I'm pleased with my progress!)

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Taylor Larimore
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Keep investing simple

Post by Taylor Larimore » Tue Jan 23, 2018 10:18 pm

Bogleheads:

I have been in retirement for many years with this allocation:

Money that I cannot afford to lose is in cash and bonds. The rest is in stocks. It works! :happy

Please read my "Simplicity" link below.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Keep investing simple

Post by metalworking » Tue Jan 23, 2018 10:55 pm

Taylor Larimore wrote:
Tue Jan 23, 2018 10:18 pm
Bogleheads:

I have been in retirement for many years with this allocation:

Money that I cannot afford to lose is in cash and bonds. The rest is in stocks. It works! :happy

Please read my "Simplicity" link below.

Best wishes.
Taylor
Can i ask your thoughts on the cash vs bonds question?

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Re: Kitces article: A cash bucket in retirement? Nope

Post by Ron » Tue Jan 23, 2018 11:03 pm

livesoft wrote:
Tue Jan 23, 2018 5:29 pm
@Ron, so did your cash ever get depleted from 4 years to 3 years or 2 years of expenses? If not, then does that mean you actually used the rest of your portfolio for expenses through thick and thin and just used the cash for peace of mind?
Sure, the cash was reduced during the 2008-09 period by not selling any equities/bonds during that period. As things started to turn around in 2010 (and later), I started to restock my cash bucket gradually as profits from my holdings allowed me to "harvest" gains going forward. Recovery of my four-year cash holding target took a few years to restore.

I did not sell any equity/bond holdings during any period of downturn since I've been retired (just over a decade). And with my SS starting next month (providing me with additional income which will exceed my budgeted expenses) I don't believe there will be a time in the future that I'll have to tap my portfolio for current income. My desire for holding four years in cash will be eliminated, since any downturn will not impact my need for cash. I'll still have cash outside of my retirement portfolio, but that will (and does) get kept in short term banking accounts to cover any ex-budget items that invariably will come up unplanned for as time goes on.

- Ron

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Taylor Larimore
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Re: Keep investing simple

Post by Taylor Larimore » Tue Jan 23, 2018 11:28 pm

metalworking wrote:
Tue Jan 23, 2018 10:55 pm
Taylor Larimore wrote:
Tue Jan 23, 2018 10:18 pm
Bogleheads:

I have been in retirement for many years with this allocation:

Money that I cannot afford to lose is in cash and bonds. The rest is in stocks. It works! :happy

Please read my "Simplicity" link below.

Best wishes.
Taylor
Can i ask your thoughts on the cash vs bonds question?
metalworking:

I don't think it matters much whether we hold cash or a good-quality, low-cost, intermediate- or short-term bond fund.

If very safe cash (including CDs) are chosen, we can increase our allocation to stocks for the same expected risk and return.

If more risky bonds are chosen, we must reduce our stock allocation for the same expected risk and return.

Either cash or bonds, if properly allocated, should do the job of providing safety (and income) for our portfolios.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Keep investing simple

Post by in_reality » Tue Jan 23, 2018 11:43 pm

Taylor Larimore wrote:
Tue Jan 23, 2018 11:28 pm
metalworking wrote:
Tue Jan 23, 2018 10:55 pm
Taylor Larimore wrote:
Tue Jan 23, 2018 10:18 pm
Bogleheads:

I have been in retirement for many years with this allocation:

Money that I cannot afford to lose is in cash and bonds. The rest is in stocks. It works! :happy

Please read my "Simplicity" link below.

Best wishes.
Taylor
Can i ask your thoughts on the cash vs bonds question?
metalworking:

I don't think it matters much whether we hold cash or a good-quality, low-cost, intermediate- or short-term bond fund.

If very safe cash (including CDs) are chosen, we can increase our allocation to stocks for the same expected risk and return.

If more risky bonds are chosen, we must reduce our stock allocation for the same expected risk and return.

Either cash or bonds, if properly allocated, should do the job of providing safety (and income) for our portfolios.

Best wishes.
Taylor
I agree. Even if the cash is liquid in a bank account or under your mattress, it's still a form of fixed income and affects your overall duration. In high inflation periods, it seemed the article suggested cash helped avoid the worst outcomes.

Wish they'd do another analysis with inflation protected bonds.

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Re: Kitces article: A cash bucket in retirement? Nope

Post by TonyDAntonio » Tue Jan 23, 2018 11:49 pm

clown wrote:
Tue Jan 23, 2018 7:41 pm
I have a full FIVE YEARS of net spending requirement (difference between annual spending and income) in VG Prime MM and Ultra Short. Zero in bonds. All the rest in broad market stock index funds. This strikes me like going to a tennis match, watching the ball go back and forth with no personal stake in the outcome. I can watch the market go up and down -- knowing that a major correction will recover within the five years I have in cash. So no need to sell when equities are down, no worries about interest rates effecting bond values, and no significant drag on performance. The five years of cash is about 16% of the total portfolio. This gives max dollars available to grow in equities.
I have almost exactly the same allocation. And I too refer to my cash-like amount in years-of-spending terms rather than a strict percentage of my portfolio.

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Re: Kitces article: A cash bucket in retirement? Nope

Post by tj » Wed Jan 24, 2018 12:05 am

Is it time to post TFB's post on why Cash is better than Bonds for retail investors? :D

https://thefinancebuff.com/why-investor ... bonds.html

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Re: Keep investing simple

Post by Theoretical » Wed Jan 24, 2018 12:32 am

I agree. Even if the cash is liquid in a bank account or under your mattress, it's still a form of fixed income and affects your overall duration. In high inflation periods, it seemed the article suggested cash helped avoid the worst outcomes.

Wish they'd do another analysis with inflation protected bonds.
Now this is not entirely accurate, at least in the context of the mattress or a standard nil yield bank account.

But you're quite right that a high interest savings account, floating rate treasuries, 1-6 month tbills, money market accounts, or the like will do much better in inflationary times than a (bin-TIPS) bond portfolio. It would also allow you to barbell risk to where most of the bond portfolio is in cash or equivalents but you've got a slug of 20 year treasuries to concentrate your term risk but keep the bulk of the non-equity portfolio in ultrashort.

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Re: Kitces article: A cash bucket in retirement? Nope

Post by AtlasShrugged? » Wed Jan 24, 2018 7:13 am

Bogleheads:

I have been in retirement for many years with this allocation:

Money that I cannot afford to lose is in cash and bonds. The rest is in stocks. It works! :happy

Please read my "Simplicity" link below.

Best wishes.
Taylor
Mr. Larimore....Another question for you. When you say 'money you cannot afford to lose' are you thinking of this in 'X years of expenses', or an overall percentage of your portfolio? What benchmark are you using = money I cannot afford to lose'?

A sidenote: After reading (and re-reading many times) your Simplicity thread, I distilled my Roth down to a three-fund portfolio. Oddly relieving - there is so much less 'thinking' and 'stressing' over it.

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Re: Keep investing simple

Post by Call_Me_Op » Wed Jan 24, 2018 7:43 am

Taylor Larimore wrote:
Tue Jan 23, 2018 10:18 pm
Bogleheads:

I have been in retirement for many years with this allocation:

Money that I cannot afford to lose is in cash and bonds. The rest is in stocks. It works! :happy

Please read my "Simplicity" link below.

Best wishes.
Taylor
Taylor,

Does this mean that at age 60, you held 35 years of spending in bonds and cash?
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Re: Kitces article: A cash bucket in retirement? Nope

Post by sperry8 » Wed Jan 24, 2018 9:39 am

TonyDAntonio wrote:
Tue Jan 23, 2018 11:49 pm
clown wrote:
Tue Jan 23, 2018 7:41 pm
I have a full FIVE YEARS of net spending requirement (difference between annual spending and income) in VG Prime MM and Ultra Short. Zero in bonds. All the rest in broad market stock index funds. This strikes me like going to a tennis match, watching the ball go back and forth with no personal stake in the outcome. I can watch the market go up and down -- knowing that a major correction will recover within the five years I have in cash. So no need to sell when equities are down, no worries about interest rates effecting bond values, and no significant drag on performance. The five years of cash is about 16% of the total portfolio. This gives max dollars available to grow in equities.
I have almost exactly the same allocation. And I too refer to my cash-like amount in years-of-spending terms rather than a strict percentage of my portfolio.
Interesting. I hold ten years (30%) but in all cash (VG Prime MM or CDs with higher APY) and for the same reason. Sort of my way of saying, I won the game and I don't need to play anymore, yet while still playing.
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Taylor Larimore
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Re: Kitces article: A cash bucket in retirement? Nope

Post by Taylor Larimore » Wed Jan 24, 2018 9:44 am

JCE66 wrote:
Wed Jan 24, 2018 7:13 am
Bogleheads:

I have been in retirement for many years with this allocation:

Money that I cannot afford to lose is in cash and bonds. The rest is in stocks. It works! :happy

Please read my "Simplicity" link below.

Best wishes.
Taylor
Mr. Larimore....Another question for you. When you say 'money you cannot afford to lose' are you thinking of this in 'X years of expenses', or an overall percentage of your portfolio? What benchmark are you using = money I cannot afford to lose'?

A sidenote: After reading (and re-reading many times) your Simplicity thread, I distilled my Roth down to a three-fund portfolio. Oddly relieving - there is so much less 'thinking' and 'stressing' over it.
JCE66:

"Money you cannot afford to lose " refers to money I absolutely must have if my stocks plunge (selling stocks at a market bottom is a terrible mistake). I live conservatively on income from my pension, social security, annuities, etc.. I can afford to lose nearly all my portfolio which, therefore, is mostly in stocks.

I am pleased to learn that you have "distilled my Roth down to a three-fund portfolio and a enjoying the pleasure of "less 'thinking' and 'stressing' over it."

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Keep investing simple

Post by Taylor Larimore » Wed Jan 24, 2018 9:49 am

Call_Me_Op wrote:
Wed Jan 24, 2018 7:43 am
Taylor Larimore wrote:
Tue Jan 23, 2018 10:18 pm
Bogleheads:

I have been in retirement for many years with this allocation:

Money that I cannot afford to lose is in cash and bonds. The rest is in stocks. It works! :happy

Please read my "Simplicity" link below.

Best wishes.
Taylor
Taylor,

Does this mean that at age 60, you held 35 years of spending in bonds and cash?
Call_Me_Op:

Nope, because at age 60 I was living modestly within my income. This allowed me to have a portfolio of mostly stocks.

Read my reply to JCE66.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Kitces article: A cash bucket in retirement? Nope

Post by vested1 » Wed Jan 24, 2018 9:55 am

livesoft wrote:
Tue Jan 23, 2018 9:01 am
vested1 wrote:
Tue Jan 23, 2018 8:13 am
+2 My thoughts exactly. As long as it is a relatively short term bucket with a pre-determined short term strategy I see it as a positive. Most disagree, but "most" don't delay filing for SS until age 70. I would never hold a large cash bucket as a long term strategy simply out of fear. The mental gymnastics that helps me justify this dwindling bucket keeps me in shape. The sub 2% interest on this bucket is inconsequential, it's the goal that is meaningful. Refilling that bucket with dividends in that same short term time frame keeps the money invested until needed.
So you are not using your cash for that goal at all if you keep filling it back up with dividends. If you were actually using your cash to reach age 70, then the value of that account should slowly go down to zero at age 70 as you spend it down.

My long term strategy is to delay filing for SS until age 70 as well. I am spending down my total portfolio of equities and fixed income to get to that age.
Yes, I am using my cash bucket, which is a matured deferred annuity, until the balance is zero. When it is empty, around the time my wife and I implement our initial SS filing this year (me 66, wife 65), the dividends will have filled enough of the "cash" bucket to continue delaying until age 70 since they will continue to trickle in. This will keep me from tinkering, which I'm admittedly no good at. Dividends alone should allow us to avoid selling stocks or bonds until RMD's begin. This is due to the fact that withdrawals from MM filled from dividends will be cut in half this year when SS benefits begin.

I'll never be as astute as you are at knowing when to sell and when to buy, so I take the easy route of not having to worry about it. The exception will be ROTH conversions starting this year which will be used to rebalance and help with RMD's at age 70.5. All new ROTH conversions will go to Total US Stock at either VG or Fidelity, regardless of which position them come from.

Other comments on this thread bolster my conviction that I'm on the right track. We have 32 years of expenses (minus SS and pensions) currently in our portfolio, 14.5 of which are in cash or "safe" investments. This would make us 98 and 97 when our portfolio is exhausted, assuming our portfolio only performed well enough to keep up with inflation.

If I ever reach a point where needed expenses are covered for our projected lifetime by "safe" investments I will increase our allocation to equities dramatically. I may even do it incrementally if the ratio of years in covered expenses continues to rise.

The ratio between equities and "safe" investments has remained the same at 60/40 in retirement with periodic rebalancing, but the years of "safe" investments that cover expenses has risen appreciably. I'll never reach the 35 years of expenses in "safe" investments that some here have, but that's OK with me. I don't need to break any records, although I continue to reach goals I never expected to achieve.

Edit: corrected age when covered expenses taken from portfolio have exhausted the accounts.
Last edited by vested1 on Wed Jan 24, 2018 10:00 am, edited 1 time in total.

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Re: Kitces article: A cash bucket in retirement? Nope

Post by dbr » Wed Jan 24, 2018 9:56 am

You can't plan retirement without going beyond portfolios to the world of pensions, annuities, and SS. I think for younger investors this presents a challenge as pensions are not so common anymore and 401k plans and IRAs, which are not designed or intended as real pensions, have to take the place. Young investors also question SS, though discussion of that is off topic political speculation. None of this prevents people from buying annuities, however, which is one thing Taylor has done.

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Re: Kitces article: A cash bucket in retirement? Nope

Post by vested1 » Wed Jan 24, 2018 10:08 am

dbr wrote:
Wed Jan 24, 2018 9:56 am
You can't plan retirement without going beyond portfolios to the world of pensions, annuities, and SS. I think for younger investors this presents a challenge as pensions are not so common anymore and 401k plans and IRAs, which are not designed or intended as real pensions, have to take the place. Young investors also question SS, though discussion of that is off topic political speculation. None of this prevents people from buying annuities, however, which is one thing Taylor has done.
In a way, knowing that there will be no pension forthcoming is an advantage to younger investors. It forces them to be more self-reliant. Many boomers found out that promises made by an employer mean nothing until they are kept, and learned that lesson the hard way when the pension evaporated as they neared retirement age.

As for annuities, if you don't need to buy one in early retirement it's best to avoid doing so in order to maintain growth, at least IMHO. If I'm not mistaken, Taylor purchased his SPIA's at an age when credits for an expected shorter term made payments from the insurance company more attractive.

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Re: Kitces article: A cash bucket in retirement? Nope

Post by dbr » Wed Jan 24, 2018 10:12 am

vested1 wrote:
Wed Jan 24, 2018 10:08 am
dbr wrote:
Wed Jan 24, 2018 9:56 am
You can't plan retirement without going beyond portfolios to the world of pensions, annuities, and SS. I think for younger investors this presents a challenge as pensions are not so common anymore and 401k plans and IRAs, which are not designed or intended as real pensions, have to take the place. Young investors also question SS, though discussion of that is off topic political speculation. None of this prevents people from buying annuities, however, which is one thing Taylor has done.
In a way, knowing that there will be no pension forthcoming is an advantage to younger investors. It forces them to be more self-reliant. Many boomers found out that promises made by an employer mean nothing until they are kept, and learned that lesson the hard way when the pension evaporated as they neared retirement age.

As for annuities, if you don't need to buy one in early retirement it's best to avoid doing so in order to maintain growth, at least IMHO. If I'm not mistaken, Taylor purchased his SPIA's at an age when credits for an expected shorter term made payments from the insurance company more attractive.
Both good points. And it is true SPIA is better done when older. Another factor in SPIAs is they are not free of the crushing dictatorship of history. SPIA payout depends on the interest rates prevailing when they are purchased. If real interest rates were much higher than they are now our discussion of bonds, TIPS, and SPIAs would be very different than it is.

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Re: Kitces article: A cash bucket in retirement? Nope

Post by CWRadio » Wed Jan 24, 2018 10:24 am

Both good points. And it is true SPIA is better done when older. Another factor in SPIAs is they are not free of the crushing dictatorship of history. SPIA payout depends on the interest rates prevailing when they are purchased. If real interest rates were much higher than they are now our discussion of bonds, TIPS, and SPIAs would be very different than it is.
At what age does mortality credits and current interest rates converge? Or at what age is mortality credits more important then the current interest rate when you buy a SPIA? Thanks Paul

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Re: Kitces article: A cash bucket in retirement? Nope

Post by The Wizard » Wed Jan 24, 2018 10:31 am

dbr wrote:
Wed Jan 24, 2018 9:56 am
You can't plan retirement without going beyond portfolios to the world of pensions, annuities, and SS. I think for younger investors this presents a challenge as pensions are not so common anymore and 401k plans and IRAs, which are not designed or intended as real pensions, have to take the place. Young investors also question SS, though discussion of that is off topic political speculation. None of this prevents people from buying annuities, however, which is one thing Taylor has done.
Immediate Annuities are something I've done as well and are a great way to reduce risk while having higher retirement income...
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Re: Kitces article: A cash bucket in retirement? Nope

Post by livesoft » Wed Jan 24, 2018 10:38 am

@vested1, thanks for the reply. But I cannot say I understand everything you wrote. I guess that your wife has filed for SS benefits and you are delaying until age 70. I guess your "deferred mature annuity" is all cash.

This whole thread really re-iterates what Kitces wrote in the article linked by katietsu (Buying Happiness and Life Satisfaction ...) and what is discussed as Behavioral Life-Cycle Theory by the behavioral finance folks. That is, many people do not treat money as fungible and have specific thoughts and needs about cash which all seem foreign to me. I'm the odd person out, I guess.
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Re: Kitces article: A cash bucket in retirement? Nope

Post by The Wizard » Wed Jan 24, 2018 10:40 am

CWRadio wrote:
Wed Jan 24, 2018 10:24 am
Both good points. And it is true SPIA is better done when older. Another factor in SPIAs is they are not free of the crushing dictatorship of history. SPIA payout depends on the interest rates prevailing when they are purchased. If real interest rates were much higher than they are now our discussion of bonds, TIPS, and SPIAs would be very different than it is.
At what age does mortality credits and current interest rates converge? Or at what age is mortality credits more important then the current interest rate when you buy a SPIA? Thanks Paul
There is no magic age at which that happens.
Mortality credits increase very slowly year by year.
I did my initial annuitization at start of retirement, age 63.
I did a small additional annuitization a year ago at age 67.
I'll have a nice income uptick when SS starts at age 70, so no immediate plans for more annuitizations...
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Re: Kitces article: A cash bucket in retirement? Nope

Post by marcopolo » Wed Jan 24, 2018 10:44 am

In a forum that generally support the idea of diversification and low costs, I am a bit surprised at all the dislike for cash like investments. I understand not wanting to keep a large chink in a checking account not earning anything. But, can someone explain the rationale for disliking CDs so much.

The way i look at them as another type of Fixed Income asset. They may or may not outperform bonds in the next 7 years, but they might. I don't know nothing, so i diversify. Out of my 40% total allocation to Fixed Income, i keep 30% in intermediate bond fund, and 10% in CDs, mostly earning 3%.
I have no idea which will perform better going forward.

Another way I think about this is that bond funds, unlike equities, somewhat predict their expected performance. If i understand it correctly, A bond fund with 7 year duration yielding 2.8% can be expected to return roughly 2.8% annualized over the next seven years. Where changes in bond prices (due to interest rate changes) are offset by changes in yield of newly purchased bonds in the fund. So, given that expectation, i don't see a big down side to investing in a 7 year CD yielding 3%. If interest shoot up dramatically, say 2%. I can cash in the CD, paying a 6 month penalty (1.5%), and reinvest the rest in the 5% CD. My bond fund will also be buying newer bonds paying the higher yield, but the drop in value of existing bonds can drop the value of the bond fund much more than the 1.5% i would lose in the CD.

I think that is one scenario where the CD comes out as a better FI investment than bond funds. There are certainly other scenarios where the bond fund would come out ahead. Since i don't know which scenario will play out, why not diversify? Isn't that the argument on the Equity side? What am i missing? For all those that don't like cash (CDs), why not diversify your FI investments?

Also, CDs have 0% Expense ratio, so less expensive that bond funds, we like that, right?
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Kitces article: A cash bucket in retirement? Nope

Post by vested1 » Wed Jan 24, 2018 10:49 am

livesoft wrote:
Wed Jan 24, 2018 10:38 am
@vested1, thanks for the reply. But I cannot say I understand everything you wrote. I guess that your wife has filed for SS benefits and you are delaying until age 70. I guess your "deferred mature annuity" is all cash.

This whole thread really re-iterates what Kitces wrote in the article linked by katietsu (Buying Happiness and Life Satisfaction ...) and what is discussed as Behavioral Life-Cycle Theory by the behavioral finance folks. That is, many people do not treat money as fungible and have specific thoughts and needs about cash which all seems foreign to me. I'm the odd person out, I guess.
Sorry, yes the deferred annuity is all cash. Buying it in the first place was a mistake in my opinion because it locked $200,000 into a 2.75% compounded interest contract for 5 years while I was still working during a strong bull market. Once it matured I took $100,000 and invested it based on my current AA in existing positions. The remainder has been used to fund the delay. In my defense I was ignorant of investing principles when I was talked into the annuity, but it's still on me that I pulled the trigger.

The SS strategy is that when my wife turns 65 this year I will turn 66 on the same day in July. She will file for her own benefit and I will file a restricted application for half of her PIA. This will result in about $36,000 extra income, taxed more favorably (no State tax and lower federal), which I will no longer need to withdraw from the cash bucket, lowering the overall withdrawal to under 3% until I turn 70, when SS will be around 65k - 70k, depending on COLA. From then on RMD's only, with 5 years of ROTH conversions up to at least the top of the 12% federal tax rate.

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Re: Kitces article: A cash bucket in retirement? Nope

Post by The Wizard » Wed Jan 24, 2018 10:58 am

marcopolo wrote:
Wed Jan 24, 2018 10:44 am
In a forum that generally support the idea of diversification and low costs, I am a bit surprised at all the dislike for cash like investments. I understand not wanting to keep a large chink in a checking account not earning anything. But, can someone explain the rationale for disliking CDs so much...
CDs in an IRA might be OK. But in a taxable savings account, no.
I formerly paid 28+5% income tax on interest income, declining this year to 24+5%.
I feel thats a losing proposition and much prefer a stock index fund...
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Re: Kitces article: A cash bucket in retirement? Nope

Post by vested1 » Wed Jan 24, 2018 11:03 am

CWRadio wrote:
Wed Jan 24, 2018 10:24 am
Both good points. And it is true SPIA is better done when older. Another factor in SPIAs is they are not free of the crushing dictatorship of history. SPIA payout depends on the interest rates prevailing when they are purchased. If real interest rates were much higher than they are now our discussion of bonds, TIPS, and SPIAs would be very different than it is.
At what age does mortality credits and current interest rates converge? Or at what age is mortality credits more important then the current interest rate when you buy a SPIA? Thanks Paul
You can go to https://www.immediateannuities.com/annuity-calculators/ and play with the calculator to see the increase in mortality credits. Interest rates can't be predicted, and neither can returns of SPIA's not purchased. However, the one true aspect is that the older you are when you buy the SPIA, the larger your monthly payment will be. It's up to you to make the decision if and when to buy one in order to eliminate the risk of running out of money in retirement.

Using the calculator and a $100,000 SPIA, substituting age increments of 5 years you come up with the following for a single person with no return of principle. Married couples who have survivor contracts or who want return of principle to the estate will receive smaller monthly payments.

- Age 70 - $605 a month - Break even 83.77 years of age
- Age 75 - $724 a month - Break even 86.5 years of age
- Age 80 - $905 a month - Break even 89.2 years of age
- Age 85 - $1,221 a month - Break even 91.9 years of age

Break even is kind of meaningless in this case IMHO, but is a way to compare return of principle. Virtually no one other than a fraction of 1% will actually break even. Some will win the bet and some will lose. It's insurance. The most meaningful aspects are peace of mind and the desire to leave a larger or smaller legacy.
Last edited by vested1 on Wed Jan 24, 2018 11:06 am, edited 1 time in total.

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Re: Keep investing simple

Post by WoodSpinner » Wed Jan 24, 2018 11:04 am

Taylor Larimore wrote:
Tue Jan 23, 2018 10:18 pm
Bogleheads:

I have been in retirement for many years with this allocation:

Money that I cannot afford to lose is in cash and bonds. The rest is in stocks. It works! :happy

Please read my "Simplicity" link below.

Best wishes.
Taylor
+1 from me. This is one of the core strategies for my retirement. It helps drive an AA I can live with since it is derived to match a known set of liabilities. I have shifted from trying to accumulate more, to being able to safely spend more.

Different psychology! I am pretty new to this game—will see how it works out.

Taylor, many thanks, this is a strategy you (and others) have really influenced.

WoodSpinner :greedy

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Re: Kitces article: A cash bucket in retirement? Nope

Post by Broken Man 1999 » Wed Jan 24, 2018 11:21 am

My initial strategy in withdrawing expenses in retirement was withdrawing an amount representing a year's expenses in late December of the preceding year. But I really didn't like seeing such a large sum sitting in an account with such a wretched interest rate.

So this year I am withdrawing on a monthly rate, keeping as much of our portfolio invested as long as possible.

We have never maintained an emergency fund, and keeping a cash bucket just would not be comfortable for me.

I am not worried about encountering a bad year for equities, as we have a large portion of our portfolio invest in bonds, mostly short-term treasuries.

Personally, I think each retiree should follow the path that leads to sleeping well at night. Lots of different ways can keep your retirement funded, there is no one perfect method.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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Re: Kitces article: A cash bucket in retirement? Nope

Post by garlandwhizzer » Wed Jan 24, 2018 11:34 am

JCE66 wrote in response to my comment that my 2-3 years of living expenses in MM funds saved me a bundle during the 2007-9 crash:
garlandwhizzer....Was having the MM fund by happenstance or design back in 07-09? Did you set up that MM fund thinking it was a 'behavioral brake' for yourself? If you did that purposefully, it sounds like your strategy worked (like sperry8).
I have made market timing mistakes in the past but that was not one of them. I actually sold some equity in my non-tax-deferred account and moved into the money market, correctly anticipating a collapse. At the time they were lending a half million dollars to buy a house in California without any documentation of income or even documentation of a job. All you had to do was to make up some income numbers and put a signature on a mortgage loan document. I believed there was only one way that this would end. I didn't know when it would occur, but I knew it would occur, so I took some money off the equity table. Those MM funds saw me through the bear market and ever since then I've maintained them in place because I know that I cannot predict accurately the timing of the next downturn. It's a behavioral brake now, sort of like Linus with his security blanket. It gives me a long window, 2 -3 years, in which to sell something, hopefully at market highs, to replenish the spending money that I take out of MM funds every month. For tax simplicity MM is a nice fit because there are no capital losses or gains generated by sales, only interest income, in contrast to bond funds which generate capital gains or losses with each sale. If you take out money every month as I do, that's a lot of tax complexity for very little in the way of extra return with bonds, particularly now with a flattening yield curve and principal value losses in bond funds as interest rates rise.

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Re: Kitces article: A cash bucket in retirement? Nope

Post by marcopolo » Wed Jan 24, 2018 11:39 am

The Wizard wrote:
Wed Jan 24, 2018 10:58 am
marcopolo wrote:
Wed Jan 24, 2018 10:44 am
In a forum that generally support the idea of diversification and low costs, I am a bit surprised at all the dislike for cash like investments. I understand not wanting to keep a large chink in a checking account not earning anything. But, can someone explain the rationale for disliking CDs so much...
CDs in an IRA might be OK. But in a taxable savings account, no.
I formerly paid 28+5% income tax on interest income, declining this year to 24+5%.
I feel thats a losing proposition and much prefer a stock index fund...
Well sure, i think that would be true of any FI asset, like an intermediate bond fund. The "dividend" paid on such a fund would be subject to similar taxation. So, likewise, it would be more tax efficient to put such funds into tax-deferred accounts. I don't think that changes the comparison between CDs and Bond funds.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Kitces article: A cash bucket in retirement? Nope

Post by HongKonger » Wed Jan 24, 2018 11:55 am

sperry8 wrote:
Wed Jan 24, 2018 9:39 am
TonyDAntonio wrote:
Tue Jan 23, 2018 11:49 pm
clown wrote:
Tue Jan 23, 2018 7:41 pm
I have a full FIVE YEARS of net spending requirement (difference between annual spending and income) in VG Prime MM and Ultra Short. Zero in bonds. All the rest in broad market stock index funds. This strikes me like going to a tennis match, watching the ball go back and forth with no personal stake in the outcome. I can watch the market go up and down -- knowing that a major correction will recover within the five years I have in cash. So no need to sell when equities are down, no worries about interest rates effecting bond values, and no significant drag on performance. The five years of cash is about 16% of the total portfolio. This gives max dollars available to grow in equities.
I have almost exactly the same allocation. And I too refer to my cash-like amount in years-of-spending terms rather than a strict percentage of my portfolio.
Interesting. I hold ten years (30%) but in all cash (VG Prime MM or CDs with higher APY) and for the same reason. Sort of my way of saying, I won the game and I don't need to play anymore, yet while still playing.
I also hold 10 Years (25%) in cash (Various length term deposits in multiple currencies). Dividends and interest roll in, I spend it. I watch my portfolio of ETFs doing what it does. I sleep well.

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