For those who use a 2 year cash(like) buffer, how do you know when to use it?

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FrankLUSMC
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For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by FrankLUSMC » Fri Sep 21, 2018 9:25 am

I'm still in accumulation phase but thinking about the cash buffer/bucket for a market downturn.

Those that have this buffer and retired and withdrawing, do you:

1. Draw from your equities (keeping AA intact)until the market reaches a certain percent below its high? What percentage, 10 or wait for worse? What if a slow melt down say 1% month for 5 or more vs. a quick 5% drop in one month?

2. Draw from the cash bucket during your first 2 years and then start drawing form equities (keeping AA intact)? Then forget about a cash buffer?

3. You will know it when you see it?

Just looking for some strategies to run through my filter.

Thanks!

rixer
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by rixer » Fri Sep 21, 2018 9:41 am

I've been retired for 5 years. Besides my LS holdings, I have a three year ladder of cd's for that moment when the market tanks and I don't want to sell any of my LS fund.
I haven't used them ever so I can't say for sure when I will. I keep them strictly for a meltdown. My portfolio hasn't done too well this year but I will not cash in a cd. I save that for when it's really needed.
Anyway, that's my strategy.

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David Jay
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by David Jay » Fri Sep 21, 2018 9:53 am

I expect to retire next year. In my IPS, I call for an increasing equity glideslope (I built a "bond tent" for my early retirement years) of 2% per year.

This takes care of both situations: a downturn or good times because I "pay myself first" (i.e I withdraw expenses as the first re-balance step). In the event of a downturn, I sell more bonds (or even all bonds) because of the need to re-balance to equities. In a good year for stocks, I sell stocks to keep the asset allocation from becoming too stock heavy.

Simplicity.

[edit] So no, I do not have a separate bucket for cash and I don’t wrestle with all the questions you face. I just follow my IPS.
Last edited by David Jay on Fri Sep 21, 2018 7:45 pm, edited 2 times in total.
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bradpevans
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by bradpevans » Fri Sep 21, 2018 10:04 am

FrankLUSMC wrote:
Fri Sep 21, 2018 9:25 am
I'm still in accumulation phase but thinking about the cash buffer/bucket for a market downturn.

Those that have this buffer and retired and withdrawing, do you:

1. Draw from your equities (keeping AA intact)until the market reaches a certain percent below its high? What percentage, 10 or wait for worse? What if a slow melt down say 1% month for 5 or more vs. a quick 5% drop in one month?

2. Draw from the cash bucket during your first 2 years and then start drawing form equities (keeping AA intact)? Then forget about a cash buffer?

3. You will know it when you see it?

Just looking for some strategies to run through my filter.

Thanks!
You might think about cash vs non-volatile investments. What i mean is that the protection against market drop is assets that don't drop / don't drop as much.

Its not clear (to me) if you are thinking of this cash as:
a) funds to "buy on the dips" (as in market timing)
b) funds to live on when retire AND facing a market drop (to avoid "selling low")

garlandwhizzer
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by garlandwhizzer » Fri Sep 21, 2018 11:59 am

The main purpose of cash buffer is to avoid selling equity into market weakness. This is particularly important if you're retired and have no significant source of reliable ongoing income. Market downturns can be sudden and severe and this is when cash in a non-tax sheltered account comes in handy. You don't have to pay taxes to get money as needed and when needed. Most of these market downturns last less than 2 years before equity starts to recover again so you don't need more than 2 - 3 years of living expenses in cash to provide an adequate buffer. Cash has also outperformed bonds YTD and over one year--Vanguard's Prime MMF has outperformed all their bond funds in the current rising rate environment, so you don't lose anything at present being in cash. The other purpose of cash buffer is to have liquid funds available when very compelling investment opportunities arise but most of us are not good at pickling entry points into heavily discounted assets, so this should IMO be extremely rare. If you're Warren Buffett it works, but we aren't Warren. Hope this helps.

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JoMoney
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by JoMoney » Fri Sep 21, 2018 12:06 pm

Here's a thought - work out what your 2 year cash bucket is as a percentage of your portfolio, maintain that percentage by spending it down if necessary or rebalancing.
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FrankLUSMC
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by FrankLUSMC » Fri Sep 21, 2018 1:29 pm

bradpevans wrote:
Fri Sep 21, 2018 10:04 am
FrankLUSMC wrote:
Fri Sep 21, 2018 9:25 am
I'm still in accumulation phase but thinking about the cash buffer/bucket for a market downturn.

Those that have this buffer and retired and withdrawing, do you:

1. Draw from your equities (keeping AA intact)until the market reaches a certain percent below its high? What percentage, 10 or wait for worse? What if a slow melt down say 1% month for 5 or more vs. a quick 5% drop in one month?

2. Draw from the cash bucket during your first 2 years and then start drawing form equities (keeping AA intact)? Then forget about a cash buffer?

3. You will know it when you see it?

Just looking for some strategies to run through my filter.

Thanks!
You might think about cash vs non-volatile investments. What i mean is that the protection against market drop is assets that don't drop / don't drop as much.

Its not clear (to me) if you are thinking of this cash as:
a) funds to "buy on the dips" (as in market timing)
b) funds to live on when retire AND facing a market drop (to avoid "selling low")
This:
b) funds to live on when retire AND facing a market drop (to avoid "selling low")

When retired. A previous post was maybe my answer in that the cash is part of my AA. I was treating it separately, but now I see that I can re-balance when needed to keep the cash buffer.

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FrankLUSMC
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by FrankLUSMC » Fri Sep 21, 2018 1:32 pm

JoMoney wrote:
Fri Sep 21, 2018 12:06 pm
Here's a thought - work out what your 2 year cash bucket is as a percentage of your portfolio, maintain that percentage by spending it down if necessary or rebalancing.
Thanks Jo, that is the answer I was missing.

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k66
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by k66 » Fri Sep 21, 2018 3:50 pm

David Jay wrote:
Fri Sep 21, 2018 9:53 am
I expect to retire next year. In my IPS, I call for an increasing equity glideslope (I built a "bond tent" for my early retirement years) of 2% per year.
...
I am interested in that you are planning a increasing glide for equities during retirement. I am still several years away from retirement myself, but what Equities glide are you planning to undertake? I haven't ruled the possibility of something along this line for myself (e.g. 60% initially ramping up to 100% @ 40 years... assuming I even get that far!).
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KlangFool
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by KlangFool » Fri Sep 21, 2018 4:00 pm

David Jay wrote:
Fri Sep 21, 2018 9:53 am
I expect to retire next year. In my IPS, I call for an increasing equity glideslope (I built a "bond tent" for my early retirement years) of 2% per year.

This takes care of both situations: a downturn or good times because I "pay myself first" (i.e I withdraw expenses as the first re-balance step). In the event of a downturn, I sell more bonds (or even all bonds) because of the need to re-balance to equities. In a good year for stocks, I sell stocks to keep the asset allocation from becoming too stock heavy.

Simplicity.
David Jay,

In order for this to work, your portfolio has to be big enough. Is the assumption here that your portfolio is 50 times your retirment expense?

KlangFool

MIretired
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by MIretired » Fri Sep 21, 2018 4:03 pm

I don't think a 2 yr cash like bucket could be good for much of anything but unplanned spending or buying stocks that fell a lot.

ThrustVectoring
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by ThrustVectoring » Fri Sep 21, 2018 4:06 pm

During accumulation: cash buffers are used when the inevitable life stuff happens. So if there's a market correction and you become unemployed, instead of selling stocks at the bottom, you use the cash buffer.

During decumulation: fixed income is used to preserve equity value at a level that supports your long-term needs for growth. For me, I think I will need 18 years of expenses in equities for the long-term success of my portfolio. So my portfolio at retirement is going to be 12 years of FI + 18 years stocks, spending stocks when that amount is > 18 years and bonds when that amount is <18 years. I'm undecided on whether I need to use bonds to rebuy stocks post-dip.
Current portfolio: 60% VTI / 40% VXUS

ReadyOrNot
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by ReadyOrNot » Fri Sep 21, 2018 4:22 pm

I think you got it.
The usual method is the cash is part of the asset allocation. It's the most liquid part, so it is natural to spend from it. Then it can be replenished with rebalancing. Or maybe it didn't need replenishing if all other assets were reduced more.

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David Jay
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by David Jay » Fri Sep 21, 2018 4:26 pm

k66 wrote:
Fri Sep 21, 2018 3:50 pm
David Jay wrote:
Fri Sep 21, 2018 9:53 am
I expect to retire next year. In my IPS, I call for an increasing equity glideslope (I built a "bond tent" for my early retirement years) of 2% per year.
...
I am interested in that you are planning a increasing glide for equities during retirement. I am still several years away from retirement myself, but what Equities glide are you planning to undertake? I haven't ruled the possibility of something along this line for myself (e.g. 60% initially ramping up to 100% @ 40 years... assuming I even get that far!).
Here is a thread discussing the bond tent with the key graphic and a link to Kitces’ article: viewtopic.php?t=209728

ERN (earlyretirementnow.com) also has an analysis of an increasing equity portfolio in retirement.
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by David Jay » Fri Sep 21, 2018 4:32 pm

KlangFool wrote:
Fri Sep 21, 2018 4:00 pm
David Jay wrote:
Fri Sep 21, 2018 9:53 am
I expect to retire next year. In my IPS, I call for an increasing equity glideslope (I built a "bond tent" for my early retirement years) of 2% per year.

This takes care of both situations: a downturn or good times because I "pay myself first" (i.e I withdraw expenses as the first re-balance step). In the event of a downturn, I sell more bonds (or even all bonds) because of the need to re-balance to equities. In a good year for stocks, I sell stocks to keep the asset allocation from becoming too stock heavy.

Simplicity.
David Jay,

In order for this to work, your portfolio has to be big enough. Is the assumption here that your portfolio is 50 times your retirment expense?

KlangFool
Not following your line of thinking, there is nothing about my strategy that requires an excess portfolio. ERN demonstrates that an increasing equity glideslope increases the SWR of a portfolio. In fact, we are a moderate-income family with a limited portfolio that is just “enough” (I couldn’t afford to retire prior to age 62).

Please restate your question in a way that gives me a clue what you think I said.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

KlangFool
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by KlangFool » Fri Sep 21, 2018 4:42 pm

David Jay wrote:
Fri Sep 21, 2018 4:32 pm
KlangFool wrote:
Fri Sep 21, 2018 4:00 pm
David Jay wrote:
Fri Sep 21, 2018 9:53 am
I expect to retire next year. In my IPS, I call for an increasing equity glideslope (I built a "bond tent" for my early retirement years) of 2% per year.

This takes care of both situations: a downturn or good times because I "pay myself first" (i.e I withdraw expenses as the first re-balance step). In the event of a downturn, I sell more bonds (or even all bonds) because of the need to re-balance to equities. In a good year for stocks, I sell stocks to keep the asset allocation from becoming too stock heavy.

Simplicity.
David Jay,

In order for this to work, your portfolio has to be big enough. Is the assumption here that your portfolio is 50 times your retirment expense?

KlangFool
Not following your line of thinking, there is nothing about my strategy that requires an excess portfolio. ERN demonstrates that an increasing equity glideslope increases the SWR of a portfolio. In fact, we are a moderate-income family with a limited portfolio that is just “enough” (I couldn’t afford to retire prior to age 62).

Please restate your question in a way that gives me a clue what you think I said.
David Jay,

Let's assume that your portfolio is 60/40 and it is at 50 times your retirement expense.

A) After one year, you need to spend 2% ( one year of expense ) and your new AA is 62/38.

B) In this case, you just need to sell about 2% of your portfolio in the bond to reach your new AA.

On the other hand,

if your portfolio is 60/40 and it is at 25 times your retirement expense.

A) After one year, you need to spend 4% ( one year of expense ) and your new AA is 62/38.

B) How do you plan to achieve the new AA of 62/38? Selling 4% of your portfolio in the bond will not get you to the new AA.

KlangFool

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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by livesoft » Fri Sep 21, 2018 4:43 pm

@FrankLUSMC, tells us what your bond funds in your asset allocation are doing while you are thinking about your equities and cash please.
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by marcopolo » Fri Sep 21, 2018 5:07 pm

KlangFool wrote:
Fri Sep 21, 2018 4:42 pm
David Jay wrote:
Fri Sep 21, 2018 4:32 pm
KlangFool wrote:
Fri Sep 21, 2018 4:00 pm
David Jay wrote:
Fri Sep 21, 2018 9:53 am
I expect to retire next year. In my IPS, I call for an increasing equity glideslope (I built a "bond tent" for my early retirement years) of 2% per year.

This takes care of both situations: a downturn or good times because I "pay myself first" (i.e I withdraw expenses as the first re-balance step). In the event of a downturn, I sell more bonds (or even all bonds) because of the need to re-balance to equities. In a good year for stocks, I sell stocks to keep the asset allocation from becoming too stock heavy.

Simplicity.
David Jay,

In order for this to work, your portfolio has to be big enough. Is the assumption here that your portfolio is 50 times your retirment expense?

KlangFool
Not following your line of thinking, there is nothing about my strategy that requires an excess portfolio. ERN demonstrates that an increasing equity glideslope increases the SWR of a portfolio. In fact, we are a moderate-income family with a limited portfolio that is just “enough” (I couldn’t afford to retire prior to age 62).

Please restate your question in a way that gives me a clue what you think I said.
David Jay,

Let's assume that your portfolio is 60/40 and it is at 50 times your retirement expense.

A) After one year, you need to spend 2% ( one year of expense ) and your new AA is 62/38.

B) In this case, you just need to sell about 2% of your portfolio in the bond to reach your new AA.

On the other hand,

if your portfolio is 60/40 and it is at 25 times your retirement expense.

A) After one year, you need to spend 4% ( one year of expense ) and your new AA is 62/38.

B) How do you plan to achieve the new AA of 62/38? Selling 4% of your portfolio in the bond will not get you to the new AA.

KlangFool
Re-balancing does not need to be limited to your withdrawals.

Withdraw what you need (probably from the asset class that has increased in allocation the previous year). Then if that is not sufficient to get you to desired allocation, do what you would have done without the withdrawal, sell some of one asset class to buy the other.

Why would this require an excessively large portfolio to accomplish, perhaps I am missing a subtle point here?
I am asking sincerely because I am just getting started with a similar approach.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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David Jay
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by David Jay » Fri Sep 21, 2018 5:16 pm

KlangFool wrote:
Fri Sep 21, 2018 4:42 pm
David Jay wrote:
Fri Sep 21, 2018 4:32 pm
KlangFool wrote:
Fri Sep 21, 2018 4:00 pm
David Jay wrote:
Fri Sep 21, 2018 9:53 am
I expect to retire next year. In my IPS, I call for an increasing equity glideslope (I built a "bond tent" for my early retirement years) of 2% per year.

This takes care of both situations: a downturn or good times because I "pay myself first" (i.e I withdraw expenses as the first re-balance step). In the event of a downturn, I sell more bonds (or even all bonds) because of the need to re-balance to equities. In a good year for stocks, I sell stocks to keep the asset allocation from becoming too stock heavy.

Simplicity.
David Jay,

In order for this to work, your portfolio has to be big enough. Is the assumption here that your portfolio is 50 times your retirment expense?

KlangFool
Not following your line of thinking, there is nothing about my strategy that requires an excess portfolio. ERN demonstrates that an increasing equity glideslope increases the SWR of a portfolio. In fact, we are a moderate-income family with a limited portfolio that is just “enough” (I couldn’t afford to retire prior to age 62).

Please restate your question in a way that gives me a clue what you think I said.
David Jay,

Let's assume that your portfolio is 60/40 and it is at 50 times your retirement expense.

A) After one year, you need to spend 2% ( one year of expense ) and your new AA is 62/38.

B) In this case, you just need to sell about 2% of your portfolio in the bond to reach your new AA.

On the other hand,

if your portfolio is 60/40 and it is at 25 times your retirement expense.

A) After one year, you need to spend 4% ( one year of expense ) and your new AA is 62/38.

B) How do you plan to achieve the new AA of 62/38? Selling 4% of your portfolio in the bond will not get you to the new AA.

KlangFool
Okay, now I see the confusion. I was not clear, I made the two features of my plan seem dependent on each other:

1. My IPS calls for an increasing equity glideslope each year: age 62 50/50, age 63 52/48, age 64 54/46 and so on, stabilizing at 70/30. This has the effect of reducing my fixed income (bonds) holdings over time as I move out of the critical “sequence of returns” time period.

2. The action of rebalancing each year through a combination of withdrawals from the over-allocated class and fund-to-fund rebalancing If withdrawals are not enough to reach my AA. This means that I do not need a cash reserve or need to evaluate when to spend my cash for expenses or “buy-on-the-dip” as the OP was asking.

I did not make it clear that these two features are not dependent on each other. If equities go up $50,000 and my expenses are $50,000 then my withdrawal from equities spends all the growth but doesn’t move the AA. I would have to exchange 2% from bonds to equities to adjust the AA to the next year’s target.

I hope that clarifies things...
Last edited by David Jay on Fri Sep 21, 2018 5:21 pm, edited 1 time in total.
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David Jay
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by David Jay » Fri Sep 21, 2018 5:18 pm

marcopolo wrote:
Fri Sep 21, 2018 5:07 pm
...perhaps I am missing a subtle point here?
Nope, you got it.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by KlangFool » Fri Sep 21, 2018 5:22 pm

David Jay wrote:
Fri Sep 21, 2018 5:16 pm
KlangFool wrote:
Fri Sep 21, 2018 4:42 pm
David Jay wrote:
Fri Sep 21, 2018 4:32 pm
KlangFool wrote:
Fri Sep 21, 2018 4:00 pm
David Jay wrote:
Fri Sep 21, 2018 9:53 am
I expect to retire next year. In my IPS, I call for an increasing equity glideslope (I built a "bond tent" for my early retirement years) of 2% per year.

This takes care of both situations: a downturn or good times because I "pay myself first" (i.e I withdraw expenses as the first re-balance step). In the event of a downturn, I sell more bonds (or even all bonds) because of the need to re-balance to equities. In a good year for stocks, I sell stocks to keep the asset allocation from becoming too stock heavy.

Simplicity.
David Jay,

In order for this to work, your portfolio has to be big enough. Is the assumption here that your portfolio is 50 times your retirment expense?

KlangFool
Not following your line of thinking, there is nothing about my strategy that requires an excess portfolio. ERN demonstrates that an increasing equity glideslope increases the SWR of a portfolio. In fact, we are a moderate-income family with a limited portfolio that is just “enough” (I couldn’t afford to retire prior to age 62).

Please restate your question in a way that gives me a clue what you think I said.
David Jay,

Let's assume that your portfolio is 60/40 and it is at 50 times your retirement expense.

A) After one year, you need to spend 2% ( one year of expense ) and your new AA is 62/38.

B) In this case, you just need to sell about 2% of your portfolio in the bond to reach your new AA.

On the other hand,

if your portfolio is 60/40 and it is at 25 times your retirement expense.

A) After one year, you need to spend 4% ( one year of expense ) and your new AA is 62/38.

B) How do you plan to achieve the new AA of 62/38? Selling 4% of your portfolio in the bond will not get you to the new AA.

KlangFool
Okay, now I see the confusion. I was not clear, I made the two features of my plan seem dependent on each other:

1. My IPS calls for an increasing equity glideslope each year: age 62 50/50, age 63 52/48, age 64 54/46 and so on, stabilizing at 70/30.

2. The action of rebalancing each year through a combination of withdrawals from the over-allocated class and fund-to-fund rebalancing If withdrawals are not enough to reach my AA. This means that I do not need a cash reserve or need to evaluate when to spend my cash for expenses or “buy-on-the-dip” as the OP was asking.

I did not make it clear that these two features are not dependent on each other. If equities go up $50,000 and my expenses are $50,000 then my withdrawal from equities spends all the growth but doesn’t move the AA. I would have to exchange 2% from bonds to equities to adjust the AA to the next year’s target.

I hope that clarifies things...
Thanks. Now, I understand. I have to do some simulation to see how it works out in various scenerio.

KlangFool

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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by willthrill81 » Fri Sep 21, 2018 5:23 pm

David Jay wrote:
Fri Sep 21, 2018 9:53 am
I expect to retire next year. In my IPS, I call for an increasing equity glideslope (I built a "bond tent" for my early retirement years) of 2% per year.

This takes care of both situations: a downturn or good times because I "pay myself first" (i.e I withdraw expenses as the first re-balance step). In the event of a downturn, I sell more bonds (or even all bonds) because of the need to re-balance to equities. In a good year for stocks, I sell stocks to keep the asset allocation from becoming too stock heavy.

Simplicity.
I would assume that with such a strategy, it would likely be a long time before you would ever sell equities.
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by KlangFool » Fri Sep 21, 2018 5:25 pm

marcopolo wrote:
Fri Sep 21, 2018 5:07 pm
KlangFool wrote:
Fri Sep 21, 2018 4:42 pm
David Jay wrote:
Fri Sep 21, 2018 4:32 pm
KlangFool wrote:
Fri Sep 21, 2018 4:00 pm
David Jay wrote:
Fri Sep 21, 2018 9:53 am
I expect to retire next year. In my IPS, I call for an increasing equity glideslope (I built a "bond tent" for my early retirement years) of 2% per year.

This takes care of both situations: a downturn or good times because I "pay myself first" (i.e I withdraw expenses as the first re-balance step). In the event of a downturn, I sell more bonds (or even all bonds) because of the need to re-balance to equities. In a good year for stocks, I sell stocks to keep the asset allocation from becoming too stock heavy.

Simplicity.
David Jay,

In order for this to work, your portfolio has to be big enough. Is the assumption here that your portfolio is 50 times your retirment expense?

KlangFool
Not following your line of thinking, there is nothing about my strategy that requires an excess portfolio. ERN demonstrates that an increasing equity glideslope increases the SWR of a portfolio. In fact, we are a moderate-income family with a limited portfolio that is just “enough” (I couldn’t afford to retire prior to age 62).

Please restate your question in a way that gives me a clue what you think I said.
David Jay,

Let's assume that your portfolio is 60/40 and it is at 50 times your retirement expense.

A) After one year, you need to spend 2% ( one year of expense ) and your new AA is 62/38.

B) In this case, you just need to sell about 2% of your portfolio in the bond to reach your new AA.

On the other hand,

if your portfolio is 60/40 and it is at 25 times your retirement expense.

A) After one year, you need to spend 4% ( one year of expense ) and your new AA is 62/38.

B) How do you plan to achieve the new AA of 62/38? Selling 4% of your portfolio in the bond will not get you to the new AA.

KlangFool
Re-balancing does not need to be limited to your withdrawals.

Withdraw what you need (probably from the asset class that has increased in allocation the previous year). Then if that is not sufficient to get you to desired allocation, do what you would have done without the withdrawal, sell some of one asset class to buy the other.

Why would this require an excessively large portfolio to accomplish, perhaps I am missing a subtle point here?
I am asking sincerely because I am just getting started with a similar approach.
marcopolo,

I have to do some simulation to see whether it will work in my case. For example, I need 5 years of expense guaranteed by FI. How would this play out if the stock market drops 50% and stay down for 5 years?

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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by KlangFool » Fri Sep 21, 2018 5:26 pm

willthrill81 wrote:
Fri Sep 21, 2018 5:23 pm
David Jay wrote:
Fri Sep 21, 2018 9:53 am
I expect to retire next year. In my IPS, I call for an increasing equity glideslope (I built a "bond tent" for my early retirement years) of 2% per year.

This takes care of both situations: a downturn or good times because I "pay myself first" (i.e I withdraw expenses as the first re-balance step). In the event of a downturn, I sell more bonds (or even all bonds) because of the need to re-balance to equities. In a good year for stocks, I sell stocks to keep the asset allocation from becoming too stock heavy.

Simplicity.
I would assume that with such a strategy, it would likely be a long time before you would ever sell equities.
willthrill81,

Why would you say that?

KlangFool

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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by willthrill81 » Fri Sep 21, 2018 5:32 pm

KlangFool wrote:
Fri Sep 21, 2018 5:26 pm
willthrill81 wrote:
Fri Sep 21, 2018 5:23 pm
David Jay wrote:
Fri Sep 21, 2018 9:53 am
I expect to retire next year. In my IPS, I call for an increasing equity glideslope (I built a "bond tent" for my early retirement years) of 2% per year.

This takes care of both situations: a downturn or good times because I "pay myself first" (i.e I withdraw expenses as the first re-balance step). In the event of a downturn, I sell more bonds (or even all bonds) because of the need to re-balance to equities. In a good year for stocks, I sell stocks to keep the asset allocation from becoming too stock heavy.

Simplicity.
I would assume that with such a strategy, it would likely be a long time before you would ever sell equities.
willthrill81,

Why would you say that?

KlangFool
Because his IPS is explicitly calling for him to increase his equity position every year, and the very premise of a 'bond tent' strategy is that at the point of a retirement, the AA is heavily tilted toward bonds. He could easily have only a 30% allocation to stocks right now. So in order to sell stocks anytime soon, the stocks would have to rise above bonds at a rate faster than his IPS calls for him to increase his equity allocation.
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by Leif » Fri Sep 21, 2018 5:42 pm

I've been retired for about 1 year. I have a cash buffer of approximately 1-2 years of expenses not covered by my income. Much of that is to cover taxes on Roth conversions. Taxes (Roth conversion, property, other income) is by far my biggest expense. Next on my expense list is medical. I have a 5 year CD ladder, which matures every year. That replenishes my cash. Once Medicare starts and SS begins I will feel comfortable in reducing my level of cash.

So, I use it to cover expenses. Not as a source of rebalancing in a down equity market. If I decide I want to rebalance I would sell bonds to purchase equities.

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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by KlangFool » Fri Sep 21, 2018 6:14 pm

willthrill81 wrote:
Fri Sep 21, 2018 5:32 pm
KlangFool wrote:
Fri Sep 21, 2018 5:26 pm
willthrill81 wrote:
Fri Sep 21, 2018 5:23 pm
David Jay wrote:
Fri Sep 21, 2018 9:53 am
I expect to retire next year. In my IPS, I call for an increasing equity glideslope (I built a "bond tent" for my early retirement years) of 2% per year.

This takes care of both situations: a downturn or good times because I "pay myself first" (i.e I withdraw expenses as the first re-balance step). In the event of a downturn, I sell more bonds (or even all bonds) because of the need to re-balance to equities. In a good year for stocks, I sell stocks to keep the asset allocation from becoming too stock heavy.

Simplicity.
I would assume that with such a strategy, it would likely be a long time before you would ever sell equities.
willthrill81,

Why would you say that?

KlangFool
Because his IPS is explicitly calling for him to increase his equity position every year, and the very premise of a 'bond tent' strategy is that at the point of a retirement, the AA is heavily tilted toward bonds. He could easily have only a 30% allocation to stocks right now. So in order to sell stocks anytime soon, the stocks would have to rise above bonds at a rate faster than his IPS calls for him to increase his equity allocation.
willthrill81,

This is highly dependent on the number of years of annual expense on FI.

Let's assume that it is 60/40 and the portfolio is 1 million. Plus, the annual expense is 40K.

If the stock crash 50% right at the retirement date, the portfolio will go down to 300K Stock and 400K bond. If the AA is 60/40, it will rebalance to 420K stock and 280K bond. After a few years of downturn, eventually, someone has to sell stock.

In summary, there is a relationship between years of expense in FI versus the duration of the downturn. In my opinion, there should be a minimum amount of FI in absolute value that someone should be keeping during retirement.

KlangFool

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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by marcopolo » Fri Sep 21, 2018 6:21 pm

KlangFool wrote:
Fri Sep 21, 2018 5:25 pm
marcopolo wrote:
Fri Sep 21, 2018 5:07 pm
KlangFool wrote:
Fri Sep 21, 2018 4:42 pm
David Jay wrote:
Fri Sep 21, 2018 4:32 pm
KlangFool wrote:
Fri Sep 21, 2018 4:00 pm


David Jay,

In order for this to work, your portfolio has to be big enough. Is the assumption here that your portfolio is 50 times your retirment expense?

KlangFool
Not following your line of thinking, there is nothing about my strategy that requires an excess portfolio. ERN demonstrates that an increasing equity glideslope increases the SWR of a portfolio. In fact, we are a moderate-income family with a limited portfolio that is just “enough” (I couldn’t afford to retire prior to age 62).

Please restate your question in a way that gives me a clue what you think I said.
David Jay,

Let's assume that your portfolio is 60/40 and it is at 50 times your retirement expense.

A) After one year, you need to spend 2% ( one year of expense ) and your new AA is 62/38.

B) In this case, you just need to sell about 2% of your portfolio in the bond to reach your new AA.

On the other hand,

if your portfolio is 60/40 and it is at 25 times your retirement expense.

A) After one year, you need to spend 4% ( one year of expense ) and your new AA is 62/38.

B) How do you plan to achieve the new AA of 62/38? Selling 4% of your portfolio in the bond will not get you to the new AA.

KlangFool
Re-balancing does not need to be limited to your withdrawals.

Withdraw what you need (probably from the asset class that has increased in allocation the previous year). Then if that is not sufficient to get you to desired allocation, do what you would have done without the withdrawal, sell some of one asset class to buy the other.

Why would this require an excessively large portfolio to accomplish, perhaps I am missing a subtle point here?
I am asking sincerely because I am just getting started with a similar approach.
marcopolo,

I have to do some simulation to see whether it will work in my case. For example, I need 5 years of expense guaranteed by FI. How would this play out if the stock market drops 50% and stay down for 5 years?

KlangFool
It depends on a couple of factors:
Is the 5 years all you have in FI?
Do you always need keep your 5 year FI, or do you plan to use some of it during market down turns?

If you only have 5 years in FI, AND want to keep that, then you obviously cant follow this approach.
If you have 10 years in FI, and want to always keep 5, you could follow this approach for the first 5 years of downturn and hope equities come back by then.

One could also follow McClung's Prime Harvesting approach, and just use bonds for living expenses, but never sell bonds to buy more equities once retired, just give them time to recover without selling any equities either. I have to admit there is some "sleep well at nite" part of me that is considering this approach as well.
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by David Jay » Fri Sep 21, 2018 6:29 pm

willthrill81 wrote:
Fri Sep 21, 2018 5:23 pm
David Jay wrote:
Fri Sep 21, 2018 9:53 am
I expect to retire next year. In my IPS, I call for an increasing equity glideslope (I built a "bond tent" for my early retirement years) of 2% per year.

This takes care of both situations: a downturn or good times because I "pay myself first" (i.e I withdraw expenses as the first re-balance step). In the event of a downturn, I sell more bonds (or even all bonds) because of the need to re-balance to equities. In a good year for stocks, I sell stocks to keep the asset allocation from becoming too stock heavy.

Simplicity.
I would assume that with such a strategy, it would likely be a long time before you would ever sell equities.
No, if the market is up then I will sell equities for living expenses. But because I will be moving the AA towards equities it does bias towards spending bonds.

For example, if equities are up 13% in a year and bonds are up 3%, we have a 10 point gap in return. At 50/50, equity percentage will be up 5% (using round numbers) and bond percentage down 5%. In order to limit the growth in equities to 2%, I must sell some equities to keep equities from exceeding the planned AA.

I should mention that the withdrawals are much higher (as a percentage of portfolio) before filing for SS benefits than they will be after age 70.
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by spencer99 » Fri Sep 21, 2018 6:40 pm

FrankLUSMC wrote:
Fri Sep 21, 2018 1:32 pm
JoMoney wrote:
Fri Sep 21, 2018 12:06 pm
Here's a thought - work out what your 2 year cash bucket is as a percentage of your portfolio, maintain that percentage by spending it down if necessary or rebalancing.
Thanks Jo, that is the answer I was missing.
There's something I'm not understanding here.

It doesn't strike me that the "X years living expenses in cash" objective can be met by including in AA. Wouldn't that structure a fixed expense as a variable amount of portfolio, potentially a much reduced portfolio in the event of a major market decline? Including this cash as part of the AA could (depending upon IPS) result in rebalancing from cash into equities, reducing the cash buffer.

Bogleheads do not usually consider a pre-retirement emergency fund as part of one's AA. It seems the same would hold true for a somewhat analogous post-retirement cash buffer.

S

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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by willthrill81 » Fri Sep 21, 2018 7:34 pm

David Jay wrote:
Fri Sep 21, 2018 6:29 pm
willthrill81 wrote:
Fri Sep 21, 2018 5:23 pm
David Jay wrote:
Fri Sep 21, 2018 9:53 am
I expect to retire next year. In my IPS, I call for an increasing equity glideslope (I built a "bond tent" for my early retirement years) of 2% per year.

This takes care of both situations: a downturn or good times because I "pay myself first" (i.e I withdraw expenses as the first re-balance step). In the event of a downturn, I sell more bonds (or even all bonds) because of the need to re-balance to equities. In a good year for stocks, I sell stocks to keep the asset allocation from becoming too stock heavy.

Simplicity.
I would assume that with such a strategy, it would likely be a long time before you would ever sell equities.
No, if the market is up then I will sell equities for living expenses. But because I will be moving the AA towards equities it does bias towards spending bonds.

For example, if equities are up 13% in a year and bonds are up 3%, we have a 10 point gap in return. At 50/50, equity percentage will be up 5% (using round numbers) and bond percentage down 5%. In order to limit the growth in equities to 2%, I must sell some equities to keep equities from exceeding the planned AA.

I should mention that the withdrawals are much higher (as a percentage of portfolio) before filing for SS benefits than they will be after age 70.
That makes sense, but 50/50 isn't much of a 'bond tent' strategy. Kitces' example was much more bond heavy at the point of retirement.
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by David Jay » Fri Sep 21, 2018 7:39 pm

willthrill81 wrote:
Fri Sep 21, 2018 7:34 pm
David Jay wrote:
Fri Sep 21, 2018 6:29 pm
willthrill81 wrote:
Fri Sep 21, 2018 5:23 pm
David Jay wrote:
Fri Sep 21, 2018 9:53 am
I expect to retire next year. In my IPS, I call for an increasing equity glideslope (I built a "bond tent" for my early retirement years) of 2% per year.

This takes care of both situations: a downturn or good times because I "pay myself first" (i.e I withdraw expenses as the first re-balance step). In the event of a downturn, I sell more bonds (or even all bonds) because of the need to re-balance to equities. In a good year for stocks, I sell stocks to keep the asset allocation from becoming too stock heavy.

Simplicity.
I would assume that with such a strategy, it would likely be a long time before you would ever sell equities.
No, if the market is up then I will sell equities for living expenses. But because I will be moving the AA towards equities it does bias towards spending bonds.

For example, if equities are up 13% in a year and bonds are up 3%, we have a 10 point gap in return. At 50/50, equity percentage will be up 5% (using round numbers) and bond percentage down 5%. In order to limit the growth in equities to 2%, I must sell some equities to keep equities from exceeding the planned AA.

I should mention that the withdrawals are much higher (as a percentage of portfolio) before filing for SS benefits than they will be after age 70.
That makes sense, but 50/50 isn't much of a 'bond tent' strategy. Kitces' example was much more bond heavy at the point of retirement.
For comparison, I was 100% equity just 5 years ago. So for me, moving half of my portfolio to bonds has been painful.

My bond holdings could cover 100% of living expenses from retirement to SS, so the “tent” fully covers the risk.
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by willthrill81 » Fri Sep 21, 2018 7:47 pm

David Jay wrote:
Fri Sep 21, 2018 7:39 pm
willthrill81 wrote:
Fri Sep 21, 2018 7:34 pm
David Jay wrote:
Fri Sep 21, 2018 6:29 pm
willthrill81 wrote:
Fri Sep 21, 2018 5:23 pm
David Jay wrote:
Fri Sep 21, 2018 9:53 am
I expect to retire next year. In my IPS, I call for an increasing equity glideslope (I built a "bond tent" for my early retirement years) of 2% per year.

This takes care of both situations: a downturn or good times because I "pay myself first" (i.e I withdraw expenses as the first re-balance step). In the event of a downturn, I sell more bonds (or even all bonds) because of the need to re-balance to equities. In a good year for stocks, I sell stocks to keep the asset allocation from becoming too stock heavy.

Simplicity.
I would assume that with such a strategy, it would likely be a long time before you would ever sell equities.
No, if the market is up then I will sell equities for living expenses. But because I will be moving the AA towards equities it does bias towards spending bonds.

For example, if equities are up 13% in a year and bonds are up 3%, we have a 10 point gap in return. At 50/50, equity percentage will be up 5% (using round numbers) and bond percentage down 5%. In order to limit the growth in equities to 2%, I must sell some equities to keep equities from exceeding the planned AA.

I should mention that the withdrawals are much higher (as a percentage of portfolio) before filing for SS benefits than they will be after age 70.
That makes sense, but 50/50 isn't much of a 'bond tent' strategy. Kitces' example was much more bond heavy at the point of retirement.
For comparison, I was 100% equity just 5 years ago. So for me, moving half of my portfolio to bonds has been painful.

My bond holdings could cover 100% of living expenses from retirement to SS, so the “tent” fully covers the risk.
That's reasonable, especially if SS will cover a substantial portion of your expenses.
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by David Jay » Fri Sep 21, 2018 7:51 pm

willthrill81 wrote:
Fri Sep 21, 2018 7:47 pm
David Jay wrote:
Fri Sep 21, 2018 7:39 pm
For comparison, I was 100% equity just 5 years ago. So for me, moving half of my portfolio to bonds has been painful.

My bond holdings could cover 100% of living expenses from retirement to SS, so the “tent” fully covers the risk.
That's reasonable, especially if SS will cover a substantial portion of your expenses.
100% of monthly expenses (only need to spend portfolio for unexpected expenses: new roof, replacement vehicle, etc.)
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by goingup » Fri Sep 21, 2018 8:05 pm

spencer99 wrote:
Fri Sep 21, 2018 6:40 pm
Bogleheads do not usually consider a pre-retirement emergency fund as part of one's AA. It seems the same would hold true for a somewhat analogous post-retirement cash buffer.
That's not quite true. Many do hold a cash allocation and include it in their AA. When a portfolio gets sufficiently large, and there is a robust taxable account, there is no need to have a separate "emergency fund". We're not retired yet, but will likely always hold 5% in cash.

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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by marcopolo » Fri Sep 21, 2018 8:45 pm

willthrill81 wrote:
Fri Sep 21, 2018 7:34 pm
David Jay wrote:
Fri Sep 21, 2018 6:29 pm
willthrill81 wrote:
Fri Sep 21, 2018 5:23 pm
David Jay wrote:
Fri Sep 21, 2018 9:53 am
I expect to retire next year. In my IPS, I call for an increasing equity glideslope (I built a "bond tent" for my early retirement years) of 2% per year.

This takes care of both situations: a downturn or good times because I "pay myself first" (i.e I withdraw expenses as the first re-balance step). In the event of a downturn, I sell more bonds (or even all bonds) because of the need to re-balance to equities. In a good year for stocks, I sell stocks to keep the asset allocation from becoming too stock heavy.

Simplicity.
I would assume that with such a strategy, it would likely be a long time before you would ever sell equities.
No, if the market is up then I will sell equities for living expenses. But because I will be moving the AA towards equities it does bias towards spending bonds.

For example, if equities are up 13% in a year and bonds are up 3%, we have a 10 point gap in return. At 50/50, equity percentage will be up 5% (using round numbers) and bond percentage down 5%. In order to limit the growth in equities to 2%, I must sell some equities to keep equities from exceeding the planned AA.

I should mention that the withdrawals are much higher (as a percentage of portfolio) before filing for SS benefits than they will be after age 70.
That makes sense, but 50/50 isn't much of a 'bond tent' strategy. Kitces' example was much more bond heavy at the point of retirement.
While Kitces has written several posts of rising equity glide paths and "bond tents", I am not sure i have seen a specific starting AA recommended by him for the bond tent.

ERN did a pretty thorough historical analysis of rising equity glide paths (essentially the same as bond tent once retirement starts), and he found that a fairly high (60%) starting allocation followed by a ramp up to close to 100% equity performed the best, historically.

https://earlyretirementnow.com/2017/09/ ... lidepaths/
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by willthrill81 » Fri Sep 21, 2018 8:49 pm

marcopolo wrote:
Fri Sep 21, 2018 8:45 pm
willthrill81 wrote:
Fri Sep 21, 2018 7:34 pm
David Jay wrote:
Fri Sep 21, 2018 6:29 pm
willthrill81 wrote:
Fri Sep 21, 2018 5:23 pm
David Jay wrote:
Fri Sep 21, 2018 9:53 am
I expect to retire next year. In my IPS, I call for an increasing equity glideslope (I built a "bond tent" for my early retirement years) of 2% per year.

This takes care of both situations: a downturn or good times because I "pay myself first" (i.e I withdraw expenses as the first re-balance step). In the event of a downturn, I sell more bonds (or even all bonds) because of the need to re-balance to equities. In a good year for stocks, I sell stocks to keep the asset allocation from becoming too stock heavy.

Simplicity.
I would assume that with such a strategy, it would likely be a long time before you would ever sell equities.
No, if the market is up then I will sell equities for living expenses. But because I will be moving the AA towards equities it does bias towards spending bonds.

For example, if equities are up 13% in a year and bonds are up 3%, we have a 10 point gap in return. At 50/50, equity percentage will be up 5% (using round numbers) and bond percentage down 5%. In order to limit the growth in equities to 2%, I must sell some equities to keep equities from exceeding the planned AA.

I should mention that the withdrawals are much higher (as a percentage of portfolio) before filing for SS benefits than they will be after age 70.
That makes sense, but 50/50 isn't much of a 'bond tent' strategy. Kitces' example was much more bond heavy at the point of retirement.
While Kitces has written several posts of rising equity glide paths and "bond tents", I am not sure i have seen a specific starting AA recommended by him for the bond tent.
He didn't 'recommend' it, but he definitely modeled it.

Image
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by marcopolo » Fri Sep 21, 2018 10:13 pm

willthrill81 wrote:
Fri Sep 21, 2018 8:49 pm
marcopolo wrote:
Fri Sep 21, 2018 8:45 pm
willthrill81 wrote:
Fri Sep 21, 2018 7:34 pm
David Jay wrote:
Fri Sep 21, 2018 6:29 pm
willthrill81 wrote:
Fri Sep 21, 2018 5:23 pm


I would assume that with such a strategy, it would likely be a long time before you would ever sell equities.
No, if the market is up then I will sell equities for living expenses. But because I will be moving the AA towards equities it does bias towards spending bonds.

For example, if equities are up 13% in a year and bonds are up 3%, we have a 10 point gap in return. At 50/50, equity percentage will be up 5% (using round numbers) and bond percentage down 5%. In order to limit the growth in equities to 2%, I must sell some equities to keep equities from exceeding the planned AA.

I should mention that the withdrawals are much higher (as a percentage of portfolio) before filing for SS benefits than they will be after age 70.
That makes sense, but 50/50 isn't much of a 'bond tent' strategy. Kitces' example was much more bond heavy at the point of retirement.
While Kitces has written several posts of rising equity glide paths and "bond tents", I am not sure i have seen a specific starting AA recommended by him for the bond tent.
He didn't 'recommend' it, but he definitely modeled it.

Image
Well, I think that was single snapshot as an illustrative example of the concept. Which is useful, but i much prefer an analysis that looks at various starting AA, glide paths, across various time periods and determines which particular combination yielded the best historical results. Having said that, I am not sure i would comfortable going all the way to 100% equities at age 85.
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by KlangFool » Fri Sep 21, 2018 10:23 pm

marcopolo wrote:
Fri Sep 21, 2018 10:13 pm
willthrill81 wrote:
Fri Sep 21, 2018 8:49 pm
marcopolo wrote:
Fri Sep 21, 2018 8:45 pm
willthrill81 wrote:
Fri Sep 21, 2018 7:34 pm
David Jay wrote:
Fri Sep 21, 2018 6:29 pm

No, if the market is up then I will sell equities for living expenses. But because I will be moving the AA towards equities it does bias towards spending bonds.

For example, if equities are up 13% in a year and bonds are up 3%, we have a 10 point gap in return. At 50/50, equity percentage will be up 5% (using round numbers) and bond percentage down 5%. In order to limit the growth in equities to 2%, I must sell some equities to keep equities from exceeding the planned AA.

I should mention that the withdrawals are much higher (as a percentage of portfolio) before filing for SS benefits than they will be after age 70.
That makes sense, but 50/50 isn't much of a 'bond tent' strategy. Kitces' example was much more bond heavy at the point of retirement.
While Kitces has written several posts of rising equity glide paths and "bond tents", I am not sure i have seen a specific starting AA recommended by him for the bond tent.
He didn't 'recommend' it, but he definitely modeled it.

Image
Well, I think that was single snapshot as an illustrative example of the concept. Which is useful, but i much prefer an analysis that looks at various starting AA, glide paths, across various time periods and determines which particular combination yielded the best historical results. Having said that, I am not sure i would comfortable going all the way to 100% equities at age 85.
marcopolo,

<< Having said that, I am not sure i would comfortable going all the way to 100% equities at age 85.>>

What if your portfolio size is 50 to 100 times your retirement expense? You are not taking much risk at all.

That was my whole point. The portfolio size in relation to the retirement expense matters. The amount of FI in term of years of expense matters.

KlangFool

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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by marcopolo » Fri Sep 21, 2018 10:30 pm

KlangFool wrote:
Fri Sep 21, 2018 10:23 pm
marcopolo wrote:
Fri Sep 21, 2018 10:13 pm
willthrill81 wrote:
Fri Sep 21, 2018 8:49 pm
marcopolo wrote:
Fri Sep 21, 2018 8:45 pm
willthrill81 wrote:
Fri Sep 21, 2018 7:34 pm


That makes sense, but 50/50 isn't much of a 'bond tent' strategy. Kitces' example was much more bond heavy at the point of retirement.
While Kitces has written several posts of rising equity glide paths and "bond tents", I am not sure i have seen a specific starting AA recommended by him for the bond tent.
He didn't 'recommend' it, but he definitely modeled it.

Image
Well, I think that was single snapshot as an illustrative example of the concept. Which is useful, but i much prefer an analysis that looks at various starting AA, glide paths, across various time periods and determines which particular combination yielded the best historical results. Having said that, I am not sure i would comfortable going all the way to 100% equities at age 85.
marcopolo,

<< Having said that, I am not sure i would comfortable going all the way to 100% equities at age 85.>>

What if your portfolio size is 50 to 100 times your retirement expense? You are not taking much risk at all.

That was my whole point. The portfolio size in relation to the retirement expense matters. The amount of FI in term of years of expense matters.

KlangFool
Agree. I hope I have that problem someday.
Once in a while you get shown the light, in the strangest of places if you look at it right.

JBTX
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by JBTX » Fri Sep 21, 2018 11:14 pm

marcopolo wrote:
Fri Sep 21, 2018 10:13 pm
willthrill81 wrote:
Fri Sep 21, 2018 8:49 pm
marcopolo wrote:
Fri Sep 21, 2018 8:45 pm
willthrill81 wrote:
Fri Sep 21, 2018 7:34 pm
David Jay wrote:
Fri Sep 21, 2018 6:29 pm

No, if the market is up then I will sell equities for living expenses. But because I will be moving the AA towards equities it does bias towards spending bonds.

For example, if equities are up 13% in a year and bonds are up 3%, we have a 10 point gap in return. At 50/50, equity percentage will be up 5% (using round numbers) and bond percentage down 5%. In order to limit the growth in equities to 2%, I must sell some equities to keep equities from exceeding the planned AA.

I should mention that the withdrawals are much higher (as a percentage of portfolio) before filing for SS benefits than they will be after age 70.
That makes sense, but 50/50 isn't much of a 'bond tent' strategy. Kitces' example was much more bond heavy at the point of retirement.
While Kitces has written several posts of rising equity glide paths and "bond tents", I am not sure i have seen a specific starting AA recommended by him for the bond tent.
He didn't 'recommend' it, but he definitely modeled it.

Image
Well, I think that was single snapshot as an illustrative example of the concept. Which is useful, but i much prefer an analysis that looks at various starting AA, glide paths, across various time periods and determines which particular combination yielded the best historical results. Having said that, I am not sure i would comfortable going all the way to 100% equities at age 85.
All of these models were based upon history. The problem is when it goes down, it assumes the markets will go back up in reasonably short order. So it calls for a heavy stock portfolio when you are very old and have drawn down much of your portfolio. You are making a big bet that what you have will come back in a big way. It typically does.....but what if it doesn't?

These models completely ignore typical assumed risk aversion that as you grow older and closer to a terminal end date you decrease risk and instead you increase risk based upon historical mean reversion. For all the threads blasting market timing and advocating stay the course this seems like an inconsistent strategy.

The issue is the risk of failure is small, but if you do fail you fail in a big way. Realistically an 70-85 year old in 2009 after his 50/50 portfolio is down 25% is probably not going to be comfortable 70-100% stocks.

marcopolo
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by marcopolo » Fri Sep 21, 2018 11:26 pm

JBTX wrote:
Fri Sep 21, 2018 11:14 pm


All of these models were based upon history. The problem is when it goes down, it assumes the markets will go back up in reasonably short order. So it calls for a heavy stock portfolio when you are very old and have drawn down much of your portfolio. You are making a big bet that what you have will come back in a big way. It typically does.....but what if it doesn't?

These models completely ignore typical assumed risk aversion that as you grow older and closer to a terminal end date you decrease risk and instead you increase risk based upon historical mean reversion. For all the threads blasting market timing and advocating stay the course this seems like an inconsistent strategy.

The issue is the risk of failure is small, but if you do fail you fail in a big way. Realistically an 70-85 year old in 2009 after his 50/50 portfolio is down 25% is probably not going to be comfortable 70-100% stocks.
I don't think that it assumes that at all, in addition to looking across historical data, ERN (in the article I linked above), specifically looked at the 1929, 1966, and 2000, they ALL did better with the rising glide path relative to a fixed AA. The 2000 retiree had relatively quick recovery, followed by another fall, and another quick recovery; You can argue about 1929, but i don't think anyone thinks 1966 retiree had a quick recovery.

I completely agree with your point about the behavioral aspect of this approach.
Once in a while you get shown the light, in the strangest of places if you look at it right.

JBTX
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by JBTX » Fri Sep 21, 2018 11:56 pm

marcopolo wrote:
Fri Sep 21, 2018 11:26 pm
JBTX wrote:
Fri Sep 21, 2018 11:14 pm


All of these models were based upon history. The problem is when it goes down, it assumes the markets will go back up in reasonably short order. So it calls for a heavy stock portfolio when you are very old and have drawn down much of your portfolio. You are making a big bet that what you have will come back in a big way. It typically does.....but what if it doesn't?

These models completely ignore typical assumed risk aversion that as you grow older and closer to a terminal end date you decrease risk and instead you increase risk based upon historical mean reversion. For all the threads blasting market timing and advocating stay the course this seems like an inconsistent strategy.

The issue is the risk of failure is small, but if you do fail you fail in a big way. Realistically an 70-85 year old in 2009 after his 50/50 portfolio is down 25% is probably not going to be comfortable 70-100% stocks.
I don't think that it assumes that at all, in addition to looking across historical data, ERN (in the article I linked above), specifically looked at the 1929, 1966, and 2000, they ALL did better with the rising glide path relative to a fixed AA. The 2000 retiree had relatively quick recovery, followed by another fall, and another quick recovery; You can argue about 1929, but i don't think anyone thinks 1966 retiree had a quick recovery.

I completely agree with your point about the behavioral aspect of this approach.
I think the best way to make my point is look at the article and you see that the 100% equity glide path almost does as well as the upward sloping glide paths.

It is obvious to most people that 100% equity your entire retirement is inconsistent with our common notions of risk aversion. Over the entire duration of 40+ years 100% equity gives you among the best probabilities of success. But that is the probability at the starting point. Down the road, at a later point in time, 100% will not give you the greatest odds of success. But future probability is not measured in these models. Only the probability of success at the beginning point.

It also just assumes failure is failure. It doesnt measure how badly or abruptly those that fail actually fail. An 85 year old on a path to failure with a 50/50 portfolio may be able to mitigate modestly to avoid failure. But the same person 100% in stocks may have a higher chance of success, but the failure scenarios could be catastrophic enough that modest mitigation doesn't help.

clown
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by clown » Sat Sep 22, 2018 12:11 am

My gut says a 2 year buffer is not enough. I have kept a 5 year cushion for a while now. KlangFool asks the question what if equities decline very sharply and stay down for 5 years, which is a fair point. Recovery typically (but not always) starts sooner but may not catch up fully for an extended period of time. With 5 years cash, I can watch the daily market gyrations and not really care -- it's cheap entertainment. In the meantime, I can rebalance if bonds experience a flight to quality. Since Vanguard Prime MM is paying 2+%, my yield is almost bond-like but I have no exposure to values decreasing due to interest rate changes. Put it all together, and it works for me.

marcopolo
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by marcopolo » Sat Sep 22, 2018 8:33 am

JBTX wrote:
Fri Sep 21, 2018 11:56 pm

I think the best way to make my point is look at the article and you see that the 100% equity glide path almost does as well as the upward sloping glide paths.
I get a very different takeaway from the article. Maybe it depends on your definition of "almost does as well".

If you look at the table just before his conclusions, he presents the 3 worst starting years for retirement outcomes (1929, 1966, 2000). In most years, the AA, glide path, etc, only affects how much money you leave on the table. It is these problematic scenarios that drive SWR limits. For all three years, the rising glide path provided better SWR than 100% equities. In 2 of the 3 cases it was significantly higher, 4.2% vs 2.6% in 1929, and 3.99% vs. 3.1% in 2000.
Once in a while you get shown the light, in the strangest of places if you look at it right.

JBTX
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by JBTX » Sat Sep 22, 2018 11:21 am

marcopolo wrote:
Sat Sep 22, 2018 8:33 am
JBTX wrote:
Fri Sep 21, 2018 11:56 pm

I think the best way to make my point is look at the article and you see that the 100% equity glide path almost does as well as the upward sloping glide paths.
I get a very different takeaway from the article. Maybe it depends on your definition of "almost does as well".

If you look at the table just before his conclusions, he presents the 3 worst starting years for retirement outcomes (1929, 1966, 2000). In most years, the AA, glide path, etc, only affects how much money you leave on the table. It is these problematic scenarios that drive SWR limits. For all three years, the rising glide path provided better SWR than 100% equities. In 2 of the 3 cases it was significantly higher, 4.2% vs 2.6% in 1929, and 3.99% vs. 3.1% in 2000.
That wasn't really my point.

Why start with retirement? Why not develop a lifelong glide path starting when you start investing? I am going to guess if you look at historical outcomes, starting in your 20s and contributing every year until you retire, then using a SWR, that 100% equities the entire time will give the optimum result. But most people here don't follow that.

The reason is these backward looking glide paths in retirement don't take into account the dynamic nature of your risk aversion as you age. While it may be true looking forward when you are 65 that a 30 year glide path that puts you at 100% stocks when you are 85 years old looks the best. However once you actually get 85 years old 100% stocks is not the allocation that optimizes your outcome.

ceperry
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by ceperry » Sun Sep 23, 2018 12:17 am

I think I am missing something fundamental here, and I’m hoping someone can point it out to me. What I don’t understand is how keeping two (or more) years of expenses in cash is better than keeping all your money in the market and just withdrawing in such a way that your portfolio remains in (or at least gets closer to) your desired allocation.

For example, let’s say you retire with a $1M portfolio kept in a 50/50 allocation, and you have $40,000 in annual expenses. If stocks tank by 10% and push that portfolio to 47/53 ($450,000 stocks, $500,000 bonds) then, if you are withdrawing to maintain your asset allocation, the next annual $40,000 withdrawal would be all from bonds, moving the portfolio back to 49/51 ($450,000 stocks, $460,000 bonds).

In short, it seems like any time stocks drop enough to make a retiree consider spending the cash bucket in order to avoid selling stocks, withdrawing according to your desired allocation would already make that problem moot, since you would already be selling all (or at least mostly) bonds to bring your portfolio closer to the desired allocation.

So I guess my question is, what am I missing? In what cases is spending down a bucket of cash better than withdrawing according to your allocation?

Topic Author
FrankLUSMC
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by FrankLUSMC » Sun Sep 23, 2018 6:13 am

ceperry wrote:
Sun Sep 23, 2018 12:17 am
I think I am missing something fundamental here, and I’m hoping someone can point it out to me. What I don’t understand is how keeping two (or more) years of expenses in cash is better than keeping all your money in the market and just withdrawing in such a way that your portfolio remains in (or at least gets closer to) your desired allocation.

For example, let’s say you retire with a $1M portfolio kept in a 50/50 allocation, and you have $40,000 in annual expenses. If stocks tank by 10% and push that portfolio to 47/53 ($450,000 stocks, $500,000 bonds) then, if you are withdrawing to maintain your asset allocation, the next annual $40,000 withdrawal would be all from bonds, moving the portfolio back to 49/51 ($450,000 stocks, $460,000 bonds).

In short, it seems like any time stocks drop enough to make a retiree consider spending the cash bucket in order to avoid selling stocks, withdrawing according to your desired allocation would already make that problem moot, since you would already be selling all (or at least mostly) bonds to bring your portfolio closer to the desired allocation.

So I guess my question is, what am I missing? In what cases is spending down a bucket of cash better than withdrawing according to your allocation?
What if stocks tank 10% AND bond funds tank 10%? Then a cash fund would be used. This may be a short time period of a few months until everyone flocks to bonds out of stocks to prop up the bond funds but still would be a period for cash.

livesoft
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by livesoft » Sun Sep 23, 2018 6:54 am

When was the last time bonds tanked 10%?

What if cash loses 10% of its purchasing power to inflation?
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bradpevans
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Re: For those who use a 2 year cash(like) buffer, how do you know when to use it?

Post by bradpevans » Sun Sep 23, 2018 8:06 am

JBTX wrote:
Sat Sep 22, 2018 11:21 am
marcopolo wrote:
Sat Sep 22, 2018 8:33 am
JBTX wrote:
Fri Sep 21, 2018 11:56 pm

I think the best way to make my point is look at the article and you see that the 100% equity glide path almost does as well as the upward sloping glide paths.
I get a very different takeaway from the article. Maybe it depends on your definition of "almost does as well".

If you look at the table just before his conclusions, he presents the 3 worst starting years for retirement outcomes (1929, 1966, 2000). In most years, the AA, glide path, etc, only affects how much money you leave on the table. It is these problematic scenarios that drive SWR limits. For all three years, the rising glide path provided better SWR than 100% equities. In 2 of the 3 cases it was significantly higher, 4.2% vs 2.6% in 1929, and 3.99% vs. 3.1% in 2000.
That wasn't really my point.

Why start with retirement? Why not develop a lifelong glide path starting when you start investing? I am going to guess if you look at historical outcomes, starting in your 20s and contributing every year until you retire, then using a SWR, that 100% equities the entire time will give the optimum result. But most people here don't follow that.

The reason is these backward looking glide paths in retirement don't take into account the dynamic nature of your risk aversion as you age. While it may be true looking forward when you are 65 that a 30 year glide path that puts you at 100% stocks when you are 85 years old looks the best. However once you actually get 85 years old 100% stocks is not the allocation that optimizes your outcome.
The bond tent is aimed at sequence of return risk, not investor risk aversion that might change with age
In accumulation phase, the sequence of returns is irrelevant, you just keep adding to your investments

In the spend-down phase you are removing money, so the order matters

As your portfolio size decreases (right side of the plot), the “portfolio effect” is smaller, so the equity percentages can go back up without the huge swings in value that might occur when the portfolio is largest (middle of the plot)

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