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Old 08-28-2017, 11:51 AM
 
Location: SoCal
13,235 posts, read 6,340,776 times
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We pay for nice hotels or condos when the kids are with us. Lol
I want them to have a good time and remember it.
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Old 08-28-2017, 09:15 PM
Q44
 
Location: Hudson Valley, NY
895 posts, read 766,360 times
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Quote:
Originally Posted by dcfas View Post
We have nine years yet to retirement. These CD boards caught my eye and have me planning in ways that many folks don't think about until much closer to their retirement dates. At this point 4% of our projected savings would only scratch the surface of what we currently need, which is closer to four times that figure. Fortunately, we both will have pensions and (hopefully) SS, and will likely need considerably less as we will no longer be in the accumulation phase. One thing that will be costly is our plan to winter in warmer climbs. That alone could cost us one third of 4%. We both max a Roth presently, and will convert our deferred account each year after retirement and up to 70.5, keeping mindful of the tax brackets.

There seems an awful lot to keep your eye on. No wonder so many folks are ill prepared.


Mind my asking approximately what part of Upstate you are in? We sat down to look at what the budget would include in retirement and I had $$ set aside to snowbird. My wife asked me if I was nuts. She asked if I wanted to go south for the winter and I said not really but I thought she might. She said she has zero desire to go to Florida for months at a time. She does want to go visit her parents but said she'd rather do that 2-3 times a year for a week at a time. It really doesn't get so cold so often for so long that we want to leave for the whole winter. But if we lived near the Great Lakes we might think differently.
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Old 08-29-2017, 04:39 PM
 
Location: Near San Francisco, CA
184 posts, read 115,118 times
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Quote:
Originally Posted by mathjak107 View Post
no matter how you slice it cash is a weight in up markets and lags bonds and equities .

it is very very rare that just spending from the pie and maintaining your original allocation of stocks and bonds won't beat anything with a few years cash too .

in fact i saw a study with two years cash and all the rest equities . over a 30 year retirement it had a lower success rate than 50/50 .

of course that could work out differently if rates have an extended rise instead of fall .

but generally comparing spending from a portfolio of just equities and bonds , no cash tends to do better than trying to maintain a cash bucket for down years in a bucket system . .

that being said we always have 1 to 2 years cash on hand .
I decided to run a few back tests using three test portfolios with different allocations to stocks, bonds and cash, and here are the results:

Portfolio #1: 50% stocks; 50% bonds
Portfolio #2: 65% stocks; 25% bonds; 10% cash
Portfolio #3: 75% stocks; 15% bonds; 10% cash

The results in order from best to worst are #3, #2, #1, showing that the "drag" of the cash is easily overcome by changing the allocation percentages. The CAGRs are 9.10%, 8.75%, 8.45%, respectively, based upon a start date of 1987. The maximum drawdowns are worse with a higher stock percentage, but that's what the cash is for. I did try a few different start years and the results were the same except for a start year of 2000, for which the results were reversed, but very close. I don't have an automated way to test each year, so I just tried as many as I could do manually.

The study simply moved some of the assets to cash without changing the allocation percentages, which seems counterproductive. The whole point of having three years living expenses in cash is to be able to be more aggressive with the invested funds.

It's an interesting and important issue.
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Old 08-29-2017, 04:50 PM
 
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if you change allocations and have to go more aggressive than it is not apples to apples as far as the comparison .

it is not a constant cash level either . the cash is spend down yearly and then refilled as in a typical bucket system .

so 5 years cash gets spent down , then bonds sold to refill cash . at some point equities sold to refill bonds .

a typical cash bucket system would be different than you tested .

here is a very interesting discussion with christine benz of morningstar and michael kitces on the effect of cash when spending down .

http://www.morningstar.com/cover/vid...aspx?id=601506

Last edited by mathjak107; 08-29-2017 at 04:59 PM..
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Old 08-29-2017, 05:32 PM
 
Location: Near San Francisco, CA
184 posts, read 115,118 times
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Quote:
Originally Posted by mathjak107 View Post
if you change allocations and have to go more aggressive than it is not apples to apples as far as the comparison .

it is not a constant cash level either . the cash is spend down yearly and then refilled as in a typical bucket system .

so 5 years cash gets spent down , then bonds sold to refill cash . at some point equities sold to refill bonds .

a typical cash bucket system would be different than you tested .

here is a very interesting discussion with christine benz of morningstar and michael kitces on the effect of cash when spending down .

Cashing Out of the Bucket Strategy
I think the point of having three years living expenses in cash is that the allocation of the invested portfolio can be more growth oriented. As for the spend down and refilling issue, that is valid, but I don't have an easy way of simulating that.

Thanks
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Old 08-30-2017, 02:40 AM
 
71,643 posts, read 71,777,271 times
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why not skip the 3 years cash and make it more growth oriented anyway if you are increasing the allocation to equities ? . once you increase the volatility on the equity side you increase volatility -period .

ideally when you use cash it just comes out of the bond side and equities stay the same . it is like i am 46/46/8 at the beginning of the year and end the year around 48/48 /4 before refilling cash ..


i could forget about cash and just maintain 50/50 all year by drawing equally from the pie in good and bad times . results are likely to be a bit better that way . but i do like the feel of dealing with the cash in a separate spending account but it really adds nothing other than mental
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Old 08-30-2017, 04:29 AM
 
Location: Central Massachusetts
4,800 posts, read 4,850,322 times
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Quote:
Originally Posted by Westcoasters View Post
I think the point of having three years living expenses in cash is that the allocation of the invested portfolio can be more growth oriented. As for the spend down and refilling issue, that is valid, but I don't have an easy way of simulating that.

Thanks
Quote:
Originally Posted by mathjak107 View Post
why not skip the 3 years cash and make it more growth oriented anyway if you are increasing the allocation to equities ? . once you increase the volatility on the equity side you increase volatility -period .

ideally when you use cash it just comes out of the bond side and equities stay the same . it is like i am 46/46/8 at the beginning of the year and end the year around 48/48 /4 before refilling cash ..


i could forget about cash and just maintain 50/50 all year by drawing equally from the pie in good and bad times . results are likely to be a bit better that way . but i do like the feel of dealing with the cash in a separate spending account but it really adds nothing other than mental
I understand the need for cash because converting bonds and equities take time so there is a need. I am not sure keeping 3 years of cash is critical but I will leave that alone.

The trouble I have with that is when do you replenish the cash. We know we are not trying to save more as I believe we are talking about retirement funds. Retirement means no or very low earned income and drawing passive income such as IRA, 401k. pension and SS. In a few cases drawing from non-retirement accounts.

The question stems from thinking on what happens during bad times. If the equities market is down that could mean the bond market is up. Drawing from there and then is okay but what if both are down and you are in need of cash. You are now stuck. Looking ahead with my new crystal ball will help but sometimes that area of the world is cloudy.

I guess it is confusing to me since I haven't got lots of different savings vehicles. I have one 401k which I am drawing from. In the future my wife will have one IRA that she will draw from. We have a brokerage account to hold long term any money we do not have need of for living but that is a far cry from having to juggle a multitude of accounts.
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Old 08-30-2017, 05:06 AM
 
71,643 posts, read 71,777,271 times
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studies show it matters not spending down directly in bad times vs the effect of cash , my fund sales are in my checking account in one day and usable so we have no delay if we went that route .


. we think it does but the math shows other wise . it is just a matter of personal taste .
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Old 08-30-2017, 12:15 PM
 
6,260 posts, read 4,737,090 times
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I guess we are unlikely to hear from Pfau or the other talking heads who thought 4%was going to be too high.
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Old 08-30-2017, 12:59 PM
 
71,643 posts, read 71,777,271 times
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nope , wrong there

michael kitces thinks 4% is not only still fine but if anything 90% of the time you need to take raises or you end with more than you started . 67% of the time you ended with 2x what you started and 50% of the time 3x what you started with .

he says monitor the progress over the years .

if 3 years in you are still above 50% where you started take your normal inflation raises plus another 10% .

repeat every 3 years . don't forget it is the regular inflation adjusting plus add another 10% to the draw . that adds up to quite a bit if it goes on .

you need to maintain at least a 2% real return average over the first 15 years for 4% to hold .
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