Cash buffer for retirement?

[racemize]

For those that have or are about to, do you use a cash buffer?  E.g., 200-300k in cash to cover living expenses in down markets that you replenish in up-markets?

 

Intuitively, I think this is a good idea, but now I'm wondering if it isn't better to have it all in (assuming good ideas) so that all the money is working for you on good years, but I really worry about having to pull money out right at the bottom.

 

Also curious if anyone has done the math/monte carlo simulation type deal.

[bookie71]

I try to have about a years worth of cash + a buffer.  You don't want to have to liquidate a great idea because  of needing ash.

[racemize]

Yeah, that's my intuition as well.  There's a few papers out there that are somewhat conflicting:

 

Against:

Attached

 

For:

https://www.onefpa.org/journal/Pages/The%20Benefits%20of%20a%20Cash%20Reserve%20Strategy%20in%20Retirement%20Distribution%20Planning.aspx

 

and:

https://sothatshowyoudoit.wordpress.com/2016/04/02/the-effect-of-a-cash-buffer-on-returns/

Sustainable_Withdrawal_Rates.pdf

[Guest cherzeca]

For those that have or are about to, do you use a cash buffer?  E.g., 200-300k in cash to cover living expenses in down markets that you replenish in up-markets?

 

Intuitively, I think this is a good idea, but now I'm wondering if it isn't better to have it all in (assuming good ideas) so that all the money is working for you on good years, but I really worry about having to pull money out right at the bottom.

 

Also curious if anyone has done the math/monte carlo simulation type deal.

 

i think having 5 years living expenses in cash/short term treasuries makes sense, with rest in equities. actually, given low interest rates on debt (and long term interest rate risk), i have more than 5 years in cash

[Uccmal]

There is no easy answer to this.  I try to keep a buffer (not necessarily cash but liquidity) that isn't subject to market vagaries.  Its hard.  During times with lots of ideas I overbuy.  Then we move into a situation like this August, where I dont see so many good ideas.  To me that indicates it may be time to trim positions which I will be doing over the coming weeks. 

 

To get around the cash flow situation since I quit full time work, I have been sticking mostly to dividend payers.  This meets my cash flow needs at the moment, even after having 2 of my prominent holdings cut their dividends.  Two years ago when I stopped full time work I started to focus on buying dividend growers - several in my signature meet this criteria.  It is interesting that some companies kept right on growing their dividends through 2008-2009-2010.  Similarly, there were companies in every recession/depression since 1900 that did the same thing.  Usually they are the companies that provide something essential, that varies not too much in demand over time.  This may work better in Canada, than the US, which has punitive double taxation on dividends but I am not convinced.  Once our income is totally in our control, in retirement, it is easy to manage it to eliminate taxes.  .and sometimes, even these comoanies go on sale, such as last fall and winter in Canada.

 

I also have 3 essentially untapped lines of credit.  I rotate money through them and keep some negative balance all the time.  There is a possibility that these get shuttered in a major bad economic event, but it didn't happen in 2008-2010, so it is unlikely.  This amounts to enough to live on for nearly two years.  There is also the real estate.  One property is financed by my margin account - another has a mortgage.  I could, if needed set up a Heloc against the unmortgaged property.  All told, I can probably go for 10 years without appreciably selling the principal in my equity portfolio.  By that time a partial pension from my old job, and some government money start arriving, putting off the inevitable forever basically. 

 

There is also the skill set of managing money.  The results are variable, but as I tell my Wife: I am good at this, and not likely to become stupid all of a sudden (barring outright insanity, or dementia).

 

Something a bit greater than the great depression would have me out of business but that will be the least of our worries.  At that point land and weapons are King as it has always been. 

 

The problem with setting aside actual cash is that its doing nothing while you sit.  This problem has always existed, but has lately been exacerbated by non existent interest.  I suppose there is always bitcoin but it seems to be prone to anonymous theft. 

[Jurgis]

Possibly OT, since I'm not retired or close to, but I'd probably keep 200K in cash if I was retired. Right now I keep less than that.

[boilermaker75]

In early 2012 I needed cash, but had everything in the market including some margin. Since my house was paid for, I took out a mortgage. That is probably what I would do if I ever retire, count on taking out a mortgage to get cash if needed.

[SharperDingaan]

I was reminded many years ago - that one of the smartest things you can do for yourself in retirement, is to get a job. You are your own worst enemy, especially when you have nothing to do; so most folks choose to do something entirely different.

 

One of the people who told me this ultimately chose to become a part owner of a brothel, and died in her sleep at 84. Her daughter was a wealth manager to trophy wives and kept women. The two of them together were some of the smartest women I’ve ever met.

 

SD

 

 

 

[stahleyp]

I think Tweedy or Browne suggested having three years of living expenses put aside.

[Guest longinvestor]

When I think about this (this is purely a thinking process for me, not  so much mathematical), financial considerations are,

 

a. how many years worth of living expenses I have at the time when earnings stop. Living expense=non-discretionary expenses;

b. conservative (little doubt of clearing) rate of return for the entire retirement

 

I have an excel model I developed many years ago, well before my retirement and I have been updating my actual versus projected every year. I'm a few years away from when I want to retire, so with my modeling I'm learning about my own biases, errors in thinking etc.

 

What I'm really learning in this thinking process is that the non-financial trumps financial; How to stay healthy, meaningful use of time, pursuing activities that bring happiness and how to meaningfully give back. These are looming much larger than I had previously thought.

 

 

 

 

[Jurgis]

One of the people who told me this ultimately chose to become a part owner of a brothel

 

Where do I apply?  :o  :-*

[Uccmal]

When I think about this (this is purely a thinking process for me, not  so much mathematical), financial considerations are,

 

a. how many years worth of living expenses I have at the time when earnings stop. Living expense=non-discretionary expenses;

b. conservative (little doubt of clearing) rate of return for the entire retirement

 

I have an excel model I developed many years ago, well before my retirement and I have been updating my actual versus projected every year. I'm a few years away from when I want to retire, so with my modeling I'm learning about my own biases, errors in thinking etc.

 

What I'm really learning in this thinking process is that the non-financial trumps financial; How to stay healthy, meaningful use of time, pursuing activities that bring happiness and how to meaningfully give back. These are looming much larger than I had previously thought.

 

 

Yeah, there is that side but the question was about financial, not holistic.  I have always wanted to play music live.  Call it a work in progress.

 

Dont know about SDs brothel idea... maybe a meth lab.  Could meet some interesting characters as Heisenberg North. 

[racemize]

There is no easy answer to this.  I try to keep a buffer (not necessarily cash but liquidity) that isn't subject to market vagaries.  Its hard.  During times with lots of ideas I overbuy.  Then we move into a situation like this August, where I dont see so many good ideas.  To me that indicates it may be time to trim positions which I will be doing over the coming weeks. 

 

Given the rest of your answer, I'm not sure if this next question applies, but perhaps it does and/or you've given it some thought: If you use your buffer, how/when do you decide to replenish it?  To some extent, I think this replenishing choice is what caused one study to show that the buffer is bad and the other good.  I think it is perhaps easier answering it as a value investor than the indexers, since we already have some intuition about "timing the market" based on whether deals are present or not.  I think my problem is that I would never want to sell anything (I tend to be fully invested all the time).   

[Uccmal]

There is no easy answer to this.  I try to keep a buffer (not necessarily cash but liquidity) that isn't subject to market vagaries.  Its hard.  During times with lots of ideas I overbuy.  Then we move into a situation like this August, where I dont see so many good ideas.  To me that indicates it may be time to trim positions which I will be doing over the coming weeks. 

 

Given the rest of your answer, I'm not sure if this next question applies, but perhaps it does and/or you've given it some thought: If you use your buffer, how/when do you decide to replenish it?  To some extent, I think this replenishing choice is what caused one study to show that the buffer is bad and the other good.  I think it is perhaps easier answering it as a value investor than the indexers, since we already have some intuition about "timing the market" based on whether deals are present or not.  I think my problem is that I would never want to sell anything (I tend to be fully invested all the time). 

 

Joel,

 

I have never not been at least 120% invested even in 2008/2009.  That said I have no desire to repeat that scenario without the backup income I had then.  At the moment my dividend income will cover fixed costs: mortgage, property taxes, insurance, utilities, phone bills, kids.  My kids education fund - RESP is fully funded to get them through school in 7 years. 

 

One at a time: 

 

RESP: My plan is to let the dividends start to accumulate as cash a couple of years ahead of the withdrawals.  I will sell stocks opportunistically as we get closer to the date of use.  No leverage in this account.

 

Dividends: I sort of assume a potential 20% cut which leaves me able to meet existing expenses.  Anything greater, and we would need to reduce spending.  There is also the lines of credit which are untapped at the moment. 

 

20-30% borrow in margin accounts:  I market time this, and its time to bring it to the lower side of that range.  As to market timing you know what I mean.  I am not exiting the market and selling everything, just trimming to bring the debt down.  I guess we can call this replenishing my firepower. 

 

Two RSPs: with no leverage.  I will let dividends add up in these for now.

 

Zeroing in on the margin accounts: 1 Cdn and 1 US:  In addition to reducing the borrow through trimming I have in place low lying puts bought on weaker names from the S&P 500. Google Mark Bern at Seeking Alpha to read up on this if your are interested (credit to another board member who bought this up, and credit to Mark Bern - I just increased his readership).  These puts are insurance against a major market default.  This is a new strategy for me and shouldn't cost anything on an after tax basis.  It is likely they will be profitable when the time comes.  I have stress tested it recently after the Brexit vote and almost sold some at big profits but I restrained myself.  I have to pay taxes on profits which is why I prefer to minimize selling in general.

 

As to the markets right now and why I am trimming:  It rhymes wilth 2007. Then the markets had been rising for years and stayed maddenly high for months, then.  We aren't seeing alot to take them down this minute but something, somewhere will do it, some time in the not to distant future.  I dont want to sidetrack this thread into market discussion so I will leave it at what we can agree on: Markets go up and they come down which is why Joel bought this up in the first place.

 

I feel I need to put in this CAVEAT (not directed at you Racemize).  I have been using margin debt for twenty years, have survived margin calls twice (2008/09).  One of those times I had to get my broker to front me the money to buy out a put position I had sold to free up margin again.  Dont sell puts or calls using margin - I believe this is how Buffett's sister wound up 1.4 Million in the hole.  I no longer sell puts. 

 

[SharperDingaan]

When I think about this (this is purely a thinking process for me, not  so much mathematical), financial considerations are,

 

a. how many years worth of living expenses I have at the time when earnings stop. Living expense=non-discretionary expenses;

b. conservative (little doubt of clearing) rate of return for the entire retirement

 

I have an excel model I developed many years ago, well before my retirement and I have been updating my actual versus projected every year. I'm a few years away from when I want to retire, so with my modeling I'm learning about my own biases, errors in thinking etc.

 

What I'm really learning in this thinking process is that the non-financial trumps financial; How to stay healthy, meaningful use of time, pursuing activities that bring happiness and how to meaningfully give back. These are looming much larger than I had previously thought.

 

 

Yeah, there is that side but the question was about financial, not holistic.  I have always wanted to play music live.  Call it a work in progress.

 

Dont know about SDs brothel idea... maybe a meth lab.  Could meet some interesting characters as Heisenberg North.

 

Both these women were French, & Paris based - so completely different to start with.

They were both very strong minded, did their own thing versus what was societally expected of them, & very adventurous. Not shy either.

There had also been a few previous husbands, but they had kept dying on them - apparently, it's very frustrating.

 

The old lady 'knew somebody' & publicly told him off over the poor treatment of his girls. Unable to extricate himself - he 'bet' her that she couldn't do any better. If she could, he would make her a partner; 3 years later she was. The end result was nothing like what anyone would have imagined, was very effective, & was very good - but could not have been replicated outside of Paris, or perhaps Berlin.

 

Turned out that one of my grandmothers knew the old lady from times past, & that they would share a few beers over the 'store' every time she passed through Paris. Needless to say both of them were very swift, & very colourful.

 

Retirement is what you make of it.

 

SD