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I read an article that Pixy wrote in April about having a 3-5 year cushion for income while retired. It explained distributing the money you know you would need into money market accounts and bonds, and the remainder invested in stocks. I wonder if he would reccomend any modifications to the plan if your investment funds were substatianlly more than the example given and you were age 30?
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Sonya7 asks:

I read an article that Pixy wrote in April about having a 3-5 year cushion for income while retired. It explained distributing the money you know you would need into money market accounts and bonds, and the remainder invested in stocks. I wonder if he would reccomend any modifications to the plan if your investment funds were substatianlly more than the example given and you were age 30?

The only thing I ever strive to recommend is that each of us make our own decisions based on our comfort level and understanding. Personally, I subscribe to the theory that age is totally immaterial when it comes to investing. My style of investing would not change because I am either young or old. That means I always endeavor to keep five years' of needed investment income out of the stock market. Others would keep three, and still others seven. They're no more right or wrong than I am. You, then, need to establish your preference based on your understanding of markets and your comfort level.

Regards..Pixy
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TMFPixy writes,

<<<<<I read an article that Pixy wrote in April about having a 3-5 year cushion for income while retired. It explained distributing the money you know you would need into money market accounts and bonds, and the remainder invested in stocks. I wonder if he would reccomend any modifications to the plan if your investment funds were substatianlly more than the example given and you were age 30? >>>>>>

The only thing I ever strive to recommend is that each of us make our own decisions based on our comfort level and understanding. Personally, I subscribe to the theory that age is totally immaterial when it comes to investing. My style of investing would not change because I am either young or old. That means I always endeavor to keep five years' of needed investment income out of the stock market. Others would keep three, and still others seven. They're no more right or wrong than I am. You, then, need to establish your preference based on your understanding of markets and your comfort level.


This answer may be a bit difficult for a 30-year-old to interprete.

I agree that in retirement one should keep a minimum of 5 year's worth of needed investment income out of the market. However, a 30-year-old planning to retire at age 50 won't need any investment income for another 20 years. Does such a 30-year-old still need to keep 5-year's worth of living expenses out of the market, or would a 6-month "emergency fund" be sufficient.

Certainly you're not suggesting that a 30-year-old spending $50,000 per year wait until he had accumulated $250,000 in a money market fund before he invests his first dollar in the stock market.

intercst
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Intercst writes:

I agree that in retirement one should keep a minimum of 5 year's worth of needed investment income out of the market. However, a 30-year-old planning to retire at age 50 won't need any investment income for another 20 years. Does such a 30-year-old still need to keep 5-year's worth of living expenses out of the market, or would a 6-month "emergency fund" be sufficient.

Certainly you're not suggesting that a 30-year-old spending $50,000 per year wait until he had accumulated $250,000 in a money market fund before he invests his first dollar in the stock market.


I'm surprised at you. What I'm saying is what we have preached in Fooldom from Day One. Money you know you will need from savings in the next five years or so should NEVER be invested in the stock market. IMHO if you're silly enough at ANY age to invest money in stocks that you KNOW you will or must come from your savings in the next five years, and then you see the market plunge just as you have to take that money out of your savings to cover that expense, then you deserve the hardship you have created for yourself. I know for a fact you don't plan that way.

As you well know, it's utterly ludicrous to think one must wait until a $250K pot is amassed prior to investing. Will that person have to take that $250K from savings within the next five years? Not likely, because that person will have wages from which the vast majority of needed income comes. OTOH, if that person intends to buy a home and will need $20K for a downpayment, then that $20K must be amassed outside of the stock market to ensure it's there when needed.

Or maybe that person is an early retiree, like you, who must live exclusively on income from savings (i.e., no Social Security, no pension, no job wages). If that's the case, and they need $50K per year to live on, then absolutely that person must have $250K NOT invested in stocks to cover the 5-year period of withdrawals from savings.

Why is it I suspicion you knew what my response would be before you even asked the question? Are you testing me or simply enjoying a slight bit of harassment to enliven an otherwise boring day? :-)

Regards..Pixy
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Pixy asks,

As you well know, it's utterly ludicrous to think one must wait until a $250K pot is amassed prior to investing. Will that person have to take that $250K from savings within the next five years? Not likely, because that person will have wages from which the vast majority of needed income comes. OTOH, if that person intends to buy a home and will need $20K for a downpayment, then that $20K must be amassed outside of the stock market to ensure it's there when needed.

Or maybe that person is an early retiree, like you, who must live exclusively on income from savings (i.e., no Social Security, no pension, no job wages). If that's the case, and they need $50K per year to live on, then absolutely that person must have $250K NOT invested in stocks to cover the 5-year period of withdrawals from savings.

Why is it I suspicion you knew what my response would be before you even asked the question? Are you testing me or simply enjoying a slight bit of harassment to enliven an otherwise boring day? :-)


Not at all. Just thought that many youngsters would benefit from the clarification that the "5-year" rule only applies to those in (or near) retirement. Those more than 5 years from retirement may still want to be 100% invested.

intercst

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Pixy & intercst:

I will complicate matters by disagreeing/diverging from both of you; not in principle, but in practice.

Further, let's limit ourselves to the retirement issue where I agree that the retiree needs a 3/5/7 year source of "non-volatile" funds; presumably so that the retiree will not need to sell stock securities at inopportune moments.

Most preaching on the above axiom invariably says: "cash, cash & cash". It is here that I disagree in that I believe that there are a variety of different places to go to in order to solve this need:

1. REITs
2. Annuities
3. Investment Grade bonds
4. Cash flow real estate
5. Debt

What I am suggesting is that generally, retirees or anyone else who invests in the stock market (either directly or indirectly) will likely arrive with a portfolio that has an approximate beta of 1.0; unless that investor intentionally works very hard at devising a stock portfolio that is materially different in its beta. It is this beta that we are trying to avoid by holding "5 years of cash" because cash has a beta of 0.0.

However, cash has traditionally crappy returns. So I suggest that other categories be used as a replacement for cash as each have much higher returns but have similar beta's to cash.

As an example compare the SP500 to a REIT to cash. SP500 has traditional returns of 11% per annum and a beta of 1.0; a REIT has traditional returns around 8% with a beta of .2 versus cash which has a traditonal return around 4% to 6% with a beta of 0.0. Why sacrifice 2% to 4% to achieve a .2 reduction in beta?

Intuitively (but I can't figure out how to prove it mathematically) it seems to me that the retiree should really have a protfolio that is:

1. 6 months of cash
2. 54 mohths of low beta investments
3. The balance in common equities.

Personally, I take the most risky of all positions by remaining 100% invested in common equities; but for incidental cash positions; backed up by the ability to borrow up to 5 years of typical living needs.

TheBadger


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TheBadger writes:

Most preaching on the above axiom invariably says: "cash, cash & cash". It is here that I disagree in that I believe that there are a variety of different places to go to in order to solve this need:

1. REITs
2. Annuities
3. Investment Grade bonds
4. Cash flow real estate
5. Debt


Works for me. I've never advocated cash only, just NOT stocks. REITS might be the only area where I might quibble some, but they can have a great cash flow.

Regards..Pixy
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Personally, I take the most risky of all positions by remaining 100% invested in common equities; but for incidental cash positions; backed up by the ability to borrow up to 5 years of typical living needs.

TheBadger.


I fall somewhere in between. While I agree that the 100% safe position is as stated by Pixy and intercst, I hate to see so much money tied up in cash or short term CDs, notes, or bonds. I find that 2 years of living expenses in a safe harbor is sufficient, with the ability to draw on a line of credit if the need arises. I often have wondered whether it would be better to go the route mentioned by TheBadger, which strikes me as being reasonably safe under most circumstances. Being a bit of a chicken, I have opted for something a little more conservative, but I would be interested in knowing whether anyone has run the calculations on risk/return for having to draw off a line of credit for 2 or 3 three years in order to avoid selling into a down market.


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Hi all,
I want to thank you all for this informative and lively discussion. I currently have only 1.5 to 2 years of retirement income in non stock investments. So this discussion was very appropriate, probing and enlightening.
Regards
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Works for me. I've never advocated cash only, just NOT stocks. REITS might be the only area where I might quibble some, but they can have a great cash flow.

Just to decrease the overall beta of my entire portfolio & because I really don't understand
bonds as well as I suppose I should; I am in the process of bulding an "anchor" to sit in the bottom of my portfolio of 10 - 12 high yield REITs.

TheBadger

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