No. of Recommendations: 0
In the "13 retirement steps" on this site, a suggestion for asset allocation is given. My question is if one needs to complete a step, before going to the next one, i.e. for example, if (1) any money one needs in the next year should be in cash, is let´s say 60,000 USD, do I have to have this first, before going to step 2? Subsequently, in step (2) any money you need in the next 2 - 5 years should be in a safe income investment, then needs 5 x 60,000 = 300,000 USD before going to step (3)? Step 3 is the stock market where one puts money not needed in the next 10 years. Comments please.
Print the post Back To Top
No. of Recommendations: 1
FB101,

Welcome to the Fool.

The cash and near-cash guidelines for retirement are pretty much what you say with one exception. It needs to be oriented toward your cash contributions above your pensions, SSA, etc.

If your pension and SSA come to $50,000 a year and your expenses are $60,000, you need to cover $10,000 per year from savings. That is the cash you need to ladder as a minimum.

I normally keep 6 months of full expenses in passbook savings(at .01% or something). I exclude this from any portfolio planning since I consider it "spent" from the portfolio. During the 2007-2009 downturn, this was sufficient to hold us without requiring a sale of stock to pay bills.

I replenish the savings from dividends and from occasional sales to trim positions, etc.

If you are within 5 years of retiring, start building your cash position, maybe using a CD ladder, where each year you buy a 5 year CD for the amount you believe you will need.

Gene
Print the post Back To Top
No. of Recommendations: 1
Exactly. TMF emphasizes equity investments where possible, but fixed incomes make sense in some situations especially when funds are needed in that 2-5 year band.

For those retired on investment income, the usual suggestion is to put 5 years of living expenses into a laddered maturity bond portfolio. You live off the of the interest and the bond that matures each year. Then in a normal year, you sell equities to cover your living expenses and buy a 5 yr bond to maintain the ladder.

In bad years, when stocks are down you live off of the bond portfolio and defer selling stocks until the market recovers. This keeps you from selling stocks in a down market. Most dips are 3 yrs or less. So 5 yrs is considered adequate. But of course a longer one with more bonds is safer (but because equities give better return gives lower returns).

This ideas has to be fine tuned to fit your situation, but you get the idea. It works quite well for many.
Print the post Back To Top
No. of Recommendations: 3
You might be confusing retirement investing with cash management. Overall, the point is valid, any money you definitely plan on spending in the next 5 years needs to be in something safe (money market or CDs).

Retirement investing, if you're 25 and getting started, I wouldn't worry about worry about having 5 years of cash. If you're 55-60 and plan on retiring at 65, then I'd start working on that 5 year set aside.

So at 25, after you have an emergency fund and any planned spending (car, house, etc) in cash, go to the stock market.

JLC
Print the post Back To Top
No. of Recommendations: 0
If your pension and SSA come to $50,000 a year and your expenses are $60,000, you need to cover $10,000 per year from savings.

Or, if you're retired, maybe you can try to limit your retirement expenses to the $50,000 you're getting!?

I know... no one should judge how others live, but $50,000/yr sounds pretty darned good to us for retirees!

Just another man's opinion.

Vermonter
Print the post Back To Top
No. of Recommendations: 0
You might be confusing retirement investing with cash management. Overall, the point is valid, any money you definitely plan on spending in the next 5 years needs to be in something safe (money market or CDs).

Now I'm going off topic from retirement investing, but this is a concept I am starting to struggle with as I am getting older. I'm 44 and kids will be off to college in 3, 5, and 7 years.

I've been putting money away in a mutual fund for "Down the Road" (college and other stuff) over the last decade. Now "Down the Road" is approaching. So as I approach those "Life Goals" I am guessing I should sell mutual funds and switch the money to Money Market or CD. Is this the right concept?

My work around has been when saving monthly, instead of contributing to Mutual Fund, just put it in the MM, and use those funds for the goal that once was far away but is closer now. The funds in the Mutual Funds then "Transfer" accordingly to another goal that is "Down the Road".
As the life events that are coming are bigger, I need to figure another way, hate to sell the Mutual Funds, but i guess that is why I've been saving them. The Asset Allocation stated here on the Fool site says:

Rule 1: If you need the money in the next year, it should be in cash.

Rule 2: If you need the money in the next one to five years, choose safe, income-producing investments such as Treasuries, certificates of deposit (CDs), or bonds.

Rule 3: Any money you don't need within the next five is a candidate for the stock market.


According to this, in a hypothetical situation one should put funds into stocks for a goal that is 7-10 years away. Then as that goal gets closer, say 4-5 years away, sell those equities, pay the taxes(assuming in taxable account) and purchase bonds or treasuries, or CDs. Then as the goal is within one year, sell, pay the taxes(assuming in taxable account) and put into MM.

Does this all sound about right? Also, my funds are with Vanguard, so will be looking for something in the Vanguard family that meets the criteria of #2.

dozer
Print the post Back To Top
No. of Recommendations: 0
dozer183e asks,

Rule 1: If you need the money in the next year, it should be in cash.

Rule 2: If you need the money in the next one to five years, choose safe, income-producing investments such as Treasuries, certificates of deposit (CDs), or bonds.

Rule 3: Any money you don't need within the next five is a candidate for the stock market.

According to this, in a hypothetical situation one should put funds into stocks for a goal that is 7-10 years away. Then as that goal gets closer, say 4-5 years away, sell those equities, pay the taxes(assuming in taxable account) and purchase bonds or treasuries, or CDs. Then as the goal is within one year, sell, pay the taxes(assuming in taxable account) and put into MM.

Does this all sound about right? Also, my funds are with Vanguard, so will be looking for something in the Vanguard family that meets the criteria of #2.

</snip>


To keep things simple, I use the Vanguard Short-term Bond Fund for my 0-5 years money. At 0% interest, I don't see any reason to have anything in a money market fund today.

intercst
Print the post Back To Top
No. of Recommendations: 0
To keep things simple, I use the Vanguard Short-term Bond Fund for my 0-5 years money. At 0% interest, I don't see any reason to have anything in a money market fund today.</v>

Intercst, once again I appreciate your input.

So are you saying you make deposits and withdrawels frequently with this fund? Does it just act like a MM in that regard?

I was actually just looking at these Vanguard Bond Funds VBTLX VFITX VBIRX VFICX. I understand the Short Term Bond fund for 0-2 years, but if some of my funds were definitely 3-5 years out, would I want to look at one of the intermediate term funds? I actually have put most of my 5-8 year funds into VWINX which at 60/40 bonds to stocks may be bond heavy for that range. But I have enjoyed decent growth and dividend reinvestment there. So after 3 years, those 5-8 year funds are now 2-5 year ones, so you recommend I convert them to a bond fund like the one you suggest at that time?

dozer
Print the post Back To Top
No. of Recommendations: 0
dozer183e asks,

<<<To keep things simple, I use the Vanguard Short-term Bond Fund for my 0-5 years money. At 0% interest, I don't see any reason to have anything in a money market fund today.>></v>

Intercst, once again I appreciate your input.

So are you saying you make deposits and withdrawels frequently with this fund? Does it just act like a MM in that regard?

</snip>


Yes. I'm essentially using it as a MM and make 50 or 60 transactions per year on the fund. I was worried about the bookkeeping hassle of accounting for all the capital gains/losses at tax time, but you can import everything into Turbo Tax, so it's easy.

Since I believe interest rates will eventually rise, I wouldn't go too far out the yield curve. VFSUX (the fund I use) has a maturity of 3 years and duration of 2.3 years.

intercst
Print the post Back To Top
No. of Recommendations: 0
Does this all sound about right?

You pretty much have the idea.

My only quibble would be about bonds. Most people do not buy individual bonds. Usually too expensive (from commission and spread fees) so people buy bond funds. Totally different animal. A bond fund can and does act just like an equities fund. You can lose capital. Nothing is guaranteed.

So I would modify Rule 2 to Treasuries and CDs only.

Personally, following the KISS Principle (Keep It Simple Stupid), have only 2 rules: Rule 1: Money needed in 5 years or less keep in a money market fund. Reasoning is you can get close enough interest rates to CDs/Treasuries that the difference is minimal. Plus, you don't have to tie up the money for months/years at a time. Rule 2: Money needed more than 5 years away, stock market/other investments candidate.

JLC
Print the post Back To Top