Does that help you?
Yes, thanks Gene. While not in your situation precisely (of course), I have a similar methodology and was just curious about how you would handle the cash cushion situation. I also do not see this being a problem for me, but I do tend to fret every once in a while before coming to my senses 
Pete
AJ,
Thank you again for all you share here.
I wish I had known you when I was getting stock options, bonuses and other exec comp that I had no idea how to best to manage for the long term. I actually cashed out of all of my stock options (TJX) and cashed in my Executive comp plan as well. Took a huge hit in taxes that year, but I felt I could have the cash and then move all of the pre-tax money into my IRA and the post-tax money into our brokerage account. I’ve been reluctant to be in the market due to my logical mind saying “this has to crash as some point”. We’re getting there, then I’ll deploy a chunk (40%) of my IRA and post-tax savings into Index EFTs and maybe BRK.
Thanks again!!
'38Packard
Hi Gene:
“The entire idea behind the cushion is to draw it down when selling securities is not a good idea and to refill it when selling securities is a good idea.”
I got that idea.
But I guess I don’t get the magnitude of your cushion. You say that you keep a 3 year cushion. That means 3 years of expenses you need for your lifestyle, right? But you also say that initially in 2005 you put cash that can be used to build a house. That means your cash may be much more than 3 years of expense.
3 years of expense means you would have used it all in 3 years so normally sometimes in that period you would need to draw on dividends or sell of stocks to replenish, right?
so at least once every 3 years you would need to sell stocks or draw on your stock dividends, right? I am not sure what is that money for building a house for. You had this money since 2005 and you are using it only now?
essentially you are putting in cash almost a decade of living expense?
what does big expense mean?
and how long are you planning your retirement will last? 30years?
so you are putting aside today 1/3 of the money you need for the next 30 years. Is that the rule of thumb?
Gene:
“Our portfolio generates enough cash to fill our needs plus some. The cash payment is lumpy, not an even amount every month, but that has never been an issue before.”
so these cash payment are from dividends? and interests?
Hi thejusticier,
“But I guess I don’t get the magnitude of your cushion. You say that you keep a 3 year cushion. That means 3 years of expenses you need for your lifestyle, right? But you also say that initially in 2005 you put cash that can be used to build a house. That means your cash may be much more than 3 years of expense.”
Yes, a lot!
Right now, it has much more than our living expenses too. In late 2020, I sold a lot of stock when we decided to move. We paid for the land in Jan 2021 and excavation started Oct 20, 2021. Right now most of the work is inside the house and shop.
We have paid 8 draws to our contractor and a lot of separate bills like 319 tons of gravel, all the lighting fixtures, most of the plumbing fixtures, appliances, etc. It all comes from our cash cushion.
And, right now is a perfect example of why I use a cash cushion!
Our portfolio is down -53.78% from our all time high in Nov 2021. In reality, it is down -44.92% when adjusted for withdrawals since the ATH.
It would be STUPID to be selling stock right now. Without the cash on hand, paying people would be “difficult” right now.
So, that standard advice:
Cash you need in the next 3 to 5 years should not be invested!
I have the cash …
“so at least once every 3 years you would need to sell stocks or draw on your stock dividends, right? I am not sure what is that money for building a house for. You had this money since 2005 and you are using it only now?”
We built and paid cash for a new home in 2005 and we lived in it until July 2021 when we moved up here. Now we are building and paying for a new house. (Photos below)
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx
General photos of the land and maps:
https://photos.app.goo.gl/3NC9sbPMxjzUZBc76
Construction: From bare grass on October 17, 2021 to current.
https://photos.app.goo.gl/YdH6e5w4rwz5rknG9
Shop Construction
Hi thejusticier,
"Our portfolio generates enough cash to fill our needs plus some. The cash payment is lumpy, not an even amount every month, but that has never been an issue before."
“so these cash payment are from dividends? and interests?”
Yes, dividends and interest.
The dividends are mostly from stock while the interest is primarily from our cash annuities.
Our Portfolio Yield as of Mon Jun 6 12:55:59 2022:
Dividend Core 4.32%
Other Dividend 1.30%
ETFs 3.00%
Annuities 4.50%
Combined Div/Int Yield: 4.26%
Portfolio Yield: 1.58%
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx
“Our portfolio is generally run at 85% stocks,15% cash. One third of the cash cushion backs up cash secured puts,so worst case,we would be 90/10.”
that cash is used to generate income? and it is separate from the cash cushion covering your regular (and irregular) expenses?
another way to generate income would be to do covered calls and instead of using cash you would sell the underlying stock.
Would you consider doing either depending on market situation?
Typically what is the percentage of your income that would come from selling puts (or calls)? Do you think this is a relatively stable source over the long run?
tj
“Our portfolio generates enough cash to fill our needs plus some. The cash payment is lumpy, not an even amount every month, but that has never been an issue before.”
Hi Gene:
it sounds like you are in a good position in terms of your cash cushion having replenished it last year. You can refrain from going to your portfolio while the market is bear.
Do you follow a particular strategy aside the general directive of harvesting during rising markets and holding off during bear markets?
What? Do you trim multiple stocks to get the amount you need, or do you look opportunistically at what to sell or what to sell more of?
When? In a good market, how do you think about when to harvest during the year? Or again you do that opportunistically?
Over the long term, this may not matter too much if diversified properly? it seems that the different composition of stock/bond may not be that important either to the survivability of the portfolio(?). One would need some near term stability and long term growth always.
I am now trying to imagine me going through the motion after I retire and when I will not have a paycheck coming in anymore.
tj
“Yes, dividends and interest.”
Hi Gene:
I missed those 2 replies of yours…
So basically, the yields from your portfolio are enough to replenish your cash cushion. So I do you do not need to sell any stocks regardless of market condition. Unless you need large sums, you can just leave your portfolio alone and let it compound.
Did your portfolio had enough yield at the beginning of your retirement to cover your living expenses or did you need to sell stocks to cover that if you exclude the cash you initially had to buy or build a house?
I saw the pictures. Wow. Beautiful! That’s a big and secluded land! Did you live on such a big land prior? That must have been a big plan all by itself.
You funded that by selling your prior house and from capital gains from your portfolio? The remaining part of your portfolio may have fallen >50% but you did extract a good chunk from the 2020-2021 rise.
tj
selling puts (or calls)? Do you think this is a relatively stable source over the long run?
No.
Agreed. Options are leverage, and therefore more risky. I would never rely on them for “stable” income.
1poorguy (never uses options for anything)
Hi thejusticier,
“When? In a good market, how do you think about when to harvest during the year? Or again you do that opportunistically?”
I do not use a calendar, so opportunistically. Markets doing well and our portfolio doing well.
"Do you follow a particular strategy aside the general directive of harvesting during rising markets and holding off during bear markets?
What? Do you trim multiple stocks to get the amount you need, or do you look opportunistically at what to sell or what to sell more of?"
These are the selling portion of my portfolio guidelines:
Selling:
1. To make cash: I normally do not sell until our portfolio is setting new highs. I do
not use any external factors/indexes. This is infrequent. I will sell for our cash
position or to top-off our expense cash cushion which is outside of our portfolio.
2. For company reasons: This can occur at any time, any market/portfolio condition. I
might sell all or part of a position. Company buy-out, accounting fraud, difficult
business environment for a longer term, etc. The investment thesis of company changes
to a point I do not want the business.
3. Position size exceeds portfolio guide lines: This is flexible based on the type of
company (fast grower, blue chip, speculative, cyclical, etc) and how it is doing
business-wise. I normally limit a position to 10%, 15% for fast growers and beyond
if I believe it may have an advantage.
4. Based on price targets **if it is a trading position**: Occasionally, I will add a
position strictly as a short-term investment. More likely, I will take a small
portion of a long-term position and buy/sell that portion. This is the only buy/sell
that I use price as a guide.
Selling considerations for withdrawals
When I am selling for cash to withdraw, I look for the weaklings. I manage our
portfolio in two categories: Income and Growth.
The Income portion, dividend payers, I normally keep as they are, selling only for
cause in rules 2 - 4 above.
The growth portion is what I use for sales. I want to retain the best growers. The
weaklings are what I trim. I look for reduced earnings or other things that tell me
the future growth may be lower.
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx
Hi thejusticier,
“So basically, the yields from your portfolio are enough to replenish your cash cushion. So I do you do not need to sell any stocks regardless of market condition. Unless you need large sums, you can just leave your portfolio alone and let it compound.”
Yes, but no. The cash position in our portfolio normally is not filled by dividends. Our portfolio yield is 1.65%. That number goes down as our growth portion expands. At our portfolio peak, it was less than 0.90% yield. Just is not enough to rebuild an 8% cash position unless you wait 8 years.
Right now, our cash position is at about 2% with a target of 8%. (The excess, currently about 6% of portfolio, is the portion of our building money I left in our Roth IRA’s)
“Did your portfolio had enough yield at the beginning of your retirement to cover your living expenses or did you need to sell stocks to cover that if you exclude the cash you initially had to buy or build a house?”
Most of our assets were in IRA’s which I did not want to touch until 59.5. That said, I really did not look at how much in dividends they would pay vs expenses.
So, yes, selling of long-term holdings in a taxable account.
"Did you live on such a big land prior? That must have been a big plan all by itself.
You funded that by selling your prior house and from capital gains from your portfolio? The remaining part of your portfolio may have fallen >50% but you did extract a good chunk from the 2020-2021 rise."
Yes, a 270 acre lot. Lot’s of planning. Yes, old place sold, using that cash plus some of our portfolio profit from 2020/21. Made lots of cash selling and flowed about 80% of it to our cash cushion for the build.
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx
Hi Gene:
yes that does help me.
"I normally do not sell until our portfolio is setting new highs. "
so if the portfolio does not hit a new high for the next 3 years and you need to replenishment in your cash cushion, you would have to decide when to draw regardless.
Ideally, you want your portfolio to get back to at least last November’s high before you draw? If it does not in the next year or two then you would have to decide to draw something sometimes. Or you have to decide at one point to draw even if it does not hit a new high.
The cash cushion is a buffer between your regular cash consumption and the market. But the question in my mind is always if a favorable time to draw the replacement cash from the portfolio will be identified before the cushion is flat, and this will have to be good enough to reflate your cushion back to cover 3 years of expenses.
You are managing your portfolio for long term growth and you are taking income from it only opportunistically. With your cash cushion, you have 3 years to do so.
The question in my mind is what if it takes more than 3 years to find these opportunities? We don’t want to get back to a situation where one is forced to take from his portfolio every year in which case he would be completely dependent on market conditions.
tj
"Right now, our cash position is at about 2% with a target of 8%. "
This 8% if the money from your portfolio you need to replenish your cushion to 3 years of expenses?
I guess I got a bit confused on how you talk about the cash you leave in your portfolio and the one that is in your cushion.
Hi thejusticier,
"I normally do not sell until our portfolio is setting new highs."
“so if the portfolio does not hit a new high for the next 3 years and you need to replenishment in your cash cushion, you would have to decide when to draw regardless.”
You are confusing selling and withdrawals. They are not the same and not necessarily tied together.
Often when I sell, I am filling our cash position. At times, our cash position has excess cash and I have to decide the best use of that cash at the time, invest or push to the expense cash cushion.
I can take cash at any time for our cash cushion if I believe that is the best use of that cash at the time.
That is simply a part of managing to competing but complimentary piles of cash:
They both need cash. During a market downturn, they are both consumed, one based on our portfolio guidelines and the other based on our spending.
"You are managing your portfolio for long term growth and you are taking income from it only opportunistically. With your cash cushion, you have 3 years to do so.
The question in my mind is what if it takes more than 3 years to find these opportunities? We don’t want to get back to a situation where one is forced to take from his portfolio every year in which case he would be completely dependent on market conditions."
If push comes to shove, I can take the dividend cash.
In a worst case scenario, if all our dividends were eliminated and our guaranteed interest went into default, I would be forced to sell stock.
But our portfolio would be in better shape at that point because I would not have taken 3 years worth of draws out of it already!
“The cash cushion is a buffer between your regular cash consumption and the market. But the question in my mind is always if a favorable time to draw the replacement cash from the portfolio will be identified before the cushion is flat, and this will have to be good enough to reflate your cushion back to cover 3 years of expenses.”
NOT reflate to 3 years! If I can flow a couple of months or so into the cushion, that is what I would do.
Our portfolio continues to generate cash and I still control how I will use that cash.
Do you have a car?
Gas, diesel or electric doesn’t matter because you either fill a battery or a fuel tank (buffer) occasionally. Let’s say it is gas.
Do you stop at every gas station along your route and top-off your tank?
Let’s say you are at 3/4 tank and see a sign, “Next Gas 200 Miles.” Do you top-off your tank or drive past?
You can do both but I suspect the #1 scenario you would not do. Why?
Best use of a resource, your time, right?
That is how I look at cash. It is a resource that I can invest or stash away for spending. I make decisions on which to do.
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx
Best use of a resource, your time, right?
+++
+++
While cash is fungible [expense vs investment], I find it desirable to trade some of my cash for the time I [previously] spent doing mundane {& no longer enjoyable} TASKS. Yard care, vehicle maintenance & pool care are among those I now pay to have done.
sunray
a man who Knows that you can’t take it with ya
This simulator is quite useful.
I wasn’t sure I understood the “single portfolio dips (50 bottom)”. There is the start year and a cycle #. What is the cycle number? There are different cycle number for different years.
“Note that the success of an allocation of 95/5 is not that different than 60/40. I would probably move to 60/40 but not rush it and consider tax consequences of selling.”
yes that is somewhat surprising but I think it may be about short to mid term volatility differences. Higher volatility for stocks but higher long term returns. Volatility could be gut wrenching e.g. if the start year were 1966 and with a given income extracted each year from a mostly stock portfolio, it could have brought the portfolio down by almost 58% 15 years into the retirement before rising up. That would have been very uncomfortable.
Maybe in the long term the main goal is not to run out and not so much about maximizing terminal value as far as FIRE is concerned.
tj
Hi thejusticier,
""Right now, our cash position is at about 2% with a target of 8%. "
This 8% if the money from your portfolio you need to replenish your cushion to 3 years of expenses?
I guess I got a bit confused on how you talk about the cash you leave in your portfolio and the one that is in your cushion. "
No, 8% of our portfolio is close to 8 years of our needed cash from our portfolio.
The cash position in our portfolio has no direct tie to our expense cash cushion.
Expense cash cushion is 3 years of needed cash COMPLETELY SEPARATE from our portfolio.
This cash is stored to be SPENT on Expenses.
====================================================================================
The cash position in our portfolio is an INTEGRAL PART OF OUR PORTFOLIO.
This cash is stored in our portfolio to be INVESTED! Opportunities like market declines and other opportunities.
Two separate piles that have different purposes. They are managed separately.
The 8% is a portfolio decision and it has absolutely nothing to do with expenses, cash cushion size or timing.
Item 6 of my portfolio guidelines:
6. Manage an adjustable cash position.
A. Size between 5% and 15% of portfolio
B. Possibly use bond funds for a portion
of the cash position larger than 5%.
Depending on what I believe is happening, I will adjust the target size of the cash position but it has nothing to do with expenses, cash cushion, large expenses, etc. It is purely an investing decision.
If you do not have a cash position in your portfolio, don’t worry about it.
In fact, most people that invest completely in funds, ETF’s and mutual funds, do not use a cash position. Everything is invested. Many with stock portfolios do not have cash positions either.
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx