That’s the first time I’ve heard “5-8 years”. Usually it’s “2-3” in cash or equivalent. We have about 2 years, give or take.
Generally, 3-5 years is considered a reasonable period for a growth portfolio to recover from a severe correction or recession. The 5-8 years comes into play because those in retirement don’t have the benefit of fresh income to help grow the portfolio - recovery has to be based on the invested assets alone. Also, it’s an added degree of safety for those whose income is primarily based on their retirement savings.
Fuskie
Who notes the point is to not put yourself in the position where you have to make inopportune decisions to sell out of a position…
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Generally, 3-5 years is considered a reasonable period for a growth portfolio to recover from a severe correction or recession. The 5-8 years comes into play because those in retirement don’t have the benefit of fresh income to help grow the portfolio - recovery has to be based on the invested assets alone. Also, it’s an added degree of safety for those whose income is primarily based on their retirement savings.
I would point out that if you are retiring with 25 times your expenses (i.e. 25 years worth of expenses) that holding 8 years in cash means that you are holding nearly 1/3 of your entire portfolio in cash. That introduces it’s own risks.
Circling back to my original question: What are the odds that our record debt-to-GDP (similar to WW2, but without the “king of the hill” benefit we had in 1945) will cause a significant decline in the standard of living for retirees, for the rest of their lives, living on stock and bond interest/dividends/capital gains/consumption of principal?
Pretty low. The actual cost of debt service compared to GDP is not particularly high at the moment, and a lot lower than it has been in the past.
The best strategy, especially for someone about to retire or living in retirement, is to make sure you have 5-8 years retirement income needs in cash or equivalent to protect you against market volatility over the next few years. It’s amazing how much better you can sleep at night not having to wonder if you can pay the bills tomorrow.
Can you elaborate? I just retired this year at age 57. Having this much cash in my situation sounds extremely risky.
I have some income producing real estate, but other than that I’m about 98% cash and I sleep like a baby. I’d need Maalox with that much cash.
We have maintained a target of 3 years of our income shortfall since we retired in 2005. It has worked perfectly.
Our lowest point was October 2010 when we had less than 1 year of cash in our savings account. I sold some stock to start replenishing our cushion. Our previous sale was in June 30, 2007 after our portfolio had been peaking through May and June. Our portfolio was fully recovered and set a new high on June 26, 2010.
I do adhere to the notion that “cash needed in the next 3 to 5 years should not be invested.” Any cash I know I will need is removed from our portfolio when it is identified.
Ok, got a little fib in there. In late 2020, we decided to move and build another house. After making some guesstimates, I sold stock for a few months and removed all the initial cash I needed plus some to start construction. We purchased the lot in Jan 21 and started excavation Oct 20, 2021. I started paying bills in November with the cash from 2020 and continue through today.
Since this is all coming from our Roth IRA’s, I left a lot sit in the IRA’s. When it is all done, I will top-off our cash cushion if needed then decide to reinvest any excess. If I took it all out, I have no way to get the excess back in.
<<<Generally, 3-5 years is considered a reasonable period for a growth portfolio to recover from a severe correction or recession. The 5-8 years comes into play because those in retirement don’t have the benefit of fresh income to help grow the portfolio - recovery has to be based on the invested assets alone. Also, it’s an added degree of safety for those whose income is primarily based on their retirement savings.>>
I would point out that if you are retiring with 25 times your expenses (i.e. 25 years worth of expenses) that holding 8 years in cash means that you are holding nearly 1/3 of your entire portfolio in cash. That introduces it’s own risks.
I kept 10 years worth of living expenses in cash and short-term bonds after the 2008 real estate and mortgage collapse. Of course my withdrawal rate was about 1% at the time, so I still had a 90% stock portfolio. As interest rates declined, I decided that was too much money earning a close to zero percent interest rate return and I cut it to 5 years worth of of expenses in cash and bonds – an asset allocation of 95/05 or less.
Theres more than one way to skin a cat. Many would cover that 5 to 8 years not with cash but mostly with dividend paying stocks. And with a fairly stable collection of say blue chip stocks.
Years of expenses in cash and/ or bonds in one way but other ways cover the situation. As always diversification is a plus. A blend of several strategies protects you from unexpected surprises. Giving you time to adjust. None of this is cast in concrete. Better to adapt as situations develop.
Of course my withdrawal rate was about 1% at the time, so I still had a 90% stock portfolio.
Yeah, having 100 times your annual expenses in your portfolio is a lot different than my stated assumption of having 25 times your annual expenses. Your experience doesn’t seem that applicable.
will cause a significant decline in the standard of living for retirees,
I think a decline is a reasonable concern but not “significant” decline (however you define it).
Retirees benefit from the most inflation protected income stream in existence - social security. Retirees are probably safer from any looming disaster than any other group of citizens - especially considering their politically protected status.
Many would cover that 5 to 8 years not with cash but mostly with dividend paying stocks.
Paul, many would indeed do so, but dividends are not guaranteed during a severe market downturn. How many companies suspended dividends at the start of the pandemic and still have not resumed them?
Plus, paying a dividend doesn’t make the company immune from market volatility. You suffer a net loss if the value of the dividend paid is countered by a drop in the value of the position.
Fuskie
Who notes also that a Fool would have to have sufficient investment income from dividends to cover their retirement income needs or they could still be pressured to liquidate positions during a down market…
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Nope, not a typo. I appreciate your input, but as I mentioned, I have income producing real estate and some other small passive income streams. In many ways that’s a superior substitute for cash. And importantly, my investment horizon is at least 30 years. A big cash position not only will lose to inflation, but has a big opportunity risk as well. I’ve been through enough market downturns such that volatility doesn’t bother me.
A big cash position not only will lose to inflation, but has a big opportunity risk as well. I’ve been through enough market downturns such that volatility doesn’t bother me.
Sorry, but that really doesn’t square with but other than that I’m about 98% cash
Paul, many would indeed do so, but dividends are not guaranteed during a severe market downturn.
True, but neither are bond interest payments.
Yes, it takes a huge hit to earnings to put those payments at risk. Fortunately most recessions are far less severe than that. Most industry leaders work hard at continuing to pay dividends.
Our Dividend Growth Investing discussion board focuses exactly on that. Those with a long record of increasing their dividend. I suspect omitting a dividend (a big black O in the old Barron’s listing) would get a company kicked off of their list for years.
Of course my withdrawal rate was about 1% at the time, so I still had a 90% stock portfolio.
Yeah, having 100 times your annual expenses in your portfolio is a lot different than my stated assumption of having 25 times your annual expenses. Your experience doesn’t seem that applicable.
Right. But it does demonstrate the very important aspect of the “4% rule” that many don’t understand. It’s the maximum inflation-adjusted withdrawal that survived all 30-year payout periods in history, it’s not an average result.
There’s a very good chance that you’ll end the 30-year period with more money than you can spend – as long as you don’t yield to some of the sub-optimal advice being presented here and elsewhere.
Retirees benefit from the most inflation protected income stream in existence - social security. Retirees are probably safer from any looming disaster than any other group of citizens - especially considering their politically protected status.
Not so much for higher income/higher net worth retirees doing a FATFIRE retirement. SS is a small piece of the income pie and IRMAA adds health care cost (although IRMAA is really a tax more so than a healthcare cost).
There’s a very good chance that you’ll end the 30-year period with more money than you can spend – as long as you don’t yield to some of the sub-optimal advice being presented here and elsewhere.
intercst
Intercst, do you think the S&P500 will reach a new all time high within the next 5 years? Others too…put another way, do you think this is 1966?
<<will cause a significant decline in the standard of living for retirees,>>
I think a decline is a reasonable concern but not “significant” decline (however you define it).
Retirees benefit from the most inflation protected income stream in existence - social security. Retirees are probably safer from any looming disaster than any other group of citizens - especially considering their politically protected status.
Absolutely!
Waiting another 3 years and 5 months to collect SS at age 70 is currently the best performing “asset” in my portfolio – an 8% per year increase in benefits plus inflation.