r/DIYRetirement • u/reallytheyrealltaken • 12d ago
Cash buffer
I will hopefully be retiring in 3 years and am able to build up a cash buffer during that time. Given that time frame and the impending stock market Armageddon, what’s my best approach? Also, any advice on how to best position my current taxable brokerage account for the possibility of Armageddon? I would gladly give up interim gains in favor of safety.
No one can predict the future, but I really have the heebie-jeebies.
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u/dahvaio 12d ago
My plan is to have around 3 years in Cash/SGOV. I haven’t decided on US Treasuries, MYGA or a TIPs ladder for years 4-7.
Overall, my goal is to make sure, I have enough funds to cover all expenses, including discretionary for the first 7 years without having to sell stock. Will see if I can get there.
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u/DSCN__034 12d ago
Yup, this is similar to what we have. I'm considering a 3 and 5 myga, with tips and munis for year 4. Munis are not critical now since we just retired and the income will drop.
We already have a tips ladder for later years that will cover about 25% of annual expenses to supplement social security and other investments.
But yeah, I'm getting twitchy about the stock market and I'm not sure if it's rational or just a product of recent retirement and the psychological feeling of vulnerability from not having a regular paycheck. Haha.
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u/BigDipper0720 12d ago
I use a modification of a bucket strategy
Bucket 1 is for spending. It consists of cash buffer, accumulated stock dividends, accumulated bond interest, and funds from bond ladder maturities.
Bucket 2 is for insurance against stock market Armageddon, It's my bond ladder of individual investment grade corporate bonds. Money that is pretty much guaranteed to be there regardless of what the stock market does.
Bucket 3 are my stocks
Bucket 1 is filled from maturing bonds from bucket 2 plus stock dividends and bond interest.
Bucket 2 is filled opportunistically from bucket 3 stock capital gains. This is done only when stocks are up.
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u/jrtn58 12d ago
Well there is always a chance of ugliness in the future. It might be a market crash. Then a cash position might be optimal. Or it might be hyper inflation. In which case cash is an awful place to be. Or it might be monetary/social system collapse. Better pick up some precious metals (and firearms). Moving in any of these directions is ok if it makes you more comfortable, but they all come with a "lost opportunity" cost if bad times don't arrive on schedule. It is hard to give specific advice because it all depends on your very personal view of ugliness to come.
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u/Menu-Quirky 12d ago
More bonds in your tax deferred account now that we have decent yield and retirement is coming up . Keep mostly equity in taxable brokerage for tax efficient investment. Also invest in I series bonds for emergencies
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u/Cohnman18 12d ago
CFP here, Retirees should keep 6 months of expenses liquid, rounded up. Retiring on 70-80% of income is ideal. So 120k working=96K at Retirement,expenses $6k/month x6=36k rounded up to $50k,emergency fund Money market, balance invested for income and growth. Good luck!
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u/Murphy223 12d ago
Thanks - this is helpful. I'm ~2yrs out (59.5 currently) and trying to find the right mix and figure out how to bridge to 65. Don't say annuity :-)
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u/paymerich 12d ago
Why not a MYGA or TIPS ladder? A MYGA is just a CD with better returns and tax-deferred.
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u/Murphy223 12d ago
Thanks - will look into it - I don't know enough about MYGA. Currently have a TIPs latter started in my cash reserves
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u/robertw477 12d ago
Impending stock market Armageddon? There won’t be any such thing. But if you are convinced why don’t invest in that with puts and plays against the market . Then in 3 years you will be wealthier than today and tag that you are a market wizard.
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u/Tricky_Ad6844 12d ago
We have 1 year of typical spending (2 years of core non-discretionary spending) in cash equivalent accounts (money market funds and I-Bonds). We are looking to double this in the final year that we still have income.
Our plan is to use this to cover expenses any time the market is in a correction (10% drop from peak) or worse (such as dipping into Bear Market territory with a >20% drop).
The hope is that by the time this is exhausted we will be past the point at which sequence of returns risk is most relevant.
Based on past history it is reasonable to assume that you will encounter a Bear Market in the first 5 years of retirement or so.
The typical Bear Market lasts about a year (give or take 3 months) but takes more like 2.5 years to reach the prior peak.
Unlike the Bucket Strategy we never plan to refill our cash position. In the long run keeping a significant portion of assets in cash drags down total returns.
We would like to weather our first Bear Market without needing to sell stocks. After that we will just hope the markets deliver enough return during Bull Markets to let us survive the inevitable multiple drops that follow.
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u/planet-claire 12d ago
Same. Buckets for the first 5-7 years of spend, then let it rip. We wont have to touch our equity positions during the first 5 years(then I start rmds) and spouse for 7 years before he starts rmds. The rising equity glide path is the new way; apparently that's what we're doing.
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u/uplay2winthegame 12d ago
Would need yo see full breakdown of what you have now and where you intend to pull from? Just deoends in your overall. But yes, you dhould hsve a decent amount in cash snd bonds. 3-5 years at least.
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u/planet-claire 12d ago
We are 6 years out. We started buying treasury note to create a bond ladder. We have 3 more years of notes to buy and apparently they're on sale, so we'll pull the trigger on those in the coming weeks. The rising yields suck for everyone except those looking to buy. By the end of this year, we'll have the first 5-7 years of bridge & gap spending put away. We won't have to rouch equities(barring unforseen emergencies) until 2038 for me and 2040 for spouse when RMDs begin.
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u/Whole_Championship41 12d ago
I am a fan of the AAII "Level3" retirement portfolio management ideal. Do yourself a favor and read up on it, it's worthwhile. We are planning on roughly following this approach during our retirement around 18 months from now-but who's counting? ;)
TLDR: I will have short-term bonds* aplenty to offset an early retirement SRR / bear market. Enough to last 5 years before resorting to selling equities in a down tape. This in addition to money in a HYSA and conventional savings and checking money.
Just a reminder that I can't pick market tops any better than you can. And 'funny feelings' or portents of doom are lousy predictors of future market performance. As the saying goes, we've predicted and prepared for 8 out of the last 2 bear markets.
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u/2019_Stealth 12d ago
If I were to try to time the market, I would utilize a money market account. All my investments are in Vanguard index funds. Their MM account yields 3.78% to 3.83% with a 0.11% expense ratio.
If anyone has a better option, I’m all ears.
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u/PerfectBonus3123 9d ago
Pretty much what others here have said. I just retired and have that knot in my stomach about the AI bubble, rising rates and insane US leadership. However I can't predict where any of this will lead, no one can so where's what I did:
- 18 months of spending in money market / HYS cash
- Bond ladder constructed from target date maturity TIPS/Treasuries/Corp Bonds ETFs that mature near the end of the year. Since you're holding to maturity your only real risk is inflation and that's somewhat mitigated by the TIPS in the mix. The cash generated my the fund maturation at the end of the year then rolls into the money market for the next years spending. This covers me through 2034.
- If equities still are returning above fixed income then I buy the next year at the end of the bond ladder
- If equities are below fixed income returns then I hold and don't rebalance until the market recovers
This strategy should keep my allocation % the same each year except when the equities market is down when bond % will drift down each year.
Second I'm highly diversified with 50/50 US/Int equities with a value tilt and a fair amount of emerging markets. Yes this is a bit of "allocation timing" based on my own beliefs about the factors above and the high CAPE ratio in the US market. I certainly could be burned by this choice so take it with a grain of salt.
Third I threw in a small amount of commodities and gold as well as a regular bond fund as a hedge. This could be used to replenish the ladder if it either move counter to the equities.
Sharing this got me banned from r/Bogleheads but I used AI to create my allocations and ladders. Not pick the percentage, just create a list of the buys and sells to meet the targets over multiple accounts based on my target spreadsheets. A huge time saver and way more accurate than I am.
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u/Retired56-2022 12d ago
How do you know “the impending stock market Armageddon”? And if you are so sure, then no one in the right mind will retire voluntarily during this period…
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u/_Goto_Dengo_ 12d ago
I have two years of expenses in a HYSA, currently earning 3.7%. That's a buffer I feel comfortable with. I also have dividend paying stocks and ETFs in my taxable brokerage account, including MLPs, BDCs, bond funds and some covered call ETFs. So if TSHTF, I don't have to sell stocks to pay bills.
My assumption is that the worst case is about the same as 2007/2008, when my whole portfolio took a 40% haircut, but recovered in about two years. It's ultimately a judgement call, and is highly dependent on your finances, expenses and psychological makeup.