Schwab's Advice For Retirees Unprepared For Market Downturns

while cash reserves sound good , research has shown it really adds nothing except some mental comfort .

spending directly down from stocks and bonds has actually done better then having a cash bucket .

remember in down turns it isn’t equities that are sold , it’s bonds to rebalance.

as kitces points out

EXECUTIVE SUMMARY​

For retirees who fear the impact of a market downturn on their spending, an increasingly popular strategy is just to hold several years of cash in a reserve account to accomplish near-term spending goals. As the logic goes, if there are years of spending money already available, the portfolio can avoid selling equities in a down market to raise the required cash, and clients don't have to sweat where their retirement income distributions will come from while waiting for the markets to recover.

Yet the mathematics of rebalancing reveals in the truth, even clients following a standard rebalancing strategy don't sell equities in down markets, rendering the cash reserve strategy potentially moot. On the other hand, some benefits still remain - although aside from an indirect short-term tactical bet, the most significant impact of a cash reserve strategy may be more mental than real.





Is A Retirement Cash Reserve Bucket Unnecessary?
 
Actually cash reserves were fairly smart while interest rates paid were up. No, it doesn't compare to a market bubble, but it wasn't like Benjamins in the basement.

You re-assess as conditions change.

The income tax on SS might be repealed again. Many states are dropping pension taxes, and for all we know pensions might end up exempt from Federal income taxes.
 

social security needs those taxes to stay solvent .

about 25% of what social security pays out comes from income taxes paid on it . the trust fund is credited with all income taxes paid collected on ss .

so i don’t see it happening
 
IMO reducing day to day expenses and limiting draws on retirement portfolios is much better than relying on a cash reserve.

Better to structure a budget around a 2-3% draw and then squeeze out a lump sum during good times. It would probably still work out to the conventional logic of 4% draw without having to sell in a down market.

I do agree that a cash savings plan is important for repair and replacement during retirement.

In the end we all have to find a system that works for our situation.
 
mathjak107 said:
while cash reserves sound good , research has shown it really adds nothing except some mental comfort .

spending directly down from stocks and bonds has actually done better then having a cash bucket .

remember in down turns it isn’t equities that are sold , it’s bonds to rebalance.

as kitces points out

EXECUTIVE SUMMARY​

For retirees who fear the impact of a market downturn on their spending, an increasingly popular strategy is just to hold several years of cash in a reserve account to accomplish near-term spending goals. As the logic goes, if there are years of spending money already available, the portfolio can avoid selling equities in a down market to raise the required cash, and clients don't have to sweat where their retirement income distributions will come from while waiting for the markets to recover.

Yet the mathematics of rebalancing reveals in the truth, even clients following a standard rebalancing strategy don't sell equities in down markets, rendering the cash reserve strategy potentially moot. On the other hand, some benefits still remain - although aside from an indirect short-term tactical bet, the most significant impact of a cash reserve strategy may be more mental than real.





Is A Retirement Cash Reserve Bucket Unnecessary?
Click to expand...
For a lot of people, especially those skittish about the markets, peace of mind is very important. And I ain't even mad at 'em. After all, we know that next to stock returns, banks pay next to nothing, thus the value of that cash actually declines significantly over time. Since my portfolio is somewhat aggressive, I know I probably have more in savings than I should, but I feel better knowing it's there. As of today, my savings and checking accounts make up 20.51% of my retirement portfolio.

You said that you were down 100k as of the other day. As of today, I'm down a little over $44,000. Total gain is listed ad 36.98% though, so I'm nowhere near panic mode (which I don't do anyway). My BFF told me a good friend of hers lost millions as of Friday. I know he had bought a whole lot of shares of NVDIA (in addition to his other holdings), but I was under the impression he had gotten them at a lower price than what they dropped to over the last couple of days. Nvidia is down about $24 per share over the average cost I paid. Don't have that many shares though.
 
Last edited:
Teacher Terry said:
The problem with reducing expenses is that eventually you run out of things to cut especially with everything going up in price.
Click to expand...
exactly.

cutting expenses only seems the same as increasing income , until there is nothing left to cut and expenses keep rising.

that is companys are judged by profits , which can come from cost cutting , as well as revenue which needs to show growing
 
OneEyedDiva said:
For a lot of people, especially those skittish about the markets, peace of mind is very important. And I ain't even mad at 'em. After all, we know that next to stock returns, banks pay next to nothing, thus the value of that cash actually declines in value, significantly over time. Since my portfolio is somewhat aggressive, I know I probably have more in savings than I should, but I feel better knowing it's there. As of today, my savings and checking accounts make up 20.51% of my retirement portfolio.

You said that you were down 100k as of the other day. As of today, I'm down a little over $44,000. Total gain is listed ad 36.98% though, so I'm nowhere near panic mode (which I don't do anyway). My BFF told me a good friend of hers lost millions as of Friday. I know he had bought a whole lot of shares of NVDIA (in addition to his other holdings), but I was under the impression he had gotten them at a lower price than what they dropped to over the last couple of days. Nvidia is down about $24 per share over the average cost I paid. Don't have that many shares though.
Click to expand...
it is really about allocation and volatility , not about whether you have cash buckets .

a low volatility portfolio can have a better beta and sharpe ratio using no cash buckets compared to a more volatile portfolio with cash buckets .

as an example a stock fund like fidelity equity income and some short term bond funds is going to perform a lot different and sustain a lot less volatility then say fidelity blue chip growth , TLT long term bonds and a cash bucket


think about this :

up until the fall think about this

the s&p had fully one third of its value dominated by the magnificent 7 stocks .

the s&p was so heavily weighted by those 7 stocks and tech that vanguard put a warning on all their s&p funds that they are NOT DIVERSIFIED ANYMORE .

the s&p was more concentrated by tech than nasdaq was 30 years ago …

read that again , the S&P was more risky than nasdaq was .

so funds like fidelity blue chip growth fell 23% until today .

on the other hand a fund like fidelity equity income fell just 7.5% while berkshire was actually still up .

so what your funds are , even in the same allocation determine how risky your portfolio is and cash buckets are not going to change much assuming similar allocations to equities
 
Last edited:
I would rather cut expenses than assume more risk in an effort to increase income.

The market doesn’t care what any of us want or need and running out of income would be worse for me than restricting expenses.
 
Aunt Bea said:
I would rather cut expenses than assume more risk in an effort to increase income.

The market doesn’t care what any of us want or need and running out of income would be worse for me than restricting expenses.
Click to expand...
we need to do both in retirement.

i grew up in a nyc housing project and cutting and eliminating was a way of life .

i made a promise to myself that i would never raise my own family in one , and i would never really deprive myself ever again .

so once i was working i was never one to cut spending .

i rather have learned to start investing and raise my income .

at times i worked 3 jobs to make sure i had money to invest .

i was a hvac tech all day , i ran my own service at night on the side and i was a drummer doing gigs .

i made if a point to buy a new car every 4 years since 1974
 
Aunt Bea said:
IMO reducing day to day expenses and limiting draws on retirement portfolios is much better than relying on a cash reserve.

Better to structure a budget around a 2-3% draw and then squeeze out a lump sum during good times. It would probably still work out to the conventional logic of 4% draw without having to sell in a down market.

I do agree that a cash savings plan is important for repair and replacement during retirement.

In the end we all have to find a system that works for our situation.
Click to expand...
Being able to cut expenses is good, but if there's no cash stash, what happens if a person has to move or absolutely needs to buy another vehicle to get back and forth to work? What if prices rise so high, as is expected with these tariffs, that cutting back no longer helps because there's nothing else that can be cut?
 
OldOld said:
If you know you have more money than you need for the rest of your life. The mental comfort of cash reserves is very valuable.
Click to expand...
i agree , i like the feeling of a cash bucket .

but the fact is financially one can just rebalance stocks and bonds when they need to refill cash and it has traditionally been more efficient that way

but it has zero to do with having enough money for the rest of your life .

its just basic portfolio management and allocation.

whether you take money from bonds in a down turn or cds , money markets and tbills is irrelevant.

its all fixed income at the end of the day.

its has just produced better results over time not having the cash buckets as stocks and bonds have had higher returns than stocks , bonds and cash instruments.

but either way there is going to be little difference with or with out a cash bucket with more than a years cash.

right now i broke my own rules because. i have reduced my equity holdings way way down in this environment.

this isn’t a natural business cycle .. this is self inflicted damage by one man, so i have more cash than i ever have had .

hopefully that will go back in once the chaos is done
 
Last edited:
I would rarely keep much at all in a standard savings, which pays next to nothing. A High Yield Saving can pay as high as 5.5% when interest rates are up, and they are FDIC insured. If the Fed drops interest rates and your HY savings falls below a level you are happy with, you can just draw the money out and rebalance elsewhere. Money Markets are nice too for a regular income (Although insured by a different entity).

If one chooses to invest in the market, but still need income, one of the safer options is JEPI. It pays a fairly regular dividend that averages anywhere from 7% to 12%, but still subject to ups and downs. They have the ability to make money even in a troubled market (Although not 100% of the time). They do this by selling Call Options and Equity Linked Notes.

A call option works like this: JP Morgan buys a wide range of stocks in the S&P500, so it owns the stocks from major companies. Then it does covered calls to other investors. Here is an example:

JPM buys a certain stock for $50 per share. Now Average Joe buys this option from JPM for $2 per share which guarantees that Joe can buy that stock from JPM for a limited time (Say a month) at a strike price of, let's say $55. If the share doesn't go above the strike price, then JPM gets to keep the $2 per share, plus any small gains from it's original purchase. If the share goes to $60 per share within a month, then Joe exercises the call option and buys the stock from JPM for $55.

If that happens, JPM gets to keep the $2 per share for the call option, but loses $5 from the sale of the stock, however, since JPM bought the stock originally for $50 and had to sell them to Joe for $55 (The strike price), JPM made $5 + $2 = $7. However, they could have made $10 per share if they had just held them and sold at $60. So they end up missing out on $3 more potential gain.

On the other hand, if the stock goes to, say $53, which is below the $55 (Strike price), then the covered call is never used because Average Joe can buy the same share on the market for less than $55, so JPM pockets the covered call money of $2, plus the increase in stock price of $3 over what they were originally bought at. So JPM makes $3 + $2 = $5 per share.

If the shares fall below what JPM originally paid for them, then there is a loss of stock price, but they still get to keep the covered call money, so they are still better off than one is who just owns the stock. It's also worth mentioning that they have very seasoned professionals there who are buying stocks and timing the market, so they aren't flying blind when buying. It's a formula that works well.

If the market makes a severe upswing, they don't do as well as the market, but they still do pretty good because they do make money on rising stock prices.
 
jepi is not in the same class as cash instruments.

it has lost 5.38% including all interest ytd and lost over 6% just in the last week.

not a place someone looking at cash instruments should be .

JPST would be more appropriate

there are loads of long / short funds today since the sec approved hedge fund strategies for etfs and funds in 2020 .

but none , not even something like SWAN which is 90% treasuries and 10% LEAPS is a proxy for cash instruments
 
Last edited:
for now my go to portfolio is almost 70% less volatile than the s&p

30% is in equities split between a utilities / telecom fund and a pretty aggressive fidelity growth fund.

the fixed income side is all real actively shorter term bond funds

an ultra conservative bond fund , a short term bond fund going out 1-3 years , and an intermediate term bond fund that goes out about 3.5 years .

while the fed controls short term money market rates and cd rates , investors control. the note and bond rates. .

the future direction of rates and inflation is predicted in those rates daily so they change before the fed does .

anyone who things they will sit in a money market until the fed cuts rates and then switch to bonds missed the boat .

by the time the fed cuts rates the bond market has already made the shift rate wise and you lost the advantage of owning bonds and notes over a money market when rates fall.

this is why timing rarely works out well ..
 
mathjak107 said:
jepi is not in the same class as cash instruments.

it has lost 5.38% including all interest ytd and lost over 6% just in the last week.

not a place someone looking at cash instruments should be .

JPST would be more appropriate

there are loads of long / short funds today since the sec approved hedge fund strategies for etfs and funds in 2020 .

but none , not even something like SWAN which is 90% treasuries and 10% LEAPS is a proxy for cash instruments
Click to expand...

Believe what you will, but here is the side by side comparison:

JEPI Dividend Performance.jpg

JPST Dividend Yield.jpg
 
who cares what the yield is .

with all divide included it lost over 5 % this year .

bad deal . you lost money not gained a penny

NEVER CHASE YIELD , IT IS ONLY ABOUT YOUR TOTAL RETURN

jpst has a ytd return of 1.11% so far , compared to losing over 5% in jepi

for the week jpst lost .30% , jepi lost 6.13%.

jepi is as volatile as a junk bond fund. no way should anyone buy that as a replacement for their cash instruments .

buy it as you would a junk bond fund , it’s that volatile but no way does that belong as a proxy for cds or money markets
 
Last edited:
mathjak107 said:
who cares what the yield is .

with all divide included it lost over 5 % this year .

bad deal . you lost money not gained a penny

NEVER CHASE YIELD , IT IS ONLY ABOUT YOUR TOTAL RETURN

jpst has a ytd return of 1.11% so far , compared to losing over 5% in jepi

for the week jpst lost .30% , jepi lost 6.13%.

jepi is as volatile as a junk bond fund. no way should anyone buy that as a replacement for their cash instruments .

buy it as you would a junk bond fund , it’s that volatile but no way does that belong as a proxy for cds or money markets
Click to expand...

People who care about monthly and yearly income care about the yield, and btw, if this looks like a volatile stock to you, then I think you need a reality check.

JEPI stock price history.jpg
 
bobcat said:
People who care about monthly and yearly income care about the yield, and btw, if this looks like a volatile stock to you, then I think you need a reality check.

View attachment 415950
Click to expand...
they are fools if they chase yield .

no matter what the yield is if your share value falls more you lost money .

in the case of jepi you lost 6% over just one week and 5% over the last month and that is counting all that interest .

a money market was a better investment so far this year . you would have over 6% more with interest from the money market

if you don’t understand this and the fact that fund is now losing money you shouldn’t be telling people what is good
 

You must log in or register to reply here.

Back
Top