Category Archives: Bucket Strategy

Recession Lessons Learned Hold Up During Pandemic Market Drop

Bucket Strategy, Investment Strategy, Retire Early,

I was still in my first long career and just months away from my FIRE date in 2008 when it became obvious it was all going to hell. I learned valuable personal finance lessons regarding once in a lifetime economic dumps when everything is unprecedented with no signs of stability in sight. But back then I was still employed and had options. Retiring early and living off of a portfolio presents different challenges when that “just enough” portfolio can be severely stressed. I took the recession lessons learned and applied them to my early retirement portfolio strategy. Here’s a quick rundown on how it has held up during this pandemic crisis and its related market drop.

Recession Lessons Learned Hold Up During Pandemic Market Drop

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Year To Date Numbers Look Rotten

Pulling some numbers for use as an example from the first of the year (1/2/20) to (3/19/20) before the market stimulus bump shows substantial investment market damage.

  • DJI, Dow Jones: -33.6% 
  • GSP, S&P 500: -29.2%
  • IXIC, Nasdaq: -24.3%
  • VTSMX, Vanguard Total Market Index Fund: -30.0%
  • Leisure Freak Tommy’s retirement portfolio: -17.4%

Fortunately the stimulus market bump occurred and the end of quarter numbers did improve from the week before but still the worst quarter since 1987. 

  • DJI, Dow Jones: -23.2% 
  • GSP, S&P 500: -20.0%
  • IXIC, Nasdaq: -14.2%
  • VTSMX, Vanguard Total Market Index Fund: -20.3%
  • VTI, Vanguard Total Market Index Fund -22.4%
  • VTSMX, Vanguard Total Stock Market Index Fund -20.3%
  • Leisure Freak Tommy’s retirement portfolio: -12.2%

2008 Recession Lessons Learned – Portfolio Diversification Matters 

My being somewhere between leanFIRE and FIRE had me a bit more conservative to reduce risk. I used the recession lessons learned to attempt lowering financial pain from another extended market dump during my early retirement. Although I have no problem working in retirement when I want to, I never want to NEED to work for survival. I’m sure that post pandemic there will also be plenty of new lessons learned from this crisis to carry forward. 

I know plenty of people who are all in with stocks, mostly through Index and ETF funds. I would watch the market go gangbusters of late and think, what if I had only been all in stocks or stock funds too? One of the recession lessons learned was that diversified portfolios recovered much quicker than those all in stocks. 

Great Recession Diversified Portfolio Recovery Details

Stocks/Bonds Maximum Loss Time to Breakeven
20/80 9% 22 months
40/60 23% 25 months
60/40 35% 37 months
80/20 46% 42 months
100% Stock 55% 59 months

Another 2008 recession lesson learned was that sometimes bonds will track with stocks instead of going the opposite direction as in past history. That may be the case this time too. Diversification can lessen portfolio decline but not stop it. As listed above, my portfolio is down 12.2% for the first quarter of 2020 with this COVID-19 pandemic. But that’s much less than the sampled stock indexes.

The numbers look bad and may get much worse. 

If I was fatFIRE I might be able to stomach large losses and continue on. I wondered if being all in stocks over the past few years meant the excessive gains they have enjoyed are far greater than what has trimmed thus far during this pandemic market dump. So I took a quick look at the numbers on 3/20/20 prior to the stimulus market bump when things were at their recent worst.

  • DOW closed 3/20/20 at 28,869. That takes it back to what it was 11/1/16
  • S&P 500 closed 3/20/20 at 3,258. That takes it back to what it was 1/1/17
  • Nasdaq closed 3/20/20 at 6,880. That takes it back to what it was 11/1/17
  • VTSMX Vanguard Total Market Index Fund closed 3/20/20 at $56.01. That takes it back to what it was 12/1/16

I used the Vanguard date of 12/1/16 because it went the farthest back and I looked at my portfolio amount. I haven’t added any money to my portfolio during this timeframe and on top of that it has been paying out to me monthly since then. Comparing my 12/1/16 portfolio amount to 3/20/20 it was down -16.4%, which was 1% better than it was when looking at the first of the year to 3/20/20. That’s even after paying out to fund my and my wife’s early retirement lifestyle since that time. There were also associated CFP wrap fees on 90% of the portfolio since then. So unless I am missing something, being all in stocks appears to be a lot riskier when a major market dump occurs. That would account for a longer post recession portfolio recovery time frame.  

My FIRE Portfolio Allocation

I do keep a diversified allocation of stocks and bond funds like many people do. But I do something else. I use a bucket strategy where I keep two years expenses in cash and short-term bonds along with another year in a savings account. It was 2 years ago (3/2018) when I set this asset allocation.

  • 18.5% Cash/Cash Investments
  • 29.5% Bonds Fixed Income
  • 48% Equities
  • 4% Alternatives

I did not see the astronomical portfolio growth over the past couple of years that I would have with a larger stock allocation. But I also didn’t experience the higher level of losses now. I hope things come back to some version of normal sooner rather than later. With all the unknowns I now really appreciate having the cash as my FIRE portfolio survival insurance. It’s calming to know it’s there to  support our retirement lifestyle without resorting to depressed priced asset sales for a couple of years. 

If post pandemic recovery goes like that of the great recession then I hope to see similar favorable recession portfolio recovery timeframes for a portfolio with a diversified stock/bond/cash allocation. A leanFIRE to FIRE early retirement means I don’t have a lot to cut from our lifestyle to reduce spending during a sustained market dump. That’s why I took the 2008 recession lessons learned to heart to help ensure my early retirement portfolio survival during once in a lifetime or never before seen world and market events. 

I’m not trying to tell anyone what they should have done before the pandemic hit. 

If I could go back in time I would have gone to all cash last month. But that’s not how things work. I have no idea how the recession lessons learned or my portfolio will hold up with the next market close or even my own personal survival. I am only sharing this to support FIRE as a worthy goal. When some are saying this pandemic market dump means the end of FIRE or the end of early retirement, I feel it’s times like this that reinforces the need for the good personal finance habits of FIRE. I believe that FIRE is still a worthy goal. These are the times that really test our financial strategies and offer lessons to use going forward. 

 

Update 4/30/20: Anyone who experiences job loss due to the pandemic can check a new estimated stimulus unemployment benefit calculator. Zippia analyzed each state’s unemployment policies to determine how much unemployed workers can expect to receive under the coronavirus stimulus by state and salary. Remember, in addition to state level benefits, unemployed workers now receive an additional $600 a week for the next 4 months regardless of income. (The calculator is not a paid or sponsored link)

How I’ve Managed Income During Early Retirement

Bucket Strategy, Funding Retirement, Retirement Plan,

One of the challenges to early retirement is figuring out how to develop a reliable long-term income strategy. After decades of clocking-in and receiving regular paychecks for our efforts, retirement brings a totally different way of living both mentally and financially. This was something I worried about before retiring. As I approach my 10 year FIRE anniversary I thought I would share how I’ve managed income during early retirement. I’ve found that it isn’t rocket science even without having a million dollar plus retirement portfolio. It takes having the discipline to stick to an informed and verified plan. A plan that is monitored during retirement and allows for flexibility to adjust as required when conditions or projections change.

How I’ve Managed Income During Early Retirement

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The Way I Managed Income During Early Retirement 

Basic principle: Income during retirement must be greater than or equal to (>) lifestyle budget

There was no extreme early retirement strategy. We chose smart frugal living to save money and lived our retirement lifestyle for many years before we retired. We understood what and how we liked to live. A big part of our strategy was developing a split budget based on our different incomes. We then saved enough to support our individual budgets in retirement. This gave us a solid understanding of what it cost to both sustain and enjoy our chosen lifestyle. With that in mind we based our early retirement funding needs on that budget. 

Early retirement income sources: Where our income comes from now and later

When we retired almost all of our retirement savings were in 401K, IRA, and Roth IRA accounts. We then rolled our 401K account funds into IRAs. In my case I was age 51 and my wife retired a few years later at the age of 58. We also had some cash in savings accounts. Our income during early retirement would come from our IRAs and the cash savings. Later we will have Social Security to also provide retirement income and lower our savings withdrawal rate. 

Withdrawal plan: Establishing a sustainable withdrawal rate

We knew what we needed to receive in income during early retirement since our budget was well known. Instead of settling on the often touted 4% withdrawal rate plus inflation each year we used our required budget amount. Then calculating its probable sustainability in retirement calculators (FIREcalc) using our portfolio amount and estimated future earned Social Security income.

My initial withdrawal rate was about 4.6% and my wife’s initially 6% of her holdings. Hers would only be that higher rate for 4 years. Then her withdrawal rate will drop to 3% once her social security payments begin. My withdrawal rate has dropped over the years. It will also decrease to an estimated 2% range once we’re eligible for Medicare and when I begin Social Security at full retirement age. This along with historical investment cycles was considered in the calculation when using the retirement calculator resulting in 100% success. Basically we accept having a higher withdrawal rate early in retirement for a short period of time with lower withdrawal rates later once our earned Social Security and Medicare is available.      

Retire early and often: Where any earned money during retirement goes

I had always considered pursuing opportunities of interest and passions in early retirement. My retirement lifestyle was funded by my IRA so anything earned was extra money. Any earnings from my retirement gigs and a short encore career were saved in new 401K accounts, used to pay off our small mortgage, and put into a savings account as cash. 

Portfolio income distribution: It’s a bucket thing

We use a portfolio bucket strategy to provide income during early retirement. Within our retirement funding IRA is a cash bucket that we receive our monthly direct deposit distributions from. As with our budget, we keep separate bank/credit union checking and savings accounts where our individual IRA monthly distribution goes.

Our portfolio is diversified with various stock and bond funds. All interest and dividends are directed to the cash buckets. Selected assets are occasionally sold to maintain our desired cash bucket amount. When I was working through my bucket list of paying opportunities my portfolio’s cash bucket was 6 to 8 months of my income distributions. Now that I have worked through my list and I’m no longer actively pursuing paid adventures my IRA cash bucket strategy is to have closer to 2 years cash, as is my wife’s.

Unspent monthly distributed money that we receive is saved in our bank savings accounts to be used as needed when monthly expenses exceed our distribution amount. Such as in months when annual property taxes or bi-annual auto insurance are due and our travel months. I also keep nearly 2 years cash in savings and CDs. If/when I take on a new paid adventure then cash/bucket adjustments can be made. 

Getting income during early retirement without penalty: Pre age 59 ½ access to retirement accounts  

Most of my savings was in tax deferred retirement accounts. My early retirement strategy relied on the SEPP 72t (Substantially Equal Periodic Payment) rule to get penalty free distributions before age 59 ½. I took a chunk of my portfolio to set up an IRA and locked into a SEPP 72t at the age of 51. It provided a fixed monthly distribution until I reached the age of 59 ½. I used these distributions to fund early retirement and paid income taxes based on my income tax rate for the year.

When I worked in paying opportunities I routed those employment earnings back into savings and mortgage elimination. My wife stayed working until age 58 to reach her 20 year service anniversary which gave her some retirement benefits. She saved 2 years of retirement funding in her savings account and didn’t need to begin IRA withdrawals until age 60 when the early withdrawal penalty would no longer apply.

Managing Taxes: Starving the Tax Monster

I purposely try to under-withhold taxes within the underpayment thresholds to avoid penalty. I never want to get a tax refund. Even though a savings account pays little interest it is still better than an interest free loan to the government. Not to mention delayed refund potential due to all the tax filing fraud that seems prevalent. When I work in paid opportunities it does raise my tax rate. I would set my W4 to withhold taxes at the single rate with 0 allowances to withhold the maximum. My portfolio distributions has a tax withholding of 10%. Even with that, when I worked in retirement I still owed money at tax filing time.

Without paid work our real tax owed is 5% to 6% of total retirement income. Our IRA financial planner’s system only supports 10% + withholding for federal taxes. So I suspend tax withholding on our IRA distributions from January through June and then have them apply the 10% withholding rate until year end. This works out where we owe a very small amount at tax filing time. We have no State tax withheld from our retirement income but fortunately our low taxable income means only paying at most a couple of hundred dollars a year. 

Social Security Income: We earned Social Security by paying into it and plan on getting it

Social Security seemed so far off when I first retired almost a decade ago. Now it is knocking on our door. Aside from all the strategies to maximize Social Security, when to apply and receive benefits is a very personal thing. We have run the numbers through every scenario on retirement and Social Security calculators. Based on our lifetime income differences and thus the resulting benefit amounts between my wife and I, our plan is she begins her benefit at age 62 and I wait until Full Retirement Age (FRA) 66.7. That time is still years away and I can decide then whether to wait until age 70. It will all depend on whether we need it due to market and portfolio conditions or any changes to Social Security that may come. 

 

That’s it in a nutshell. As you can see there’s nothing complicated. 

The Retirement Calming Effect of More Cash and No Mortgage

Bucket Strategy, Funding Retirement, Investment Strategy, Non-financial Aspects of retirement, Retirement Plan, ,

There are a lot of financial decisions a retiree has to make. How to best fund their retirement, when to begin social security benefits, etc. But once that is settled, there’s a couple of decisions a retiree might have to make that can bug us to no end. How much cash should I keep and should I pay off the mortgage? If you have the funds to even consider these questions then the mental conflict is to just keep the money fully invested in the markets. That way it can possibly provide decent returns. I made these retirement money moves and can attest to one under-reported and powerful aspect to these decisions – The retirement calming effect of increasing cash and being mortgage free.  

The Retirement Calming Effect of More Cash and No Mortgage

My Retirement Calming Decisions of Cash and Mortgage

It’s certainly a first-world problem for those of personal finance success. Even talking or writing about it feels a little dirty knowing the struggles of many underfunded retirees trying to figure out how to pay for retirement when there isn’t enough. I am only able to reign in guilt when I think about where I came from to get here. Just another poor working stiff who used frugal living to feed an early retirement plan.

I never questioned retiring with a mortgage when I retired in 2009. There was about $100K still on the bank’s books and I budgeted for the monthly payment. As to cash, I left my first career with only about $20K available. The rest of my retirement funds were all in recession diminished stocks and bonds within my 401k and IRAs.

The Retirement Calming Effect of Cash

Going To One Year Retirement Funding Cash

I did wish that I had set aside more cash but it didn’t overly disturb me. It was just there in the background of the normal “what ifs” all new retirees go through. I had always planned on living a “retire early and often” lifestyle and after a few months put it to action. With my first stepped down retirement gig I continued to live off of my 72t distributions and I used my salary to increase my cash to around $35K. That represented one year’s retirement funding. I invested the rest of my paychecks into the offered 401K and my IRA.

That simple cash increase gave me my first retirement calming taste of having a bigger cash cushion. It reminded me of how I felt when I became non-mortgage debt free. This small cash jump gave me a feeling of calm knowing I added to my financial strength and it told me something about myself. Not only did I feel more confident about my retirement funding, but I didn’t sweat all the market swings as much during this 2010 through 2011 period of my early retirement.

I was a proud risk taker regarding my ditching a long career for early retirement. But I mentally preferred a bigger cash cushion when it came to my portfolio. Financially rational or not, I simply had less market worry and higher retirement confidence.

Going To Two Years Retirement Funding Cash

Two years into my early retirement I left the stepped down retirement gig and started what I call my encore career. I stuck to living off of my 72t and used the new gig’s larger salary like I had done before. Knowing the retirement calming effect I received with my first cash increase, I decided to increase my cash to cover 2 years retirement funding. It provided even more early retirement confidence. I discovered that I find financial calm in using cash to hedge against market volatility.

Going To Four Years Retirement Funding Cash

Years after my encore career and last paycheck ended I decided to once again increase my cash. The market was at all time highs and when running my numbers I found that I could take some chips off of the table to pump up my retirement cash. There’s no doubt about it, I’m really calm now. I should be able to easily outlast a recession or market downturn when it comes and for me there’s nothing more retirement calming than that.

The Retirement Calming Effect of Being Mortgage Free

As I mentioned above, I had never considered retiring mortgage free. It seemed out of reach without staying on the job I no longer enjoyed a lot longer. My total house payment was reasonable after refinancing to lower interest rates and it made for manageable payments in my retirement. I had already dropped below Federal Tax ‘Schedule A’ filing thresholds and wasn’t getting any mortgage interest tax benefits. It was during my encore career after hitting my 2 years cash goal that I made the decision to focus my salary on the mortgage. It was dispatched just 18 months later and I joined the small ranks of mortgage free homeowners. I was surprised at how eliminating this payment made me feel. No matter what manufactured market crisis occurred, I would own my home. It’s an intangible value that provides long-lasting retirement calm and happiness.    

Why How Much Retirement Cash To Have or Using Funds To Clear A Mortgage Are Tough Questions To Answer

The financial argument against cash is its inability to retain value against inflation. My cash isn’t dead money. I do get a little interest from my savings account and money market accounts. I am getting 2.5% from a 13 month CD and will continue to look at other higher interest earning opportunities. Yes, all pay less in interest than inflation. But the majority of my portfolio is invested in the market and I see the difference between cash’s earnings and inflation as the cost of what I call my retirement calm insurance. I find value in the emotional peace and that makes it worth it.

When it comes to paying off the mortgage the financial argument is about the loan interest percent saved in payments vs. the percentage that could be earned if left invested. I locked into a guaranteed return. No matter what else happens in the markets, I have that locked down. But the other benefit is it takes less to live on. When not working as I am now and living off of my portfolio, I’m able to reduce my taxable income by the payment amount. I not only have a guaranteed return but I now will pay less income taxes too.

The argument against both higher cash savings and mortgage payoff includes the lost opportunity for money left in the market for big market gains if invested right. Especially over the long-term. Depending on your goals, this can not only impact your long-term retirement funding but also any thoughts towards leaving a financial legacy to your family. That’s why it’s important to run your numbers through a good retirement calculator to make sure your portfolio will last at least as long as you do. You also need to have a clear legacy plan in place and make sure you can still meet it.

In the end, we all know markets don’t always go up which must also be considered in the arguments for and against having more cash and using funds to pay off the mortgage in retirement.

The Questions That Need To Be Answered

I’m not some super investor, had no inside secrets, nor received a windfall to retire early as I did. I am just an average Joe who decided that I wanted to be free of the rat race and figured out how to pull it off in a way that worked for me. But now that I’m retired, I prefer to not be looking over my portfolio’s shoulder all the time. I prefer the retirement calm of what the extra cash and mortgage freedom provides me.

The questions I needed to answer before making these retirement calming moves were –   

Is now the best time to pay off the mortgage?

We had considered long before retirement that we would sell our home and move to a smaller home in a less expensive real estate market. That way we could be mortgage fee. But after grand-kids came we nixed that plan. I don’t believe it would have made sense to use taxable retirement funds to payoff a mortgage. In my case I had income coming in and no mortgage interest income tax benefits. Payoff also meant reducing my taxable retirement funding needs in the nearer future. Yes, it was the best time to pay it off.

Do the numbers still work with so much cash on the sideline?

When I increased to one year and two years worth of cash this wasn’t an issue. I was happily in retirement gigs and used the extra income to grow cash. This question came in the jump to four years cash while I was relying 100% on my portfolio. Running the numbers through the FIREcalc retirement calculator was my first step. I then made my proposal to my CFP and they also ran my numbers. Yes, the numbers looked good.

If the numbers work, then why risk unnecessary injury playing in a game already won?  

The same question echoed during my decision to retire or stay on the job longer. Do I have something more to prove or can I be happy and satisfied by making the move. I never regretted giving up the title and salary of my career, I had enough. It was easy to answer this question. I had no doubts. I wouldn’t regret about my higher cash savings missing out on any market runs.

Would I really value this as retirement calm insurance?

History and numbers show that staying at two years cash with a diversified asset allocation would work fine over the long-haul. But what I was going for was gaining even less concern about market volatility and being able to fully enjoy my retirement without thinking about finances all the time. The sting of the last great recession hit me hard. When being truthful about what causes me more distress, either having this sidelined money miss out on a bull market run or not having enough cash to get through a long market downturn, the answer was clear.

Are there any other upsides other than the retirement calming effect of jumping up cash?

Along with the memory of the last great recession’s sting is also the memory of all the opportunities to buy heavily devalued investments if only I had some cash. In 2009 as the markets hit bottom and the years that followed, stocks were a bargain. Having higher cash reserves means being able to take advantage of any future investing opportunities.

 

Everyone’s risk tolerance is unique to the investor. Finding the perfect formula that meets both necessary funding needs without adding investor distress is the recipe for a retirement calming portfolio. My mentally preferred recipe just happens to love the higher cash allocation and being mortgage free.

Seek that which keeps you calm, Lokah Samastah Sukhino Bhavantu.

How Much Cash Is In Your Portfolio? Why I Increased Retirement Cash Holdings

Bucket Strategy, Funding Retirement, Investment Strategy, Protect Assets, Risk Tolerance, Saving Money,

I decided I wanted to cash in a few chips and take some of my profits off of the table. I sold off investments and increased retirement cash holdings in my portfolio. Not just a little bit either. I’m on my way to 20% of my portfolio being cash. My decision had nothing to do with in-depth analysis of the yield curve or stock price to earnings (PE) ratios. Nor inflation threats or claims a lack of available workers may drag down this country’s latest economic growth predictions. Not to mention the possible negative economical impact of trade wars. Nope, it’s simply because of the convergence of my age, life expectancy, and the numbers to cover my nut with less on the table. It’s personal.

Increased Retirement Cash Holdings

Increasing Retirement Cash Holdings – What’s the Right Portfolio Percentage?

We all know we have to accept investment risk if we want decent returns. You have to play to win. Nobody can exactly predict or time the market. Major drops happen when they happen. That means we have to stay in through thick and thin.

Investment history suggests that over the long-term the balance of risk vs returns is generally favorable to the investor. Especially when we are practicing dollar cost average investing through both good and bad markets. But that all turns more into a gamble as the investor’s age vs longevity ratio tightens and we are no longer feeding the portfolio with earned income but instead depending on the portfolio to fund our retirement lifestyle. Market recovery time becomes more critical. A 5 year recovery period is a bigger percentage of your remaining life when you’re 60 than when you’re 45.

Portfolio Rebalance and Re-Running the Numbers

When I retired at the age of 51 I kept a small amount of my net worth in cash. I have different expectations now that I will hit the age of 60 later this year and can almost see my Social Security full retirement age ahead of me. I know how fast my years in early retirement have flown by thus far and will soon no longer be considered an early retiree.

For the most part I use the 110 minus age declining equity glidepath approach to rebalancing my portfolio. Subtract your age from 110 and that is the equity portfolio percentage to consider having. Logically that leaves the rest to bonds and cash. I use 110 instead of 100 for my declining equity glidepath rebalance calculation because Social Security will eventually play a role in the non-equity side of retirement funding. The calculation doesn’t explain how much cash is appropriate in the non equity side of the portfolio. Opinions seem to always be critical of holding too much cash. As far as I am concerned, when you have experienced a good run and have enough, it’s time to set aside some of your winnings.

I settled on 4 years retirement funding in cash plus a $25K emergency fund. My retirement withdrawal strategy uses a bucket approach and the cash is in my IRA’s bucket #1 and a savings account. My portfolio allocation looks like this:

  • 18.5% Cash/Cash Investments
  • 29.5% Bonds Fixed Income
  • 48% Equities
  • 4% Alternatives

To determine how much cash I wanted I simply understood my overall goals.

  1. Not have to worry or sell equities during a rotten market.
  2. Have my portfolio last as long as I do.

Increased Retirement Cash Holdings looks good

I then ran the numbers through the retirement calculator-FireCalc. I used 35 years of funding, 45% equity investment position, social security provided estimate amount, bumped up my yearly spending amount by $10K to counter higher cash holdings with its lower returns, and let her rip. The results looked great!

Full Proof? Hardly

Cash doesn’t offer anything in earning interest today and I have no idea how hard inflation will hit. Will interest earnings climb enough to offset inflation? Who knows. I also don’t know what will happen with social security, the markets, or the price of tweets in the White House. However, I am comfortable with this level of cash holdings even going to 20%. This is a decent time to take profits and I will continue rebalancing as long as the market continues to climb. I feel that the FireCalc calculation padding I used in my income numbers and longevity (I seriously doubt I will live to 95) that my odds look really good. Aside from all the financial considerations there is also the mental benefits to my increased cash move.  

High Retirement Cash Holdings – Cowardly or Courageous?

I do have a healthy fear of another market crash and multi-year recovery. There have been enough of them in my years of investing to know there will be more. I am making some optimistic assumptions when there are plenty of unknowns going forward. But what’s new there, there’s always unknowns when it comes to investing and retirement. I do count on adjusting things as needed.

I don’t see pulling a higher amount of cash to the side as either cowardly or courageous. This is simply wanting to hedge my bets and have options. I can cease selling any assets or taking IRA withdrawals in a down market and take advantage of opportunities to buy investments when they arise.

 

As far as I can see, taking profits after a historically long running Bull Market to have higher retirement cash holdings provides both downside protection and upside opportunity. At least in my personal situation. What is the perfect percentage of cash holdings to have in one’s retirement portfolio? How much cash is in your portfolio?

Down Market Crushing Early Retirement Dreams

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Is the start of 2016’s down market crushing early retirement dreams? I am seeing a shortage of upbeat early retirement posts lately. In fact I can even see from the hits on the Leisure Freak site that the number of people searching for early retirement information has trailed off since Friday January 15th’s big market selloff and resulting 2.39% drop in the DOW.

Obviously it is a total bummer seeing portfolios hit so hard in the historically damaging start to a new year. But investing is for the long haul and if we had a plan it should have been one to get through market bumps.

Oh no. Not Again

This certainly reminds us of what it felt like at the start of the 2007 market fall. A lot of us held on to the hope that the real estate bubble couldn’t really destroy the world’s investment markets. Many financial professionals were saying just that, telling us that there is nothing to worry about at that time. Saying that the mortgage and real estate market represented only a small percentage of the economy. Little did they know. If my memory serves me right the markets did continue to drop into the toilet through Feb 2009. This is different this time. At least the job numbers look good and other than the oil sector corporate profits have been mostly up.

Sometimes when a long and happy rapid recovery takes us back to record market highs like we experienced in the past few years we forget that what goes up eventually has to come down.

The New Fear – Oil and China. Its always Something

Just as now where it is the fear of oil’s drop and China’s slow-down causing concern, those who are on the edge of portfolio panic have forgotten just the opposite. Forgetting that this recent drop will eventually find a floor and begin to rise again. As long as you have planned your portfolio and investment strategy to be aligned with your risk tolerance and your early retirement goals there is a way to reverse this down market crushing early retirement dreams funk-feeling.

Fighting the Feeling of the Down Market Crushing Early Retirement Dreams

I do get it. My portfolio has taken a beating. I just spent a few hours analyzing all the various funds my financial planner has me in and some were real stinkers. One in particular was aligned with the oil and gas industry for diversity reasons a couple of years ago. That one is down 52% from the first of 2015. Because my portfolio was set up to provide income there were a number of funds paying a decent dividend or interest rate but they seem to have had some big downside in this recent market drop. Sadly my Overall portfolio is down 9.3% after considering my 72t payments and wrap fee from the first of Jan 2015 to Jan 15, 2016.

I should be feeling the down market crushing early retirement dreams funk but I know there is more to this than looking at the portfolio balance numbers from a year ago and comparing to now after the ugly market conditions.

Still Getting Dividends and Interest.

If anything, getting income from my investments is a psychological boost and buffer against feeling the sting of the down market and portfolio decrease. Some of these fund dividends and the interest is harvested to replenish the cash bucket of which pays my 72t payment each month. Other fund’s dividends are reinvested. Those reinvested dividends are buying in at a lower cost now and will generate even more dividend income.

Cash Bucket Cushion.

My early retirement lifestyle is funded from my portfolio. I have enough cash along with the dividend and interest earned to continue sending me my 72t monthly check for all of 2016 without having to sell any assets. That is another important buffer against feeling the down market sting. I also keep additional cash in my credit union savings account to use for any additional needs if they arise. Cash isn’t making much income but it isn’t at risk of taking a 10% to 40% hit either during spooked market conditions.

Don’t Let the Down Market Crush Your Early Retirement Dreams

I was set to retire early in 2008 and the down market at that time delayed my early retirement dreams by another year. When I retired early in December 2009 the market wasn’t much better and jobs were still being eliminated. The unemployment numbers were very high. Eventually I decided that it was time to begin the retirement dream. If you are feeling like your dream is being crushed then by all means delay things until you feel the time is right. Whether you delay or not here are a few things you can do to get over the down market crushing early retirement dreams funk.

Run the Numbers:

I don’t know if the market has found its bottom and we can rebuild from here. It could just as well be a false bottom and we are in for more downside. Take your portfolio numbers and run them against a good retirement calculator. I like to use FireCalc with its Monte Carlo approach. Run the numbers again with a reduced portfolio amount. You can play with this and see what would happen if the market did drop another 10% right after you retired. Get comfortable with your situation. If all looks good then relax. No crushed retirement dreams. If they don’t look good then consider a slight delay as I did. Just don’t panic and do anything harmful to your portfolio. It may be a good time to seek financial advice from a CFP.      

Look at Your Portfolio as Buckets:

In preparation of your early retirement you should have a strategy for funding your new retirement lifestyle. Look at the different phases of your retirement and how you will fund them as buckets. The first years are bucket one. Then there is the intermediate years and finally the many years out bucket. If you have no idea what I am talking about I have a page with a very simple bucket strategy example.

If you have the first years funding figured out and have cash set aside then stop worrying. You can retire and let the other buckets ride until you need them and hopefully the markets have returned to sanity by them. If you haven’t done this then start setting a funding strategy now and once you feel it is safe move forward. Again, if you have concerns It may be a good time to seek financial advice from a CFP.

Reassess your Investment Risk Tolerance:

If you can’t sleep at night or have thoughts of financial dread you may be too aggressively invested for your risk tolerance. Everyone is different. There is always risk in investing but there are ways to dial it back a little. Less risk of loss means less gains but don’t let your fear of missing out on big gains overshadow your risk tolerance. Make necessary adjustments and if you have any questions seek the advice of a trusted CFP.

The Last Word

Don’t allow the down market to crush your early retirement dreams. Think at worst there is a slight delay to retiring early. It’s best to get your investments and comfort level aligned before you retire.

Are you feeling the down market crushing early retirement dreams funk?