Cash bucket strategy

[Riches1]

In order to alleviate potential sequence of return risks when you want to start living off of your investments, wouldn't it make sense to simply keep around 3 years (potentially 4-5 years of very frugal) living expenses in cash or another highly liquid form (bonds perhaps)?

This would allow you to simply live off of the money from your cash bucket in case there's a market downturn, and you would not have to cut into a portfolio that's currently down. And when the portfolio is in green territory again, you could slowly fill these cash buckets up again over time.

Wouldnt this basically solve a lot of the issues that arise from fixed, and even variable withdrawal plans?

 

[Baptiste Wicht]

Hi

I have done some simulations about this here:

Should You Use A Cash Cushion In Retirement? - The Poor Swiss

Does a cash cushion help your chances of success in retirement? We find out with a ton of historical data and some simulations!

thepoorswiss.com

In my results, it was not so great. Indeed, it turns out that a cash cushion (or bucket) is more or less the same as lowering the withdrawal rate (to get a larger portfolio).

On the other hand, I have not added a cash bucket that would refill over time, only one that would simply disappear after some time.

 

[spartans]

That’s basically why a lot of retirees keep a cash/bond buffer. You probably won’t get the absolute best returns, but having 3-5 years set aside can stop you making bad decisions during a crash.