Cash Insurance Policy against the 4% SWR

[MrSeven]

I have been thinking about a scenario where you cash out a portion of your savings as an insurance policy against future negative market returns in the first year of starting you SWR of 4%. I wanted to know the number (years of savings) required to get a 95% or greater success rate with the 4% SWR

For example, lets assume you need $100K per year for FI, as such that would require $2.5 million invested in the stock market (assuming a 4% SWR).

In your opinion; How much additional years of savings in cash (above the $2.5 million in stock accounts) would it require to survive negative market downturns? Meaning, whenever the market returned a significant negative number (more than -5%) you use the cash for those years.

My intuition tells me an additional 5 years of cash ($500K) would most likely be a sufficient safety net... which means about $3 million in net assets to start FI.

Yes, I know the numbers say just put that money in the market, and in most cases you will do better in the long run. I am not looking for maximum returns, I looking for an reasonable insurance policy against negative market return years. Also, lets leave bonds out of the picture for now. Lets assume the Vanguard Total Stock Index fund and a cash account that yields 2% APR.

[terran]

Not exactly the same as your idea, but see the glide path posts at https://earlyretirementnow.com/safe-withdrawal-rate-series/ for well researched methods on sequence of return risk mitigation from a very smart former (now FIRE'd) economist.

[MrSeven]

Thanks less4success! This is exactly what I was looking for...

ERN states, "So, for the record, let me state that this cash bucket strategy seems to work pretty well, despite my previous doubts! It’s relatively inexpensive insurance against Sequence Risk! Think of it as a mini-glidepath during the first few years of retirement! And it “only” takes the flexibility of getting to 27.5x instead of 25x annual spending!"

However, he assumes a SWR <4%, but he does answer my original question of a cash cushion at the beginning that is used in times of negative downturn and is not replenished.