Author Topic: Advice in getting to 4% from all cash  (Read 8523 times)

mjones1234

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Advice in getting to 4% from all cash
« on: November 07, 2015, 08:10:17 AM »
My better half and I have been much better savers than investors, and have missed many of bull runs in the market. We did work hard to pay off our house and eliminate debt. Now we're at a point in our late forties where we want to scale down, get out of the conventional rate race and enjoy time with our granddaughter. We could live off a 4% withdrawal rate if we were making those returns. But it sits in cash making about .75% interest (dismal I know). My question is - how does one go from all cash to making 4% a year?  I'm hesitant to just plow it all into equities. I think if we had scaled in over time, it would have been much easier, but hindsight is 20/20. Any suggestions on how to go from an all cash position to earning the 4% on money with some element of safety? Or is that just an elusive dream? Thanks for any recommendations!

FerrumB5

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Re: Advice in getting to 4% from all cash
« Reply #1 on: November 07, 2015, 08:15:14 AM »
As many here would advice - low cost low fee Vanguard index in NTF/No fees account (naturally comes with Vanguard account). Gives 7% average over many years before tax.

Imonaboat

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Re: Advice in getting to 4% from all cash
« Reply #2 on: November 07, 2015, 08:21:49 AM »
.75% is actually worse than it sounds, since you are losing value due to inflation. You are losing value every day your nest egg sits in the bank, even if you take nothing out.

FerrumB5

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Re: Advice in getting to 4% from all cash
« Reply #3 on: November 07, 2015, 08:25:39 AM »
My Chase savings account is 0.02% (yes, I did not mess up zeros). WTF??

Financial.Velociraptor

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Re: Advice in getting to 4% from all cash
« Reply #4 on: November 07, 2015, 08:43:25 AM »
My better half and I have been much better savers than investors, and have missed many of bull runs in the market. We did work hard to pay off our house and eliminate debt. Now we're at a point in our late forties where we want to scale down, get out of the conventional rate race and enjoy time with our granddaughter. We could live off a 4% withdrawal rate if we were making those returns. But it sits in cash making about .75% interest (dismal I know). My question is - how does one go from all cash to making 4% a year?  I'm hesitant to just plow it all into equities. I think if we had scaled in over time, it would have been much easier, but hindsight is 20/20. Any suggestions on how to go from an all cash position to earning the 4% on money with some element of safety? Or is that just an elusive dream? Thanks for any recommendations!

Are you wanting 4% in yield or just 4% average returns?

mjones1234

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Re: Advice in getting to 4% from all cash
« Reply #5 on: November 07, 2015, 08:48:40 AM »
Thanks Imonaboat about the inflation comment. I do realize that this is eroding things a bit. We've worked to combat this by being smarter in other areas. For example, we've cut our grocery bills by 25% by shopping Aldi and Costco. Friend loaning friends tools and helping with projects rather than going at it solo. No TV for the last five years, and never missed it for a day. Even the kids are fine with it. More time outdoors. But I realize there's only so many things we can cut.

mjones1234

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Re: Advice in getting to 4% from all cash
« Reply #6 on: November 07, 2015, 09:09:26 AM »
Thanks Ferrum B5. I'll look into that. Sounds like a solid track record.

AdrianC

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Re: Advice in getting to 4% from all cash
« Reply #7 on: November 07, 2015, 09:06:16 PM »
As many here would advice - low cost low fee Vanguard index in NTF/No fees account (naturally comes with Vanguard account). Gives 7% average over many years before tax.

7% average will be from a buy price at an average valuation.

We are not currently at an average valuation. Price matters.

Bellatrix

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Re: Advice in getting to 4% from all cash
« Reply #8 on: November 08, 2015, 06:24:29 AM »
I have trouble letting go of my cash.  I've decided to have 7 years worth of expenses in cash/CD's and the rest in vanguard index funds. This way if there is a prolonged market crash, I can wait it out by using some of my cash reserves.  Maybe you would also feel better about investing if you had a large chunk of cash set aside. 

Retire-Canada

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Re: Advice in getting to 4% from all cash
« Reply #9 on: November 08, 2015, 10:45:28 AM »
7% average will be from a buy price at an average valuation.

We are not currently at an average valuation. Price matters.

If you options are keep it all in cash and have it eaten away by inflation or get it invested so it's working for you I can't see the later being a bad option. If you are worried about current valuations what event are you going to wait for that will make you feel comfortable investing your $$?

http://jlcollinsnh.com/2013/05/22/stocks-part-xviii-investing-in-a-raging-bull/

Get invested in a diversified portfolio. Start collecting dividends and stop losing value to inflation. The market will go up and the market will go down, but unless you have a crystal ball you have no idea what's going to happen so it's safer to not pretend you do and try and time things.

If your portfolio is diversified you'll be able to pull out your 4% annually with some confidence.

Left

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Re: Advice in getting to 4% from all cash
« Reply #10 on: November 08, 2015, 10:54:00 AM »
what about opening a myra?

it is being floated around on bogleheads... not much for the limit but it won't lose value so you can pull out principle if you need it as an emergency fund (sucks you can't "put it back" later though)

but better than sitting in bank "waiting" for an emergency and unable to earn anything

daverobev

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Re: Advice in getting to 4% from all cash
« Reply #11 on: November 08, 2015, 03:45:07 PM »
Either take the plunge, figure out your asset alloc and follow it (ie put 40+% into the market), or

buy real property that cashflows, or

buy an annuity that pays enough.

Maybe try peer to peer lending. And find a better interest rate for any cash you DO decide to keep! Even Discover's saving acct is 1% I think - a 33% increase!

ooeei

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Re: Advice in getting to 4% from all cash
« Reply #12 on: November 09, 2015, 06:20:40 AM »
Since you wish you'd put it in little by little over the years, why not start now?  Maybe go in with 4% a month for the next two years?

That way you will get the benefit of investing, but aren't going to panic and sell everything if the market crashes in 6 months.

Based purely on the math putting it all in at once is more likely (although not certain) to have a better return than putting it in over time.  That being said, this is a once in a lifetime investment for you, so it might be better to play it safer and take the slight hit on return.

BeanCounter

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Re: Advice in getting to 4% from all cash
« Reply #13 on: November 09, 2015, 06:50:50 AM »
Depending on how big your savings is, I would look into buying an annuity (make sure it's low fee, I think the Fidelity annuities are supposed to be pretty good) and then possibly putting some each month into an index fund. That would give you a stable check each month from the annuity and the ability to capitalize on some market gains.

StressLess

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Re: Advice in getting to 4% from all cash
« Reply #14 on: November 09, 2015, 09:36:02 AM »
is the money in a tax sheltered space?

Personally, I would dollar cost average it in over a period of time.  That said, there is more sound math behind dumping it in all at once.  But it sounds like you and your wife are risk averse so i would suggest not doing a lump sum investment until you PROMISE yourself that will not touch it no matter what happens.

also you should be getting a much better return on cash, check out some CDs for ultra safe returns

https://www.synchronybank.com/banking/products/cd/


mjones1234

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Re: Advice in getting to 4% from all cash
« Reply #15 on: November 09, 2015, 03:09:14 PM »
I wanted to thank all of those who have contributed ideas for us to consider. There are several comments here that we'll be exploring. The article that Vikb sent along was directly on point and gave me better insight into my dilemma. I've never looked into annuities and am considering the Vanguard ITA as a definite place to park some of our cash. Nice to have a place you can pose a question like this and get such constructive feedback!

AdrianC

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Re: Advice in getting to 4% from all cash
« Reply #16 on: November 10, 2015, 01:17:17 PM »
If your portfolio is diversified you'll be able to pull out your 4% annually with some confidence.

http://dqydj.net/sp-500-return-calculator/

Just cherry-picking some dates for illustrative purposes:

1965-1985 total average annual return adjusted for inflation: 1.474%

2000-2015 total average annual return adjusted for inflation: 2.502%

There have been long periods when the S&P500 did not manage the magic 4% annually.

1965-2015 total average annual return adjusted for inflation: 5.325%. Even over 50 years the S&P500 did not manage the often touted "7%".

Current S&P500 PE is about 22, an earnings yield of 4.5%. Profit margins are at historically very high levels. The market is being driven up by just a few mega-cap tech stocks. Interest rates are at very low levels.

In my opinion, now is not the time to be sinking one's entire nest-egg into a market-cap weighted index fund.

AdrianC

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Re: Advice in getting to 4% from all cash
« Reply #17 on: November 10, 2015, 01:45:09 PM »
Here's Bogle recently:

http://news.morningstar.com/articlenet/article.aspx?id=718910

"Over the next 10 years, investors may see stock returns as low as 4% before inflation, well below the level assumed in many financial plans, says Vanguard founder Jack Bogle."

Knock 2% off for inflation and you're looking at 2% real return, less if you have some in bonds.

This is not to say don't invest, just that expectations need to be realistic.

Gone Fishing

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Re: Advice in getting to 4% from all cash
« Reply #18 on: November 10, 2015, 01:50:44 PM »
Depending on how big your savings is, I would look into buying an annuity (make sure it's low fee, I think the Fidelity annuities are supposed to be pretty good) and then possibly putting some each month into an index fund. That would give you a stable check each month from the annuity and the ability to capitalize on some market gains.

This was my thought as well.  Annuities are "expensive", but probably offer the best guaranteed return for someone that is extremely risk adverse.

K-ice

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Re: Advice in getting to 4% from all cash
« Reply #19 on: November 10, 2015, 02:35:03 PM »
Since you wish you'd put it in little by little over the years, why not start now?  Maybe go in with 4% a month for the next two years?

This is kind of my method.  I didn't have that much cash lying around but I invested in 4 chunks.  Now every month I add a bit more.  Things were not "balanced" at the start. But with every chunk it gets more balanced.  My plan was to reduce fees by purchasing something different every month instead of a little of 3 things every month.

I am also waiting for my CDs to mature and I will invest them chunk by chunk into better (Vanguard) things.

I too wish I had started long ago. But, better now than never.

JLee

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Re: Advice in getting to 4% from all cash
« Reply #20 on: November 10, 2015, 02:42:30 PM »
Here's Bogle recently:

http://news.morningstar.com/articlenet/article.aspx?id=718910

"Over the next 10 years, investors may see stock returns as low as 4% before inflation, well below the level assumed in many financial plans, says Vanguard founder Jack Bogle."

Knock 2% off for inflation and you're looking at 2% real return, less if you have some in bonds.

This is not to say don't invest, just that expectations need to be realistic.

Maybe. Then again, if the market could be predicted, we'd all be rich. :P

And...2% real return is still better than -1.25% real return, which is what they're seeing now (if you assume 2% inflation).

AdrianC

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Re: Advice in getting to 4% from all cash
« Reply #21 on: November 11, 2015, 08:48:07 AM »
Maybe. Then again, if the market could be predicted, we'd all be rich. :P

And...2% real return is still better than -1.25% real return, which is what they're seeing now (if you assume 2% inflation).

I do wonder how many people posting here were fully invested in 2008. It was gut wrenching. We were down 40% of net worth. It was tough to stay the course. We did, and we are glad we did. It was tough to see all those cheap stocks and have no money to invest. We have pulled some out over the last 12 months or so, reasoning that it is prudent to hold some cash when valuations are very high.

What market returns are you expecting from here?

JLee

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Re: Advice in getting to 4% from all cash
« Reply #22 on: November 11, 2015, 09:03:44 AM »
Maybe. Then again, if the market could be predicted, we'd all be rich. :P

And...2% real return is still better than -1.25% real return, which is what they're seeing now (if you assume 2% inflation).

I do wonder how many people posting here were fully invested in 2008. It was gut wrenching. We were down 40% of net worth. It was tough to stay the course. We did, and we are glad we did. It was tough to see all those cheap stocks and have no money to invest. We have pulled some out over the last 12 months or so, reasoning that it is prudent to hold some cash when valuations are very high.

What market returns are you expecting from here?

I'm far enough out from FI that I'm not really thinking about what the market will do. I'm just pouring in as much money as I can.

Scandium

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Re: Advice in getting to 4% from all cash
« Reply #23 on: November 11, 2015, 09:29:51 AM »


Since you wish you'd put it in little by little over the years, why not start now?  Maybe go in with 4% a month for the next two years?

That way you will get the benefit of investing, but aren't going to panic and sell everything if the market crashes in 6 months.

Why not? How will this help prevent anyone from selling? If they would sell with lump sum I think they would sell with DCA too, I don't understand how it would be different? Overcome emotional weakness with reasoning and logic, not false security blankets (especially when they won't work)

Find an AA, probably heavy on bonds,  and put it all in now. Or an annuity if you really want to do that tradeoff for security.

AdrianC

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Re: Advice in getting to 4% from all cash
« Reply #24 on: November 11, 2015, 08:24:04 PM »
I'm far enough out from FI that I'm not really thinking about what the market will do. I'm just pouring in as much money as I can.

The OP has enough to be FI at a 4% withdrawal rate, so different situation.

We did the same as you starting about 15 years ago. Just socked away whatever we could in stocks. Didn't think much about valuations. We also paid off all debt, saved >50% of income and worked hard. It worked out for us, despite 2000 and 2008. Hopefully it will for you too.

AdrianC

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Re: Advice in getting to 4% from all cash
« Reply #25 on: November 11, 2015, 08:27:12 PM »
Find an AA, probably heavy on bonds,  and put it all in now. Or an annuity if you really want to do that tradeoff for security.

What is an "AA"?

Frankies Girl

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Re: Advice in getting to 4% from all cash
« Reply #26 on: November 11, 2015, 09:06:01 PM »
Find an AA, probably heavy on bonds,  and put it all in now. Or an annuity if you really want to do that tradeoff for security.

What is an "AA"?

It's "asset allocation."

If you're in need of some basic investing info, here are some good places to start:

https://www.bogleheads.org/wiki/Investment_policy_statement

https://www.bogleheads.org/wiki/Asset_allocation

And Jim Collins' entire stock market series is gold - read the whole thing as soon as you can:
http://jlcollinsnh.com/stock-series/


Fishindude

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Re: Advice in getting to 4% from all cash
« Reply #27 on: November 12, 2015, 05:50:56 AM »
Some municipal bonds have been paying close to that.

AdrianC

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Re: Advice in getting to 4% from all cash
« Reply #28 on: November 12, 2015, 08:48:29 AM »

It's "asset allocation."

If you're in need of some basic investing info, here are some good places to start:

Thanks. I'm OK.

Yeah, I figured later that he/she meant asset allocation, but it seemed an odd thing to write. "Find an Asset Allocation" is exactly what the OP is asking for advice on!

What asset allocation will reliably give me a 4% real return per year?


It's not bonds. Not from here.



ooeei

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Re: Advice in getting to 4% from all cash
« Reply #29 on: November 13, 2015, 07:36:09 AM »

Why not? How will this help prevent anyone from selling? If they would sell with lump sum I think they would sell with DCA too, I don't understand how it would be different? Overcome emotional weakness with reasoning and logic, not false security blankets (especially when they won't work)

Find an AA, probably heavy on bonds,  and put it all in now. Or an annuity if you really want to do that tradeoff for security.

Well if he puts in 4% per month, and the market crashes in 6 months, now he's only got 1/4 of his money in the market.  At that point it seems like he should feel great because then he gets to buy at a discount with the other 3/4 of his money.  I guess I'm assuming he isn't going to pull that 1/4 out instantly at a downturn, since anyone who does that has little/no hope of getting a 4% safe withdrawal rate.

Retire-Canada

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Re: Advice in getting to 4% from all cash
« Reply #30 on: November 13, 2015, 01:28:20 PM »
If your portfolio is diversified you'll be able to pull out your 4% annually with some confidence.

http://dqydj.net/sp-500-return-calculator/

Just cherry-picking some dates for illustrative purposes:

1965-1985 total average annual return adjusted for inflation: 1.474%

2000-2015 total average annual return adjusted for inflation: 2.502%

There have been long periods when the S&P500 did not manage the magic 4% annually.

1965-2015 total average annual return adjusted for inflation: 5.325%. Even over 50 years the S&P500 did not manage the often touted "7%".

Current S&P500 PE is about 22, an earnings yield of 4.5%. Profit margins are at historically very high levels. The market is being driven up by just a few mega-cap tech stocks. Interest rates are at very low levels.

In my opinion, now is not the time to be sinking one's entire nest-egg into a market-cap weighted index fund.



There is nothing that's for sure, but if you want 4% longterm a diversified AA is a reasonable approach.

If not what "time" are we waiting for to get invested into the stock market? When it's gone up another 20% and you've missed out on that growth and the dividends while your cash gets erroded further?

AdrianC

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Re: Advice in getting to 4% from all cash
« Reply #31 on: November 14, 2015, 11:30:21 AM »
Do you know of a calculator that can show the chances of a 4% return that also takes market valuation into account?

See this:
https://personal.vanguard.com/pdf/s338.pdf

Figure 5 "Annual valuation versus the subsequent 10-year annualized real return"

Current PE1 is 22, PE10 is 27. The graph indicates a 10-year annualized real return of 2-3%.

We also have historically high profit margins and ultra low interest rates against us.