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I'm retired, 58, living off a portfolio of Berkshire and cash.

I've let my cash bucket that I use for living expenses dwindle down to about 2.5 years worth, and I'm trying to decide when I should sell some Berkshire to refill the bucket.

I'm generally pretty bad at selling Berkshire in big chunks (poor timing,regret), and wondering if maybe a monthly/quarterly selling system might be better? That way I could leave the cash bucket smaller and take advantage of better Berkshire returns.

Has anyone experimented with something like this? Is it crazy to have such a small cash cushion?

Here is very reasonable discussion of using BRK as an income vehicle while protecting against running out of principal...https://rationalwalk.substack.com/p/berkshire-hath...

'Is it crazy to have such a small cash cushion?'

If you're pulling out 4% and have 10% in cash then you're following Buffett's advice, more or less - yes he recommended an S&P 500 index fund, but when asked he did say Berkshire would be fine also.

Thanks, Adrian. I did not know that Mr. Buffett said that a primary/major allocation in the vicinity of 90% in Berkshire (in lieu of the S&P 500) would be fine for a retiree.

This is good to know because like many others on this board, I have a major allocation to Berkshire and no allocation to the S&P 500, primarily because the latter seems so expensive.

By any chance, do you have a cite for it?

My withdrawal rate has been 2% the last few years, and I'm sitting at about 5% cash.

Assuming a person lives from their portfolio, as I do, I see two quite distinct reasons one might need a cash cushion.

One it to have cash on hand in case of an emergency of some sort--life can be unpredictable. That makes a lot of sense.

Another is to have cash for living expenses because you are afraid of the possibility that your investments might have low market prices when you do your next few small sales to generate money for living.

The latter is very much like the reasoning to buy put options against a market decline: you are spending money, reducing your long run returns, in order to buy your way out of a fear that isn't entirely rational.
If you're selling a little bit of your portfolio every quarter to raise money for living expenses over a period of many many years, the prices will vary.
Some sales will take place at high valuation levels, some at low valuation levels. Almost by definition the average price you realize will be average.
Since we don't expect more than the average over the long run anyway, why should that be a problem?

As an example, I was a little low on cash this spring and sold some Berkshire stock in early April. The valuation level wasn't great: certainly the price is higher now, but you know what? I'm OK with that.
The price I get on average for my sales over time will be just fine.
The key point is that on any given day, the price might be super low. It might last for a while, too. But you're only selling a tiny bit each time.

The upside is that without a big cash allocation all the time, that money can be invested and have a positive real return over the long haul.
That's what you're giving up if you give into fear and have a big cash pile simply because it feels good.

So, my two cents:
By all means, have a solid cash cushion for emergencies. (or even emergency investment opportunities, like Berkshire trading at $200k a share!)
But a multi-year cash cushion for living expenses doesn't make sense to me.

If a short period of low market prices is enough to push you over into the dreaded (but not real) "sequence of return risk" category, you are simply withdrawing too much money.
Plus, to know when to use your cash pile versus when to replenish it you have to be competent at valuing your investments: use the cash when valuations are low, top it up when valuations are high.
Not everybody has that skill.

Health warning: Like my habit of trashing bonds (and most especially bond funds), this view does not match conventional wisdom.

Jim

Jim,

Thanks for the reply. I once kept a ridiculous 10 year cash cushion, but I think you are the one who told me that was dumb.

I am trying to evolve my thinking like yours: if I have to sell some at a less than perfect valuation for a period of time, my low withdrawal rate means that I won't be pulling that much out so it should't kill me.

I've been trying to sell bigger chunks at 1.5x peak book value, but that was requiring me to keep a larger cash cushion than I really wanted to, and really sell more than I wanted to.

' Thanks, Adrian. I did not know that Mr. Buffett said that a primary/major allocation in the vicinity of 90% in Berkshire (in lieu of the S&P 500) would be fine for a retiree.

This is good to know because like many others on this board, I have a major allocation to Berkshire and no allocation to the S&P 500, primarily because the latter seems so expensive.

By any chance, do you have a cite for it?'

Me too :-)

It was an interview he did with Todd and Ted. Maybe 10 years ago? I'll have the ref on my computer. Look it up tomorrow.

Hi,
Buffett has stated for his wife's inheritance, 10% will be in Treasuries and 90% in S&P 500. He stated that BRK would be OK instead of S&P at a shareholder meeting. Keep in mind, I suspect Mrs Buffett will inherit far more than most of us have in retirement and I further suspect with Buffett's extreme conservatism (i.e no risk of failure), the 10% in cash would last Mrs Buffett's lifetime as it appears to me that she lives a relatively frugal lifestyle like Warren.

Warren has also stated in a Financial Times interview that over 20 years time BRK would perform similarly to S&P 500. Any edge would be small.

All that said, I think that keeping cash for 2-5 years with everything else in BRK is a very fine strategy especially in taxable accounts. But, in Mrs Buffett's case if that means 10 million in cash and 90 million in S&P 500, then most of us are in a different and higher risk situation with that allocation :)

I am trying to figure out for myself how much cash I should keep and I am thinking 2 years expenses is a minimum. I also assume very unreasonable high expenses that I could easily decrease if necessary based on economic conditions (e.g. less big vacation expenses).

Cheers

Brian

I love the "only cash and Berkshire" purist approach. In my case, retirement income will come very significantly from Berkshire, but also from a hodgepodge of other sources (index ETFs, target funds in 403b and 401k). In terms of cash lying around, I guess I do "need" some sort of security blanket. 2-3 years sounds about right. I used to think more, but this board has helped me to see there's probably little point in 5-10 years of cash. Between Jim's posts on Berkshire drawdown and the Rational Walk article on Berkshire generating income, I hope to be all set when the time comes.

I think I'm now ok with the 2-3 year cash security blanket as well.

One of my justifications for keeping so much cash around in the past was to buy more Berkshire when it got cheap, but I suppose I'm pretty much done with buying now.

I will say, I've found it way harder to sell Berkshire than to buy it, but I'm starting to get a little more comfortable with selling it now, I think. 😬

Thanks, Adrian. I did not know that Mr. Buffett said that a primary/major allocation in the vicinity of 90% in Berkshire (in lieu of the S&P 500) would be fine for a retiree.

This is good to know because like many others on this board, I have a major allocation to Berkshire and no allocation to the S&P 500, primarily because the latter seems so expensive.

By any chance, do you have a cite for it?

CNBC Transcript: Warren Buffett on 'Squawk Box'
https://www.cnbc.com/2014/03/03/cnbc-transcript-wa...

BECKY: You also-- revealed something in the annual letter this year, where you said--
you laid out the terms of your will, what you've set aside for your wife. Which, I didn't
know any of this.

BUFFETT: Yeah.

BECKY: And--

BUFFETT: Well, I didn't lay out my whole will. There's hope for some of you who
haven't been mentioned yet. The-- but I did explain, because I laid out what I thought
the average person who is not an expert on stocks should do.

And my widow will not be an expert on stocks. And- I wanna be sure she gets a decent
result. She isn't gonna get a sensational result, you know? And since all my Berkshire
shares are going-- to philanthropy-- the question becomes what does she do with the
cash that's left to her?

And I've been-- part of it goes outright, part of it goes to a trustee. But I've told the
trustee to put 90% of it in an S&P 500 index fund and 10% in short-term governments.
And the reason for the 10% in short-term governments is that if there's a terrible period
in the market and she's withdrawing 3% or 4% a year you take it out of that instead of
selling stocks at the wrong time. She'll do fine with that. And anybody will do fine with
that. It's low-cost, it's in a bunch of wonderful businesses and it takes care of itself.

...

BECKY: We do have the opportunity for viewers to write in and ask you their questions.
One viewer did write in-- (I'm sorry, I'm looking for the number right now) wrote in the
question asking about why-- did you lay out that you had said you set this money aside
for your wife to be put into a Vanguard index instead of put back into Berkshire shares.

BUFFETT: Yeah. Well-- Berkshire would be okay. But like I say, I'm giving away all the
Berkshire shares. And Vanguard is fine. And-- Berkshire would be fine. But-- I wouldn't
wanna be touting Berkshire to people, generally. I have no problem touting the S&P
500 at a low cost.

If a short period of low market prices is enough to push you over into the dreaded (but not real) "sequence of return risk" category

Do you mind elaborating on this Jim?

Charlie however has been more forthright with his inner thoughts and told his progeny (and whoever cares to listen) that he prefers Berkshire to the Index and do not be so 'dumb' as to sell your Berkshire. Not insignificant advice imo. My BRK ownership is roughly 5x my S&P + QQQE ownership. Who knows, but I sense BRK and QQQE will surpass the RSP or SPY over the next 10-15 years, although they all seem reasonable choices. Let's hope we are all around to look up at the scoreboard in 15-20 years!

If a short period of low market prices is enough to push you over into the dreaded (but not real) "sequence of return risk" category
..
Do you mind elaborating on this Jim?

Nothing deeper than what was already in my post.
My point is that selling at a low valuation multiple isn't that big a deal, because you will be doing many, many sales over a very long period of time.
Some will be at good prices, some at low prices, but you'll average about whatever the long run average is, and you're not selling all that much in any given couple of years.

Sequence of return risk (SORR) is generally taken to mean the risk of a portfolio not sustaining one through retirement if and only if it sees big mark-to-market drawdowns in the first few years of retirement.
In very borderline cases, the same overall CAGR in (say) the first 25 years of retirement can be sufficient if the first few years are good but not sufficient if they aren't.
This specific risk comes not from the rate of return or the withdrawal rate, but from the order in which the returns happen to occur.

SORR is generally considered in conjunction with a "withdraw a constant dollar amount" program (with or without inflation adjustment).
Obviously the retiree will sell some of the portfolio at temporarily low prices from time to time.
If too much of this happens early in retirement, selling more shares than expected, it could leaving the retiree with too few remaining investments (too few shares) to sustain them through the rest of the retirement.

But, given what a small percentage of one's portfolio you're selling in a few year period in any sensible scheme to live off a portfolio, this can only happen in a retirement withdrawal program that is very badly designed.
For two reasons: (1) If you're that close to the edge, you're withdrawing too much, and (2) Even if you absolutely have to push things to the edge because your savings are borderline, then the amount sold should not be constant.


This is my suggestion to my spouse on how to handle investments after my death:
* Don't hold a big pile of cash, put it almost all in equities. I have made a specific suggestion for the portfolio holdings.
* Each quarter, sell 1.4% of whatever number of shares are currently owned in the portfolio (same percentage of each position).
Or less, if she doesn't need that much cash in a given quarter.

The income will be variable, but the number of shares 15 years later won't be any lower in the event of potentially poor stock prices in the first few years.
By construction the stream of cash will last forever as long as the investments don't all go bankrupt.
The real income will either rise quite gradually or fall quite gradually over the long haul depending on whether the long run real return on the portfolio is more or less than inflation + 5.8%/year.

If we could get actuarially fair prices on a deferred annuity or tontine then the plan would be different, but it seems nobody sells those.

Anybody want to join me in a mutual inheritance fund (tontine)?
You have to be a minimum age to play, say 63. Separate fund for men and fund for women.
Very round numbers: We each put in $X now. An accountant acts as trustee, charging by the hour.
Assuming you're still alive, you start getting at least about $X a year in real terms starting ~20 years from now, lasting till whenever you croak even if it's age 130.
The income starts very low and irregular, starts rising slowly and becoming more regular, then starts rising a LOT. Zero counterparty or default risk, zero actuarial or longevity risk.
For the rest of your retirement savings (everything minus the $X you put in), you can spend 100% of the capital and income linearly over the next 20 years, yet never worry about going broke.

Jim

I would join the tontine, but (1) I'm too young and (2) I've read too many philosophy books and mystery novels to trust the other parties in a tontine.

I would join the tontine, but (1) I'm too young and (2) I've read too many philosophy books and mystery novels to trust the other parties in a tontine.

Funny, isn't it?
That's the main reason for hesitation for most potential participants, and many a naive regulator too.
(contrary to common wisdom, they're only banned in 1.5 US states)

Yet the fear is irrational: there isn't a single historical tontine-motivated murder case to be found.
That's despite half of all US households having a tontine in the late 1800s. The reason? They're a great idea.
Besides, the motivation for bad acts is even higher with ordinary life insurance policies, where you only have to off ONE person.

They weren't wound down or banned because of murder, but because they were popular long before trustees got audited or regulated.
Sponsors tended to simply ran off with the money.

Secondarily because many of them unwisely had a guaranteed coupon, which isn't sound without a whole lot of spare capital, which was not required or even checked.
Consequently some honest but mathematically primitive sponsors simply couldn't meet the payments they had guaranteed and went bust.
Including King William, I guess.

The modern edition can't go bust and needs no spare capital, as it skips the minimum coupon.
Each time a member croaks, the assets corresponding to his/her share are liquidated and paid to the remaining shareholders in proportion to their shareholdings.
No deaths, no payments, which is why the payment stream is irregular. But it can't ever run short of money.
I would propose to liquidate and pay out the remainder when the number of living annuitants gets down to 10.
If you get a cheque for a gazillion bucks at age 104, you can probably buy a pretty fine annuity with the cash, so the lack of more payments won't be an issue.
Secondarily, for marketing purposes, that raises to 10 the minimum number of murders for a bad guy to benefit!

Cool historical note: just like any mutual fund sponsor, Mr Tonti's original scheme charged an annual management fee on assets under management, of 0.125%.


As for your age objection, we can have entirely separate funds for different age ranges : )
Mr Tonti did the same.

Some people have proposed doing adjustment factors to make it fair for participants of all ages, but that starts down the road of mortality calculations and regulated capital buffers and risk.
I like the simple "mutual inheritance scheme" approach. It's incredibly easy to explain and understand, and no spare money is ever needed.

Jim

the dreaded (but not real) "sequence of return risk" category

Do you mind elaborating on this Jim?

I'm not Jim, but it goes like this:
Every day is the first day of the rest of your life, and
every year is the first year of the lifetime of our portfolio.

The people who worry about "sequence of return risk" are thinking that the first year of retirement is the only year of concern.

What's the difference between a 30% loss in the 1st year of retirement and a 30% loss in the 20th year of retirement? None. The year after the loss is the first year of the rest of your portfolio. There is nothing special about the first year.

Where the sequence of return risk is actually important is when you retire on a shoestring and a large loss will drop the portfolio value below the "safe" level. So don't retire with barely enough money.

What's the difference between a 30% loss in the 1st year of retirement and a 30% loss in the 20th year of retirement? None. The year after the loss is the first year of the rest of your portfolio. There is nothing special about the first year.


I think there is a difference. Remaining life in the first year of retirement is x. After 20 years is x-20 which is a much smaller number than x.

When you are in a drawdown mode, with a fixed amount of withdrawal per year (not a percentage of assets), you will have more at the end of the investment period if higher returns are at the beginning of the period under study.

Example. -10% first year. 20% second year. $100 starting amount, $10 per end of year withdrawal.

Yr 0 $100
Yr 1 $80
Yr 2 $86

Example 2 20% first year, -10% second year. $100 starting amount, $10 per end of year withdrawal.

Yr 0 $100
Yr 1 $110
Yr 2 $89

So sequence makes a difference with fixed withdrawal amount. Sequence does not make a difference if a fixed percentage of current balance is withdrawn.

What can be done about it? Not much that I know about except keep the fixed amount of withdrawal to a reasonable number.
Craig

The people who worry about "sequence of return risk" are thinking that the first year of retirement is the only year of concern.
What's the difference between a 30% loss in the 1st year of retirement and a 30% loss in the 20th year of retirement? None. The year after the loss is the first year of the rest of your portfolio. There is nothing special about the first year...
Where the sequence of return risk is actually important is when you retire on a shoestring and a large loss will drop the portfolio value below the "safe" level. So don't retire with barely enough money.

I certainly agree with the conclusion.

But the first part isn't really right.
The first year of your retirement IS unique, as it is the only year which is immediately after your decision that the portfolio can support you from then on with a given withdrawal plan.

In year two (or three or four...), you can't make that decision. It has already been made, and the money available may have changed a lot based on what has already happened.
A plan that "probably" would have worked as seen from year 1 may now be a definite failure.

Now, I agree that it's not the big deal it's made out to be, because the only time it matters is AFTER you have made a really stupendously bad retirement portfolio plan.
You picked a fixed-dollar withdrawal amount that your portfolio couldn't reliably support.

But the sequence of return problem is a real one.

Consider two sequences with the same overall CAGR:
Number one is -20% for five years in a row, +30% for the next five years, and 2%/year for the next decade.
Number two is +30% for five years in a row, -20% for the next five years, and 2%/year for the next decade.

If this portfolio has a too-aggressive withdrawal plan in fixed dollars, the first one may run out of money whereas the second one doesn't with the same withdrawal plan.
It doesn't fail because of the overall portfolio CAGR or because of longevity, but because of the bad luck of the *order* of withdrawals.
In the first sequence, a 4% withdrawal plan will run out of money in year 20.
In the second case, it will still have 74% of the starting balance at year 20.

Which only matters if you have already made a dumb plan, making such a failure likely, but it is a real failure, and it does indeed depend critically on the sequence of returns alone.
So...it's a thing you only worry about when it's the result of a prior bad decision.
But it's a real thing.

If your tires aren't strong enough to drive at 150 MPH, a blowout is a real risk which might happen or might not and is worth understanding.
But the whole thing is moot if you're smart enough not to drive at 150MPH in the first place.

As you in effect note, a small portfolio can not reliably support a large fixed-dollar withdrawal plan.
And picking the biggest withdrawal number that would always have worked in the past is not going to work either.
The sequence of historical returns that the world has seen is not a good guide to the maximum range of what CAN happen.

Jim

the dreaded (but not real) "sequence of return risk" category

Do you mind elaborating on this Jim?

I'm not Jim, either, but to expand on his clarification that the biggest risk is in a constant withdrawal during a downturn I played with some numbers.

Assuming each of the following four retires on Jan 1, 2030 with $100 and withdraws 4% each year as living expenses.

For Larry and Moe, that date happens to coincide with the start of a Pharaonic seven-fat-followed-by-seven-lean-years in the market. Specifically, the market returns 15% annually years 1-7, and loses 15% each year years 8-14

For Curly and Shemp, the opposite happens: a 15% annual loss years 1-7 followed by a 15% gain years 8-14

Where are they after fourteen years?

In first place is Lucky Larry. He not only starts with a 15% annual gain, but withdraws only the initial $4 annually i.e. not adjusting his withdrawal to current portfolio value. He finishes with $54

Tied for second place are Moe and Curly. While they had exactly opposite sequence of returns, and thus divergent portfolio values every year excepting only the start and end points, they each end the fourteen years with $47. This, I think, was what Jim was referring to when her referenced the "dreaded (but not real)" SORR.

Moe and Curly's trick? They each withdrew 4% of the current year's balance, spending more good times while cutting back in bad.

However, note that while Moe's low-water mark was at the very end, Curly lost all of his hair due to being down to $23 after only seven years (only 11% of Moe's balance on that date)

Sad Shemp (constant $4 withdrawal AND 15% annual loss years 1-7) is no longer heard from, having finished year 12 with only $2

(This also goes a long way to explaining why we now only hear of the three Stooges, btw)

--sutton

Numbers (apologies for not mastering any avail table function):

M L C S
$100 $100 $100 $100
$111 $110 $81 $82
$123 $122 $66 $66
$137 $136 $53 $53
$152 $152 $43 $41
$169 $170 $35 $32
$187 $191 $28 $24
$208 $215 $23 $17
$168 $179 $25 $15
$136 $149 $28 $12
$110 $123 $31 $9
$89 $101 $35 $6
$72 $83 $39 $2
$59 $67 $43 -$2
$47 $54 $47 -$7

Assuming each of the following four retires on Jan 1, 2030 with $100 and withdraws 4% each year as living expenses.

Now lets assume that they retired on Jan 1, 2025 with $50 which grew enormously and 5 years later on Jan 1, 2030 wound up with $100. Same fat-then-lean and lean-then-fat scenarios.

That's why the SOR risk is bogus, a boogeyman to scare people.
They had GREAT results the first 5 years of retirement. But the period after 1/1/2030 was the same, no matter if it was the 1st year of retirement or several years into retirement.

Every year is the first year of the rest of your portfolio. Doesn't matter how long ago the portfolio began.

Now lets assume that they retired on Jan 1, 2025 with $50 which grew enormously and 5 years later on Jan 1, 2030 wound up with $100. Same fat-then-lean and lean-then-fat scenarios.
That's why the SOR risk is bogus, a boogeyman to scare people.
They had GREAT results the first 5 years of retirement. But the period after 1/1/2030 was the same, no matter if it was the 1st year of retirement or several years into retirement.
Every year is the first year of the rest of your portfolio. Doesn't matter how long ago the portfolio began.

I'm not sure I follow your straw man there : )
If they had retired five years earlier with $50, then on that retirement date no-one could know that the portfolio was about to double in value in five years.
And those starting out were starting with 8% withdrawal rate and thus behaving crazily.
Then five years pass and returns were great in those five years, so with hindsight their idiocy was saved by dumb luck.
Taking an unacceptable risk then getting out of it by lock doesn't demonstrate that the risk didn't exist.

For someone choosing fixed withdrawals that are too large relative to portfolio size on retirement date, sequence of return risk is a real risk, and the first few years are *definitely* materially different in importance compared to any subsequent year.
If they're particularly bad you go broke, and otherwise you don't, plainly enough.
For a *smart* person who doesn't make both of those two mistakes, sequence of return risk isn't a worry.

It is wildly untrue to suggest that every year is the first year in terms of this risk, unless you are prepared to change your withdrawal plan at any time.
Which means it isn't a fixed withdrawal plan, meaning that it's a person who hasn't made one of the two mistakes that, when combined, make sequence risk a big thing.

My own preference is to estimate the value of the portfolio on a regular basis, and adjust the values for inflation.
Smooth out that sequence if needed so it doesn't have too many short term squiggles.
The amount that you can liquidate with absolute certainty is the fraction of your investments that correspond to the increment in value (not price) since the last time you checked.
If you have 100 shares of something and they go up in intrinsic value by 8%, you can safely sell 8 shares. The price of those 8 shares might be high or low on that date, but it will be something.
By construction, and assuming your investments rise rather than fall in true value over time, your portfolio will always have the same real value and you can draw income forever without going broke.
You just don't know in advance how much it will be in any specific year.
This is a discussion of that using BRK as an example. http://www.datahelper.com/mi/search.phtml?nofool=y...
Note, the same valuation technique can be used to create a smooth trajectory that causes your portfolio value to reach zero on a fixed future date, liquidating the principal as well as the income.
The notion is that you would have a deferred annuity that would kick in on that date.
Even though annuities are almost always scarily overpriced, you still get to spend a whole lot more that way.

Jim

Great info here:

https://earlyretirementnow.com/safe-withdrawal-rat...

Including Part 12: Six reasons to be suspicious about the 'Cash Cushion'

https://earlyretirementnow.com/2017/03/29/the-ulti...

Tied for second place are Moe and Curly. While they had exactly opposite sequence of returns, and thus divergent portfolio values every year excepting only the start and end points, they each end the fourteen years with $47. This, I think, was what Jim was referring to when her referenced the "dreaded (but not real)" SORR.

While it is true that Moe and Curly ended up with the same amounts, Moe withdrew 3 times more money than Curly ($72 vs $24). Moe's average balance was much greater than Curly's average balance, therefore he was able to withdraw more money. So even though they withdrew the same percentage amount, there is still a sequence of returns risk. The question is what can be done about it? To my knowledge, only accepting that there is a sequence of returns risk.

Craig

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