I understand the function of the cash floor and ceiling regarding overflows but I am having difficulties coming up with a value. Is this an emergency fund, beyond the structured visualization of say a bucket strategy that has about 3 years of living expenses in accessible funds? Can anyone help with a reasonable value as well as an example of its structure and use? Thanks.
John
@carrj587 John, I can tell you that it's generally intended to represent the amount of money you typically keep in your checking and savings accounts. Generally speaking, it's where your income goes first and it's where your expenses are paid from. Pralana tools do not specifically model bucket strategies, but I suppose you could look at this as the bucket to handle near term expenses. I'll leave it to other folks to offer help on specific numbers for floor and ceiling.
Stuart
@carrj587 The simplest way to look at it is:
Floor: The point at which you start getting nervous about your total amount of money in checking/savings being too low.
Ceiling: The point at which you start thinking "Too much in checking/savings, I'm going to move that to taxable brokerage to invest."
When working, it's typical to have six months of essential (non-discretionary) expenses in an emergency fund in case of job loss. In retirement, typically not so much a problem but people do bank money there for unexpected big expenses like the roof starts leaking or hvac stops working.
So what happens if you set the floor and ceiling to zero? Do all of the money flows simply show actual expenditures?
@gguillot If the cash floor and ceiling are set to zero, the cash account balance will always remain at zero. Positive cash flows will result in a deposit to the taxable account of the same amount and negative cash flows will result in a withdrawal of that amount from your other accounts based on the specified withdrawal priorities.
Stuart
In my mind, the point of cash (if it is held in any appreciative amount) is as part of fixed income meant to mitigate the risk of having to sell equities in a down market. I personally keep about $100 in our checking accounts, but I have planned and accessible fixed income to cover emergencies, usual living expenses for 5 years, and planned Roth conversions. I prefer to keep fixed income in TIPS, MMF, and MYGA, so I set the ceiling/floor to $100 since I expect it to mirror my checking account
I'm able to tell Pralana to pull funds from the brokerage first, but I still don't know how to instruct the program to spend the MMF before the other allocations. Perhaps that is a built-in behavior ?
I'm still a newb, so read the above accordingly
@abq-goldgmail-com No, definitely not built-in behavior. The tool doesn't have the ability to withdraw one asset class ahead of others within any given account; it always maintains the specified/derived asset allocation as cash flow ebbs and flows.
Stuart
I include everything (like a money market fund) that I want to deplete automatically during a cash flow shortage as cash and adjust the cash rate of return to account for that. For instance, we may move in a few years, I'm allowing a higher cash ceiling until then, so we have some ready funds.
Note that this is comfort food, but generally not an optimal plan. The best plan is generally to keep cash low and put all bonds in tax-deferred, using Asset Allocation Mode 2 to keep the overall asset allocation constant. Whether the market is going up or down, you simply sell stocks as necessary in taxable and then buy stocks/sell bonds in tax deferred to keep your asset allocation on track.
Whether the market is going up or down, you simply sell stocks as necessary in taxable and then buy stocks/sell bonds in tax deferred to keep your asset allocation on track.
I'm going to have to ponder your statement for a while. Do you have an easy example to follow ?
I suppose I cannot easily reconcile it with my usual understanding of selling stocks during good years, and using fixed income in poor years -- although, as you mention, with ongoing allocation corrections.
My first thought (which is typically wrong) is to make up a dummy account in Pralana that holds my brokerage fixed assets only, and then tell Pralana to draw from there first.
This type of asset allocation is sometimes promoted as a "bucket strategy" or "Tactical Asset Allocation". It's more complicated than holding a fixed asset allocation, but it seems to be mostly luck as to whether it helps or not, there's no evidence that it actually helps. A write-up where Karsten Jaske (a retired Fed economist) backtested it at his EarlyRetirementNow blog:
An older paper by Moshe Milevsky looks at a similar concept, where he points out that the larger variation in results looks a lot like what you'd expect from a generally higher average stock allocation and in fact you end up holding a generally higher stock allocation than your target because of selling bonds in downturns.
From a behavioral standpoint, I wonder if people could actually execute the strategy through a prolonged downturn. Could you really sell your remaining bonds while holding your seemingly worthless stocks in the Great Depression or from 1968-1982 or 2000-2009? These downturns all look like two or more external events caused separate down markets that happened to occur before recovery from the last one. So there's no "characteristic" recovery time to plan around. Assuming you have the nerve to hold high stock allocations during downturns, why couldn't have the nerve to hold high stock allocations all the time and enjoy more of the upturns?
There were/are actually funds that advertise ideas like this, but they generally haven't been very interesting to the public. Over time, I think they lagged the markets as they tended to move away from high stock allocations just as markets had recovered, missing out on the gains of the next rise or perhaps the public bailed when the markets were down and they didn't want that much risk.
