Can I make sure what I'm doing is kosher?
I have what is regularly thought of as a "cash" account that I keep at 50k that I use for day-to-day expenses. I have another bucket I always keep at 135k that I invest moderately-conservatively (30% AA) for my emergency fund. Anything beyond these two buckets get invested for long term.
In Pralana I'm using the "cash" entry category to reflect the combination of my cash accounts and that second bucket. I do so because it is seems the best way to reflect how money gets transferred when it hits that 135k ceiling. (I set the asset allocation and growth taxation in the Cash category in the "Advanced Portfolio Modeling" to reflect the combined buckets, rather than the usual 0% usual cash return.)
In my mind this works fine, but will it mess up anything in the program logic?
will it mess up anything in the program logic?
I hope not because that's what I do. "Cash" isn't just what's in checking/savings. It can/should incorporate what's in CDs, emergency funds, etc. I think that's correct because the primary use of this in the tool is to determine when and how much overflow to send to taxable brokerage to invest, plus to preserve the floor by not spending it, for example if you're saving to buy a house soon.
As far as emergency fund, if the roof does go out and you have to spend a chunk, it can be done as a scheduled withdrawal now since that's been opened up! If you do buy that house and put down that big downpayment, don't forget to adjust your floor since you no longer need that big number there.
@hines202 Good point about not forgetting to readjust it as I actually use it. I originally set up this bucket (half Vanguard Lifestyle Moderate, half MM/individual CDs and Bonds=30% equity overall) that I labeled "Next Seven Years of Expenses" when I starting investing decades ago because--not coming from generational wealth and with a social worker's salary--I needed to "build up" to more risky investments. After I filled out that bucket I started investing overflow at a more risky 50/50 allocation. Having it there while I was accumulating kept my overall allocation "anchored" in reality, if you will. Now, 25 years later, I'm retired and my portfolio dwarves this original bucket. I now think of it as my emergency funds, given lack of human capital. I'm finding the adjustment of switching to decumulation strategizing from accumulation strategizing more difficult than I'd anticipated, as it's a whole other theoretical approach with its own intellectual and psychological problems. You didn't suggest it; but perhaps this bucket has served its purpose and I should just let it go as I think about what the best way is to approach decumulation.
@jkandell Let it go! 😋 Switching to decumulation is a big challenge for a lot of people 😯. I fund this web site called Rethinking65 https://rethinking65.com/
that interesting. It has an article entitled: Breaking the Fear Factor: Spending in Retirement https://rethinking65.com/breaking-the-fear-factor-spending-in-retirement/ that includes references to research articles (I love that).
From the article:
People spend decades saving for retirement. But when they retire, many are afraid to spend their hard-earned money and unnecessarily limit their experiences in their next chapter. Sadly, it’s not uncommon for retirees to have plenty of money to enjoy this phase of their lives but be unwilling to have or do things they have always wanted.
It turns out that reluctance to spend in retirement is very common. David Blanchett and Michael Finke, professors at the American College of Financial Services, studied this phenomenon and found retirees consistently spend approximately 75% of what they could afford to. They also found that after controlling for different levels of wealth, retirees with a larger proportion of guaranteed income spent more each year than retirees with a larger proportion of investments.
It happens among people at all financial levels. When Susan was a wealth advisor, she focused on serving high-net-worth individuals. She often says that underspending is rampant with a lot of wealthy people. So, the size of your nest egg does not explain the behavior.
The researchers who found that retirees consistently spend less than they can afford to offer one solution: “Retirees will spend twice as much each year in retirement if they shift investment assets into guaranteed income wealth.” [ https://www.protectedincome.org/wp-content/uploads/2024/06/RP-28_BlanchettFinke_v2.pdf ]
Maybe creating a “retirement paycheck” with a guaranteed income or simply helping them reframe their retirement income as a paycheck someone else is paying them will help to shift their mindset about spending. We all are more comfortable spending money out of our paycheck than we are spending from savings.
However, your clients still need to know how much they need that paycheck to be. Unless they have a well-thought-through lifestyle plan, they probably don’t have a solid answer.
Admittedly the web site does have a pro-guaranteed income bent, but I found it interesting.
