[Retire Early]
Safe Retirement Withdrawals with Cash Buffers - by Bob Herlien


Safe Retirement Withdrawals with Cash Buffers - by Bob Herlien

Return to Table of Contents - Home Page

This article was posted on January 19, 2000.

Bob Herlien (BluesH on the Motley Fool) agreed to let Retire Early post the following article and accompanying Excel spreadsheet describing his model for safe retirement withdrawals using a cash buffer.


I've now modified the REHP Safe Withdrawal calculator to simulate a cash buffer. The new version of the calculator, wdraw7.xls, has the following features:

- Can do fixed or variable withdrawal calculations. Set cell B10 to 0 for fixed, 1 for variable. If you use fixed, the Max/Min rates at cells B14 and B15 have no effect.

- Cell B12, labelled ReBalance Portfolio?, has 3 possible values. 0 means never rebalance, 1 means rebalance every year, and 2 means rebalance only in those years in which the S&P 500 return is positive.

You'll notice that this spreadsheet is based on my earlier variable withdrawal spreadsheet, which of course is based on intercst's spreadsheet. But I've removed the macro which calculates the 95% to 5% percentile returns. Sorry, but maintaining this through the changes I made was just too difficult.


I used the spreadsheet with cash buffer simulation to see just how much difference it made to the safe withdrawal results.

The following results are for a portfolio allocation of 75/25, e.g., 75% stocks, 25% fixed. I made no attempt to find the "efficient frontier" of allocation, as intercst did; and therefore these results will differ from his. In particular, the 75/25 split is a long ways from the efficient frontier for a 10 year horizon; intercst has shown that for 10 years, the frontier is 44/56. I encourage anyone who wants to, to find the efficient frontier results.

Also note that the "cash buffer" algorithm is far from optimal. It simply states that you won't reallocate in years with negative market returns. But it's possible to have a long bear market that contains years with marginally positive returns, e.g. 0.1%. In this case, you'll draw down your cash buffer in the "down" years, but completely replenish it whenever the return is positive, no matter how small.

Safe Withdrawal Rates

Always Rebalance Method (B12=1)
                   Time Horizon
% Safety     10yr   20yr   30yr   40yr   50yr
100%         8.34   4.74   3.89   3.63   3.43
95%          8.83   5.21   4.51   4.54   4.34
90%          9.23   5.65   5.06   4.94   4.64

Cash Buffer Method (B12=2)
% Safety     10yr   20yr   30yr   40yr   50yr
100%         8.49   4.86   3.97   3.69   3.47
95%          9.01   5.28   4.57   4.62   4.41
90%          9.62   5.72   5.14   4.99   4.67

Variable Withdrawals
Starting with 5% withdrawals, what is the minimum rate necessary to achieve 100% safety?

                     20yr   30yr   40yr   50yr
5/x% Rebalance       4.72   3.77   3.48   3.24
5/x% Cash Buffer     4.85   3.86   3.55   3.30

As you can see, the cash buffer does indeed create marginally higher withdrawal rates. But the emphasis is on marginal. Other than 10 years, for which you'd expect to heavily depend on cash, most of the other entries have a difference of around 0.06% or so. From a $1M portfolio, that amounts to $600/year or about $50/month.

------------- by Bob Herlien -------------

Download the Safe Retirement Withdrawals w/Cash Buffer Calculator

This Microsoft Excel 5.0/7.0 spreadsheet allows you to run some scenarios on your own. Click below to download the file.

Download the Safe Retirement Withdrawals w/Cash Buffer Calculator
(wdraw7.zip, filesize=1,666kb, expands to wdraw7.xls, filesize=2,557kb)

Note: You will need pkunzip.exe, or some similar program, to expand the zip file into Excel format.

filename = cashwith.html
Copyright 2000 Bob Herlien, All rights reserved.

Send a message to: The Retire Early Home Page