One year of spending is held in safe money, then the portfolio is rebalanced once per year. This approach simplifies budgeting by setting a consistent time each year and preparing funds for the next year’s spending needs. For many retirees, one year of spending can be a small portion of the portfolio, around 5%, while the remaining majority stays invested to continue compounding. Larger cash buffers can reduce long-term returns because excess cash earns less over time. Cash yields may look attractive in the short term, but long-run performance is viewed as inferior, especially when inflation and opportunity cost are considered.
"“I like a year. I think a year makes everything really easy. It makes your annual rebalancing easier. It sets you up. If you do this at a set time every year, like the end of the year, and you put it away for the next year, it gives you a budget from which to work.”"
"“If you have a year's worth of spending, that may amount to 5% of your portfolio,” McDonald said. “The remaining 95% stays invested and continues compounding, which matters more than ever given where inflation sits today.”"
"“The traditional bucket strategy often calls for two to five years of cash to ride out bear markets. McDonald's argument cuts against that orthodoxy because excess cash drags on long-term returns.”"
"“Cash, well, in the long haul is trash.” Tom Seacock agreed, even while conceding that today's yields are unusually generous, noting uncertainty about how long those yields last."
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