Level 3 Investing -- Withdrawal Approach

[gabrewer]

Hello all;

I am currently reading Level 3 Investing by James Cloonan (founder of AAII). Yes, they inundated by inbox enough times that I finally took the bait. The basic underlying premise is of course nothing new -- stocks outperform other asset classes in the long run. I do find his take on how to take withdrawals during retirement to be interesting. Similar to the bucket approach he advocates keeping 4 years (or 3-5 depending on your tolerance) in safe investments. However he views this as "insurance" -- only to be touched when the stock market is down. Otherwise withdrawals are to be made from the long-term stock portion of the portfolio in up years. Another interesting aspect is there is no "middle bucket." He views long term bonds as a waste of time, contending that on an inflation adjusted basis they have been long-term losers.

I guess I'm just interested if anyone here is familiar with or read about this approach and what opinions or criticisms there might be of it. At first glance it does have a certain intuitive logic -- as does the bucket approach, asset allocation, various glide paths, living on interest and dividends, etc.

Thanks for any and all feedback; hope everyone has a good Labor Day weekend!

 

[LOL!]

That just sounds like another way of saying "Use withdrawals to do any needed rebalancing", so it doesn't seem particularly controversial to me.

Buckets have been pretty much trashed as a mental crutch which suggests only the weak-minded use buckets.

4 years of expenses in bonds/fixed income is must less than the typical asset allocation to this asset class. Say 40% in fixed income at 4% withdrawal per year is 10 years of spending.

Otherwise, withdraw tax-efficiently and you are on your way. For instance, you can take your dividends in cash and spend them, then sell things that would not cause you an increase in taxes in a move towards rebalancing.

 

[Rianne]

I guess long term bonds today are a poor investment. I have (140K) of long term bonds earning 4%, but bought them years ago. Those days are over. I will let these puppies sit and gain interest until I have to redeem them.

 

[Blue Collar Guy]

Put a fork in me over this one, Im done learning new strategies , buckets. TIPS, REITS, foreign bonds, baseball cards, etc.. It took all my energy to figure out an AA, and since i have 15 % international stocks that have been lagging for 10 years Im putting my head in the sand over that too. I hear people love the bucket thing, if it makes you sleep better Im all for it. Keep us posted on what you think of it.

 

[flintnational]

Put a fork in me over this one, Im done learning new strategies , buckets. TIPS, REITS, foreign bonds, baseball cards, etc.. It took all my energy to figure out an AA, and since i have 15 % international stocks that have been lagging for 10 years Im putting my head in the sand over that too. I hear people love the bucket thing, if it makes you sleep better Im all for it. Keep us posted on what you think of it.

Don't feel bad. I have 21% in international stocks and have had for many years. Something about the "efficient frontier" I read years ago.

 

[rayvt]

he advocates keeping 4 years (or 3-5 depending on your tolerance) in safe investments. However he views this as "insurance" -- only to be touched when the stock market is down.

Ok, so what does he say about when you've had to spend 2 of the 4 year's worth of safe investments? Do you sell stocks to replenish the "safe investment" bucket? In that case, all that you've done is sell stocks at time B instead of time A. B.F.D.

Or do you just treat it as a one-time protection bucket? Seems odd -- you decide that there may be *one* crash-event, but also decide that there won't ever be *two*.

 

[Focus]

Don't feel bad. I have 21% in international stocks and have had for many years. Something about the "efficient frontier" I read years ago.

If it's any reassurance, that's considered conservative now. Vanguard currently recommends 30-50% in international. They've shifted higher with time. I've remained at 30%.

After underperforming for a while, the total international index fund has been doing very well lately (much better than the total U.S. index fund).

 

[marko]

Put a fork in me over this one, Im done learning new strategies , buckets. TIPS, REITS, foreign bonds, baseball cards, etc.. I hear people love the bucket thing, if it makes you sleep better Im all for it. Keep us posted on what you think of it.

+1
I'm living nicely off my dividends and cap gains (and SS). This has been working for me for a decade now and see no reason to fiddle with it. Re-balance once in a while and sell/buy something interesting but other than that.....

 

[pb4uski]

I toyed with buckets a few years ago and at the end of the day it ended up very similar to the 60/35/5 AA that I use so it seems to be much ado about nothing to me.

 

[Doc0]

I dunno my foreign and emerging market allocations are up 20 and 25% this year to date. Best performing of my holdings.

Bond performance is distorted up because the Fed has forced interest rates low for so long. Because of that distortion I've lightened up on bonds and moved to shorter maturities in that aspect of my portfolio. I've also moved into alternatives which are equities which tend to be not correlated with the general market and therefore are bond like in terms of portfolio risk but do not hold the risk of bonds in a bubble. I use that aspect of my portfolio as "security" and not for appreciation, though I think living on a bubble isn't that secure. Someday maybe things will right themselves.

My bond exposure these days is about 17% bonds (and another 12% in muni bonds which is what I live off of). The non-muni's are mostly US and various terms and overall yields about 2.5%. My other allocations are REITS, commodities, alternative, and US stocks. I also have LT cap loss to pair against LT cap gain.

The S&P is about 48% foreign exposed, so if your 66:33 S&P:Bonds you actually have about 30% foreign exposure. If you own the above 66:33 portfolio you are participating in the "efficient frontier" in a passive manner.

My withdrawal approach is to live off the MUNI's and replenish off what ever has appreciated most, typically stocks. I sell them from what ever accounts (pre tax v post tax) is most tax efficient. I'm presently not taking SS and not under RMD constraints, so the whole withdrawal thing will change in the future when that stuff kicks in. I like living off the MUNI's because it forces budget discipline on my spending. I treat it like a home brew 5 year annuity, which I will refund when SS and RMD kicks in. In other words I have 5 years to not worry about it.

My impression at least this far into retirement is withdrawal is going to be somewhat dynamic based on what is going on with the portfolio/economy in any given epoch (the present 5 years is an epoch for example), so I base my plan on an epoch and not year to year. Living off the Muni's will naturally tend to make the stock% of my portfolio slowly increase with no need for rebalancing year to year, it will be automatic based on consumption. In 5 years I will be 5 years closer to death so any mistakes I make, my portfolio mistakes and all will tend to outlive me, in other words I should have heir money

My withdrawal starting point was 3% sweep per year for 5 years funding with the most tax efficient stock sales, have a nice life, then re-evaluate when things change (RMD SS etc). If 5 years turns into 4 years because of some unexpected expenses no big deal my overall sweep percentage raises only slightly still below 4%.

Best

 

[pb4uski]

You dunno what?