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Portfolio Withdrawing & Re-balancing
Old 10-11-2004, 06:21 AM   #1
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Portfolio Withdrawing & Re-balancing

This is our first year of IRA withdrawal and basically living off our savings. I have been drawn to Frank Armstrong's 2 buckets and trying to avoid selling stocks in down markets. I haven't seen much detail though, in how to pursue this strategy; i.e., if you have a -25% year followed by a +5% year, does that mean the 5% is profit to spend in the second year!

I've also appreciated Larry Swedroe's books and his 5/25 approach to range setting allocations to trigger re-allocation moves. I believe I have read where Larry has spoken against Frank's approach, saying you should always have a plan that stays within allocation targets to control overall risk.

So, I have been thinking about a sort of hybrid approach and would appreciate feedback as to whether it makes any sense, is too simplistic, stupid, etc.

Assumptions:
1) Equity is sub-allocated into MPT-like well diversified sub-categories.
2) Cash is raised for expenses once a year.
3) Larry's 5/25 rule is used for stock and stock sub-category target and min/max allocations.
4) Yearly, at raising cash & rebalancing time, the amounts needed for cash and to be withdrawn or added to stock are determined. The amount to be withdrawn or added to bonds will be determined by these 2 amounts.

Equity withdrawal rules:
1) Allocation between target and max: No withdrawal if non-positive earnings during past year. Otherwise, will withdraw the smaller of the positive earnings or what is required to bring equity allocation back to target.
2) Allocation above max: Execute rule 1. If result is an allocation still above max, withdraw enuf from stock to get back down to maximum level. This is intended to keep portfolio from getting too far out of target after repeated instances of primarily using bonds for expenses.
3) Allocation between target and minimum: No change to equity allocation.
4) Allocation below minimum: Add enuf to stock from bonds to bring allocation back up to minimum.

In all cases, would try to keep sub-equity categories within their defined ranges.

Thanks for your thoughts!.... Bill
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Re: Portfolio Withdrawing & Re-balancing
Old 10-11-2004, 06:59 AM   #2
 
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Re: Portfolio Withdrawing & Re-balancing

There was a thread here last week that had the following link. It also had some withdrawal rules that lead to increased SWR. I think you might fuind it helpful.

http://www.fpanet.org/journal/articl...nderforprint=1
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Re: Portfolio Withdrawing & Re-balancing
Old 10-11-2004, 10:29 AM   #3
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Re: Portfolio Withdrawing & Re-balancing

I am also in the IRA draw down phase. To prevent
"reverse dollar cost averaging", I am attempting to
hold my equity allocation at a fixed dollar amount to
be increased by the rate of inflation each year. Any
surplus over that is added to the short term bond
account which provides monthly funds. In down
equity years I plan to rebalance to the prior year
amount plus inflation. This strategy requires a big
pot of money in the short term bond fund and a
relatively high tolerance for volatility.

Cheers,

Charlie l
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Re: Portfolio Withdrawing & Re-balancing
Old 10-13-2004, 08:06 AM   #4
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Re: Portfolio Withdrawing & Re-balancing

Cut-Throat, this was an interesting article, although it seemed that it might involve a little data mining; i.e., if I concoct enuf rules this will turn out realllly good! The approach mostly addressed determining a withdrawal amount. I monitor expenses closely and assume an internal rate of inflation for future cash needs as well as a forecast for major purchases (e.g., new car). Fortunately, we have been coming in well under 4% since I retired in 2000 and I am comfortable with withdrawal amounts for near future. My focus right now is strictly on the portfolio management side.

Charlie - Have seen you mention this approach before. I have created a spreadsheet that follows our equity investments from 2002 which is as far back as I have "seeded" Quicken. The spreadsheet keeps a running total of gain/loss by equity investment. Planned on using it as a possible input to withdrawal/ rebalancing; i.e., not taking more than accurued gain. Didn't apply inflation, but guess that I could.
How many cycles/years have you been using your approach? Also, do you do it by equity as a total or by each sub-class (large value, small value, etc)? Do you rebalance within equity sub-classes even in years there is no overall gain for expense withdrawal?

Thanks! Bill
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Re: Portfolio Withdrawing & Re-balancing
Old 10-13-2004, 09:37 PM   #5
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Re: Portfolio Withdrawing & Re-balancing

Bill,

I just started the withdrawal strategy mentioned
above this year ...... so no track record yet. I
am using the "coffeehouse" approach for the
equity sub-classes and plan to rebalance as described
above in January of each year. If some fund gets
ahead or behind too much I will rebalance on the fly
as I recently did with the REIT fund.

Cheers,

Charlie
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Re: Portfolio Withdrawing & Re-balancing
Old 10-14-2004, 07:18 AM   #6
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Re: Portfolio Withdrawing & Re-balancing

Thanks Charlie. *That's what I figured you might plan to do. *By the way, did you ever make changes you discussed of using Asset Allocation fund and Windsor II for large and large value?... Bill

Whoops! Forget the question; I see you answered it in another post... Thanks! I am considering using the Vanguard Large Cap as well since it has a little more exposure to mid-cap than the 500.
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