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Rebalancing and Firecalc
Old 01-02-2014, 12:07 PM   #1
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Rebalancing and Firecalc

With the run up in stocks over the last several years, I was wondering how retired folks have changed their portfolios and goals.

Seems like there are only a few options. Given an acceptable Firecalc success percentage, as the portfolio increased in value, and you are one year closer to death so your time frame is less:

1). Maintain current goals, reduce risk, selling stocks, increasing cash or bonds.

2). Rebalance to same AA, increase goals such as current spending or legacy gifts (an increase in Firecalc % above what is acceptable seems like a way of saying you're going to continue to LBYM and leave more stuff in your estate).

3). Do nothing, resulting in higher risk portfolio, and potential rewards of significantly increasing your goals.

I'm in my first year of retirement, feel like I've been handed a windfall with this years market results. I'm doing option 1 above, and increasing cash holdings.
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Old 01-02-2014, 12:46 PM   #2
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I rebalanced about a month ago after a previous run-up in the S&P500. I took out my total withdrawal for 2014 at the time. I have no problem with locking in a profit and the money I need to spend on life in the next year. Since then the market has continued to go up and I am now a bit over my stock percentage. I will fix that late this year or early in 2015 when I next rebalance.

For what it's worth, despite withdrawing money to live on in 2013 and for 2014, and some depreciation in my bond funds, I am still up nicely for the year even after adjusting for inflation. Not a bad way to start my first full calendar year of retirement.
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Old 01-02-2014, 01:09 PM   #3
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Originally Posted by gcgang View Post
With the run up in stocks over the last several years, I was wondering how retired folks have changed their portfolios and goals.
If you're a market timer you might choose option 1 or 3.

If you have an IP (investment plan), you've set an asset allocation that fits your risk tolerance and portfolio needs and you follow a rebalancing routine (periodic and/or bands w/wo tax considerations), essentially option 2.

If you did a poll here, I'd think #2 would be the front runner. But asking on most forums would probably have at least some self-fulfilling prophecy built in, more a reflection of that forum than what's right or wrong? And though this is a retirement forum, I doubt the membership here represents retirees at large. You probably realize all this...
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Old 01-02-2014, 01:13 PM   #4
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I have cash for 2014 and maybe half of 2015. We are hitting a nice portfolio high, but it's mostly recovery from 2007-2009. No change of plan here.
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Old 01-02-2014, 01:20 PM   #5
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Going from 65% equities to 60% mid month.
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Old 01-02-2014, 06:03 PM   #6
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Congratulations on choosing a great year in which to retire! Me too - - I retired in 2009, just as the market was beginning its long term rise after the 2008-2009 crash.

Three years before retirement I started gradually moving from my accumulation phase asset allocation of 100% equities, towards my retirement asset allocation of 45% equities. By a year before I retired, I was there IIRC.

Since then, I have rebalanced according to the criteria that I list in my home-made financial plan. That means that I rebalance during the first week in January every year, plus additional times if equities drop below 42.5% or exceed 47.5%.

I just rebalanced yesterday when the market was closed, and would have had exactly 45% equities until the market dropped today. So, I am kicking myself about that. But anyway, this is how I deal with the rebalancing issue.
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Old 01-02-2014, 06:08 PM   #7
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Quote:
Originally Posted by gcgang View Post
With the run up in stocks over the last several years, I was wondering how retired folks have changed their portfolios and goals.

Seems like there are only a few options. Given an acceptable Firecalc success percentage, as the portfolio increased in value, and you are one year closer to death so your time frame is less:

1). Maintain current goals, reduce risk, selling stocks, increasing cash or bonds.

2). Rebalance to same AA, increase goals such as current spending or legacy gifts (an increase in Firecalc % above what is acceptable seems like a way of saying you're going to continue to LBYM and leave more stuff in your estate).

3). Do nothing, resulting in higher risk portfolio, and potential rewards of significantly increasing your goals.

I'm in my first year of retirement, feel like I've been handed a windfall with this years market results. I'm doing option 1 above, and increasing cash holdings.
Rebalancing has nothing to do with withdrawal rate - FWIW.

If you are using the traditional SWR method based on the initial portfolio value, increased by inflation each year, and has nothing to do with the recent year's performance.

UNLESS......this is year 1!!!!

So - maybe for you the windfall is that you are using Dec 31 as your initial portfolio value? Well - congrats!!!!

And - I rebalance annually (or so) no matter what any individual asset class has done. I don't change my AA. Trying to change your AA based on market conditions - well, a few can do it, but most end up shooting themselves in the foot (i.e. being too clever for their own good).
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Old 01-02-2014, 06:12 PM   #8
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Originally Posted by W2R View Post
Congratulations on choosing a great year in which to retire! Me too - - I retired in 2009, just as the market was beginning its long term rise after the 2008-2009 crash.

Three years before retirement I started gradually moving from my accumulation phase asset allocation of 100% equities, towards my retirement asset allocation of 45% equities. By a year before I retired, I was there IIRC.

Since then, I have rebalanced according to the criteria that I list in my home-made financial plan. That means that I rebalance during the first week in January every year, plus additional times if equities drop below 42.5% or exceed 47.5%.

I just rebalanced yesterday when the market was closed, and would have had exactly 45% equities until the market dropped today. So, I am kicking myself about that. But anyway, this is how I deal with the rebalancing issue.
Well, I was planning to rebalance today - just a small clean-up after distributions paid out and my annual withdrawal - but I think the market already did it for me, because I was only off by about 1% going into today!

FWIW - technically you can't rebalance on Jan 1 because mutual funds don't trade. The soonest you can do it is Jan 2, and that ends up using the mutual fund prices at the close of the trading day. Even if you enter the trades on Jan 1 they don't execute until end-of-day Jan 2.
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Old 01-03-2014, 08:01 AM   #9
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I just rebalanced yesterday when the market was closed, and would have had exactly 45% equities until the market dropped today. So, I am kicking myself about that. But anyway, this is how I deal with the rebalancing issue.
Um, you realize that a certain cheer you uttered on Dec 31 caused this, don't you?
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Old 01-03-2014, 10:05 AM   #10
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I rebalance any time my equities get 1% above the max allocation. I do not rebalance if equities drop. But in a bad decline I have an algorithm for rebalancing on recoveries. So this is pretty conservative.

In 2013 I rebalanced by -1% each in March, May, and November.
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Old 01-03-2014, 12:11 PM   #11
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If you're a market timer you might choose option 1 or 3.
. You probably realize all this...
I couldn't disagree more.

In 1, changing your AA results from your increased ability to achieve your personal lifestyle goals and avoid taking on unnecessary risk. It has nothing to do with your perception of what the market will do (market timing).

Appropriate spending and investment policies change with circumstances. If you've been retired and in stocks the last five years, your circumstances are much improved. I'm just wondering whether people:
A) reduce risk, maintain spending
B) maintain AA, increase spending
C) rebalance, maintain spending and leave more $ in your estate.
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Old 01-03-2014, 12:14 PM   #12
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C) rebalance, maintain spending and leave more $ in your estate.
There is also this one...

D) rebalance, maintain spending and hope not to run out of money before running out of time

What goes up doesn't always stay up.
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Old 01-03-2014, 01:43 PM   #13
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There is also this one...

D) rebalance, maintain spending and hope not to run out of money before running out of time

What goes up doesn't always stay up.
But that's the point of reducing risk after your portfolio goes up. You don't have to hope so much. And you're in much better shape WHEN things go down.
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