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Suggestions for Investment when going from Saving to Withdrawing
Old 07-20-2015, 10:43 PM   #1
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Suggestions for Investment when going from Saving to Withdrawing

Hi guys.
Just looking for some basic advice here.
I'm probably going to FIRE in about a year and for the first time since about 17 y/o will be REDUCING savings... yikes.

So for the past few decades I've mostly just saved and invested fairly "aggressively." This was a mix of buying individual stocks with mixed success and a bulk in a mix US and global index funds, a little bit of bond exposure and whatever "low" fee index fund work actually provided (I could go on about trying to get work to change 401k options... but what do you want to do ).

I'm thinking that in preparing to enter the "withdrawal" stage, stability seems way more important.

My gut was to do this:
VTI 40%
VXUS 30%
BND 20%
BNDX 10%

and then just rebalance each year.

I know the bond market is about to crash. I know the market is at all time highs. Yes that stresses me out... but there's always SOMETHING, right?

In addition to that, keep 2 years in a money market/ally checking account and if the market is "down" I consume that, if the market is "up" I sell shares at the beginning of the year to cover annual costs.


This is part of my plan to "reduce the stuff I think about" so I can focus on my family and whatever hobbies/personal projects I want to do . I really enjoy investing, but I think once I am dependent on the income it'll become a source of stress and I want to try looking at account balances every few months instead of every day . I also need a way to control my emotions from making stupid decisions when/if the next "bad market thing" happens.

Do you guys have practical experience with this?
Thanks!
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Old 07-20-2015, 11:15 PM   #2
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That's a decent plan, to my mind. You might also add a plan to use just the bonds from your portfolio if equities are taking a dive. Then you have quite a few years before selling equities. 70% equities is definitely on the aggressive side compared to what I've seen here, so maybe not the most sleep-inducing level.

I stayed 100% equities in retirement, but raised cash each time the portfolio reached a future start-of-the-year projected value. So if the market is getting ahead of my expectations by a year, I'm raising cash for the next year. If the portfolio is below expectations and I don't have that cash available then I sell only as needed for expenses. I started retirement with about 2-3 years of cash just to get things started. While you don't really want to have a "cash buffer" all the time (it's a performance drag), I feel fine raising cash when the portfolio is ahead of expectations.
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Old 07-21-2015, 10:14 AM   #3
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Quote:
Originally Posted by petershk View Post

I'm thinking that in preparing to enter the "withdrawal" stage, stability seems way more important.

My gut was to do this:
VTI 40%
VXUS 30%
BND 20%
BNDX 10%

and then just rebalance each year.!
Seems like a fine plan (very boglehead-ish). However, I can't comment further without knowing more (your age, annual expenses, portfolio size, pensions, etc).
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Old 07-21-2015, 10:56 AM   #4
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Hi Peter,

Looks like a pretty solid plan; however, may be a little more complicated than it needs to be. Consider this: 3-Fund 60/40 portfolio with an expense ratio of .08%. Now instead of the 3 funds (VTSAX, VTIAX, VTBLX), you use the Moderate Growth Life Strategy Fund VSMGX with its ER of .16%. On a $1M portfolio, that's about $800/year for VG to essentially take care of the rebalancing. Or about 800/12=$67 per month. Sounds like a lot till you consider your approach of keeping 2 years expenses in an Ally account earning 1%

Let's look at that. Say VSMGX returns 3% (conservative estimate) for a 2% differential on 2 years worth of expenses. Say 40K/year or 80K. That's $1600 in return that you're missing out on by having 2 years cash set aside.

To truly simplify your financial life, I'd consider putting everything in VSMGX and set up a monthly transfer from this fund to your checking account. You'll have 12 sales to report each tax year, but that's all pretty much automatic nowadays assuming you use some form of tax ware. If you have a significant other, this method provides the added benefit that nothing has to be done should you get incapacitated for any reason. The transfers will just keep on happening to minimize stress during a potentially very stressful time for your loved ones.

Just something to chew on. I've been on this road for just over 2 years.

Good luck.
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Old 07-21-2015, 01:36 PM   #5
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Do keep in mind that the withdrawal stage does not necessarily mean reducing savings (meaning NW) Case in point, my NW has actually about doubled in the 12 years since ER even though I have been living off my investments ( I did start SS a couple of years ago) My portfolio is a more conservative 50/50 with wide re balance bands . In a properly constructed portfolio (which yours seems to be) with regular balancing as long as the withdrawal rate is reasonable many scenarios will result in an increasing NW, not decreasing.
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Old 07-21-2015, 09:28 PM   #6
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If you haven't read it already, Jim Otar's Unveiling The Retirement Myth is an excellent resource for post-retirement income planning.

Unfortunately, his site is down, but you can order the book for download and it's a lot cheaper than the $238 book on Amazon. Here's an idea of what's in the book:

Unveiling The Retirement Myth: Jim C. Otar: 9780968963425: Amazon.com: Books

and

Unveiling The Retirement Myth Book Review
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Old 07-22-2015, 10:04 AM   #7
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Originally Posted by petershk View Post
In addition to that, keep 2 years in a money market/ally checking account and if the market is "down" I consume that, if the market is "up" I sell shares at the beginning of the year to cover annual costs.
Lots of people keep a "cash buffer". I always ask how they'll know when the market is "down" and it's time to draw it down. And, how they'll know that the market is "up" and it's time to refill it.

I'd recommend thinking about a rule, then looking at some historic periods and seeing how it would have played out.
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Old 07-22-2015, 05:17 PM   #8
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Quote:
I'd recommend thinking about a rule, then looking at some historic periods and seeing how it would have played out.
I wondered about this myself, when I retired, and so I wrote a spreadsheet to examine the question. You can download it here:https://www.dropbox.com/s/xf4ma5blug...cket_rules.xls

Spoiler: cash bucket strategy is a mirage. Mirages are attractive and filled with great promise, but there's no "there" there.
It doesn't do what we think it will do, and the thing that we want it to do (i.e., don't sell stocks when they are down) is done automatically anyway by simply annually rebalancing.

Download the SS and play with the parameters. I have not been able to come up with any combination of parameters where the cash bucket method was better than a simply rebalance method.

Quote:
I know the bond market is about to crash.
No, you don't. You don't know that at all. Nobody does.

Quote:
I know the market is at all time highs.
And water is wet.
Pull up a chart of the stock market going back as far as you can get. What do you see? What you see is that the market is *always* hitting new all-time highs.
When the S&P500 hit 500 (in 1995), that was an all-time high. Um, and near as I can tell, it never dropped below 500 everafter.


As far as your ETF picks, seems okay to me. For a fire-and-forget B&H portfolio. If that's your thing. Which is probably best for most people.

I, personally, have essentially no bonds. I just use the 10 month SMA of the S&P500 as a signal for when to sell the stocks and sit out a bear market. Similar to Mebane Faber's QTAA paper.
Then I don't have to fret over bonds crashing or whatever. Or stocks. Or worrying about *when* this much-predicted crash will occur.

But lots of people call this "market timing" and drag out the garlic and wooden stakes. Lots of people don't have the interest or desire to compute SMA's once a month. For those, your proposed ETF allocations look pretty good.
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Old 07-22-2015, 07:25 PM   #9
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I wondered about this myself, when I retired, and so I wrote a spreadsheet to examine the question. You can download it here:https://www.dropbox.com/s/xf4ma5blug...cket_rules.xls

Spoiler: cash bucket strategy is a mirage. Mirages are attractive and filled with great promise, but there's no "there" there.
It doesn't do what we think it will do, and the thing that we want it to do (i.e., don't sell stocks when they are down) is done automatically anyway by simply annually rebalancing.

Download the SS and play with the parameters. I have not been able to come up with any combination of parameters where the cash bucket method was better than a simply rebalance method.


No, you don't. You don't know that at all. Nobody does.


And water is wet.
Pull up a chart of the stock market going back as far as you can get. What do you see? What you see is that the market is *always* hitting new all-time highs.
When the S&P500 hit 500 (in 1995), that was an all-time high. Um, and near as I can tell, it never dropped below 500 everafter.


As far as your ETF picks, seems okay to me. For a fire-and-forget B&H portfolio. If that's your thing. Which is probably best for most people.

I, personally, have essentially no bonds. I just use the 10 month SMA of the S&P500 as a signal for when to sell the stocks and sit out a bear market. Similar to Mebane Faber's QTAA paper.
Then I don't have to fret over bonds crashing or whatever. Or stocks. Or worrying about *when* this much-predicted crash will occur.

But lots of people call this "market timing" and drag out the garlic and wooden stakes. Lots of people don't have the interest or desire to compute SMA's once a month. For those, your proposed ETF allocations look pretty good.
Thanks. I've never done a spreadsheet, but I've seen similar comments on this board.

If the 10 month SMA is your buy/sell signal, how much do you buy/sell in the first month? The whole portfolio, or some portion?
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Old 07-22-2015, 07:31 PM   #10
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Thanks guys! I meant the bond market crash and high value thing somewhat sarcastically because I agree... You don't know when or if or how much... Which makes your follow up on SMA surprising to me .

But ultimately I think doing what will give you the fortitude to not do permanent damage is the most important thing.

As for keeping cash and drawing. My thought was simple... I do an annual distribution end of January if the S&P500 is negative for the year I take it from cash and leave everything in the market (I.e. I just rebalance). If it's up... I rebalance and withdraw. In thinking about it this makes no sense mathmatically but is somehow psychologically satisfying so maybe I just need to figure out how to fight that.

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Old 07-22-2015, 07:59 PM   #11
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Originally Posted by rayvt View Post

...

Spoiler: cash bucket strategy is a mirage. Mirages are attractive and filled with great promise, but there's no "there" there.
It doesn't do what we think it will do, and the thing that we want it to do (i.e., don't sell stocks when they are down) is done automatically anyway by simply annually rebalancing...
Otar doesn't think so, and he in fact endorses it. Whether he's right or not has been debated elsewhere and I'm not personally interested in who is right. A very big "there" there is the psychological aspect. If it's a mirage that keeps an investor from capitulating in a market like we had in '08, then that mirage will have done it's job. Mental accounting? Drag on the PF? Perhaps. But a real drag is an inability to stay invested during a crash.
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Old 07-22-2015, 10:24 PM   #12
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Your AA is pretty similar to mine. The only major difference is that I don't have international bonds. You don't mention your withdrawal rate or age. I'm 51 now (retired at 47) and I have managed well with a withdrawal rate under 2.5% so far.


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Old 07-24-2015, 05:37 AM   #13
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i am retiring in 4 days and put the final portfilio in place last month.


we have 2 years withdrawals in cash and an emergency fund.

i did not want to have to much in interest rate sensitve bond funds since rates will likely rise and since feb bonds have been falling .


about 55/32/13 cash

i used a mix of managed and index funds .

the version as it stands now :

fidelity growth and income fund FDGRX - held this for many many years now .

fidelity blue chip growth FBGRX- had this for many years now

vanguard total market index vti

vanguard extended market index vxf etf

vanguard veu all world index etf

that is the equity side.

the bond side uses

vanguard admiral total bond fund (now only 10% of the portfolio)

fidelity floating rate high yield

vanguard bsv short term bond

vanguard vtip short term inflation proof bond etf
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