transition from saver to spender

[Blux]

Thanks to the rising tide raising all boats, I am right on the verge of retirement.

Investing aggressively got me to where I can, but I fear my aggressive allocation is now a bit of a liability.

I hadn't given much thought about how I would transition my portfolio when I retire.

Current allocation is 90% stock ETFs(mostly VTI and QQQ spread across Roth/IRA/401 rollovers/taxable brokerage).

10% is currently in money market funds. I sold some stinkers late 2023 and was waiting for a dip that didn't happen.

Now I am thinking about selling more stock ETFs to lessen my risk as I would like to retire mid this year to early next year.

I had always thought Wellington would be my answer, but with most of my funds in Schwab that isn't really cost effective.

Is a 80/20 or 70/30 a workable strategy using my current stock ETFs as the stock portion and MM/CDs for the stable portion or consider some sort of balanced fund or combo of current funds combined with bond fund(s)?

 

[Kork13]

Asset allocation is all about what you feel comfortable with. Is the risk involved acceptable & does it provide the growth you're seeking, while allowing you to sleep at night?

It sounds like that is no longer the case for you with your current 90/10 AA, with your upcoming retirement looming (congrats & good luck in pulling the trigger!). With that in mind, 80/20 or 70/30 would likely both be good options for you. Maybe try 80/20 on for size for 6 months or so, and see what your think. Do you find that you still worry that it'll crash & leave you unprepared for your later years in retirement? If so, then adjust onward to 70/30. Are those fears quieted? Great! Start there. Conversely, maybe you think you won't be able to earn what you want/need to, or you worry that you're leaving money on the table, so moving up to 75/25 is appropriate.

Feel free to dial in on what seems to satisfy both your quantifiable needs as well as your intuitive feelings/concerns. I expect that you can settle on something & stay there for a while. Over time, maybe your priorities, motivations, or concerns change, and you need to adjust again. That's fine, do it. Realistically, in that range, your returns will likely be pretty healthy still, and your risk will have been well-moderated. So I wouldn't stress too much over finding exactly the "right" answer.

As for how you setup your portfolio to match your desired AA, lots of ways to do that. Equity ETFs plus MM/CD fixed income is certainly a viable, reasonable plan. The 3-fund portfolio or using a balanced fund are also good options. Equities plus individual Treasury/muni/corporate bonds is another. As with the AA discussion, I'm one to say pick something that you understand, that you're comfortable with, and that will meet your needs/goals. Many, many ways to skin this cat, and if someone tells you that you're doing it "wrong", they're likely clueless to your situation.

My simple advice: don't stress, and manage your portfolio as it makes sense to YOU ... not to satisfy the arbitrary decisions of somebody else.

 

[pb4uski]

I think it would be wise to take some chips off the board given that stocks are at all-time highs and you will no longer have steady income coming in every payday.

MM funds and a 5 year CD ladder would work. I recently set up at 10-rung 5-year CD ladder for a friend with CDs maturing every 6 months or so that yielded 5.3%. In the current interest rate environment it might be a little lower but should be close to 5%.

 

[mrfeh]

Thanks to the rising tide raising all boats, I am right on the verge of retirement.

Investing aggressively got me to where I can, but I fear my aggressive allocation is now a bit of a liability.

I hadn't given much thought about how I would transition my portfolio when I retire.

Current allocation is 90% stock ETFs(mostly VTI and QQQ spread across Roth/IRA/401 rollovers/taxable brokerage).

10% is currently in money market funds. I sold some stinkers late 2023 and was waiting for a dip that didn't happen.

Now I am thinking about selling more stock ETFs to lessen my risk as I would like to retire mid this year to early next year.

I had always thought Wellington would be my answer, but with most of my funds in Schwab that isn't really cost effective.

Is a 80/20 or 70/30 a workable strategy using my current stock ETFs as the stock portion and MM/CDs for the stable portion or consider some sort of balanced fund or combo of current funds combined with bond fund(s)?

My answer depends on many factors, 3 of which are a) your age b) expected withdrawal rate and c) size of your brokerage/taxable accounts.

In general, I wouldn't be comfortable with 90% equities going into early retirement, but if your withdrawal rate is low, it might be acceptable.

 

[MichaelB]

Is a 80/20 or 70/30 a workable strategy using my current stock ETFs as the stock portion and MM/CDs for the stable portion or consider some sort of balanced fund or combo of current funds combined with bond fund(s)?

I think it would be wise to take some chips off the board given that stocks are at all-time highs and you will no longer have steady income coming in every payday.

+1. That’s what I have done.

You can model this using FIRECalc and see the impact of different allocations. You’ll probably see that a lower allocation to equities does not lead to a lower survival probability of your portfolio. It probably will lead to a lower total portfolio value at the end of the measurement period.

The higher equity allocation will create more portfolio volatility and probably lead to more for the heirs, but it won’t give you a largar withdrawal rate.

 

[mathjak107]

great article and thought for determining what to do .


EXECUTIVE SUMMARY

The final decade leading up to retirement, and the first decade of retirement itself, form a retirement danger zone, where the size of ongoing contributions and the benefits of continuing to work are dwarfed by the returns of the portfolio itself. As a result of this “portfolio size effect”, the portfolio becomes almost entirely dependent on getting a favorable sequence of returns to carry through.

And because the consequences of a bear market can be so severe when the portfolio’s value is at its peak, it becomes necessary to dampen down the volatility of the portfolio to navigate the danger – a strategy commonly implemented by many lifecycle and target date funds, which use a decreasing equity glidepath that drifts equity exposure lower each year.

Yet the reality is that the retirement danger zone is still limited – after the first decade, good returns will have already carried the retiree past the point of danger, and bad returns at least mean that good returns are likely coming soon, as valuation normalizes and the market cycle takes over. Which means while it’s necessary to be conservative to defend against the portfolio size effect, it’s not necessary to reduce equity exposure indefinitely.

Instead, the optimal glidepath for asset allocation appears to be a V-shaped equity exposure, that starts out high in the early working years, gets lower as retirement approaches, and then rebuilds again through the first half of retirement. Or viewed another way, the prospective retiree builds a reserve of bonds in the final decade leading up to retirement, and then spends down that bond reserve in the early years of retirement itself (allowing equity exposure to return to normal).

Ultimately, further research is necessary to determine the exact ideal shape of this “bond tent” (named for the shape of the bond allocation as it rises leading up to retirement and then falls thereafter). But the point remains that perhaps the best way to manage sequence of return risk in the years leading up to retirement and thereafter is simply to build up and then use a reserve of bonds to weather the storm.


https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

 

[mathjak107]

+1. That’s what I have done.

You can model this using FIRECalc and see the impact of different allocations. You’ll probably see that a lower allocation to equities does not lead to a lower survival probability of your portfolio. It probably will lead to a lower total portfolio value at the end of the measurement period.

The higher equity allocation will create more portfolio volatility and probably lead to more for the heirs, but it won’t give you a largar withdrawal rate.

whether or not it gives you a larger withdrawal rate depends on which withdrawal method you use .

a higher equity allocation and balance with 95/5 allows a higher draw rate

a bigger balance even in the constant dollar method could allow for raises other then inflation adjusting as well , so allocation , balance and draw rate after the initial year are joined at the hip as far as capability for drawing more.

whether one chooses to Draw more is a different issue other then the capability to draw more

 

[VanWinkle]

I would start lower, maybe 60/40 and ratchet up from there if you want to get to 70/30 or 80/20. If you want hands off, go with index equity funds and short term bond funds along with the money market funds. If you start out with more risk than you can handle, it is harder to sell and ratchet down. (You would use intermediate bonds with your investment horizon).

 

[MarieIG]

I recently took a little off the table due to the all-time highs. VTSAX (the mutual fund version of VTI) is my largest mutual fund holding. I have some VTI in my taxable / TD Ameritrade account. QQQ has growth opportunities but may be a tad volatile. I see nothing wrong with taking some profits for a little risk mitigation.

I retired end of 2021 - and did not regret having a "cash cushion."

Your desired allocation may be influenced somewhat by your age and other income sources.

 

[Bigdawg]

I recently took a little off the table due to the all-time highs. VTSAX (the mutual fund version of VTI) is my largest mutual fund holding. I have some VTI in my taxable / TD Ameritrade account. QQQ has growth opportunities but may be a tad volatile. I see nothing wrong with taking some profits for a little risk mitigation.

I retired end of 2021 - and did not regret having a "cash cushion."

Your desired allocation may be influenced somewhat by your age and other income sources.

You have a little bit of time before you pull the plug. I would stop reinvesting div's and keep/put them in MM or CD's. All future investments (the money you are currently investing from your paycheck) you could put into MM, bonds or CD's. If it plays out right, in 6 months to a year you may be down to 85/15 and well on your way to 80/20 without having to sell much of anything. Good luck.