AA during 3 years High Spending

[Katsmeow]

I have a situation that I haven't really seen discussed. This is sort of long but appreciate those who stick with it. My primary question is what asset allocation to have during the next 3 years and what funds to put that allocation in.

For the TL ; DR – Due to 2 kids in college we will draw out 34% of our portfolio over the next 3 years and then our spending drops sharply. Firecalc give a 100% for our planned spending with a 55/45 asset allocation. I am wondering if I should switch to a 45/55 asset allocation to avoid some volatility over the next 3 years and, if so, which equities to sell to accomplish that.


DH retired in 2010 and I semi-retired. DH receives SS. For purposes of this exercise I want to not consider my income. Our current asset allocation is 55/45.
We have 2 kids at home, one is full-time in college and the other is starting in the spring on a 2 year program. We expect both to be out of school by mid-2016.
Mostly due to these kid-related expenses, we will have very high spending the next 3 years. Basically, after DH's SS, we expect to withdraw from the portfolio13% each in 2014 and 2015 and 8% in 2016. In 2017, however, our expenses will drop precipitously. I will be eligible for SS then as well. If I took it in 2017 (not decided), our portfolio withdrawals would be about 2.2% of today's portfolio (about 3.5% of a portfolio that was 60% of today’s portfolio)

With the above spending and our current portfolio, Firecalc gives us 100% with some cushion for higher spending.
So I could just stop there and keep on with what we are doing currently. But I’m worried about volatility over the next 3 years and withdrawals in 2014 and 2015 will be higher than they were this year (8% this year versus 13% in 2014 and 2015).

I've run various Firecalc runs with starting amounts 3 years from now. I've found that if our 2017 portfolio is no less than 60% of today's portfolio then the runs starting in 2017 are still at 100%. I recognize that over the next 3 years we will pull out roughly 34% of our today portfolio. So, if the next 3 years were just flat years with the market doing nothing then we would be OK. On the other hand, if the next 3 years were average years, then in 2017 we would have extra money which would be nice.

On the one hand, Firecalc says that historically if we have the spending I mention above and have a 55/45 portfolio then it would have succeeded 100%.

On the other hand, Firecalc also shows that if 3 years from now we have a portfolio that is less than 40% of what we have now then our success rate goes down (how far it goes down depends on how much less it is).

I also ran a run that set a minimum portfolio floor of 60% of the starting portfolio 3 years from now and that has a 80% success rate with 55/45 AA and 90% success rate with 35/65 AA. That said, I looked at the cycles that failed and several of them were the portfolio dipping in year 2 but then being back up to 60% at the end of the 3 years and several were the portfolio missing the 60% by a trivial amount.

So I am inclined to switch our AA somewhat to reduce volatility in the next 3 years. I found with Firecalc that on the long-term 30 year plan we do best with a 55/45 AA. On the next 3 years we do better for plan success with less equities but the average ending amount of the plan goes down. I am thinking about basically switching to a 45/55 asset allocation over the next 3 years. Would welcome any thoughts on this.

If I do it, the hard part is how to accomplish it.

Right now we have the following portfolio:

DH's IRA/Vanguard


Wellesley VWIAX 12% Portfolio .18 ER
Vanguard High-Yield Corporate VWEHX 5% Portfolio 0.14 ER
Vanguard Prime Money Market VMMXX 2% Portfolio 0.23 ER
Vanguard Short-Term Investment Grade VFSUX 14% Portfolio 0.16 ER
Vanguard Total Bond VBTLX 11% Portfolio 0.1 ER
Vanguard Extended Market VEXAX 11% Portfolio .14 ER

DH's IRA - Cash 2.5% Portfolio

My 401k/Fidelity

Dreyfux S&P 500 PEOPX 31%Portfolio .51 ER


Taxable

Cash 2.5% Portfolio
Vanguard Total International VTIAX 8% Portfolio .16 ER
Vanguard Total Stock Market VTSAX 1.5% Portfolio .05 ER


Right now my 401k is entirely equities. The reason for this is twofold. I am 6 1/2 years younger than DH so the plan is to withdraw first from his IRA since he will have to start RMDs in 2018. Second, the choices in my 401k aren't great. The only somewhat reasonable other choice is a stable value fund (current yield is .84%) or the Strategic Income fund (FSIAX) with a .98 ER. I could possibly put some of my 401k into one of those.

To move from 55/45 AA to 45/55 AA is where I am having problems.

Option 1: Move about 1/3 of my 401k to either the stable value fund or the strategic income fund. What I don't like about that is that the money in my 401k was money I wasn't planning to touch for years (I might do some Roth conversions when we are in a lower tax bracket 3 years from now).

Option 2: Sell the Extended Market Fund in DH's IRA. Put about half of it in the new Vanguard Total International Bond Fund. Put the other half somewhere. Would need feedback on that.

This is fairly easy to do. The negative of it is that we have the extended market fund so that it and the S&P 500 fund in my 401k approximates a total stock market fund. If I sell the Extended Market Fund then I no longer have that coverage of the overall stock market since I would still have 31% of our portfolio in an S&P fund. (There are other stock funds in my 401k but most of them have high expenses: Available stock funds are FCTLK, FNITX, HRSVX, JDERX, RSPFX, FTADX, ODVNX, FAGNX, FGDTX, FREAX). FTADX is an international fund, so I could move my international part of the AA to my 401k and then in the taxable account I could just have Total Stock Market so then I only have 23% of the portfolio in the S&P 500 fund so maybe that makes it easier to sell the Extended Market fund. However, FTADX has a 1.59% Expense ratio so I don't really like that.

Option 3 - Split the difference. That is, sell some of the S&P 500 fund and a proportionate amount of the extended market fund. I would then buy either the stable value or strategic income fund in my 401k and would then buy Total International in the IRA.

Option 4 - Sell everything in the taxable fund and put it all in cash or in CD's. That would be a great idea if I planned to use this money for living expenses in the next 3 years but I specifically do not want to do that. It is a small part of our Asset Allocation and I want to keep it available in case I want to spend money without it being something where it is all taxable (for example, if I want to keep within a certain tax bracket or don't want AGI to go above a certain number). I just don’t want to end up with little after tax money available in case I need it. I really don’t plan to spend more than 10% of the taxable account during the next 3 years so that is why I planned to keep it in equities particularly given that it is a taxable account.

[jebmke]

A couple of times I have had large, near term liabilities (2-3 years) that were fairly easy to estimate and virtually certain. I put those funds in a short term bond fund and excluded the whole lot from my portfolio for planning purposes.

[Katsmeow]

Quote:

Originally Posted by jebmke A couple of times I have had large, near term liabilities (2-3 years) that were fairly easy to estimate and virtually certain. I put those funds in a short term bond fund and excluded the whole lot from my portfolio for planning purposes.

The way I get to the 45/55 is basically a variation of this. That is I take the excess withdrawals over the next 3 years (that is, we would ordinarily withdraw say 4% each year for 3 years, so the excess is 22%. If I put that 22% in fixed income of some sort that is basically a 45/55 asset allocation).

Doing that, we still end up having to figure out which equities to sell and put into the short term fund. That is where I am mostly having difficulty.

[W2R]

Quote:

Originally Posted by jebmke A couple of times I have had large, near term liabilities (2-3 years) that were fairly easy to estimate and virtually certain. I put those funds in a short term bond fund and excluded the whole lot from my portfolio for planning purposes.

This is what I have done in the past, as well, except that I kept the money in the bank earning nothing instead of a short term bond fund. The latter is probably best.

I think this question of how to deal with these expenses is separate from your asset allocation question. Whatever your desired asset allocation, that is what you should end up with (after selling to buy the short term bonds, which should be considered separately). So choose the equities to sell according to what will leave you with your correct AA. The college money would be separate from your portfolio and not involved in the AA.

[Animorph]

Quote:

Originally Posted by jebmke A couple of times I have had large, near term liabilities (2-3 years) that were fairly easy to estimate and virtually certain. I put those funds in a short term bond fund and excluded the whole lot from my portfolio for planning purposes.

+1 on this. I'd take out enough now to at least make your portfolio withdrawals in 2014-2016 roughly equivalent to 2017 and not count it in the AA. Keep it in cash/CD's or short term bonds, whatever guarantees the principal and gives the best interest.

As to which equities to sell, stick with your AA. With a Roth conversion of some of your DH's IRA, you could end up placing some of your taxable account (equal to the taxes you paid) into the Roth. Better than just keeping it in the taxable account. I'm not sure the fund details matter as much. My concentration level is too low currently to really follow the options and form an opinion...

[Katsmeow]

Quote:

Originally Posted by W2R I think this question of how to deal with these expenses is separate from your asset allocation question. Whatever your desired asset allocation, that is what you should end up with (after selling to buy the short term bonds, which should be considered separately). So choose the equities to sell according to what will leave you with your correct AA. The college money would be separate from your portfolio and not involved in the AA.

I can see from the responses so far that I have totally not asked my question the right way.

I had 2 questions.

Question One - How to divide up my money between equities and fixed rate during the next 3 years given that I would ordinarily be OK with 55/45.

I suggested possibly 45/55. I got to that a couple of ways. When doing a 3 year plan for Firecalc 45/55 did better than 55/45. 35/65 was OK but not all that much better and on average ended up with a less amount after 3 years than 45/55.

I also thought about setting aside the entire amount that I will withdraw from the portfolio during the next 3 years and not considering that part of the asset allocation. However, I didn't do that because that basically ignores the fact that typically I could withdraw 4% from the portfolio each year.

It seems to me that the 4% that I would ordinarily withdraw from the portfolio just like other retired people should notbe set aside to a separate fund. Doing that would basically mean that I had 34% of the portfolio in a separate fund and for the next 3 years withdrew zero from the remaining "regular" portfolio.

So I felt it made more sense to set aside the amount that I will spend over the next 3 years in excess of the yearly 44%. That is basically 22% of the portfolio.

Once I do that, it comes out to pretty close to a 45/55 allocation (closer to 44/56 but I rounded).

I think this makes sense, but would welcome any reasoning for something different.

Question Two - Which equities to sell to get to the 45/55. Theoretically I could sell any of my equities to get to it. But I have difficulty figuring out which to do given the composition of my 401k and DH's IRA and our taxable account.

To briefly recap. We planned to draw from DH's IRA until much later since he is 6 1/2 years older and will have to do RMD's years before I have to do them. Since we won't be drawing from my 401k for years it made since to put equities in it. Also, other choices in my 401k have a higher ER. (details in my first post)

If I keep all equities in my 401k then, I could achieve 45/55 by selling Extended Market from DH's IRA. But selling that leaves me almost entirely with just an S&P fund (what I have in my 401k) rather than having the whole stock market (which I get from having both S&P and Extended Market).

See my original post for more discussions of the options.

So probably the primary question I'm asking is which equity fund to sell in order to be able to put aside the extra money we will spend in the next 3 years.

[Katsmeow]

Quote:

Originally Posted by Animorph As to which equities to sell, stick with your AA. With a Roth conversion of some of your DH's IRA, you could end up placing some of your taxable account (equal to the taxes you paid) into the Roth. Better than just keeping it in the taxable account. I'm not sure the fund details matter as much. My concentration level is too low currently to really follow the options and form an opinion...

We are unlikely to do Roth conversions of any significance with DH's IRA. Right now we are in the 25% bracket and doing Roth conversions would put us in the 28% bracket. That would also occur in next 2 years. DH is already 66 so it is doubtful we could do many Roth conversions before he turns 70 unless we want to make the conversions in the 28% bracket.

What is more likely is that we do Roth conversions later with my 401k once the kids are gone.

As to sticking with the asset allocation in selling equities, there is no ideal situation as I posted in the first post. Basically I have two main options. I can sell extended market in DH's IRA, leaving almost of our US stock allocation in an S&P 500 fund, rather than the broader market. Or I can sell part of the S&P 500 fund in my 401k buying either stable value or strategic income fund in my 401k even though the stable value has low yield (.84%), the strategic income fund has high ER (.98) and I wanted to have equities in my 401k since I don't plan to touch it for years.

I could possibly do some combination of this, selling half of the extended market for example and then selling part of the S&P fund.

I am just unsure as to which option is best (see post 1 for more detail).

[Animorph]

Can you sell some/all of your S&P 500 shares and exchange some of DH's extended market shares for S&P 500 shares? Normally I would expect the IRA to have full (Vanguard) flexibility and no need to worry about triggering capital gains taxes. Is there some restriction there?

[Katsmeow]

Quote:

Originally Posted by Animorph Can you sell some/all of your S&P 500 shares and exchange some of DH's extended market shares for S&P 500 shares? Normally I would expect the IRA to have full (Vanguard) flexibility and no need to worry about triggering capital gains taxes. Is there some restriction there?

No. There is no tax concern.

Basically the concern is asset allocation and usage.

That is I to get to a 45/55 allocation I need to reduce my equities by about 10%.

If I sold all of the extended market shares that would basically do it since the Extended Market is 11% of the portfolio. Put all of that in fixed income (probably part Total International Bond Fund and the rest VFSUX) and I have a 45/55 allocation and have set aside the money that over the next 3 years we would withdraw that is above a 4% WR.

But that changes the makeup of my equity allocation. In that before, between the S&P 500 fund in the 401k and the extended market in the IRA, we had coverage of the broad stock market as if I had invested in the Total Stock Market Fund. Selling extended market changes my equity allocation from that broad allocation to making almost all of my domestic equities an S&P fund.

Of course, I could keep the Extended Market in the IRA and sell about 1/3 of the S&P 500 fund that is in my 401k. I would then use the proceeds from that to either buy (1) stable value fund I have in my 401k (yield is only .84%) or (2) strategic income fund (.98 ER). I am not enthusiastic about that since I don't plan to spend anything from my 401k for years to come (and remember this money I'm setting aside is money that I may need to spend during the next 3 years).

I could split the difference and sell some of the S&P fund and some of the extended market so that I keep the same basic type of equity allocation. That would still result in some fixed income in my 401k but less than it would if sold only some of the S&P fund.

It is deciding between these choices that I can't decide.

[donheff]

I still don't understand why you wouldn't liquidate the 34% you need short term now (after a multi year run up) and evaluate the rest of your portfolio against your expected ongoing expenses. You say Firecalc looks fine if you stay at or above 60% of current value but you already have 34% coming out over that three year period (before your regular expenses). If we got a 20% correction in year one, you would be pulling a lot of money out of a depressed portfolio over the next two years and would fall below 50%. All of the sequence of returns horror stories would worry me looking at that scenario.

I assume you have already run Firecalc against the projected reduced portfolio if you did liquidate now? Are you trying to compare that scenario against estimates of the relative volatility protection you would get by a 10% shift in AA compared to segregating the funds?

[audreyh1]

Quote:

Originally Posted by donheff I still don't understand why you wouldn't liquidate the 34% you need short term now (after a multi year run up) and evaluate the rest of your portfolio against your expected ongoing expenses. You say Firecalc looks fine if you stay at or above 60% of current value but you already have 34% coming out over that three year period (before your regular expenses). If we got a 20% correction in year one, you would be pulling a lot of money out of a depressed portfolio over the next two years and would fall below 50%. All of the sequence of returns horror stories would worry me looking at that scenario.

+1

[MichaelB]

Quote:

Originally Posted by Katsmeow I can see from the responses so far that I have totally not asked my question the right way. I had 2 questions. Question One - How to divide up my money between equities and fixed rate during the next 3 years given that I would ordinarily be OK with 55/45. I suggested possibly 45/55. I got to that a couple of ways. When doing a 3 year plan for Firecalc 45/55 did better than 55/45. 35/65 was OK but not all that much better and on average ended up with a less amount after 3 years than 45/55. I also thought about setting aside the entire amount that I will withdraw from the portfolio during the next 3 years and not considering that part of the asset allocation. However, I didn't do that because that basically ignores the fact that typically I could withdraw 4% from the portfolio each year. It seems to me that the 4% that I would ordinarily withdraw from the portfolio just like other retired people should notbe set aside to a separate fund. Doing that would basically mean that I had 34% of the portfolio in a separate fund and for the next 3 years withdrew zero from the remaining "regular" portfolio. So I felt it made more sense to set aside the amount that I will spend over the next 3 years in excess of the yearly 44%. That is basically 22% of the portfolio. Once I do that, it comes out to pretty close to a 45/55 allocation (closer to 44/56 but I rounded). I think this makes sense, but would welcome any reasoning for something different.

Quote:

Originally Posted by donheff I still don't understand why you wouldn't liquidate the 34% you need short term now (after a multi year run up) and evaluate the rest of your portfolio against your expected ongoing expenses. You say Firecalc looks fine if you stay at or above 60% of current value but you already have 34% coming out over that three year period (before your regular expenses). If we got a 20% correction in year one, you would be pulling a lot of money out of a depressed portfolio over the next two years and would fall below 50%. All of the sequence of returns horror stories would worry me looking at that scenario. I assume you have already run Firecalc against the projected reduced portfolio if you did liquidate now? Are you trying to compare that scenario against estimates of the relative volatility protection you would get by a 10% shift in AA compared to segregating the funds?

+2@ donheff. It will be much easier to look at the remaining portfolio and make asset allocation choices.

[daylatedollarshort]

Quote:

Originally Posted by donheff If we got a 20% correction in year one, you would be pulling a lot of money out of a depressed portfolio over the next two years and would fall below 50%. All of the sequence of returns horror stories would worry me looking at that scenario.

+3. Personally, I would not have money I needed in three years for fixed expenses in stocks, especially with interest rates likely to rise during that time.

We refinanced our house when rates were at 3.5%, took some money out and got a HELOC for the next few years while our kids are in college to help with cash flow. This allows us to limit how much we draw down from our businesses or retirement accounts, which in turn keeps our MAGI low. The low MAGI allows us to qualify for financial aid for college, reduced tuition rates, college tax credits, maximum ACA subsidies and possibly zero state and federal income taxes.

[Katsmeow]

I can see again that I'm not just explaining what I am doing well.

Basically I am plan to set aside 22% of my portfolio right now and will set that aside from the normal portfolio allocation(I don't see any reason to set aside 34% since it is only 22% that is basically "excess" over what would be the normal 4% withdrawal per year. The other 12% will stay in my normal portfolio).

The reason I keep talking about 45/55 is that it is turns out doing the above would result right how in my having 45% of the total portfolio (including the set aside 22%) in equities and 55% in fixed income.

If it makes it easier to answer my question, one could instead say I'm going to have 22% of what is my current portfolio set aside from the portfolio and that the resulting portfolio (not including the 22%) will be at 55/45 allocation.

Regardless of whether you think of what I am doing as a 45/55 allocation or as setting aside 22% the bottom line is that I still have to sell about 10% of my portfolio that is currently in equities in order to set aside the 22% (or to achieve a 45/55 allocation).

The issue I am raising is which equities to sell so that I have enough fixed income in my portfolio to set aside 22% and still have enough fixed income in the resulting shrunken overall portfolio. Do I liquidate all the extended market (which leaves me with the issue of then having most of my US equities be an S&P fund) or do I liquidate some of the S&P fund in my 401k given what I've said about not spending money from the 401k (see my prior posts on this).

Quote:

It will be much easier to look at the remaining portfolio and make asset allocation choices.

I still have to know which equities to sell. I can't just sell all the extended market to set aside the 22% and then decide I want to keep it since once I sell it I can't rebuy it for several months under Vanguard policies. I have to know what I'm going to do before I start selling.

The bottom line is that if I take about 11% of my current portfolio that is in equities and I sell it and put the money in, say, VFSUX I then have enough money in fixed income at that point to set aside 22% of the portfolio for the "excess" spending over 4% over the next 3 years and then the rest of my portfolio can be 55/45. (As it turns out doing this would result in everything at that point being 45/55).

[Katsmeow]

Quote:

Originally Posted by donheff I still don't understand why you wouldn't liquidate the 34% you need short term now (after a multi year run up) and evaluate the rest of your portfolio against your expected ongoing expenses. You say Firecalc looks fine if you stay at or above 60% of current value but you already have 34% coming out over that three year period (before your regular expenses). If we got a 20% correction in year one, you would be pulling a lot of money out of a depressed portfolio over the next two years and would fall below 50%. All of the sequence of returns horror stories would worry me looking at that scenario. I assume you have already run Firecalc against the projected reduced portfolio if you did liquidate now? Are you trying to compare that scenario against estimates of the relative volatility protection you would get by a 10% shift in AA compared to segregating the funds?

What I think is being missed here is that liquidating and setting aside the money needed over the next 3 years (I use 22% not 34% since 12% of it would be the regular 4% withdrawal each year so I think can stay in the regular portfolio) is the same numbers as now having a 45/55 asset allocation. That is, if I now liquidate equities and end up with a 45/55 asset allocation then I can set aside 22% and leave the rest of the portfolio at 55/45. (I would during the next 3 years rebalance the 55/45 as needed but wouldn't rebalance the 22%).

I did many Firecalc runs. First, I ran just my actual portfolio with the projected high spending over the next few years. To be clear Firecalc gives us 100% when I do that. So, historically, even if something happened bad in the first few years the portfolio ultimately recovered.

That said if I do a Firecalc run 3 years in the future and I start with a portfolio that is more than 40% less than my current portfolio it starts to show some failures (although most were very small failures that could have been avoided with small changes in spending).

So I think it is more prudent to set aside some of the money today that I will be spending over the next 3 years. You and I don't disagree on that at all. It is figuring out how to accomplish it (i.e. which equities to sell) that is my primary difficulty.

The one area we might disagree is that I think it is sufficient to set aside 22% from the normal asset allocation because I think that 12% of the spending over the next 3 year is simply the normal 4% withdrawal over that time so doesn't need to be set aside.

[Live And Learn]

Quote:

Originally Posted by donheff I still don't understand why you wouldn't liquidate the 34% you need short term now (after a multi year run up) and evaluate the rest of your portfolio against your expected ongoing expenses. You say Firecalc looks fine if you stay at or above 60% of current value but you already have 34% coming out over that three year period (before your regular expenses). If we got a 20% correction in year one, you would be pulling a lot of money out of a depressed portfolio over the next two years and would fall below 50%. All of the sequence of returns horror stories would worry me looking at that scenario. I assume you have already run Firecalc against the projected reduced portfolio if you did liquidate now? Are you trying to compare that scenario against estimates of the relative volatility protection you would get by a 10% shift in AA compared to segregating the funds?

+4 (or maybe it's 5)

You could then decide how you want to "invest" the college costs. I'd do a CD ladder maturing each semester (ie: every 6 moinths for the next 3 years). Its only 3 years of expenses. Put the remainder in your selected AA and let it ride.

I think the reason people aren't answering the question as you asked it is because we can't see the reason for the question in the first place (sorry ! dont mean to be blunt)

[Live And Learn]

Sorry - I get it now ! You're asking us to help you decide WHICH equities to sell to get you to (a) establish the cash / near cash college fund and (b) get to your new desired 45 / 55 asset allocation once part (a) is completed. Is that correct ?

[daylatedollarshort]

So basically your question is you want to liquidate 22% of your stocks now to cover fixed obligations in the next 3 years and move the money to fixed income assets classes, but which specific assets to sell?

Are financial aid for college, ACA subsidies or reducing income taxes something you need / want to consider?

Added -

Reducing income taxes, maxing ACA subsidies, and assorted financial aid grants, tuition reductions and tax credits for college comes out to saving ~$200K for us over the next several years, equivalent to even more in taxable earnings.

[Animorph]

OK, you need 34% of the portfolio in the next three years for expenses. Of that, you'd like to reserve 22% now and withdraw 4%/year for the three years. 12% of the 22% comes from bonds already, so you need to move 10% of your portfolio from equities to bonds or cash.

Currently you have:

DH's IRA/Vanguard


Wellesley VWIAX 12% Portfolio .18 ER
Vanguard High-Yield Corporate VWEHX 5% Portfolio 0.14 ER
Vanguard Prime Money Market VMMXX 2% Portfolio 0.23 ER
Vanguard Short-Term Investment Grade VFSUX 14% Portfolio 0.16 ER
Vanguard Total Bond VBTLX 11% Portfolio 0.1 ER
Vanguard Extended Market VEXAX 11% Portfolio .14 ER

DH's IRA - Cash 2.5% Portfolio

My 401k/Fidelity

Dreyfux S&P 500 PEOPX 31%Portfolio .51 ER


Taxable

Cash 2.5% Portfolio
Vanguard Total International VTIAX 8% Portfolio .16 ER
Vanguard Total Stock Market VTSAX 1.5% Portfolio .05 ER

I would sell these in order to keep roughly your current equity AA:
All Total Stock Market in taxable: 1.50% of portfolio
Some of Total International in taxable: 1.42% of portfolio
Some of S&P in your 401k: 5.23% of portfolio
Some of Extended Market in DH's IRA: 1.85%

That gives you 10% equity sales while leaving everything nearly balanced, and somewhat minimizing the amount of S&P you have to sell. I think anything else I would like to do would begin with selling more S&P, which doesn't seem to leave any better options. You could sacrifice some or all of Wellesley, allowing you to sell a little less S&P, but that doesn't seem to be a great option either.

In the next three years then, you are selling some taxable and withdrawing from DH's IRA for the rest.

[Katsmeow]

Quote:

Originally Posted by Animorph OK, you need 34% of the portfolio in the next three years for expenses. Of that, you'd like to reserve 22% now and withdraw 4%/year for the three years. 12% of the 22% comes from bonds already, so you need to move 10% of your portfolio from equities to bonds or cash.

Very succinct. I should have gotten you to write my first post!

Quote:

Originally Posted by Animorph I would sell these in order to keep roughly your current equity AA: All Total Stock Market in taxable: 1.50% of portfolio Some of Total International in taxable: 1.42% of portfolio Some of S&P in your 401k: 5.23% of portfolio Some of Extended Market in DH's IRA: 1.85% That gives you 10% equity sales while leaving everything nearly balanced, and somewhat minimizing the amount of S&P you have to sell. I think anything else I would like to do would begin with selling more S&P, which doesn't seem to leave any better options. You could sacrifice some or all of Wellesley, allowing you to sell a little less S&P, but that doesn't seem to be a great option either.

That would work, but I'm not sure what I do with the funds that I sell in the taxable portfolio. Where would I put them to avoid negative tax consequences?

We do not want to use the taxable funds that are invested for living expenses the next few years. That is basically the only after tax money we have and we won't to keep it in case we want or need to spend money that wouldn't add to our taxable income. For example, if at some point we were close to hitting the limit to have to pay higher medicare premiums but needed to replace our roof then I could use that money. Or, if I wanted to get MAGI down to be eligible for ACA subsidies, I could use some of that money (right now kids and I get subsidized insurance through DH's retiree plan and it is cheaper than ACA insurance, but things could change).

I am not open to using any of the taxable funds for the expenses I have budgeted already for the next 3 years unless doing so would keep us from reaching some limit where we wouldn't get some benefit.

Even so, I guess I could sell the taxable equities (or some of them) and invest that money in fixed income as part of my regular fixed income allocation and not spend that money during the next 3 years. However, my understanding has always been that that is tax disadvantageous which is why I was keeping the taxable fund in equities.