Cash to start funding ladders in a downturn

[HealthyFuture]

Hi, all. I follow with envy those of you who have cash to snap up good treasury or CD rates when you see them. I get that many of you have things maturing that permit you to do that. But how do you start?

My situation: The vast majority of our assets are in tax-deferred accounts. We have recently stopped working (as much) so are doing aggressive Roth conversions, as those seem prudent to do while the market is lower than it was 15 months ago, and also before we hit IRMAA look back time. Also prudent to let that money grow tax free.

We are no longer earning real salaries, so no way to save that money and sock it away in CDs.

We do have some money in taxable accounts, but the market is down. My Vanguard account for example is up 12% over 10 years, but cumulative inflation over that time is over 20%. So it seems unwise to withdraw $100,000 to stick into CDs and/or treasuries while the market is down.

I’d love to get ladders going in this higher-rate environment, but am having a hard time figuring out how to think about the strategy for getting started beyond selling stocks when they are low given our situation.

Any insights to share? I suspect some of you were smart and started your ladders before you stopped your higher-earning / work. But, as you may have heard, no time machines around to fix it for those of us who didn’t. [emoji1]

 

[Gumby]

When I retired four years ago, I put my mutual fund distributions on cash pay instead of reinvest. That has allowed me to raise money for buying bonds without selling stock. (our pensions and social security cover our living expenses).

 

[jebmke]

Hi, all. I follow with envy those of you who have cash to snap up good treasury or CD rates when you see them. I get that many of you have things maturing that permit you to do that. But how do you start?

My situation: The vast majority of our assets are in tax-deferred accounts. We have recently stopped working (as much) so are doing aggressive Roth conversions, as those seem prudent to do while the market is lower than it was 15 months ago, and also before we hit IRMAA look back time. Also prudent to let that money grow tax free.

We are no longer earning real salaries, so no way to save that money and sock it away in CDs.

We do have some money in taxable accounts, but the market is down. My Vanguard account for example is up 12% over 10 years, but cumulative inflation over that time is over 20%. So it seems unwise to withdraw $100,000 to stick into CDs and/or treasuries while the market is down.

I’d love to get ladders going in this higher-rate environment, but am having a hard time figuring out how to think about the strategy for getting started beyond selling stocks when they are low given our situation.

Any insights to share? I suspect some of you were smart and started your ladders before you stopped your higher-earning / work. But, as you may have heard, no time machines around to fix it for those of us who didn’t. [emoji1]

What is in your VG account? I have a conservative allocation in mine (40/60) and it is up 70% over 10 years, even allowing for some withdrawals.

 

[pb4uski]

... We do have some money in taxable accounts, but the market is down. My Vanguard account for example is up 12% over 10 years, but cumulative inflation over that time is over 20%. So it seems unwise to withdraw $100,000 to stick into CDs and/or treasuries while the market is down. ...

Any insights to share? ...

What is in the past is in the past so there is no reason to let that hold you back. what is important is what you think will hapen from here on out so those past losses are not relevant to the decision.

I've shifted from 60/40 to [-]100/0[/-] 0/100 over the last few years... most of it in one fell swoop. I think stocks are overpriced and that the outlook for the near future is at best uncertain... so I'm a bear. If I can get 5% in safe CDs, UST and GSE bonds then that will more than satisfy our income needs so there is no need to risk that money.. I no longer NEED stocks. Now if at some point stocks are more attractive then I'll reconsider them.

So in my case, the shift to a ladder was done at the same time as a change in my AA significantly reducing my stock allocation.

 

[Montecfo]

When you switch from 100 pct equities to having an allocation to fixed income, as I think most people do in their working lives, you have to sell equities to reinvest in debt.

As far as bond ladders, I began building that when I retired, first so I would have maturing money each quarter in my taxable account for spending, so I would not need to sell equities at a bad time. My equities in that account are also lower beta dividend paying stocks. As an active investor, I regularly and tactically sell equities which frees funds for new equity or bond purchases.

In my tax deferred, I sold most of my fund portfolio at the beginning of 2020 in anticipation of higher rates and moved into floating rate funds and bonds. I have been building a ladder in my tax deferred from those funds.

There is no getting around that you will have to sell something. You could wait till equities rally, but then interest rates will almost certainly have fallen, triggering an equity rally.

Choices to make.

 

[COcheesehead]

I started building my ladders about 5 years prior to retirement. I followed Kitces bond tent or rising equity glide path strategy.
I used downturns to reduce or eliminate capital gains in my taxable account and put that money into a tax free ladder. Today that ladder alone funds our retirement needs without any pension or social security.
Know your numbers, what do I need to earn to make our plan work. Then judge if you can get that in fixed income. If so, lock it in - with a buffer and enjoy retirement.

 

[Al18]

I view stocks/bonds/fixed income as a money making machine. Based on 12% increase in 10 years, your machine is broken, because most people’s machines would have made considerably more money than your machine. It’s magical thinking that your machine will somehow fix itself. You need to make changes. Sell some of your taxable investments now and start a CD ladder.

 

[Closet_Gamer]

Ultimately, this is about asset allocation.

Do you not like your overall AA in the face of these yields? Then first change up the AA and then focus on deploying the money.

For example, I finally threw in the towel on my REIT indices. I had been chasing yield but the whole thing was just not good. That freed up some AA room and I moved it into Fixed Income. Presto...cash to invest in higher yield, secured instruments.

I also gave up on SCHP...more cash to move into fixed income.

Both of these were "I learned my lesson" changes to AA combined with an explicit desire to pick up some of these nice, guaranteed yields. My biggest error was letting the cash sit for a bit.

 

[youbet]

I've shifted from 60/40 to 100/0 over the last few years... .

From reading your other posts, I thought you switched from 60/40 to 0/100. Did I misunderstand or is this just a typo?

 

[pb4uski]

From reading your other posts, I thought you switched from 60/40 to 0/100. Did I misunderstand or is this just a typo?

Typo. My bad. Fixed the prior post.

 

[pb4uski]

He moved to 100% fixed income for sure. Maybe he only had 40% equities before?

No, I was 60/40 before.

 

[pb4uski]

Funny, now that I think about it I seem to recall a very conservative poster many years ago that was 100% CDs and was roundly villified for being so conservative... obgyn65. I never had a problem with his AA as long as he recognized the inflation risk that might result in but others were much more harsh. He last posted in June 2015.

 

[W2R]

We are no longer earning real salaries, so no way to save that money and sock it away in CDs.

Before I retired, most of my income came from just one source, a salary that I could save and use in any way I wanted.

After I retired, my income started coming to me from not just one but a number of excellent sources such as dividends, mini-pension, social security, RMD's, and so on. My AGI has gone up, not down.

I don't really understand why being retired means people suddenly have no income and can't possibly save anything any more. But a lot of people do agree with you about that! Honestly I just don't get it. I'm sure I am missing something.

 

[11522914]

I think stocks are overpriced and that the outlook for the near future is at best uncertain... so I'm a bear. If I can get 5% in safe CDs, UST and GSE bonds then that will more than satisfy our income needs so there is no need to risk that money.. I no longer NEED stocks. Now if at some point stocks are more attractive then I'll reconsider them

I completely agree with you. Although I had at most 20% in equities, I sold everything in June 22 and invest everything for income. I no longer need stocks either and love it.

Always keep some cash in case there is capitulation but haven't seen that yet. But if not, plenty of locked in income for the next 5 years. Obviously my risk is inflation stays elevated or dramatically increases. A risk I'm willing to take.

 

[disneysteve]

I don't really understand why being retired means people suddenly have no income and can't possibly save anything any more.

Exactly. As long as you LBYM in retirement just as you did during your working years, there is still extra income to save and invest.

Probably the easiest way to raise cash in this case is to turn off auto-reinvestment on your existing holdings. When dividends and capital gains are paid out, use that money to build your fixed income holdings.

 

[Montecfo]

Exactly. As long as you LBYM in retirement just as you did during your working years, there is still extra income to save and invest.



Probably the easiest way to raise cash in this case is to turn off auto-reinvestment on your existing holdings. When dividends and capital gains are paid out, use that money to build your fixed income holdings.

Sure but that is a really slow roll. OP was asking about current high interest rates. Also, they are probably spending divs since not working.

 

[disneysteve]

Sure but that is a really slow roll. OP was asking about current high interest rates. Also, they are probably spending divs since not working.

True. For that you need to sell stuff.

 

[simple girl]

My situation: The vast majority of our assets are in tax-deferred accounts.

I’d love to get ladders going in this higher-rate environment, but am having a hard time figuring out how to think about the strategy for getting started beyond selling stocks when they are low given our situation.

What is your asset allocation? Do you have any allocation to bonds? If you have bond funds in your IRA you could consider selling them and changing to a CD ladder (you can purchase brokered CD's within an IRA at several institutions). Deciding to do that depends on whether you think bond funds will recover faster than what you can make with a ladder...YMMV.

 

[SnowballCamper]

What is your asset allocation? Do you have any allocation to bonds? If you have bond funds in your IRA you could consider selling them and changing to a CD ladder (you can purchase brokered CD's within an IRA at several institutions). Deciding to do that depends on whether you think bond funds will recover faster than what you can make with a ladder...YMMV.

This...but it has it's own risks..e.g. inflation will be higher than whatever rates you can currently find. IMHO interest rates will have to go higher than inflation before inflation comes down to the Fed's target. In the meantime stocks will be gyrating with lots of volatility. The peace of mind from making your own treasury/CD ladder where you can manage maturities to meet income needs will likely give the most psychological benefit. Good luck!

 

[simple girl]

The peace of mind from making your own treasury/CD ladder where you can manage maturities to meet income needs will likely give the most psychological benefit. Good luck!

Yep. That's what it came down to for us. Hence, YMMV. Depends on your risk tolerance and also what you might have otherwise in your portfolio (like pensions or SS expectations) which will affect your decision. No one can make that decision for you, but they can pose questions which help you deliberate upon what is best for your personal situation.

 

[HealthyFuture]

What is in your VG account? I have a conservative allocation in mine (40/60) and it is up 70% over 10 years, even allowing for some withdrawals.

jebmke thanks for asking. I may unknowingly be misrepresenting. The example I gave of my small Vanguard brokerage account specifically has VFIAX (most of the account) and VTSAX (a minority). Both have .04% expense ratios. In my app, Vanguard reports for this fund that my “performance return” over 10 years is 12%. Perhaps performance return does not mean what I thought it does.

I will note that this account is a minor amount (comparatively) in the context of our tax-deferred assets. That company reports my last 10 year rate of return in the 9.5% range. So even though there is a lot more money there, it’s not like I’m seeing a marked difference between those two reporting approaches and my ‘results’ which represent an 80% stock allocation. What am I missing on this point?

 

[HealthyFuture]

When I retired four years ago, I put my mutual fund distributions on cash pay instead of reinvest. That has allowed me to raise money for buying bonds without selling stock. (our pensions and social security cover our living expenses).

Gumby, thank you. Our dividends for our taxable account are quite tiny but still a great idea to stop reinvesting those. But it sounds in general from replies that I just need to sell…and I’m sooooo in a Strange New World thinking about that because we’ve been saving for so long!

 

[HealthyFuture]

What is in the past is in the past so there is no reason to let that hold you back. what is important is what you think will hapen from here on out so those past losses are not relevant to the decision.

I've shifted from 60/40 to [-]100/0[/-] 0/100 over the last few years... most of it in one fell swoop. I think stocks are overpriced and that the outlook for the near future is at best uncertain... so I'm a bear. If I can get 5% in safe CDs, UST and GSE bonds then that will more than satisfy our income needs so there is no need to risk that money.. I no longer NEED stocks. Now if at some point stocks are more attractive then I'll reconsider them.

So in my case, the shift to a ladder was done at the same time as a change in my AA significantly reducing my stock allocation.

pb4uski, thank you. You have done what I wish to do (though not quite that drastic). We have ‘won the game’ as they say, and I’d like to reduce our exposure significantly. (I would say we are about 60/40 currently; up until 2017 we were more 70/30.) I’m realizing that I’m experiencing a mini money mental crisis — I’ve saved so long I’m just unfamiliar with this concept of needing to spend my savings. I really like the idea of selling as a way to both shift AA and take advantage of the CD/treasury rates available right now.

 

[harley]

Gumby, thank you. Our dividends for our taxable account are quite tiny but still a great idea to stop reinvesting those. But it sounds in general from replies that I just need to sell…and I’m sooooo in a Strange New World thinking about that because we’ve been saving for so long!

There's no need to rush, although I also think equities are overpriced. Even with the recent drop. But over your remaining investing lifetime you will probably have times when you are not comfortable with your high equity AA. Those would be good times to sell some, locking in any gains, and freeing up cash that can be invested in bonds/CDs. If it doesn't happen, that means you're happy with your AA, so drive on.

I had been 100% equities (not counting real estate) for most of my life, but a couple of years ago I was getting itchy about stock prices and sold enough to drop my AA down to about 50/50. Of course, then I had to watch as the market rose by another 40% while my cash was sitting there at basically nothing, so I was kicking myself. But now that I've had a chance to buy some CDs at decent rates, I'm feeling more satisfied with my decision.

The secret to doing this sort of selling/reinvestment is to determine the AA you want, and only sell enough to get there. Don't panic sell. Just sell when prices are high or when you are ready to adjust your AA. This isn't a sprint, it's a marathon. Good luck.

 

[HealthyFuture]

When you switch from 100 pct equities to having an allocation to fixed income, as I think most people do in their working lives, you have to sell equities to reinvest in debt.

There is no getting around that you will have to sell something.

Thank you. This is what I needed to hear. It has seemed like a chicken and egg situation, but I now see this is what needs to happen even if the market is ‘down.’ It’s not that we can’t afford to sell while the market is down, I just know you all on the forum talk about not ‘having to sell’ while the market is down. (I’m not so sure I think the market is ‘down’ given its not terribly far off where it was two years ago, but I also know I’m a novice and am trying to avoid making stupid mistakes.)