Does this fixed AA make sense with inflation on the way?

[DawgMan]

I debated on adding on to a previous thread I started, https://www.early-retirement.org/fo...es-if-inflation-is-here-to-stay-109440-4.html, but thought it might warrant it's own discussion.

While probably not enough to move the needle, I am doing some tweaking to perhaps how I shuffle my fixed allocation deck as I get ready to take my first withdrawal in 2022. Big picture, I am currently running with a 60/40 AA and will have a low 2% WR supporting a relatively large annual spend (significant discretionary spending). While I will probably stay primarily an annual AA rebalance guy, I am overlying a little "bucket-ish" lens on my first 10 years of spending. Also know, my current fixed allocation is a mix of cash (HYSA), intermediate and short term treasury ETFs, and some preferred ETFs. I do buy into the ballast theory as opposed to chasing yield with bond/CD ladders... but always open to exploring new mouse traps.

So here's my question... with inflation rearing it's head, does this fixed stack make sense for 10 years worth of spend...

1 - 2 years in cash (HYSA) - up to 2 years would ride out any smaller market blips and minimize need to sell any short term treasuries if inflation runs a little hot for 2 years.
3 - 4 years in short term treasuries - 2 years of cash allows enough time for the overall returns to recalibrate
5 - 10 years Intermediate - similar to above, but 5 years of cash/short term treasuries allows enough time for the overall returns to recalibrate

The "thought" here is I am giving my short term & intermediate term bond ETFs enough time to rebound over the respective periods before having to touch them, especially if inflation runs hot in the more immediate future.

Perhaps I'm a little anal here, but just looking to tighten the screws!

Thoughts?

 

[pb4uski]

So at a 2% WR, 10 years in cash/STT/ITT is only 20%... what is the rest of your 40% in fixed income invested in?

 

[DawgMan]

So at a 2% WR, 10 years in cash/STT/ITT is only 20%... what is the rest of your 40% in fixed income invested in?

Combination of more short/intermediate bond ETFs and preferreds….heavier on the intermediate s

 

[pb4uski]

I dunno... I think you might be overthinking it as leaving a little yield on the table as a result.

Even if you kept it simple and went with 2-4% short-term for 1-2 years of spending and all the rest in intermediate term and preferred ETFs and periodly refilled the short-term bucket when you rebalanced I think that would be fine.

 

[DawgMan]

I dunno... I think you might be overthinking it as leaving a little yield on the table as a result.

Even if you kept it simple and went with 2-4% short-term for 1-2 years of spending and all the rest in intermediate term and preferred ETFs and periodly refilled the short-term bucket when you rebalanced I think that would be fine.

Perhaps. My quick analysis of past overall returns of intermediate & short term bond funds showed positive overall returns in periods of 2 - 5 yrs where a negative 1 year return occurred is what spurred on the potential strategy. Of course, if we have a long run of inflation and fed action who knows if that will stay true.

Just tinkering...

 

[triangle]

With a "2% WR supporting a relatively large annual spend" my reaction is does it even matter? Since you should be fine with almost any asset allocation. I like your basic bucket approach, but I would probably be a little more risk adverse than you since bond rates are so low. But now knows what the future will hold in regards to inflation, deflation, currency moves, taxes, etc.

 

[CRLLS]

I can't say one way or another since I don't use a bucket strategy. I wonder if there are any calculators that can simulate this portfolio detail? I would guess not. Even if they could, another guess is they will just return some spreadsheet showing annual expenses and balance, not anything related to the peace of mind I think you are after. I'm interested is seeing if there is some calculators thing like that.

I'd think that if anything is not enough to "move the needle" as you put it, It probably isn't enough to move the needle if the decision is wrong. I would suggest that "always open to exploring new mouse traps" doesn't sound to me like you have made a long term plan and are following it.

 

[DawgMan]

I would suggest that "always open to exploring new mouse traps" doesn't sound to me like you have made a long term plan and are following it.

Well, I suppose I view it as keeping an open mind to alternative approaches/being flexible to change if change is warranted. The current macro plan is in place, just tinkering a little based on current market conditions. I suppose it's my inner nature to try and perfect the un-perfectible. Candidly, some of it is for sport to see if I can create a "better plan".

 

[pb4uski]

Sometimes, perfection is the enemy of good.