Total Return/Re-balance | Buckets | Rising Equity Glidepath... what's a guy to do??

[DawgMan]

I know this is banged around allot and there are multiple answers, but all these different approaches have me second guessing my pursuit for the best/right one for me, so I am reaching out to you all to hear suggestions for my case...

- Plans are to start drawing down on investments in 2021 (guessing 70% of desired income will come from investments, balance coming from some part time work I will be wrapping up thru 2021).
- DW & I are 56
- Retirement investments split 50/50 taxable/tax differed
- Conservatively planning on about a 3% WR growing with inflation year after year, not counting any future SS in my numbers so that will be gravy, whatever it is. My 3% WR is somewhat Fat Fire with significant discretionary spending, so I have levers to pull to bring my WR to 2% (or less) pretty easily, but none the less, like my 3% plan!
- Current AA plan is/has been 60/40 with annual re-balance and plans to stay there indefinitely, although I have drifted currently to 56/44

So here is where I get distracted/confused/second guess myself in choosing the most prudent mousetrap for me. I was all in on my planned 60/40 AA re-balance and then over the last year or so thought adopting a "bucket overlay" may help me better sleep at night. I suppose the bucket overlay gives me the option of re-balancing or not into stocks at the end of the year in the event of a prolonged down market by knowing I still have X years of cash/bonds to draw on. Jedi mind tricks perhaps, but one more lens to evaluate my portfolio. Then comes along the Rising Equity Glide Path rule showing me how I need to drop to 30% equities and glide back to say 60%+ to improve my portfolio longevity probability and avoid SORR. Throw in a little economic and political volatility, a long bull market run/valuations somehow basically back even, and election and I am paralyzed again. I suppose I could do nothing and be just fine, but should I really be taking a harder look at the rising equity glide path approach? Or, does a lower WR and flexible levers to pull help negate the need to over protect for SORR

What say you?

 

[LOL!]

So after the third week of March 2020, you did not rebalance at all by buying more equities?

 

[DawgMan]

So after the third week of March 2020, you did not rebalance at all by buying more equities?

No. My "rules" have always had me re-balancing at the end of the year. I have since been reading on adopting other certain buying (or selling rules) such as after 5% drop buy X% back in, but frankly, have just stayed the course.

 

[CardsFan]

I can't say what is right for you, but here is how I look at it.

Our AA is 55/45. Of the 45%, a little less than 1/2 sits in cash and CD's. If you want to call it a bucket, that's OK. It is probably about 7 years of spending, but when I start SS in 2 years it will be more like 15 years of required withdrawals above SS. I also take all distributions (Int/Div/cap gains) as cash, and then pump that into CD's (well not right now) or keep as cash. By doing this, I have been able to stay in the range I want for 4 years without re-balancing.

The cash/CD's are a drag on return, but I sleep well at night and don't have any urge to react to big market swings.

I think at a 3% WR, you can do what ever you want. No need to run up the score, and no need to put it all under the mattress.

JMHO

 

[DawgMan]

I can't say what is right for you, but here is how I look at it.

Our AA is 55/45. Of the 45%, a little less than 1/2 sits in cash and CD's. If you want to call it a bucket, that's OK. It is probably about 7 years of spending, but when I start SS in 2 years it will be more like 15 years of required withdrawals above SS. I also take all distributions (Int/Div/cap gains) as cash, and then pump that into CD's (well not right now) or keep as cash. By doing this, I have been able to stay in the range I want for 4 years without re-balancing.

The cash/CD's are a drag on return, but I sleep well at night and don't have any urge to react to big market swings.

I think at a 3% WR, you can do what ever you want. No need to run up the score, and no need to put it all under the mattress.

JMHO

Thanks.

Was your AA mix your going in strategy or did it morph that way over time?

There has been a good bit of chatter lately here about the glide path and "sell all your equities" so it has me digging a little deeper. That, and the fact my over all balances are back (and not believing there is a good reason why right now) has me wondering what the best approach is right before launching. I tend to believe my under 4% WR gives me some flexibility, but none the less, want to do the best thing... whatever that is.

 

[COcheesehead]

I put in place an AA that will meet my goals, but then I overlay that with buckets. So a part of the AA is short term money, mid term and long term. So as the market bounces around I know I have 8 years of maturing bonds to fund me, 10-15 more years of income producing assets and finally long term stuff that I let ride, no matter what because I know I won’t touch it for about 20 years.
I don’t let the bucket define the investment. So in bucket 1, I have little cash because I have a constant flow of maturing bonds. Bucket 2 includes among other things, a rental property that will be sold in that timeframe, etc.
The buckets just help me define when I will use the funds.
I find it very useful to help me not fiddle with investments based on the market emotions de jour.

 

[CardsFan]

Thanks.

Was your AA mix your going in strategy or did it morph that way over time?

There has been a good bit of chatter lately here about the glide path and "sell all your equities" so it has me digging a little deeper. That, and the fact my over all balances are back (and not believing there is a good reason why right now) has me wondering what the best approach is right before launching. I tend to believe my under 4% WR gives me some flexibility, but none the less, want to do the best thing... whatever that is.

Our AA was about 60/40 4.5 years ago, when I retired. By taking distributions as cash, then re-investing it in cash/CD's/and some bonds, I intentionally moved down to 55%, but very slowly. FWIW, 55% is +/-5%, and I do not re-balance when the market is swinging wildly (like the last few months).

Like you, we are in the position to live comfortably off a less than 3% WR (though I think your fat fire 3% is a bit more than mine)

 

[SecondCor521]

Or, does a lower WR and flexible levers to pull help negate the need to over protect for SORR

What say you?

I think it does.

SORR gets plenty of air time these days. It's the risk that you might retire at a bad time and might run out of money at a given WR. Some make an analogy to Russian roulette.

I'm 51 at an AA of 96/4 and a sub-1% net WR. I believe the future financially will be as good as or better than the past. To me my situation is like playing Russian roulette with no bullets in the gun. So I don't worry about SORR.

Buckets never made sense to me personally.

 

[DawgMan]

I think it does.

SORR gets plenty of air time these days. It's the risk that you might retire at a bad time and might run out of money at a given WR. Some make an analogy to Russian roulette.

I'm 51 at an AA of 96/4 and a sub-1% net WR. I believe the future financially will be as good as or better than the past. To me my situation is like playing Russian roulette with no bullets in the gun. So I don't worry about SORR.

Buckets never made sense to me personally.

Sub 1% WR? Are you relying on a pension/SS/annuities or other non-investment portfolio assets to generate income? In my case, I am 100% relying on my assets to generate income so hence, the heightened sensitivity. At 51, you also need to underwrite a longer life span, but kudos to you for a 1% WR!

 

[SecondCor521]

Sub 1% WR? Are you relying on a pension/SS/annuities or other non-investment portfolio assets to generate income? In my case, I am 100% relying on my assets to generate income so hence, the heightened sensitivity. At 51, you also need to underwrite a longer life span, but kudos to you for a 1% WR!

Well, I'm pretty frugal and live in a LCOL area with a paid off house and car for starters. ETA: It also helps that I RE'd 2 years after hitting my 4% FIRE number and the market has been kind to me since February 2016. I also got some life insurance when my Mom passed away.

I did say "net WR". My gross WR is currently 2.27% and is my spending over the last six months (*) divided by my FIRE stash. I do include what I consider to be a conservative NPV of my SS in my FIRE stash.

From my gross WR, I do have what I call non-portfolio income (NPI) which is equivalent on an annual basis to 1.45% of my FIRE stash. It is any income that I have that is reasonably reliable and isn't generated by my FIRE stash. So it includes several easy side gigs and some other miscellaneous things (like the extra CARES advance tax credit thing this year).

To get my net WR, I take gross WR minus NPI: 2.27% - 1.45% = 0.82%. Obviously the numbers bounce around, but I kinda keep track and it's been between about 0.4% and 1.0% since FIRE four years ago.

As far as life span, I either assume 85 or 90, whichever gives me the more conservative result. For example, I use 85 in calculating NPV of SS and doing my RMD spreadsheet estimates but I use 90 in my FIREcalc runs.

(*) excluding child support, which ended three months ago, and college spending, which comes from more-than-fully-funded college accounts which are separate from my FIRE stash.

 

[TechLead]

Once we have Medicare we don't need cash since then I can withdraw dividends generated by 401k and IRA accounts.

Have it not been for ACA cliff we would be now 95% in equities.

No rebalancing, no selling, buying back, market timing etc. Once we buy something like X shares of VTI, VXUS, VIG, VWO we just collect dividends and *never* touch shares.

 

[DawgMan]

Once we have Medicare we don't need cash since then I can withdraw dividends generated by 401k and IRA accounts.

Have it not been for ACA cliff we would be now 95% in equities.

No rebalancing, no selling, buying back, market timing etc. Once we buy something like X shares of VTI, VXUS, VIG, VWO we just collect dividends and *never* touch shares.

You are also touching on the other strategy I failed to note... dividend investors. I have not studied in depth the historical performance, particularly dividend % and consistency in paying those dividends over time, but I can see an argument for taking that strategy with a high equity position if the dividend covers your WR (plus I suppose some factor for inflation). Perhaps another mouse trap to explore.

 

[TechLead]

You are also touching on the other strategy I failed to note... dividend investors. I have not studied in depth the historical performance, particularly dividend % and consistency in paying those dividends over time, but I can see an argument for taking that strategy with a high equity position if the dividend covers your WR (plus I suppose some factor for inflation). Perhaps another mouse trap to explore.

Well we both are not retired yet, but dividends are 10k+ a month and that is enough for us. This is not high dividend yield portfolio. Portfolio has more of the *quality* tilt.

Dividends grow faster than inflation (most of the time) so our income should grow without buying any more index ETFs. (We are still working and buying more)

 

[OldShooter]

... distracted/confused/second guess ... Throw in a little economic and political volatility, a long bull market run/valuations somehow basically back even, and election and I am paralyzed again. I suppose I could do nothing and be just fine ... What say you?

I say you're looking at all the right stuff -- lots of different ways to evaluate and develop a financial strategy.

But I also say you are in analysis paralysis and need to recognize that there is absolutely no way you can determine your individually optimum strategy. The only way to know that is to examine the alternatives and their actual results as of the day you die. None of these analysis approaches is or can ever be predictive.

So ... relax. Have a glass of wine and some nice cheese. Pick an approach and plan to re-evaluate it once in a while. Maybe once a year. Maybe once every two years. The world changes, you change, your needs and wants change, ... it goes on and on. You just have to accept that and realize that adaptation is still a way of life even after you've retired.

 

[CardsFan]

I say you're looking at all the right stuff -- lots of different ways to evaluate and develop a financial strategy.

But I also say you are in analysis paralysis and need to recognize that there is absolutely no way you can determine your individually optimum strategy. The only way to know that is to examine the alternatives and their actual results as of the day you die. None of these analysis approaches is or can ever be predictive.

So ... relax. Have a glass of wine and some nice cheese. Pick an approach and plan to re-evaluate it once in a while. Maybe once a year. Maybe once every two years. The world changes, you change, your needs and wants change, ... it goes on and on. You just have to accept that and realize that adaptation is still a way of life even after you've retired.

One of the best pieces of advice posted here.

 

[audreyh1]

Yeah, don’t try to optimize this. Go with simple. The simpler the better. Also be sure to prioritize your goals.

Also Old Shooter points out that you get to review and course correct over time. Very important thing to keep in mind.

 

[CyclingInvestor]

Well we both are not retired yet, but dividends are 10k+ a month and that is enough for us. This is not high dividend yield portfolio. Portfolio has more of the *quality* tilt.

Dividends grow faster than inflation (most of the time) so our income should grow without buying any more index ETFs. (We are still working and buying more)

Same here, but retired since 2006. Dividends have averaged 7-8% growth per year over the decades, including the cuts (thanks KMI, GE, GGP).

 

[DawgMan]

I say you're looking at all the right stuff -- lots of different ways to evaluate and develop a financial strategy.

But I also say you are in analysis paralysis and need to recognize that there is absolutely no way you can determine your individually optimum strategy. The only way to know that is to examine the alternatives and their actual results as of the day you die. None of these analysis approaches is or can ever be predictive.

So ... relax. Have a glass of wine and some nice cheese. Pick an approach and plan to re-evaluate it once in a while. Maybe once a year. Maybe once every two years. The world changes, you change, your needs and wants change, ... it goes on and on. You just have to accept that and realize that adaptation is still a way of life even after you've retired.

Ok, ok, you talked me off a ledge. I had a weak moment and will get 2nd half of my first drink!

 

[Out-to-Lunch]

But I also say you ... need to recognize that there is absolutely no way you can determine your individually optimum strategy.

You have no idea how much I needed to read that at this particular moment!

Thanks for that.

 

[DrRoy]

I have a situation very close to yours on AA and WR. The only real difference is that over the last few years I had a strategy of tweaking down my AA as the market rose beyond my expectations. In 5 years I went from 63% equities to 58% (beta of 1.0). That helped me weather the Covid market storm vs the Great Recession when I was 82% and beta 1.2. I have only been keeping 1 year of spending in actual cash (money market) with the rest in investment grade corp. bonds. The only change I plan to make is to raise my cash to two years. Otherwise I am happy with this. Just another data point for you to reference.

 

[OldShooter]

... Also Old Shooter points out that you [-]get[/-] will have to review and course correct over time. Very important thing to keep in mind.

FTFY

 

[big-papa]

Maybe consider a withdrawal method that exchanges SORR for Sequence of Income risk? That is, change the risk from prematurely running out of money to a method where each year's withdrawal is variable - meaning that there is always the possibility that any given year's withdrawal might be below what you need but at the same time there is a direct relation between the performance of your portfolio and the amount you can withdraw.

Anyway, there are many examples out there
- Something relatively simple such as withdrawing a fixed percentage of your portfolio and letting the long term returns of your portfolio take care of inflation. Mathematically this can never deplete your portfolio, though if your chosen percentage is too high, the size of your portfolio can asymptotically approach $0 over time.
- VPW which has a monotonically increasing withdrawal percentage each year. The actual percentages depend on your Asset Allocation and how many years you expect to be around. This can all be pre-calculated
- "Time Value of Money" which is VPW-like but also takes into account the NPV of any future cash flows like SS, or expected future lump sums, but also uses metrics to guesstimate future stock and bond fund returns, which tends to smooth out the withdrawals over time..
- More complex methods like floor/ceiling, Kitces Ratcheting, Guyton-Klinger and others.

Many, but not all, can be found on this site: https://www.bogleheads.org/wiki/Withdrawal_methods

Others can be found via google.

Cheers,
Big-Papa

 

[Navigator]

I say you're looking at all the right stuff -- lots of different ways to evaluate and develop a financial strategy.

But I also say you are in analysis paralysis and need to recognize that there is absolutely no way you can determine your individually optimum strategy. The only way to know that is to examine the alternatives and their actual results as of the day you die. None of these analysis approaches is or can ever be predictive.

So ... relax. Have a glass of wine and some nice cheese. Pick an approach and plan to re-evaluate it once in a while. Maybe once a year. Maybe once every two years. The world changes, you change, your needs and wants change, ... it goes on and on. You just have to accept that and realize that adaptation is still a way of life even after you've retired.

I agree with OldShooter that you should keep it simple and choose one plan. Your original plan should be fine, even taking into account SORR risk. If the markets crash and burn, you can always adjust your plan or withdrawal rate. Because you haven’t included SS in your analysis, you actually have a lot of financial flexibility.

 

[Katoslake]

Keep thinking AA of 45 S&P 45 US Bond index 10 cash equivalents. I’m conservative and wanting 5% or so overall