JB posted this strategy elsewhere:
To make your retirement portfolio last, follow this strategy devised by financial planner Frank Armstrong.
1. Divide your assets into three parts: cash, bonds, and stocks.
2. Keep one year's worth of living expenses in cash. That's the money you'll be living off of, so a money-market account will be fine. You want a year's worth of expenses because you don't want to dip into investments when they're down. You don't want to put much more in the cash pile, though--you could miss out on some of the gains you'd get from investing.
3. Put between five and seven years' worth of living expenses in a short-term bond fund. This is the key to the strategy: Seven years would have carried you through the longest stock-market declines in U.S. history. This should allow you to survive a down market without selling your stock funds.
4. The rest of your portfolio stays in stock funds. If you're an aggressive investor, that's fine, but be sure that growth isn't the only theme in your portfolio. Your growth bets should enhance your core investments, not replace them.
Setting the Plan in Motion
For convenience, have your funds pay dividends or capital gains distributions into your money-market account. That means that you won't have to sell as many shares to refill your money market account yourself, which will limit additional capital-gains taxes. At the end of each year, transfer whatever amount you need to keep a year's worth of living expenses in the money-market account. Where will the cash come from? That depends on how your bond and stock funds performed in the previous year.
Scenario One: Bonds and stocks are both up for the year. In this case, reduce your bond position so that it once again covers seven year's worth of expenses before you tap into your stock funds. Your stock funds are the fuel for your portfolio, so the less you have to draw on them, the better.
Scenario Two: Stocks up, bonds down. Replenish your money-market account by using the gains from your stock funds first. Don't dip below their profits for the year, though, because that would cut into your principal. If your stock gains aren't sufficient, make it up by selling bond funds. Fill your bond stake again with future stock gains.
Scenario Three: Stocks and bonds are both down. The golden rule of this strategy is to never sell stocks when they're down. Draw on the bond funds instead--that's why you have seven years' worth of living expenses in them. Restore your bond stake by selling stock funds the next year they gain ground. Remember not to sell off more than you made, though.
Scenario Four: Stocks down, bonds up (the case in 2001). As I mentioned in the third scenario, the golden rule of this strategy is to never sell stocks when they're down. Draw on the bond funds and restore your bond stake by selling stock funds the next year they gain ground. When you restore your bond stake, remember not to sell off more than you made in stocks, though."