Rising equity glide path

[monte1022]

Anyone here on a glide path? A lot has been written about the idea but most of it seems to be theory. Curious if anyone else is considering/actually doing a glide path. What was your initial percentage of stocks, how fast are you increasing your stock allocation, and what is your final goal?

I find myself wanting to lower stock risk since we are contemplating FIRE end of 22 or sometime in 23. SORR AND the fear of a sudden draw down immediately after leaving ft employment are the primary reasons for wanting to implement this strategy.

The portfolio is currently configured 50/40/10, but I may go to 35-40/50-55/10 and glide to 60/35/5 over the next 10yrs. The logic of this move is based on the fact that we will be SS eligible at that time and a rapid rise in equity is suggested to be ideal. No pensions. We will turn 56/53 this year.

 

[FLSUnFIRE]

Not interested. In my taxable accounts which I will draw first, shifting allocation to bonds/cash would trigger excessive taxes and destroy my MAGI. My tax deferred accounts won't be touched for several years so shifting them to bonds/cash would almost certainly be sub-optimal and not really help me with SORR as I don't intend to tap them right away. Also, I have a long time horizon in RE and a relatively low WDR so not too worried about SORR (especially with the market, some concern with inflation if 8%+ becomes the norm for the next decade but I still think the best hedge against inflation is found in equities).



I will liquidate and realize gains at the end of the year up to my MAGI threshold. If more than I need (market down, so more principle) I will reinvest at a higher basis and use those first (once they pass the long-term threshold)*. If less than I need (market up, more gains limiting total amount sold), I will do a mid-year decision to sell more in the following year depending on actual burn or could use my HELOC to fund expenses if the market is down sharply and wait until a recovery to pay off (yes, at some risk but might be willing to take that leverage risk rather than sell after a precipitous fall).


* Interesting paradox is that since my limiting factor is MAGI, my total withdrawal would be higher in a down market as a greater percentage of my proceeds would be basis and not gains.

 

[VanWinkle]

I think you are already in a defensive position that is reasonable for your age and time until retirement. Getting more defensive now would likely just lock in some losses that would then take longer to recover with a new allocation to equities. Your plan to increase to 60% equities when SS is received makes sense.

Just my 2 cents worth!!

Good luck on retirement.

VW

 

[donheff]

I am not on a specific glide path but I have let our AA drift from about 65/35 to 75/25 over the past several years. We are getting older and our SWR is low. The reset aligned the portfolio more towards our heirs' time frames.

 

[mrfeh]

I considered it, but decided on keeping our AA static in retirement.

 

[jebmke]

We are 50/50 now roughly, I have no plans to re-balance on the upside so equity will rise naturally for a while (I hope). Once we start RMDs, equity will rise dramatically since I have no plans to sell equity.

 

[USGrant1962]

I'm doing age in equities from semi-retirement (age 55) to age 65 or so. I was almost all equities until my late 40s and moved toward 55/45 as I approached age 55. Basically a muted/subdued bond tent.

Having said that, the difference in portfolio performance and SWR between 55/45 and 65/35 is in the noise. For me, having peak FI at retirements was more of a SWAN thing allowing me to punch out of Megacorp.

 

[monte1022]

Thank you to all for very useful replies/opinions. I guess I'm getting the willies about a market crash soon after I exit ft employment. Our w/d rate will be around 3%-3.25% until SS in 14yrs. Firecalc, Fidelity, and numerous other calculators say that we are ok. I just need to come to peace with a potential 50% drop, plan accordingly, and jump.

The dollars currently in fixed will last 16ish yrs at 3% inflation at max budget. We could certainly shave some discretionary stuff if pressed to do so. Perhaps that is good enough without the added complexities of gliding up or down.

 

[Montecfo]

yes. I think you can over-plan for the downside and miss the more likely (and needed) upside.

Also, safe withdrawal rate research already considers SORR, so in some ways you are considering it twice, or ignoring the research (depending on how you wish to look at it).

Just another view.

 

[RunningBum]

The portfolio is currently configured 50/40/10, but I may go to 35-40/50-55/10 and glide to 60/35/5 over the next 10yrs. The logic of this move is based on the fact that we will be SS eligible at that time and a rapid rise in equity is suggested to be ideal. No pensions. We will turn 56/53 this year.

I guess I'm getting the willies about a market crash soon after I exit ft employment.

Seems to me that the rising glide path plan is designed for people with a 30 year horizon. At your ages, it's not unlikely for at least one of you to go 40 years. What happens if the market waits for 10 years to crash just when you get to 60/35/5?

Maybe having SS then helps with this. Not saying don't do this, but consider that you are market timing. I retired 11 years ago at 49 and did not use a rising glide path. Very glad I didn't underweight equities over this time! No idea what the future holds.

 

[sengsational]

I've always wondered (but hope I don't find out first-hand) how a long, and I mean long, downturn would be managed. Say you have 5 years of spending in cash and the market gets cut in half. No problem, no need to sell low. But now it's 2.5 years in, and you've spent half of your cash, so your AA is out of whack. But do you dare rebalance? You'd be knocking your last 2.5 years of spending down if you did.

 

[COcheesehead]

I did it. I followed Kitces bond tent or rising equity glide path, but I did not do it as a rebalance, but just how I invested starting about 5-6 years out from retirement. I put more into an individual muni bond ladder and less or none into equities. I am glad I did, I retired right in the middle of Covid - 2020. Those early bond purchases now throw off more than we need to live and I have the benefit of pretty large groups of maturing bonds this year through 2025+ so lots of fresh cash to buy more bonds now at higher yields, stick into the market or live off of.
I suggest reading Kitces blogs on the topic. My goal was to create income in gap years until we reach full retirement age for social security.

 

[OldShooter]

... I just need to come to peace with a potential 50% drop, plan accordingly, and jump. ...

My history books say that the dips are no big deal and always temporary. The way to turn them into a big deal is to "jump." I think that is pretty universally understood to be the situation.

... The dollars currently in fixed will last 16ish yrs at 3% inflation at max budget. We could certainly shave ...

WADR, I think you are worrying about the wrong thing when you look at small tuning tactics ref the stock market. Inflation, again MHO, is far more dangerous for all of us. Inflation never recovers; it is always cumulative. If you are thinking 3% that is historically very optimistic and also arguably optimistic given the current worldwide numbers. IIRC the long term US average inflation is a bit over 4% and the recent (late 70s/early 80s) burst broke into the teens.

 

[Chuckanut]

WADR, I think you are worrying about the wrong thing when you look at small tuning tactics ref the stock market. Inflation, again MHO, is far more dangerous for all of us. Inflation never recovers; it is always cumulative. If you are thinking 3% that is historically very optimistic and also arguably optimistic given the current worldwide numbers. IIRC the long term US average inflation is a bit over 4% and the recent (late 70s/early 80s) burst broke into the teens.

I agree. For many the biggest loss this year will be to inflation, not a drop in the market.

As far as recovering from a 50% drop while recent events have had quick recoveries, I do remember the crash of 73-74. IIRC, it took the US stock market 19 years to recover in REAL terms. That crash was followed by years of high inflation, including double digits at times. So, yes, inflation is to be feared. One real example of why to fear inflation is the fact that most of the people I know of my age have at least one child who has left this area because of the rapidly rising cost of housing. IMHO, that is a direct negative impact on one's quality of life.

 

[OldShooter]

Not sure a dip in the market can be blamed for the market not keeping up with inflation during crazy times, but really "recovery" is a kind of strange thing anyway.

Our investments don't know what we paid for them and the market doesn't know anything about its history. The behavioral economists will tell us that our focus on "recovery" is simply a manifestation of the loss aversion that evolution has baked into us. For example: " ... when it recovers to where I bought it I'm going to sell ... " That's a real knee-slapper for the behavioral economics crowd. IOW " ... I'm going to hold onto this poor-performing investment and pretend that I haven't lost any money, hoping that it will move back up so my loss aversion will let me sell ... "

The other thing about "recovery" is that it is really a process where investment prices slowly rise following the bottom of a dip. So even if my Bucket #1 is running low after five or ten years waiting for prices to rise, if I do sell history says I will be selling at well above the dip.

So, yes I would rather not "lose" money following a dip and yes I have a Bucket #1 to forestall SORR problems, but I'm really not too worried about that bucket running dry. Most dips/recoveries are not long term and if we run into a long one I don't think it will hurt too much (loss aversion) to eventually have to do some selling.

 

[pb4uski]

Not interested. In my taxable accounts which I will draw first, shifting allocation to bonds/cash would trigger excessive taxes and destroy my MAGI....

What makes you think that a rising equity glide path necessitates holding lots of bonds or cash in taxable accounts? Depending on your mix of taxable/tax-deferred and tax-free you could do a rising equity glide path and have the same amount of money in cash and bonds in taxable accounts as you plan to without doing a rising equity glide path.

 

[foxfirev5]

While I call it rising glide path my equity portion is really an old fashioned buy and hold portfolio. On the fixed side I'm pursuing a liability matching portfolio of CD's and Treasuries for the next 15-20 years expenses. This was started back in 2018 when rates topped 3.5%. Today I'm a less greedy and willing to settle for 2.8%+. Now I have a few hundred k maturing in the next three years to extend the ladder if rates cooperate. Right now I have 14 years expenses in a CD/Treas Strip ladder. The equity portion of my tIRA contributes dividends for some income growth potential. This should cover my lifetime as well as DW.

Meanwhile I continue to do Roth conversions into my 95/5 Roth account. The overall equity % is moot as long as my cash flow needs are met for the next few years. The Roths can run free and grow as they are untouched.

FWIW, if I combine DW's accts we're at 50/50 overall. Somewhere between 30/70 and 70/30 as some highly esteemed expert once said.

 

[Exchme]

I think you are already in a defensive position that is reasonable for your age and time until retirement. Getting more defensive now would likely just lock in some losses that would then take longer to recover with a new allocation to equities. Your plan to increase to 60% equities when SS is received makes sense.

Just my 2 cents worth!!

Good luck on retirement.

VW

+1

Longer retirements need more stocks than a 30 year retirement, OP's stock allocation already seems low for what could be 40+ years of drawing from the portfolio (unless the portfolio is so outsized that it doesn't matter).

If you need growth, there's no solid indication that rising equity glide paths actually help, they lock in low growth prospects today, locking in the need for growth and risk taking tomorrow.

Markets price in what's knowable and guessable about the future. They move most meaningfully when unpredictable events hit and those are, well, unpredictable. Hoping that the far future's unpredictable events will be better for a portfolio than today's is not generally a good bet.

Put differently, tomorrow will be just as risky as today, even if it doesn't seem as scary ahead of time. So if you can't stomach today's events in the market, you have learned something important about yourself. You are likely better off building a larger stockpile for retirement rather than fooling yourself that you can game the system and somehow take only low risk but still get good returns.

 

[Jerry1]

I'm not sure about it yet, but I'm considering letting my equity portion grow over time. I'm a few years away from both me and DW being on SS. At that time, with our SS and pension, my withdraw rate will be very low - under 2%. At that time, I may consider letting my equity percentage increase. Later in life, if I'm confident I've made it, I may go up to 100% stocks and try to leave a bit more for my heirs. It's all a thought at this point in time, but I will consider it later on.

 

[OldShooter]

I'm not sure about it yet, but I'm considering letting my equity portion grow over time. I'm a few years away from both me and DW being on SS. At that time, with our SS and pension, my withdraw rate will be very low - under 2%. At that time, I may consider letting my equity percentage increase. Later in life, if I'm confident I've made it, I may go up to 100% stocks and try to leave a bit more for my heirs. It's all a thought at this point in time, but I will consider it later on.

I think that makes sense. As we get closer to dying, the amount of "safe" money we will need diminishes. As long as we have that safely, the rest of the stash is for our estate and in most cases would be best invested for the longer term --- IOW longer than us. The idea that everyone's % of equity should be constantly declining with age makes no sense to me as a general rule.

 

[Out-to-Lunch]

Anyone here on a glide path? A lot has been written about the idea but most of it seems to be theory. Curious if anyone else is considering/actually doing a glide path. What was your initial percentage of stocks, how fast are you increasing your stock allocation, and what is your final goal?

Kind of. It could also be conceptualized as a bridge to SS, or as a LMP/RP approach. (LMP = liability matching portfolio; RP = risk portfolio.) We are 56/58, so looking at 12 years before SS is fully turned on.

We have pensions and (obviously) savings. (They are not fixed pensions, but will be adjusted upwards.) I took a chunk of our savings and bought a ladder of TIPS to cover my LMP. Those will throw off enough that, when combined with our pensions, the funds will cover our minimum desired standard of living (which is our current level). The remaining funds (the RP) are invested at a 70/30 AA. When you combine the LMP and RP, the overall AA started out at 55/45, but will obviously glide up to 70/30 as the funds in the LMP are exhausted over 12 years.

 

[monte1022]

The portfolio is approx 3.3m (950k Roth, 1700k pretax, and 650k taxable). All of the Roth, some of the pretax and taxable make up the stock component. Our base spend is 45k/yr. We will need ACA insurance so add that to my base. Full planned annual net spend is 90k with an occasional burst above that number for unforeseen things. Fidelity says we can spend 12k/mo until past 100yo for a score of 100 on their planner. The Fidelity planner increases my score when I change the stock allocation to a lower percentage (40% vs 50%) making me wonder what additional background assumptions are used.

I agree that inflation should be one's greatest worry especially now that it is not being described as transitory.

 

[audreyh1]

No. If the paper had been written before I retired I might have done it.

Instead I started highish and gradually reduced equity% since retiring.

Once I reach a certain age I might blow off all rebalancing a just take all distributions in cash. This usually results in increasing equity exposure over the long term, but you never know.

Don’t have young heirs. Not that much younger siblings are heirs and I need to gift to them while I’m alive, assuming I’m long-lived (knock on wood).

 

[monte1022]

I would say that I'm stuck between Pfau/Kitces and William Bernstein. I strongly prefer a fixed amount sufficient to bridge to my 70yo SS claim. At 70 (if alive), our combined SS will be 65k. The remaining portfolio will need to supply 25k net for the next 20-30yrs after SS start. Our current fixed plus additions until RE will cover us until early 70s while the stock component is left to grow ie. Bernstein. Dropping to 30-40% stock (Pfau/Kitces) will push the Bernstein "safe" years initially well into our 70s, but the now present high inflation component complicates this approach. Return on fixed assets are now improving making the Pfau/Kitces high fixed percentage a bit more palatable.

Perhaps all of this is simply splitting hairs and introducing the concept of "perfect is the enemy of good." Having been 100% stocks until just a few years ago, I am now thinking in the other extreme which, according to research, simply will not work as well.

The idea of ending a steady check is proving to be a more difficult monster to slay than I had imagined. Current events are not helping to assuage my concerns. At the same time, the clock is ticking on this finite journey.

Thanks again to everyone.

 

[ncbill]

Not for me...with my taxable portfolio it would generate too much tax liability by rebalancing from equity-heavy to fixed income-heavy at the beginning of the glide path.

Instead, I plan to use the "cash bucket" (never refilled) approach as outlined here:

https://earlyretirementnow.com/2018...hdrawal-rates-part-25-more-flexibility-myths/

Note it is in addition to (sits in top of) the portfolio, so essentially it means saving 27.5x versus just 25x.