Bogleheads

[vanb]

I am following the Swensen Portfolio and I am approaching retirement. I am reflecting on how I should modify the portfolio as I enter retirement. I would welcome your help.

Swensen has a section in his book Unconventional Success called "Time Horizon." As I understand it, he suggests putting 100% of what you need for the next two years in a riskless strongbox (my word--not his). So that's 2 units in the strongbox (a unit is what I want to annually extract from my portfolio). For years 3 and 4 he suggests that 75% percent of your need should be in cash, so that is another 1.5 units in the strongbox. For years 5 and 6, 50 % should be in cash (1 unit for the strongbox), and for years 7 and 8, 25% should go to the strongbox (another 0.5 units). That is a total of 5 units in a riskless portfolio (cash) with the rest in the risky portfolio (i.e., the Swensen portfolio). In retirement, the strongbox should always have 5 units.

Does this approach make sense to you. It seems a bit conservative to me.

Thanks for your help.

Bill

[livesoft]

Doesn't sound too conservative to me. If you take a conventional retirement portfolio of 60% equities, 40% fixed income then you pretty much get what you wrote if you divide the 40% fixed income up as 10% bonds, 20% TIPS, 10% cash of the total portfolio.

[CyberBob]

In retirement, having 5 years of withdrawals out of the stock market doesn't seem too conservative. (especially when that 6-year bear market comes along )

But if it's the 'cash' aspect that bothers you, how about just having 1 year in actual cash, and the other 4 in short-term bonds?

I personally like having 10 years of retirement withdrawals out of stocks, which I figure should leave me okay through all but the most ferocious bear markets without having to sell stocks.

However, that 10 years isn't best invested in all cash. More along the lines of:

year 1 in money market fund
years 2-5 in short-term bonds
years 5-10 in intermediate-term bonds and TIPS
years 10+ in stocks

Basically, I think that what Swensen is saying is that as the time you need to withdraw money from your portfolio draws closer, you need to have that money invested in things that become progressively less volatile.

You should also check out Larry Swedroe's book. He mentions this kind of thing in his 'Liquidity Test' which is in his book The Only Guide to a Winning Investment Strategy You'll Ever Need.

Bob

[grayfox]

I don't think the term "riskless strongbox" necessarily means cash.

For instance, for money you need in one year, a 1-YR CD would be a r.s.
for money needed in 5-years, a 5-year CD would be a r.s.

To me bond funds don't qualify as a r.s. because they don't have a certain maturity date when you get your principle back, so they have risk.

So for a 5-unit, it sounds like a CD or Treasury 5 -year ladder would work.

[vanb]

Thanks for the great advice. I am new at investing in bond funds. The bonds I have owned in the past were through balanced funds. I will look into short-term bond funds, CDs, and bond ladders as well as cash for my 5 unit riskless portfolio.

Thanks again.

Bill

[a2z]

CyberBob
However, that 10 years isn't best invested in all cash. More along the lines of:

year 1 in money market fund
years 2-5 in short-term bonds
years 5-10 in intermediate-term bonds and TIPS
years 10+ in stocks

Will these MM/bond/TIPS funds be in taxables? Everything I read says bonds in taxables are nearly illegal and/or immoral! Please advise. I do have them in IRA's now.

a2z

[jiclemens]

CyberBob,
Please go into how you implement this 10 year scenario. You must execute sales every year to keep feeding your moneymarket. You would not want to end up at year 10 with all equities, right? How about a real-world example? Thanks,
John

[CyberBob]

[jiclemens]

Thanks CB. I will look at the references.
John