retirement strategy

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chAabw
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retirement strategy

Post by chAabw » Thu Nov 30, 2017 7:28 pm

Just retiring. Have about 2.2M invested. So the asset mix suggested to me was 50/50 If I calculate I will need $200,000 over the next 5 years for living expenses would it be smarter to raise my risk and asset mix to 65/35 and just take $200K and put into a cash vehicle to use over the next 5 years. This way the bulk of my assets will grow hopefully a little more than a 50/50 mix and if the market corrects itself I won't have to withdraw funds that have gone down in value. Thanks much for your help.

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David Jay
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Re: retirement strategy

Post by David Jay » Thu Nov 30, 2017 9:53 pm

Over your retirement horizon (say 30 years), higher stock allocation will almost certainly provide higher returns. Higher bond allocation will provide lower volatility. You have to look at your comfort level, but 65/35 is not unreasonable. I am looking at a 70/30 for my "legacy" (I.e. Inheritance) funds.

I look at retirement as having (2) periods: The era between retirement and start is SS. Then the era after start of SS. Like your plan, I will have my living expenses for era #1 in bonds (a couple of years worth in Short Term, remainder in intermediate term).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

sport
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Re: retirement strategy

Post by sport » Thu Nov 30, 2017 9:59 pm

In the event of a market correction, a 50/50 portfolio might lose 25% of its value. Similarly, a 65/35 holding might lose 32% of its value. What is your comfort level/pain threshold? I am retired, and my target AA is 35/65 with 5% excursions allowed from the target. It is a personal choice. There is no right answer. I subscribe to the idea that if you have "won the game", don't take unnecessary risks. In other words, I don't want to mess up a good thing.

msk
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Re: retirement strategy

Post by msk » Thu Nov 30, 2017 10:45 pm

So you need only $40k annually for living expenses ($200k for 5 years)? I am at age 73 and have a 100% stocks portfolio. Using Monte Carlo simulations and also a 50 year history check, a 5% of portfolio withdrawal rate annually will survive >50 years, keep up with inflation and, on average, your withdrawals will also keep up with inflation; median forecast. For $40k annually you can ride out a drop in your portfolio down to $800k, that's a 60% market crash. The bigger your portfolio is relative to withdrawal needs, the more you can allocate to stocks. The more weighting you have in bonds, the more you are shortchanging your heirs, or foregoing the possibility of purchasing luxury baubles. Fear and Greed, Bonds and Stocks :greedy

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Watty
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Re: retirement strategy

Post by Watty » Thu Nov 30, 2017 11:14 pm

chAabw wrote:
Thu Nov 30, 2017 7:28 pm
...if the market corrects itself I won't have to withdraw funds that have gone down in value.
If you just set your investments to not automatically reinvest the dividends then a 2% dividend, which is reasonable, would give you $44,000 a year so you should not have to actually sell any of your investments.

avalpert
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Re: retirement strategy

Post by avalpert » Thu Nov 30, 2017 11:20 pm

It sounds like you are talking about the difference between $1.1m in equities and $1.3m in equities - not sure the upside there would make all that much difference for you in the long run whereas the sequence of return risk could cause issues. I'm increasingly leaning towards starting retirement with a lower equity rate and increasing it over time - in you case that could mean starting with the 50/50 and spend from fixed income to take you to 65/35 over time.

Also, I wouldn't create mental buckets - the $200k is still part of your portfolio.

dbr
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Re: retirement strategy

Post by dbr » Thu Nov 30, 2017 11:45 pm

chAabw wrote:
Thu Nov 30, 2017 7:28 pm
Just retiring. Have about 2.2M invested. So the asset mix suggested to me was 50/50 If I calculate I will need $200,000 over the next 5 years for living expenses would it be smarter to raise my risk and asset mix to 65/35 and just take $200K and put into a cash vehicle to use over the next 5 years. This way the bulk of my assets will grow hopefully a little more than a 50/50 mix and if the market corrects itself I won't have to withdraw funds that have gone down in value. Thanks much for your help.
No. It would not be smarter nor would it be particularly harmful beyond creating confusion.

You are essentially saying you want to start retirement at an allocation of 60/40 and then evolving in some unknown way as you don't seem to have a plan for asset allocation as you spend the 200k and the rest of your investments grow or shrink according to the market. In general the more you have invested in stocks the more your wealth will grow on average but with more uncertainty as to how much that growth will be.

It helps not at all to mentally separate that cash. If stocks go down, then the portfolio value will go down and you will be withdrawing from a shrinking portfolio no matter how you do the mental accounting. The only issue is what sort of asset allocation you have all along. If you sell bonds for withdrawals when stocks are down that is ok, but failing to also sell bonds to rebalance into stocks that have declined is a rebalancing strategy that has an effect similar to holding less in stocks to start with, which then just takes you in a circle back to where you were. Note I don't hear you having an awareness that when stocks are down you don't sell stocks; you sell bonds and buy stocks so it doesn't make any sense to talk about selling funds that have gone down in value. That would only happen if you had all stocks, but in that case your expected return would also be higher and would offset the problem of having to withdraw from funds when they are down.

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steve roy
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Re: retirement strategy

Post by steve roy » Fri Dec 01, 2017 12:07 am

My advice? Think about NOT diving into retirement with a higher stock exposure. Equities aren't undervalued, even though they may go higher for several more years. There's a reasonably good chance that won't happen.

I wouldn't bet the health of my retirement on stocks outperforming, especially in the first years after you hang it up. Better to wade in with a conservative portfolio, and then unwind it some over time. What you don't need is to be overweighted in equities right out of the retirement gate and then get hit with a major loss. (Full disclosure: DW and I have a 30/70 allocation. We'll let the equity allocation drift slowly up over a decade and a half. The last thing we want is a major drop early on.)

Olemiss540
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Re: retirement strategy

Post by Olemiss540 » Fri Dec 01, 2017 8:34 am

I would stick to a 50/50 allocation and never think about it again (aside from yearly rebalancing). Keep it simple and with your withdrawal rate you will find that dividends and interest will handle most off your income needs forever.

westrichj312
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Re: retirement strategy

Post by westrichj312 » Fri Dec 01, 2017 8:46 am

with only needing 40K per year to live you will never have to touch the principle. Live a little and spend unless your comfortable just giving the money to your heirs to spend when your gone.

Dottie57
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Re: retirement strategy

Post by Dottie57 » Fri Dec 01, 2017 8:51 am

chAabw wrote:
Thu Nov 30, 2017 7:28 pm
Just retiring. Have about 2.2M invested. So the asset mix suggested to me was 50/50 If I calculate I will need $200,000 over the next 5 years for living expenses would it be smarter to raise my risk and asset mix to 65/35 and just take $200K and put into a cash vehicle to use over the next 5 years. This way the bulk of my assets will grow hopefully a little more than a 50/50 mix and if the market corrects itself I won't have to withdraw funds that have gone down in value. Thanks much for your help.
You and I have the same plan. I am 50/50 now. But as the fixed income is spent, I will of course go up as a percentage in stocks.

RadAudit
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Re: retirement strategy

Post by RadAudit » Fri Dec 01, 2017 9:20 am

I'm 6 or 7 years in to retirement with a 50 / 50 AA.

If you are asking for withdrawal strategies from a retirement portfolio, there are hundreds. This year I read McClung's Living Off Your Money. In it, he tested a number of strategies. One of them - Prime Harvesting -, or Alt-Prime Harvesting, essentially suggested withdrawing from the bond side of the portfolio and then rebalancing in to bonds by selling stocks - if the value of the stock side of the portfolio was greater than the value of the stock side at retirement times the inflation rate plus 20% (for a buffer). Essentially never sell stocks at a loss (adjusted for inflation + 20%) to rebalance.

Based on just ball parking your numbers, you've got what - about 25 years in withdrawals in bonds? That should take care of sequence of return risks for the foreseeable future.

At least that's what I keep telling myself when I look at my portfolio.

Best of luck.
FI is the best revenge. LBYM. Invest the rest. Stay the course.

dbr
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Re: retirement strategy

Post by dbr » Fri Dec 01, 2017 9:23 am

RadAudit wrote:
Fri Dec 01, 2017 9:20 am
I'm 6 or 7 years in to retirement with a 50 / 50 AA.

If you are asking for withdrawal strategies from a retirement portfolio, there are hundreds. This year I read McClung's Living Off Your Money. In it, he tested a number of strategies. One of them - Prime Harvesting -, or Alt-Prime Harvesting, essentially suggested withdrawing from the bond side of the portfolio and then rebalancing in to bonds by selling stocks - if the value of the stock side of the portfolio was greater than the value of the stock side at retirement times the inflation rate plus 20% (for a buffer). Essentially never sell stocks at a loss (adjusted for inflation + 20%) to rebalance.

Based on just ball parking your numbers, you've got what - about 25 years in withdrawals in bonds? That should take care of sequence of return risks for the foreseeable future.

At least that's what I keep telling myself when I look at my portfolio.

Best of luck.
A person with that much wealth relative to what is needed for spending does not need a withdrawal strategy. The real question is how much wealth does the investor want and what does he intend to do with it. The default is that his heirs are going to get a lot of money.

RadAudit
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Re: retirement strategy

Post by RadAudit » Fri Dec 01, 2017 9:55 am

dbr wrote:
Fri Dec 01, 2017 9:23 am
A person with that much wealth relative to what is needed for spending does not need a withdrawal strategy. The real question is how much wealth does the investor want and what does he intend to do with it. The default is that his heirs are going to get a lot of money.
You're probably right; but, the OP seemed concerned about taking money out of the portfolio.

How much to leave to the heirs? Oh, goodness! A whole another set of threads. Hint: Most likely, it'll all be gone within three generations so there's no sense in spending too much time worrying about it.
FI is the best revenge. LBYM. Invest the rest. Stay the course.

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ruralavalon
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Re: retirement strategy

Post by ruralavalon » Fri Dec 01, 2017 10:10 am

chAabw wrote:
Thu Nov 30, 2017 7:28 pm
Just retiring. Have about 2.2M invested. So the asset mix suggested to me was 50/50 If I calculate I will need $200,000 over the next 5 years for living expenses would it be smarter to raise my risk and asset mix to 65/35 and just take $200K and put into a cash vehicle to use over the next 5 years. This way the bulk of my assets will grow hopefully a little more than a 50/50 mix and if the market corrects itself I won't have to withdraw funds that have gone down in value. Thanks much for your help.
Your other posts indicate age 59, with a desired asset allocation of 65/35.

In my opinion either 65/35 or 50/50 is within the range of what is reasonable at age 59 and retired.

I would not sideline $200,00 into cash to cover 5 years of spending. Cash is almost guaranteed to give you a negative real return net of inflation. It's better to have the money invested in something with the prospect of a positive real return.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

B. Wellington
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Re: retirement strategy

Post by B. Wellington » Fri Dec 01, 2017 10:19 am

RadAudit wrote:
Fri Dec 01, 2017 9:55 am
dbr wrote:
Fri Dec 01, 2017 9:23 am
A person with that much wealth relative to what is needed for spending does not need a withdrawal strategy. The real question is how much wealth does the investor want and what does he intend to do with it. The default is that his heirs are going to get a lot of money.
You're probably right; but, the OP seemed concerned about taking money out of the portfolio.

How much to leave to the heirs? Oh, goodness! A whole another set of threads. Hint: Most likely, it'll all be gone within three generations so there's no sense in spending too much time worrying about it.
+1 Depending on the heirs, they may think that they just hit the lottery! It all could be gone in less than a year. (I have seen it happen.)

B. Wellington
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Re: retirement strategy

Post by B. Wellington » Fri Dec 01, 2017 10:24 am

ruralavalon wrote:
Fri Dec 01, 2017 10:10 am
chAabw wrote:
Thu Nov 30, 2017 7:28 pm
Just retiring. Have about 2.2M invested. So the asset mix suggested to me was 50/50 If I calculate I will need $200,000 over the next 5 years for living expenses would it be smarter to raise my risk and asset mix to 65/35 and just take $200K and put into a cash vehicle to use over the next 5 years. This way the bulk of my assets will grow hopefully a little more than a 50/50 mix and if the market corrects itself I won't have to withdraw funds that have gone down in value. Thanks much for your help.
Your other posts indicate age 59, with a desired asset allocation of 65/35.

In my opinion either 65/35 or 50/50 is within the range of what is reasonable at age 59 and retired.

I would not sideline $200,00 into cash to cover 5 years of spending. Cash is almost guaranteed to give you a negative real return net of inflation. It's better to have the money invested in something with the prospect of a positive real return.
Agree. A 50/50 AA range seems reasonable. Full disclosure: Our "retirement" target is 60/40...

dbr
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Re: retirement strategy

Post by dbr » Fri Dec 01, 2017 10:25 am

B. Wellington wrote:
Fri Dec 01, 2017 10:19 am
RadAudit wrote:
Fri Dec 01, 2017 9:55 am
dbr wrote:
Fri Dec 01, 2017 9:23 am
A person with that much wealth relative to what is needed for spending does not need a withdrawal strategy. The real question is how much wealth does the investor want and what does he intend to do with it. The default is that his heirs are going to get a lot of money.
You're probably right; but, the OP seemed concerned about taking money out of the portfolio.

How much to leave to the heirs? Oh, goodness! A whole another set of threads. Hint: Most likely, it'll all be gone within three generations so there's no sense in spending too much time worrying about it.
+1 Depending on the heirs, they may think that they just hit the lottery! It all could be gone in less than a year. (I have seen it happen.)
If the OP feels the same way he should be seriously considering where his money is going to go. Heirs in general can mean worthy organizations and not simply irresponsible descendants.

sport
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Re: retirement strategy

Post by sport » Fri Dec 01, 2017 11:32 am

Many of the replies refer to "x" number of years of expenses. It seems that one should also consider the possibility of large expenses that may occur as we get older, such as medically related expenses and long term care. Even if you have LTC insurance, it may not pay for everything if you can get it to pay anything.

WhiteMaxima
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Re: retirement strategy

Post by WhiteMaxima » Fri Dec 01, 2017 11:44 am

Bond is no safer than stock. We know huge deficit lead to higher interest rate which will depress fix income price. While company with heavy debt will suffer. Company can raise product price. So looking company with good balance sheet.

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ruralavalon
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Re: retirement strategy

Post by ruralavalon » Fri Dec 01, 2017 11:45 am

sport wrote:
Fri Dec 01, 2017 11:32 am
Many of the replies refer to "x" number of years of expenses. It seems that one should also consider the possibility of large expenses that may occur as we get older, such as medically related expenses and long term care. Even if you have LTC insurance, it may not pay for everything if you can get it to pay anything.
The posts refer to 5 years because the original poster referred to 5 years. Her other posts indicate she is 59, so that's about how long she has until Medicare eligibility and to nearly full retirement age for Social Security purposes.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

wolf359
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Re: retirement strategy

Post by wolf359 » Fri Dec 01, 2017 12:52 pm

chAabw wrote:
Thu Nov 30, 2017 7:28 pm
Just retiring. Have about 2.2M invested. So the asset mix suggested to me was 50/50 If I calculate I will need $200,000 over the next 5 years for living expenses would it be smarter to raise my risk and asset mix to 65/35 and just take $200K and put into a cash vehicle to use over the next 5 years. This way the bulk of my assets will grow hopefully a little more than a 50/50 mix and if the market corrects itself I won't have to withdraw funds that have gone down in value. Thanks much for your help.
I think that what you are proposing should work just fine.

If you need only $40,000 a year, and you're withdrawing it from a portfolio of 2.2M, you're at a 1.8% withdrawal rate. That rate will generally survive almost any calamity. If run through monte carlo simulators, it works 100% of the time.

You are proposing what is called a liability matching strategy, in which your expected expenses in the next 5 years are covered by cash. If you have a planned expense in 5 years or less, it is in fact preferred that you keep it in cash (or cash equivalents), rather than stocks or bonds. This is a great idea. Keeping that much cash around will reduce your returns a little, but that isn't a problem. I'd suggest that you use TIPS for the cash, so that it at least has a chance of keeping up with inflation, but the 5-year time period won't make a huge difference in that.

Segregating your money into buckets isn't the bad thing people say it is. Behaviorally, it is easier to think of buckets of money and stay with the plan. In 5 years you will also have social security, and your withdrawals as a percentage of your portfolio will be even lower.

If a crash starts in the first year, you will have $200,000 in cash and 5 years of expenses covered, so you can wait out the crash. If a crash doesn't happen until the 5th year, then your balance will have grown by having an additional 4-5 years of growth, and you will have more than enough buffer to handle what is currently a 1.8% withdrawal rate (and by then may be even lower.)

I'd suggest writing down your retirement withdrawal plan in an investor policy statement, so that if/when things do go south, you have a written reminder of your plan and can execute on it with a clear head. Psychologically, market collapses are magnified when you're 100% dependent on it to support yourself.

heyyou
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Re: retirement strategy

Post by heyyou » Fri Dec 01, 2017 11:34 pm

During and after a stock market crash, you can choose to spend only from your bond fund holdings, while waiting for the recovery of the stock funds. Calling those bond holdings a separate bucket, is okay.
A short term bond fund would partially follow inflation if it occurred.

In Michael H. McClung's book Living Off Your Money, he records the value of his equity portfolio on retirement day to monitor his long term gains and losses there, while spending only from his bond holdings, starting retirement with near half of the portfolio in bonds. That allows extra time for the equity funds to grow in the first and riskiest decade of retirement, when any spending from equities reduces their long term growth. He only replenishes some or all of the bond portion when the equities have grown to 120% of their retirement day value, spending from the equity portion only if the bond funds have been exhausted later in retirement.

chAabw
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Re: retirement strategy

Post by chAabw » Wed Dec 06, 2017 4:17 pm

Just a quick note to thank everyone for taking the time to reply and for all your good advice. Truly appreciated!

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midareff
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Re: retirement strategy

Post by midareff » Wed Dec 06, 2017 4:26 pm

Watty wrote:
Thu Nov 30, 2017 11:14 pm
chAabw wrote:
Thu Nov 30, 2017 7:28 pm
...if the market corrects itself I won't have to withdraw funds that have gone down in value.
If you just set your investments to not automatically reinvest the dividends then a 2% dividend, which is reasonable, would give you $44,000 a year so you should not have to actually sell any of your investments.
I am very much in this camp. Most probably anywhere between 40/60 and 60/40 will provide this dividend result, or your $40K annually + a few pennies.

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