LifeStrategy Funds in Retirement?

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alamander
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LifeStrategy Funds in Retirement?

Post by alamander » Tue Jan 14, 2020 2:59 pm

Hola All:

I am retired, 68, not yet taking SS. We have LifeStrategy Funds at Vanguard. A third party said that was a bad idea, since I am retired and theoretically in need of withdrawing those funds for retirement living (we haven't actually needed to do that yet). His rationale was that if the stock market goes down, we would need to withdraw from both the bond and stock elements of the LifeStrategy funds, rather than just the bond side, in effect selling the stocks low.

I see his point, although we shouldn't have to draw from these funds for living expenses except in unforeseen circumstances. But unforeseen circumstances do occur!

So, would it be better then to move into separate bond and stock funds? Thanks for your thoughts.

- Alamander

Makefile
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Re: LifeStrategy Funds in Retirement?

Post by Makefile » Tue Jan 14, 2020 3:09 pm

I suppose the portfolio managers for the fund at Vanguard, after a stock decline, could use a combination of selling bonds to buy stock, and selling only bonds to meet redemptions as a way to get the fund back to its target percentages of stocks and bonds.

So, redeeming wouldn't necessarily mean selling stocks low. I'd say the difference between LifeStrategy and multiple funds is whether you rebalance manually or automatically.

The bigger issue with LifeStrategy funds is that they only exist in Investor shares, so the expenses are higher, and because they make capital gain distributions which you would want to avoid in a taxable account.

rkhusky
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Re: LifeStrategy Funds in Retirement?

Post by rkhusky » Tue Jan 14, 2020 3:13 pm

You only need to worry about taking separately from stocks or bonds if you don't plan to maintain your asset allocation, i.e. you don't plan to rebalance if stocks have dropped or risen. Your 3rd party forgot that the LS or TR funds would have sold bonds and bought stocks if stocks had a drop.

For example, you have a 50/50 AA with $10,000 total and need to withdraw $1,000 next week. But the stock market drops 50% before you can do so. What is the difference between owning separate funds and a LS fund? For separate funds, after the drop you have $2500 in stocks and $5000 in bonds, you withdraw $1000 from bonds, leaving $2500 in stocks and $4000 in bonds. You then rebalance by selling $750 in bonds and buying stocks, such that you end up with $3250 in stocks and $3250 in bonds, along with your $1000 in cash.

A 50/50 TR or LS fund would also start with $5000 in stocks and $5000 in bonds, but after the stock drop and rebalancing would end up with $3750 in stocks and $3750 in bonds (losing $2500 due to the stocks, with the balance being $7500). When you withdraw $1000, it would be taken equally from the stocks and bonds, $500 from each, leaving $3250 in stocks and $3250 in bonds, the same as with the individual stocks, plus the $1000 in cash. The end result is the same whether you own individual funds and rebalance or a TR/LS fund.

If you plan to maintain your AA, then LifeStrategy or Target Retirement funds are perfectly fine for retirement, especially in a tax-advantaged account like an IRA or 401k.

sycamore
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Re: LifeStrategy Funds in Retirement?

Post by sycamore » Tue Jan 14, 2020 3:37 pm

I'm not withdrawing from my portfolio yet but I've been reading up on various withdrawal approaches just to learn more. From what I've read, there are indeed some people who avoid selling their stock funds when stocks are down - mostly it appears to avoid feeling the sting of a loss or in the hopes of letting the stocks recover. Easier said than done is my guess.

I wouldn't base my choice of withdrawal strategy on just that one factor. As rkhusky mentioned, there's the idea of maintaining a certain Asset Allocation so you maintain a certain exposure to stock risk (Life Strategy is good for that). Or maybe you value simplicity of just one fund in the portfolio, or maybe you're thinking of a future where your spouse survives your passing but your spouse is not interested in figuring out which fund to sell.

There are a good number of bogleheads.org posts on the subject, here's an oldie I was looking at: viewtopic.php?t=180532

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Wiggums
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Re: LifeStrategy Funds in Retirement?

Post by Wiggums » Tue Jan 14, 2020 3:59 pm

alamander wrote:
Tue Jan 14, 2020 2:59 pm
Hola All:

I am retired, 68, not yet taking SS. We have LifeStrategy Funds at Vanguard. A third party said that was a bad idea, since I am retired and theoretically in need of withdrawing those funds for retirement living (we haven't actually needed to do that yet). His rationale was that if the stock market goes down, we would need to withdraw from both the bond and stock elements of the LifeStrategy funds, rather than just the bond side, in effect selling the stocks low.

I see his point, although we shouldn't have to draw from these funds for living expenses except in unforeseen circumstances. But unforeseen circumstances do occur!

So, would it be better then to move into separate bond and stock funds? Thanks for your thoughts.

- Alamander
I hold the three fund portfolio. Having said that, I like the all in one funds too. You don’t need to do anything. A very nice feature, I’d say. If the person handling the Finances is out of the picture, there’s nothing for the surviving spouse to do.

The biggest negative of the life strategy fund, I think, is the fact that you may or may not like the amount of international funds. (As an example.). In general, I don’t think it’s a problem that you’re selling stocks and bonds together. Yes, if you had separate funds, the are some benefits AND trade offs. There is no perfect portfolio and the life strategy portfolio is significantly better than paying a 1%+ AUM fee.

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Brianmcg321
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Re: LifeStrategy Funds in Retirement?

Post by Brianmcg321 » Tue Jan 14, 2020 4:12 pm

The advantage to having one fund is when you need money, just transfer it to your bank account.

Vanguard will figure the best way to get them to you. That's worth the extra few points in fees to me. For all you know the money you got from the fund was just new influx of cash from new investments. A "sale" may not even have taken place.

I'm currently a three funder. But I plan to consolidate everything to either the Balanced Index or the Life Strategy Moderate Growth when I hit 60.
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alamander
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Re: LifeStrategy Funds in Retirement?

Post by alamander » Tue Jan 14, 2020 4:44 pm

rkhusky wrote:
Tue Jan 14, 2020 3:13 pm
You only need to worry about taking separately from stocks or bonds if you don't plan to maintain your asset allocation, i.e. you don't plan to rebalance if stocks have dropped or risen. Your 3rd party forgot that the LS or TR funds would have sold bonds and bought stocks if stocks had a drop.

For example, you have a 50/50 AA with $10,000 total and need to withdraw $1,000 next week. But the stock market drops 50% before you can do so. What is the difference between owning separate funds and a LS fund? For separate funds, after the drop you have $2500 in stocks and $5000 in bonds, you withdraw $1000 from bonds, leaving $2500 in stocks and $4000 in bonds. You then rebalance by selling $750 in bonds and buying stocks, such that you end up with $3250 in stocks and $3250 in bonds, along with your $1000 in cash.

A 50/50 TR or LS fund would also start with $5000 in stocks and $5000 in bonds, but after the stock drop and rebalancing would end up with $3750 in stocks and $3750 in bonds (losing $2500 due to the stocks, with the balance being $7500). When you withdraw $1000, it would be taken equally from the stocks and bonds, $500 from each, leaving $3250 in stocks and $3250 in bonds, the same as with the individual stocks, plus the $1000 in cash. The end result is the same whether you own individual funds and rebalance or a TR/LS fund.

If you plan to maintain your AA, then LifeStrategy or Target Retirement funds are perfectly fine for retirement, especially in a tax-advantaged account like an IRA or 401k.
Thanks for this clear example and to the other posters explaining the underlying principle. Very helpful indeed!

- Alamander

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Artsdoctor
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Re: LifeStrategy Funds in Retirement?

Post by Artsdoctor » Tue Jan 14, 2020 5:38 pm

It's pretty hard to beat the simplicity of LifeStrategy funds. You could do far, far worse than just sticking with the LS suited to your needs through thick and thin. To say that it's a "bad idea" is overly simplistic.

Like most things, you'll probably pay a bit for the simplicity--which isn't necessarily bad. LS funds have higher expense ratios but this is a small point. They're not nearly as tax-efficient as the individual components but if you're holding them in your tax-advantaged accounts it shouldn't make any difference.

The rebalancing algorithm for the LS funds isn't known (the details, that is). As a first step, they rebalance with new money coming in and old money going out. But if the market becomes exceptionally volatile, they have not really divulged how the funds are rebalanced (they ARE rebalanced, but according to which bands, which timing, etc., isn't entirely clear). You'd definitely have more control if you start selling the individual components on your own. How much that control really matters in the end remains unknown.

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Re: LifeStrategy Funds in Retirement?

Post by RadAudit » Tue Jan 14, 2020 6:00 pm

alamander wrote:
Tue Jan 14, 2020 2:59 pm
A third party said that was a bad idea, ... His raonale was that if the stock market goes down, we would need to withdraw from both the bond and stock elements of the LifeStrategy funds, rather than just the bond side, in effect selling the stocks low.
I'm almost 73. I've been retired for about a decade. I have very recently been through the idea of going from a DIYer (multiple accounts, four + funds, rebalancer) investor to a Life Strategy fund investor. If you plan to maintain an AA that fits your plans, the value of your portfolio will decrease in a market decline no matter if you are in individual funds or LifeStrategy funds. (Probably less of a decline with LifeStrategy. Don't know.) Your third party acquaintance isn't asking the right / fair question.

The question that might be interesting to address - and I can't do the math - is does a daily rebalanced portfolio behave better or worse (make more money) than a portfolio that is rebalanced iaw a +/- 5% band rule through a decline and recovery? And do you want to do that anymore? But, if you are a DIYer rebalancer, you sort of have to also ask yourself can you rebalance through a 50% decline and recovery? (sort of like market timing - and we know how that works out.)

Anyway, I was finally convinced to go with an AA I was comfortable with and use LifeStrategy funds to do it. (Partly to help DW with portfolio management / withdrawals, etc. after I'm gone. Any rationalization will do.)
Last edited by RadAudit on Tue Jan 14, 2020 6:16 pm, edited 2 times in total.
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Freefun
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Re: LifeStrategy Funds in Retirement?

Post by Freefun » Tue Jan 14, 2020 6:05 pm

RadAudit wrote:
Tue Jan 14, 2020 6:00 pm
alamander wrote:
Tue Jan 14, 2020 2:59 pm
A third party said that was a bad idea, ... His raonale was that if the stock market goes down, we would need to withdraw from both the bond and stock elements of the LifeStrategy funds, rather than just the bond side, in effect selling the stocks low.
I'm almost 73. I've been retired for about a decade. I have very recently been through the idea of going from a DIYer (multiple accounts, four + funds, rebalancer) investor to a Life Strategy fund investor. If you plan to maintain an AA that fits your plans, the value of your portfolio will decrease in a market decline no matter if you are in individual funds or LifeStrategy funds. (Probably less of a decline with LifeStrategy. Don't know.) Your third party acquaintance isn't asking the right / fair question.

The question that might be interesting to address - and I can't do the math - is does a daily rebalanced portfolio behave better or worse (make more money) than a portfolio that is rebalanced iaw a +/- 5% band rule through a decline and recovery? But, if you are a DIYer rebalancer, you sort of have to also ask yourself can you rebalance through a 50% decline and recovery? (sort of like market timing - and we know how that works out.)

Anyway, I was finally convinced to go with an AA I was comfortable with and use LifeStrategy funds to do it.
That analysis was done. Frequent rebalancing doesn’t seem to help and can potentially increase transaction costs.

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RadAudit
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Re: LifeStrategy Funds in Retirement?

Post by RadAudit » Tue Jan 14, 2020 6:13 pm

Freefun wrote:
Tue Jan 14, 2020 6:05 pm
That analysis was done. Frequent rebalancing doesn’t seem to help and can potentially increase transaction costs.
Should of kept looking. Guess I'll have to wait and see if LifeStrategy and my portfolio, AA, and SWRs are good enough.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

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Re: LifeStrategy Funds in Retirement?

Post by grabiner » Tue Jan 14, 2020 10:26 pm

Using balanced funds in retirement may cause you to sell stocks in a down market, but this is offset by the stocks purchased by the fund to rebalance, so the net effect is the same.

Suppose you have individual funds with $400K in stock and $600K in bonds. The stock market loses 10% of its value, so you have $360K in stock. You need to withdraw $60K, and you withdraw it from the bond fund, so you now have $360K in stock and $540K in bonds, restoring your previous allocation.

Now suppose you have $1M in a balanced fund. The stock market loses 10% of its value, and the fund moves $24K from bonds to stock to rebalance; it now has $384K in stock and $576K in bonds. You withdraw $60K, which is $24K in stock and $36K in bonds. Your final allocation is the same $360K in stock and $540K in bonds, as you sold and bought equal amounts of stock.
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Artsdoctor
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Re: LifeStrategy Funds in Retirement?

Post by Artsdoctor » Thu Jan 16, 2020 1:34 pm

grabiner wrote:
Tue Jan 14, 2020 10:26 pm
Using balanced funds in retirement may cause you to sell stocks in a down market, but this is offset by the stocks purchased by the fund to rebalance, so the net effect is the same.

Suppose you have individual funds with $400K in stock and $600K in bonds. The stock market loses 10% of its value, so you have $360K in stock. You need to withdraw $60K, and you withdraw it from the bond fund, so you now have $360K in stock and $540K in bonds, restoring your previous allocation.

Now suppose you have $1M in a balanced fund. The stock market loses 10% of its value, and the fund moves $24K from bonds to stock to rebalance; it now has $384K in stock and $576K in bonds. You withdraw $60K, which is $24K in stock and $36K in bonds. Your final allocation is the same $360K in stock and $540K in bonds, as you sold and bought equal amounts of stock.
I agree with the concept. In practice, I don’t know if it works that way in a volatile market. We are assuming that the asset allocation remains relatively constant and it might. But Vanguard has not been transparent on when this rebalancing occurs. For the most part, we’re assuming that the AA goals are maintained and I’m also assuming that in the long run, everything evens out. During market turbulence which is unusual (like 2008-2009) I don’t know what the rebalancing algorithm was.

I would guess that if someone maintained a cash cushion, this isn’t a big difference. However, there are some people who evidently have little to no cash and sell parts of their portfolio as needed. Whether or not the sales of assets would be the same during extreme market volatility is unknown.

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