May have to spend ENTIRE taxable account. Sell all stocks?

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bck63
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May have to spend ENTIRE taxable account. Sell all stocks?

Post by bck63 »

Due to the current economic crisis and health issues, I may have to spend my entire taxable account over the next five years in order to reach social security eligibility. My current allocation in taxable is 30/70. I am debating whether I should sell all my stocks and move the funds to cash and/or bonds. The need to spend the funds is a strong possibility, but may not materialize exactly this way.

Any thoughts would be appreciated.
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Tamarind
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Re: May have to spend ENTIRE taxable account. Seeking thoughts.

Post by Tamarind »

Could you provide more information about your other holdings? Tax deferred accounts, amount, overall AA, existing emergency funds? Is your total nest egg enough to retire? Will your social security cover your expected expenses?

The reason I ask is because the advice for a short-term cash crisis, where you are otherwise ok, is different than the advice if you are at risk of being permanently underfunded.

In general, I would suggest that you not make any hasty moves. You already have 70% bonds in taxable. That means your expected max drawdown is quite limited, and means you have time to think. If you were certain you'd have to spend the full amount within 5 years I'd say you should take it out of the market entirely - even bonds have some risk on that time scale. But it doesn't sound like you are certain and there are a lot of missing pieces.

ETA: More specifically to you: I looked at some of your posting history. On Tuesday you were tempted to buy S&P500... Today you are wanting to scrap stocks in taxable entirely. You have/had a high enough income that you use tax exempt bond funds. But you were quite nervous during the 2018 Q4 correction, and again now. So let me further advise that you sit on any plan for at least two weeks before making any changes to allocation.
Last edited by Tamarind on Sat Apr 25, 2020 6:51 am, edited 1 time in total.
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samsoes
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Re: May have to spend ENTIRE taxable account. Sell all stocks?

Post by samsoes »

bck63 wrote: Sat Apr 25, 2020 6:32 am Due to the current economic crisis and health issues, I may have to spend my entire taxable account over the next five years in order to reach social security eligibility. My current allocation in taxable is 30/70. I am debating whether I should sell all my stocks and move the funds to cash and/or bonds. The need to spend the funds is a strong possibility, but may not materialize exactly this way.

Any thoughts would be appreciated.
In this uncertain environment, and especially when funds will be needed and the risk of further loss is unacceptable, yes, sell the stocks and move the proceeds to cash and/or a short-term Treasury bond fund. (Since most of the funds aren't in equities already, it won't make much of a difference.) There will be a tax hit, but you will have what you need.

But please, don't act on emotion. Think, analyze, and carefully consider the advice of all on this thread who may respond.
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Re: May have to spend ENTIRE taxable account. Sell all stocks?

Post by sd323232 »

bck63 wrote: Sat Apr 25, 2020 6:32 am Due to the current economic crisis and health issues, I may have to spend my entire taxable account over the next five years in order to reach social security eligibility. My current allocation in taxable is 30/70. I am debating whether I should sell all my stocks and move the funds to cash and/or bonds. The need to spend the funds is a strong possibility, but may not materialize exactly this way.

Any thoughts would be appreciated.
How much do you have in taxable account? You sound like asset protection is more important that asset growth. Therefore, you need to get out of stock market.
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Re: May have to spend ENTIRE taxable account. Sell all stocks?

Post by livesoft »

If you spend ALL you taxable account, then will you actually have enough money to reach your goals. One can assume that cash will yield 0% for the next 5 years. If you don't have enough in your taxable account to do that, then what's the point because you will have to use other assets anyways.

I cannot predict the future, but I would just maintain my overall asset allocation provided that I could use other assets or means to fund my expenses if my taxable assets were spent down to zero.
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Re: May have to spend ENTIRE taxable account. Sell all stocks?

Post by stan1 »

bck63 wrote: Sat Apr 25, 2020 6:32 am Due to the current economic crisis and health issues, I may have to spend my entire taxable account over the next five years in order to reach social security eligibility. My current allocation in taxable is 30/70. I am debating whether I should sell all my stocks and move the funds to cash and/or bonds. The need to spend the funds is a strong possibility, but may not materialize exactly this way.

Any thoughts would be appreciated.
I'd hesitate to give you specific advice without knowing the rest of your situation. Retirement accounts? Paid off home or mortgage? Spouse? What percentage of your total portfolio is the taxable account? Is there also a pension or other income?

It sounds like a big step, especially since you were already 30/70. You could move more out of bonds into multiple 12-24 month CDs. My mom has 5 year CDs in value of $25K and $50K so she can break one or two and leave the rest at the higher rate (3.5% since we bought them in Jan 2019).
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Re: May have to spend ENTIRE taxable account. Sell all stocks?

Post by Cyclesafe »

At 30/70 you're already conservative to a fault - even if you're thinking you might be squeezed for cash flow within the next 5 years. You've been doing everything right (for you) to this point and you are in what many might say is an enviable position with a relatively low exposure to the market.

Please stay the course and sell equity at depressed levels ONLY when you have exhausted your fixed. Even the most pessimistic among us believe that in three years all will be well. If not, we will have worse problems and it won't have mattered at all what you did now.
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birdog
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Re: May have to spend ENTIRE taxable account. Sell all stocks?

Post by birdog »

30-70 is already very conservative. I'd have a hard time selling stocks (which are currently yielding more than bonds) to put everything in bonds at a time when bonds have such lousy expected future returns (based on current interest rates).
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Re: May have to spend ENTIRE taxable account. Sell all stocks?

Post by aristotelian »

At 30/70 you are already pretty conservative. I would suggest maintaining a level allocation, spending from stocks if they go up and from bonds if they stay down or go down further. How many years expenses do you have in bonds currently?
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Re: May have to spend ENTIRE taxable account. Sell all stocks?

Post by dziuniek »

Or you could hedge with puts on your respective holdings. Might be cheaper than selling all your taxable holdings and incurring a hefty tax bill. Check your possible capital gains.
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nisiprius
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Re: May have to spend ENTIRE taxable account. Sell all stocks?

Post by nisiprius »

My main thought is that you should consider seizing what I believe to be a market timing opportunity in bank CDs.The brick-and-mortar hometown bank I've used for decades abruptly cut its best rates for CDs to 0.50-0.65%. However, if depositaccounts.com is to be trusted, at the moment it is not too hard to find 1-5 year CDs in roughly 2% territory; and Capital One 360, where I have some bank accounts, is currently offering 1.50%.

Given that as I write this,

1) Vanguard's website is showing an SEC yield of 1.62% on Total Bond, and

2) you are talking about money you will need over 1-5 years and Vanguard has long said that Total Bond and other similar bond funds "may be appropriate for investors with medium-term investment horizons (4 to 10 years),"

it seems to me that it is appealing to lock in a bank sure-thing rate rather than fretting about possible fluctuations in Total Bond.

A rule which I personally have tried to follow, and really have followed, is "no big sudden changes in asset allocation, ever." "Selling all stocks" would break that rule. It's just my own rule, and I plan to keep following it, but I think there is a perfectly real possibility that stocks could go down further... or up. If you have "enough," then you might logically want to cut back on stocks even farther, but, gee, I dunno. Sell all stocks? I dunno. And keep everything that isn't stocks in bonds? I dunno. Maybe find some appealing bank CDs, ladder them, and sell a portion of your portfolio, maintaining the 30/70 ratio?
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nisiprius
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Re: May have to spend ENTIRE taxable account. Sell all stocks?

Post by nisiprius »

One other thought is that Benjamin Graham wrote in 1973:
We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds. There is an implication here that the standard division should be an equal one, or 50–50, between the two major investment mediums.
I don't want to get into questions of whether Graham's advice is sacrosanct or whether his advice in 1973 applies in 2020. But it's some kind of touchstone. The fact that he uses such round numbers tells you that he doesn't believe in false precision, and that, probably, neither should we.

At 30/70 you are near, but not at, Graham's lower limit. You could cut back to 25/75 and still be within the limits of Graham's advice.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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birdog
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Re: May have to spend ENTIRE taxable account. Sell all stocks?

Post by birdog »

nisiprius wrote: Sat Apr 25, 2020 9:50 am One other thought is that Benjamin Graham wrote in 1973:
We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds. There is an implication here that the standard division should be an equal one, or 50–50, between the two major investment mediums.
I don't want to get into questions of whether Graham's advice is sacrosanct or whether his advice in 1973 applies in 2020. But it's some kind of touchstone. The fact that he uses such round numbers tells you that he doesn't believe in false precision, and that, probably, neither should we.

At 30/70 you are near, but not at, Graham's lower limit. You could cut back to 25/75 and still be within the limits of Graham's advice.
I'm glad you posted this. I thought of Graham's advice on AA in regards to the OP's question as well but didn't get around to posting it.
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Re: May have to spend ENTIRE taxable account. Sell all stocks?

Post by LilyFleur »

If you have tax-deferred non-equity funds available to you, it may be advantageous to spend from there. If your income drops, and you have deductible medical expenses, you may be able to save money on taxes.
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Re: May have to spend ENTIRE taxable account. Sell all stocks?

Post by White Coat Investor »

bck63 wrote: Sat Apr 25, 2020 6:32 am Due to the current economic crisis and health issues, I may have to spend my entire taxable account over the next five years in order to reach social security eligibility. My current allocation in taxable is 30/70. I am debating whether I should sell all my stocks and move the funds to cash and/or bonds. The need to spend the funds is a strong possibility, but may not materialize exactly this way.

Any thoughts would be appreciated.
30/70? I wouldn't. If you said 90/10 I'd say sell some of them.
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Re: May have to spend ENTIRE taxable account. Sell all stocks?

Post by bligh »

I was in your situation earlier on. When the market was cratering, a few weeks ago, I watched my retirement portfolio fall in value,(I have a high percentage in stocks) without really being bothered by it. If the market didn't tank too much (or recovered quickly), that was fine, my portfolio's value would be preserved.. if it did tank, that was fine too for I looked forward to adding to my positions at discounted prices.

However, I have a separate (and, for me, fairly large), fund for a large planned expense in the next few of years, that was invested 50/50 and my reaction to watching it go down was very different. You see, if the market did stay down for several years (which is quite possible), I feared I could actually find myself "locked out" of the stock portion of the fund. How would I feel about selling those stock funds at massive losses, locking those losses in forever?

I saw the mistake I was making. I was taking on risk that I should not have. The general advice on this forum is that, if you need the money in the next 5 years, it doesn't belong in the stock market. I didn't heed this advice because to me, having such a large sum of money sitting there not earning returns just felt like a bad idea. As I watched the market crater, I realized I was wrong and that I was at risk of making behavioral mistakes with this pool of money because I knew there was a chance I wanted the option to have the money available to spend in a short time frame. If the market kept tanking and remained depressed, I would essentially lose the option to spend the stock portion of those funds. I would refuse to sell at such huge losses. ie. I realized there was a risk that I could either lose my option to spend that money for many more years, or lock in huge losses, both were not acceptable to me. Lesson learned.

If you think you might run that risk as well, imagine the crash resumes, as it very likely could. Imagine the value of your 30% stocks halving from this point. If that would not cause you much distress, then keep the stock portion as is. If you do think it would bother you even a little bit, I would suggest slowly selling it off a few percent at a time over the coming days and weeks. See how you feel about the stock portion that remains. Would you be okay getting locked out of those funds for years to avoid selling them at a loss? If so, you have reached a good point. Otherwise, keep going until you are at 100% short term treasuries or in some other safe form (MM/Savings accounts/CDs.)
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Re: May have to spend ENTIRE taxable account. Sell all stocks?

Post by mega317 »

Do you mean you anticipate spending all the money for living expenses? I don't think it's strictly necessary but I would do it if it makes you feel better. Sell the same amount to bonds to buy stocks in a tax-advantaged account.
And I wholeheartedly agree with the CD advice.
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bck63
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Re: May have to spend ENTIRE taxable account. Sell all stocks?

Post by bck63 »

nisiprius wrote: Sat Apr 25, 2020 9:40 am My main thought is that you should consider seizing what I believe to be a market timing opportunity in bank CDs.The brick-and-mortar hometown bank I've used for decades abruptly cut its best rates for CDs to 0.50-0.65%. However, if depositaccounts.com is to be trusted, at the moment it is not too hard to find 1-5 year CDs in roughly 2% territory; and Capital One 360, where I have some bank accounts, is currently offering 1.50%.

Given that as I write this,

1) Vanguard's website is showing an SEC yield of 1.62% on Total Bond, and

2) you are talking about money you will need over 1-5 years and Vanguard has long said that Total Bond and other similar bond funds "may be appropriate for investors with medium-term investment horizons (4 to 10 years),"

it seems to me that it is appealing to lock in a bank sure-thing rate rather than fretting about possible fluctuations in Total Bond.

A rule which I personally have tried to follow, and really have followed, is "no big sudden changes in asset allocation, ever." "Selling all stocks" would break that rule. It's just my own rule, and I plan to keep following it, but I think there is a perfectly real possibility that stocks could go down further... or up. If you have "enough," then you might logically want to cut back on stocks even farther, but, gee, I dunno. Sell all stocks? I dunno. And keep everything that isn't stocks in bonds? I dunno. Maybe find some appealing bank CDs, ladder them, and sell a portion of your portfolio, maintaining the 30/70 ratio?
This all makes a lot of sense. Thanks very much.
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bck63
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Re: May have to spend ENTIRE taxable account. Sell all stocks?

Post by bck63 »

Thank you to everyone who took the time to reply. It is very much appreciated.
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Re: May have to spend ENTIRE taxable account. Sell all stocks?

Post by grabiner »

bck63 wrote: Sat Apr 25, 2020 6:32 am Due to the current economic crisis and health issues, I may have to spend my entire taxable account over the next five years in order to reach social security eligibility. My current allocation in taxable is 30/70. I am debating whether I should sell all my stocks and move the funds to cash and/or bonds. The need to spend the funds is a strong possibility, but may not materialize exactly this way.
If you are in a low tax bracket, there is no federal tax cost for selling your taxable stock for a long-term capital gain. So you might sell the taxable stock, and move an equal amount in your 401(k) or IRA from bonds to stock if you don't want to decrease your stock allocation. If you need the money, you can spend down your taxable account while keeping tax-deferred growth. If you don't need the money, you can keep investing.

I would assume "Social Security eligibility" means age 62. If your health issue gives you a reduced life expectancy (heart disease, emphysema) and you do not have a spouse who will receive benefits on your record, claiming early may make sense. If your health issue gives you a normal life expectancy but affects your ability to work (arthritis, back problems), or if you have a healthy spouse who will receive benefits based on your record, waiting as long as you can is a good deal. You can hold money in bonds in CDs to cover the SS you are not getting, because you will need less invested once you get a larger SS benefit.
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bck63
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Re: May have to spend ENTIRE taxable account. Sell all stocks?

Post by bck63 »

grabiner wrote: Sat Apr 25, 2020 9:14 pm
bck63 wrote: Sat Apr 25, 2020 6:32 am Due to the current economic crisis and health issues, I may have to spend my entire taxable account over the next five years in order to reach social security eligibility. My current allocation in taxable is 30/70. I am debating whether I should sell all my stocks and move the funds to cash and/or bonds. The need to spend the funds is a strong possibility, but may not materialize exactly this way.
If you are in a low tax bracket, there is no federal tax cost for selling your taxable stock for a long-term capital gain. So you might sell the taxable stock, and move an equal amount in your 401(k) or IRA from bonds to stock if you don't want to decrease your stock allocation. If you need the money, you can spend down your taxable account while keeping tax-deferred growth. If you don't need the money, you can keep investing.

I would assume "Social Security eligibility" means age 62. If your health issue gives you a reduced life expectancy (heart disease, emphysema) and you do not have a spouse who will receive benefits on your record, claiming early may make sense. If your health issue gives you a normal life expectancy but affects your ability to work (arthritis, back problems), or if you have a healthy spouse who will receive benefits based on your record, waiting as long as you can is a good deal. You can hold money in bonds in CDs to cover the SS you are not getting, because you will need less invested once you get a larger SS benefit.
David -- A belated thank you for this. Very helpful.
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