Please review my de-risking/cash-out plan

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KlangFool
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Please review my de-risking/cash-out plan

Post by KlangFool »

Folks,

The background information

Age: Above 55

Status: unemployed. I am looking for a suitable and safe job. And, if that does not pan out, I may retire.

Annual expense: 60K per year including mortgage

Health insurance: 2 years of COBRA. Transition to ACA health insurance for coverage before medicare.

Emergency fund: 120K = 2 years of expense

Portfolio: 60/40 - 1.5 million

Earned Social Security if I stop working this year, $2,400 per month at age of 67. 50% of that for my wife.

Rebalancing rule, keep a minimum of 5 years of expense = 300K in fixed income.

I am missing a cash-out plan if the portfolio is doing well.

My current idea.

If the portfolio went up by 60K above 1.5 million, I would convert 30K of that 60K into cash.

For example,

At 1.56 million, I would withdraw 30K of cash from the portfolio. The portfolio would go down to 1.53 million. The next 60K increase would be at 1.59 million. At 1.59 million, I would withdraw another 30K of cash from the portfolio.

Please review my plan.

KlangFool
000
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Re: Please review my de-risking/cash-out plan

Post by 000 »

Do you think USD will be a good store of value intermediate- or long-term?
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KlangFool
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Re: Please review my de-risking/cash-out plan

Post by KlangFool »

000 wrote: Wed Aug 19, 2020 8:42 pm Do you think USD will be a good store of value intermediate- or long-term?
000,

I know that I know nothing. Hence, I am diversified. I have US stock, International stock, US bond, mortgage, CASH, and physical gold/silver.

KlangFool
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Re: Please review my de-risking/cash-out plan

Post by 000 »

KlangFool wrote: Wed Aug 19, 2020 8:45 pm
000 wrote: Wed Aug 19, 2020 8:42 pm Do you think USD will be a good store of value intermediate- or long-term?
000,

I know that I know nothing. Hence, I am diversified. I have US stock, International stock, US bond, mortgage, CASH, and physical gold/silver.

KlangFool
If you end up retiring, will you pay off the mortgage? Or will you maintain the mortgage + multiple buckets of cash?
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KlangFool
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Re: Please review my de-risking/cash-out plan

Post by KlangFool »

000 wrote: Wed Aug 19, 2020 8:51 pm
KlangFool wrote: Wed Aug 19, 2020 8:45 pm
000 wrote: Wed Aug 19, 2020 8:42 pm Do you think USD will be a good store of value intermediate- or long-term?
000,

I know that I know nothing. Hence, I am diversified. I have US stock, International stock, US bond, mortgage, CASH, and physical gold/silver.

KlangFool
If you end up retiring, will you pay off the mortgage? Or will you maintain the mortgage + multiple buckets of cash?
000,

If my portfolio is big enough, I may do that. It has to be a lot bigger than 1.5 million. At 1.8 million, it may be safe enough for me to do that.

The mortgage is at 250K now.

KlangFool
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Re: Please review my de-risking/cash-out plan

Post by 000 »

KlangFool wrote: Wed Aug 19, 2020 8:55 pm 000,

If my portfolio is big enough, I may do that. It has to be a lot bigger than 1.5 million. At 1.8 million, it may be safe enough for me to do that.

The mortgage is at 250K now.

KlangFool
Even at current size, why hold 720k in fixed income yielding less than the mortgage unless you're planning to move?

For the "cash-out" bucket, will you spend from that without replenishing it? i.e. you've successfully cashed out $30k from the 60/40 main portfolio and have a $10k expense. Where will the $10k come from?
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KlangFool
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Re: Please review my de-risking/cash-out plan

Post by KlangFool »

000 wrote: Wed Aug 19, 2020 9:13 pm
KlangFool wrote: Wed Aug 19, 2020 8:55 pm 000,

If my portfolio is big enough, I may do that. It has to be a lot bigger than 1.5 million. At 1.8 million, it may be safe enough for me to do that.

The mortgage is at 250K now.

KlangFool
Even at current size, why hold 720k in fixed income yielding less than the mortgage unless you're planning to move?

For the "cash-out" bucket, will you spend from that without replenishing it? i.e. you've successfully cashed out $30k from the 60/40 main portfolio and have a $10k expense. Where will the $10k come from?
000,

<<Even at current size, why hold 720k in fixed income yielding less than the mortgage unless you're planning to move?>>

My mortgage is at fixed 3.49%.

https://finance.yahoo.com/quote/VBTLX?p=VBTLX

VBTLX YTD return is 6.35%

https://finance.yahoo.com/quote/VFIUX?p=VFIUX

VFIUX YTD return is 8.05%

<<For the "cash-out" bucket, will you spend from that without replenishing it? i.e. you've successfully cashed out $30k from the 60/40 main portfolio and have a $10k expense. Where will the $10k come from?>>

Where is the 10K expense come from? I am putting the 30K into my 120K EF and increase it to 150K.

KlangFool
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Hector
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Re: Please review my de-risking/cash-out plan

Post by Hector »

Why are you limiting upside when you have 2 years worth expense in cash + 5 years worth in bonds?
How about considering all your liquid assets as one bucket and keep at least 7 years of expense in cash/bond when you are selling bonds to buy stocks when market tanks?
Last edited by Hector on Wed Aug 19, 2020 9:32 pm, edited 2 times in total.
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Re: Please review my de-risking/cash-out plan

Post by 000 »

KlangFool wrote: Wed Aug 19, 2020 9:21 pm <<For the "cash-out" bucket, will you spend from that without replenishing it? i.e. you've successfully cashed out $30k from the 60/40 main portfolio and have a $10k expense. Where will the $10k come from?>>

Where is the 10K expense come from? I am putting the 30K into my 120K EF and increase it to 150K.
Ok, consider the following: markets did well, portfolio got to 1.56M, KF cashed out and now has: 150K EF and 1.53M 60/40.

Suddenly, KF's furnace dies. KF needs to spend 10K to buy a new one.

Where does the 10K come from?
  1. Is the EF reduced to 140K and not replenished?
  2. Does KF pull the 10K from the EF, and then pull an another 10K from the 60/40 to get the EF back to 150K?
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Re: Please review my de-risking/cash-out plan

Post by willthrill81 »

Hector wrote: Wed Aug 19, 2020 9:25 pm Why are you limiting upside when you have 2 years worth expense in cash + 5 years worth in bonds?
Very good question.

Klangfool, I thought that you had already determined that you were going to retire. Have you changed your mind? If so, why?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Please review my de-risking/cash-out plan

Post by 000 »

Hector wrote: Wed Aug 19, 2020 9:25 pm Why are you limiting upside when you have 2 years worth expense in cash + 5 years worth in bonds?
Indeed, this approach may limit upside without limiting downside.
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Re: Please review my de-risking/cash-out plan

Post by nix4me »

What are you going to do if the market is down for 6 years? Does your plan address that? I'd like to have that answer if i was you before making a plan for the good years.
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KlangFool
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Re: Please review my de-risking/cash-out plan

Post by KlangFool »

000 wrote: Wed Aug 19, 2020 9:26 pm
KlangFool wrote: Wed Aug 19, 2020 9:21 pm <<For the "cash-out" bucket, will you spend from that without replenishing it? i.e. you've successfully cashed out $30k from the 60/40 main portfolio and have a $10k expense. Where will the $10k come from?>>

Where is the 10K expense come from? I am putting the 30K into my 120K EF and increase it to 150K.
Ok, consider the following: markets did well, portfolio got to 1.56M, KF cashed out and now has: 150K EF and 1.53M 60/40.

Suddenly, KF's furnace dies. KF needs to spend 10K to buy a new one.

Where does the 10K come from?
  1. Is the EF reduced to 140K and not replenished?
  2. Does KF pull the 10K from the EF, and then pull an another 10K from the 60/40 to get the EF back to 150K?
000,

<<Is the EF reduced to 140K and not replenished?>>

Not replenished immediately.

<<Does KF pull the 10K from the EF, and then pull an another 10K from the 60/40 to get the EF back to 150K?>>

I have up to 2 years of expense in my EF. I do not need to withdraw from my portfolio immediately.

KlangFool
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Re: Please review my de-risking/cash-out plan

Post by KlangFool »

Hector wrote: Wed Aug 19, 2020 9:25 pm Why are you limiting upside when you have 2 years worth expense in cash + 5 years worth in bonds?
How about considering all your liquid assets as one bucket and keep at least 7 years of expense in cash/bond when you are selling bonds to buy stocks when market tanks?
1) CASH is a separate asset class than the bond. I do not want to mix them with the bond.

2) Spending CASH does not generate taxable income or gain.

KlangFool
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Re: Please review my de-risking/cash-out plan

Post by KlangFool »

nix4me wrote: Wed Aug 19, 2020 9:31 pm What are you going to do if the market is down for 6 years? Does your plan address that? I'd like to have that answer if i was you before making a plan for the good years.
nix4me,

I have enough money (CASH + fixed income) to last at least 7 years.

KlangFool
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Re: Please review my de-risking/cash-out plan

Post by Hector »

nix4me wrote: Wed Aug 19, 2020 9:31 pm What are you going to do if the market is down for 6 years? Does your plan address that? I'd like to have that answer if i was you before making a plan for the good years.
If the market tanked and he rebalanced, he would at least have 7 years worth expense in cash/bond. If the market stays down for that long, he would have dividend coming from stocks. After that, he would have option to tap into home equity till he and his spouse start getting social security. If that doesn't work, all of us would be in big trouble.
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Re: Please review my de-risking/cash-out plan

Post by KlangFool »

willthrill81 wrote: Wed Aug 19, 2020 9:27 pm
Hector wrote: Wed Aug 19, 2020 9:25 pm Why are you limiting upside when you have 2 years worth expense in cash + 5 years worth in bonds?
Very good question.

Klangfool, I thought that you had already determined that you were going to retire. Have you changed your mind? If so, why?
willthrill81,

If I can get a good job. I won't mind working for a few more years.

KlangFool
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Re: Please review my de-risking/cash-out plan

Post by KlangFool »

Hector wrote: Wed Aug 19, 2020 9:36 pm
nix4me wrote: Wed Aug 19, 2020 9:31 pm What are you going to do if the market is down for 6 years? Does your plan address that? I'd like to have that answer if i was you before making a plan for the good years.
If the market tanked and he rebalanced, he would at least have 7 years worth expense in cash/bond. If the market stays down for that long, he would have dividend coming from stocks. After that, he would have option to tap into home equity till he and his spouse start getting social security. If that doesn't work, all of us would be in big trouble.

After 7 years, we would be 62 years old or older. In the worst case, we can withdraw social security.

KlangFool
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Re: Please review my de-risking/cash-out plan

Post by Hector »

KlangFool wrote: Wed Aug 19, 2020 9:34 pm
Hector wrote: Wed Aug 19, 2020 9:25 pm Why are you limiting upside when you have 2 years worth expense in cash + 5 years worth in bonds?
How about considering all your liquid assets as one bucket and keep at least 7 years of expense in cash/bond when you are selling bonds to buy stocks when market tanks?
1) CASH is a separate asset class than the bond. I do not want to mix them with the bond.

2) Spending CASH does not generate taxable income or gain.

KlangFool
1) Not mixing cash and bond is the right thing to do then as you are comfortable with it.
2) Do you have the option to keep bonds in retirement accounts and stocks in non-retirement accounts? If you stay unemployed, would you pay tax on long term capital gain and dividends?
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Re: Please review my de-risking/cash-out plan

Post by KlangFool »

Hector wrote: Wed Aug 19, 2020 9:40 pm
KlangFool wrote: Wed Aug 19, 2020 9:34 pm
Hector wrote: Wed Aug 19, 2020 9:25 pm Why are you limiting upside when you have 2 years worth expense in cash + 5 years worth in bonds?
How about considering all your liquid assets as one bucket and keep at least 7 years of expense in cash/bond when you are selling bonds to buy stocks when market tanks?
1) CASH is a separate asset class than the bond. I do not want to mix them with the bond.

2) Spending CASH does not generate taxable income or gain.

KlangFool
1) Not mixing cash and bond is the right thing to do then as you are comfortable with it.
2) You have option to keep bonds in retirement accounts and stocks in non-retirement accounts. If you stay unemployed, would you pay tax on long term capital gain and dividends?
Hector,

ACA subsidy level is dependent on your MAGI. It is worth 10K to 20K per year.

https://www.healthcare.gov/lower-costs/ ... wer-costs/

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Re: Please review my de-risking/cash-out plan

Post by 000 »

It's still not clear to me why you want to do this. I understand wanting to have enough spending cash pre-Medicare, but other than that, shouldn't rebalancing the main portfolio with a fixed income floor provide the necessary risk reduction?

Scenario 1: Markets Do Well
Result: KlangFool has too much cash yielding almost nothing, increasing risk of not having enough later

Scenario 2: Markets Do Poorly
Result: KlangFool has to spend down the EF, meaning the 60/40 becomes a larger percentage of the portfolio (or is sold to generate more cash)

Where is the downside risk protection? Unless you get the specific sequence of a long stretch of good returns followed by a long stretch of bad returns, what is the cash-out accomplishing? And if you get that sequence, why not just rebalance continually to a fixed % of cash and/or bonds with a floor?
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Re: Please review my de-risking/cash-out plan

Post by Hector »

KlangFool wrote: Wed Aug 19, 2020 9:44 pm
Hector wrote: Wed Aug 19, 2020 9:40 pm
KlangFool wrote: Wed Aug 19, 2020 9:34 pm
Hector wrote: Wed Aug 19, 2020 9:25 pm Why are you limiting upside when you have 2 years worth expense in cash + 5 years worth in bonds?
How about considering all your liquid assets as one bucket and keep at least 7 years of expense in cash/bond when you are selling bonds to buy stocks when market tanks?
1) CASH is a separate asset class than the bond. I do not want to mix them with the bond.

2) Spending CASH does not generate taxable income or gain.

KlangFool
1) Not mixing cash and bond is the right thing to do then as you are comfortable with it.
2) You have option to keep bonds in retirement accounts and stocks in non-retirement accounts. If you stay unemployed, would you pay tax on long term capital gain and dividends?
Hector,

ACA subsidy level is dependent on your MAGI. It is worth 10K to 20K per year.

https://www.healthcare.gov/lower-costs/ ... wer-costs/

KlangFool
I see. You are going to sell regularly to keep 120k in cash. That would generate capital gain regardless.
Regarding your main question/topic, I am not a fan of limiting upside, but it makes sense if that makes you sleep better at night.
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KlangFool
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Re: Please review my de-risking/cash-out plan

Post by KlangFool »

000 wrote: Wed Aug 19, 2020 10:02 pm It's still not clear to me why you want to do this. I understand wanting to have enough spending cash pre-Medicare, but other than that, shouldn't rebalancing the main portfolio with a fixed income floor provide the necessary risk reduction?

Scenario 1: Markets Do Well
Result: KlangFool has too much cash yielding almost nothing, increasing risk of not having enough later

Scenario 2: Markets Do Poorly
Result: KlangFool has to spend down the EF, meaning the 60/40 becomes a larger percentage of the portfolio (or is sold to generate more cash)

Where is the downside risk protection? Unless you get the specific sequence of a long stretch of good returns followed by a long stretch of bad returns, what is the cash-out accomplishing? And if you get that sequence, why not just rebalance continually to a fixed % of cash and/or bonds with a floor?
000,

<<Scenario 1: Markets Do Well
Result: KlangFool has too much cash yielding almost nothing, increasing risk of not having enough later>>

How is that possible when our combined social security income is at least $3,600 per month at 67 years old? At 67 years old, our annual expense after social security income drops to 17K per years.

<<Scenario 2: Markets Do Poorly
Result: KlangFool has to spend down the EF, meaning the 60/40 becomes a larger percentage of the portfolio (or is sold to generate more cash)>>

Poorly for how long? If the market does not recover for 7 years, then, money is no longer the problem.

<<Where is the downside risk protection? Unless you get the specific sequence of a long stretch of good returns>>

The stock market only has to go up by 6.7% in order for the gain to be 60K. So, it is not a long stretch of good returns. And, for every 60K bump, I gain 6 months of CASH in term of downside protection. And, the percentage increase with the 60K gets smaller as the portfolio gets bigger.

<<And if you get that sequence, why not just rebalance continually to a fixed % of cash and/or bonds with a floor?>>

Only works if I adjust the Fixed Income floor upward by 30K. It is simpler to add 30K of CASH.

KlangFool
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Re: Please review my de-risking/cash-out plan

Post by 000 »

KlangFool wrote: Wed Aug 19, 2020 10:27 pm How is that possible when our combined social security income is at least $3,600 per month at 67 years old?
Then why do you need these complicated schemes at all?

Why not just enough cash until medicare kicks in and let the 60/40 run?
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KlangFool
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Re: Please review my de-risking/cash-out plan

Post by KlangFool »

Hector wrote: Wed Aug 19, 2020 10:15 pm
KlangFool wrote: Wed Aug 19, 2020 9:44 pm
Hector wrote: Wed Aug 19, 2020 9:40 pm
KlangFool wrote: Wed Aug 19, 2020 9:34 pm
Hector wrote: Wed Aug 19, 2020 9:25 pm Why are you limiting upside when you have 2 years worth expense in cash + 5 years worth in bonds?
How about considering all your liquid assets as one bucket and keep at least 7 years of expense in cash/bond when you are selling bonds to buy stocks when market tanks?
1) CASH is a separate asset class than the bond. I do not want to mix them with the bond.

2) Spending CASH does not generate taxable income or gain.

KlangFool
1) Not mixing cash and bond is the right thing to do then as you are comfortable with it.
2) You have option to keep bonds in retirement accounts and stocks in non-retirement accounts. If you stay unemployed, would you pay tax on long term capital gain and dividends?
Hector,

ACA subsidy level is dependent on your MAGI. It is worth 10K to 20K per year.

https://www.healthcare.gov/lower-costs/ ... wer-costs/

KlangFool
I see. You are going to sell regularly to keep 120k in cash. That would generate capital gain regardless.
Regarding your main question/topic, I am not a fan of limiting upside, but it makes sense if that makes you sleep better at night.
Hector,

I have another 250K in Roth IRA that would generate zero taxable income. I do not need to sell my taxable investment to cover my annual expense.

KlangFool
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KlangFool
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Re: Please review my de-risking/cash-out plan

Post by KlangFool »

000 wrote: Wed Aug 19, 2020 10:30 pm
KlangFool wrote: Wed Aug 19, 2020 10:27 pm How is that possible when our combined social security income is at least $3,600 per month at 67 years old?
Then why do you need these complicated schemes at all?

Why not just enough cash until medicare kicks in and let the 60/40 run?
It is not safe to put too many eggs in any single basket.

KlangFool
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Re: Please review my de-risking/cash-out plan

Post by 000 »

KlangFool wrote: Wed Aug 19, 2020 10:33 pm It is not safe to put too many eggs in any single basket.
I think this strategy will likely perform very similarly to a 50% stocks / 40% bonds / 10% cash portfolio with much more complexity.
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KlangFool
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Re: Please review my de-risking/cash-out plan

Post by KlangFool »

000 wrote: Wed Aug 19, 2020 10:36 pm
KlangFool wrote: Wed Aug 19, 2020 10:33 pm It is not safe to put too many eggs in any single basket.
I think this strategy will likely perform very similarly to a 50% stocks / 40% bonds / 10% cash portfolio with much more complexity.
000,

If you have a 50/40/10 portfolio, you have to rebalance while keeping the 10% in CASH. It is more complex when the actual goal is to keep a fixed amount (120K) in CASH.

KlangFool
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Re: Please review my de-risking/cash-out plan

Post by 000 »

KlangFool wrote: Wed Aug 19, 2020 10:39 pm
000 wrote: Wed Aug 19, 2020 10:36 pm
KlangFool wrote: Wed Aug 19, 2020 10:33 pm It is not safe to put too many eggs in any single basket.
I think this strategy will likely perform very similarly to a 50% stocks / 40% bonds / 10% cash portfolio with much more complexity.
000,

If you have a 50/40/10 portfolio, you have to rebalance while keeping the 10% in CASH. It is more complex when the actual goal is to keep a fixed amount (120K) in CASH.

KlangFool
But that's not your actual goal. You are hoping to do a binary rebalance out of stocks/bonds into cash when a particular set of conditions is met.

You can do 50/40/10 with fixed income floor(s).

I just don't understand the need for the complicated rebalancing rule, because that's what the "cash-out" strategy really is.
aristotelian
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Re: Please review my de-risking/cash-out plan

Post by aristotelian »

KlangFool wrote: Wed Aug 19, 2020 9:21 pm
My mortgage is at fixed 3.49%.

https://finance.yahoo.com/quote/VBTLX?p=VBTLX

VBTLX YTD return is 6.35%

https://finance.yahoo.com/quote/VFIUX?p=VFIUX

VFIUX YTD return is 8.05%
Why are you looking at past (YTD) return? That only means that interest rates have gone down recently, i.e. you got lucky. Your current yield is only 1.14%. Your total return will exceed that number only if rates go further down (negative). If rates go up, your total return will be even lower than 1.14%, possibly negative. Why would you want to loan money (own bonds) while borrowing money at a higher rate at the same time? Whatever purpose you are trying to accomplish with bonds, you are working at cross purposes by taking on debt.

You say you want to reduce risk, but you are using the mortgage to put more money at risk. If your mortgage is $200K, that means your actual net worth is $1.3M, so your true allocation is 70/45 (you have 70% of your net worth at risk in stocks, not 60%).

Seems to me you are all set for retirement if you want it. Your portfolio can cover your expenses without SS, plus at some point presumably you will pay off your mortgage and your expense will go down.

I am not quite following the cash-out plan. What happens to the cash when you withdraw? Are you spending extra or saving for future emergency?
desiderium
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Re: Please review my de-risking/cash-out plan

Post by desiderium »

KF

I am concerned that unemployment is freeing your formidable analytic skills to overthink this. You seem to be talking about taking a little bit off the table every time the portfolio does well. It appears similar to the variable withdrawal, except that you are not necessarily spending what you remove from risky assets. It doesn't move the needle in terms of risk.

Similar to what others say, it seems to me that having a mortgage (risk-free negative bond that yields 3.5%) and several times that in a combination of low-yield cash and bonds carrying duration risk is unnecessary, complicated and loses you money.

I suggest you pay off the mortgage now or spread across a couple of years but while you are on COBRA. Adjust your balance of Cash/bonds/equities to suit your situation. This will reduce your expenses and in theory permit you to generate more low-tax income through roth conversions and still stay below the ACA threshold.
MrDrinkingWater
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Re: Please review my de-risking/cash-out plan

Post by MrDrinkingWater »

KlangFool,

I think I understand what you are trying to do: You would like to build a bigger cash cushion and you don't mind removing investable dollars from an ever-increasing stock portfolio to do that. I think your plan is okay to achieve that goal, if the returns of the entire stock market, as a whole, generally continue its upward positive-sloping trend.

You are shifting where you are taking your risks, but I'm not sure if there is much more additional risk reduction being created. After the first iteration of your de-risking / cash-out plan, you go from having about 7 years of expenses in bonds and cash to having 7.4 years of expenses in bonds and cash. That doesn't seem like much of a change, but if it seems significant to do, go ahead and do it. You can always stop or hold your de-risking plan after the first iteration and evaluate if that is enough and not do a second iteration as the overall market continues to go up, as it will be likely to do.
Kookaburra
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Re: Please review my de-risking/cash-out plan

Post by Kookaburra »

Why not just maintain a 60/40 allocation thru re-balancing and spending from whichever asset class(es) is needed to meet expenses (with a fixed income floor of X years expenses)?
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Re: Please review my de-risking/cash-out plan

Post by geerhardusvos »

KlangFool wrote: Wed Aug 19, 2020 8:41 pm Folks,

The background information

Age: Above 55

Status: unemployed. I am looking for a suitable and safe job. And, if that does not pan out, I may retire.

Annual expense: 60K per year including mortgage

Health insurance: 2 years of COBRA. Transition to ACA health insurance for coverage before medicare.

Emergency fund: 120K = 2 years of expense

Portfolio: 60/40 - 1.5 million

Earned Social Security if I stop working this year, $2,400 per month at age of 67. 50% of that for my wife.

Rebalancing rule, keep a minimum of 5 years of expense = 300K in fixed income.

I am missing a cash-out plan if the portfolio is doing well.

My current idea.

If the portfolio went up by 60K above 1.5 million, I would convert 30K of that 60K into cash.

For example,

At 1.56 million, I would withdraw 30K of cash from the portfolio. The portfolio would go down to 1.53 million. The next 60K increase would be at 1.59 million. At 1.59 million, I would withdraw another 30K of cash from the portfolio.

Please review my plan.

KlangFool
KF - You have too much cash. You don’t need to rebalance. Don’t touch your portfolio so much. Just let it ride. Let those equities grow. In fact, put more in equities if you want to go the distance. Why are you trying to derisk if you are already 60/40?

I thought you said you were buying gold.

I thought you said you were retired. And why do you need a “safe” job if you are unemployed and have enough to retire?
VTSAX and chill
retire2022
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Re: Please review my de-risking/cash-out plan

Post by retire2022 »

Klangfool

I went from 1.50 million to 1.89 million in 2016-2020, my asset allocation is 91/7/2, albeit I have pension and cannot be terminated. I have a safe job, pension, healthcare, I am 60 with 34 years on the job, waiting for retirement incentives before state layoffs.

good luck
Dude2
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Re: Please review my de-risking/cash-out plan

Post by Dude2 »

-- Don't understand the Cobra thing. From my experience, yes, you get the same insurance as your last employer, but the cost was 20x what I paid while employed. (Perhaps as a contractor you had some other kind of setup going?) In any case, ACA health care was a mere 10x. Losing a job was a life-changing event to qualify for ACA. Not understanding why anybody goes with Cobra these days when ACA is cheaper. I do understand if there is some good reason like being sure an important medical need is satisfied. Of course, going onto ACA takes some work to figure out the right plan with the right insurance provider. (Trial-and-error). Sounds like you are going toward ACA eventually anyway, so why mess around with Cobra? I'm sure there's a good reason, but that was one thought when reading your post.

-- You are holding 2 years expenses in cash as emergency fund. Bravo. I like that approach. Then what is wrong with, as time goes forward, spend from that account, and replenish from retirement funds at SWR <= 3%. Of course, do not pull from anything with a 59.5 age restriction until you can do so penalty free. (Goes without saying).

-- If it were me, I'd pay off the mortgage. Not saying to do so quickly or dramatically, but no reason to hold debt like that. Consider it a negative bond. What are you getting out of that?
Then ’tis like the breath of an unfee’d lawyer.
Topic Author
KlangFool
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Re: Please review my de-risking/cash-out plan

Post by KlangFool »

000 wrote: Wed Aug 19, 2020 10:51 pm
KlangFool wrote: Wed Aug 19, 2020 10:39 pm
000 wrote: Wed Aug 19, 2020 10:36 pm
KlangFool wrote: Wed Aug 19, 2020 10:33 pm It is not safe to put too many eggs in any single basket.
I think this strategy will likely perform very similarly to a 50% stocks / 40% bonds / 10% cash portfolio with much more complexity.
000,

If you have a 50/40/10 portfolio, you have to rebalance while keeping the 10% in CASH. It is more complex when the actual goal is to keep a fixed amount (120K) in CASH.

KlangFool
But that's not your actual goal. You are hoping to do a binary rebalance out of stocks/bonds into cash when a particular set of conditions is met.

You can do 50/40/10 with fixed income floor(s).

I just don't understand the need for the complicated rebalancing rule, because that's what the "cash-out" strategy really is.
You have to show me why it is easier and simpler. I need example.

KlangFool
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KlangFool
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Re: Please review my de-risking/cash-out plan

Post by KlangFool »

aristotelian wrote: Wed Aug 19, 2020 10:56 pm
KlangFool wrote: Wed Aug 19, 2020 9:21 pm
My mortgage is at fixed 3.49%.

https://finance.yahoo.com/quote/VBTLX?p=VBTLX

VBTLX YTD return is 6.35%

https://finance.yahoo.com/quote/VFIUX?p=VFIUX

VFIUX YTD return is 8.05%
Why are you looking at past (YTD) return? That only means that interest rates have gone down recently, i.e. you got lucky. Your current yield is only 1.14%. Your total return will exceed that number only if rates go further down (negative). If rates go up, your total return will be even lower than 1.14%, possibly negative. Why would you want to loan money (own bonds) while borrowing money at a higher rate at the same time? Whatever purpose you are trying to accomplish with bonds, you are working at cross purposes by taking on debt.

You say you want to reduce risk, but you are using the mortgage to put more money at risk. If your mortgage is $200K, that means your actual net worth is $1.3M, so your true allocation is 70/45 (you have 70% of your net worth at risk in stocks, not 60%).

Seems to me you are all set for retirement if you want it. Your portfolio can cover your expenses without SS, plus at some point presumably you will pay off your mortgage and your expense will go down.

I am not quite following the cash-out plan. What happens to the cash when you withdraw? Are you spending extra or saving for future emergency?
1) I don't believe that mortgage equal to negative bond.

2) I borrow at 3.49% to invest at my 60/40 portfolio. I believe the return will exceed 3.49%.

3) The 1.5 million does not include home equity.

4) The additional cash increases the emergency fund.

KlangFool
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KlangFool
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Re: Please review my de-risking/cash-out plan

Post by KlangFool »

Dude2 wrote: Thu Aug 20, 2020 5:00 am -- Don't understand the Cobra thing. From my experience, yes, you get the same insurance as your last employer, but the cost was 20x what I paid while employed. (Perhaps as a contractor you had some other kind of setup going?) In any case, ACA health care was a mere 10x. Losing a job was a life-changing event to qualify for ACA. Not understanding why anybody goes with Cobra these days when ACA is cheaper. I do understand if there is some good reason like being sure an important medical need is satisfied. Of course, going onto ACA takes some work to figure out the right plan with the right insurance provider. (Trial-and-error). Sounds like you are going toward ACA eventually anyway, so why mess around with Cobra? I'm sure there's a good reason, but that was one thought when reading your post.

-- You are holding 2 years expenses in cash as emergency fund. Bravo. I like that approach. Then what is wrong with, as time goes forward, spend from that account, and replenish from retirement funds at SWR <= 3%. Of course, do not pull from anything with a 59.5 age restriction until you can do so penalty free. (Goes without saying).

-- If it were me, I'd pay off the mortgage. Not saying to do so quickly or dramatically, but no reason to hold debt like that. Consider it a negative bond. What are you getting out of that?
1) The Cobra is subsidized by the ex-employer.

2) The cash out plan provide for quicker withdrawal if the market is crazy. For example, now.

3) Mortgage is not negative bond.

KlangFool
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KlangFool
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Re: Please review my de-risking/cash-out plan

Post by KlangFool »

Kookaburra wrote: Wed Aug 19, 2020 11:48 pm Why not just maintain a 60/40 allocation thru re-balancing and spending from whichever asset class(es) is needed to meet expenses (with a fixed income floor of X years expenses)?
That doesn't reduce my risk exposure to the market.

KlangFool
wackerdr
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Re: Please review my de-risking/cash-out plan

Post by wackerdr »

I would keep it simple. If 2 years EF doesn’t feel comfortable, add an additional year. Get the best insurance - health, umbrella, home , auto - to ensure your out of pocket expenses are predictable. May be a term life insurance for the remainder amount of mortgage , if you don’t have it already.

Then stay with AA you are comfortable with.
Dude2
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Re: Please review my de-risking/cash-out plan

Post by Dude2 »

KlangFool wrote: Wed Aug 19, 2020 8:41 pm My current idea.

If the portfolio went up by 60K above 1.5 million, I would convert 30K of that 60K into cash.

For example,

At 1.56 million, I would withdraw 30K of cash from the portfolio. The portfolio would go down to 1.53 million. The next 60K increase would be at 1.59 million. At 1.59 million, I would withdraw another 30K of cash from the portfolio.
Assume a x/y stock bond allocation that you are comfortable with. At any time, if portfolio exceeds risk level, then algorithm says to rebalance to proper risk level, i.e. take winnings off the table and restore to steady state. I think that's how most BHs are going to withdraw from their portfolios in retirement. They keep the same allocation. They rebalance and withdraw in one action. Does your approach differ from that? Are you going to be increasing your risk level in doing these withdrawals?
Then ’tis like the breath of an unfee’d lawyer.
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KlangFool
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Re: Please review my de-risking/cash-out plan

Post by KlangFool »

Dude2 wrote: Thu Aug 20, 2020 7:12 am
KlangFool wrote: Wed Aug 19, 2020 8:41 pm My current idea.

If the portfolio went up by 60K above 1.5 million, I would convert 30K of that 60K into cash.

For example,

At 1.56 million, I would withdraw 30K of cash from the portfolio. The portfolio would go down to 1.53 million. The next 60K increase would be at 1.59 million. At 1.59 million, I would withdraw another 30K of cash from the portfolio.
Assume a x/y stock bond allocation that you are comfortable with. At any time, if portfolio exceeds risk level, then algorithm says to rebalance to proper risk level, i.e. take winnings off the table and restore to steady state. I think that's how most BHs are going to withdraw from their portfolios in retirement. They keep the same allocation. They rebalance and withdraw in one action. Does your approach differ from that? Are you going to be increasing your risk level in doing these withdrawals?
In this case, the portfolio size increased to a level where I want to take money out of the portfolio. I want to reduce risk by cashing out.

KlangFool
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KlangFool
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Re: Please review my de-risking/cash-out plan

Post by KlangFool »

wackerdr wrote: Thu Aug 20, 2020 7:04 am I would keep it simple. If 2 years EF doesn’t feel comfortable, add an additional year. Get the best insurance - health, umbrella, home , auto - to ensure your out of pocket expenses are predictable. May be a term life insurance for the remainder amount of mortgage , if you don’t have it already.

Then stay with AA you are comfortable with.
I am comfortable with 2 years of EF at 1.5 million. If the stock market goes up by 7% over the next few weeks, I am more comfortable by cashing out of 30K.

KlangFool
ad2007
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Re: Please review my de-risking/cash-out plan

Post by ad2007 »

What is your SWR if you're drawing 60K out of 1.6M but have $ from SS in x years?

I'm asking because I just feel SWR is more important than AA if you're above 50% stocks, and you're way lower than 4%. So you should be fine.
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KlangFool
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Re: Please review my de-risking/cash-out plan

Post by KlangFool »

Folks,

I know that I know nothing. I have a plan for if the stock market crashes. I do not have a plan for if the stock market goes up rapidly from now. This is my plan for if the market goes up rapidly.

KlangFool
aristotelian
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Re: Please review my de-risking/cash-out plan

Post by aristotelian »

KlangFool wrote: Thu Aug 20, 2020 6:47 am 1) I don't believe that mortgage equal to negative bond.

2) I borrow at 3.49% to invest at my 60/40 portfolio. I believe the return will exceed 3.49%.

3) The 1.5 million does not include home equity.

4) The additional cash increases the emergency fund.

KlangFool
1. Semantics. Not interested in going down that rabbit hole. Question is whether mortgage accomplishes your goals, especially the goal of de-risking.
2. Depends on how you look at it. I don't see the point of borrowing in order to loan money at a lower rate, or increasing your stock allocation when you are trying to de-risk. Sure your expected return is > 3.49% but if it were only about expected return you should be 100% stock or leveraged even more.
3. Don't see the relevance of home equity unless you plan to sell.
4. That is an important consideration but if your are financially independent should be less of a concern. If you eliminate mortgage expense you reduce your annual draw.

One more consideration is the mortgage expense could put you in a higher tax bracket but then again paying off the mortgage might cause a tax hit if you would be selling stocks. Would need to evaluate.
Last edited by aristotelian on Thu Aug 20, 2020 7:48 am, edited 1 time in total.
dknightd
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Re: Please review my de-risking/cash-out plan

Post by dknightd »

You are juggling many things. You are not yet 59.5 so likely you do not want to touch the tax deferred part of your portfolio yet. You do not say how much is tax deferred, if any. I'm going to assume you have enough after tax money to last you well past 59.5. It sounds like some of that is in Roth, which is great!
You want income to stay below ACA subsidy levels. I do not know what they are, but I suspect the best plan would be to make sure you have income below those levels. So I would probably take income every year, but take just enough to stay below those levels.
You also have a mortgage that you will eventually want, or have, to pay off.
You have a cash out plan for when your portfolio increases in value. Your plan is to take 1/2 of of the gains. I would instead suggest you take enough gains to keep you below your MAGI target. If you do not need the money to live on, do Roth rollovers, or put extra toward mortgage.
You have a healthy cash buffer. I assume you want to keep a healthy cash buffer. So you are going to need to figure out a cash out plan for when your portfolio balance does not increase.
You also have a healthy portfolio that should meet your needs. So, you have lots of flexibility.
What I have been doing is taking cash out of my portfolio when it goes up and covers my expenses. If it goes up more than I need I let the extra ride. I have not had to decide how small I should let my buffer go. I'm thinking 1 year. I make sure I take out enough each year to be just below my taxable target for the year. I do not need all that money yet, so some goes to mortgage, some to Roth.

Just for fun, you might consider buying an SPIA that combined with SS will cover your, and your wife's, expenses for life. Then you just need to cover your selves till you claim SS. An SPIA helps de-risk living a long long time ;)

edit: it took me too long to type this, hopefully it is still relevant
Last edited by dknightd on Thu Aug 20, 2020 9:14 am, edited 1 time in total.
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds. Retired 9/19. Still working on mortgage payoff.
aristotelian
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Re: Please review my de-risking/cash-out plan

Post by aristotelian »

dknightd wrote: Thu Aug 20, 2020 7:47 am You are juggling many things. You are not yet 59.5 so likely you do not want to touch the tax deferred part of your portfolio yet.
He can and should start doing Roth conversions right now while not employed.
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dziuniek
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Re: Please review my de-risking/cash-out plan

Post by dziuniek »

How about an annuity from just the bond/cash side of things?

What would your $ of bonds+cash get you in an annuity?

I would consider these seeing how low bonds yields are now. Maybe.

Wade Pfau was on Afford Anything podcast and he mentioned going from stocks and bonds to stocks and annutities a decent enough idea these days.
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