Mitigating SORR with income funds

[digitalshepard]

I intend to stop working in the next year or two (I’ve already passed the “safe” retirement date provided by Pralana Retirement FWIW), yet I appreciate that safety is largely an illusion and sequence of return risk (SORR) is something to pay attention to. To mitigate SORR I plan to implement the following:

• Use a 3 bucket income approach https://www.morningstar.com/portfolios/ ... -portfolio to portfolio management, with bucket 2 bonds in Traditional IRAs.

• Implement an equity glide path https://earlyretirementnow.com/2017/09/ ... lidepaths/ starting at 60% stock / 40% bonds and ending around 100% stock a decade later, where bucket 2 effectively disappears.

The question I am working through is what the bucket 2 bond allocation should look like. I thought about creating a TIPS ladder, but now that rates have fallen from peak a TIPS ladder looks less appealing. What I am leaning toward and would like feedback on is using a 50/50 split of Wellesley Income Fund (VWIAX) and Vanguard Intermediate Treasuries as my bond allocation. Back testing this allocation https://www.portfoliovisualizer.com/bac ... ONwtUFZ0qd with withdrawals during the down market period of 2000 through 2012 performed amazingly well precisely due to the high income it produced, meaning fewer shares of the underlying funds needed to be sold in a down market to fill bucket 1. I couldn’t find any combination of funds that produced a higher income, although perhaps this approach leaves me vulnerable to inflation?

Second question; assuming Vanguard Intermediate Treasuries is one of the holdings I end up with, I don’t know if Vanguard Interm-Term Treasury Adm (VFIUX) or Vanguard Intmdt-Term Trs ETF (VGIT) would work better. In theory these are the same fund, yet back testing shows the index fund generally yields higher income and in some years much higher income relative to the ETF https://www.portfoliovisualizer.com/bac ... HP7nycExTv. Why would this be the case, and will that trend continue?

------Updated to include portfolio specifics------
My specifics
Emergency Funds: Yes – Series I Bonds
Debt: Mortgage $350k @ 2.5% Fixed 30yr
Tax Filing: Married Filing Jointly
Tax Rate: 22% Federal, 5.75% State
State: VA
Age: 41, wife is 41
Desired Asset Allocation: 60 stock/ 40 bond/fixed
Desired International Allocation: 15%-20%
Portfolio size: ~1.5M

Current Retirement Assets
Taxable:
27% Vanguard Large Cap (VLCAX) (.05)
8% Vanguard Total Stock Mkt Index (VTI) (.03)
1% Cash

His 401k at Vanguard:
5% Vanguard Total Intl Stock Market Institutional (.05)

His Traditional IRA at Vanguard:
8% Vanguard Total Stock Mkt Index (VTI) (.03)

His Roth IRA at Vanguard:
2% Vanguard Total Stock Mkt Index (VTI) (.03)

His Rollover IRA at Fidelity
13% Fidelity Zero Intl Index (FZILX) (0)
13% Fidelity Zero US Index (FZROX) (0)

His Rollover Roth IRA at Fidelity
3% Vanguard Small Cap ETF (VB) (.05)
2% Van Eck Semiconductor ETF (SMH) (.35)
1% Fidelity Zero US Index (FZROX) (0)

His HSA at Fidelity
6% Fidelity Zero US Index (FZROX) (0)

His HSA at Bank of America
1% Vanguard Total World Stock Index Fund (VTWAX) (.10)

Her Traditional IRA at Vanguard:
9% Vanguard Total Stock Mkt Index (VTI) (.03)

Her Roth IRA at Vanguard:
1% Vanguard Total Stock Mkt Index (VTI) (.03)

Contributions:
$2500 His Roth IRA
$4500 His Traditional IRA
$7000 Her Traditional IRA
$23,500 His Traditional 401K
$4,700 His 401K Company Match

[rkhusky]

Are you planning to follow the bucket filling/emptying rules spelled out in the Benz article?

It is unlikely that anything that did the best in the past will be the best in the future. So, devising too specific strategies from backtesting will be unlikely to perform the same way in the future.

VGIT and VSIGX are the same index fund. VFIUX is an active fund, with similar duration, ER and SEC yield, which may or may not do better than the former in any particular time period, but I would expect them to perform about the same, which is confirmed by your PV link.

You could also choose TR Income or LS Income for your bucket 2. They are about the same as 50/50 Wellesley/Int Treas.

I find bucket strategies too complex with little benefit over a simple 3 or 4 fund portfolio that is rebalanced regularly.

[digitalshepard]

Are you planning to follow the bucket filling/emptying rules spelled out in the Benz article?

Given the second bullet in my post, I wasn't planning on refilling bucket 2. After bucket 2 is exhausted, bucket 3 would directly fill bucket 1.

It is unlikely that anything that did the best in the past will be the best in the future. So, devising too specific strategies from backtesting will be unlikely to perform the same way in the future.

This is a very fair point. That said, logically wouldn't selling fewer shares of a fund in a down market to generate income be better than selling more shares of a fund of similar composition for income? From analysis I've seen, Wellesley's performance is comparable to other balanced funds when no withdrawals are taken.

Thank you for pointing out the TR income fund, I'll investigate further.

[dogagility]

I'm reluctant to write this since you've obviously put much effort into thinking about buckets and ways to mitigate SORR. My opinion is your plan is unnecessarily complicated.

There has been a lot written about buckets on Bogleheads. In my opinion, buckets are a psychological strategy with no real-life utility and complicated to execute to boot.

Regarding SORR, I agree with others that the way to mitigate SORR is not to use a "bond tent" but to maintain a fixed asset allocation and reduce spending, if needed. See viewtopic.php?p=8134287#p8134287 and viewtopic.php?t=349765 and https://tpawplanner.com/learn/sequence-of-return-risk

[rkhusky]

From analysis I've seen, Wellesley's performance is comparable to other balanced funds when no withdrawals are taken.

Best to say “has been comparable”. And then figure out the reason why that might have been so, and try to predict if that will continue in the future.

For example, US has outperformed International for many years. Do we expect that to continue? Should we invest 100% in US because of the prior performance? Or perhaps 100% International, if we expect mean reversion?

[ScubaHogg]

Tpawplanner.com set to the appropriate risk tolerance (for you), possibly combined with a TIPS ladder, is probably a more elegant and effective way to solve your concerns with SORR

[KEotSK66]

A bad return sequence can occur at any time, your strategy assumes it will occur near retirement. The threat could lessen in later years but your portfolio will still be affected, depending on your intentions (eg, a charity) that might not be acceptable.

You're timing the market at a strategic/high level and in the process complicating your planning.

You'd be better off knowing your monthly/yearly spending in combination with reasonable assumptions about inflation to determine your needed return and then selecting a fund/portfolio/AA which targets your needed return and assumes the corresponding SD/risk.

KISS...buckets, tents, glidepaths, etc. are unnecessary. The only way you'll realize the benefits of a fund/portfolio/AA is to hold it long-term. You're going to shoot yourself in the foot.

You could go with VWIAX or VWENX, if inflation is a major concern you could add an inflation-response fund like PIRMX, FSRRX, etc. You would have to tolerate low returns from inflation-response funds if inflation never materializes, the price of some asset classes.

Good Luck.

[digitalshepard]

I appreciate the commentary and additional links. If I was looking for validation I would have posted in an echo chamber somewhere else, but I'd rather get the truth and be challenged by the diversity of opinion here that maybe I'm wrong. For my first question I'm thinking I probably am wrong. On my second question I still have no idea why portfolio visualizer would show dramatic differences in income flows between an index fund and ETF for vanguard intermediate Treasury, and I get the feeling some analysis of that historical data may be in my future...

I am familiar with TPAW and the thinking behind it from reading the forums here. I hoped the online TPAW calculator would be a bit more customizable in terms of income and expense flows (e.g. there's no option for future windfalls).

[sycamore]

On my second question I still have no idea why portfolio visualizer would show dramatic differences in income flows between an index fund and ETF for vanguard intermediate Treasury...

Here is your second question:

Second question; assuming Vanguard Intermediate Treasuries is one of the holdings I end up with, I don’t know if Vanguard Interm-Term Treasury Adm (VFIUX) or Vanguard Intmdt-Term Trs ETF (VGIT) would work better. In theory these are the same fund, yet back testing shows the index fund generally yields higher income and in some years much higher income relative to the ETF https://www.portfoliovisualizer.com/bac ... HP7nycExTv. Why would this be the case, and will that trend continue?

rkhusky answered it:

VGIT and VSIGX are the same index fund. VFIUX is an active fund, with similar duration, ER and SEC yield, which may or may not do better than the former in any particular time period, but I would expect them to perform about the same, which is confirmed by your PV link.

To reiterate, VFIUX is Vanguard Intermediate-Term Treasury Fund Admiral Shares. It is NOT an index fund.

By contrast VGIT and VSIGX are merely different share classes of the same fund:
- VGIT is called Vanguard Intermediate-Term Treasury ETF.
- VSIGX is called Vanguard Intermediate-Term Treasury Index Fund Admiral Shares.
But the underlying holdings are the same. If you compare VGIT and VSIGX performance, they'll be nearly identical -- the only difference would be in the expense ratio.

The performance difference between VFIUX and VGIT/VSIGX can be much greater than just the expense ratio because VFIUX is an actively managed fund so its composition can be non-trivially different from VGIT/VSIGX.


Here's a portfolio visualizer comparison of VFIUX and VGIT and VSIGX: https://www.portfoliovisualizer.com/bac ... fAFEH1fstk. VGIT and VSIGX have the same exact CAGR return.

[digitalshepard]

rkhusky answered it:

Yes he did.

To reiterate, VFIUX is Vanguard Intermediate-Term Treasury Fund Admiral Shares. It is NOT an index fund.

I didn't catch the distinction the first time. All makes sense again. Thank you.

[birdbard]

Are you planning to follow the bucket filling/emptying rules spelled out in the Benz article?

Given the second bullet in my post, I wasn't planning on refilling bucket 2. After bucket 2 is exhausted, bucket 3 would directly fill bucket 1.

but the buckets 1 and 2 only cover ~6 years initially, and the glidepaths can last 10 or more years, so that is a little unclear to me. Unless you intend to do more than 5 years in bucket 2?

which 60-100 glidepath will you follow, active or passive?

[KlangFool]

OP,

What is the number of years of expense in each bucket?

A) Cash

B) Fixed Income/Bond

C) Stock

The details matter.

KlangFool

[birdbard]

A bad return sequence can occur at any time, your strategy assumes it will occur near retirement. The threat could lessen in later years but your portfolio will still be affected, depending on your intentions (eg, a charity) that might not be acceptable.

You're timing the market at a strategic/high level and in the process complicating your planning.

You'd be better off knowing your monthly/yearly spending in combination with reasonable assumptions about inflation to determine your needed return and then selecting a fund/portfolio/AA which targets your needed return and assumes the corresponding SD/risk.

KISS...buckets, tents, glidepaths, etc. are unnecessary. The only way you'll realize the benefits of a fund/portfolio/AA is to hold it long-term. You're going to shoot yourself in the foot.

You could go with VWIAX or VWENX, if inflation is a major concern you could add an inflation-response fund like PIRMX, FSRRX, etc. You would have to tolerate low returns from inflation-response funds if inflation never materializes, the price of some asset classes.

Good Luck.

if you have a sub 3%WR, I agree. But I am not sure what we know about OPs situation. If you have sub 3% most AAs are going to work out just fine.

In my case I do not have the levels of wealth a lot around here have, and likely never will. But I still need to retire someday and make of it what I can.

If some minor complexity in design helps me side step a devasting market drop in the early years of retirement, seems a decent enough payoff. The article linked about the glidepath is predicated on an early retirement and 60 year need for income. I could only wish for that! But from the article POV the glidepath would be done with during the midage years. Instead of working.

And the glidepath idea really isn't much more complicated than periodly rebalancing a static portfolio. Just a bit of nuance added in. You are just edging the AA of stock up a bit at each rebalancing point.

[dogagility]

I am familiar with TPAW and the thinking behind it from reading the forums here. I hoped the online TPAW calculator would be a bit more customizable in terms of income and expense flows (e.g. there's no option for future windfalls).

The online version (tpawplanner.com) can be customized in terms of income and expenses.

[digitalshepard]

but the buckets 1 and 2 only cover ~6 years initially, and the glidepaths can last 10 or more years, so that is a little unclear to me. Unless you intend to do more than 5 years in bucket 2?

which 60-100 glidepath will you follow, active or passive?

My current planning has bucket 2 being the 40% bond allocation that would not get refilled, but rather get converted to equities over a 10 year span. I would say this is more like equity glidepath than the bucket system as detailed on Morningstar. In theory the active glidepath has better outcomes compared to passive and is my goal, however the only criteria ERN lays out for active is not converting when equities are at all time highs. By that definition, waiting for equities to be 1% below all time highs counts as active which seems silly to me.

Here's a picture to give a broader overview of what I'm currently planning on. Since the scope of this scope expanded, I'll try to edit the original post to provide my specifics.

What is the number of years of expense in each bucket?

A) Cash

B) Fixed Income/Bond

C) Stock

A) Cash = 1.5 year
B) Fixed Income/Bond = Maybe 18 years in conjunction with the glidepath, although bond holding after 10 years would be close to 0. https://www.portfoliovisualizer.com/fin ... FX6FM3ibEt Slightly suspect, turn on first 10 years with poor sequence of returns and somehow the projection improves.
C) Stock = Hopefully I have expenses for another 50-55 years.

if you have a sub 3%WR, I agree. But I am not sure what we know about OPs situation. If you have sub 3% most AAs are going to work out just fine.

I'm targeting roughly a 3.6%WR. I'm young and could work longer to lower that number. I also have a job I increasingly do not enjoy and children I do enjoy who won't be around forever. I have enough skills and flexibility that I should be able to pick up some type of employment I enjoy later if need be.

[KlangFool]

What is the number of years of expense in each bucket?

A) Cash

B) Fixed Income/Bond

C) Stock

A) Cash = 1.5 year
B) Fixed Income/Bond = Maybe 18 years in conjunction with the glidepath? https://www.portfoliovisualizer.com/fin ... FX6FM3ibEt Slightly suspect, turn on first 10 years with poor sequence of returns and somehow the projection improves.
C) Stock = Hopefully I have expenses for another 50-55 years.

digitalshepard,

I am totally confused.

Are you claiming that you will be retiring with 1.5+18+55= 74.5 years of expense?

My question has nothing to do with what you hope to happen. It has to do with what do you plan to start with your 3 buckets plan.

KlangFool

[oldlongbeard]

Retire at 43 with only $1.5MM in the bank, and holding a $350k mortgage? Not for me, but you haven't painted to whole picture.....is Bob Ross going to paint us a nice pensions that cover all of your expenses, and a nice SS check every month....over here? Not enough information to make intelligent commentary.

[rkhusky]

Note that it’s best to use different funds in the taxable account compared to tax-advantaged accounts to help avoid permanent wash sales if you end up selling for a loss in taxable.

How much will you need to withdraw from the portfolio yearly for expenses?

If you pass away, will your wife be able to follow this plan? If not, have you written instructions on how to unwind and simplify the portfolio?

[digitalshepard]

A) Cash = 1.5 year
B) Fixed Income/Bond = Maybe 18 years in conjunction with the glidepath? https://www.portfoliovisualizer.com/fin ... FX6FM3ibEt Slightly suspect, turn on first 10 years with poor sequence of returns and somehow the projection improves.
C) Stock = Hopefully I have expenses for another 50-55 years.

digitalshepard,

I am totally confused.

Are you claiming that you will be retiring with 1.5+18+55= 74.5 years of expense?

My question has nothing to do with what you hope to happen. It has to do with what do you plan to start with your 3 buckets plan.

KlangFool

I will make an assumption that the years you are referring to are starting bucket valuations divided by annual expenses the portfolio will have to cover in the starting year. If that is the case,
Bucket 1: 1.5 years
Bucket 2: 10.1 years
Bucket 3: 17.5 years

Note that it’s best to use different funds in the taxable account compared to tax-advantaged accounts to help avoid permanent wash sales if you end up selling for a loss in taxable.

If you pass away, will your wife be able to follow this plan?

Great point. Most of taxable is in VLCAX to avoid wash sales. As for my wife, I wouldn't say managing money is her strength, so I've been creating documentation and sharing other educational materials to help get her up to speed over the past few years. Ideal for her would be just having money appear in a bank account monthly without consideration for taxable/post-tax/pre-tax, but short of that it may make sense for her to hire a financial advisor.

[rkhusky]

Note that it’s best to use different funds in the taxable account compared to tax-advantaged accounts to help avoid permanent wash sales if you end up selling for a loss in taxable.

If you pass away, will your wife be able to follow this plan?

Great point. Most of taxable is in VLCAX to avoid wash sales. As for my wife, I wouldn't say managing money is her strength, so I've been creating documentation and sharing other educational materials to help get her up to speed over the past few years. Ideal for her would be just having money appear in a bank account monthly without consideration for taxable/post-tax/pre-tax, but short of that it may make sense for her to hire a financial advisor.

I noted the VTI in both. If it has low cost basis, might not be an issue.

Will wife know how to pick a good advisor or will she be susceptible to the Edward Jones of the world?

Might be best to leave instructions for putting tax-advantaged into target date funds and look at setting up automatic withdrawals.

[steadyosmosis]

For me, it was much easier to buy a 30-yr TIPS ladder in my traditional IRA.
Thirty years will get me beyond age 59.5, when I can then access all tax-deferred and all Roth IRA dollars penalty-free.
And I will start social security by age 70 (with option of sooner if I change my mind).
The TIPS ladder virtually eliminated SORR for me.

[KlangFool]

digitalshepard,

I am totally confused.

Are you claiming that you will be retiring with 1.5+18+55= 74.5 years of expense?

My question has nothing to do with what you hope to happen. It has to do with what do you plan to start with your 3 buckets plan.

KlangFool

I will make an assumption that the years you are referring to are starting bucket valuations divided by annual expenses the portfolio will have to cover in the starting year. If that is the case,
Bucket 1: 1.5 years
Bucket 2: 10.1 years
Bucket 3: 17.5 years

digitalshepard,

A) So, what happened when the stock market crashes 50%? Do you rebalance by selling the bond to buy the stock to maintain 60/40?

B) Conversely, if the stock jump up 50%, do you rebalance by selling the stock to buy the bond?

KlangFool

[KEotSK66]

If some minor complexity in design helps me side step a devasting market drop in the early years of retirement, seems a decent enough payoff. The article linked about the glidepath is predicated on an early retirement and 60 year need for income. I could only wish for that! But from the article POV the glidepath would be done with during the midage years. Instead of working.

And the glidepath idea really isn't much more complicated than periodly rebalancing a static portfolio. Just a bit of nuance added in. You are just edging the AA of stock up a bit at each rebalancing point.

It seems you're doing the same as the OP.

If you're ok making strategic AA decisions that's your choice but there's no reason to believe anyone can execute strategic AA successfully. All the managers who tried strategic AA said they would change the AA slowly too, they either AA'd themselves out of existence or their performance is poor.

Being heavily invested at the time of retirement in low risk classes followed by just the opposite in the later years is obviously timing.

In the end you're going to have to spend what you must spend. That reality is a much firmer basis for your portfolio/AA, assuming you translate your monthly/yearly requirement into a return and SD/risk level, than letting fear in the beginning followed by optimism at the end set your portfolio/AA.

If you feel things could be tight you should tighten your belt so you don't come up short, doing so will allow you to target a reasonable return without taking inordinate SD/risk.

Anyway, good luck.

[Exchme]

So your expenses are 3.6% of $1.5M = $54,000 and $8750 of those expenses are interest on the mortgage. Let's simplify for internet discussion and say you pay off the mortgage, have a $1.15M portfolio and 54,000 - 8,750 = $45,250 in spending. If I added right, 48% of your assets are in tax deferred = $720,000. Let's apply a 15% haircut to guesstimate the taxes on that, so after-tax, that's worth $626,000, so your equivalent portfolio is $1.056M. Your spending is then 4.3% of your real assets. That strikes me as risky for such a long retirement.

Your projected expenses seem low for a family of at least 4 (OP mentioned children). Children get more expensive as time goes on until you get them fully launched. Most parents that are well off enough to retire early would also want to ensure their kids get good educations without them going into ruinous debt, so the parents set aside substantial money in 529s, UTMAs or as a reserve in taxable. There's also the matter of healthcare - the current ACA premium credits are scheduled to go back to the less generous ones after 2025, so you may have a unpleasant surprise there. Lumpy expenses like roofs, cars, air conditioners, healthcare deductibles are all in your future that can add substantially to the average spend as well.

There is no proven benefit to either income funds (they tend to lag total market funds) or buckets (they are timing, so results are just good or bad luck). No amount of finagling with asset allocations, income funds, buckets, etc. changes the fact that this is a marginal plan.

I would keep chopping wood for a few more years. The job may get better on its own (you are at the age when your role may change to more mentoring/managerial) or you may be able to find a role where you are happier and can slow down and not put in all kinds of free extra work that bosses love to get out of employees.

[KEotSK66]

A 3.6% draw in...

2% personal inflation requires an annualized TR of 5.81% to...

3% personal inflation requires an annualized TR of 6.84% to...

4% personal inflation requires an annualized TR of 7.88% to...

grow the portfolio with personal inflation AND thereby grow the draw with personal inflation.

[birdbard]

If some minor complexity in design helps me side step a devasting market drop in the early years of retirement, seems a decent enough payoff. The article linked about the glidepath is predicated on an early retirement and 60 year need for income. I could only wish for that! But from the article POV the glidepath would be done with during the midage years. Instead of working.

And the glidepath idea really isn't much more complicated than periodly rebalancing a static portfolio. Just a bit of nuance added in. You are just edging the AA of stock up a bit at each rebalancing point.

It seems you're doing the same as the OP.

If you're ok making strategic AA decisions that's your choice but there's no reason to believe anyone can execute strategic AA successfully. All the managers who tried strategic AA said they would change the AA slowly too, they either AA'd themselves out of existence or their performance is poor.

Being heavily invested at the time of retirement in low risk classes followed by just the opposite in the later years is obviously timing.

In the end you're going to have to spend what you must spend. That reality is a much firmer basis for your portfolio/AA, assuming you translate your monthly/yearly requirement into a return and SD/risk level, than letting fear in the beginning followed by optimism at the end set your portfolio/AA.

If you feel things could be tight you should tighten your belt so you don't come up short, doing so will allow you to target a reasonable return without taking inordinate SD/risk.

Anyway, good luck.

Did you read the ERN article? It doesn't seem that you understand what the process or rationale is.

[KEotSK66]

Did you read the ERN article? It doesn't seem that you understand what the process or rationale is.

I'm quite familiar with these risk-avoidance gimmicks.

[digitalshepard]

So your expenses are 3.6% of $1.5M = $54,000 and $8750 of those expenses are interest on the mortgage. Let's simplify for internet discussion and say you pay off the mortgage, have a $1.15M portfolio and 54,000 - 8,750 = $45,250 in spending. If I added right, 48% of your assets are in tax deferred = $720,000. Let's apply a 15% haircut to guesstimate the taxes on that, so after-tax, that's worth $626,000, so your equivalent portfolio is $1.056M. Your spending is then 4.3% of your real assets. That strikes me as risky for such a long retirement.

1) According to Pralana I'll have some Federal tax liability when doing IRA Conversions, although by current tax law the standard deduction and the child tax credit drops federal taxes for roughly 25 of 50 years to $0, totaling roughly $29.5k spread over 50 years of continued growth. I'm not sure what that would look like in terms of an initial portfolio haircut, but a lot lower.

2) Annual principle and interest on the house is $18k, fixed for another 27 years at 2.5%. I could pay off the house before stopping employment and lower my withdrawal rate to roughly 3.1% (which includes Federal & State taxes). Years ago I thought about paying off the house, but given the low interest rate I would think some sort of liability matching investment would make more sense, say a Treasury bond ladder, and effectively subtracts that loan from the spending the remainder of the portfolio needs to account for. I haven't settled on an approach yet.

Your projected expenses seem low for a family of at least 4 (OP mentioned children). Children get more expensive as time goes on until you get them fully launched. Most parents that are well off enough to retire early would also want to ensure their kids get good educations without them going into ruinous debt, so the parents set aside substantial money in 529s, UTMAs or as a reserve in taxable. There's also the matter of healthcare - the current ACA premium credits are scheduled to go back to the less generous ones after 2025, so you may have a unpleasant surprise there. Lumpy expenses like roofs, cars, air conditioners, healthcare deductibles are all in your future that can add substantially to the average spend as well.

3) Children can be more expensive as they age, and parents can also spend considerable sums on them when they are infants or in preschool. I am mindful that people often have their highest spending years between 40 and 60 (could include some help for college if they go), and returns in early years won't have time to compound to generate higher spend rates (unless taking a variable spending approach mentioned in multiple other threads here).

4) Increased ACA premiums are factored into future spending. Believe it or not, there is also a fair amount of discretionary spending factored into the current spending projections that can be cut. Annual O&M spending projected for housing, vehicle(s), and medical is also factored in.

I would keep chopping wood for a few more years. The job may get better on its own (you are at the age when your role may change to more mentoring/managerial) or you may be able to find a role where you are happier and can slow down and not put in all kinds of free extra work that bosses love to get out of employees.

5) This hits the nail on the head. I'm looking at working likely for another 2 years in a managerial role, but would love to go less than full time at some point. For what its worth my net worth has tripled over the past 5 years (combination of market returns, rising income, limited increased spending, rising investment contributions); its completely feasible that 2 years from now my investments will be north of 2MM and provide additional margin for life. Conversely, wait too long to pull the plug and you'll have money but many of life's opportunities may have passed you by. There is no free lunch.

A) So, what happened when the stock market crashes 50%? Do you rebalance by selling the bond to buy the stock to maintain 60/40?

B) Conversely, if the stock jump up 50%, do you rebalance by selling the stock to buy the bond?

Market crashes 50%, start to draw down the bond portfolio until the market start to recover. Market jumps 50%, top off the bond portfolio to account for X number of years of spending to take a bite out of the next market down turn.

I still have some time to figure out the asset allocation approach that will work best for me. I do appreciate the candid and challenging responses - if my logic is off I'd rather find out sooner than later!

[KlangFool]

A) So, what happened when the stock market crashes 50%? Do you rebalance by selling the bond to buy the stock to maintain 60/40?

B) Conversely, if the stock jump up 50%, do you rebalance by selling the stock to buy the bond?

Market crashes 50%, start to draw down the bond portfolio until the market start to recover. Market jumps 50%, top off the bond portfolio to account for X number of years of spending to take a bite out of the next market down turn.

I still have some time to figure out the asset allocation approach that will work best for me. I do appreciate the candid and challenging responses - if my logic is off I'd rather find out sooner than later!

In summary, you only do one way rebalancing: selling stock to buy the bond.

KlangFool

P.S.: I do 5/25 and annual rebalancing both ways. I keep 2 to 3 years expense as emergency fund outside of my 60/40 portfolio. I will not rebalance below 5 years of expense for my fixed income portion of my portfolio. I do not believe any recession/market down turn lasting more than 5 to 8 years is a money problem. If that happened, you need physical gold/silver.

[rkhusky]

Market crashes 50%, start to draw down the bond portfolio until the market start to recover. Market jumps 50%, top off the bond portfolio to account for X number of years of spending to take a bite out of the next market down turn.

I still have some time to figure out the asset allocation approach that will work best for me. I do appreciate the candid and challenging responses - if my logic is off I'd rather find out sooner than later!

So much easier to pick a reasonable AA and then rebalance when it gets out of whack by a given amount. You don’t have to watch the market or come up with rules for buckets. You just watch your own AA. You can even plan for a bond tent if you want.

[Lawrence of Suburbia]

So much easier to pick a reasonable AA and then rebalance when it gets out of whack by a given amount. You don’t have to watch the market or come up with rules for buckets. You just watch your own AA. You can even plan for a bond tent if you want.

This.

For my own situation, my income is mostly (75%?) drawn from balanced funds (Target 2025, Wellesley) which rebalance themselves, leaving me no decisions to make.