Which asset do you liquidate in retirement?

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stocksforthelongrun
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Joined: Sat Sep 12, 2015 9:45 pm

Which asset do you liquidate in retirement?

Post by stocksforthelongrun »

I came here asking a simple question, but it seems like there's no easy answer and it has started me down a long philosophical path.

If you're in retirement and you hold stocks and bonds, how do you choose which asset to liquidate? The Vanguard approach looks like you just rebalance and then sell everything according to its proportion. So if you are holding 60% stocks and 40% bonds and you want to liquidate 2% of your portfolio you would sell 2% of your stocks and 2% of your bonds to maintain that constant 60% / 40% allocation.

I have also heard of strategies like this one viewtopic.php?f=2&t=142058&p=2621832#p2107197 where you hold a fixed number of years in bonds, and then you sell the bonds when stocks are in a "bear market" and you sell the stocks when stocks otherwise. My question is how do you formally define this strategy, what constitutes a "bear market", and how do you know the relative proportions of each asset to sell to make your portfolio last? Is there any advantage one can harvest by strategically choosing whether to sell stocks or bonds based upon their relative ups and downs? I was thinking of comparing the stock price to some moving average, looking at the cost basis, or looking at the cumulative returns from the past say 5 years but I'm really not sure how to define such a strategy and would like to know what others do.

The more I think about it I think I am realizing that the constant allocation may actually be the simplest and best. Here is the intuition why: because you are rebalancing, if stocks fall in value, then you will naturally sell bonds to repurchase stocks. Suppose you're 90/10 and stocks fall 50% so you are now 45/10. You rebalance to 49.5/5.5. Then you need to withdraw 5% of the original value so you sell 4.5% stocks and 0.5% bonds so now you're 45/5. Technically you didn't sell any stocks on withdrawal because the rebalancing covered the withdrawal. Now suppose you tried to follow a strategic liquidation rule. Assets fall to 45/10, and you decide to arbitrarily sell bonds because "stocks are down" and you want to wait for them to recover. So you sell 5% in bonds and now you're at 45/5, the exact same allocation! It must be because I chose the right set of numbers, but in this case both portfolios are equal. Now suppose stocks stay flat and next year we're still 45/5. The rebalance sells down to 40.5/4.5 while the strategic seller sells the bonds again and is now down to 45/0. Now the two portfolios have diverged. Which one is better? On one hand 45 is better poised for a rebound from the crash but on the other hand if the bear market continues 40.5/4.5 will do better in the long run because it still has a buffer it can keep tapping into it if the market continues to fall.

Apologies for the long rambling rant, my thinking is still unclear so it's hard to put down into words.
Rodc
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Re: Which asset do you liquidate in retirement?

Post by Rodc »

The more I think about it I think I am realizing that the constant allocation may actually be the simplest and best.
There a ton of threads on this. There are pros and cons to each and which does better depends more on luck than anything else: it just depends on the exact sequence of market returns as to which is best.

It is a lot like rebalancing that way. And not surprising. If you liquidate (or move around in rebalancing) a small percentage in any given year how much can it matter? Over decades it might matter. In a super deep dive it might matter. On the decades long scale you have plenty of time to adjust spending. In a deep dive regardless of how you do this you should adjust spending.

Pick a sensible plan, any sensible plan, and adjust your spending as needed.

Best of luck.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
larryswedroe
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Re: Which asset do you liquidate in retirement?

Post by larryswedroe »

IMO the only logical one is to rebalance. What logic is there to changing your allocation unless one of the assumptions used in building the plan has changed regarding your ability, willingness or need to take risk.

Also this bucket approach is not a good one, though it can help those who do mental accounting and it helps them stay the course. The problem should be obvious--it assumes things will turn around after say 5 years when it certainly doesn't have to. Two example, Japan and US during the Great Depression. This is the error I refer to as treating the unlikely as impossible, something humans are prone to do (along with treating the likely as certain)

Hope that is helpful
Larry
livesoft
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Re: Which asset do you liquidate in retirement?

Post by livesoft »

I figure out which thing is the best one to sell at the moment that creates the least taxes for me as the top priority, then I think about asset allocation which is quite squishy and not as important. For instance, if I want an asset allocation of 59% stocks and 31% bonds and 7% TIAA-CREF real estate account, then it really doesn't matter if I actually have 60:32:8 at that point in time, so I could have sold 2% from any of them or 0.5% from any of them or 1% from two of them or any other amount that I wanted.

Bottom line: It just doesn't matter.
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Topic Author
stocksforthelongrun
Posts: 66
Joined: Sat Sep 12, 2015 9:45 pm

Re: Which asset do you liquidate in retirement?

Post by stocksforthelongrun »

larryswedroe wrote:IMO the only logical one is to rebalance. What logic is there to changing your allocation unless one of the assumptions used in building the plan has changed regarding your ability, willingness or need to take risk.

Also this bucket approach is not a good one, though it can help those who do mental accounting and it helps them stay the course. The problem should be obvious--it assumes things will turn around after say 5 years when it certainly doesn't have to. Two example, Japan and US during the Great Depression. This is the error I refer to as treating the unlikely as impossible, something humans are prone to do (along with treating the likely as certain)

Hope that is helpful
Larry
Wow! That is perfect and says everything. Thank you larryswedroe.

This topic is done.
rixer
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Re: Which asset do you liquidate in retirement?

Post by rixer »

I'm retired but I have yet to withdraw anything from retirement accounts. Since most everything is in balanced funds (Lifestrategy Con. Growth), it will balance automatically.
My plan is to start taking cap gains and dividends first and along with SS it covers my expenses. Before I must take RMD's, I'll sell from taxable as needed for extras like trips and unexpected home repairs etc.

At any rate, that's the plan so far....
2015
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Re: Which asset do you liquidate in retirement?

Post by 2015 »

stocksforthelongrun wrote:
larryswedroe wrote:IMO the only logical one is to rebalance. What logic is there to changing your allocation unless one of the assumptions used in building the plan has changed regarding your ability, willingness or need to take risk.

Also this bucket approach is not a good one, though it can help those who do mental accounting and it helps them stay the course. The problem should be obvious--it assumes things will turn around after say 5 years when it certainly doesn't have to. Two example, Japan and US during the Great Depression. This is the error I refer to as treating the unlikely as impossible, something humans are prone to do (along with treating the likely as certain)

Hope that is helpful
Larry
Wow! That is perfect and says everything. Thank you larryswedroe.

This topic is done.
+1
I've greatly reduced the time I spend on this site by simply: (a) refraining to view any click bait threads (of which there are way too many, IMHO); (b) opening only those threads where I think I may learn something new; and (c) scan through all posts until I come upon one by Mr. Swedroe and Nisiprius and then be done with it.

I didn't retire just to sit in front of a screen.
small_index
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Re: Which asset do you liquidate in retirement?

Post by small_index »

stocksforthelongrun wrote:Suppose you're 90/10 and stocks fall 50% so you are now 45/10. You rebalance to 49.5/5.5. Then you need to withdraw 5% of the original value ...
In Vanguard's retirement nest egg calculator, I entered 30 years for a 90/10 allocation and 5% withdrawal... and got a 79% chance of success (Monte Carlo simulation). I don't think 5% stocks or 5% bonds matters if both paths could lead you to going broke 30 years into retirement (1 in 5 chance). To me, those are poor odds, and I'd look at a lower withdrawal rate.

Note that Vanguard's simulation assumes stocks are total stock market, and bonds are the broad bond market.
Topic Author
stocksforthelongrun
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Joined: Sat Sep 12, 2015 9:45 pm

Re: Which asset do you liquidate in retirement?

Post by stocksforthelongrun »

small_index wrote:
stocksforthelongrun wrote:Suppose you're 90/10 and stocks fall 50% so you are now 45/10. You rebalance to 49.5/5.5. Then you need to withdraw 5% of the original value ...
In Vanguard's retirement nest egg calculator, I entered 30 years for a 90/10 allocation and 5% withdrawal... and got a 79% chance of success (Monte Carlo simulation). I don't think 5% stocks or 5% bonds matters if both paths could lead you to going broke 30 years into retirement (1 in 5 chance). To me, those are poor odds, and I'd look at a lower withdrawal rate.

Note that Vanguard's simulation assumes stocks are total stock market, and bonds are the broad bond market.
Right, just an example. I agree 90/10 and 5% is not sustainable.
john94549
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Re: Which asset do you liquidate in retirement?

Post by john94549 »

We plan to use our IRA CDs from age 70 - 85. Thereafter, our 60/40 IRAs, should we live that long. While others have noted this is but "mental accounting", it fits our risk tolerance. I can tell my wife, each year, within a thousand dollars (+/-), what her "budget" will be from age 70 - 85, without regard to the "ups and downs" of the stock or bond markets. Using "moneychimp" and the effective rate on our IRA CDs, along with the years remaining before age 85, I just use the annuity calculator. Tells me what I can withdraw that year.*

At age 85 (see above for caveat), we can revisit the appropriate "SWR" for the funds available. Should either or both of us push past age 100, we still have a "Plan B".

In an over-abundance of caution, I'm assuming zero real growth in our 60/40 balanced funds over the next 16+ years, i.e., until we're 85. Stated another way, were we able to keep pace with inflation (as we do with our IRA CDs), we'll be fine. As Bill Bernstein noted, "once you've won the game, why keep playing?"

*For example, just as a hypothetical, a million in IRA CDs with an effective yield of 2.5%, withdrawn over 15 years, yields just short of $79,000/year. Sounds weird, but there it is. It's just math. Math is good.
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