Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
jeffyscott
Posts: 13438
Joined: Tue Feb 27, 2007 8:12 am

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by jeffyscott »

Doc wrote:
jeffyscott wrote:I disagree. We were at 50/50, the decline in stocks was far more than 40% and who's to say it might not have gone to -80%. As it happened we remained at 50/50, but I was not about to ruin my retirement plans to satisfy some sort of asset allocation purity test by continuing to buy into a declining market without limit. The timing of that decline began 7-9 years prior to planned retirement, I was not going to bet my early retirement on the "certainty" that stocks would recover by then.
It sounds like you have an "ability and need to take risk" dilemma. You want a 50/50 portfolio to fund your post SS retirement but you want to set aside $X to fund an early retirement. Since your total dollars are limited you make the choice of not rebalancing during a market crash so that you don't jeopardize your early retirement by eating up your set aside. But by not rebalancing you are not buying stocks during the downturn and therefore will have fewer $'s after the recovery so your plan protects your early retirement but at the possibility of having fewer assets than desired post SS.

A "better" plan might be to just reduce your AA to maybe 45/55 and use part of that money to fund your pre-SS needs but also to rebalance. Putting a limit on how much you are willing to use to rebalance is an option but you need to consider that those stocke you didn't buy at the "low" will not be there 20 years from now.

Hard choices. :beer
Nope. Your scenario does not match what our circumstances were in 2008 or my attempt to explain what our plan was.

In any case, we now have assets far beyond our needs and wants and any conflict would be between ability and willingness to take risk. Our need to take risk is essentially now 0. :moneybag
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by KlangFool »

NMJack wrote:
KlangFool wrote: TheGipper,

Let's assume that your asset is 50 times annual expense now. If you put 10 years of annual expense into fixed income, we are looking at 80/20 (Stock / fixed income) = 50x. If the market crashes 50%, you are down to 30 years of annual expense. After 10 years, you are selling stock and lock in the losses. So, where does the 100 years come from?

KlangFool
So we are assuming that the market drops 50% tomorrow and doesn't recover one dime for the next 10 years?
NMJack,

Are you assuming that it cannot happen?

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
MathWizard
Posts: 6542
Joined: Tue Jul 26, 2011 1:35 pm

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by MathWizard »

kolea wrote:
dbr wrote:I don't get it. Unless the portfolio is otherwise 100% stocks, why would a person have to sell stocks to withdraw money during a stock market decline. One would either sell bonds to withdraw money and buy stocks or just sell bonds to withdraw money.

Is the contention here that putting this large amount of money in so-called "cash" is different from putting the large amount of money in so-called bonds? Can someone please explain?
I believe the OP's suggestion comes down to whether you continue to rebalance or stop while the market is down. For example, if:
Initial assets = $1M (it is easier to work in $)
AWR = 4%, or 40k
You allocate 10 years worth of withdrawals to bonds, so 40% (400k)
Equities are 60%

Let's say the market drops 30% in value. You now have 400k in bonds and 420k in equities. Your AA is now (about) 52/48. You are heavy in bonds so you make your withdrawals by selling bonds. This is good because your goal is to not sell equities in a down market anyway.

Now assume that the market languishes for another 5 years, in which time you have spent down your bonds by 5x40k = 200k. Your AA is now 67/33. Now you are overweight in equities. Do you sell equities to get your AA back to 60/40 or do you continue selling bonds because the market is still down and you want to protect your equities? That is the problem I see.
Back up 2 years so that you are at 420k equities and 280k bonds, so you have 420k/700k equities and 280/700K bonds.
You are back to 60/40. Now draw out in a 60/40 ratio, 24K from equities and 16K from Bonds.

This all assumes that neither equities or bonds earn anything, which is unlikely to be the case, especially after a 30% market correction. Likely equities have recovered much of the $180K loss.
User avatar
Johnnie
Posts: 587
Joined: Sat May 28, 2016 3:18 pm
Location: Michigan

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by Johnnie »

Doc wrote:
Call_Me_Op wrote:
dbr wrote: Is the contention here that putting this large amount of money in so-called "cash" is different from putting the large amount of money in so-called bonds? Can someone please explain?
In today's rate environment, I think it makes little sense to fundamentally distinguish between cash, ST-bonds, and IT-bonds. They are all essentially bonds with very small coupons.
In any rate environment "it makes little sense to fundamentally distinguish between cash, ST-bonds, and IT-bonds". The only thing the rate environment does is affect the cost (return) from your decision. Many think of MM account as cash but in reality that MM is invested in very short term debt instruments not currency in a vault somewhere.

One shouldn't be changing their FI allocation based on current market conditions unless your name is Gross. (Pun intended. :D ) (emphasis added - Johnnie)
And that's the real question, isn't it? In the event of a big downdraft, how much should a person in distribution mode give-in to the temptation to let their AA get out of whack in the direction of stocks, in the hope that "it will come back because it always has."

Versus take your lumps on the way down and back up, and be glad/wish you saved and invested more than enough so that you'll be OK regardless.
"I know nothing."
Topic Author
TheGipper
Posts: 280
Joined: Fri Jun 26, 2015 9:52 am

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by TheGipper »

Johnnie wrote:
Doc wrote:
Call_Me_Op wrote:
dbr wrote: Is the contention here that putting this large amount of money in so-called "cash" is different from putting the large amount of money in so-called bonds? Can someone please explain?
In today's rate environment, I think it makes little sense to fundamentally distinguish between cash, ST-bonds, and IT-bonds. They are all essentially bonds with very small coupons.
In any rate environment "it makes little sense to fundamentally distinguish between cash, ST-bonds, and IT-bonds". The only thing the rate environment does is affect the cost (return) from your decision. Many think of MM account as cash but in reality that MM is invested in very short term debt instruments not currency in a vault somewhere.

One shouldn't be changing their FI allocation based on current market conditions unless your name is Gross. (Pun intended. :D ) (emphasis added - Johnnie)
And that's the real question, isn't it? In the event of a big downdraft, how much should a person in distribution mode give-in to the temptation to let their AA get out of whack in the direction of stocks, in the hope that "it will come back because it always has."

Versus take your lumps on the way down and back up, and be glad/wish you saved and invested more than enough so that you'll be OK regardless.
OP here. This question ultimately comes down to the time horizon of your investments (i.e. Mostly for your own retirement consumption vs largely to pass on to heirs) and your capacity for risk.

Was directed to a Swedroe article on ETF.com that reviewed another authors paper looking at a similar approach using CAPE 10, D/P, and E/P, with 20-30% shifts in AA, and showed that the valuation based approaches did NOT improve upon a 60/40 portfolio with annual rebalancing. Two primary reasons were 1) while these valuation metrics are strongly predictive of equity performance over the next decade, it is not predictive over the next few years and 2) there are many complicating factors that may degrade the value of determining a historical mean P/E.

The keep it simple crowd may win this argument yet again.
Call_Me_Op
Posts: 9872
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by Call_Me_Op »

Doc wrote:
One shouldn't be changing their FI allocation based on current market conditions unless your name is Gross. (Pun intended. :D )
Why not? There is a risk-reward trade-off that needs to be made with any investment. I might buy a 20 year treasury if its real rate were 4%. When its real rate is 0%, and I am taking all of that inflation risk, I view it differently. I don't feel I am being rewarded for that risk.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
User avatar
Kevin M
Posts: 15750
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by Kevin M »

jeffyscott wrote: In any case, we now have assets far beyond our needs and wants and any conflict would be between ability and willingness to take risk. Our need to take risk is essentially now 0. :moneybag
Interesting way of looking at it, but different than mine. I view the conflict as between ability and need, since need to take risk is low (perhaps even 0, as you say), but for the same reasons need to take risk is low (high ratio of wealth to residual living expenses), ability to take risk is relatively high. So for me, willingness to take risk is the deciding factor on how much risk to take, since there's a spectrum that would be acceptable given ability and need to take risk.

So I take more risk than I need to take for my own personal financial well being, somewhat because I enjoy it, but most of the benefit, if any, probably will go to my heirs. But I make sure that the risk I take does not exceed my ability to take risk, since my heirs financial well being is secondary to my own when it comes to my wealth. Come to think of it, putting a priority on my financial well being is in my heirs' interest, since it reduces if not eliminates the possibility that I will become financially dependent on them.

This can be recast in the LMP/RP framework as having an LMP that has lots of margin for error, and an RP that probably is smaller than it safely could be.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
dbr
Posts: 46137
Joined: Sun Mar 04, 2007 8:50 am

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by dbr »

Kevin M wrote:take risk is essentially now 0. :moneybag
Interesting way of looking at it, but different than mine. I view the conflict as between ability and need, since need to take risk is low (perhaps even 0, as you say), but for the same reasons need to take risk is low (high ratio of wealth to residual living expenses), ability to take risk is relatively high. So for me, willingness to take risk is the deciding factor on how much risk to take, since there's a spectrum that would be acceptable given ability and need to take risk.

[/quote]

My concept of working across those three considerations is that willingness is the psychological dimension of being able to deal with volatility without making really bad decisions. So, as you say, you can't exceed willingess, because that is really dangerous. The thing Larry Swedroe has said about how to resolve low need and high ability is that low risk is always the trump card. He reminds investors that the marginal utility of wealth is a decreasing function and that risk is often underestimated.

I personally have begun to wonder more about willingness though. The question is whether one should reduce risk to accomodate one's level of fear or whether one should adopt one's psychological irrationalities to accomodate one's level of risk. I think there are people for whom fear is appropriate and those for whom psychological adaptation is appropriate.

I also personally would suggest a person who has little need for risk examine their objectives in investing as they may have too narrow a view of things.

This is not intended to be a carte blanche invitation to rationalize excessive risk.
User avatar
Doc
Posts: 10606
Joined: Sat Feb 24, 2007 12:10 pm
Location: Two left turns from Larry

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by Doc »

Call_Me_Op wrote:
Doc wrote:
One shouldn't be changing their FI allocation based on current market conditions unless your name is Gross. (Pun intended. :D )
Why not? There is a risk-reward trade-off that needs to be made with any investment. I might buy a 20 year treasury if its real rate were 4%. When its real rate is 0%, and I am taking all of that inflation risk, I view it differently. I don't feel I am being rewarded for that risk.
Not sure we're not talking past each other. I wouldn't sell equities to buy that 20yr TIPS at 4% real. I also wouldn't sell a ten year nominal to buy it either. (The market already has that difference baked in.) But if I had a 10 maturing I might consider rolling to a 20 instead of another 10. But my IPS says that I don't buy long bonds except TIPS and then not if the real rate is very low. On the other hand a Bill Gross is marching around the yield curve on a short term basis. But he is using derivatives to keep the cost and long term exposure within reasonable limits. I can't do that.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
User avatar
Kevin M
Posts: 15750
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by Kevin M »

dbr wrote: My concept of working across those three conserations is that willingness is the psychological dimension of being able to deal with volatility without making really bad decisions.
Yes, but it's also about how miserable excessive risk might make you feel. Even if I don't make bad decisions, I don't want to be miserable. I think I made pretty good decisions in late 2008 and early 2009, continuing to value average from cash into stocks and investment-grade/corporate bonds, but my level of anxiety was so high that I had to shut out all stock market news except for once each week, when I would grit my teeth, take a look at my portfolio, and enter more buy orders. And this was with a portfolio that was (and still is) much more conservative than the portfolios of most Bogleheads (from the sense I get in reading forum posts). I learned a lot about my willingness to take risk then.
dbr wrote:The question is whether one should reduce risk to accomodate one's level of fear or whether one should adopt one's psychological irrationalities to accomodate one's level of risk.
Good thoughts, but these are not mutually exclusive. I believe my portfolio risk is at or below a level appropriate for my willingness to take risk, but I also believe my willingness to take risk has increased since the financial crisis due to more study, reflection and work on my cognitive biases. Nothing since then has really phased me--the corrections we've had since then, when we start seeing more FUD posts, have simply seemed like rebalancing opportunities, causing essentially no anxiety. But I won't really know if my willingness to take risk truly has increased until/unless we experience another super-scary financial crisis. This is why one element of my investment policy is to consider increasing my allocation to stocks if and only if another super-scary financial crisis occurs.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
NMJack
Posts: 836
Joined: Sun Feb 14, 2016 12:22 pm

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by NMJack »

KlangFool wrote:
NMJack wrote:
KlangFool wrote: TheGipper,

Let's assume that your asset is 50 times annual expense now. If you put 10 years of annual expense into fixed income, we are looking at 80/20 (Stock / fixed income) = 50x. If the market crashes 50%, you are down to 30 years of annual expense. After 10 years, you are selling stock and lock in the losses. So, where does the 100 years come from?

KlangFool
So we are assuming that the market drops 50% tomorrow and doesn't recover one dime for the next 10 years?
NMJack,

Are you assuming that it cannot happen?

KlangFool
Yes. I don't believe that even a severe recession occurring during a period of extreme inefficiency in the market (i.e. irrational exuberance) could result in a 50% drop lasting 10 years. I believe that the inherent, tangible value of corporate assets would preclude that. Remember, stocks are an ownership interest in a combination of tangible (land, buildings, inventory, patents, etc.) and intangible (brand, goodwill, etc.) assets. I don't believe that even total loss of the intangibles could mathematically result in the doomsday you have described. If I was that prone to fear the extreme, I would likely never leave the house, live in a plastic bubble, arm myself with every weapon known to man, etc. etc. Life is just too short. :sharebeer
User avatar
jeffyscott
Posts: 13438
Joined: Tue Feb 27, 2007 8:12 am

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by jeffyscott »

NMJack wrote:I don't believe that even a severe recession occurring during a period of extreme inefficiency in the market (i.e. irrational exuberance) could result in a 50% drop lasting 10 years.
I'm sure folks in 1929 didn't believe that what did happen could happen either. DJIA decline of about 89%, recovery to a level that was still less than 50% of 1929, then a new decline. Did not get above 50% of 1929 peak until 1946.

On an inflation adjusted basis there were some short periods where it went above 50% then dropped again, but still not more than about 60% of 1929 peak until about 1955. It did not go above 50% (inflation adjusted) to stay until about then.

http://www.macrotrends.net/1319/dow-jon ... ical-chart

I think we could well have had such an experience had not central banks and governments taken the extraordinary actions that they did and still are.
NMJack
Posts: 836
Joined: Sun Feb 14, 2016 12:22 pm

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by NMJack »

jeffyscott wrote:

I'm sure folks in 1929 didn't believe that what did happen could happen either. DJIA decline of about 89%, recovery to a level that was still less than 50% of 1929, then a new decline. Did not get above 50% of 1929 peak until 1946.
I do not consider the DJIA reflective of "the market."
User avatar
jeffyscott
Posts: 13438
Joined: Tue Feb 27, 2007 8:12 am

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by jeffyscott »

Yes, I'm sure everything was just fine from 1929 on, if one could just find a different stock index history.

Aha, there it is a mere 86% decline, not 89% like that lying dow index had.
http://www.nbcnews.com/id/37740147/ns/b ... 4frIuhOlDs
NMJack
Posts: 836
Joined: Sun Feb 14, 2016 12:22 pm

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by NMJack »

jeffyscott wrote:Yes, I'm sure everything was just fine from 1929 on, if one could just find a different stock index history.

Aha, there it is a mere 86% decline, not 89% like that lying dow index had.
http://www.nbcnews.com/id/37740147/ns/b ... 4frIuhOlDs
A guy asks me a simple question:
KlangFool wrote: NMJack,

Are you assuming that it cannot happen?

KlangFool
I give him a simple answer:
NMJack wrote: Yes. I don't believe that even a severe recession occurring during a period of extreme inefficiency in the market (i.e. irrational exuberance) could result in a 50% drop lasting 10 years.
I'm fully aware of the financial disaster that was the Great Depression. I just choose to assume (using Klango's term) that it will not happen again during my investing lifetime. If others wish to insure against it by placing ridiculously high allocations in "safe" investments, then more power to them! I would rather roll the dice in favor of a chance at an enjoyable early retirement than work until 75 so that I can avoid equities and the chance of an ill-timed great depression 2.0. :sharebeer
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by Phineas J. Whoopee »

NMJack wrote:...
I do not consider the DJIA reflective of "the market."
What was the drawdown in the Wilshire 5000 during the Great Depression?
PJW
User avatar
Kevin M
Posts: 15750
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by Kevin M »

If you look at annual total returns for the S&P 500 (in whatever form it existed back then), it doesn't look quite so bad, but still pretty bad. As I recall from looking at it yesterday, still down about 50% or more after six years, then after the quick, partial recovery, down again, and still down about 35% since end of 1928 after 12 or 13 years.

This is without inflation adjustment, so probably not this bad in real terms considering the deflation in the early 1930s. I haven't looked lately, but maybe the Simba backtesting spreadsheet maintained by forum members has this data also, and perhaps even the inflation-adjusted data. Can get the CPI numbers from FRED to do the inflation adjustments (back to 1913 for not seasonally adjusted).

You can find total returns since 1928 for S&P 500 here: pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
User avatar
One Ping
Posts: 1087
Joined: Thu Sep 24, 2015 4:53 pm

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by One Ping »

Kevin M wrote:If you look at annual total returns for the S&P 500 (in whatever form it existed back then), it doesn't look quite so bad, but still pretty bad. As I recall from looking at it yesterday, still down about 50% or more after six years, then after the quick, partial recovery, down again, and still down about 35% since end of 1928 after 12 or 13 years.

This is without inflation adjustment, so probably not this bad in real terms considering the deflation in the early 1930s. I haven't looked lately, but maybe the Simba backtesting spreadsheet maintained by forum members has this data also, and perhaps even the inflation-adjusted data. Can get the CPI numbers from FRED to do the inflation adjustments (back to 1913 for not seasonally adjusted).

You can find total returns since 1928 for S&P 500 here: pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html.

Kevin
S&P looks like it was still down 50% in early '42, almost 13 years after the peak in late '29. 60/40 was still down about 25%.

Image
Interesting tidbit, the S&P didn't get back to even (nominally) until just after Taylor had gone through the Battle of the Bulge in Dec. 44 and didn't catch up to the 5 yr Treasuries until just after the Korea "Police Action" started.

One Ping
"Re-verify our range to target ... one ping only."
columbia
Posts: 3023
Joined: Tue Aug 27, 2013 5:30 am

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by columbia »

I believe the term is "deep risk."
User avatar
Kevin M
Posts: 15750
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by Kevin M »

One Ping wrote: S&P looks like it was still down 50% in early '42, almost 13 years after the peak in late '29. 60/40 was still down about 25%.
Are you looking at total return or price only? The Damodaran data I linked to shows total return for S&P down 35% at the end of 1941 compared to end of 1928. Only annual returns are provided, so don't know about intra-year returns.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
User avatar
jeffyscott
Posts: 13438
Joined: Tue Feb 27, 2007 8:12 am

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by jeffyscott »

Kevin M wrote:The Damodaran data I linked to shows total return for S&P down 35% at the end of 1941 compared to end of 1928. Only annual returns are provided, so don't know about intra-year returns.
Shiller has monthly data. In 1929 the decline was about 1/3 in the last quarter of the year. So instead of the annual figure of -8.3% for 1929, could use something like -30% or so to figure things from around the peak.

Shiller also has CPI, real price, and dividends, so everything needed to do whatever sort of analysis you want.
http://www.econ.yale.edu/~shiller/data.htm

Just looking at the real price, he's got it at just about 436 in 1929 and even in 1942 it went as low as 117. Real price finally went above 436 in late 1958.
User avatar
jeffyscott
Posts: 13438
Joined: Tue Feb 27, 2007 8:12 am

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by jeffyscott »

NMJack wrote:I'm fully aware of the financial disaster that was the Great Depression. I just choose to assume (using Klango's term) that it will not happen again during my investing lifetime. If others wish to insure against it by placing ridiculously high allocations in "safe" investments, then more power to them! I would rather roll the dice in favor of a chance at an enjoyable early retirement than work until 75 so that I can avoid equities and the chance of an ill-timed great depression 2.0. :sharebeer
My issue was about rebalancing, without constraints, into a severe and prolonged decline. So if I am at 50/50, say $500,000 stocks and $500,000 bonds/cash and I am spending $30,000 per year from my portfolio, I'd set a constraint such as: don't rebalance if it would take bonds/cash below $300,000. So were there a decline of 40% in stocks, I'd rebalance and have $400K/$400K. Then if there was another -50% from there, I'd rebalance to be at $300K/$300K and that'd be the end of my rebalancing.
User avatar
One Ping
Posts: 1087
Joined: Thu Sep 24, 2015 4:53 pm

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by One Ping »

Kevin M wrote:
One Ping wrote: S&P looks like it was still down 50% in early '42, almost 13 years after the peak in late '29. 60/40 was still down about 25%.
Are you looking at total return or price only? The Damodaran data I linked to shows total return for S&P down 35% at the end of 1941 compared to end of 1928. Only annual returns are provided, so don't know about intra-year returns.

Kevin
The data I used is monthly data for the cumulative growth of $1 from January 1926 onward. I believe it is total return, but I'll check to confirm later today. Even though the crash occurred in Oct '29 the peak in the data I have (from DFA) occurred the August before, so I normalized every thing to the August values to show the relative run-up, crash & recovery.
"Re-verify our range to target ... one ping only."
User avatar
Johnnie
Posts: 587
Joined: Sat May 28, 2016 3:18 pm
Location: Michigan

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by Johnnie »

Jack: I'm fully aware of the financial disaster that was the Great Depression. I just choose to assume (using Klango's term) that it will not happen again during my investing lifetime. If others wish to insure against it by placing ridiculously high allocations in "safe" investments, then more power to them! I would rather roll the dice in favor of a chance at an enjoyable early retirement than work until 75 so that I can avoid equities and the chance of an ill-timed great depression 2.0.
That makes perfect sense given one condition: That your retirement savings are for "nice to haves" not "need to haves." IOW, that your needs are covered by other income sources, or are so modest that an 80 percent crash-and-stay-crashed wouldn't put you in a bread line.

~~~~~~~~~~~~~~~~

I read recently that with dividends and deflation, in real terms 1929 investors actually became whole again in 1938. Also, that the longest period of stocks remaining underwater was a dozen years or so that included the big bad bears and inflation of the 1970s.

Investors in 2016 are a pretty hardened group when you consider the double whammy we've experienced since 2000. Going forward, my guru as always for anything related to the future is Sgt. Schultz: "I know nothing. Nuh-thing!"
"I know nothing."
User avatar
David Jay
Posts: 14569
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by David Jay »

Call_Me_Op wrote:In today's rate environment, I think it makes little sense to fundamentally distinguish between cash, ST-bonds, and IT-bonds. They are all essentially bonds with very small coupons.
You seem to only be considering yield, not capital risk.

If I have funds in a ST bond fund, the NAV will "recover" from a massive interest rate hike within (approximately) the timeframe of the average duration, say a year. So if I have a year's cash on hand then an ST bond fund is very low risk.

By contrast, if I have funds in an IT bond fund, it could be 5 years before the NAV recovers.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
User avatar
One Ping
Posts: 1087
Joined: Thu Sep 24, 2015 4:53 pm

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by One Ping »

One Ping wrote:
Kevin M wrote:
One Ping wrote: S&P looks like it was still down 50% in early '42, almost 13 years after the peak in late '29. 60/40 was still down about 25%.
Are you looking at total return or price only? The Damodaran data I linked to shows total return for S&P down 35% at the end of 1941 compared to end of 1928. Only annual returns are provided, so don't know about intra-year returns.

Kevin
The data I used is monthly data for the cumulative growth of $1 from January 1926 onward. I believe it is total return, but I'll check to confirm later today. Even though the crash occurred in Oct '29 the peak in the data I have (from DFA) occurred the August before, so I normalized every thing to the August values to show the relative run-up, crash & recovery.
Kevin M,

I compared the S&P 500 annual growth calculated from the monthly data I used to the annual (total return) growth shown in the "DFA Matrix 2016" book (https://www.ifa.com/book-library/3493/D ... ook__2016/). (Excerpt below.)

Image
They match exactly. So the number shown in my graph above is "Relative Nominal Total Return Growth."

One thing to remember is the data in the Matrix book are for calendar years, so the number for measuring return starting in 1929 is from the beginning of the year. That is why the return shows positive for 1929 through 1936. If you used monthly data and measure from the peak in August 1929, is not positive again until January 1945.

One Ping
"Re-verify our range to target ... one ping only."
User avatar
Kevin M
Posts: 15750
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by Kevin M »

One Ping wrote: One thing to remember is the data in the Matrix book are for calendar years, so the number for measuring return starting in 1929 is from the beginning of the year. That is why the return shows positive for 1929 through 1936. If you used monthly data and measure from the peak in August 1929, is not positive again until January 1945.
OK, got it--things don't look as bad with annual returns as when you measure from the monthly peak.

The DFA annual numbers shown are pretty close to the Damodaran numbers (note that the matrix shows annualized returns, not cumulative returns). Using annual numbers, max drawdown was about -65% at the end of 1932, with cumulative return of about +1% at end of 1936, back down to about -35% in 1937, then up a bit, then back down to about -35% at end of 1941, then at end of 1944 about +15.5% cumulative.

A pretty rough 15-year ride no matter how you measure it, and what was happening in the stock market probably was the least of most people's worries. Very thankful that 2008 was not the beginning of another ride like this, and let's hope we don't experience anything as bad in our lifetimes, but as a retiree, I don't want to bet my financial well being on it.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
NMJack
Posts: 836
Joined: Sun Feb 14, 2016 12:22 pm

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by NMJack »

jeffyscott wrote:
NMJack wrote:I'm fully aware of the financial disaster that was the Great Depression. I just choose to assume (using Klango's term) that it will not happen again during my investing lifetime. If others wish to insure against it by placing ridiculously high allocations in "safe" investments, then more power to them! I would rather roll the dice in favor of a chance at an enjoyable early retirement than work until 75 so that I can avoid equities and the chance of an ill-timed great depression 2.0. :sharebeer
My issue was about rebalancing, without constraints, into a severe and prolonged decline. So if I am at 50/50, say $500,000 stocks and $500,000 bonds/cash and I am spending $30,000 per year from my portfolio, I'd set a constraint such as: don't rebalance if it would take bonds/cash below $300,000. So were there a decline of 40% in stocks, I'd rebalance and have $400K/$400K. Then if there was another -50% from there, I'd rebalance to be at $300K/$300K and that'd be the end of my rebalancing.
That's the nice thing about 100% equities. You never have to worry about rebalancing. The profit is already built in. :sharebeer
User avatar
One Ping
Posts: 1087
Joined: Thu Sep 24, 2015 4:53 pm

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by One Ping »

Kevin M wrote: OK, got it--things don't look as bad with annual returns as when you measure from the monthly peak.
Unfortunately, you live it month-to-month, or more likely day-to-day, in a situation like that ... unless or course you are a Boglehead with an asset allocation appropriate to your risk tolerance. :happy
Kevin M wrote: (note that the matrix shows annualized returns, not cumulative returns).
Yes. If you move along the top diagonal you can get the calendar year annual returns.
Kevin M wrote: A pretty rough 15-year ride no matter how you measure it
No doubt. :shock:

:sharebeer
One Ping
"Re-verify our range to target ... one ping only."
User avatar
packer16
Posts: 1488
Joined: Sat Jan 04, 2014 1:28 pm

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by packer16 »

IMO the biggest issue with comparison to 1929 is that the comparison is apples and oranges. In the Great Depression, banks failed so folks savings they worked their entire lifetime went "poof". So not only was there a large loss in equity and real estate markets many savers were wiped out. The accumulated savings of many generations were destroyed. Then shortly thereafter you had WW II which continued the wealth destruction. You probably had the most wealth destruction in the history of mankind from 1929 to 1945.

Packer
Buy cheap and something good might happen
User avatar
Kevin M
Posts: 15750
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by Kevin M »

One Ping wrote:
Kevin M wrote: OK, got it--things don't look as bad with annual returns as when you measure from the monthly peak.
Unfortunately, you live it month-to-month, or more likely day-to-day, in a situation like that ... unless or course you are a Boglehead with an asset allocation appropriate to your risk tolerance. :happy
Or unless you follow John Bogle's advice to not peek.

Putting little quips aside, assuming you weren't devastated in other ways, then focusing on just the drop from peak to trough is not necessarily what's important to you. It reminds me of people who freaked out about the recent big drops on the Friday after the Brexit vote while ignoring the increases in the weeks and months leading up to it. Just looking at annual returns, you had a 44% increase in 1928. So do you just ignore that and focus on the subsequent drops? Assuming you were a young accumulator who didn't lose your job, you had some great buying and rebalancing opportunities.

Unless you moved a lifetime of accumulated wealth from cash or bonds to stocks at the peak and then retired, the peak to trough drop may not have been that relevant to you. If you had rebalanced out of stocks on the way up, maybe you rebalanced into stocks on the way down during 1929-1932, and then out again as the market soared again in 1933, 1935 and 1936. Of course if we're talking about 100% stocks, this wouldn't apply.
One Ping wrote:
Kevin M wrote: (note that the matrix shows annualized returns, not cumulative returns).
Yes. If you move along the top diagonal you can get the calendar year annual returns.
Yes, I get that. Annual returns are shown both in the matrix and in the Damodaran data. What I was getting at is that the Damodaran data also shows cumulative total return, while the matrix also shows annualized total return.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by KlangFool »

NMJack wrote:
That's the nice thing about 100% equities. You never have to worry about rebalancing. The profit is already built in. :sharebeer
NMJack,

Or, you invest in a balanced fund like Wellington fund or Life Strategy Moderate fund. It is re-balance daily. Your profit is locked in everyday. Hence, you do not need to worry about the fund losing 50% any time.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
KlangFool
Posts: 31426
Joined: Sat Oct 11, 2008 12:35 pm

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by KlangFool »

Kevin M wrote: Assuming you were a young accumulator who didn't lose your job, you had some great buying and rebalancing opportunities.

Kevin
Kevin M,

Just because a person did lose the job in the first round, how would he / she know that he / she would not be next? Especially in a recession when many of your friends and families are out of job. Hindsight is 20/20.

In 7/2008, my employer told us that he wants everyone of us in the location. Then, in 1/2009, he laid of 50% of us at that location. And, the market crashed. I survived that round but I might be gone in a few months.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
User avatar
jeffyscott
Posts: 13438
Joined: Tue Feb 27, 2007 8:12 am

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by jeffyscott »

Johnnie wrote:I read recently that with dividends and deflation, in real terms 1929 investors actually became whole again in 1938. Also, that the longest period of stocks remaining underwater was a dozen years or so that included the big bad bears and inflation of the 1970s.
When you are retired and living off your portfolio, you may not be able to leave your stocks alone and allow them to become whole again, if you do not have enough safe assets. This would be the reason for keeping enough to cover something like 5-10 years of spending in things that are safer and/or things that are likely to be significantly less volatile than stocks. And then not rebalancing into stocks if and when that would reduce your safety cushion too much.
User avatar
TheTimeLord
Posts: 12092
Joined: Fri Jul 26, 2013 2:05 pm

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by TheTimeLord »

jeffyscott wrote:In any case, we now have assets far beyond our needs and wants and any conflict would be between ability and willingness to take risk. Our need to take risk is essentially now 0. :moneybag
I am in a similar situation (although I won't use the term far beyond just yet), our retirement is assured unless we make a series of unforced errors. So I have decided to manage risk by limiting the absolute dollar amount I have invested in equities instead of a specific AA. As a result I have been harvesting a fair amount of gains in this recent run up further strengthening my long term position. Will this yield me the maximum from my portfolio, who knows and I don't care because at this point maintaining the position I am in is far more important than improving it. I hope I was correctly following your point. Congrats on achieving your financial situation. :beer
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
User avatar
Sheepdog
Posts: 5783
Joined: Tue Feb 27, 2007 2:05 pm
Location: Indiana, retired 1998 at age 65

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by Sheepdog »

jeffyscott wrote:
Johnnie wrote:I read recently that with dividends and deflation, in real terms 1929 investors actually became whole again in 1938. Also, that the longest period of stocks remaining underwater was a dozen years or so that included the big bad bears and inflation of the 1970s.
When you are retired you may not be able to leave your stocks alone and allow them to become whole again, if you do not have enough safe assets. This would be the reason for keeping enough to cover something like 5-10 years of spending in things that are safer and/or things that are likely to be significantly less volatile than stocks. And then not rebalancing into stocks if and when that would reduce your safety cushion too much.
Experience speaking here. This is true. In retirement and living off of your savings every month, safety and growth are both important, but safety comes first. Keep that 3 to 5 year cushion.
Unless you try to do something beyond what you have already mastered you will never grow. (Ralph Waldo Emerson)
mule
Posts: 326
Joined: Sun Mar 01, 2015 9:17 pm

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by mule »

Very interesting thread to say the least and some very good information. I just retired a few months ago and through the years I planned how I was going to exit the work force. One of my plans was to have enough liquid money to live my lifetime including SS and not touch my investments. I will have 13 years of expenses in liquid money to live with out taking SS and If I take SS early I should never have to ever touch an stock investments in my life time. Those stock investment are 2.5M at the present time. I'm not sure if this is a good plan but it was my strategy and plan.

If I would have invested all my money in stocks and the market I'm not sure what I my be worth but it may have been a better plan.
User avatar
packer16
Posts: 1488
Joined: Sat Jan 04, 2014 1:28 pm

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by packer16 »

The alternative way I have seen this described is to take money out of the stock bucket if the stock bucket goes up and only take money from the cash bucket in downturns. When the market recovers you replenish the cash bucket. This way your asset allocation moves more to stocks when they are down and less when they are up. I have played with some scenarios using this approach and some mutual funds and the results appear pretty good.

Packer
Buy cheap and something good might happen
User avatar
jeffyscott
Posts: 13438
Joined: Tue Feb 27, 2007 8:12 am

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by jeffyscott »

TheTimeLord wrote:
jeffyscott wrote:In any case, we now have assets far beyond our needs and wants and any conflict would be between ability and willingness to take risk. Our need to take risk is essentially now 0. :moneybag
I am in a similar situation (although I won't use the term far beyond just yet), our retirement is assured unless we make a series of unforced errors. So I have decided to manage risk by limiting the absolute dollar amount I have invested in equities instead of a specific AA. As a result I have been harvesting a fair amount of gains in this recent run up further strengthening my long term position. Will this yield me the maximum from my portfolio, who knows and I don't care because at this point maintaining the position I am in is far more important than improving it. I hope I was correctly following your point. Congrats on achieving your financial situation. :beer
I say "far beyond" because we could probably live off just pension and we also probably could live off just our assets (in both cases with the addition of SS at some time in the future). We also are not big spenders.

The way I have arrived at a maximum equity figure is to assume 1% real return, SS at 75% of current law (with future inflation adjustments also at 75%). I have set a minimum target for retirement "income" (or, more accurately, spending) based on past spending, adjusted for changes in post-retirement healthcare costs and taxes. Only the assets beyond those needed to meet this minimum target may be invested in stocks, currently this would allow about 70% equities, but we are only at about 1/2 of that.
longinvest
Posts: 5672
Joined: Sat Aug 11, 2012 8:44 am

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by longinvest »

I have a feeling that those who worry about rebalancing into stocks might have a lower allocation to bonds than their effective risk/volatility tolerance during a crisis would seem to suggest.

Take, for example, a retiree with a 30/70 stocks/bonds portfolio. Stocks drop 50%, then comes the time to take a yearly withdrawal and to rebalance. Even if bonds just stayed afloat in value (e.g. didn't increase in value due a sudden attractiveness of bonds during a stock downturn), and assuming the retiree also took a 4% withdrawal at the same time, here's what would happen:

Initial portfolio, before downturn: $1,000,000 ( = $300,000 stocks + $700,000 bonds)
Portfolio after 50% stocks drop: $850,000 ( = $150,000 stocks + $700,000 bonds)

Withdrawal: $34,000 ( = 4% of $850,000)
Portfolio transactions:
- Sell $128,800 from bonds
- Transfer $34,000 into a savings account
- Reinvest $94,800 into stocks

Portfolio after withdrawal and rebalacing: $816,000 ( = $244,800 stocks + $571,200 bonds)

In other words, rebalancing after taking a 4% withdrawal from bonds (because stocks are down) required selling only 14% of the remaining bond allocation to invest the proceeds into stocks. That's a pretty small portion of the bond allocation (after withdrawal), specially when compared to the huge 50% drop of stocks.

Personally, I see no reason to be afraid of moving 14% of the bond allocation into stocks that got 50% cheaper. If the investor is afraid that stocks could still drop another 50%, this means that he should have anticipated a possibility of stocks losing 75% of their value before the downturn and set his asset allocation appropriately. In other words, I think (it is only an opinion) that those who are afraid of rebalancing have set their stock allocation beyond their effective volatility/risk tolerance.

On the other hand, investors must take into account their own likely behavior during a crisis when setting their asset allocation. In other words, it is more important to chose an investment policy that one will stick to, during a crisis, than to chose a possibly better one (however one defines "better") that one won't follow during a crisis. Good luck to all!
Last edited by longinvest on Sun Jul 17, 2016 8:27 am, edited 1 time in total.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
mrc
Posts: 1908
Joined: Sun Jan 10, 2016 5:39 am

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by mrc »

Well said longinvest. Stuff happens, and living on investments means just that.
By the time you know enough to choose a good financial adviser, you don't need one. | bogleheads.org is my advisor: The ER is 0.0% and the advice always solid.
User avatar
jeffyscott
Posts: 13438
Joined: Tue Feb 27, 2007 8:12 am

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by jeffyscott »

longinvest wrote:If the investor is afraid that stocks could still drop another 50%, this means that he should have anticipated a possibility of stocks losing 75% of their value before the downturn and set his asset allocation appropriately.
Maybe you just worded that poorly, but whether one is afraid of it or not, does not change what could happen.

Even though I am close to 30/70, I don't believe that everyone who thinks that a 75% decline is an event that could happen should base their allocations on being able to rebalance into such a decline. Nor do I believe that 30/70 would be appropriate for someone who fears that -75% could occur, but at the same time inappropriate for one in similar circumstances just because they don't think it possible (or that stocks would surely recover in short order in the case of such an event, so they would not fear rebalancing into it).

Is it necessarily better to hold 30/70 all the time just so you can rebalance even into a 75% decline or to hold, say, 50/50 and rebalance into a 50% decline but not beyond that? How much return is the 30/70 person giving up in order to be prepared for the small chance of such an extreme event?
User avatar
Doc
Posts: 10606
Joined: Sat Feb 24, 2007 12:10 pm
Location: Two left turns from Larry

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by Doc »

jeffyscott wrote:Even though I am close to 30/70, I don't believe that everyone who thinks that a 75% decline is an event that could happen should base their allocations on being able to rebalance into such a decline. Nor do I believe that 30/70 would be appropriate for someone who fears that -75% could occur, but at the same time inappropriate for one in similar circumstances just because they don't think it possible (or that stocks would surely recover in short order in the case of such an event, so they would not fear rebalancing into it).
You don't need to do it all. Design your portfolio to rebalance in a say 50% crash. If the crash goes to 75% there is nothing to stop you from stopping that rebalance at some point. That 75% drop is unlikely to happen overnight and if it does our portfolios are going to be the least of our worries.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
Snowjob
Posts: 1650
Joined: Sun Jun 28, 2009 10:53 pm

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by Snowjob »

longinvest wrote:
Personally, I see no reason to be afraid of moving 14% of the bond allocation into stocks that got 50% cheaper. If the investor is afraid that stocks could still drop another 50%, this means that he should have anticipated a possibility of stocks losing 75% of their value before the downturn and set his asset allocation appropriately. In other words, I think (it is only an opinion) that those who are afraid of rebalancing have set their stock allocation beyond their effective volatility/risk tolerance.

On the other hand, investors must take into account their own likely behavior during a crisis when setting their asset allocation. In other words, it is more important to chose an investment policy that one will stick to, during a crisis, than to chose a possibly better one (however one defines "better") that one won't follow during a crisis. Good luck to all!
Best thing I've read in a while, love the part about setting an investment policy that you can stick to during a crisis
User avatar
convert949
Posts: 411
Joined: Thu May 07, 2009 8:33 am
Location: Fort Myers, FL

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by convert949 »

I have been pondering a similar approach to the OP. At the end of the day, (and after being retired for 10 years), I have learned that for me, managing my portfolio successfully revolves around having enough in fixed income to avoid a knee jerk reaction in a bad market. While we maintain a detailed budget, we have found that "stuff happens" and therefore, it is difficult to predict with absolute accuracy, your expenses in any given year causing us consider increasing our equity allocation (currently age in bonds).

In the spirit of Dr. Bernstein, my current IPS is drawn roughly on the concept of Liability Matching (not an LMP) with 1-2 years in cash, another 2-3 in short term bonds, another 10 in intermediate term bonds, and the balance in equities and inflation protected bonds (TIP funds and I Bonds). The equity portion should not be needed (at budget) for 20 years or more.

While I am mostly happy with this approach, I have also wondered if those inflation protected bonds should become part of the 15 years of fixed income, allowing us to carry a higher equity allocation to give us a better chance of weathering the "stuff happens", maybe a couple of "off budget" luxuries as well as to increase our legacy.
User avatar
jeffyscott
Posts: 13438
Joined: Tue Feb 27, 2007 8:12 am

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by jeffyscott »

Doc wrote:
jeffyscott wrote:Even though I am close to 30/70, I don't believe that everyone who thinks that a 75% decline is an event that could happen should base their allocations on being able to rebalance into such a decline. Nor do I believe that 30/70 would be appropriate for someone who fears that -75% could occur, but at the same time inappropriate for one in similar circumstances just because they don't think it possible (or that stocks would surely recover in short order in the case of such an event, so they would not fear rebalancing into it).
You don't need to do it all. Design your portfolio to rebalance in a say 50% crash. If the crash goes to 75% there is nothing to stop you from stopping that rebalance at some point. That 75% drop is unlikely to happen overnight and if it does our portfolios are going to be the least of our worries.
Exactly. There is nothing wrong with having a limit to the amount of rebalancing you will do, in a declining stock market.

Even when it works out and stocks recover, the benefits of rebalancing are not huge. Over the last 10 years, $10,000 in VBINX (automatically rebalanced) would have grown to $19,996 while staring with 60% VTSMX and 40% VBMFX and just letting it ride, your $10,000 would have grown to $19,569. Sure, it's nice to have an extra 2%, but not that big a deal.

While there may be bigger worries in such situations, it's still very likely to be better to have more money than less money. :mrgreen:
User avatar
vitaflo
Posts: 1905
Joined: Sat Sep 03, 2011 3:02 pm

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by vitaflo »

TheGipper wrote: I hope to withdraw at 2%/yr, so for me this is more of an exercise in maximizing estate.
If you're only drawing 2%, it doesn't matter what you do. Certainly you will have the ability to take greater risk. You just have to decide if you want to. You yourself will be fine either way.
itstoomuch
Posts: 5343
Joined: Mon Dec 15, 2014 11:17 am
Location: midValley OR

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by itstoomuch »

TheGipper wrote:This is certainly not a new concept or in any way my idea. I have always thought it made intuitive sense and this has been reinforced after reading darrow kirkpatrick's excellent new book.

Looking at the major market declines of the last 100 years, it takes an average of 3 years for full recovery of the US equity market, the worst several declines taking a full 10 years to recover. If my goal in early retirement is to tactically withdraw from bonds and fixed income when the market is down and from stocks when valuations are high, using CAPE or some variant of, seems to me I need to maintain 3-10 years worth of expenses in safe investmentments such as short term treasuries, to minimize negative impact and lower sequence of return risk.

As long as I rebalance appropriately and can behaviorly weather the storms, I don't see any need to hold more than 3-10 years of expenses in bonds/fixed income despite the fact that this would put me at an aggressive AA.

Granted this strategy would probably only work well for those planning to withdraw 0-4% of their assets per year, not someone needing to withdraw 5%+, as the resulting rebalancing would force one to sell low on equities anyway. I hope to withdraw at 2%/yr, so for me this is more of an exercise in maximizing estate.

Seems kind of archaic to think of optimal AA in terms of %stocks and %fixed income. Keep looking.

Thoughts?
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
User avatar
Doc
Posts: 10606
Joined: Sat Feb 24, 2007 12:10 pm
Location: Two left turns from Larry

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by Doc »

jeffyscott wrote:Even when it works out and stocks recover, the benefits of rebalancing are not huge. Over the last 10 years, $10,000 in VBINX (automatically rebalanced) would have grown to $19,996 while staring with 60% VTSMX and 40% VBMFX and just letting it ride, your $10,000 would have grown to $19,569. Sure, it's nice to have an extra 2%, but not that big a deal.
A total bond market index fund is hardly the best choice if you are trying to access the benefits of what your FI portfolio consists of when you are looking at the portfolio as a whole.

That being said the main purpose of rebalancing is to control risk not to increase return. If you are going to use return as your metric for success you probably shouldn't have any FI at al except for that "emergency/contingency" fund.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
Topic Author
TheGipper
Posts: 280
Joined: Fri Jun 26, 2015 9:52 am

Re: Maintaining 3-10 yrs expenses in fixed income in retirement rather than set %

Post by TheGipper »

vitaflo wrote:
TheGipper wrote: I hope to withdraw at 2%/yr, so for me this is more of an exercise in maximizing estate.
If you're only drawing 2%, it doesn't matter what you do. Certainly you will have the ability to take greater risk. You just have to decide if you want to. You yourself will be fine either way.
Sure it won't matter for the viability of my portfolio lasting my lifetime, but it certainly will matter to the ending portfolio value passed to my children and grandchildren, which in large part is driving my approach. Realize this is not a typical scenario.
Post Reply