Is there a name for the strategy described below?
Here is a withdraw strategy for retirement. The rules are simple, but they depend on some definitions:
- "stocks" portfolio or mutual fund of equities e.g. Vanguard Total Stock Market Index Fund
- "bonds" portfolio or mutual fund of bonds e.g. Vanguard Total Bond Market Index Fund
- "peak" means highest price (inflation-adjusted) of stock
- "threshold" is a fixed fraction below peak e.g. 10% below peak
- "budget" living expenses for a fixed amount of time e.g. $200,000 to cover four years of expenses
- "reserve" is enough bonds to cover budget time span when stock prices are low
- When working at first, invest in stocks only
- At budget span before retirement, every year increment reserve by 1 year until budget span is in reserve
- Every month, sell stocks or bonds to cover monthly living expenses
- if stocks are above threshold, sell stocks
- if stocks are below threshold, sell bonds
- When stocks are at peak again, sell stocks to replenish reserve
- Selling stocks when their prices are high, and avoid selling stock when their prices are low
- Most money is in stocks for higher returns
- Budget money is in bonds which is more stable
- Running out of reserve before stock prices recover, in which case you sell stocks at low prices
What is the optimal amount of time that the reserve should cover?
Is there a finical service that can automatically replenish the reserve (sell stocks and buy bonds) using similar rules?
Maybe this is a bad strategy and I don't see why. Please comment.
(I am familiar with Vanguard Target Retirement Funds)