Withdraw strategy for retirement

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wolfv
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Withdraw strategy for retirement

Post by wolfv » Sat Jan 27, 2018 6:34 pm

I have a strategy idea for withdrawing for retirement. But I haven't read it anywhere, so that's a bad sign. :D
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
Retirement withdraw strategy rules:
  • 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
The strategy has advantages and risks.
Advantages:
  • 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
Risk:
  • Running out of reserve before stock prices recover, in which case you sell stocks at low prices
Is there a name for this strategy? I would like to read some research about it.
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)

Thank you.
Last edited by wolfv on Sat Jan 27, 2018 11:35 pm, edited 1 time in total.

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willthrill81
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Re: Withdraw strategy for retirement

Post by willthrill81 » Sat Jan 27, 2018 6:42 pm

This is basically a 'bucketed approach' to withdrawals: taking withdrawals from stocks as long as they are 'up', taking withdrawals from bonds otherwise, and then replenishing the bond bucket when stocks are 'up' again.

It's a pain to try to model how this would have performed in the past, but if I recall, those who have done so report that it's little/no better from an objective standpoint than just using a traditional AA approach. That being said, I have no doubt that many are using a very similar method to taking withdrawals.

Whether this method would be better from a psychological standpoint is something only you can answer.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

IlliniDave
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Re: Withdraw strategy for retirement

Post by IlliniDave » Sat Jan 27, 2018 6:47 pm

I don't know of a name for it. It's a little like combining rebalancing and withdrawal strategy where you'd target withdrawals to preserve an AA, whether the AA based on percentages or some other criteria.
Don't do something. Just stand there!

wolfv
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Re: Withdraw strategy for retirement

Post by wolfv » Sat Jan 27, 2018 6:52 pm

What does "AA" stand for? American Airlines? 12-step program?

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willthrill81
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Re: Withdraw strategy for retirement

Post by willthrill81 » Sat Jan 27, 2018 6:57 pm

wolfv wrote:
Sat Jan 27, 2018 6:52 pm
What does "AA" stand for? American Airlines? 12-step program?
Asset allocation, like 60% stocks / 40% bonds (60/40).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

MoonOrb
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Re: Withdraw strategy for retirement

Post by MoonOrb » Sat Jan 27, 2018 6:59 pm

Asset allocation.

dbr
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Re: Withdraw strategy for retirement

Post by dbr » Sat Jan 27, 2018 7:00 pm

wolfv wrote:
Sat Jan 27, 2018 6:52 pm
What does "AA" stand for? American Airlines? 12-step program?
AA = Asset Allocation The idea is that what happens to a portfolio over time depends on what average return that portfolio targets together with the effect of how variable that return is one year after the next. "Fixed income" also known as bonds also known as bonds, CDs, savings account etc. targets low return but without much variation from year to year. Stocks target high return with lots of uncertainty in what is returned from year to year. An allocation between those two provides different choices of how much return to target and how much variation to live with. Lots of things are affected by what choice you make, and some things are surprisingly not as much affected as one might have thought.

wolfv
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Re: Withdraw strategy for retirement

Post by wolfv » Sat Jan 27, 2018 11:27 pm

Thanks for all your responses. So I was able to read about the bucketed approach.

My strategy is a kind of 'bucketed approach'.
And the performance would be about the same as a Targeted retirement-date approach.
The main difference is...

Targeted strategy:
  • tuned for people that retire at typical age, good for IRA, more convenient
  • risk of not having a good asset allocation schedule for unexpected early retirement
My bucket strategy:
  • fits retirement at any age, more flexible
  • for unexpected early retirement, build reserve when needed

AlohaJoe
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Re: Withdraw strategy for retirement

Post by AlohaJoe » Sat Jan 27, 2018 11:38 pm

wolfv wrote:
Sat Jan 27, 2018 6:34 pm
Maybe this is a bad strategy and I don't see why. Please comment.
Have you tested it? Have you compared it to other withdrawal strategies in the literature?

I can see lots of reasons why it is a bad strategy.

itstoomuch
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Re: Withdraw strategy for retirement

Post by itstoomuch » Sat Jan 27, 2018 11:55 pm

reads like a framework for an algorithm.
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

wolfv
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Re: Withdraw strategy for retirement

Post by wolfv » Sun Jan 28, 2018 12:56 am

AlohaJoe wrote:
Sat Jan 27, 2018 11:38 pm
wolfv wrote:
Sat Jan 27, 2018 6:34 pm
Maybe this is a bad strategy and I don't see why. Please comment.
Have you tested it? Have you compared it to other withdrawal strategies in the literature?

I can see lots of reasons why it is a bad strategy.
I have not tested it. I only read 3 articals about bucket strategies written by financial advisers, nothing scholarly.
I decided to stick with Vanguard Target Retirement fund because I don't know what I am doing.
But I am curious, what is bad about the strategy I posted?

wolfv
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Re: Withdraw strategy for retirement

Post by wolfv » Sun Jan 28, 2018 12:57 am

itstoomuch wrote:
Sat Jan 27, 2018 11:55 pm
reads like a framework for an algorithm.
Ha! I am software developer.

itstoomuch
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Re: Withdraw strategy for retirement

Post by itstoomuch » Sun Jan 28, 2018 1:35 am

^
"Is there a name for this strategy?"
yes, it's called, Retiree's Optimized Choice, Rev 277-7804.309-681.8s
Last edited by itstoomuch on Sun Jan 28, 2018 2:04 am, edited 1 time in total.
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

AlohaJoe
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Re: Withdraw strategy for retirement

Post by AlohaJoe » Sun Jan 28, 2018 1:42 am

wolfv wrote:
Sun Jan 28, 2018 12:56 am
AlohaJoe wrote:
Sat Jan 27, 2018 11:38 pm
wolfv wrote:
Sat Jan 27, 2018 6:34 pm
Maybe this is a bad strategy and I don't see why. Please comment.
Have you tested it? Have you compared it to other withdrawal strategies in the literature?

I can see lots of reasons why it is a bad strategy.
I have not tested it. I only read 3 articals about bucket strategies written by financial advisers, nothing scholarly.
I decided to stick with Vanguard Target Retirement fund because I don't know what I am doing.
But I am curious, what is bad about the strategy I posted?
Constants matter. Is the "budget" 4 years? 2 years? 7 years? How do you know the number you picked isn't the worst possible choice? Why is the threshold 10% versus 25%? How do you know the threshold you've chosen isn't the worst possible threshold?

Why is it measured in years instead of percentages? Why 4 years of living expenses instead of 25% of the portfolio? How do you know that one is better or worse than the other without testing?

Why is the "peak" the right choice for when to use bonds versus stocks? Why not any of a number of other choices? Say, 50% above where you started? Or "did stocks have a positive year last year"?

Why is inflation-adjusted better or worse than non-inflation-adjusted?

Selling bonds whenever stocks are more than 10% from their all-time high means that most retirees will sell all of their bonds and be 100% stocks after the first four years. Do you think that most retirees are okay with that?

Selling bonds when the market tanks is a potentially good idea but it means that when the market crashes you're telling people to load up on stocks and make their portfolio even more volatile. Do you think that would be an easy thing to tell retirees? "The market crashed 40%, you're 77 years old, now is the time to be 100% stocks."

Most real portfolios combine different asset classes. Is the peak and threshold based on the overall portfolio? Or different asset classes? That is, if my International is down 20% but my REITs are up 30%...what do I do? Overall, I'm still within the threshold so....I'm supposed to sell my International even though it is down 20%? Even though one of the claimed advantages is not selling stocks when prices are low?

Even if all of the choices are good & right, how much of an improvement is it over something simpler & naive like just keeping a 60/40 portfolio and doing annual rebalancing? Does it result in an extra $500 a year of spending? Or an extra $10,000 a year?

Is this strategy something that you could continue to implement when you are 80 years old and cognitively impaired? Is it something that your spouse could implement once you die?

Coming up with a withdrawal strategy isn't exactly brain surgery but it is does have some gotchas.

wolfv
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Re: Withdraw strategy for retirement

Post by wolfv » Sun Jan 28, 2018 3:29 am

AlohaJoe wrote:
Sun Jan 28, 2018 1:42 am
Constants matter. Is the "budget" 4 years? 2 years? 7 years? How do you know the number you picked isn't the worst possible choice?
This is similar to bucket-2 of other bucket strategies, the example bucket-2s I saw used 10 years.
AlohaJoe wrote:
Sun Jan 28, 2018 1:42 am
Why is the threshold 10% versus 25%? How do you know the threshold you've chosen isn't the worst possible threshold?
I haven't run the numbers, 10% was just an example.
AlohaJoe wrote:
Sun Jan 28, 2018 1:42 am
Why is it measured in years instead of percentages? Why 4 years of living expenses instead of 25% of the portfolio? How do you know that one is better or worse than the other without testing?
Years are used because market cycles are in years.
AlohaJoe wrote:
Sun Jan 28, 2018 1:42 am
Why is the "peak" the right choice for when to use bonds versus stocks? Why not any of a number of other choices? Say, 50% above where you started? Or "did stocks have a positive year last year"?
There are probably hundreds of variations. "Peak" is simple and gets the point across.
AlohaJoe wrote:
Sun Jan 28, 2018 1:42 am
Why is inflation-adjusted better or worse than non-inflation-adjusted?
To exclude the effect of inflation when computing threshold.
AlohaJoe wrote:
Sun Jan 28, 2018 1:42 am
Selling bonds whenever stocks are more than 10% from their all-time high means that most retirees will sell all of their bonds and be 100% stocks after the first four years. Do you think that most retirees are okay with that?
When stocks are at peak again, sell stocks to replenish reserve (buy bonds).
This can be done manually every month when user logs in to withdraw monthly living expenses, or automatically if there is such a service.
There is a risk of running out of reserve before stock prices recover, in which case user sells stocks at low prices to cover living expenses.
AlohaJoe wrote:
Sun Jan 28, 2018 1:42 am
Selling bonds when the market tanks is a potentially good idea but it means that when the market crashes you're telling people to load up on stocks and make their portfolio even more volatile. Do you think that would be an easy thing to tell retirees? "The market crashed 40%, you're 77 years old, now is the time to be 100% stocks."
Better to do that automatically as a service, similar automatic rebalancing of Targeted funds.
AlohaJoe wrote:
Sun Jan 28, 2018 1:42 am
Most real portfolios combine different asset classes. Is the peak and threshold based on the overall portfolio? Or different asset classes? That is, if my International is down 20% but my REITs are up 30%...what do I do? Overall, I'm still within the threshold so....I'm supposed to sell my International even though it is down 20%? Even though one of the claimed advantages is not selling stocks when prices are low?
That kind of complexity is a problem with bucket strategies in general.
Better to keep it simple with just Vanguard Total Stock Market Index Fund and Vanguard Total Bond Market Index Fund.
AlohaJoe wrote:
Sun Jan 28, 2018 1:42 am
Even if all of the choices are good & right, how much of an improvement is it over something simpler & naive like just keeping a 60/40 portfolio and doing annual rebalancing? Does it result in an extra $500 a year of spending? Or an extra $10,000 a year?

Is this strategy something that you could continue to implement when you are 80 years old and cognitively impaired? Is it something that your spouse could implement once you die?
Would have to be automated and sold as a service.
AlohaJoe wrote:
Sun Jan 28, 2018 1:42 am
Coming up with a withdrawal strategy isn't exactly brain surgery but it is does have some gotchas.
That's way too much work for me to figure out. I will stick with Vanguard Target Retirement fund.

Well that was a good thought exercise. It looked a lot simpler when I started. :mrgreen:

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Earl Lemongrab
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Re: Withdraw strategy for retirement

Post by Earl Lemongrab » Sun Jan 28, 2018 2:55 pm

Many people use new money directed to lagging allocations to perform a sort of continual rebalancing, one could certain do that in reverse for withdrawals.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

wolfv
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Re: Withdraw strategy for retirement

Post by wolfv » Sun Jan 28, 2018 3:18 pm

Earl Lemongrab wrote:
Sun Jan 28, 2018 2:55 pm
Many people use new money directed to lagging allocations to perform a sort of continual rebalancing, one could certain do that in reverse for withdrawals.
Thanks Earl,

My bucket strategy is a kind of continuous conversion from stocks to bonds.
Which is OK for an estate that will span multiple generations.
But if stock prices crash, they may not recover in my life time.
So the glide path to conservative investments, as provided by Target-date funds, is better for my situation.

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