Soft vs Hard Rebalancing

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retiredjg
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Re: Soft vs. Hard Rebalancing

Post by retiredjg »

marcopolo wrote: Sat Jul 02, 2022 10:45 pm I think many people do this naturally, they just don't give it a name.
I agree. People do it. It's the natural thing to do and the easiest thing to do.
Exchme
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Re: Soft vs. Hard Rebalancing

Post by Exchme »

Marseille07 wrote: Sat Jul 02, 2022 8:54 pm
Exchme wrote: Sat Jul 02, 2022 8:21 pm Whew! Two pages and I think OP's strategy can be boiled down to - all stocks except a non-refillable emergency cash bucket. Use the cash bucket iff stocks are below the minimum stock percentage.

Since that hasn't been studied all that well (at least that I know of), I would use the SWR spreadsheet available at ERN since it has monthly historical data and try it out to at least make sure it wouldn't have failed spectacularly in the past. Then I would think about how the "near misses" might have been different in a way that hurt this strategy more than other strategies.
Where did you get the idea of a non-refillable emergency cash bucket? My fixed income happens to be cash but that's actually besides the point. The idea is to simply withdraw from whichever is heavier at the moment.

This idea isn't at all crazy. If you aim for 60/40 and your AA is 50/50, why would you withdraw from equities? You don't.
When did I imply it was "crazy"? I said that what you are doing, which I apparently still don't grasp, doesn't have a lot of testing in the literature, so you should do your own and I gave a suggestion of a place to start.

As for my not grasping what you are doing in retirement, I haven't seen the description of how you refill your cash once you use it. I got the idea you don't rebalance into cash from your writing (across several different posts):

I only "nudge" equities, I do not reset my AA to 50/50. If my AA keeps going up to 70/30, 80/20, 90/10, I don't care. I only sell the amount needed for monthly withdrawals (if I'm in retirement).

This is why I said I don't rebalance out of equities, other than the amount being nudged. It's possible my approach is actually zero-way rebalancing rather than one-way rebalancing, or perhaps it's called something else. In which case, I need to update my terminology.

"I don't care" doesn't mean I don't care what my AA is, I don't care that the market run-up far outpaces the nudging counter-effect and makes my AA very aggressive.

Yeah, I think my terminology was off. What you're describing is one-way rebalancing, mine's no rebalancing.
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Re: Soft vs. Hard Rebalancing

Post by KlangFool »

OP,

1) What is your targeted AA?

2) What is you current AA?

3) What is the number of years of expense in your Fixed Income/Cash/Bond?

4) I assume that after X number of years of withdrawing from your fixed income/Cash/Bond, you may ended up withdrawing the stock if the stock market stays down long enough. What is X? Let's assume that the stock market crashes 50% and stays down for X number of years.

" If you aim for 60/40 and your AA is 50/50, why would you withdraw from equities?"

5) In your system, if you withdraw from the bonds/fixed income long enough and the stock stays down, eventually, your AA would become 60/40 and more.

KlangFool
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Re: Soft vs. Hard Rebalancing

Post by Marseille07 »

Exchme wrote: Sun Jul 03, 2022 8:01 am As for my not grasping what you are doing in retirement, I haven't seen the description of how you refill your cash once you use it. I got the idea you don't rebalance into cash from your writing (across several different posts)
OK, so let me explain the "refill" process.

Say I aim for 50/50. My portfolio is currently $56/$50 and I need to withdraw $4. Since equities are heavier, I draw $4 from stocks. But $4 doesn't just disappear, it becomes part of fixed income...so my resulting portfolio after withdrawal is $52/$54.

My soft-rebalancing is done at this point and I just spend down fixed income until my next checkpoint. This is how fixed income is refilled.
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Re: Soft vs. Hard Rebalancing

Post by Marseille07 »

dknightd wrote: Sun Jul 03, 2022 6:44 am
Marseille07 wrote: Sat Jul 02, 2022 10:32 pm For some reason many posters don't appear to understand the concept of soft-rebalancing, which I find somewhat concerning.
I *think* I understand what you mean by soft and hard rebalancing. But I'm not positive.
Soft: take from which ever asset class is overvalued
Hard: Rebalance, then withdraw proportionally.
I guess this assumes you are in the withdrawal phase (though I suppose the same concept could be applied during accumulation)

When I was accumulating, I contributed according to my desired asset allocation. Once a year I did a "hard" rebalance to my desired allocation. This was easy, my 403b provider (TIAA) would do this automatically for me on my birthday.
Now that I'm withdrawing, I currently take my withdraws from "fixed" income. I've left automatic annual rebalancing active on some of my accounts. Others I've turned it off. For various reasons, mostly high variance this year. I have more 403b accounts than I would like - partially because some are taxed in my state, and some are not. Eventually (before RMD kicks in) I plan to have this down to just two accounts. One state taxable, one not. With automatic rebalancing once again in place on all accounts.

There are many ways to do this rebalancing thing. Frankly I do not think it makes much difference how you do it. Currently I do nothing except annual rebalance in some accounts, and others I'm more active. If stocks happen to go way up (like they did in my first 2 years of retirement) I move some to fixed. If stocks happen to go way down (which it looks like they might this year) I'll have to move some fixed into equities.

Either way, for now, all withdrawals come from "fixed". Which for me is TIAA Traditional which always goes up, although lately less than inflation rate.

TIAA allows the option of taking all withdrawals proportionally. I'll probably do that when I'm subject to RMD. It will eventually be my low tech Variable withdrawal method. And keep automatic annual rebalancing in place. Essentially I'll be on auto pilot. I plan to buy more annuities, and at 70 claim SS. Together those should cover my basic expenses. RMD will for fun, or something, not sure yet.

I'm not sure how previous SWR studies handled rebalancing. And it probably does not matter much (at least to me, and probably you). I assume they did "hard" rebalancing since that would be easier to model.

I think 4% is still a useful guidance. Most likely you will not run out of money in 30 years. You might end up with too much left over. I don't think the rebalancing method you choose matters too much.
Yeah, it might not matter too much; it's just that soft-rebalancing is simple & easy because you're just making one move, not multiple moves.

Also, it lets you save equities as long as possible. There is a study showing this is beneficial, I've quoted somewhere but not sure if I did so on this thread.
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Re: Soft vs. Hard Rebalancing

Post by retiredjg »

Marseille07, I think what we have learned here is that you actually do not "rebalance" in the way the term is usually used here on the forum. "Rebalance" means to bring your portfolio back to your target asset allocation. You apparently don't do that, by choice.

You are "nudging" and calling it a "soft rebalance". And that is fine. Call it what you like. Just understand that it is not the same as rebalancing. I would call it a nudge towards rebalancing or a nudge toward target.

The term "soft rebalance" is not new. It's been used around here for a number of years and has also been used to describe more than one type of activity.


There is one other thing that I think may be causing some confusion in all this. It is unclear what you actually do...as opposed to what you plan to do in the future. Sometimes people write in the present tense, thinking that readers understand that this is what you plan to do in the future.

A couple of times I've wondered if you are talking about now vs what you plan to do later. This might explain why it seems you are saying one thing and then saying something different later on.

If you like your method and it satisfies your needs, use it.
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Re: Soft vs. Hard Rebalancing

Post by Marseille07 »

retiredjg wrote: Sun Jul 03, 2022 11:00 am Marseille07, I think what we have learned here is that you actually do not "rebalance" in the way the term is usually used here on the forum. "Rebalance" means to bring your portfolio back to your target asset allocation. You apparently don't do that, by choice.

You are "nudging" and calling it a "soft rebalance". And that is fine. Call it what you like. Just understand that it is not the same as rebalancing. I would call it a nudge towards rebalancing or a nudge toward target.

The term "soft rebalance" is not new. It's been used around here for a number of years and has also been used to describe more than one type of activity.


There is one other thing that I think may be causing some confusion in all this. It is unclear what you actually do...as opposed to what you plan to do in the future. Sometimes people write in the present tense, thinking that readers understand that this is what you plan to do in the future.

A couple of times I've wondered if you are talking about now vs what you plan to do later. This might explain why it seems you are saying one thing and then saying something different later on.

If you like your method and it satisfies your needs, use it.
I didn't coin the term. I actually used to call it "nudging" myself. If that's more suited then I'm absolutely fine to call it so. No one's purposely trying to use confusing terms here.

I will address KlangFool's questions later today.
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Re: Soft vs. Hard Rebalancing

Post by KlangFool »

Marseille07 wrote: Sun Jul 03, 2022 10:57 am
Exchme wrote: Sun Jul 03, 2022 8:01 am As for my not grasping what you are doing in retirement, I haven't seen the description of how you refill your cash once you use it. I got the idea you don't rebalance into cash from your writing (across several different posts)
OK, so let me explain the "refill" process.

Say I aim for 50/50. My portfolio is currently $56/$50 and I need to withdraw $4. Since equities are heavier, I draw $4 from stocks. But $4 doesn't just disappear, it becomes part of fixed income...so my resulting portfolio after withdrawal is $52/$54.

My soft-rebalancing is done at this point and I just spend down fixed income until my next checkpoint. This is how fixed income is refilled.
Marseille07,

You withdraw the $4 to spend. Hence, it disappear eventually. If you would like to keep it in your portfolio for a few months, go right ahead. But, it serves zero purposes. You do not need to look at your portfolio again until the next withdrawal. So, what is the point for you to do this?

It is easier to assume the $4 disappear. Do not make your life harder. Do not make busy work. Simplify.

K.I.S.S.

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Re: Soft vs. Hard Rebalancing

Post by Marseille07 »

KlangFool wrote: Sun Jul 03, 2022 12:04 pm Marseille07,

You withdraw the $4 to spend. Hence, it disappear eventually. If you would like to keep it in your portfolio for a few months, go right ahead. But, it serves zero purposes. You do not need to look at your portfolio again until the next withdrawal. So, what is the point for you to do this?

It is easier to assume the $4 disappear. Do not make your life harder. Do not make busy work. Simplify.

K.I.S.S.

KlangFool
I was just explaining how fixed income is seen as "refilled" as the poster was asking. If equities keep growing then it is possible (if not likely) that the amount of fixed income increases over time as well.
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Re: Soft vs. Hard Rebalancing

Post by LadyGeek »

Marseille07 wrote: Sun Jul 03, 2022 11:07 am
retiredjg wrote: Sun Jul 03, 2022 11:00 am Marseille07, I think what we have learned here is that you actually do not "rebalance" in the way the term is usually used here on the forum. "Rebalance" means to bring your portfolio back to your target asset allocation. You apparently don't do that, by choice.

You are "nudging" and calling it a "soft rebalance". And that is fine. Call it what you like. Just understand that it is not the same as rebalancing. I would call it a nudge towards rebalancing or a nudge toward target.

The term "soft rebalance" is not new. It's been used around here for a number of years and has also been used to describe more than one type of activity.


There is one other thing that I think may be causing some confusion in all this. It is unclear what you actually do...as opposed to what you plan to do in the future. Sometimes people write in the present tense, thinking that readers understand that this is what you plan to do in the future.

A couple of times I've wondered if you are talking about now vs what you plan to do later. This might explain why it seems you are saying one thing and then saying something different later on.

If you like your method and it satisfies your needs, use it.
I didn't coin the term. I actually used to call it "nudging" myself. If that's more suited then I'm absolutely fine to call it so. No one's purposely trying to use confusing terms here.

I will address KlangFool's questions later today.
The OP can change the thread title by editing the Subject: line in Post #1. Don't change it too many times, as it will get confusing. If you can come up with a concise and clear title, go for it.
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Re: Soft vs. Hard Rebalancing

Post by Marseille07 »

LadyGeek wrote: Sun Jul 03, 2022 12:29 pm The OP can change the thread title by editing the Subject: line in Post #1. Don't change it too many times, as it will get confusing. If you can come up with a concise and clear title, go for it.
I wasn't aware Post #1's subject is the thread title. I just updated myself, thank you.
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Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by FactualFran »

Marseille07 wrote: Sat Jul 02, 2022 5:50 pm I have reasons to believe that soft rebalancing comes out ahead, but I do not have studies to back up my belief.
Doing the calculations, there is generally little difference in the 30-year SWR for the two approaches of 1) withdraw and rebalance and 2) withdraw from higher. Using the historical data from a Stocks, Bonds, Bills, and Inflation yearbook, with a 50:50 portfolio of Large-Cap Stocks and Intermediate-Term Government Bonds, the starting years with the largest differences were 1927 and 1952.

With 1927 as the starting year, the withdraw from higher approach supported a lower SWR than the withdraw and rebalance approach. After the withdrawal at the end of 1932, 37% of the portfolio would have been in stocks with the withdraw from higher approach, while 50% would have been with the withdraw and rebalance approach. A portfolio with a lower allocation to stocks at the end of 1932 would have benefited less from the high stock return for 1933.

With 1952 as the starting year, the withdraw from higher approach supported a higher SWR than the withdraw and rebalance approach. After the withdrawal at the end of 1954, 61% of the portfolio would have been in stocks with the withdraw from higher approach, while 50% would have been with the withdraw and rebalance approach. A portfolio with a higher allocation to stocks at the end of 1954 would have benefited more from the high stock return for 1955.
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Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by Marseille07 »

FactualFran wrote: Sun Jul 03, 2022 12:55 pm Doing the calculations, there is generally little difference in the 30-year SWR for the two approaches of 1) withdraw and rebalance and 2) withdraw from higher. Using the historical data from a Stocks, Bonds, Bills, and Inflation yearbook, with a 50:50 portfolio of Large-Cap Stocks and Intermediate-Term Government Bonds, the starting years with the largest differences were 1927 and 1952.

With 1927 as the starting year, the withdraw from higher approach supported a lower SWR than the withdraw and rebalance approach. After the withdrawal at the end of 1932, 37% of the portfolio would have been in stocks with the withdraw from higher approach, while 50% would have been with the withdraw and rebalance approach. A portfolio with a lower allocation to stocks at the end of 1932 would have benefited less from the high stock return for 1933.

With 1952 as the starting year, the withdraw from higher approach supported a higher SWR than the withdraw and rebalance approach. After the withdrawal at the end of 1954, 61% of the portfolio would have been in stocks with the withdraw from higher approach, while 50% would have been with the withdraw and rebalance approach. A portfolio with a higher allocation to stocks at the end of 1954 would have benefited more from the high stock return for 1955.
Just to be clear on 1) withdraw and rebalance, you're calculating the withdrawal amount properly?

For example, let's say my target is 60/40 and my current AA is 300K/700K and I need 40K. "Withdraw and rebalance" would have to draw 24K from equities, 16K from bonds, then rebalance the rest as 576K/384K.

It's generally easier to rebalance first to 600K/400K, then withdraw proportionally from both assets.
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Re: Soft vs. Hard Rebalancing

Post by Marseille07 »

KlangFool wrote: Sun Jul 03, 2022 10:00 am OP,

1) What is your targeted AA?

2) What is you current AA?

3) What is the number of years of expense in your Fixed Income/Cash/Bond?

4) I assume that after X number of years of withdrawing from your fixed income/Cash/Bond, you may ended up withdrawing the stock if the stock market stays down long enough. What is X? Let's assume that the stock market crashes 50% and stays down for X number of years.

" If you aim for 60/40 and your AA is 50/50, why would you withdraw from equities?"

5) In your system, if you withdraw from the bonds/fixed income long enough and the stock stays down, eventually, your AA would become 60/40 and more.

KlangFool
1) What is your targeted AA?
Right now it is <everything_else_in_equities>/300K cash because I need to save up for a property. Otherwise I aim for 90/10(cash) to 95/5(cash).

2) What is you current AA?
<equities>/<some_cash_less_than_300K>

3) What is the number of years of expense in your Fixed Income/Cash/Bond?
I don't measure by that, since I would assume 300K would provide enough.

4) I assume that after X number of years of withdrawing from your fixed income/Cash/Bond, you may ended up withdrawing the stock if the stock market stays down long enough. What is X? Let's assume that the stock market crashes 50% and stays down for X number of years.

I don't have X because I'm just drawing from whichever is heavier at the time. If there is a big crash, fixed income goes heavy for a long time. We don't know ahead of time how long.

5) In your system, if you withdraw from the bonds/fixed income long enough and the stock stays down, eventually, your AA would become 60/40 and more.
That's correct. Then I would start drawing from equities via nudging.
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Re: Soft vs. Hard Rebalancing

Post by KlangFool »

Marseille07 wrote: Sun Jul 03, 2022 1:51 pm
KlangFool wrote: Sun Jul 03, 2022 10:00 am OP,

1) What is your targeted AA?

2) What is you current AA?

3) What is the number of years of expense in your Fixed Income/Cash/Bond?

4) I assume that after X number of years of withdrawing from your fixed income/Cash/Bond, you may ended up withdrawing the stock if the stock market stays down long enough. What is X? Let's assume that the stock market crashes 50% and stays down for X number of years.

" If you aim for 60/40 and your AA is 50/50, why would you withdraw from equities?"

5) In your system, if you withdraw from the bonds/fixed income long enough and the stock stays down, eventually, your AA would become 60/40 and more.

KlangFool
1) What is your targeted AA?
Right now it is <everything_else_in_equities>/300K cash because I need to save up for a property. Otherwise I aim for 90/10(cash) to 95/5(cash).

2) What is you current AA?
<equities>/<some_cash_less_than_300K>

3) What is the number of years of expense in your Fixed Income/Cash/Bond?
I don't measure by that, since I would assume 300K would provide enough.

4) I assume that after X number of years of withdrawing from your fixed income/Cash/Bond, you may ended up withdrawing the stock if the stock market stays down long enough. What is X? Let's assume that the stock market crashes 50% and stays down for X number of years.

I don't have X because I'm just drawing from whichever is heavier at the time. If there is a big crash, fixed income goes heavy for a long time. We don't know ahead of time how long.

5) In your system, if you withdraw from the bonds/fixed income long enough and the stock stays down, eventually, your AA would become 60/40 and more.
That's correct. Then I would start drawing from equities via nudging.
Marseille07,

"I don't measure by that, since I would assume 300K would provide enough."

A) How much are you going to use to pay for the house?

B) Please do not tell us that most of your annual expense are covered by the pension and social security. And, your retirement expense is zero.

C) If you retirement expense after pension and social security is zero, you should mention that first. It is pointless for most of us to discuss with you further. You can lose all your stocks and it won't matter to you.

D) Anything less than that, why do you think that it is safe to be 90/10 or 95/5?

E) How do you know that 300K of cash is enough for you? What is this assumption based on?

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Re: Soft vs. Hard Rebalancing

Post by Marseille07 »

KlangFool wrote: Sun Jul 03, 2022 2:23 pm
A) How much are you going to use to pay for the house?
Probably 200K~250K *out of cash* and finance the rest by selling equities.

B) Please do not tell us that most of your annual expense are covered by the pension and social security. And, your retirement expense is zero.
I do not have a pension and I do not count SS in my planning. My guess of retirement expense is probably 30K~40K.

C) If you retirement expense after pension and social security is zero, you should mention that first. It is pointless for most of us to discuss with you further. You can lose all your stocks and it won't matter to you.

Well I didn't initiate the discussion as far as my AA, you did. It's also unclear how this relates to nudging vs rebalancing.

D) Anything less than that, why do you think that it is safe to be 90/10 or 95/5?
My equity side is not safe, I never claimed it is.

E) How do you know that 300K of cash is enough for you? What is this assumption based on?
300K cash that's getting refilled 3~4%/year when you're spending 30K~40K/year? That's enough.
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Re: Soft vs. Hard Rebalancing

Post by KlangFool »

Marseille07 wrote: Sun Jul 03, 2022 2:37 pm
KlangFool wrote: Sun Jul 03, 2022 2:23 pm
A) How much are you going to use to pay for the house?
Probably 200K~250K *out of cash* and finance the rest by selling equities.

B) Please do not tell us that most of your annual expense are covered by the pension and social security. And, your retirement expense is zero.
I do not have a pension and I do not count SS in my planning. My guess of retirement expense is probably 30K~40K.

C) If you retirement expense after pension and social security is zero, you should mention that first. It is pointless for most of us to discuss with you further. You can lose all your stocks and it won't matter to you.

Well I didn't initiate the discussion as far as my AA, you did. It's also unclear how this relates to nudging vs rebalancing.

D) Anything less than that, why do you think that it is safe to be 90/10 or 95/5?
My equity side is not safe, I never claimed it is.

E) How do you know that 300K of cash is enough for you? What is this assumption based on?
300K cash that's getting refilled 3~4%/year when you're spending 30K~40K/year? That's enough.
Marseille07,

A) Let's assume that you take 200K out of that 300K for the house. You are left with 100K.

B) Let's assume that you have 900K of stock and 100K of cash = 90/10.

C) Let's assume that you spend 30K per year.

D) 100K/3 = 3.3 year.

E) If the stock drops 50%, you are no longer at 90/10.

F) In your system, you would spend cash.

G) After 3 years, you would have to sell stock.

Is my understanding of your system correct?

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Re: Soft vs. Hard Rebalancing

Post by Marseille07 »

KlangFool wrote: Sun Jul 03, 2022 2:58 pm Marseille07,

A) Let's assume that you take 200K out of that 300K for the house. You are left with 100K.

B) Let's assume that you have 900K of stock and 100K of cash = 90/10.

C) Let's assume that you spend 30K per year.

D) 100K/3 = 3.3 year.

E) If the stock drops 50%, you are no longer at 90/10.

F) In your system, you would spend cash.

G) After 3 years, you would have to sell stock.

Is my understanding of your system correct?

KlangFool
If I were running 900K/100K and stocks drop 50% then we have 450K/100K, or 81/19. Since 90/10 would be 450K/50K, I can spend (100K - 50K) = 50K of cash until my AA is restored. This would cover less than 2 years in this example.

Once my AA reaches 450K/50K then I'd draw from whichever is heavier at that time. Of course, 450K/50K is exactly 90/10 but in practice it is never exactly at 90/10 because I jot down to the exact dollar when calculating AA.
Last edited by Marseille07 on Sun Jul 03, 2022 3:44 pm, edited 1 time in total.
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Re: Nudging vs Rebalancing

Post by Leesbro63 »

For what it's worth, I preferred the "Soft vs Hard Rebalancing" title of this thread! I think the whole discussion of rebalancing was lacking, until now, this great distinction. And just as with the many, many, 4%SWR threads, I honestly hope that there will be more threads, as thinking evolves and market change, about soft vs hard rebalancing. It's amazing that this terminology took this long to come into existence.
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Re: Nudging vs Rebalancing

Post by Marseille07 »

Leesbro63 wrote: Sun Jul 03, 2022 3:34 pm For what it's worth, I preferred the "Soft vs Hard Rebalancing" title of this thread! I think the whole discussion of rebalancing was lacking, until now, this great distinction. And just as with the many, many, 4%SWR threads, I honestly hope that there will be more threads, as thinking evolves and market change, about soft vs hard rebalancing. It's amazing that this terminology took this long to come into existence.
I put the title back. I'll soft-rebalance the title daily from whichever is heavier. Just kidding, of course.
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Re: Nudging vs Rebalancing

Post by retiredjg »

Leesbro63 wrote: Sun Jul 03, 2022 3:34 pm It's amazing that this terminology took this long to come into existence.
This terminology has been around quite awhile. A quick search shows the term "soft rebalance" used many times over the years, at least back to 2013.
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Re: Nudging vs Rebalancing

Post by Leesbro63 »

retiredjg wrote: Sun Jul 03, 2022 3:41 pm
Leesbro63 wrote: Sun Jul 03, 2022 3:34 pm It's amazing that this terminology took this long to come into existence.
This terminology has been around quite awhile. A quick search shows the term "soft rebalance" used many times over the years, at least back to 2013.
I guess I just never noticed and/or never saw it contrasted as "soft vs hard rebalancing".
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Re: Soft vs Hard Rebalancing

Post by LadyGeek »

Marseille07 wrote: Sun Jul 03, 2022 3:40 pm I put the title back. I'll soft-rebalance the title daily from whichever is heavier. Just kidding, of course.
Let's leave it as "Soft vs Hard Rebalancing". Changing the thread title will be very confusing for readers searching for this thread - not to mention Google searches.

Is this concept something that should be added to the wiki?

If anyone has a suggestion, such as adding to the current Rebalancing page or creating a new article, please post here.
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Re: Nudging vs Rebalancing

Post by GAAP »

Leesbro63 wrote: Sun Jul 03, 2022 3:34 pm For what it's worth, I preferred the "Soft vs Hard Rebalancing" title of this thread! I think the whole discussion of rebalancing was lacking, until now, this great distinction. And just as with the many, many, 4%SWR threads, I honestly hope that there will be more threads, as thinking evolves and market change, about soft vs hard rebalancing. It's amazing that this terminology took this long to come into existence.
Most studies that I've seen -- whether for accumulation or distribution -- do a single, annual rebalance. If the study involves distribution, it makes a single annual withdrawal and then rebalances. The core reason for this is probably simplicity. Annual numbers are easy to work with, easy to get data for. Smaller intervals are much more work. At some point, the additional work outweighs the additional (historical) benefits.

Most such studies also assume a single monolithic portfolio. The realities of dealing with a portfolio that is spread across multiple accounts with different tax treatments may lead to different answers than typically appear in a theoretical study. I suggest "simplify early and simplify often" as a practical approach with long-term benefits.

Hard vs. soft or nudge vs. rebalancing may come down to the individual investor's personal preferences. I doubt that the results will make much real difference.
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Re: Nudging vs Rebalancing

Post by retiredjg »

Leesbro63 wrote: Sun Jul 03, 2022 3:46 pm
retiredjg wrote: Sun Jul 03, 2022 3:41 pm
Leesbro63 wrote: Sun Jul 03, 2022 3:34 pm It's amazing that this terminology took this long to come into existence.
This terminology has been around quite awhile. A quick search shows the term "soft rebalance" used many times over the years, at least back to 2013.
I guess I just never noticed and/or never saw it contrasted as "soft vs hard rebalancing".
It has not come up many times and there does not appear to be anything about contrasting hard and soft.

But I don't think this thread is not actually about rebalancing. The original poster does not rebalance at all. And does not intend to. Just nudges. So even this thread is not discussing soft vs hard rebalancing. :?
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Re: Nudging vs Rebalancing

Post by Marseille07 »

retiredjg wrote: Sun Jul 03, 2022 3:54 pm But I don't think this thread is not actually about rebalancing. The original poster does not rebalance at all. And does not intend to. Just nudges. So even this thread is not discussing soft vs hard rebalancing. :?
But I thought nudging = soft rebalancing? If not, what is soft rebalancing?
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Re: Soft vs Hard Rebalancing

Post by retiredjg »

LadyGeek wrote: Sun Jul 03, 2022 3:52 pm Is this concept something that should be added to the wiki?
No.
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Re: Soft vs Hard Rebalancing

Post by HootingSloth »

retiredjg wrote: Sun Jul 03, 2022 3:57 pm
LadyGeek wrote: Sun Jul 03, 2022 3:52 pm Is this concept something that should be added to the wiki?
No.
In addition to discussions on the forum (which I linked earlier in this thread), the soft rebalancing concept and terminology has been discussed on the Bogleheads blog.
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Re: Nudging vs Rebalancing

Post by retiredjg »

Marseille07 wrote: Sun Jul 03, 2022 3:54 pm
retiredjg wrote: Sun Jul 03, 2022 3:54 pm But I don't think this thread is not actually about rebalancing. The original poster does not rebalance at all. And does not intend to. Just nudges. So even this thread is not discussing soft vs hard rebalancing. :?
But I thought nudging = soft rebalancing? If not, what is soft rebalancing?
Well, I never said that. :happy

You are nudging, but you are not rebalancing. So in my mind, you are not "soft rebalancing". But you can call it whatever you wish as long as you understand that you are not actually rebalancing. Rebalance literally means "bringing the portfolio back to target" and you have said several times that you do not do that.

People have used "soft rebalance" in a couple of ways that I recall.

1. Taking from the high side during withdrawal and adding to the low side in accumulation could both be called soft rebalancing by people who actually do rebalance. Maybe they rebalance back to target once a year on a certain date. During other parts of the year, when adding or taking money out, they take from or give to the side that has too much or too little. Or maybe they use bands instead of a date as their rebalancing trigger and take or give to the side that has too much or too little when they do take or add money (thus staying within their bands longer).

2. I have also seen the term "soft rebalance" used to describe bringing the portfolio back to within bands rather than all the way back to target. For example, if your target is 50/50 and it strays to 44/56, you could sell bonds and buy stocks but only enough to get back to 46/54 which is a number you have already accepted as OK.
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Re: Nudging vs Rebalancing

Post by Marseille07 »

retiredjg wrote: Sun Jul 03, 2022 4:14 pm Well, I never said that. :happy

You are nudging, but you are not rebalancing. So in my mind, you are not "soft rebalancing". But you can call it whatever you wish as long as you understand that you are not actually rebalancing. Rebalance literally means "bringing the portfolio back to target" and you have said several times that you do not do that.

People have used "soft rebalance" in a couple of ways that I recall.

1. Taking from the high side during withdrawal and adding to the low side in accumulation could both be called soft rebalancing by people who actually do rebalance. Maybe they rebalance back to target once a year on a certain date. During other parts of the year, when adding or taking money out, they take from or give to the side that has too much or too little. Or maybe they use bands instead of a date as their rebalancing trigger and take or give to the side that has too much or too little when they do take or add money (thus staying within their bands longer).

2. I have also seen the term "soft rebalance" used to describe bringing the portfolio back to within bands rather than all the way back to target. For example, if your target is 50/50 and it strays to 44/56, you could sell bonds and buy stocks but only enough to get back to 46/54 which is a number you have already accepted as OK.
OK, I guess I don't recognize this condition as very meaningful then: "people who actually do rebalance." I would find it puzzling if "nudging + hard-rebalancing on date / band" is soft-rebalancing, but nudging-only is just nudging.
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Re: Soft vs Hard Rebalancing

Post by retiredjg »

How can you rebalance softly if you don't rebalance at all? :happy

As I said earlier, you can call it whatever you want. You can think of it however you want. We don't all have to think the same things here. And terminology is always a stumbling block.

My question is this....what question are you trying to get answered by having this discussion?
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Re: Soft vs Hard Rebalancing

Post by Marseille07 »

retiredjg wrote: Sun Jul 03, 2022 4:29 pm How can you rebalance softly if you don't rebalance at all? :happy

As I said earlier, you can call it whatever you want. You can think of it however you want. We don't all have to think the same things here. And terminology is always a stumbling block.

My question is this....what question are you trying to get answered by having this discussion?
Nudging is still impactful, especially over the long term.

I actually did not create the thread, but I guess the intent is to discuss exactly what the title says - soft vs hard rebalancing in terms of pros and cons and why one might choose one or the other.

Obviously personal choice could be an answer but I think there's more to it.
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Re: Soft vs Hard Rebalancing

Post by jebmke »

I nudge every quarter. My equity dividends are swept to cash.
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Re: Soft vs Hard Rebalancing

Post by retiredjg »

There is no need to choose one over the other. I know I use both, as do many others here.
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Re: Soft vs Hard Rebalancing

Post by Marseille07 »

jebmke wrote: Sun Jul 03, 2022 4:39 pm I nudge every quarter. My equity dividends are swept to cash.
I nudge monthly but dividends are swept to cash like how you're doing. Because dividends can make my AA more fixed-income heavy, I might skip some months without slashing equities, which is a good thing and kind of the point of using this approach.
Last edited by Marseille07 on Sun Jul 03, 2022 6:48 pm, edited 1 time in total.
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Re: Soft vs Hard Rebalancing

Post by 2pedals »

After reading Michael McClung's Living off Your Money, I realized that a floating asset allocation can work well. I do think a plan and method that someone can stick with for harvesting assets matters. The concept of investing a dollar amount in a risk bucket without the need or want to invest more from fixed income appeals to me.
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Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by FactualFran »

Marseille07 wrote: Sun Jul 03, 2022 1:08 pm Just to be clear on 1) withdraw and rebalance, you're calculating the withdrawal amount properly?

For example, let's say my target is 60/40 and my current AA is 300K/700K and I need 40K. "Withdraw and rebalance" would have to draw 24K from equities, 16K from bonds, then rebalance the rest as 576K/384K.

It's generally easier to rebalance first to 600K/400K, then withdraw proportionally from both assets.
The withdrawal amount is calculated as is done by safe withdrawal rate studies. A withdrawal is taken at the end of each year. The initial withdrawal is the initial portfolio balance, immediately prior to the start of the first year, adjusted by inflation for the first year. The withdrawal amount for each later year is the withdrawal amount for the previous year adjusted by inflation for the year.

It is easy to rebalance after withdrawals. In this case: 1) withdraw 40k from bonds and 2) exchange 276k from bonds to stocks. For some it is easier to do those two transactions rather than the three transactions: 1) exchange 300k from bonds to stock, 2) withdraw 24k from stocks, and 3) withdraw 16k from bonds.
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Re: The Day the 4% Rule Died - Soft vs. Hard Rebalancing side discussion

Post by Marseille07 »

FactualFran wrote: Sun Jul 03, 2022 10:05 pm The withdrawal amount is calculated as is done by safe withdrawal rate studies. A withdrawal is taken at the end of each year. The initial withdrawal is the initial portfolio balance, immediately prior to the start of the first year, adjusted by inflation for the first year. The withdrawal amount for each later year is the withdrawal amount for the previous year adjusted by inflation for the year.

It is easy to rebalance after withdrawals. In this case: 1) withdraw 40k from bonds and 2) exchange 276k from bonds to stocks. For some it is easier to do those two transactions rather than the three transactions: 1) exchange 300k from bonds to stock, 2) withdraw 24k from stocks, and 3) withdraw 16k from bonds.
Cool, just making sure your math was correct and it appears it is :beer

If I were soft-rebalancing, I'd simply draw 40K from fixed income only, fully preserving equities.
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Re: Soft vs. Hard Rebalancing

Post by KlangFool »

Marseille07 wrote: Sun Jul 03, 2022 3:15 pm
KlangFool wrote: Sun Jul 03, 2022 2:58 pm Marseille07,

A) Let's assume that you take 200K out of that 300K for the house. You are left with 100K.

B) Let's assume that you have 900K of stock and 100K of cash = 90/10.

C) Let's assume that you spend 30K per year.

D) 100K/3 = 3.3 year.

E) If the stock drops 50%, you are no longer at 90/10.

F) In your system, you would spend cash.

G) After 3 years, you would have to sell stock.

Is my understanding of your system correct?

KlangFool
If I were running 900K/100K and stocks drop 50% then we have 450K/100K, or 81/19. Since 90/10 would be 450K/50K, I can spend (100K - 50K) = 50K of cash until my AA is restored. This would cover less than 2 years in this example.

Once my AA reaches 450K/50K then I'd draw from whichever is heavier at that time. Of course, 450K/50K is exactly 90/10 but in practice it is never exactly at 90/10 because I jot down to the exact dollar when calculating AA.
Good luck. I don't see how your system can survive a prolonged market downturn. Your AA is too aggressive.

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Re: Soft vs. Hard Rebalancing

Post by Marseille07 »

KlangFool wrote: Mon Jul 04, 2022 6:18 am
Marseille07 wrote: Sun Jul 03, 2022 3:15 pm
KlangFool wrote: Sun Jul 03, 2022 2:58 pm Marseille07,

A) Let's assume that you take 200K out of that 300K for the house. You are left with 100K.

B) Let's assume that you have 900K of stock and 100K of cash = 90/10.

C) Let's assume that you spend 30K per year.

D) 100K/3 = 3.3 year.

E) If the stock drops 50%, you are no longer at 90/10.

F) In your system, you would spend cash.

G) After 3 years, you would have to sell stock.

Is my understanding of your system correct?

KlangFool
If I were running 900K/100K and stocks drop 50% then we have 450K/100K, or 81/19. Since 90/10 would be 450K/50K, I can spend (100K - 50K) = 50K of cash until my AA is restored. This would cover less than 2 years in this example.

Once my AA reaches 450K/50K then I'd draw from whichever is heavier at that time. Of course, 450K/50K is exactly 90/10 but in practice it is never exactly at 90/10 because I jot down to the exact dollar when calculating AA.
Good luck. I don't see how your system can survive a prolonged market downturn. Your AA is too aggressive.

KlangFool
What was the point of this exercise?

If you argue we need 10 years of expenses in fixed income while running 3% constant-dollar/year, the conclusion is obvious - you need to be 70/30 at most (700K/300K on 30K/year). As I said earlier, this exercise has little to do with soft rebalancing vs hard rebalancing.
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Re: Soft vs. Hard Rebalancing

Post by KlangFool »

Marseille07 wrote: Mon Jul 04, 2022 8:49 am
KlangFool wrote: Mon Jul 04, 2022 6:18 am
Marseille07 wrote: Sun Jul 03, 2022 3:15 pm
KlangFool wrote: Sun Jul 03, 2022 2:58 pm Marseille07,

A) Let's assume that you take 200K out of that 300K for the house. You are left with 100K.

B) Let's assume that you have 900K of stock and 100K of cash = 90/10.

C) Let's assume that you spend 30K per year.

D) 100K/3 = 3.3 year.

E) If the stock drops 50%, you are no longer at 90/10.

F) In your system, you would spend cash.

G) After 3 years, you would have to sell stock.

Is my understanding of your system correct?

KlangFool
If I were running 900K/100K and stocks drop 50% then we have 450K/100K, or 81/19. Since 90/10 would be 450K/50K, I can spend (100K - 50K) = 50K of cash until my AA is restored. This would cover less than 2 years in this example.

Once my AA reaches 450K/50K then I'd draw from whichever is heavier at that time. Of course, 450K/50K is exactly 90/10 but in practice it is never exactly at 90/10 because I jot down to the exact dollar when calculating AA.
Good luck. I don't see how your system can survive a prolonged market downturn. Your AA is too aggressive.

KlangFool
What was the point of this exercise?

If you argue we need 10 years of expenses in fixed income while running 3% constant-dollar/year, the conclusion is obvious - you need to be 70/30 at most (700K/300K on 30K/year). As I said earlier, this exercise has little to do with soft rebalancing vs hard rebalancing.
Marseille07,

"What was the point of this exercise?"

Your system of soft rebalancing is dependent on the portfolio size as a multiple of annual expense and the asset allocation. There is a breaking point. If you beware of the trade off and it is okay for you, then, all is well.

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Re: Soft vs. Hard Rebalancing

Post by Marseille07 »

KlangFool wrote: Mon Jul 04, 2022 9:18 am Marseille07,

"What was the point of this exercise?"

Your system of soft rebalancing is dependent on the portfolio size as a multiple of annual expense and the asset allocation. There is a breaking point. If you beware of the trade off and it is okay for you, then, all is well.

KlangFool
Soft-rebalancing actually does not depend on the portfolio size because you can soft-rebalance at 500K, 3M, 10M. This is no different than hard-rebalancing in this regard.

As far as a multiple of annual expense, this has more to do with your withdrawal strategy. Now, how you rebalance is one component of that but not a major one. Case in point, if I were withdrawing 10%/year, this impacts the bottom line way bigger than withdrawing 0.5%/year, regardless of how you rebalance.
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Re: Soft vs. Hard Rebalancing

Post by KlangFool »

Marseille07 wrote: Mon Jul 04, 2022 10:13 am
KlangFool wrote: Mon Jul 04, 2022 9:18 am Marseille07,

"What was the point of this exercise?"

Your system of soft rebalancing is dependent on the portfolio size as a multiple of annual expense and the asset allocation. There is a breaking point. If you beware of the trade off and it is okay for you, then, all is well.

KlangFool
Soft-rebalancing actually does not depend on the portfolio size because you can soft-rebalance at 500K, 3M, 10M. This is no different than hard-rebalancing in this regard.

As far as a multiple of annual expense, this has more to do with your withdrawal strategy. Now, how you rebalance is one component of that but not a major one. Case in point, if I were withdrawing 10%/year, this impacts the bottom line way bigger than withdrawing 0.5%/year, regardless of how you rebalance.
"Soft-rebalancing actually does not depend on the portfolio size because you can soft-rebalance at 500K, 3M, 10M. This is no different than hard-rebalancing in this regard."

If you do not care that it failed in a prolong market downturn.

"As far as a multiple of annual expense, this has more to do with your withdrawal strategy. Now, how you rebalance is one component of that but not a major one. "

Which is dependent on your asset allocation and portfolio size. At 90/10 or 95/5, it would fail in a prolong market downturn.

It is very simple.

If someone does not care whether it works or not, all is well. If not, it is all related.

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Re: Soft vs. Hard Rebalancing

Post by Marseille07 »

KlangFool wrote: Mon Jul 04, 2022 10:17 am "Soft-rebalancing actually does not depend on the portfolio size because you can soft-rebalance at 500K, 3M, 10M. This is no different than hard-rebalancing in this regard."

If you do not care that it failed in a prolong market downturn.
Could you show us how soft-rebalancing fails in a prolong market downturn whereas hard-rebalancing doesn't? I don't follow what you're saying.
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Re: Soft vs Hard Rebalancing

Post by jebmke »

Duplicate - deleted
Last edited by jebmke on Mon Jul 04, 2022 11:37 am, edited 1 time in total.
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Re: Soft vs Hard Rebalancing

Post by jebmke »

A (late) friend of mine did soft rebalancing for many years - and his portfolio was probably in the range of 90-95% equity. Soft rebalance of dividends monthly to his sweep account. When the sweep got "fat" he would give some to his kids or put some in his grandkids education funds. His widow still has a similar allocation (I know this because I do her taxes and always reconcile her tax statements to her financial statements).
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Re: Soft vs. Hard Rebalancing

Post by KlangFool »

Marseille07 wrote: Mon Jul 04, 2022 10:20 am
KlangFool wrote: Mon Jul 04, 2022 10:17 am "Soft-rebalancing actually does not depend on the portfolio size because you can soft-rebalance at 500K, 3M, 10M. This is no different than hard-rebalancing in this regard."

If you do not care that it failed in a prolong market downturn.
Could you show us how soft-rebalancing fails in a prolong market downturn whereas hard-rebalancing doesn't? I don't follow what you're saying.
Marseille07,

They both failed. It is pointless to discuss whether each one is better if the portfolio size and AA are not good enough.

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Re: Soft vs. Hard Rebalancing

Post by Marseille07 »

KlangFool wrote: Mon Jul 04, 2022 11:49 am Marseille07,

They both failed. It is pointless to discuss whether each one is better if the portfolio size and AA are not good enough.

KlangFool
OK, then please show us how they failed on this scenario:

1M portfolio running 900K/100K, you need 30K/year, and let's say stocks go down by 50% and you end up with 450K/100K.

Quick math tells me that you still have a 550K portfolio and drawing 30K/year lasts 18.33 years. Please explain how this failed in your view.
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Re: Soft vs. Hard Rebalancing

Post by KlangFool »

Marseille07 wrote: Mon Jul 04, 2022 11:52 am
KlangFool wrote: Mon Jul 04, 2022 11:49 am Marseille07,

They both failed. It is pointless to discuss whether each one is better if the portfolio size and AA are not good enough.

KlangFool
OK, then please show us how they failed on this scenario:

1M portfolio running 900K/100K, you need 30K/year, and let's say stocks go down by 50% and you end up with 450K/100K.

Quick math tells me that you still have a 550K portfolio and drawing 30K/year lasts 18.33 years. Please explain how this failed in your view.
Marseille07,

1) "I can spend (100K - 50K) = 50K of cash until my AA is restored. This would cover less than 2 years in this example."

Your original number says 50K per year.

2) "Quick math tells me that you still have a 550K portfolio and drawing 30K/year lasts 18.33 years. Please explain how this failed in your view."

That is assuming that the stock does not drop another 50% again.

I do hard rebalancing with minimum 5 years of expense in fixed income. And, another 3 years in the emergency fund not counted as part of my portfolio. Even if the stock goes down to zero, I have enough to last 8 years.

In your case, it is either 2 years (50K per year) or 3.33 years ( 30K per year). If you believe that is good enough for you, great!

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Re: Soft vs. Hard Rebalancing

Post by Marseille07 »

KlangFool wrote: Mon Jul 04, 2022 12:03 pm Marseille07,

1) "I can spend (100K - 50K) = 50K of cash until my AA is restored. This would cover less than 2 years in this example."

Your original number says 50K per year.
No I didn't say 50K per year. 100K - 50K was just a one-time cash amount "shield" you have without slashing equities. But there is no reason you can't sell equities to generate 30K/year of expenses, which was the assumed expense in this scenario.
KlangFool wrote: Mon Jul 04, 2022 12:03 pm 2) "Quick math tells me that you still have a 550K portfolio and drawing 30K/year lasts 18.33 years. Please explain how this failed in your view."

That is assuming that the stock does not drop another 50% again.
Stocks down 50% and stay down at that level for 18.33 years is already an extremely harsh condition. What else do you want?
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