Rebalancing in Retirement.

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antiqueman
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Rebalancing in Retirement.

Post by antiqueman » Sun Jan 24, 2016 5:12 pm

I would appreciate the forums thoughts on whether or not a person should rebalance their AA during retirement.,

I recall Larry Swedroe sometime ago stating he didn't rebalance except on the upside. I assume that since Larry has stated that he has "won the game" that the reason he does not rebalance except on the upside is that he is willing to establish only x dollars in equities. He has sufficient wealth to use for the remainder of his life without the equities. If they go up, then great he can do what he wants with the profits. However if equities tank he either rides out the down turn until equities increase (even if its 20 years) or they never increase and he doesn't care. ( Please note, Larry has not stated this is why he dosen't balance on the downside the way I stated--I am providing MY interpretation of what I think he means)

So if we move forward with my question, assume anyone of us on the Boglehead's forum believe they have enough safe assets in CD's ,Tips, pensions and annuities to provide their living expenses for more than their expected life.


Please provide your thoughts on whether a person should rebalance on the downside if they believe they otherwise have sufficient "safe" assets for their life. I do not want to argue about whether one has in fact enough safe assets for their life. Lets assume they do.

Thanks.

sport
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Re: Rebalancing in Retirement.

Post by sport » Sun Jan 24, 2016 5:24 pm

I would think that someone who has "enough" and is not interested in maximizing portfolio growth would have a fairly small allocation to stocks in the first place. They might have a 70/30 or 75/25 allocation. In this case, whether or not they rebalanced when the market dropped would not really make a lot of difference. It would seem to be a matter of personal preference.

Call_Me_Op
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Re: Rebalancing in Retirement.

Post by Call_Me_Op » Sun Jan 24, 2016 5:40 pm

If someone has enough is safe assets and is risk averse, they should either not sell safe assets or sell down to a predetermined floor.
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longinvest
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Re: Rebalancing in Retirement.

Post by longinvest » Sun Jan 24, 2016 5:51 pm

Antiqueman,

If you adopt a fairly conservative asset allocation in retirement, between 50% and 75% in bonds, and take your withdrawals once a year, you won't need to rebalance much.

At the time of withdrawal, you simply have to calculate the target amounts of stocks and bonds, and take your withdrawal from the overweight asset(s). You won't often need to do anything else to rebalance.

Here's a simple example.

At withdrawal time, a 65 years old retiree has a 30/70 target AA (bonds/stocks). His portfolio contains $350,000 in stocks and $710,000 in bonds. According to VPW, he should withdraw 4.4%.

withdrawal = ($350,000 + $710,000) X 4.4% = $46,640.

after_withdrawal_portfolio = $350,000 + $710,000 - $46,640 = $1,013,360

stock_target = $1,013,360 X 30% = $304,008
bond_target = $1,013,360 X 70% = $709,352

stock_transaction = $304,008 - $350,000 = -$45,992
bond_transaction = $709,352 - $710,000 = -$648

In other words, the withdrawal is taken by selling $45,992 in stocks and $648 in bonds. There's no need to sell more stocks and buy bonds, even though the allocation has drifted to 33/67.

Had stocks drifted more, only a small amount would have been shifted from stocks to bonds.

Had stocks dropped, instead, the withdrawal would have been taken from bonds and a small additional amount of money would have been shifted from bonds to stocks.

There's nothing to fear. I think that the only worry would come from having too high an allocation to stocks in retirement.
Last edited by longinvest on Mon Jan 25, 2016 9:22 am, edited 3 times in total.
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The Wizard
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Re: Rebalancing in Retirement.

Post by The Wizard » Sun Jan 24, 2016 5:55 pm

It's more of an INCOME issue in retirement.
If you have sufficient income from pensions/SS/annuities, then your portfolio serves a different purpose than someone's where a 4% SWR is needed for living expenses...
Attempted new signature...

dbr
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Re: Rebalancing in Retirement.

Post by dbr » Sun Jan 24, 2016 7:01 pm

It is a matter of personal preference. Not rebalancing into stocks when stocks decline somewhat limits the amount at risk if the market continues down and stays down for an extended length of time. The danger in that is supposed to be offset by not having too high an allocation to stocks to start with. But, it is also known that too low an allocation to stocks is dangerous if the withdrawal rate is moderate and not small. Rebalancing when stocks rise will avoid developing an exposure to more risk as the total value of the portfolio increases. The effect of not rebalancing down but rebalancing up is generally in the direction of simply having a less risky portfolio on average and with that less return than the original position might have had.

I don't have an analysis that quantifies the difference. I don't think I know of a paper where someone has done that analysis. I think the two views most common are set the sufficiently conservative asset allocation and rebalance both up and down or decide that one has a set of non-volatile assets the magnitude of which is not to be invaded and put the rest into some kind of risky portfolio if you want to. This idea we are discussing is a kind of neither fish nor fowl between the two and strikes some as therefore odd. Personally I find the idea intuitively attractive and in fact practice it myself. I don't see the harm in it if a person generally has enough wealth and income to support retirement not on the edge of a dicey SWR estimate. As far as that goes SWR is not very sensitive to asset allocation anyway.

To repeat the direct answer to the question, there is no conclusion that anyone in particular should or should not adopt one or the other of these various choices. I guess we have to wait for someone to run a model that shows that something bad is going to happen in one case and not the other. One could even consider the possibility that in retirement one not rebalance at all. The actual data on that would tend to show that retirements are less likely to fail if the asset allocation drifts toward stocks as time goes on.

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galeno
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Re: Rebalancing in Retirement.

Post by galeno » Sun Jan 24, 2016 7:04 pm

We rebalance on both the downside and the upside. Rebalancing on the downside = buying cheap. Rebalancing on the upside = selling dear. IMHO if you only rebalance on the upside, it means you hold too much equity for your (shallow or volatility) risk tolerance. Lower it.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

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Svensk Anga
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Re: Rebalancing in Retirement.

Post by Svensk Anga » Sun Jan 24, 2016 7:11 pm

I have just retired and I expect to not rebalance. I am following the Bernstein prescription of Liability Matching Portfolio (LMP) plus Risk Portfolio (RP). LMP is all fixed income (largely CD and TIPS ladder) and we will spend this down. The RP is 90/10. I count on half of the dividends from the RP to meet our spending needs, but intend to leave the principle intact. By spending down the LMP fixed income and letting the mostly equity RP ride, we hope to have a rising equity glide path overall.

My intent is to review periodically to determine if the LMP is adequate. If not, RP funds will move to LMP, so effectively a transfer from equity to fixed income. It is possible that the opposite could occur, if for instance, spending turns out lower than planned, SS comes in better than assumed, or the dividend stream out of the RP grows.

I may rebalance the RP if stocks get hot. I do not intend to give up any fixed income should stocks decline. The 10% bonds in the RP is intended as a safety factor for miscalculations in the LMP. Eventually, a lower equity allocation probably makes sense for our heirs or for self funding long term care. The RP is really X dollars in bonds plus whatever value the market puts on our equities. It just happens to be 90/10 at present. These past three weeks it has been nice not to worry about if I should be rebalancing or if I might be catching a falling knife.

My reading on the safe withdrawal rate studies is that it is a real crap shoot to draw a nearly constant real value from a rebalanced portfolio. One is counting on future returns and inflation looking like history, but there is no guarantee. US returns last century may have been exceptional. Maybe it works if you pick a low enough draw. Maybe it works if real bonds turn out to be a better instrument than nominal bonds, to counter the odd inflation spike. One is just gambling that the future worst sequence of returns/inflation is no worse than historical. I think I sleep better not playing that game.

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BlueEars
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Re: Rebalancing in Retirement.

Post by BlueEars » Sun Jan 24, 2016 7:39 pm

Here is what we do:
1) Spend from the FI. In normal years stocks rise and the rebalancing is kind of automatically done.
2) If stocks rise above the % I've set for them, sell in tax advantaged account. This is to keep the risk level at a limit.
3) If stocks crater like 2008 do not rebalance into stocks. Just wait until a reasonable rise has occured before rebalancing the stocks. This is to guard against a 1930's like scenario in equities (don't forget we are retired). In 2009 we rebalanced at the beginning of July and that turned out to be better then rebalancing in January 2009 (with bond gains factored in). At the market low our stocks in 2009 were 10% below the equity allocation I had set.

I actually have a formulaic way of re-entering the market should another 2009 occur. Nothing magic but it's a good idea to set the strategy ahead of time then to go on gut instinct. Forces one to be more analytical about the problem.

Rodc
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Re: Rebalancing in Retirement.

Post by Rodc » Sun Jan 24, 2016 7:46 pm

I would add that years ago before farming out the management of our 401K, our 401K was managed by our employer who employs some really smart economists and it only allowed rebalancing with new money and from stocks to bonds.

I may do the same when I retire. As noted above it may not be optimal as far a returns in normal times, but reduces risk in some unusual but not impossible scenarios.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

itstoomuch
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Re: Rebalancing in Retirement.

Post by itstoomuch » Sun Jan 24, 2016 8:13 pm

:sharebeer What we have that is exposed directly to the equity, debt markets or to term savings/investments is just ~ 18%. I could lose the 18% and we could still be OK. Do I rebalance? Somewhat but not in the traditional way of BH idea of stock/bonds but in high potential companies vs dividend-established companies. :beer

Our total assets, excluding home, but including SS and Pension ( valued at 3.5% return on value), annuities at Income Acct value, Rental at Cost, Farm land at Market, and stocks at Mark to Market, is ~1.75mil. :mrgreen:
Last edited by itstoomuch on Mon May 23, 2016 11:29 pm, edited 4 times in total.
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antiqueman
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Re: Rebalancing in Retirement.

Post by antiqueman » Sun Jan 24, 2016 8:38 pm

I am the original poster.

A much appreciated thank you to ALL of the replies. Everyone of them is the type comments and thoughts I was seeking. There is a lot of great information and analysis in each of the posts.

I would appreciate further comments. I hope I receive many more but if I don't , the ones I have received are excellent.


Thanks

Rodc
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Re: Rebalancing in Retirement.

Post by Rodc » Mon Jan 25, 2016 9:11 am

longinvest wrote:A

Here's a simple example.

At withdrawal time, a 65 years old retiree has a 30/70 target AA (bonds/stocks). His portfolio contains $350,000 in stocks and $710,000 in bonds. According to VPW, he should withdraw 4.4%.

withdrawal = ($350,000 + $710,000) X 4.4% = $46,640.

after_withdrawal_portfolio = $370,000 + $690,000 - $46,640 = $1,013,360
How did the $350K go to $370K and the %710K go to $690K?
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

longinvest
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Re: Rebalancing in Retirement.

Post by longinvest » Mon Jan 25, 2016 9:21 am

Rodc wrote: How did the $350K go to $370K and the %710K go to $690K?
They shouldn't! I'll go fix that. :oops:
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magneto
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Re: Rebalancing in Retirement.

Post by magneto » Mon Jan 25, 2016 11:42 am

Suggest reading Frank Armstrong's book 'The Informed Investor' chapter 14.

Boils down to something like :-
Hold 5 - 7 years Income needs in short term bonds or cash
Only sell stocks when fully priced

This may be an over-simplification!
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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artthomp
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Re: Rebalancing in Retirement.

Post by artthomp » Mon Jan 25, 2016 3:18 pm

Since I have to take IRS Required Minimum Distributions (I'm 75 years old), I rebalance once a year in January and take my distribution minus deductions to cover Federal and State taxes. I then plan to invest excess funds in equities for a few more years until my equity allocation is used up (my planed allocation is 30% equities/ 70% fixed income-bonds). I may start investing in municipal bonds when there is no more room for taxable equities in the portfolio.
Art

SWP
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Re: Rebalancing in Retirement.

Post by SWP » Mon Jan 25, 2016 3:24 pm

I think the answer to your question has everything to do with whether you are following a declining equity strategy (such as age in bonds), a rising equity strategy (as advocated by Pfau and Kitces), or a static asset allocation in retirement. It seems to me that you'd be less likely to rebalance to buy stocks if your plan is to reduce stocks over your lifetime, but maybe more likely if your plan is to leave a legacy or keep stocks at a set percentage throughout your lifetime. If you want to go down the road of thinking about which strategy is the "safest" in retirement, an interesting article by Javier Estrada is at http://web.iese.edu/jestrada/PDF/Resear ... path-2.pdf.

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Christine_NM
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Re: Rebalancing in Retirement.

Post by Christine_NM » Mon Jan 25, 2016 3:38 pm

Please provide your thoughts on whether a person should rebalance on the downside if they believe they otherwise have sufficient "safe" assets for their life.
I have enough safe assets and I still reinvest most fund distributions. I still want to rebalance on the downside but I use fixed-allocation balanced funds to do that instead of agonizing over each rebalance myself.
17% cash 47% stock 36% bond. Retired, w/d rate 2.85%

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HomerJ
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Re: Rebalancing in Retirement.

Post by HomerJ » Mon Jan 25, 2016 3:38 pm

antiqueman wrote:I would appreciate the forums thoughts on whether or not a person should rebalance their AA during retirement.
I'm not retired, but I'm close enough to retirement, that I mostly only rebalance on the upside. I'm 50/50 stocks/bonds, and when I get close to 60/40, I rebalance back to 50/50.

If we have another crash, I will change my 401k contributions to 100% stocks, but I will never sell existing bonds or CDs to buy stocks.

dbr
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Re: Rebalancing in Retirement.

Post by dbr » Mon Jan 25, 2016 4:12 pm

SWP wrote:I think the answer to your question has everything to do with whether you are following a declining equity strategy (such as age in bonds), a rising equity strategy (as advocated by Pfau and Kitces), or a static asset allocation in retirement. It seems to me that you'd be less likely to rebalance to buy stocks if your plan is to reduce stocks over your lifetime, but maybe more likely if your plan is to leave a legacy or keep stocks at a set percentage throughout your lifetime. If you want to go down the road of thinking about which strategy is the "safest" in retirement, an interesting article by Javier Estrada is at http://web.iese.edu/jestrada/PDF/Resear ... path-2.pdf.
I would rate this paper as a "must read" for anyone interested in the subject. An important conclusion is that the subject is anything but simple.

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patrick013
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Re: Rebalancing in Retirement.

Post by patrick013 » Mon Jan 25, 2016 4:16 pm

These should get you an impressive 3-4% income with
overall low beta. Perhaps the VG - REIT (yield 4%) but
that will raise the beta a bit. Plus some AA for TSM if
possible. The worst thing is having to sell assets at a
loss for retirement expenses Bernstein said. That would
make me feel bad too.

VCSH ST Corp Bond Index ETF
VCIT Interm-Term Corporate Bond ETF
BIV Interm-Term Bond Index ETF
VYM High Div Yield Index ETF
VPU Utilities ETF
age in bonds, buy-and-hold, 10 year business cycle

jimkinny
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Re: Rebalancing in Retirement.

Post by jimkinny » Mon Jan 25, 2016 4:44 pm

I do not think much changes once one has retired. As one nears retirement I would hope that every one has got a pretty good grasp on need, ability and willingness to take risk and the marginal value of money and your own goals.

I do think that if you have reached your goal, there is not a lot of reason to keep playing a risky game. I think I have enough comparatively safe assets to not take much risk and although my income floor is met by pensions and SS and therefore I have the ability to take more risk, I am no longer willing.

I will go with the experts who see re-balancing as risk control. I may or may not buy more equities when equities are down but will not generally go very much above my equity % level, which at 35% is fairly low. I have found that a 10% decrease in the S&P 500 has little impact on my % allocation and I just ignore that noise. I have not experienced a 20-50% equity decline yet in retirement so I am not sure what I will do, but I am guessing that I will wait until my birthday to decide, my dob being the date I have chosen to rebalance if needed. I have not needed to re-balance in the 3 years since I retired but have taken a small amount out each year because I had not started SS and one pension until this past December. These funds would have been distributions in my taxable account. I am just taking it one year at time after think about it a lot over the past 10 years. I no longer do that IPS stuff, although it is a good way to get one thinking about issues.

There was a member of this forum who wrote that one can rebalance oneself into the poor house (this during 2008/2009). I do not see any reason to take that risk. If my 35% equity allocation drops to 25%, I likely would do no more that sell enough bonds to get to 28% equity or close to that.

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Re: Rebalancing in Retirement.

Post by VictoriaF » Mon Jan 25, 2016 4:58 pm

I am spending down my assets before I reach the age of 70 and start receiving the Social Security. In the foreseeable future, a large portion of my assets will be in cash and cash-like holdings (CDs, G-Fund) to ensure that I don't deny myself anythings. As I will be spending down cash, the proportion of my equities will be rising. Eventually, I will turn 70 and most of my needs will be met by the Social Security, two pensions, and maturing I Bonds. At that time, I will consider the composition and size of my portfolio and probably create an allocation of 40/60 (stocks/bonds). After that, I will probably rebalance from stocks to bonds but not from bonds to stocks.

Victoria
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SWP
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Re: Rebalancing in Retirement.

Post by SWP » Mon Jan 25, 2016 5:43 pm

dbr wrote:
SWP wrote:I think the answer to your question has everything to do with whether you are following a declining equity strategy (such as age in bonds), a rising equity strategy (as advocated by Pfau and Kitces), or a static asset allocation in retirement. It seems to me that you'd be less likely to rebalance to buy stocks if your plan is to reduce stocks over your lifetime, but maybe more likely if your plan is to leave a legacy or keep stocks at a set percentage throughout your lifetime. If you want to go down the road of thinking about which strategy is the "safest" in retirement, an interesting article by Javier Estrada is at http://web.iese.edu/jestrada/PDF/Resear ... path-2.pdf.
I would rate this paper as a "must read" for anyone interested in the subject. An important conclusion is that the subject is anything but simple.
The article is certainly not an easy read. But it does have some very interesting conclusions. With exceptions and caveats and a lot I'm leaving out, Estrada concludes that declining equity strategies have a lower probability of failure, higher ending value, and larger standard deviation than rising equity strategies. A static strategy has the lowest failure rate, highest ending value and lowest standard deviation.

I personally have been following a declining equity strategy for a long time, decreasing stocks as I age. So in the face of the current market downturn, I have been having a difficult time bringing myself to rebalance to buy stocks. But my spouse strongly disagrees. So after reading the Estrada article, I'm reconsidering. If rebalancing to a static stock percentage has the highest success rate, wouldn't that imply that rebalancing up, even assuming a declining equity strategy over time, is a good idea?

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Re: Rebalancing in Retirement.

Post by dbr » Mon Jan 25, 2016 5:54 pm

The reason for the must read would not be so much to reveal a previously unknown "right" strategy as for the review of the many attempts that have been made to figure out this aspect of investing. I think my conclusion is that there might not be much to be had in trying to engineer asset allocation for any certain gain in retirement withdrawal. It remains a fact that what will happen to any individual is that his fate will be dominated first by luck (when he retires) and secondly by withdrawal rate.

SWP
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Re: Rebalancing in Retirement.

Post by SWP » Mon Jan 25, 2016 5:57 pm

No kidding! I couldn't agree more. But are you buying stocks?

dbr
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Re: Rebalancing in Retirement.

Post by dbr » Mon Jan 25, 2016 7:20 pm

SWP wrote:No kidding! I couldn't agree more. But are you buying stocks?
I decided a long time ago to set a target asset allocation reasonably high in stocks and reduce risk by balancing out if stocks rise significantly but not to balance in if stocks decline. I am not particularly interested in optimizing anything but just keeping away from losing too much or having what I have being at too much risk once stocks go up. As I said, there is no study I am looking at that says this is or isn't an obviously good idea. It is just a little different alternative to carrying a lower allocation to stocks altogether with a little greater emphasis on avoiding severe downside risk.

To be honest right now I suspect the thing most helpful to my retirement is maintaining a low rate of inflation as long as possible.

Rodc
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Re: Rebalancing in Retirement.

Post by Rodc » Mon Jan 25, 2016 7:34 pm

dbr wrote:The reason for the must read would not be so much to reveal a previously unknown "right" strategy as for the review of the many attempts that have been made to figure out this aspect of investing. I think my conclusion is that there might not be much to be had in trying to engineer asset allocation for any certain gain in retirement withdrawal. It remains a fact that what will happen to any individual is that his fate will be dominated first by luck (when he retires) and secondly by withdrawal rate.
That is my take. Depending on what data/time period is being used rising might be a tad better (though I note that Wade's paper with Kites "tad" better is nearly infinitesimal), declining might be a tad better or fixed.

I have done a fair amount in this area and in the end to a reasonable degree all that matters is your average allocation, so going from 30% to 70% is a great deal like going from 70% to 30% which is a great deal like fixed 50%/50% at least on average. Anyone of which will randomly be better depending on the luck of the draw.

One time when rising might make sense is if one needs to take very large withdrawals in early retirement to bridge the gap to a pension or social security at age 70. In that case I can see setting aside (mentally or in reality) fixed income to cover that gap with the rest in a fixed allocation. Say I needed $50K a year for 6 years until a $25K pension and $25K SS kicked in and I have $1.3M in my portfolio. Then I might want to wall off $300K and consider my portfolio to be only $1M, and so I take $40K a year from this "portfolio". That is I take $90K for 6 years and then drop down to $40K. If I wanted a 50/50 portfolio long term I could start at $300K bonds + $500K Bonds + $500K stocks and then by the end of 6 years I would be $500K bonds + $500K stocks (plus any growth or minus any loss).

I have not run the numbers on that, but because of the very large early withdrawals the sequence of returns problem is larger than in a generic scenario.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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galeno
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Re: Rebalancing in Retirement.

Post by galeno » Tue Jan 26, 2016 8:14 am

This is a great retirement withdrawal system for those who want or need to hold a high percentage of equities in the retirement port.
magneto wrote:Suggest reading Frank Armstrong's book 'The Informed Investor' chapter 14.

Boils down to something like :-
Hold 5 - 7 years Income needs in short term bonds or cash
Only sell stocks when fully priced

This may be an over-simplification!
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

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Leif
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Re: Rebalancing in Retirement.

Post by Leif » Mon May 23, 2016 4:43 pm

Now, I do active rebalancing, such as buying EM from selling bonds in January due to my rebalance bands. I think once my portfolio money flow reverses (retirement) I'll just do "passive" rebalancing. My withdrawals will come from the asset class that is over target. I will probably never sell bonds to buy stocks, just in case a "Japan Scenario" (Equities fall and stay down for a long time) is in the future. However, I will rebalance within equities if they exceed their target.

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Re: Rebalancing in Retirement.

Post by Clive » Mon May 23, 2016 7:13 pm

The Trinity Study data suggests that historically taking 4% the first year, adjusting for inflation each year, taken from a 50/50 stock/bond portfolio had a 100% success rate for 25 year periods across years 1926 to 1995 https://www.bogleheads.org/wiki/Safe_withdrawal_rates. Enough to see a 65 year old through to age 90. Drawing from whichever had drifted higher above 50/50 weightings would steer the portfolio back towards 50/50, more so if bond interest and stock dividends were also reinvested into the lagging asset.

i.e. depends upon what you consider to be 'safe assets'. 100% TIPS can have tax risks. Bonds after costs/taxes and inflation might lose purchase power whereas stocks might be more inclined to maintain or even expand purchase power. Too much in any one single asset is riskier than being diversified. Subject to your beliefs of safe, then you might prefer not to reduce those safe holdings, only ever expand them (asymmetric rebalancing between stocks and bonds) ... or not (rebalance either way through additions (dividends/interest) or withdrawals to/from a 50/50 stock/bond 4% SWR).

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Peter Foley
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Re: Rebalancing in Retirement.

Post by Peter Foley » Mon May 23, 2016 11:11 pm

I suggest you read the studies done by Darrow Fitzpatrick.

http://www.caniretireyet.com/the-best-r ... ng-deeper/

He has done a pretty convincing analysis of various rebalancing strategies. Some work considerably better than others.

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Re: Rebalancing in Retirement.

Post by itstoomuch » Mon May 23, 2016 11:35 pm

itstoomuch wrote::sharebeer What we have that is exposed directly to the equity, debt markets or to term savings/investments is just ~ 18%. I could lose the 18% and we could still be OK. Do I rebalance? Somewhat but not in the traditional way of BH idea of stock/bonds but in high potential companies vs dividend-established companies. :beer

Our total assets, excluding home, but including SS and Pension ( valued at 3.5% return on value), annuities at Income Acct value, Rental at Cost, Farm land at Market, and stocks at Mark to Market, is ~1.75mil. :mrgreen:
update: Discretionary ~18% is now 85% cash. no bonds. YTD +3%. I'd rather protect what we have in discretionary (forego any gains) than seeking higher returns with unknown risks. We have more than enough. :beer
GL
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: Rebalancing in Retirement.

Post by AlohaJoe » Tue May 24, 2016 2:23 am

The new book Living Off Your Money also has a survey of "rebalancing strategies" (he calls it Income Harvesting). His verdict on "traditional rebalancing" is:
Again, annual rebalancing isn’t a poor solution, it just isn’t strong. Later comparisons show it performs somewhere in the upper-middle range of the surveyed strategies.
The first three chapters are available for free on the website: http://livingoffyourmoney.com/ and that free preview includes the Income Harvesting chapter.

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burt
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Re: Rebalancing in Retirement.

Post by burt » Tue May 24, 2016 8:01 am

longinvest wrote:Antiqueman,

If you adopt a fairly conservative asset allocation in retirement, between 50% and 75% in bonds, and take your withdrawals once a year, you won't need to rebalance much.

At the time of withdrawal, you simply have to calculate the target amounts of stocks and bonds, and take your withdrawal from the overweight asset(s). You won't often need to do anything else to rebalance.

Here's a simple example.

At withdrawal time, a 65 years old retiree has a 30/70 target AA (bonds/stocks). His portfolio contains $350,000 in stocks and $710,000 in bonds. According to VPW, he should withdraw 4.4%.

withdrawal = ($350,000 + $710,000) X 4.4% = $46,640.

after_withdrawal_portfolio = $350,000 + $710,000 - $46,640 = $1,013,360

stock_target = $1,013,360 X 30% = $304,008
bond_target = $1,013,360 X 70% = $709,352

stock_transaction = $304,008 - $350,000 = -$45,992
bond_transaction = $709,352 - $710,000 = -$648

In other words, the withdrawal is taken by selling $45,992 in stocks and $648 in bonds. There's no need to sell more stocks and buy bonds, even though the allocation has drifted to 33/67.

Had stocks drifted more, only a small amount would have been shifted from stocks to bonds.

Had stocks dropped, instead, the withdrawal would have been taken from bonds and a small additional amount of money would have been shifted from bonds to stocks.

There's nothing to fear. I think that the only worry would come from having too high an allocation to stocks in retirement.
Thanks for re-balancing calculations in retirement.
I figured if I had all my retirement funds in a balanced fund and sold some of that fund for annual withdrawals, the outcome would be the same as your calculations.
I do the same as you have shown, but in a more convoluted method.
Your method is better, and I will be using that next year.

burt

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Re: Rebalancing in Retirement.

Post by Dandy » Tue May 24, 2016 10:35 am

If you have enough in "safe" assets to fund your retirement to say 90+ and enough other assets to feel very comfortable then you can really do whatever you want with the "other" assets. Even if you are investing for heirs you may or may not want to take "excessive" risk with those assets.

I am in a position where I can do whatever I want with the "risk" assets and choose to not go overboard. Now overall at about 40% equities and looking forward with even more comfort when I take full SS at age 70, I can be opportunistic. i.e. when the equity market has some really bad days I might add some equities. When interest rates rise and that affects intermediate bonds I might add some. I hope to never let the overall equity allocation get below 40% and probably won't let it get above 60%. The main focus is that whatever my current drawdown dollars are needed to fund retirement for a year I have enough "safe" assets to last at that level to at least age 90. I feel free to take my RMDs from either "safe" or "risk" assets as I see fit. e.g. If equities have done especially well I make take some or all from equities.

So, If I were you, I would have two mental portfolio's a "safe" one to fully fund your retirement and a "risk" one which you can invest however you choose. Depending on your risk tolerance, sleep tolerance and goals for your "risk" portfolio you can rebalance as you see fit and withdraw from which ever suits your fancy. If your "safe" assets don't seem to be adequate due to rising costs of retirement then move some assets from "risk" to "safe".

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