How do early retirees survive bad markets?

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tpom16
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How do early retirees survive bad markets?

Post by tpom16 »

I read many posts here about Bogleheads keeping little cash in the portfolio for bear market’s cushion. Instead they draw-down from the bond portion to ride out of bad market. For those earlier retirees who have all their bonds in retirement accounts to keep tax efficient, how can they do that without 401k penalty? Do they need to save up in bonds in taxable accounts in the years approaching retirement? (So that they don't trigger taxable events when moving equity to bond in taxable account? ). Minimum how many years of expenses that bond funds should cover in the portfolio?

Thanks!
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ResearchMed
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Re: How do early retirees survive bad markets?

Post by ResearchMed »

tpom16 wrote: Sat Sep 28, 2019 10:03 pm I read many posts here about Bogleheads keeping little cash in the portfolio for bear market’s cushion. Instead they draw-down from the bond portion to ride out of bad market. For those earlier retirees who have all their bonds in retirement accounts to keep tax efficient, how can they do that without 401k penalty? Do they need to save up in bonds in taxable accounts in the years approaching retirement? (So that they don't trigger taxable events when moving equity to bond in taxable account? ). Minimum how many years of expenses that bond funds should cover in the portfolio?

Thanks!
If the "problem" you are concerned about is the fact that those bonds/bond funds are "stuck" in a tax-deferred account and the early retiree would pay a penalty to remove the money, then sell some equities in a taxable account, and then in the tax-deferred account, purchase an equivalent amount of equities. (Keep in mind that the amount purchased in the tax-deferred account will later have tax withheld, when figuring the "equivalent amount".)

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mpsz
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Re: How do early retirees survive bad markets?

Post by mpsz »

Let's say you need $10,000 and have $50,000 in a taxable account invested in stocks, and another $50,000 in your 401k invested in bonds. The stock market drops by 50% and bonds stay the same -- so you have $25,000 in your taxable account and still have $50,000 in your 401k.

You can sell $10,000 in stocks to fund the $10,000 withdrawal from your taxable account. You could then exchange $10,000 in bonds for $10,000 in stocks (ideally -- you would rebalance properly, but using this to illustrate the example) within the 401k. As you're just changing funds, there's no taxable event. So you've essentially pulled $10,000 "from bonds" and are left with $15,000 in stocks in taxable; plus $10,000 in stocks and $40,000 in bonds in the 401k.

Edit -- note that in the above scenario, you would just need to watch for a possible wash sale when you repurchase. My understanding is if it's a taxable account + 401k you should be in the clear, but if it was two accounts that you had full ownership over (eg, a taxable + Rollover IRA) there is the potential for a wash sale.
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Re: How do early retirees survive bad markets?

Post by Northern Flicker »

You can withdraw from stocks in a taxable account, and move assets from bonds to stocks in the tax-qualified account to re-establish your asset allocation. If and when the market recovers, you rebalance, which will involve moving assets in stocks in the tax-qualified account back to bonds. The tax-qualified account may not be fully reset to “all bonds” at that point, and you just live with it.

Also not having a cash position does not mean you cannot withdraw 3-6 months of expenses at a time.

Once you are 59.5 you can choose more direct withdrawal methods if most appropriate.
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BigJohn
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Re: How do early retirees survive bad markets?

Post by BigJohn »

I didn't let the tax efficiency of bonds in tax free/deferred space drive my entire allocation. I wanted some bonds in taxable for just this reason. I use a high quality muni bond fund to minimize the tax hit but this won't make sense for all depending on your tax bracket.

The bottom line for me is not to let the purity of perfect tax efficiency override your need to sleep well at night. So if you want some bonds in taxable that's OK.
livesoft
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Re: How do early retirees survive bad markets?

Post by livesoft »

For some early retirees that are trying to get ACA premium tax credits they will not want to get bond interest including tax-exempt muni bond interest in their taxable account because that will affect their PTC.
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Dandy
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Re: How do early retirees survive bad markets?

Post by Dandy »

Try to enter the early retiree phase with little debt. In 2008-9 recession their were no jobs available, home sales were basically not existent, and HELOC's were often restricted. Also, if not already retired you might get a pink slip as companies adjust to falling demand etc.

I always had a mix of fixed income and equities in all types of accounts. In taxable I kept decent assets in LTD Term Tax Exempt fund but also a decent amount in savings. I think the concern about taxes on say an online savings account are somewhat overstated. The interest rates are usually fairly low and you will be paying some taxes on the distributions from your taxable equities and usually capital gain taxes when you sell equities to fund expenses and maybe when you need to rebalance.

Having some fixed income in taxable accounts especially cash like assets makes rebalancing that portfolio less likely to cause a taxable event. I'm 71 and only once did I incur a tax to rebalance my taxable account. Of course I did pay taxes on the cash like assets. Having some equities in tax advantaged accounts was where most of my rebalancing took place.

I'm not saying bonds/cash like assets in taxable accounts is better just that in most cases it isn't a deal breaker from a tax standpoint.
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Stinky
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Re: How do early retirees survive bad markets?

Post by Stinky »

mpsz wrote: Sat Sep 28, 2019 10:11 pm Let's say you need $10,000 and have $50,000 in a taxable account invested in stocks, and another $50,000 in your 401k invested in bonds. The stock market drops by 50% and bonds stay the same -- so you have $25,000 in your taxable account and still have $50,000 in your 401k.

You can sell $10,000 in stocks to fund the $10,000 withdrawal from your taxable account. You could then exchange $10,000 in bonds for $10,000 in stocks (ideally -- you would rebalance properly, but using this to illustrate the example) within the 401k. As you're just changing funds, there's no taxable event. So you've essentially pulled $10,000 "from bonds" and are left with $15,000 in stocks in taxable; plus $10,000 in stocks and $40,000 in bonds in the 401k.

Edit -- note that in the above scenario, you would just need to watch for a possible wash sale when you repurchase. My understanding is if it's a taxable account + 401k you should be in the clear, but if it was two accounts that you had full ownership over (eg, a taxable + Rollover IRA) there is the potential for a wash sale.
This is exactly the way to do it.

All of my bonds are in IRA accounts, and I plan to use this strategy if I need to get cash during a "down" time in the stock market. I do keep a smaller money market fund in my taxable account so I don't need to trade in the 401(k) for every market hiccup.
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elainet7
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Re: How do early retirees survive bad markets?

Post by elainet7 »

by having buckets for the first 8 years for fixed expenses
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Watty
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Re: How do early retirees survive bad markets?

Post by Watty »

How do early retirees survive bad markets?
My target date 2015 fund has about 45% stocks so that if there is a 25% market decline it will only drop by about 11%, assuming bonds don't drop at the same time.

Having a paid off house and being done with child raising and college costs really reduces my core expenses so that the rest of my spending is pretty flexible and I could reduce my spending by 10 or 20 percent without any real hardship. Part of my decision to retire a bit early was that I was OK with cutting my spending some if I needed to.

I retired just before I turned 59 which is just a bit early. In looking at my numbers the six years until I turn 65 when I start Medicare and eventually start Social Security will require more withdrawals from my savings. To help bridge that six year gap I have some money that is sort of a seperate sub portfolio that is invested more conservatively since it will be needed in the first six years of retirement.

In practice I retired a bit more than 4 years ago and so far I have had very good investing returns so my portfolio is about the same now as when I retired. I got lucky and so far the sequence of returns risk has worked out in my favor. That would be pretty true for most people that have retired in the last ten years.
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Wiggums
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Re: How do early retirees survive bad markets?

Post by Wiggums »

I’d send my DW back to work :-)

I keep a small amount of fixed income (bonds, CDs and money market) in taxable. I don’t know if this is the best method, but it’s treated me well the past 33 years. I’m much better at buying/holding. I’m still figuring out the whole selling part.
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Re: How do early retirees survive bad markets?

Post by Ron »

Wiggums wrote: Sun Sep 29, 2019 9:44 am I’d send my DW back to work :-)
Does DW stand for Divorced Wife :twisted: ???

As to the OP's question, I retired in early 2007 at age 59. Not necessarily "early", but earlier than I had planned for, decades ago.

I kept 3-4 years of gross income (includes taxes on withdrawals) in cash in my FIDO/VG TIRA's. It certainly helped me sleep well during the subsequent downturn.

Starting out retirement, I held a lot of actual cash but it was reduced over the years as other income sources came "on-line", such as an SPIA, an increase in my VA disability rating, and finally my age-70 SS which started last year.

Today, I don't hold much cash other than distributions in the current year that are not reinvested, in order to pay the RMD gods in January. After I withdraw my RMD and pay FIT, I reinvest the leftover cash to bring it to a $0 balance. The only cash held at that time is whatever is maintained within my investments.

Cash was there to cover the "what if's" until all my retirement income streams became available. As time went on, excess cash was not really needed.

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rossington
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Re: How do early retirees survive bad markets?

Post by rossington »

mpsz wrote: Sat Sep 28, 2019 10:11 pm
You can sell $10,000 in stocks to fund the $10,000 withdrawal from your taxable account.
But, this is a taxable event...correct?
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beyou
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Re: How do early retirees survive bad markets?

Post by beyou »

livesoft wrote: Sun Sep 29, 2019 7:31 am For some early retirees that are trying to get ACA premium tax credits they will not want to get bond interest including tax-exempt muni bond interest in their taxable account because that will affect their PTC.
I have munis in taxable and expect to go on aca after cobra/before medicare. As of today, yields are lower than Total Stock. Anything I switch to would have even more income counting against PTC. I may well get out of munis when the time comes anyway, if at a lower income, the taxable bonds are more attractive. May for that reason move what little equity in tax def to bonds and some munis to equities in taxable, for lower total MAGI. But for those with larger taxable than tax exempt tax accts, may not be able to move much to taxable equities. Might make sense to stay in munis because of ACA, until 65/Medicare.
Last edited by beyou on Sun Sep 29, 2019 12:34 pm, edited 1 time in total.
catalina355
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Re: How do early retirees survive bad markets?

Post by catalina355 »

rossington wrote: Sun Sep 29, 2019 12:05 pm
mpsz wrote: Sat Sep 28, 2019 10:11 pm
You can sell $10,000 in stocks to fund the $10,000 withdrawal from your taxable account.
But, this is a taxable event...correct?
Yes, if you have capital gains or losses which is likely.
Last edited by catalina355 on Sun Sep 29, 2019 2:17 pm, edited 1 time in total.
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Phineas J. Whoopee
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Re: How do early retirees survive bad markets?

Post by Phineas J. Whoopee »

Here's the article from the Bogleheads wiki:

Placing cash needs in a tax-advantaged account.

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tpom16
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Re: How do early retirees survive bad markets?

Post by tpom16 »

Thanks for your feedback. Appreciate it. Swapping equities / bonds between tax deferred and taxable accounts during market downturn makes perfect sense. I assume that selling stocks from taxable account during bad markets would mostly likely result in capital loss, if wash sales managed properly. So it should work out. I actually do this trick occasionally but totally missed it in the long term picture. Thanks again.
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celia
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Re: How do early retirees survive bad markets?

Post by celia »

mpsz wrote: Sat Sep 28, 2019 10:11 pm Let's say you need $10,000 and have $50,000 in a taxable account invested in stocks, and another $50,000 in your 401k invested in bonds. The stock market drops by 50% and bonds stay the same -- so you have $25,000 in your taxable account and still have $50,000 in your 401k.
Here’s what I would do instead:

You can sell $10,000 in stocks to fund the $10,000 withdrawal from your taxable account. You could then convert $10,000 in bonds in the tax-deferred account into $10,000 in stocks in a Roth (ideally -- you would rebalance properly, but using this to illustrate the example).

So you've essentially pulled about $10,000 "from bonds" and are left with:
$15,000 in stocks in taxable plus
$10,000 in stocks in Roth IRA/401k and
$40,000 in bonds in the traditional IRA/401k.


Then, when the markets return to their previous value, you would have:
$30,000 in stocks in taxable
$20,000 in stocks in Roth IRA/401k and
$40,000 in bonds in traditional IRA/401k

instead of the implied result from the original example of:
$30,000 in stocks in taxable
$20,000 in stocks in 401k and
$40,000 in bonds in 401k.

The taxes on the Roth conversion would come from wherever they would have come in the original example or from the Emergency Fund. Even if you had paid $2,000 for the conversion (say, a 20% tax rate) that $2,000 would have looked like a 10% rate by the time the market rebounded ($2,000 for a later $20,000 Roth value).
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Rudedog
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Re: How do early retirees survive bad markets?

Post by Rudedog »

I have one year expenses in Vanguard Prime MM, and a CD ladder that we could live on for several years, all in taxable. I won't have to touch my tax-advantaged accounts (I'm only 63) or sell equities if a bear market shows up. I watch my tax bracket, yeah I have to pay some tax on the interest, but so far I have been able to stay in a low tax bracket.
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Re: How do early retirees survive bad markets?

Post by flyingaway »

If you are REALLY retired (early or not), not someone retired but with a side gig bringing $400k a year, keeping some cash or bond in a taxable account is not a big problem, I think.
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Re: How do early retirees survive bad markets?

Post by MikeG62 »

tpom16 wrote: Sun Sep 29, 2019 1:54 pm Thanks for your feedback. Appreciate it. Swapping equities / bonds between tax deferred and taxable accounts during market downturn makes perfect sense. I assume that selling stocks from taxable account during bad markets would mostly likely result in capital loss, if wash sales managed properly. So it should work out. I actually do this trick occasionally but totally missed it in the long term picture. Thanks again.
This is possible, but I don’t think you should assume that as a general rule. Much of your taxable equities would have been purchased years (decades) earlier and you’d likely be sitting on large unrealized capital gains. Plus, once retired you may well turn off dividend reinvestment (I did when I retired) as a source of cash flow (so you are not buying new shares high). Over time (markets tend to rise) you are left with shares purchased at prices much lower than what they are in the future. Sure, a 50% decline in the market may leave you with some shares you can sell at a small gain or even a loss, but I would not count on it.

Also, where are you going to source your cash flow in non-bad markets? You going to sell equites then too? You think you’ll have shares in loss position then too?

FWIW, DW and I are completing our 4th year of early retirement and we are funding our retirement spending solely from our taxable accounts. Have not had any need to sell equites to finance our retirement. However, I don’t follow the often cited advice of putting all bonds in tax deferred and equities in taxable. I manage them as separate buckets. Also, 80% of our assets are in taxable accounts so would be impossible to not have have FI in taxable in our situation (which is admittedly atypical for most who post on these boards). I also keep a fair amount in cash-like investments in taxable (CD’s/Treasuries/MMF’s/Online Savings). I consider these as the short-end of our FI exposure. In a different interest rate environment, more of this would be in bonds (muni’s).
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heyyou
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Re: How do early retirees survive bad markets?

Post by heyyou »

We keep our necessary expenses relatively lower, so our discretionary spending is reduced when our assets have a reduction in value.

My withdrawal amount is based on each recent annual account balance. With a 60/40 allocation, that is about a decade of spending in bonds before needing to sell any equity shares at reduced prices. Other posters have shown how to move stock shares and bond shares between various types of accounts.

Michael H. McClung suggests starting retirement (regardless of age) with a near 50/50 allocation, then spending from bond funds first until they are gone, or until stock funds have grown to 120% of their retirement day value for a rebalancing trigger. He also does the slowly rising spending percentage on each recent annual account balance, based on remaining expected longevity.

More succinctly, we live within our means as our portfolio value varies.
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Re: How do early retirees survive bad markets?

Post by Big Dog »

I moved about 24 months of cash expenses into our 'taxable' California Muni bond account to prepare for any big downturn. (of course, its federal and state tax exempt) But if there is a big downturn, I sell taxable equities with highest cost basis first.

And we are at a 50:50 AA. In the meantime, I'll draw from the bond accounts before claiming SS, so the AA will increase over time.
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Re: How do early retirees survive bad markets?

Post by Clever_Username »

heyyou wrote: Mon Sep 30, 2019 6:05 pm Michael H. McClung suggests starting retirement (regardless of age) with a near 50/50 allocation, then spending from bond funds first until they are gone, or until stock funds have grown to 120% of their retirement day value for a rebalancing trigger. He also does the slowly rising spending percentage on each recent annual account balance, based on remaining expected longevity.

More succinctly, we live within our means as our portfolio value varies.
For the first (of the quoted portion) paragraph, it sounds like the portfolio AA is getting more aggressive as one gets into retirement.
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Re: How do early retirees survive bad markets?

Post by whodidntante »

Ron wrote: Sun Sep 29, 2019 10:01 am Does DW stand for Divorced Wife :twisted: ???
It does now.
elainet7
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Re: How do early retirees survive bad markets?

Post by elainet7 »

Just understand Sequence of Risk!!!
heyyou
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Re: How do early retirees survive bad markets?

Post by heyyou »

On Sequence of Returns risk (SORr):
Just understand Sequence of Risk!!!
It is not uncommon for numerous workers to retire at market highs, prior to a major crash, since those, shall we say "experienced" workers, just reached their special number.

Using their prior, recently big portfolio value for its larger withdrawal amount is a mistake, if the stock market does not soon recover from the new retirees' first post-retirement crash. Sequence of Return risk (SORr) does not sneak up, it is from overspending for years by continuing to use that high, steadily inflation adjusted, withdrawal amount for too long. It is not the fault of the stock market, the problem is with those retirees who have spent beyond their current means. As written by Shakespeare, "The problem, dear Brutus, lies not in our stars, but within ourselves."

Don't get SORr (sore), adjust your annual spending to what your current portfolio value will support. In retirement, we need to still live within our means, as our means vary over thirty years.
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