New member - first questions!

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Gyrohead
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New member - first questions!

Post by Gyrohead »

I'm approaching retirement within a couple years, and while planning for the transition I came across this wonderful group! I'm not new to investing but I am new to the Bogleheads simple approach and will be new to living off my investments. I tried an AUM approach on a % of my portfolio for two years with a big firm (after being convinced it would outperform what I was doing). I was charged 1.35% and saw a lot of activity, but I beat the managed accounts by 6% with my own "passive" allocation of rather expensive funds in an IRA, that was an expensive experiment! I'm in the process of simplifying my investments and believe a 60/40ish split of low cost funds or ETF's will make a big difference in the long run, and still yield the same or better as my expensive "passive" portfolio. With that, I have some initial questions:

Within the 3 fund portfolio, is one US stock and one bond fund enough diversification to draw from in retirement? It seems like splitting up the stocks into small, mid, and large caps might give a better opportunity to draw from whichever segment is doing best at the time? Or is one stock and one bond enough to alternate between the two? Or does the % in cash buffer everything, with an ongoing flow from stocks & bonds to cash a couple years in advance?

Thanks!
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Beensabu
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Re: New member - first questions!

Post by Beensabu »

Gyrohead wrote: Sat Mar 30, 2024 2:27 pm Within the 3 fund portfolio, is one US stock and one bond fund enough diversification to draw from in retirement? It seems like splitting up the stocks into small, mid, and large caps might give a better opportunity to draw from whichever segment is doing best at the time? Or is one stock and one bond enough to alternate between the two? Or does the % in cash buffer everything, with an ongoing flow from stocks & bonds to cash a couple years in advance?
You just withdraw what you need in a way that maintains your desired AA. That means you end up drawing more (by a bit or a lot) from whatever is up more or down less. And sometimes you end up having to rebalance after that anyway (if something is up or down a ton).
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
bonesly
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Re: New member - first questions!

Post by bonesly »

Gyrohead wrote: Sat Mar 30, 2024 2:27 pm Within the 3 fund portfolio, is one US stock and one bond fund enough diversification to draw from in retirement?
...
Or is one stock and one bond enough to alternate between the two?
Yes to both questions above. Monte Carlo simulations for predicting the survivability of a portfolio in the withdrawal phase for X years typically assume proportional withdrawal from all funds within the two major asset classes of stocks and bonds, along with annual rebalancing. If the finance theorists have shown that this kind of modeling approach is valid, it is a suitable approach for an actual withdrawal. Alternative strategies generally add a cash buffer (e.g., "3 bucket strategy") to avoid selling from a a down asset class (stocks and/or bonds that had a bad year), rather than slicing within an asset class.
Gyrohead wrote: Sat Mar 30, 2024 2:27 pm It seems like splitting up the stocks into small, mid, and large caps might give a better opportunity to draw from whichever segment is doing best at the time?
No, to the question above. Large, mid, and small caps are all still stocks and are all likely to be up or down if stocks in general have a bad year because stock slices are highly correlated with the total stock market. Bonds are uncorrelated with stocks, which is why they make a good pairing, but uncorrelated is not negatively correlated (which would mean when stocks fall bonds always rise in response). Uncorrelated assets can both move up together, or down together, but mainly they move independently.
Gyrohead wrote: Sat Mar 30, 2024 2:27 pm Or does the % in cash buffer everything, with an ongoing flow from stocks & bonds to cash a couple years in advance?
Do a Google search on "3 bucket strategy" for an idea of how to use cash buffers to avoid selling when stocks and/or bonds are down, but it's time for your annual withdrawal.

This is purely a psychological fear/greed thing since the finance theory models show you can just hold stocks and bonds and only sell what you need once a year for spending (no cash buffer other than that year's finances) with portfolio survival >90%. You can potentially earn a little more (greed) or avoid selling when down (fear), but it's not necessary as the constant dollar/constant percentage strategies are sound and only use stocks/bonds with no cash buffer.

However, human emotion is not to be discounted as it can result in behavioral errors in portfolio management that have a real negative consequence to future value. If you will lose sleep and be checking your retirement balances daily because you did not have a cash buffer, then you absolutely should adopt a 3-bucket strategy. Some people just can't wrap their head around probability theory and if some alternative withdrawal approach allays their fear and causes no harm, then that's just as good as some optimally simple financial model.
rkhusky
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Re: New member - first questions!

Post by rkhusky »

Gyrohead wrote: Sat Mar 30, 2024 2:27 pm Within the 3 fund portfolio, is one US stock and one bond fund enough diversification to draw from in retirement?
The 3 fund portfolio usually has US and International stock funds, along with a bond fund.
Topic Author
Gyrohead
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Re: New member - first questions!

Post by Gyrohead »

Thank you all so much for all of the helpful information here...I've seen the models from the financial planner of the big firm and asked many times about the details of funding the retirement years, all of your answers are already more helpful to understand the draw down method. I have a few more questions as I digest all of this:

What category would investment real estate fall in? Do we exclude it from a 60/40 portfolio?

Same for Annuities, should I include those in the bond category? (I may eventually move this to include in the Bogle 60/40 portfolio funds)

Where would ROTH IRA funds go if you don't plan to touch them for over 10 years to maximize growth? (When I had my ROTH in the AUM account, they had it split between 60/40 stocks and bonds, I didn't think that was a good strategy for the ROTH. I always thought I would benefit from the ROTH in S&P or all US stock fund but that's not how they did it)

Any recommendation on which low cost funds to use for US Stocks, Bonds, International stocks?

Thanks again.
bonesly
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Re: New member - first questions!

Post by bonesly »

Gyrohead wrote: Sat Mar 30, 2024 8:36 pm What category would investment real estate fall in? Do we exclude it from a 60/40 portfolio?
Real Estate Investment Trusts (REITs) behave like stocks and have a correlation of 0.76 on a scale from -1 (negative correlation) to +1 (positive correlation), where 0 is uncorrelated. Subsequently RE is classified as a stock and is included in the X=stock % of an X/Y asset allocation.

Individual properties are more complicated, but generally present higher risk similar to holding individual stocks.
Gyrohead wrote: Sat Mar 30, 2024 8:36 pm Same for Annuities, should I include those in the bond category? (I may eventually move this to include in the Bogle 60/40 portfolio funds)
You can calculate the Net Present Value (NPV) of an annuity and assume that gets added to your bond portion, but I prefer to simply reduce the expenses that the portfolio needs cover. If I have $100K/yr expenses and a retirement annuity of $50K/yr and SocSec of $30K/yr, then the portfolio only needs to produce $20K/yr... I would set the AA for the portfolio based on 90% portfolio survival for a $20K/yr initial draw (if that's possible; drawing more than 4% on a 30-year retirement span is unlikely to succeed).
Gyrohead wrote: Sat Mar 30, 2024 8:36 pm Where would ROTH IRA funds go if you don't plan to touch them for over 10 years to maximize growth? (When I had my ROTH in the AUM account, they had it split between 60/40 stocks and bonds, I didn't think that was a good strategy for the ROTH. I always thought I would benefit from the ROTH in S&P or all US stock fund but that's not how they did it)
They might have put bonds in your Roth if they did not have access to a tax-deferred account like a Trad 401K/457b/403c/IRA (preferred placement for bonds). If you have access to a tax-deferred account and can put your entire bond allocation in those types of accounts, then yes your Roth should hold only stocks.
Gyrohead wrote: Sat Mar 30, 2024 8:36 pm Any recommendation on which low cost funds to use for US Stocks, Bonds, International stocks?
If you want ETFs then VTI, BND, and VXUS which can be traded and held at any brokerage.

If you want Mutual Funds, then use the three funds listed in the Wiki topic on the 3-Fund Portfolio for your specific brokerage (e.g., at Vanguard that would be VTSAX, VBTLX, and VTIAX, but at Schwab that would be SWTSX, SWAGX, and SWISX).
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CenTexan
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Re: New member - first questions!

Post by CenTexan »

bonesly - great info!!
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retired@50
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Re: New member - first questions!

Post by retired@50 »

Gyrohead wrote: Sat Mar 30, 2024 2:27 pm I'm approaching retirement within a couple years, and while planning for the transition I came across this wonderful group!
Welcome to the forum Gyrohead!

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
Topic Author
Gyrohead
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Re: New member - first questions!

Post by Gyrohead »

Once again, very helpful Bonesly and all!

For the ROTH, they did manage ROTH and a tax deferred IRA, but all with the exact same AA, even after I suggested it wasn't the best AA for the ROTH portion. Hence, one of the reasons I am taking over, my 1.35% fee was not providing a good strategy from the "experts".

My real estate is a few residential rental properties. Just thought it might make sense to put their values somewhere as I calculate AA %'s.

I believe I understand the annuity options: A. Include the NPV in the bond portion of AA. B. Don't include the NPV in the bond portion of the AA and reduce expenses by the annual annuity payment.

I'll be getting to work on this...in process of moving into the index funds when the market opens.
Topic Author
Gyrohead
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Re: New member - first questions!

Post by Gyrohead »

retired@50 wrote: Sun Mar 31, 2024 10:07 am
Gyrohead wrote: Sat Mar 30, 2024 2:27 pm I'm approaching retirement within a couple years, and while planning for the transition I came across this wonderful group!
Welcome to the forum Gyrohead!

Regards,
Thank you, I appreciate the support.
bonesly
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Re: New member - first questions!

Post by bonesly »

Gyrohead wrote: Sun Mar 31, 2024 11:04 am I believe I understand the annuity options: A. Include the NPV in the bond portion of AA. B. Don't include the NPV in the bond portion of the AA and reduce expenses by the annual annuity payment.
When deciding on your overall AA, if you do include the annuity/pension as a bond, the calculation I've seen recommended is something like this
Nominal Rate = 5.2% - Long-term avg for 10y T-Notes (feel free to change if you're assuming something other than intermediate Treasuries)
Inflation = 2.5% - The Fed target is 2% but historically it runs a bit above their target; could change to 3 or 3.5
[Real] Rate = Nominal - Inflation
nPer = 95 - age - where 95 is an assumption for life expectancy if it's a lifetime annuity and age is when you will start payments or your actual age if you're already receiving payments
Pmt = $X/yr - what the annual annuity payment is now or in the future (in today's dollars)

In Excel, the Bond Value = PV(Rate, nPer, -Pmt)

Be sure to include the minus sign in front of the Pmt if you want a positive bond value.
Topic Author
Gyrohead
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Re: New member - first questions!

Post by Gyrohead »

Interesting, more complex than just using the current surrender value of the annuity. Thanks.
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