Close to retirement - locking in gains with each new market high

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HomerJ
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Re: Close to retirement - locking in gains with each new market high

Post by HomerJ »

Marseille07 wrote: Sun Aug 01, 2021 12:24 amAnd we're already seeing a puzzling phenomenon where CPI printed +5.4% and 10Y crashed from 1.4% to 1.2%. For whatever reason, everyone is buying bonds despite them returning nothing.
Because everyone believes that inflation number is temporary. It may not be, but that's what most people think at this point in time. Comparing inflation to a year ago during one of the peaks of a global pandemic isn't that useful, in my opinion.

In any case, I'm not in the market for used cars, or renting cars right now, so most of the inflation isn't touching me.

I'm not buying a lot of gas either since I'm still working from home.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Nathan Drake
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Re: Close to retirement - locking in gains with each new market high

Post by Nathan Drake »

HomerJ wrote: Sun Aug 01, 2021 1:19 am
Nathan Drake wrote: Sun Aug 01, 2021 12:12 am
Marseille07 wrote: Sat Jul 31, 2021 11:48 pm
Nathan Drake wrote: Sat Jul 31, 2021 11:37 pm Yeah 50/50 or less with most of the equities in LC US TSM is extremely risky IMHO
I don't understand your take. 50/50 is extremely safe no matter how you slice it. Arguably it's too safe.
It's safe in the short-term, extremely risky in the long-term. Bonds are returning nothing. Equities in US TSM are at historic levels of valuations, projecting smaller returns going forward.

That combo + inflation is a recipe for potential retirement disaster unless equities manage to keep their valuations or even grow them.
You've got it backwards.

Long-term it will likely be fine. Short-term would be risky if I was 90/10 stocks/bonds... but short-term is less risky because I have so much in bonds/cash.

Yes, bonds are returning nothing in the short-term, but no one knows what interest rates will be in 5-10-15 years.

Yes, equities are projecting smaller returns in the short-term (if you believe in valuations theory), but the long-term will likely be higher.

That's the history of the market. That's valuations theory as well. If you believe in valuations and expected returns, then low returns over the next 10 years will predict higher returns over the following 10 years.

So having a solid chunk of money in cash/bonds/CDs means I'll be fine even the market crashes in the next few years. Because I'll have plenty to spend while waiting for stocks to recover.

Inflation is a real danger, yes. But I've built up my ibonds to be 10% of my fixed-income side, and I can adjust if we start seeing sustained higher inflation. The Fed will raise interest rates if inflation gets too out of control, which will certainly help cash, and short-term bond funds

Intermediate bond funds would get hurt in the short-run with rising interest rates, but do better in the long-run.

I don't need equities to do well in the short-run. That's the whole point of having so much in cash and fixed income.
Nothing backwards about it, you’re trading short term security for long term deterioration of your portfolio.

Outside of cash, bonds have the riskiest long-term outcomes due to portfolio erosion of inflation.

Look at long term SWR for early retirees. The only good combo is low SWR and high equity
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Escapevelocity
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Re: Close to retirement - locking in gains with each new market high

Post by Escapevelocity »

Nathan Drake wrote: Sun Aug 01, 2021 1:31 am
HomerJ wrote: Sun Aug 01, 2021 1:19 am
Nathan Drake wrote: Sun Aug 01, 2021 12:12 am
Marseille07 wrote: Sat Jul 31, 2021 11:48 pm
Nathan Drake wrote: Sat Jul 31, 2021 11:37 pm Yeah 50/50 or less with most of the equities in LC US TSM is extremely risky IMHO
I don't understand your take. 50/50 is extremely safe no matter how you slice it. Arguably it's too safe.
It's safe in the short-term, extremely risky in the long-term. Bonds are returning nothing. Equities in US TSM are at historic levels of valuations, projecting smaller returns going forward.

That combo + inflation is a recipe for potential retirement disaster unless equities manage to keep their valuations or even grow them.
You've got it backwards.

Long-term it will likely be fine. Short-term would be risky if I was 90/10 stocks/bonds... but short-term is less risky because I have so much in bonds/cash.

Yes, bonds are returning nothing in the short-term, but no one knows what interest rates will be in 5-10-15 years.

Yes, equities are projecting smaller returns in the short-term (if you believe in valuations theory), but the long-term will likely be higher.

That's the history of the market. That's valuations theory as well. If you believe in valuations and expected returns, then low returns over the next 10 years will predict higher returns over the following 10 years.

So having a solid chunk of money in cash/bonds/CDs means I'll be fine even the market crashes in the next few years. Because I'll have plenty to spend while waiting for stocks to recover.

Inflation is a real danger, yes. But I've built up my ibonds to be 10% of my fixed-income side, and I can adjust if we start seeing sustained higher inflation. The Fed will raise interest rates if inflation gets too out of control, which will certainly help cash, and short-term bond funds

Intermediate bond funds would get hurt in the short-run with rising interest rates, but do better in the long-run.

I don't need equities to do well in the short-run. That's the whole point of having so much in cash and fixed income.
Nothing backwards about it, you’re trading short term security for long term deterioration of your portfolio.

Outside of cash, bonds have the riskiest long-term outcomes due to portfolio erosion of inflation.

Look at long term SWR for early retirees. The only good combo is low SWR and high equity
I don’t consider 58-60 to be an early retirement. Homer can collect social security in a few years.
dknightd
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Re: Close to retirement - locking in gains with each new market high

Post by dknightd »

Wanderingwheelz wrote: Fri Jul 30, 2021 8:56 pm
HomerJ wrote: Thu Jul 29, 2021 8:52 pm
Basically I can't convince my wife that we're really okay.
Before retiring I’d definitely consider investing some money in a flat fee financial planner in the situation you describe in this thread. Unless your wife is 100% confident in your current plan and your ability to navigate whatever financial markets throw at you after your earned income goes to $0, I’d want another person to point a finger at, personally. It doesn’t appear that she is.
I think this is good advice. Before I retired, I figured how much we'd need to be "comfortable" and how much I'd prefer to be able to spend. I was darn sure we could likely do the "preferred" amount, but could almost certainly do the "comfortable" amount. The key for us was to get Spouse to come up with an expected spending amount. Luckily that number was between my two numbers. Then we met with a financial planner who told us we had enough to retire. I think that second opinion was crucial in letting me pull the plug.

Small tweaks to your portfolio are probably not going to make much difference (although I did something similar to what you are doing, see below). The key step now is to retire! That only makes sense if you both agree it is time. This is one of the biggest decisions you'll make in your lives (second only to perhaps deciding to get married), having both agree it is a good decision is very important IMO.

A few years before I retired I started de-risking, or locking in gains, or whatever you want to call it. When the market went up, I sold the profits and put it in cash like things. I went from about 55/45 to about 30/70. It turns out this cost us money, but, it could have gone the other way. Now we have enough cash, assuming 3% inflation, and no returns, to cover our expenses until I claim SS at 70. At 70 SS and annuity will cover my "comfortable" number. By then I expect we'll be back to about 55/45. Either because stocks keep going up, or, we spend all the cash, or both. At 70 "comfortable" should be safe, and, RMD should be enough to bring us back up to "preferred"

You never know what is going to happen. We've been blessed with many years of strong growth, and low inflation. The tide could turn, or maybe not. Unlike tides, it is very hard to forecast economic conditions.

It may have been easier, and in retrospect more profitable, to just stick with 55/45 and not play these mental accounting games, and essentially using "buckets" instead of hose. But I do not regret my decision. If stocks had tanked I might have worked one or more years if I did not have that cash buffer. So for me, the money I lost by putting into buckets was money well spent.

Yes, inflation well above 3% for several years will kink my plan. So would a big drop in the stock market that was slow to recover. Both could happen. Who knows. I still think my "comfortable" is more or less bomb proof, OK maybe not that strong . . .

All that said, you think you have enough, now convince your wife. Unless you love your job, or can't imagine life without it, spend your time and money convincing her it is time to retire. Then do it.

That is my $.10 which I'm freely donating :)
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
YRT70
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Re: Close to retirement - locking in gains with each new market high

Post by YRT70 »

Nathan Drake wrote: Sun Aug 01, 2021 12:12 am
Marseille07 wrote: Sat Jul 31, 2021 11:48 pm
Nathan Drake wrote: Sat Jul 31, 2021 11:37 pm Yeah 50/50 or less with most of the equities in LC US TSM is extremely risky IMHO
I don't understand your take. 50/50 is extremely safe no matter how you slice it. Arguably it's too safe.
It's safe in the short-term, extremely risky in the long-term. Bonds are returning nothing. Equities in US TSM are at historic levels of valuations, projecting smaller returns going forward.

That combo + inflation is a recipe for potential retirement disaster unless equities manage to keep their valuations or even grow them.
Do you mean a 4% SWR for a 30 year retirement at current valuations is extremely risky? Do you have data supporting that?

I looked up a few articles (Kitces, Siamond) that investigate SWR at high valuations but I'm not getting the impression that 4% is "extremely risky". That being said, I'd shoot for a lower WR too, just to be sure.

For what it's worth I also had a look at Vanguard's MC tool, it gives 4% WR with 50/50 and a 30 year retirement a 92% chance of success. That's a little lower than I would like but I wouldn't call it extremely risky. And I think their tool is on the conservative side.
https://retirementplans.vanguard.com/VG ... ggCalc.jsf
Nathan Drake
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Re: Close to retirement - locking in gains with each new market high

Post by Nathan Drake »

YRT70 wrote: Sun Aug 01, 2021 9:27 am
Nathan Drake wrote: Sun Aug 01, 2021 12:12 am
Marseille07 wrote: Sat Jul 31, 2021 11:48 pm
Nathan Drake wrote: Sat Jul 31, 2021 11:37 pm Yeah 50/50 or less with most of the equities in LC US TSM is extremely risky IMHO
I don't understand your take. 50/50 is extremely safe no matter how you slice it. Arguably it's too safe.
It's safe in the short-term, extremely risky in the long-term. Bonds are returning nothing. Equities in US TSM are at historic levels of valuations, projecting smaller returns going forward.

That combo + inflation is a recipe for potential retirement disaster unless equities manage to keep their valuations or even grow them.
Do you mean a 4% SWR for a 30 year retirement at current valuations is extremely risky? Do you have data supporting that?

I looked up a few articles (Kitces, Siamond) that investigate SWR at high valuations but I'm not getting the impression that 4% is "extremely risky". That being said, I'd shoot for a lower WR too, just to be sure.

For what it's worth I also had a look at Vanguard's MC tool, it gives 4% WR with 50/50 and a 30 year retirement a 92% chance of success. That's a little lower than I would like but I wouldn't call it extremely risky. And I think their tool is on the conservative side.
https://retirementplans.vanguard.com/VG ... ggCalc.jsf
We’ve never had a period in history where both bonds and equities were simultaneously extremely overvalued
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Marseille07
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Re: Close to retirement - locking in gains with each new market high

Post by Marseille07 »

HomerJ wrote: Sun Aug 01, 2021 1:23 am
Marseille07 wrote: Sun Aug 01, 2021 12:24 amAnd we're already seeing a puzzling phenomenon where CPI printed +5.4% and 10Y crashed from 1.4% to 1.2%. For whatever reason, everyone is buying bonds despite them returning nothing.
Because everyone believes that inflation number is temporary. It may not be, but that's what most people think at this point in time. Comparing inflation to a year ago during one of the peaks of a global pandemic isn't that useful, in my opinion.

In any case, I'm not in the market for used cars, or renting cars right now, so most of the inflation isn't touching me.

I'm not buying a lot of gas either since I'm still working from home.
I think that's a good point. Checking quickly, we saw CPI of 0.1~0.6 last year so the average inflation rate doesn't seem too crazy. I still think people are overbuying bonds though. We saw 10Y at 1.7%, and even that's not high from a historical standpoint. Nathan Drake's concern seems valid to me.
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HomerJ
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Re: Close to retirement - locking in gains with each new market high

Post by HomerJ »

Nathan Drake wrote: Sun Aug 01, 2021 11:54 am
YRT70 wrote: Sun Aug 01, 2021 9:27 am
Nathan Drake wrote: Sun Aug 01, 2021 12:12 am
Marseille07 wrote: Sat Jul 31, 2021 11:48 pm
Nathan Drake wrote: Sat Jul 31, 2021 11:37 pm Yeah 50/50 or less with most of the equities in LC US TSM is extremely risky IMHO
I don't understand your take. 50/50 is extremely safe no matter how you slice it. Arguably it's too safe.
It's safe in the short-term, extremely risky in the long-term. Bonds are returning nothing. Equities in US TSM are at historic levels of valuations, projecting smaller returns going forward.

That combo + inflation is a recipe for potential retirement disaster unless equities manage to keep their valuations or even grow them.
Do you mean a 4% SWR for a 30 year retirement at current valuations is extremely risky? Do you have data supporting that?

I looked up a few articles (Kitces, Siamond) that investigate SWR at high valuations but I'm not getting the impression that 4% is "extremely risky". That being said, I'd shoot for a lower WR too, just to be sure.

For what it's worth I also had a look at Vanguard's MC tool, it gives 4% WR with 50/50 and a 30 year retirement a 92% chance of success. That's a little lower than I would like but I wouldn't call it extremely risky. And I think their tool is on the conservative side.
https://retirementplans.vanguard.com/VG ... ggCalc.jsf
We’ve never had a period in history where both bonds and equities were simultaneously extremely overvalued
We absolutely have had such a period. That's where the 4% SWR comes from.

1960s, bond funds had negative real returns for 15 years due rising interest rates and high inflation. CAPE was above 20 (which was super high at the time), and stock returns from 1966-1982 were very poor. The DOW was 1000 in 1966 and STILL 1000 in 1982... 16 years of no price growth (dividends were higher back then, but mostly negated by inflation, so basically 0% real return in stocks too).

And 4% worked (okay 3.8% in 1966, the worst starting year).

So yeah, we've seen this before. Not a great place to be in, but there's nothing unprecedented about today.

And at least we're not seeing double-digit inflation. If THAT happens, then we'll be in trouble.

But pulling 4% with low returns is no big deal at all... Inflation is real danger and is what hurt retirement plans that started in the 1960s.

I do wish I had more in ibonds. I do have a lot of money in short-term Treasury bonds. Those should handle inflation okay, since they turn over so fast, and I expect the Fed to raise rates if we do see high sustained inflation.

Maybe I should look at short-term TIPs bond funds as well.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
garlandwhizzer
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Re: Close to retirement - locking in gains with each new market high

Post by garlandwhizzer »

I believe the Homer's post is really more about self-knowledge than investment strategy. Homer is 50/50 to start out with and wants to increase fixed income a bit more than that to cover for the chance of a severe bear market near term with massive portfolio value losses. As Nathan Drake points out, this will reduce long term portfolio returns. ND questions whether the greater risk is running out of money in a long retirement versus very dramatic short/intermediate term risk that a richly valued market suffers in a severe downturn. Portfolio construction is not necessarily a question of optimizing long term return in retirement which higher equity will clearly do. Instead it is a question of optimizing quality of life in retirement as viewed by the person making the decision. For maximizing long term returns as the dominant goal, 100% equity is clearly the way to go, but few choose this approach.

For risk averse individuals, the persistent fear of dramatic losses of portfolio value quickly in a bear market reduces their quality of life whether those losses occur or not. Reduction in worrying about those gut wrenching bear markets comes at a cost. HomerJ and his wife (this is a joint decision) are willing to pay that cost. They believe that their asset base is large enough to cover their NEEDS even given those expected lower returns and are willing to give up fully satisfying their WANTS in return for the emotional balm of not worrying about a market crash. This decision is entirely a judgement they make based on their own self-knowledge.

Risk/reward is a tradeoff. We are all different in where we set that balance. Reducing worrying about bear markets may emotionally compensate those who are more risk averse to a greater extent in quality of life than increased long term returns. Personally, I am not risk averse. I am 74, have been retired for 24 years, and I still hold about 70+% equity. I do not however recommend that approach for everyone. It is suited to me, just as HomerJ's approach is suited to him. Know yourself, avoid unrealistic expectations about future returns, and choose your retirement portfolio accordingly--that's my 2 cents worth.

Garland Whizzer
flyingaway
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Re: Close to retirement - locking in gains with each new market high

Post by flyingaway »

garlandwhizzer wrote: Sun Aug 01, 2021 1:28 pm I believe the Homer's post is really more about self-knowledge than investment strategy. Homer is 50/50 to start out with and wants to increase fixed income a bit more than that to cover for the chance of a severe bear market near term with massive portfolio value losses. As Nathan Drake points out, this will reduce long term portfolio returns. ND questions whether the greater risk is running out of money in a long retirement versus very dramatic short/intermediate term risk that a richly valued market suffers in a severe downturn. Portfolio construction is not necessarily a question of optimizing long term return in retirement which higher equity will clearly do. Instead it is a question of optimizing quality of life in retirement as viewed by the person making the decision. For maximizing long term returns as the dominant goal, 100% equity is clearly the way to go, but few choose this approach.

For risk averse individuals, the persistent fear of dramatic losses of portfolio value quickly in a bear market reduces their quality of life whether those losses occur or not. Reduction in worrying about those gut wrenching bear markets comes at a cost. HomerJ and his wife (this is a joint decision) are willing to pay that cost. They believe that their asset base is large enough to cover their NEEDS even given those expected lower returns and are willing to give up fully satisfying their WANTS in return for the emotional balm of not worrying about a market crash. This decision is entirely a judgement they make based on their own self-knowledge.

Risk/reward is a tradeoff. We are all different in where we set that balance. Reducing worrying about bear markets may emotionally compensate those who are more risk averse to a greater extent in quality of life than increased long term returns. Personally, I am not risk averse. I am 74, have been retired for 24 years, and I still hold about 70+% equity. I do not however recommend that approach for everyone. It is suited to me, just as HomerJ's approach is suited to him. Know yourself, avoid unrealistic expectations about future returns, and choose your retirement portfolio accordingly--that's my 2 cents worth.

Garland Whizzer
This is well said.
Nathan Drake
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Re: Close to retirement - locking in gains with each new market high

Post by Nathan Drake »

HomerJ wrote: Sun Aug 01, 2021 1:15 pm
Nathan Drake wrote: Sun Aug 01, 2021 11:54 am
YRT70 wrote: Sun Aug 01, 2021 9:27 am
Nathan Drake wrote: Sun Aug 01, 2021 12:12 am
Marseille07 wrote: Sat Jul 31, 2021 11:48 pm

I don't understand your take. 50/50 is extremely safe no matter how you slice it. Arguably it's too safe.
It's safe in the short-term, extremely risky in the long-term. Bonds are returning nothing. Equities in US TSM are at historic levels of valuations, projecting smaller returns going forward.

That combo + inflation is a recipe for potential retirement disaster unless equities manage to keep their valuations or even grow them.
Do you mean a 4% SWR for a 30 year retirement at current valuations is extremely risky? Do you have data supporting that?

I looked up a few articles (Kitces, Siamond) that investigate SWR at high valuations but I'm not getting the impression that 4% is "extremely risky". That being said, I'd shoot for a lower WR too, just to be sure.

For what it's worth I also had a look at Vanguard's MC tool, it gives 4% WR with 50/50 and a 30 year retirement a 92% chance of success. That's a little lower than I would like but I wouldn't call it extremely risky. And I think their tool is on the conservative side.
https://retirementplans.vanguard.com/VG ... ggCalc.jsf
We’ve never had a period in history where both bonds and equities were simultaneously extremely overvalued
We absolutely have had such a period. That's where the 4% SWR comes from.

1960s, bond funds had negative real returns for 15 years due rising interest rates and high inflation. CAPE was above 20 (which was super high at the time), and stock returns from 1966-1982 were very poor. The DOW was 1000 in 1966 and STILL 1000 in 1982... 16 years of no price growth (dividends were higher back then, but mostly negated by inflation, so basically 0% real return in stocks too).

And 4% worked (okay 3.8% in 1966, the worst starting year).

So yeah, we've seen this before. Not a great place to be in, but there's nothing unprecedented about today.

And at least we're not seeing double-digit inflation. If THAT happens, then we'll be in trouble.

But pulling 4% with low returns is no big deal at all... Inflation is real danger and is what hurt retirement plans that started in the 1960s.

I do wish I had more in ibonds. I do have a lot of money in short-term Treasury bonds. Those should handle inflation okay, since they turn over so fast, and I expect the Fed to raise rates if we do see high sustained inflation.

Maybe I should look at short-term TIPs bond funds as well.
Not even close, today’s numbers make the 1960s look great in comparison

Inflation is absolutely a danger and really the part that we see is rising now in combination with these other factors. It’s very concerning for anyone retiring right now.

Hopefully with SS your WR is much lower than 4%
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Marseille07
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Re: Close to retirement - locking in gains with each new market high

Post by Marseille07 »

Nathan Drake wrote: Sun Aug 01, 2021 1:45 pm Not even close, today’s numbers make the 1960s look great in comparison

Inflation is absolutely a danger and really the part that we see is rising now in combination with these other factors. It’s very concerning for anyone retiring right now.

Hopefully with SS your WR is much lower than 4%
What are the signs you're seeing to indicate 2021 is worse than say, 1966? As HomerJ noted, the notion of valuations has changed; and our inflation numbers aren't that bad either.
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Re: Close to retirement - locking in gains with each new market high

Post by Leif »

It may be helpful at the edges. If these numbers represent your personal case. Or at least to scale. But, feeling good is important.

I also took my portfolio to 50/50, but over a period of around 10 years. So 2%/year. Sometimes I did and sometimes the market did it.

Mine was a glide path, and that is not your case. Whether more money in bonds is good/necessary will depend on your withdrawal rates and cash flow projections, as well as the market.

I'm not being too dogmatic about my AA, with more then enough in bonds to cover whatever happens in equities. So I'm planning to let my AA drift with the market, but not to exceed 60/40. Being retired I'm only planning on a one way rebalance. Only selling equities. As it is turning out I guess I'm following a bond tent path.
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HomerJ
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Re: Close to retirement - locking in gains with each new market high

Post by HomerJ »

garlandwhizzer wrote: Sun Aug 01, 2021 1:28 pm I believe the Homer's post is really more about self-knowledge than investment strategy. Homer is 50/50 to start out with and wants to increase fixed income a bit more than that to cover for the chance of a severe bear market near term with massive portfolio value losses. As Nathan Drake points out, this will reduce long term portfolio returns. ND questions whether the greater risk is running out of money in a long retirement versus very dramatic short/intermediate term risk that a richly valued market suffers in a severe downturn. Portfolio construction is not necessarily a question of optimizing long term return in retirement which higher equity will clearly do. Instead it is a question of optimizing quality of life in retirement as viewed by the person making the decision. For maximizing long term returns as the dominant goal, 100% equity is clearly the way to go, but few choose this approach.

For risk averse individuals, the persistent fear of dramatic losses of portfolio value quickly in a bear market reduces their quality of life whether those losses occur or not. Reduction in worrying about those gut wrenching bear markets comes at a cost. HomerJ and his wife (this is a joint decision) are willing to pay that cost. They believe that their asset base is large enough to cover their NEEDS even given those expected lower returns and are willing to give up fully satisfying their WANTS in return for the emotional balm of not worrying about a market crash. This decision is entirely a judgement they make based on their own self-knowledge.

Risk/reward is a tradeoff. We are all different in where we set that balance. Reducing worrying about bear markets may emotionally compensate those who are more risk averse to a greater extent in quality of life than increased long term returns. Personally, I am not risk averse. I am 74, have been retired for 24 years, and I still hold about 70+% equity. I do not however recommend that approach for everyone. It is suited to me, just as HomerJ's approach is suited to him. Know yourself, avoid unrealistic expectations about future returns, and choose your retirement portfolio accordingly--that's my 2 cents worth.

Garland Whizzer
Wow, that's a great post and spot on.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
seajay
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Re: Close to retirement - locking in gains with each new market high

Post by seajay »

delamer wrote: Thu Jul 29, 2021 3:29 pm
59Gibson wrote: Thu Jul 29, 2021 1:21 pm
tibbitts wrote: Thu Jul 29, 2021 1:14 pm
delamer wrote: Thu Jul 29, 2021 12:57 pm Or if you had sufficient assets to put 25 or 30 years of expenses in cash equivalents and then invest the rest of your portfolio in stocks for growth, that is a reasonable way to go (per Wm. Bernstein’s suggestion). That is a real “sleep well at night” portfolio.
Sleeping with that much in cash equivalents would have been easier when real rates on cash equivalents was positive, even after taxes.
+1 I don't know when he suggested 25-30yrs in cash equivalents but that would seem crazy now, unless he's just another 2%< swr the skys falling type. :happy
As of 2019, he was still saying it: https://www.whitecoatinvestor.com/berns ... -the-game/
If the safe/drawdown bucket asset allocation for 30 years of 3.3% SWR is the same as the growth bucket that seeks to achieve the best worst case outcome over 30 years are the same ?!

Cash and equivalents weren't the safest choice for the drawdown bucket, all-stock wasn't the best at maximizing the worst case 30 year accumulated growth. Better choices were evident, that had the same asset allocation for both buckets, which simplifies things (no need for two buckets).
delamer
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Re: Close to retirement - locking in gains with each new market high

Post by delamer »

seajay wrote: Sun Aug 01, 2021 2:29 pm
delamer wrote: Thu Jul 29, 2021 3:29 pm
59Gibson wrote: Thu Jul 29, 2021 1:21 pm
tibbitts wrote: Thu Jul 29, 2021 1:14 pm
delamer wrote: Thu Jul 29, 2021 12:57 pm Or if you had sufficient assets to put 25 or 30 years of expenses in cash equivalents and then invest the rest of your portfolio in stocks for growth, that is a reasonable way to go (per Wm. Bernstein’s suggestion). That is a real “sleep well at night” portfolio.
Sleeping with that much in cash equivalents would have been easier when real rates on cash equivalents was positive, even after taxes.
+1 I don't know when he suggested 25-30yrs in cash equivalents but that would seem crazy now, unless he's just another 2%< swr the skys falling type. :happy
As of 2019, he was still saying it: https://www.whitecoatinvestor.com/berns ... -the-game/
If the safe/drawdown bucket asset allocation for 30 years of 3.3% SWR is the same as the growth bucket that seeks to achieve the best worst case outcome over 30 years are the same ?!

Cash and equivalents weren't the safest choice for the drawdown bucket, all-stock wasn't the best at maximizing the worst case 30 year accumulated growth. Better choices were evident, that had the same asset allocation for both buckets, which simplifies things (no need for two buckets).
I don’t understand what you are saying.

I don’t mean conceptually. What does “all-stock wasn't the best at maximizing the worst case 30 year accumulated growth” literally mean?
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
MnD
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Re: Close to retirement - locking in gains with each new market high

Post by MnD »

it sounds like a messy mix of market timing, cash buckets and other stuff which is going to be subject to all kinds of emotional and subjective pushing and pulling to manage. My IPS, including my retirement withdrawal strategy is in my signature below and I can't tell you how much it has simplified my financial life in retirement. Despite not one but two bear markets since retiring in later 2018, my retirement income from portfolio is about 80% higher than a 3% inflation-adjusted SWR and my portfolio is larger than I had ever imagined.

Just last week a very close friend received a very bad health diagnosis. Since I've retired around ten of my close relatives, friends or former close co-workers have passed in their 50's and 60's or received very bad health diagnoses. For the vast majority of Boglehead types, the real risk is running out of life or health as opposed to running out of money.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
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Zardoz
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Re: Close to retirement - locking in gains with each new market high

Post by Zardoz »

HomerJ wrote: Thu Jul 29, 2021 11:25 am If the market drops 30%, I'd be out $300,000 in stocks, but I would have already locked in $200,000 in gains, so I'd still be in great shape for retirement. I can spend from the bond/cash/CDs side until stocks recover. And if the market doesn't crash, I still spend from the bonds side until I'm back to 50/50 (and then spend from whichever side has the most money each year going forward)

I guess I'm crazy conservative, but this sure lets me sleep at night...

Am I wrong in thinking this helps with Sequence of Return risk?

In my example above, locking in $200,000 in gains, instead of just $100,000 from normal rebalancing means I have an extra 1+ year of expenses already locked into cash.

Not because I think a big crash is coming, but because I'm retiring very soon, and that way I have a large buffer even if a crash happens the day after I retire.
I'm planning to retire at the end of the year, and I did something similar last month. I hit my number earlier this year (24x expenses saved + substantial Social Security). In my case I went from 53/47 (I had drifted there from 50/50) down to 40/60.

I like the elegance of 50/50 (and I've appreciated your posts advocating for it over the years, Homer!) But I feel that 40/60 is a comfortable allocation for me during retirement - if the market crashes by 50% next year, I'm confident I will stay the course.
Withdrawal Phase Plan: Equities <= 50% | TIPS, I Bonds | VPW Worksheet | TPAW | Social Security @70
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vanbogle59
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Re: Close to retirement - locking in gains with each new market high

Post by vanbogle59 »

MnD wrote: Sun Aug 01, 2021 2:43 pm For the vast majority of Boglehead types, the real risk is running out of life or health as opposed to running out of money.
Agreed. Except that it is not the ONLY real risk. There are many others.
I always find it amusing to see people arguing over +/- 5% over 30+ years. As if.
There are SOOOO many other (more important, more likely) risks and uncertainties that are NOT captured in a portfolio balance or yearly budget.

Homer's plan is not-stupid and provides family harmony.
That's as good as it gets.
minimalistmarc
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Re: Close to retirement - locking in gains with each new market high

Post by minimalistmarc »

vanbogle59 wrote: Sun Aug 01, 2021 4:56 pm
MnD wrote: Sun Aug 01, 2021 2:43 pm For the vast majority of Boglehead types, the real risk is running out of life or health as opposed to running out of money.
Agreed. Except that it is not the ONLY real risk. There are many others.
I always find it amusing to see people arguing over +/- 5% over 30+ years. As if.
There are SOOOO many other (more important, more likely) risks and uncertainties that are NOT captured in a portfolio balance or yearly budget.

Homer's plan is not-stupid and provides family harmony.
That's as good as it gets.
Yep.

One amusing paradox is people obsessing about pensions while not sorting out their obesity, type 2 diabetes, smoking, alcohol lifestyle.
YRT70
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Re: Close to retirement - locking in gains with each new market high

Post by YRT70 »

Nathan Drake wrote: Sun Aug 01, 2021 11:54 am
YRT70 wrote: Sun Aug 01, 2021 9:27 am
Nathan Drake wrote: Sun Aug 01, 2021 12:12 am
Marseille07 wrote: Sat Jul 31, 2021 11:48 pm
Nathan Drake wrote: Sat Jul 31, 2021 11:37 pm Yeah 50/50 or less with most of the equities in LC US TSM is extremely risky IMHO
I don't understand your take. 50/50 is extremely safe no matter how you slice it. Arguably it's too safe.
It's safe in the short-term, extremely risky in the long-term. Bonds are returning nothing. Equities in US TSM are at historic levels of valuations, projecting smaller returns going forward.

That combo + inflation is a recipe for potential retirement disaster unless equities manage to keep their valuations or even grow them.
Do you mean a 4% SWR for a 30 year retirement at current valuations is extremely risky? Do you have data supporting that?

I looked up a few articles (Kitces, Siamond) that investigate SWR at high valuations but I'm not getting the impression that 4% is "extremely risky". That being said, I'd shoot for a lower WR too, just to be sure.

For what it's worth I also had a look at Vanguard's MC tool, it gives 4% WR with 50/50 and a 30 year retirement a 92% chance of success. That's a little lower than I would like but I wouldn't call it extremely risky. And I think their tool is on the conservative side.
https://retirementplans.vanguard.com/VG ... ggCalc.jsf
We’ve never had a period in history where both bonds and equities were simultaneously extremely overvalued
My opinion on that is closer to Homers'. We've had some pretty comparable periods in the past.

And besides that, I don't think sensible people would continue to withdraw 4% if they get bad returns early on. They adjust their spending a bit, which greatly increases their odds of success.
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Re: Close to retirement - locking in gains with each new market high

Post by seajay »

delamer wrote: Sun Aug 01, 2021 2:39 pm
seajay wrote: Sun Aug 01, 2021 2:29 pm
delamer wrote: Thu Jul 29, 2021 3:29 pm
59Gibson wrote: Thu Jul 29, 2021 1:21 pm
tibbitts wrote: Thu Jul 29, 2021 1:14 pm
Sleeping with that much in cash equivalents would have been easier when real rates on cash equivalents was positive, even after taxes.
+1 I don't know when he suggested 25-30yrs in cash equivalents but that would seem crazy now, unless he's just another 2%< swr the skys falling type. :happy
As of 2019, he was still saying it: https://www.whitecoatinvestor.com/berns ... -the-game/
If the safe/drawdown bucket asset allocation for 30 years of 3.3% SWR is the same as the growth bucket that seeks to achieve the best worst case outcome over 30 years are the same ?!

Cash and equivalents weren't the safest choice for the drawdown bucket, all-stock wasn't the best at maximizing the worst case 30 year accumulated growth. Better choices were evident, that had the same asset allocation for both buckets, which simplifies things (no need for two buckets).
I don’t understand what you are saying.

I don’t mean conceptually. What does “all-stock wasn't the best at maximizing the worst case 30 year accumulated growth” literally mean?
Average stock gains over say 30 years tends to be a distorted average figure, biased by infrequent extremes. Median is a better measure of the average. Also and specifically to what you ask its better to look at the worst 30 year accumulation/total-return gain for the growth bucket side and 100% stock had a lower (more bad) worst case 30 year than other choices/blends of assets.

If as a simple example (and talking in real terms) you 50/50 into two buckets, 50 bonds for drawdown, 50 stock for growth then ideally over the time period that the 50 bonds are spent you'd like the 50 growth bucket to have doubled-up. Broadly that averages 75/25 overall stock/bonds over those years, likely little different to another that constant weighted to 75/25. If the growth bucket is all in stocks then it may see a three-fold increase, great, you end with 1.5 times the start date amount. But if that comes with the risk that it could also have halved, then you'd end with just 25 of the start date amount. Better is another choice that might be less inclined to 3x (trebbled), but be more inclined to have at least 2x (doubled) in its worst case.

Also cash deposits/short term bonds etc. don't always pace inflation, they can/do cycle. Some periods of outpacing inflation, other times of lagging inflation. Widening that asset allocation to include even relatively little of other assets, such as stocks and gold and that deviation away from inflation pacing can be reduced. If again using 50/50 initial as above then if the 50 drawdown lasts longer through having less lagged inflation compared to cash, then that gives more time for the growth bucket side to grow.

When you decide that the drawdown bucket wont be all cash/equivalents and that the growth bucket wont be 100% stock, then you may find that the same asset allocation might equally serve both the drawdown and growth buckets, in which case there's no need for two separate buckets containing the exact same asset allocations, the two can be combined.
Ramjet
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Re: Close to retirement - locking in gains with each new market high

Post by Ramjet »

Nathan Drake wrote: Sun Aug 01, 2021 11:54 am
YRT70 wrote: Sun Aug 01, 2021 9:27 am
Nathan Drake wrote: Sun Aug 01, 2021 12:12 am
Marseille07 wrote: Sat Jul 31, 2021 11:48 pm
Nathan Drake wrote: Sat Jul 31, 2021 11:37 pm Yeah 50/50 or less with most of the equities in LC US TSM is extremely risky IMHO
I don't understand your take. 50/50 is extremely safe no matter how you slice it. Arguably it's too safe.
It's safe in the short-term, extremely risky in the long-term. Bonds are returning nothing. Equities in US TSM are at historic levels of valuations, projecting smaller returns going forward.

That combo + inflation is a recipe for potential retirement disaster unless equities manage to keep their valuations or even grow them.
Do you mean a 4% SWR for a 30 year retirement at current valuations is extremely risky? Do you have data supporting that?

I looked up a few articles (Kitces, Siamond) that investigate SWR at high valuations but I'm not getting the impression that 4% is "extremely risky". That being said, I'd shoot for a lower WR too, just to be sure.

For what it's worth I also had a look at Vanguard's MC tool, it gives 4% WR with 50/50 and a 30 year retirement a 92% chance of success. That's a little lower than I would like but I wouldn't call it extremely risky. And I think their tool is on the conservative side.
https://retirementplans.vanguard.com/VG ... ggCalc.jsf
We’ve never had a period in history where both bonds and equities were simultaneously extremely overvalued

So you fear stagflation and don't think the Fed will be able to tame it even if it is their mandate?
Nathan Drake
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Re: Close to retirement - locking in gains with each new market high

Post by Nathan Drake »

Ramjet wrote: Mon Aug 02, 2021 8:04 am
Nathan Drake wrote: Sun Aug 01, 2021 11:54 am
YRT70 wrote: Sun Aug 01, 2021 9:27 am
Nathan Drake wrote: Sun Aug 01, 2021 12:12 am
Marseille07 wrote: Sat Jul 31, 2021 11:48 pm

I don't understand your take. 50/50 is extremely safe no matter how you slice it. Arguably it's too safe.
It's safe in the short-term, extremely risky in the long-term. Bonds are returning nothing. Equities in US TSM are at historic levels of valuations, projecting smaller returns going forward.

That combo + inflation is a recipe for potential retirement disaster unless equities manage to keep their valuations or even grow them.
Do you mean a 4% SWR for a 30 year retirement at current valuations is extremely risky? Do you have data supporting that?

I looked up a few articles (Kitces, Siamond) that investigate SWR at high valuations but I'm not getting the impression that 4% is "extremely risky". That being said, I'd shoot for a lower WR too, just to be sure.

For what it's worth I also had a look at Vanguard's MC tool, it gives 4% WR with 50/50 and a 30 year retirement a 92% chance of success. That's a little lower than I would like but I wouldn't call it extremely risky. And I think their tool is on the conservative side.
https://retirementplans.vanguard.com/VG ... ggCalc.jsf
We’ve never had a period in history where both bonds and equities were simultaneously extremely overvalued

So you fear stagflation and don't think the Fed will be able to tame it even if it is their mandate?
I don’t believe the fed has as much control as many think. They were clearly way off on their inflation estimates

There could come a time where they need to either protect the dollar (keep inflation in check), or keeping unemployment low. They may not be able to achieve their dual mandate if external inflation factors are beyond their control
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Wanderingwheelz
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Re: Close to retirement - locking in gains with each new market high

Post by Wanderingwheelz »

Nathan Drake wrote: Mon Aug 02, 2021 8:29 am
Ramjet wrote: Mon Aug 02, 2021 8:04 am
Nathan Drake wrote: Sun Aug 01, 2021 11:54 am
YRT70 wrote: Sun Aug 01, 2021 9:27 am
Nathan Drake wrote: Sun Aug 01, 2021 12:12 am

It's safe in the short-term, extremely risky in the long-term. Bonds are returning nothing. Equities in US TSM are at historic levels of valuations, projecting smaller returns going forward.

That combo + inflation is a recipe for potential retirement disaster unless equities manage to keep their valuations or even grow them.
Do you mean a 4% SWR for a 30 year retirement at current valuations is extremely risky? Do you have data supporting that?

I looked up a few articles (Kitces, Siamond) that investigate SWR at high valuations but I'm not getting the impression that 4% is "extremely risky". That being said, I'd shoot for a lower WR too, just to be sure.

For what it's worth I also had a look at Vanguard's MC tool, it gives 4% WR with 50/50 and a 30 year retirement a 92% chance of success. That's a little lower than I would like but I wouldn't call it extremely risky. And I think their tool is on the conservative side.
https://retirementplans.vanguard.com/VG ... ggCalc.jsf
We’ve never had a period in history where both bonds and equities were simultaneously extremely overvalued

So you fear stagflation and don't think the Fed will be able to tame it even if it is their mandate?
I don’t believe the fed has as much control as many think. They were clearly way off on their inflation estimates

There could come a time where they need to either protect the dollar (keep inflation in check), or keeping unemployment low. They may not be able to achieve their dual mandate if external inflation factors are beyond their control
This might be worth 5 minutes of your time:

https://themarket.ch/interview/russell- ... on-ld.4628
Being wrong compounds forever.
delamer
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Re: Close to retirement - locking in gains with each new market high

Post by delamer »

seajay wrote: Mon Aug 02, 2021 6:49 am
delamer wrote: Sun Aug 01, 2021 2:39 pm
seajay wrote: Sun Aug 01, 2021 2:29 pm
delamer wrote: Thu Jul 29, 2021 3:29 pm
59Gibson wrote: Thu Jul 29, 2021 1:21 pm

+1 I don't know when he suggested 25-30yrs in cash equivalents but that would seem crazy now, unless he's just another 2%< swr the skys falling type. :happy
As of 2019, he was still saying it: https://www.whitecoatinvestor.com/berns ... -the-game/
If the safe/drawdown bucket asset allocation for 30 years of 3.3% SWR is the same as the growth bucket that seeks to achieve the best worst case outcome over 30 years are the same ?!

Cash and equivalents weren't the safest choice for the drawdown bucket, all-stock wasn't the best at maximizing the worst case 30 year accumulated growth. Better choices were evident, that had the same asset allocation for both buckets, which simplifies things (no need for two buckets).
I don’t understand what you are saying.

I don’t mean conceptually. What does “all-stock wasn't the best at maximizing the worst case 30 year accumulated growth” literally mean?
Average stock gains over say 30 years tends to be a distorted average figure, biased by infrequent extremes. Median is a better measure of the average. Also and specifically to what you ask its better to look at the worst 30 year accumulation/total-return gain for the growth bucket side and 100% stock had a lower (more bad) worst case 30 year than other choices/blends of assets.

If as a simple example (and talking in real terms) you 50/50 into two buckets, 50 bonds for drawdown, 50 stock for growth then ideally over the time period that the 50 bonds are spent you'd like the 50 growth bucket to have doubled-up. Broadly that averages 75/25 overall stock/bonds over those years, likely little different to another that constant weighted to 75/25. If the growth bucket is all in stocks then it may see a three-fold increase, great, you end with 1.5 times the start date amount. But if that comes with the risk that it could also have halved, then you'd end with just 25 of the start date amount. Better is another choice that might be less inclined to 3x (trebbled), but be more inclined to have at least 2x (doubled) in its worst case.

Also cash deposits/short term bonds etc. don't always pace inflation, they can/do cycle. Some periods of outpacing inflation, other times of lagging inflation. Widening that asset allocation to include even relatively little of other assets, such as stocks and gold and that deviation away from inflation pacing can be reduced. If again using 50/50 initial as above then if the 50 drawdown lasts longer through having less lagged inflation compared to cash, then that gives more time for the growth bucket side to grow.

When you decide that the drawdown bucket wont be all cash/equivalents and that the growth bucket wont be 100% stock, then you may find that the same asset allocation might equally serve both the drawdown and growth buckets, in which case there's no need for two separate buckets containing the exact same asset allocations, the two can be combined.
My interpretation of Bernstein’s proposal is that its designed to take uncertainty out of your retirement finances and provide a fixed (real) income for a large number of years. So what happens to the growth bucket — whether it triples or gets cut in half — temporarily isn’t important in terms of day-to-day living. It’s a sleep-very-well-at-night portfolio. Very similar to having a pension that covers your residual expenses.

Many retirees would love to be able to cover their fixed expenses with income streams like Social Security and pensions, while growing their portfolios for purposes of luxury spending, gifting, or legacy. Over the long run, and frequently in the short run, that will happen. If we are in a 25-year period where stocks lose half their value, we’ve got big problems.

So the point of the two buckets portfolio isn’t to come up with the optimal combination of stocks/bonds/cash to get the best risk-adjusted return. Other people have other proposals that attempt that.

Of course if you don’t invest according to his specific proposal, then you don’t need a drawdown bucket and a growth bucket. By design, they hold two distinct types of investments. It would be bizarre to have two buckets with the same allocation if you are not implementing his proposal.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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sergeant
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Re: Close to retirement - locking in gains with each new market high

Post by sergeant »

Homer, I thought you went from 50/50 to 40/50 a couple years ago? I remember you posting about it. Also, congratulations on your 17,000 post.
For the ashes of his fathers, And the temples of his gods. | Pensions= 2X yearly expenses. Portfolio= 40X yearly expenses.
flyingaway
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Re: Close to retirement - locking in gains with each new market high

Post by flyingaway »

In a down market, you would not make your number.

In an all-time high market, you reached your number. It is prudent to take the chips off the table.

That is a nice compromise.
Nathan Drake
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Re: Close to retirement - locking in gains with each new market high

Post by Nathan Drake »

Wanderingwheelz wrote: Mon Aug 02, 2021 9:24 am
Nathan Drake wrote: Mon Aug 02, 2021 8:29 am
Ramjet wrote: Mon Aug 02, 2021 8:04 am
Nathan Drake wrote: Sun Aug 01, 2021 11:54 am
YRT70 wrote: Sun Aug 01, 2021 9:27 am
Do you mean a 4% SWR for a 30 year retirement at current valuations is extremely risky? Do you have data supporting that?

I looked up a few articles (Kitces, Siamond) that investigate SWR at high valuations but I'm not getting the impression that 4% is "extremely risky". That being said, I'd shoot for a lower WR too, just to be sure.

For what it's worth I also had a look at Vanguard's MC tool, it gives 4% WR with 50/50 and a 30 year retirement a 92% chance of success. That's a little lower than I would like but I wouldn't call it extremely risky. And I think their tool is on the conservative side.
https://retirementplans.vanguard.com/VG ... ggCalc.jsf
We’ve never had a period in history where both bonds and equities were simultaneously extremely overvalued

So you fear stagflation and don't think the Fed will be able to tame it even if it is their mandate?
I don’t believe the fed has as much control as many think. They were clearly way off on their inflation estimates

There could come a time where they need to either protect the dollar (keep inflation in check), or keeping unemployment low. They may not be able to achieve their dual mandate if external inflation factors are beyond their control
This might be worth 5 minutes of your time:

https://themarket.ch/interview/russell- ... on-ld.4628
Fascinating read....explains the mechanics of what could likely happen that I hadn't really considered fully before (government mandating/backstopped loans shifting money supply onto the private sector) while breaking the link between inflation and bond yields. Certainly governments will not allow yields to go up with the massive amount of debt we have now. Savers, i.e. bond holders, will take it on the chin.
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vanbogle59
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Re: Close to retirement - locking in gains with each new market high

Post by vanbogle59 »

Nathan Drake wrote: Mon Aug 02, 2021 11:14 pm Certainly governments will not allow yields to go up with the massive amount of debt we have now.
I'll take that bet.
In fact, I will take just about any bet that begins with: "Certainly governments will ...."
Complete the sentence with whatever you want.

In fact, you can probably even leave the government out of it.
Just make any "certain" prediction, and I will lay money on the other side.
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Re: Close to retirement - locking in gains with each new market high

Post by Nathan Drake »

vanbogle59 wrote: Mon Aug 02, 2021 11:34 pm
Nathan Drake wrote: Mon Aug 02, 2021 11:14 pm Certainly governments will not allow yields to go up with the massive amount of debt we have now.
I'll take that bet.
In fact, I will take just about any bet that begins with: "Certainly governments will ...."
Complete the sentence with whatever you want.

In fact, you can probably even leave the government out of it.
Just make any "certain" prediction, and I will lay money on the other side.
Of course nothing is certain, but I fail to see how the governments would allow that to happen…Japan certainly hasn’t let it happen
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vanbogle59
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Re: Close to retirement - locking in gains with each new market high

Post by vanbogle59 »

Nathan Drake wrote: Mon Aug 02, 2021 11:54 pm Of course nothing is certain, but I fail to see how the governments would allow that to happen…Japan certainly hasn’t let it happen
Is Argentina a government?
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Re: Close to retirement - locking in gains with each new market high

Post by VanGar+Goyle »

It sounds like you think that you won the game, and can stop playing ( the stock market ).
You are going to take (some of) your dollars and go home.
That can work, but many unexpected things can happen before you die,
like inflation, a pandemic, shortage of avocado toast, or sickness.
Hopefully you continue to play a smaller part, and enjoy it more even if you are losing,
cause you already won the game.
Well, you pay a little bit, we're a little bit tough. | You pay very much, very much tough. | You pay a too much, we're too much a tough. | How much you pay? ... Well, then we're plenty tough. - Marx
james22
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Re: Close to retirement - locking in gains with each new market high

Post by james22 »

canadianbacon wrote: Sat Jul 31, 2021 8:00 pmERN has written about a strategy where you put two years of expenses into cash, but only draw it down if the market falls a certain amount (e.g. 20%). I believe he found it increased survivorship rate.
Link?

This is what I'm doing (three years cash, else equity).

Edit: This? https://earlyretirementnow.com/2016/10/ ... etirement/
politely
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Re: Close to retirement - locking in gains with each new market high

Post by politely »

First, congratulations on exceeding your number.

On the one hand, I can't help but think that if you hit your number with $100 at 50/50, why wouldn't you be even more comfortable with $120 at 50/50? However, I understand that the brain isn't always consistent. There's a difference between dreaming of winning the lotto and planning how you'll give out hypothetical bags of cash to your friends and relatives, and actually having the money in hand and actually giving the money out.

While the various SWR models include worst case scenarios, I think there's nothing wrong with making your number, and then hedging your bets. Who knows what will really happen in the future? I don't understand claims that somehow you would be worse off or are taking a big risk. Since you've already hit your number and have "excess" money, whether adding to your original AA, or safely put aside in cash, you are obviously better off. In cash, you may not realize the higher returns, but in no way are you worse off. It's all gravy.

Conversely, if you've hit your number, you should be able to allocate even more on the equity side - in the same way that very wealthy people can be 90% (or more) equities because 10% (or less) of fixed income is sufficient. I've been thinking about this a lot lately. As I near my number (yes, it has a tendency to move around) at my chosen AA, I wonder why I need to maintain that conservative AA, when the absolute amounts of fixed income will be sufficient. After a certain point, I'm not sure doggedly maintaining AA percentages is the right path. If your dollars in fixed income are sufficient, why wouldn't you put every new dollar into equities?
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Re: Close to retirement - locking in gains with each new market high

Post by marcopolo »

canadianbacon wrote: Sat Jul 31, 2021 8:00 pm
HomerJ wrote: Fri Jul 30, 2021 2:39 pm My 50/50 allocation of my number is still intact. I haven't changed it at all, in my mind.

But the gains since I hit my number, I've been squirrelling away as cash.

Pure mental accounting, I know. Silly, I know.

But if the market does crash in the next year or two, I'll be happy I did it, and will able to retire anyway without worry because of that buffer.
ERN has written about a strategy where you put two years of expenses into cash, but only draw it down if the market falls a certain amount (e.g. 20%). I believe he found it increased survivorship rate.

So it may be worth considering modifying your strategy to keep the bucket intact and live off your portfolio 50/50 as you ultimately plan to do, and then save the bucket for a rainy year.
I like most of ERNs analysis, but that particular one was a bit silly. He compared having 25x in a balanced portfolio to having the same 25x in the balanced portfolio PLUS 2x in cash. Well, surprise, the extra 2x in cash helped portfolio survival! Having 27x in the balanced portfolio would have had essentially the same effect. It is the extra money, not putting it in cash, that made most of the difference. Do not really need a lot of analysis to know that more money would give better outcome.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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MikeWillRetire
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Re: Close to retirement - locking in gains with each new market high

Post by MikeWillRetire »

HomerJ,
I've always enjoyed reading your posts, and I understand your approach. I'm even more conservative than you (and I will have a modest pension)! Congratulations on reaching your number.

Mike
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Re: Close to retirement - locking in gains with each new market high

Post by Nowizard »

It represents a more complicated way of managing your portfolio, but it appears you have done a great job of that during your accumulation years. Is it possible that this approach gives you an opportunity to remain in the game while also following general guidelines of becoming more conservative as you switch from accumulation to preservation stages?

Tim
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Re: Close to retirement - locking in gains with each new market high

Post by vanbogle59 »

politely wrote: Wed Aug 04, 2021 3:27 am Since you've already hit your number and have "excess" money, whether adding to your original AA, or safely put aside in cash, you are obviously better off. In cash, you may not realize the higher returns, but in no way are you worse off. It's all gravy.
Bingo.
The point of financial freedom is freedom.
If you want to reach for the brass ring or collapse into an easy chair, enjoy. You've arrived.
I really am convinced that 25X 50/50 (or whatever similar commitment your math leads you to), flips this switch.

My biggest problem with the whole mental exercise is not the 25 or the 50/50. It's the x.
How much income I want/need has changed rather substantially over my lifetime. Often for reasons outside of my control.
Predicting it for the next 30 years seems like spinning a fairy tale.
Nevertheless, once that is done (and it MUST be done), making your number really is a sensible "change of life" for extra money.
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canadianbacon
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Re: Close to retirement - locking in gains with each new market high

Post by canadianbacon »

james22 wrote: Tue Aug 03, 2021 8:52 pm
canadianbacon wrote: Sat Jul 31, 2021 8:00 pmERN has written about a strategy where you put two years of expenses into cash, but only draw it down if the market falls a certain amount (e.g. 20%). I believe he found it increased survivorship rate.
Link?

This is what I'm doing (three years cash, else equity).

Edit: This? https://earlyretirementnow.com/2016/10/ ... etirement/
No, it was a different post, where he was responding to a user comment / another blog and said he hadn't expected a positive impact but found there to be one. A difference between the strategy and the link you have posted is that you NEVER replenish the bucket.

Marcopolo has seen the post because he critiques it below.
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Re: Close to retirement - locking in gains with each new market high

Post by marcopolo »

canadianbacon wrote: Wed Aug 04, 2021 8:47 am
james22 wrote: Tue Aug 03, 2021 8:52 pm
canadianbacon wrote: Sat Jul 31, 2021 8:00 pmERN has written about a strategy where you put two years of expenses into cash, but only draw it down if the market falls a certain amount (e.g. 20%). I believe he found it increased survivorship rate.
Link?

This is what I'm doing (three years cash, else equity).

Edit: This? https://earlyretirementnow.com/2016/10/ ... etirement/
No, it was a different post, where he was responding to a user comment / another blog and said he hadn't expected a positive impact but found there to be one. A difference between the strategy and the link you have posted is that you NEVER replenish the bucket.

Marcopolo has seen the post because he critiques it below.

Here is the article in question.
As I mentioned above, it is a bit misleading, as it assumes the 2x in cash is in addition to the base portfolio.

https://earlyretirementnow.com/2018/05/ ... ity-myths/
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Re: Close to retirement - locking in gains with each new market high

Post by james22 »

marcopolo wrote: Wed Aug 04, 2021 9:25 amHere is the article in question.
Thanks.
canadianbacon wrote: Wed Aug 04, 2021 8:47 amA difference between the strategy and the link you have posted is that you NEVER replenish the bucket.
Yeah, this is how I intend to use the cash bucket:

...we only withdraw from that cash cushion if the investment portfolio goes more than 20% underwater. Once the cash cushion is exhausted we tap the investment portfolio and we never replenish the cash account it again. So, think of the cash cushion strictly as an insurance policy against Sequence Risk for the first few years after retirement.

Nice to see he comes around:

So, for the record, let me state that this cash bucket strategy seems to work pretty well, despite my previous doubts! It’s relatively inexpensive insurance against Sequence Risk!
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Re: Close to retirement - locking in gains with each new market high

Post by marcopolo »

james22 wrote: Wed Aug 04, 2021 10:44 am
marcopolo wrote: Wed Aug 04, 2021 9:25 amHere is the article in question.
Thanks.
canadianbacon wrote: Wed Aug 04, 2021 8:47 amA difference between the strategy and the link you have posted is that you NEVER replenish the bucket.
Yeah, this is how I intend to use the cash bucket:

...we only withdraw from that cash cushion if the investment portfolio goes more than 20% underwater. Once the cash cushion is exhausted we tap the investment portfolio and we never replenish the cash account it again. So, think of the cash cushion strictly as an insurance policy against Sequence Risk for the first few years after retirement.

Nice to see he comes around:

So, for the record, let me state that this cash bucket strategy seems to work pretty well, despite my previous doubts! It’s relatively inexpensive insurance against Sequence Risk!
Just to be clear, it works well relative to having 25x in a portfolio, because the extra 2x in cash is on top of that. If you do a fair comparison to a 27x balanced portfolio, it makes little difference.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Close to retirement - locking in gains with each new market high

Post by GaryA505 »

finite_difference wrote: Thu Jul 29, 2021 11:40 am
TheHiker wrote: Thu Jul 29, 2021 11:37 am Shifting to a more conservative AA as you are closer to retirement makes sense.
But with a very conservative AA, I would be worried about inflation which may erode the cash cushion quickly.
+1.

I think 50/50 is already pretty optimal in terms of being conservative but not too conservative. But if that feels too risky one can always let it drift to 40/60.
50/50 ? Kinda like this:
viewtopic.php?f=10&t=338016&hilit=why+not
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Re: Close to retirement - locking in gains with each new market high

Post by james22 »

marcopolo wrote: Wed Aug 04, 2021 10:53 am
james22 wrote: Wed Aug 04, 2021 10:44 am
marcopolo wrote: Wed Aug 04, 2021 9:25 amHere is the article in question.
Thanks.
canadianbacon wrote: Wed Aug 04, 2021 8:47 amA difference between the strategy and the link you have posted is that you NEVER replenish the bucket.
Yeah, this is how I intend to use the cash bucket:

...we only withdraw from that cash cushion if the investment portfolio goes more than 20% underwater. Once the cash cushion is exhausted we tap the investment portfolio and we never replenish the cash account it again. So, think of the cash cushion strictly as an insurance policy against Sequence Risk for the first few years after retirement.

Nice to see he comes around:

So, for the record, let me state that this cash bucket strategy seems to work pretty well, despite my previous doubts! It’s relatively inexpensive insurance against Sequence Risk!
Just to be clear, it works well relative to having 25x in a portfolio, because the extra 2x in cash is on top of that. If you do a fair comparison to a 27x balanced portfolio, it makes little difference.
I don't believe that's true: Makes sense because if the portfolio goes down so will the additional savings if they are invested in an 80/20 stock/bond portfolio.

But yeah, he confuses the issue.
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Re: Close to retirement - locking in gains with each new market high

Post by marcopolo »

james22 wrote: Wed Aug 04, 2021 11:01 am
marcopolo wrote: Wed Aug 04, 2021 10:53 am
james22 wrote: Wed Aug 04, 2021 10:44 am
marcopolo wrote: Wed Aug 04, 2021 9:25 amHere is the article in question.
Thanks.
canadianbacon wrote: Wed Aug 04, 2021 8:47 amA difference between the strategy and the link you have posted is that you NEVER replenish the bucket.
Yeah, this is how I intend to use the cash bucket:

...we only withdraw from that cash cushion if the investment portfolio goes more than 20% underwater. Once the cash cushion is exhausted we tap the investment portfolio and we never replenish the cash account it again. So, think of the cash cushion strictly as an insurance policy against Sequence Risk for the first few years after retirement.

Nice to see he comes around:

So, for the record, let me state that this cash bucket strategy seems to work pretty well, despite my previous doubts! It’s relatively inexpensive insurance against Sequence Risk!
Just to be clear, it works well relative to having 25x in a portfolio, because the extra 2x in cash is on top of that. If you do a fair comparison to a 27x balanced portfolio, it makes little difference.
I don't believe that's true: Makes sense because if the portfolio goes down so will the additional savings if they are invested in an 80/20 stock/bond portfolio.

But yeah, he confuses the issue.
Lots of things that seem to make sense doesn't actually make much of a difference. Most people in retirement are not 80/20. For a balanced portfolio like 60/40, keeping a separate cash bucket is mostly mental accounting, and makes very little difference.

This study certainly does not add any evidence that the same total amount of dollars, with some of it squirreled away in a cash bucket, improves outcome in any appreciable way.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Close to retirement - locking in gains with each new market high

Post by vanbogle59 »

marcopolo wrote: Wed Aug 04, 2021 11:08 am This study certainly does not add any evidence that the same total amount of dollars, with some of it squirreled away in a cash bucket, improves outcome in any appreciable way.
I know that Homer's original question was only about SORR, and it's not surprising that 27X doesn't look much different from 25X + 2 set aside...
HOWEVER....

I'm perfectly OK with it NOT improving the "outcome in any appreciable way".
So long as it doesn't flush the outcome down the toilet!

I want to use it to do mental accounting. "Making my number" is good enough for me.
Now, tie me to the mast for 30 years (I hope) and keep me from screwing it up.

Here are the chief benefits I hope to gain from having 2x on the side:
It will give me ample time to react soberly to any serious changes in my financial world, and
I won't feel the need to look at my portfolio balance every day (Rebalance once a quarter, I promise!).

If that's even close to what happens, I will be happy with the decision.
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Re: Close to retirement - locking in gains with each new market high

Post by HanSolo »

politely wrote: Wed Aug 04, 2021 3:27 am If your dollars in fixed income are sufficient, why wouldn't you put every new dollar into equities?
It's not unusual that people reduce equity allocation as they get older.

Another reason is what I posted upthread:
HanSolo wrote: Thu Jul 29, 2021 4:22 pm I think it boils down to risk tolerance. The article "Assessing risk tolerance" on the Bogleheads wiki says: "a common rule of thumb is to be prepared for a 50% loss in the stock portion of one's portfolio", implying that if you feel you can tolerate a 25% loss in your total portfolio, then 50/50 might be the right target allocation for you.

But there's no law of nature that says risk tolerance is linked to percentage loss for a given person. For some people, it might be linked to dollar loss. For example, if a person feels that they can tolerate a $500,000 loss in their portfolio, that implies a $1m ceiling on the riskier side of their asset allocation.
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Re: Close to retirement - locking in gains with each new market high

Post by politely »

HanSolo wrote: Wed Aug 04, 2021 11:10 pm
politely wrote: Wed Aug 04, 2021 3:27 am If your dollars in fixed income are sufficient, why wouldn't you put every new dollar into equities?
It's not unusual that people reduce equity allocation as they get older.
I agree to the extent we're talking about being in the process of reaching "the number" (and in fact, I am also in the growing-more-conservative-with-age camp); however, for this thought experiment we're talking about excess above and beyond the number. If someone has confidence in their number, then it wouldn't seem unreasonable for that person to take a higher equity allocation using the excess money without taking on more practical risk. Meaning, that while more dollars are at risk, the potentially higher losses shouldn't affect planning.

For example, If someone hits their number at $100 with a 50/50 allocation, and puts the next $20 of excess into equities, they would wind up with a 58.3/41.7 allocation. If there's a 50% loss in the equity markets (and no loss in bonds), in the 50/50 situation that person would have lost $25 and wound up with $75, and in the 58.3/41.7 situation lost $35 and wound up with $85. While more money was lost, the $85 is still $10 better than what that person had been planning with a 50/50 allocation.

Of course, if planned expenses increase to match the increase in assets, then staying at the more conservative allocation may make more sense.
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Re: Close to retirement - locking in gains with each new market high

Post by NearlyRetired »

Firstly Homer, congratulations on making your number.

I don't know whether this affects SORR, but from a psychological perspective I think this makes a massive difference.

During the accumulation phase, if the markets drop, it really is a case of "meh, so what" - the markets recover over time, so unless you are really close to retirement, it doesn't really matter too much. But, at the point you are close to, or are at, retirement, I think a market drop has a huge impact on someone. Taking money out of investments when the investments themselves have reduced in value, would be very difficult I would think. Having money on the side should allow someone to view the drop in the same way as one who is still in the accumulation phase. After all, if you have made your number, unless you are looking to leave a bequest, investment growth is of lessor concern than financial stability.

I think this approach would allow one to sleep soundly at night.

As an aside, I have been doing something of a similar ilk as I came to retirement, and now that I am retired. I started with an initial pot of money invested at retirement year -1. This formed my baseline, and as my investments increased (which luckily to date they have) once they reached my baseline (adjusted for inflation) plus annual expenses, I take money out of investments and into cash.

I did that in Sep 19 in preparation for retiring in Jan 20, and it did allow me to sleep soundly as Covid rocked the world - I was able to watch the turmoil with a detached interest. I am not sure how I would have felt removing assets after they had dropped so much, even though I fully understand the discussions around AA etc. I think it's one thing looking at your portfolio and going "well if the markets drop 50% then my investments will reduce by x - that's ok" and actually seeing it AND then having to withdraw for living expenses (at least I know how I would feel)
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