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

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

Post by HomerJ »

So, I'm close to retirement, have made my number, and now I'm just locking in gains every few months lately, when the market hits new highs.

I'm not just rebalancing back to my original AA, I'm building up a cushion of cash, but this slowly changes my AA.

So look at me, I'm not staying the course!

It's about risk management, not maximizing gains, or even maintaining an consistent Asset Allocation.

This will cost me in the long-run, since I will be missing out on compounding. In the short-run, I feel like it lowers my retirement sequence of return risk.

For instance, imagine I have $1 million in stocks and $1 million in bonds/cash/CDs. 50/50 portfolio

Market goes up 10%, I sell the entire $100,000 gain in stocks and move it into the bonds/cash/CDs side of the portfolio, instead of just rebalancing back to 50/50.

So now I have $1 million in stocks and $1.1 million in bonds (47/53)

If the market goes up another 10%, I still make another $100,000 on the stock side... It could have been $105,000 if I had rebalanced to 50/50, so I'm out $5000... which is a good chunk of money. If someone handed me $5000 today, I'd be pretty excited.

But I already hit my number, so I'm not too worried about missing out on compounded gains in the short-term. I still make another $100,000 if stocks keep going up... I'm not that worried about missing out on the extra $5000. I'd be pretty happy with the extra $100,000 (which I would then lock in again by selling the gains - so then I would be at 45/55)

Yes, over multiple years or multiple 10% gains, compounding that extra money adds up, so this method would be a terrible idea for an accumulator, but I won't do this very long.

Just until I retire in a year or two, at which point, I'll spend all those locked-in gains first, and slowly get back to 50/50... Or there will be a crash, I'll get back to 50/50 quickly

The point is, by locking in ALL the gains, I'm sitting pretty even if there is a large market crash. Because I've already cashed out the gains, and now have a pretty nice buffer on the cash side.

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.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
TheHiker
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Re: Close to retirement - locking in gains with each new market high

Post by TheHiker »

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

Post by finite_difference »

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

Post by HomerJ »

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.
I am probably being too conservative... I mean at 50/50, I already had 12.5 years in bonds/CDs/cash... Adding another 1-2 years of expenses to that isn't much of a difference...

But it just feels like "extra" money at this point. It's like I'm keeping my original 25x expenses at 50/50 intact, but building up 1-2 bonus years of expenses on the side.

So if I retire next year, I basically get the first 1-2 years for free, and then I retire with my original plan intact 1-2 years later.

The brain is a dangerous thing... All kinds of weird mental accounting going on up there... :)
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
MathWizard
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Re: Close to retirement - locking in gains with each new market high

Post by MathWizard »

The saying is "the ability and the NEED to take risk".

You no longer have the need to take risk, so shifting your AA
away from stocks is perfectly valid.

I recently shifted from 100% stocks to 50/50, and am now at about 30/70.
I can afford a drop of $300K in my portfolio , in fact I plan assuming that,
but my plan cannot withstand a drop $1 million in my portfolio, without working
long into the future.

My new money goes in at 60/40 which is about where I want to end up, but I
am keeping the bulk of my nest egg in less volatile investments.
59Gibson
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Re: Close to retirement - locking in gains with each new market high

Post by 59Gibson »

50/50 is good. I'd be more concerned w/ 4% swr at 40% stocks or less. The success rate drops precipitously at 30-35 yrs.
jebmke
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Re: Close to retirement - locking in gains with each new market high

Post by jebmke »

Nothing wrong with moving to a more conservative allocation approaching retirement. We did the same thing. I didn't do it by selling (tax hit would have been prohibitive), I used new money which all went to bonds.
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tibbitts
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Re: Close to retirement - locking in gains with each new market high

Post by tibbitts »

It seems like 50/50 was once well accepted here and is now on the fringe of being irrationally conservative. I have 50/50 equity vs. cash/bonds now, although it depends on how I count things like EM and HY and floating rate bonds, and whether I subtract for cash I have saved for taxes on Roth conversions. With those things it's a little more aggressive than 50/50.
helloeveryone
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Re: Close to retirement - locking in gains with each new market high

Post by helloeveryone »

HomerJ wrote: Thu Jul 29, 2021 11:25 am So, I'm close to retirement, have made my number, and now I'm just locking in gains every few months lately, when the market hits new highs.

I'm not just rebalancing back to my original AA, I'm building up a cushion of cash, but this slowly changes my AA.

So look at me, I'm not staying the course!

It's about risk management, not maximizing gains, or even maintaining an consistent Asset Allocation.

This will cost me in the long-run, since I will be missing out on compounding. In the short-run, I feel like it lowers my retirement sequence of return risk.

For instance, imagine I have $1 million in stocks and $1 million in bonds/cash/CDs. 50/50 portfolio

Market goes up 10%, I sell the entire $100,000 gain in stocks and move it into the bonds/cash/CDs side of the portfolio, instead of just rebalancing back to 50/50.

So now I have $1 million in stocks and $1.1 million in bonds (47/53)

If the market goes up another 10%, I still make another $100,000 on the stock side... It could have been $105,000 if I had rebalanced to 50/50, so I'm out $5000... which is a good chunk of money. If someone handed me $5000 today, I'd be pretty excited.

But I already hit my number, so I'm not too worried about missing out on compounded gains in the short-term. I still make another $100,000 if stocks keep going up... I'm not that worried about missing out on the extra $5000. I'd be pretty happy with the extra $100,000 (which I would then lock in again by selling the gains - so then I would be at 45/55)

Yes, over multiple years or multiple 10% gains, compounding that extra money adds up, so this method would be a terrible idea for an accumulator, but I won't do this very long.

Just until I retire in a year or two, at which point, I'll spend all those locked-in gains first, and slowly get back to 50/50... Or there will be a crash, I'll get back to 50/50 quickly

The point is, by locking in ALL the gains, I'm sitting pretty even if there is a large market crash. Because I've already cashed out the gains, and now have a pretty nice buffer on the cash side.

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.
Thanks for posting....I'm 10-15 years away from retirement but like to see threads like this so I can get a sense of what folks recommend as you get closer. There is this irrational fear of doing something terrible even though BH teachings are fairly clearcut and work well....but then as you get closer to retirement all of a sudden I worry about "what if I do something wrong".
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Re: Close to retirement - locking in gains with each new market high

Post by firebirdparts »

HomerJ wrote: Thu Jul 29, 2021 11:25 am 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?
I always compare this to "Value Average investing." That's got some written information about it, at least. I think it's pretty easy to come up with a concept for value averaging for de-cumulators. I am too lazy to offer an estimate of its effect, but it obviously would narrow the range of possible outcomes. You are cutting off some upside in exchange, happily, for cutting off some low side.

Personally I would not be afraid to buy stocks in addition to selling them, but that of course is optional.
This time is the same
helloeveryone
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Re: Close to retirement - locking in gains with each new market high

Post by helloeveryone »

HomerJ wrote: Thu Jul 29, 2021 11:44 am
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.
I am probably being too conservative... I mean at 50/50, I already had 12.5 years in bonds/CDs/cash... Adding another 1-2 years of expenses to that isn't much of a difference...

But it just feels like "extra" money at this point. It's like I'm keeping my original 25x expenses at 50/50 intact, but building up 1-2 bonus years of expenses on the side.

So if I retire next year, I basically get the first 1-2 years for free, and then I retire with my original plan intact 1-2 years later.

The brain is a dangerous thing... All kinds of weird mental accounting going on up there... :)
is the 50% part of your portfolio that 12.5 years of bonds/cd's/cash?
Also - are you retiring at >59.5 so you don't have to stress about managing money in taxable versus non taxable?
marcopolo
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Re: Close to retirement - locking in gains with each new market high

Post by marcopolo »

HomerJ wrote: Thu Jul 29, 2021 11:25 am So, I'm close to retirement, have made my number, and now I'm just locking in gains every few months lately, when the market hits new highs.

I'm not just rebalancing back to my original AA, I'm building up a cushion of cash, but this slowly changes my AA.

So look at me, I'm not staying the course!

It's about risk management, not maximizing gains, or even maintaining an consistent Asset Allocation.

This will cost me in the long-run, since I will be missing out on compounding. In the short-run, I feel like it lowers my retirement sequence of return risk.

For instance, imagine I have $1 million in stocks and $1 million in bonds/cash/CDs. 50/50 portfolio

Market goes up 10%, I sell the entire $100,000 gain in stocks and move it into the bonds/cash/CDs side of the portfolio, instead of just rebalancing back to 50/50.

So now I have $1 million in stocks and $1.1 million in bonds (47/53)

If the market goes up another 10%, I still make another $100,000 on the stock side... It could have been $105,000 if I had rebalanced to 50/50, so I'm out $5000... which is a good chunk of money. If someone handed me $5000 today, I'd be pretty excited.

But I already hit my number, so I'm not too worried about missing out on compounded gains in the short-term. I still make another $100,000 if stocks keep going up... I'm not that worried about missing out on the extra $5000. I'd be pretty happy with the extra $100,000 (which I would then lock in again by selling the gains - so then I would be at 45/55)

Yes, over multiple years or multiple 10% gains, compounding that extra money adds up, so this method would be a terrible idea for an accumulator, but I won't do this very long.

Just until I retire in a year or two, at which point, I'll spend all those locked-in gains first, and slowly get back to 50/50... Or there will be a crash, I'll get back to 50/50 quickly

The point is, by locking in ALL the gains, I'm sitting pretty even if there is a large market crash. Because I've already cashed out the gains, and now have a pretty nice buffer on the cash side.

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.
What you are describing is essentially Kitces' "bond tent".
Initially, there was some belief that it helped with SORR. But, I believe there has been further research that shows it really does not make much difference. I don't think it really hurts either. So, if it helps you be more comfortable as you approach retirement, why not.
Once in a while you get shown the light, in the strangest of places if you look at it right.
delamer
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Re: Close to retirement - locking in gains with each new market high

Post by delamer »

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.
If you had only 3 years of expenses in cash, then it would make sense to do what you are doing to add a 4th year to reduce sequence of returns risk. And maybe even a 5th and 6th year.

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.

But adding another year’s expenses in cash when you already have 12.5 years in cash/bonds just doesn’t (literally) buy you much. You already had a “pretty nice buffer.”
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
260chrisb
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Re: Close to retirement - locking in gains with each new market high

Post by 260chrisb »

jebmke wrote: Thu Jul 29, 2021 11:55 am Nothing wrong with moving to a more conservative allocation approaching retirement. We did the same thing. I didn't do it by selling (tax hit would have been prohibitive), I used new money which all went to bonds.
I started allocating money to bond funds a couple years ago with new money in addition to creating a more conservative overall allocation tax deferred, tax advantaged, and taxable. Doing this for the 2-3 years prior to retirement reduced my exposure to the market, helped me sleep better at night at a time when the markets have allowed me to sell at higher levels for the past two years. You have to get over the fact that a certain percentage of your wealth is not going to have the high rate of return as your invested money has had in the past 20-25 years. It's time to spend it after all these years and I have a 2-3 year safety net in the event of an extended down market and plan to always try to maintain it.
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HomerJ
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Re: Close to retirement - locking in gains with each new market high

Post by HomerJ »

helloeveryone wrote: Thu Jul 29, 2021 12:36 pm
HomerJ wrote: Thu Jul 29, 2021 11:44 am
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.
I am probably being too conservative... I mean at 50/50, I already had 12.5 years in bonds/CDs/cash... Adding another 1-2 years of expenses to that isn't much of a difference...

But it just feels like "extra" money at this point. It's like I'm keeping my original 25x expenses at 50/50 intact, but building up 1-2 bonus years of expenses on the side.

So if I retire next year, I basically get the first 1-2 years for free, and then I retire with my original plan intact 1-2 years later.

The brain is a dangerous thing... All kinds of weird mental accounting going on up there... :)
is the 50% part of your portfolio that 12.5 years of bonds/cd's/cash?
Also - are you retiring at >59.5 so you don't have to stress about managing money in taxable versus non taxable?
Yes, at 25x expenses (25 years worth of expenses), 50/50 means I have 12.5 years worth of expenses in stocks, and 12.5 years worth of expenses in bonds....

Every time stocks go up a decent amount, I keep selling and adding to the bonds/CDs/cash side...

so right now, I'm at 26x expenses, but instead of 13x and 13x, I'm still at 12.5x in stocks and 13.5x in bonds..

I've basically capped my stock side up until I retire in 1-2 years. I'm cashing out the gains, and I'm not letting the stock side grow any more (just short-term temporarily).

As for 59.5, my wife is 60, so we have access to her 401k stuff... but we have a decent amount in taxable, that could get us through a few years even if she wasn't over 59.5.
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hi_there
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Re: Close to retirement - locking in gains with each new market high

Post by hi_there »

It depends on your personal utility function. If you absolutely don't care about spending more than some number, I don't know say $100k, then might as well just hold cash I guess.
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HomerJ
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Re: Close to retirement - locking in gains with each new market high

Post by HomerJ »

delamer wrote: Thu Jul 29, 2021 12:57 pm But adding another year’s expenses in cash when you already have 12.5 years in cash/bonds just doesn’t (literally) buy you much. You already had a “pretty nice buffer.”
True enough. That's why I know it's a little silly.
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59Gibson
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Re: Close to retirement - locking in gains with each new market high

Post by 59Gibson »

If you have a mortgage it will prob. make more sense to accelerate the payoff before loading up on additional bonds/cash.
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Re: Close to retirement - locking in gains with each new market high

Post by tibbitts »

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

Post by Dandy »

If you have reached your number then growth isn't as important as asset preservation. How conservative should your allocation become? I faced that issue and what eventually made sense to me was Dr. Wm Bernstein's idea of having 20 to 25 years worth draw down needs in "safe" fixed income and invest the rest anyway you want even 100% equities. I thought that was a rational method of determining how much "safe" money to put aside compared with guessing what overall allocation made sense.

I use FDIC products, short term bond funds and money markets as my "safe" portfolio. It, in theory should fund my draw down needs to age 90. My "risk" portfolio is equities and intermediate bonds. Overall that left me with a 45/55 allocation. I don't treat my "safe" portfolio as an ATM -- I withdraw some from the "risk" portfolio unless equities have a bad year. This tends to keep the "safe" portfolio more than needed. The extra can be used to offset growing retirement expenses, gifts, charity or extra spending. I've done some of each.

I sleep well and my assets have never been higher. I also don't mind a slight drift upward of my equity allocation because my draw down needs are pretty safe and will last for another 17 years.
59Gibson
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Re: Close to retirement - locking in gains with each new market high

Post by 59Gibson »

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

Post by Wanderingwheelz »

Personally, I’d rather just spend less if I felt like that’s what I needed to do in a horrible SORR situation.

The Peter Lynch quote regarding more money being lost preparing for market downturns than actual market downturns is one I’ve etched into my brain as I entered my 5th decade last June. Resisting the urge to take gains is not an easy one, though.

All of the preparations we’ve made for eventual retirement (wife is still happily running her enterprise) leave enough room for market unfriendliness to still have a pretty good time, I think.

There’s more than one way to come at this, that’s for sure.
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JoeRetire
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Re: Close to retirement - locking in gains with each new market high

Post by JoeRetire »

HomerJ wrote: Thu Jul 29, 2021 11:25 amAm I wrong in thinking this helps with Sequence of Return risk?
It depends what you mean by "helps". You may have a bit less risk, but haven't eliminated it.

Suppose the market goes down 50%.

If this particular risk worries you enough, then you could eliminate it completely by getting out the market.
Or you could choose to change your asset allocation to a level where you are no longer worried.

If you have made your number, the choice is yours as to how much risk of any kind you wish to take.
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Candor
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Re: Close to retirement - locking in gains with each new market high

Post by Candor »

I was at 50/50 prior to the pandemic and bought into equities last spring during the downturn and I've been itching to get back to 50/50 ever since. Every time I sold equities over the last few months and purchased bonds I knew that it probably wasn't the optimal long-term strategy but as a recent early retiree it aligns with my willingness and need to take risk. Today, in fact, I put in the order to finally get back to 50/50 and I feel somewhat conflicted about it but the move will allow me to focus on other matters and not overthink my AA. The older I get the more I appreciate SWAN.
The fool, with all his other faults, has this also - he is always getting ready to live. - Seneca Epistles < c. 65AD
bradpevans
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Re: Close to retirement - locking in gains with each new market high

Post by bradpevans »

marcopolo wrote: Thu Jul 29, 2021 12:46 pm
HomerJ wrote: Thu Jul 29, 2021 11:25 am So, I'm close to retirement, have made my number, and now I'm just locking in gains every few months lately, when the market hits new highs.

I'm not just rebalancing back to my original AA, I'm building up a cushion of cash, but this slowly changes my AA.

So look at me, I'm not staying the course!

It's about risk management, not maximizing gains, or even maintaining an consistent Asset Allocation.

This will cost me in the long-run, since I will be missing out on compounding. In the short-run, I feel like it lowers my retirement sequence of return risk.

For instance, imagine I have $1 million in stocks and $1 million in bonds/cash/CDs. 50/50 portfolio

Market goes up 10%, I sell the entire $100,000 gain in stocks and move it into the bonds/cash/CDs side of the portfolio, instead of just rebalancing back to 50/50.

So now I have $1 million in stocks and $1.1 million in bonds (47/53)

If the market goes up another 10%, I still make another $100,000 on the stock side... It could have been $105,000 if I had rebalanced to 50/50, so I'm out $5000... which is a good chunk of money. If someone handed me $5000 today, I'd be pretty excited.

But I already hit my number, so I'm not too worried about missing out on compounded gains in the short-term. I still make another $100,000 if stocks keep going up... I'm not that worried about missing out on the extra $5000. I'd be pretty happy with the extra $100,000 (which I would then lock in again by selling the gains - so then I would be at 45/55)

Yes, over multiple years or multiple 10% gains, compounding that extra money adds up, so this method would be a terrible idea for an accumulator, but I won't do this very long.

Just until I retire in a year or two, at which point, I'll spend all those locked-in gains first, and slowly get back to 50/50... Or there will be a crash, I'll get back to 50/50 quickly

The point is, by locking in ALL the gains, I'm sitting pretty even if there is a large market crash. Because I've already cashed out the gains, and now have a pretty nice buffer on the cash side.

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.
What you are describing is essentially Kitces' "bond tent".
Initially, there was some belief that it helped with SORR. But, I believe there has been further research that shows it really does not make much difference. I don't think it really hurts either. So, if it helps you be more comfortable as you approach retirement, why not.
I think such a tent is more critical:
a) the smaller the balance
b) the less dollars already in cash/bonds

for most folks on this forum / folks with a 50:50 allocation it may be less concerning - somewhat because many have a bond tent already.
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Re: Close to retirement - locking in gains with each new market high

Post by flyingaway »

At this insane stock valuation, you are doing the right thing. But, you must have saved more than 25X.
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Re: Close to retirement - locking in gains with each new market high

Post by mtmingus »

I agree with you!
CraigTester
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Re: Close to retirement - locking in gains with each new market high

Post by CraigTester »

Homer --

Big picture, the Bengen/Trinity 4% SWR study is simply an empirical analysis to determine which retiree had the worst timing since 1925.

It turned out to be the poor guy who retired in 1966. And because he could spend 4% and still have $1 left, 30 years later, we called him “Safe”.

But how miserable would it have been to be that poor guy!

I know someone who retired in 2000 and several others who retired around 2007.

And despite all the happy talk on this site about nobody-knows-nuttin, etc….I can tell you from my friend’s experiences, you don’t want to become a candidate for being the new “least common denominator”.

My advice to you, which I realize is blasphemy on this site, is to acknowledge that we are currently at historically very, very high valuations. And we can’t just pretend we aren’t…or that it doesn’t matter when deciding when to retire.

It matters immensely!

Therefore, however you want to rationalize it, while keeping your Boglehead credentials in tact, the math that got you to 25X, is dependent upon 2021 valuation levels of the S&P500.

So why not think about this differently. If you now have 25 years of expenses saved up, and you’re say, 60 years old. That means you can live comfortably until you’re 85 years old, if you simply put your whole nest egg in TIPS right now.

And then, very importantly, what do you think the chances are that at some point over the next 25 years, you won’t get the opportunity to buy back into the S&P500 at a significantly better valuation? And completely avoid the whole experience of perhaps being the next least-common-denominator….

P.S. congrats on hitting your number,

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

Post by RickBoglehead »

HomerJ wrote: Thu Jul 29, 2021 11:25 am Market goes up 10%, I sell the entire $100,000 gain in stocks and move it into the bonds/cash/CDs side of the portfolio, instead of just rebalancing back to 50/50.

So now I have $1 million in stocks and $1.1 million in bonds (47/53)


Thought I posted a reply, can't find it.

I missed the part where you have $100,000 to invest in the bond market after selling, because you need to save off taxes for your short term capital gain that you just generated.
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Re: Close to retirement - locking in gains with each new market high

Post by AlwaysLearningMore »

HomerJ wrote: Thu Jul 29, 2021 11:25 am So, I'm close to retirement, have made my number, and now I'm just locking in gains every few months lately, when the market hits new highs.

I'm not just rebalancing back to my original AA, I'm building up a cushion of cash, but this slowly changes my AA.

So look at me, I'm not staying the course!

It's about risk management, not maximizing gains, or even maintaining an consistent Asset Allocation.

This will cost me in the long-run, since I will be missing out on compounding. In the short-run, I feel like it lowers my retirement sequence of return risk.

For instance, imagine I have $1 million in stocks and $1 million in bonds/cash/CDs. 50/50 portfolio

Market goes up 10%, I sell the entire $100,000 gain in stocks and move it into the bonds/cash/CDs side of the portfolio, instead of just rebalancing back to 50/50.

So now I have $1 million in stocks and $1.1 million in bonds (47/53)

If the market goes up another 10%, I still make another $100,000 on the stock side... It could have been $105,000 if I had rebalanced to 50/50, so I'm out $5000... which is a good chunk of money. If someone handed me $5000 today, I'd be pretty excited.

But I already hit my number, so I'm not too worried about missing out on compounded gains in the short-term. I still make another $100,000 if stocks keep going up... I'm not that worried about missing out on the extra $5000. I'd be pretty happy with the extra $100,000 (which I would then lock in again by selling the gains - so then I would be at 45/55)

Yes, over multiple years or multiple 10% gains, compounding that extra money adds up, so this method would be a terrible idea for an accumulator, but I won't do this very long.

Just until I retire in a year or two, at which point, I'll spend all those locked-in gains first, and slowly get back to 50/50... Or there will be a crash, I'll get back to 50/50 quickly

The point is, by locking in ALL the gains, I'm sitting pretty even if there is a large market crash. Because I've already cashed out the gains, and now have a pretty nice buffer on the cash side.

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.
You won the war. Congratulations, your hard work paid off :happy Why are you second-guessing yourself for doing a bit of de-risking? (When the next market downturn hits, you'll be glad you did.)
Last edited by AlwaysLearningMore on Fri Jul 30, 2021 6:34 pm, edited 1 time in total.
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Re: Close to retirement - locking in gains with each new market high

Post by HomerJ »

RickBoglehead wrote: Thu Jul 29, 2021 2:33 pm
HomerJ wrote: Thu Jul 29, 2021 11:25 am Market goes up 10%, I sell the entire $100,000 gain in stocks and move it into the bonds/cash/CDs side of the portfolio, instead of just rebalancing back to 50/50.

So now I have $1 million in stocks and $1.1 million in bonds (47/53)


Thought I posted a reply, can't find it.

I missed the part where you have $100,000 to invest in the bond market after selling, because you need to save off taxes for your short term capital gain that you just generated.
I sell in the 401k or IRA accounts.
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Re: Close to retirement - locking in gains with each new market high

Post by HomerJ »

flyingaway wrote: Thu Jul 29, 2021 1:55 pm At this insane stock valuation, you are doing the right thing. But, you must have saved more than 25X.
Heh, why do you say that?
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Re: Close to retirement - locking in gains with each new market high

Post by tibbitts »

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
It seems like theoretically prevailing rates shouldn't influence the decision, but holding 50% in bonds or cash definitely feels less comfortable to me than when you could generate after-tax real returns - even very modest ones - with those investments.
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Re: Close to retirement - locking in gains with each new market high

Post by marcopolo »

CraigTester wrote: Thu Jul 29, 2021 2:31 pm Homer --

Big picture, the Bengen/Trinity 4% SWR study is simply an empirical analysis to determine which retiree had the worst timing since 1925.

It turned out to be the poor guy who retired in 1966. And because he could spend 4% and still have $1 left, 30 years later, we called him “Safe”.

But how miserable would it have been to be that poor guy!

I know someone who retired in 2000 and several others who retired around 2007.

And despite all the happy talk on this site about nobody-knows-nuttin, etc….I can tell you from my friend’s experiences, you don’t want to become a candidate for being the new “least common denominator”.

My advice to you, which I realize is blasphemy on this site, is to acknowledge that we are currently at historically very, very high valuations. And we can’t just pretend we aren’t…or that it doesn’t matter when deciding when to retire.

It matters immensely!

Therefore, however you want to rationalize it, while keeping your Boglehead credentials in tact, the math that got you to 25X, is dependent upon 2021 valuation levels of the S&P500.

So why not think about this differently. If you now have 25 years of expenses saved up, and you’re say, 60 years old. That means you can live comfortably until you’re 85 years old, if you simply put your whole nest egg in TIPS right now.

And then, very importantly, what do you think the chances are that at some point over the next 25 years, you won’t get the opportunity to buy back into the S&P500 at a significantly better valuation? And completely avoid the whole experience of perhaps being the next least-common-denominator….

P.S. congrats on hitting your number,

CraigTester
You joined this forum on Aug 8, 2018. You have been predicting this dire outcome since at least then, perhaps for years prior to joining the forum.
The SP500 closed at 2858 on Aug 8, 2018, it is at 4420 today, plus dividends along the way. It would take something like a 40% drop just to get back to the Aug 8 value.
Probably closer to 70% drop to get back to whenever you started to think the markets were way over-valued, people have been saying that since at least 2013. You are right, someday you there will be a crash, but will you be able to buy in at a lower price than when you first started to think this way? I don't see that as a sure bet.
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 Wanderingwheelz »

HomerJ wrote: Thu Jul 29, 2021 2:43 pm
flyingaway wrote: Thu Jul 29, 2021 1:55 pm At this insane stock valuation, you are doing the right thing. But, you must have saved more than 25X.
Heh, why do you say that?
Flyingaway must not have seen your comment on the thread a few months back where you said you budget $25,000 per year for travel. There are many of us here who’ve seen our “number” balloon over the recent past due to the fact we haven’t spent aggressively while perhaps at the same time we haven’t derisked our portfolios at quite the same pace you have. I’ve done the opposite actually- raising my allocation to equities as my bond allocation has grown in dollar value to cover more and more years of expenses (Perhaps partially due to not spending enough money on travel, etc).

As I said in my earlier comment, there’s more than one way to come at this.
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Re: Close to retirement - locking in gains with each new market high

Post by HomerJ »

CraigTester wrote: Thu Jul 29, 2021 2:31 pm And then, very importantly, what do you think the chances are that at some point over the next 25 years, you won’t get the opportunity to buy back into the S&P500 at a significantly better valuation?
"Nobody knows nothing" :happy

I have no idea what the chances are. 1996 has the highest valuations in 70 years at the time. S&P 500 was around 600.

Its been 25 years, and there was never a chance to buy back in at a lower price.

Someone waiting 25 years for a S&P crash to go below 600 is pretty sad today at 4400.
P.S. congrats on hitting your number
Thanks!
Last edited by HomerJ on Thu Jul 29, 2021 3:12 pm, edited 1 time in total.
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Re: Close to retirement - locking in gains with each new market high

Post by HomerJ »

Wanderingwheelz wrote: Thu Jul 29, 2021 3:09 pm
HomerJ wrote: Thu Jul 29, 2021 2:43 pm
flyingaway wrote: Thu Jul 29, 2021 1:55 pm At this insane stock valuation, you are doing the right thing. But, you must have saved more than 25X.
Heh, why do you say that?
Flyingaway must not have seen your comment on the thread a few months back where you said you budget $25,000 per year for travel. There are many of us here who’ve seen our “number” balloon over the recent past due to the fact we haven’t spent aggressively while perhaps at the same time we haven’t derisked our portfolios at quite the same pace you have. I’ve done the opposite actually- raising my allocation to equities as my bond allocation has grown in dollar value to cover more and more years of expenses (Perhaps partially due to not spending enough money on travel, etc).

As I said in my earlier comment, there’s more than one way to come at this.
Yeah, I think maybe my idea of a safe X has changed over the past 2 years as retirement becomes more and more real.

Trying to predict health care costs is so annoying.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Re: Close to retirement - locking in gains with each new market high

Post by Explorer »

OP - I constantly derisk my portfolio. There are periods where I only have a small equity exposure in the market, and then there are times when I increase it.

The advantage of having "enough" is you can be flexible with your market exposure. There is no one else that cares about your money than you.

All the best.
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Re: Close to retirement - locking in gains with each new market high

Post by Ramjet »

50/50 is pretty conservative to begin with. What you are doing just feels unnecessary
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Re: Close to retirement - locking in gains with each new market high

Post by delamer »

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/

Note too that he talks about taking a cruise if the equity portion of your portfolio does well and not pushing a shopping cart if it doesn’t. Which I interpret to mean that the cash equivalents aren’t meant to cover the niceties of retirement like travel, eating out, gifting, expensive hobbies, etc. Rather, they are meant to provide groceries, housing, medical care, and other necessities.

Most people can differentiate between niceties and necessities, and structure their portfolio accordingly.
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Re: Close to retirement - locking in gains with each new market high

Post by Wanderingwheelz »

HomerJ wrote: Thu Jul 29, 2021 3:12 pm
Wanderingwheelz wrote: Thu Jul 29, 2021 3:09 pm
HomerJ wrote: Thu Jul 29, 2021 2:43 pm
flyingaway wrote: Thu Jul 29, 2021 1:55 pm At this insane stock valuation, you are doing the right thing. But, you must have saved more than 25X.
Heh, why do you say that?
Flyingaway must not have seen your comment on the thread a few months back where you said you budget $25,000 per year for travel. There are many of us here who’ve seen our “number” balloon over the recent past due to the fact we haven’t spent aggressively while perhaps at the same time we haven’t derisked our portfolios at quite the same pace you have. I’ve done the opposite actually- raising my allocation to equities as my bond allocation has grown in dollar value to cover more and more years of expenses (Perhaps partially due to not spending enough money on travel, etc).

As I said in my earlier comment, there’s more than one way to come at this.
Yeah, I think maybe my idea of a safe X has changed over the past 2 years as retirement becomes more and more real.

Trying to predict health care costs is so annoying.
I’ve been able to give you a lot of credit to spend 25 large on travel at 25x expenses and derisking your portfolio all through your 50s. I think many of us here would be continuing to ramp it up closer to 30-33x and cutting out a trip or two and perhaps allocating the money saved towards equities to grow the pot a little bit larger for retirement. People are living past 100 as a matter of course these days.

Lots is ways to come at things as we approach the big cord pull.
Being wrong compounds forever.
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Re: Close to retirement - locking in gains with each new market high

Post by delamer »

HomerJ wrote: Thu Jul 29, 2021 3:12 pm
Wanderingwheelz wrote: Thu Jul 29, 2021 3:09 pm
HomerJ wrote: Thu Jul 29, 2021 2:43 pm
flyingaway wrote: Thu Jul 29, 2021 1:55 pm At this insane stock valuation, you are doing the right thing. But, you must have saved more than 25X.
Heh, why do you say that?
Flyingaway must not have seen your comment on the thread a few months back where you said you budget $25,000 per year for travel. There are many of us here who’ve seen our “number” balloon over the recent past due to the fact we haven’t spent aggressively while perhaps at the same time we haven’t derisked our portfolios at quite the same pace you have. I’ve done the opposite actually- raising my allocation to equities as my bond allocation has grown in dollar value to cover more and more years of expenses (Perhaps partially due to not spending enough money on travel, etc).

As I said in my earlier comment, there’s more than one way to come at this.
Yeah, I think maybe my idea of a safe X has changed over the past 2 years as retirement becomes more and more real.

Trying to predict health care costs is so annoying.
If you are including $25,000 for travel in your expenses, then I’m going to double down on the idea that you don’t need to be adding to cash/bonds.

As I posted upthread, identifying necessities versus niceties are key in determining what is included in expenses.

(I’m assuming that travel is a significant expense, percentage-wise.)
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Re: Close to retirement - locking in gains with each new market high

Post by HanSolo »

It sounds like the kind of thing I would do.

That's not to say I think others should do what I do. I'm more conservative than most, and I recognize that many don't want to do that.

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.

I would add that, to me, the above also implies rebalancing the stock side back up to $1m, in case of a bear market.

I understand the argument that taking money off the stock side means you forego gains as the market keeps going higher. That's true, and I've foregone a lot of gains over the years. I just went with my risk tolerance. One could argue that all allocations other than 100/0 have that issue, to a degree.
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Re: Close to retirement - locking in gains with each new market high

Post by HomerJ »

delamer wrote: Thu Jul 29, 2021 3:40 pm
HomerJ wrote: Thu Jul 29, 2021 3:12 pm
Wanderingwheelz wrote: Thu Jul 29, 2021 3:09 pm
HomerJ wrote: Thu Jul 29, 2021 2:43 pm
flyingaway wrote: Thu Jul 29, 2021 1:55 pm At this insane stock valuation, you are doing the right thing. But, you must have saved more than 25X.
Heh, why do you say that?
Flyingaway must not have seen your comment on the thread a few months back where you said you budget $25,000 per year for travel. There are many of us here who’ve seen our “number” balloon over the recent past due to the fact we haven’t spent aggressively while perhaps at the same time we haven’t derisked our portfolios at quite the same pace you have. I’ve done the opposite actually- raising my allocation to equities as my bond allocation has grown in dollar value to cover more and more years of expenses (Perhaps partially due to not spending enough money on travel, etc).

As I said in my earlier comment, there’s more than one way to come at this.
Yeah, I think maybe my idea of a safe X has changed over the past 2 years as retirement becomes more and more real.

Trying to predict health care costs is so annoying.
If you are including $25,000 for travel in your expenses, then I’m going to double down on the idea that you don’t need to be adding to cash/bonds.

As I posted upthread, identifying necessities versus niceties are key in determining what is included in expenses.

(I’m assuming that travel is a significant expense, percentage-wise.)
Heh, well, it if it was just me, I'd agree with you that $25,000 a year for travel is a nicety, and not a necessity.

But my wife considers a large travel budget to be a necessity. If I say we have to cut that, she will say, "Well you better just keep working".

Now, if there's a huge crash 5 years into our retirement, she'll have no problem considering it discretionary and we can cut back for a couple of years or more.

But I'm trying to retire early here, and the only way that gets to happen is if I can promise her we can keep the same lifestyle we have today.

$2000 a month for travel is about what we spend now (one large $10,000 vacation a year, one or two smaller $3000-$4000 vacations, and the ability to spend $1000 here and a $1000 there visiting family or friends whenever we want)

This is 25% of our budget...
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Re: Close to retirement - locking in gains with each new market high

Post by Wanderingwheelz »

HomerJ wrote: Thu Jul 29, 2021 4:26 pm
delamer wrote: Thu Jul 29, 2021 3:40 pm
HomerJ wrote: Thu Jul 29, 2021 3:12 pm
Wanderingwheelz wrote: Thu Jul 29, 2021 3:09 pm
HomerJ wrote: Thu Jul 29, 2021 2:43 pm

Heh, why do you say that?
Flyingaway must not have seen your comment on the thread a few months back where you said you budget $25,000 per year for travel. There are many of us here who’ve seen our “number” balloon over the recent past due to the fact we haven’t spent aggressively while perhaps at the same time we haven’t derisked our portfolios at quite the same pace you have. I’ve done the opposite actually- raising my allocation to equities as my bond allocation has grown in dollar value to cover more and more years of expenses (Perhaps partially due to not spending enough money on travel, etc).

As I said in my earlier comment, there’s more than one way to come at this.
Yeah, I think maybe my idea of a safe X has changed over the past 2 years as retirement becomes more and more real.

Trying to predict health care costs is so annoying.
If you are including $25,000 for travel in your expenses, then I’m going to double down on the idea that you don’t need to be adding to cash/bonds.

As I posted upthread, identifying necessities versus niceties are key in determining what is included in expenses.

(I’m assuming that travel is a significant expense, percentage-wise.)
Heh, well, it if it was just me, I'd agree with you that $25,000 a year for travel is a nicety, and not a necessity.

But my wife considers a large travel budget to be a necessity. If I say we have to cut that, she will say, "Well you better just keep working".

Now, if there's a huge crash 5 years into our retirement, she'll have no problem considering it discretionary and we can cut back for a couple of years or more.

But I'm trying to retire early here, and the only way that gets to happen is if I can promise her we can keep the same lifestyle we have today.

$2000 a month for travel is about what we spend now (one large $10,000 vacation a year, one or two smaller $3000-$4000 vacations, and the ability to spend $1000 here and a $1000 there visiting family or friends whenever we want)

This is 25% of our budget...
Have you and your wife talked seriously about how your travel budget would be affected by neither of you being encumbered by work? I’ve only been “retired” for 6 months and there is quite a bit of down time. Whatever there is a desire to do now, there’ll be a desire to do even more of it once you’re through with work.
Being wrong compounds forever.
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Re: Close to retirement - locking in gains with each new market high

Post by gmaynardkrebs »

HomerJ wrote: Thu Jul 29, 2021 11:25 am So, I'm close to retirement, have made my number, and now I'm just locking in gains every few months lately, when the market hits new highs.
To me, "made my number" means that no matter what happens to stocks, between SS, inflation indexed pensions, and TIPS/Ibonds, me and my wife will be happy campers no matter what happens. If you are at that happy point with 50% or more in stocks at age 60, go for it. However, with 50% stocks at age 60, I personally would not consider myself at the "made my number point" if it were based on the assumptions that (1) that stocks will "almost surely" recover or (2) that they will decline by no more than 50%-60% from today's prices for a long time, perhaps decades. I just don't want ever to worry about money once I retire.
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Re: Close to retirement - locking in gains with each new market high

Post by Whitecap »

marcopolo wrote: Thu Jul 29, 2021 12:46 pm
HomerJ wrote: Thu Jul 29, 2021 11:25 am So, I'm close to retirement, have made my number, and now I'm just locking in gains every few months lately, when the market hits new highs.

I'm not just rebalancing back to my original AA, I'm building up a cushion of cash, but this slowly changes my AA.

So look at me, I'm not staying the course!

It's about risk management, not maximizing gains, or even maintaining an consistent Asset Allocation.

This will cost me in the long-run, since I will be missing out on compounding. In the short-run, I feel like it lowers my retirement sequence of return risk.

For instance, imagine I have $1 million in stocks and $1 million in bonds/cash/CDs. 50/50 portfolio

Market goes up 10%, I sell the entire $100,000 gain in stocks and move it into the bonds/cash/CDs side of the portfolio, instead of just rebalancing back to 50/50.

So now I have $1 million in stocks and $1.1 million in bonds (47/53)

If the market goes up another 10%, I still make another $100,000 on the stock side... It could have been $105,000 if I had rebalanced to 50/50, so I'm out $5000... which is a good chunk of money. If someone handed me $5000 today, I'd be pretty excited.

But I already hit my number, so I'm not too worried about missing out on compounded gains in the short-term. I still make another $100,000 if stocks keep going up... I'm not that worried about missing out on the extra $5000. I'd be pretty happy with the extra $100,000 (which I would then lock in again by selling the gains - so then I would be at 45/55)

Yes, over multiple years or multiple 10% gains, compounding that extra money adds up, so this method would be a terrible idea for an accumulator, but I won't do this very long.

Just until I retire in a year or two, at which point, I'll spend all those locked-in gains first, and slowly get back to 50/50... Or there will be a crash, I'll get back to 50/50 quickly

The point is, by locking in ALL the gains, I'm sitting pretty even if there is a large market crash. Because I've already cashed out the gains, and now have a pretty nice buffer on the cash side.

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.
What you are describing is essentially Kitces' "bond tent".
Initially, there was some belief that it helped with SORR. But, I believe there has been further research that shows it really does not make much difference. I don't think it really hurts either. So, if it helps you be more comfortable as you approach retirement, why not.
Marcopolo,

Could you post that research for me. I enjoyed that Kitces article about Bond Tents. In his article he spoke that more research was needed on the subject. I’m happy to hear that some more has been done. Could you post that for me for my education?

Thank you sir,
Whitecap
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HomerJ
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Re: Close to retirement - locking in gains with each new market high

Post by HomerJ »

Wanderingwheelz wrote: Thu Jul 29, 2021 4:58 pm
Have you and your wife talked seriously about how your travel budget would be affected by neither of you being encumbered by work? I’ve only been “retired” for 6 months and there is quite a bit of down time. Whatever there is a desire to do now, there’ll be a desire to do even more of it once you’re through with work.
Yeah, that's where the $1000 here and there for trips to visit family and friends come in.

We won't be doing extra big trips, just more of the visits.

And we have plenty planned to do in retirement :)
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
delamer
Posts: 17348
Joined: Tue Feb 08, 2011 5:13 pm

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

Post by delamer »

HomerJ wrote: Thu Jul 29, 2021 4:26 pm
delamer wrote: Thu Jul 29, 2021 3:40 pm
HomerJ wrote: Thu Jul 29, 2021 3:12 pm
Wanderingwheelz wrote: Thu Jul 29, 2021 3:09 pm
HomerJ wrote: Thu Jul 29, 2021 2:43 pm

Heh, why do you say that?
Flyingaway must not have seen your comment on the thread a few months back where you said you budget $25,000 per year for travel. There are many of us here who’ve seen our “number” balloon over the recent past due to the fact we haven’t spent aggressively while perhaps at the same time we haven’t derisked our portfolios at quite the same pace you have. I’ve done the opposite actually- raising my allocation to equities as my bond allocation has grown in dollar value to cover more and more years of expenses (Perhaps partially due to not spending enough money on travel, etc).

As I said in my earlier comment, there’s more than one way to come at this.
Yeah, I think maybe my idea of a safe X has changed over the past 2 years as retirement becomes more and more real.

Trying to predict health care costs is so annoying.
If you are including $25,000 for travel in your expenses, then I’m going to double down on the idea that you don’t need to be adding to cash/bonds.

As I posted upthread, identifying necessities versus niceties are key in determining what is included in expenses.

(I’m assuming that travel is a significant expense, percentage-wise.)
Heh, well, it if it was just me, I'd agree with you that $25,000 a year for travel is a nicety, and not a necessity.

But my wife considers a large travel budget to be a necessity. If I say we have to cut that, she will say, "Well you better just keep working".

Now, if there's a huge crash 5 years into our retirement, she'll have no problem considering it discretionary and we can cut back for a couple of years or more.

But I'm trying to retire early here, and the only way that gets to happen is if I can promise her we can keep the same lifestyle we have today.

$2000 a month for travel is about what we spend now (one large $10,000 vacation a year, one or two smaller $3000-$4000 vacations, and the ability to spend $1000 here and a $1000 there visiting family or friends whenever we want)

This is 25% of our budget...
Given that, what if $15,000 for travel is a necessity and $10,000 is a nicety?

How does that change your years-of-expenses-in-fixed-income number?

It’s sort of the classic steaks vs. hamburgers issue. Don’t give up steak altogether, but cut it back from twice-a-week to once-a-week.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
marcopolo
Posts: 8411
Joined: Sat Dec 03, 2016 9:22 am

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

Post by marcopolo »

Whitecap wrote: Thu Jul 29, 2021 5:32 pm
marcopolo wrote: Thu Jul 29, 2021 12:46 pm
HomerJ wrote: Thu Jul 29, 2021 11:25 am So, I'm close to retirement, have made my number, and now I'm just locking in gains every few months lately, when the market hits new highs.

I'm not just rebalancing back to my original AA, I'm building up a cushion of cash, but this slowly changes my AA.

So look at me, I'm not staying the course!

It's about risk management, not maximizing gains, or even maintaining an consistent Asset Allocation.

This will cost me in the long-run, since I will be missing out on compounding. In the short-run, I feel like it lowers my retirement sequence of return risk.

For instance, imagine I have $1 million in stocks and $1 million in bonds/cash/CDs. 50/50 portfolio

Market goes up 10%, I sell the entire $100,000 gain in stocks and move it into the bonds/cash/CDs side of the portfolio, instead of just rebalancing back to 50/50.

So now I have $1 million in stocks and $1.1 million in bonds (47/53)

If the market goes up another 10%, I still make another $100,000 on the stock side... It could have been $105,000 if I had rebalanced to 50/50, so I'm out $5000... which is a good chunk of money. If someone handed me $5000 today, I'd be pretty excited.

But I already hit my number, so I'm not too worried about missing out on compounded gains in the short-term. I still make another $100,000 if stocks keep going up... I'm not that worried about missing out on the extra $5000. I'd be pretty happy with the extra $100,000 (which I would then lock in again by selling the gains - so then I would be at 45/55)

Yes, over multiple years or multiple 10% gains, compounding that extra money adds up, so this method would be a terrible idea for an accumulator, but I won't do this very long.

Just until I retire in a year or two, at which point, I'll spend all those locked-in gains first, and slowly get back to 50/50... Or there will be a crash, I'll get back to 50/50 quickly

The point is, by locking in ALL the gains, I'm sitting pretty even if there is a large market crash. Because I've already cashed out the gains, and now have a pretty nice buffer on the cash side.

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.
What you are describing is essentially Kitces' "bond tent".
Initially, there was some belief that it helped with SORR. But, I believe there has been further research that shows it really does not make much difference. I don't think it really hurts either. So, if it helps you be more comfortable as you approach retirement, why not.

Marcopolo,

Could you post that research for me. I enjoyed that Kitces article about Bond Tents. In his article he spoke that more research was needed on the subject. I’m happy to hear that some more has been done. Could you post that for me for my education?

Thank you sir,
Whitecap
Here is a thread that discussed it, with links to studies that show somewhat mixed results from it.

viewtopic.php?t=317628

Here is another analysis showing mixed results:
https://www.fiphysician.com/what-is-the ... etirement/
Last edited by marcopolo on Thu Jul 29, 2021 6:13 pm, edited 1 time in total.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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