MIL Portfolio- safe as possible?

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Mr. Potter
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MIL Portfolio- safe as possible?

Post by Mr. Potter »

I helped my MIl move her IRA to Fidelity last year and put her in a conservative TD fund (FKIFX) er .12 30/70 stocks-bonds. Even that conservative fund is down over 10% this year. I’m thinking if the market recovers a bit to try and get a little safer by selling FKIFX and just using CD’s for the fixed part of this and low cost etf’s for the 30% stock allocation. She is 83 and in good health so I’m thinking she needs a little exposure to equities. Does this plan seem reasonable?
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retiredjg
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Re: MIL Portfolio- safe as possible?

Post by retiredjg »

I'd leave it where it is.

Your plan is not unreasonable. I just don't think it will make much difference and it does add complexity.
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JoeRetire
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Re: MIL Portfolio- safe as possible?

Post by JoeRetire »

Oak&Elm wrote: Sat May 21, 2022 6:36 amI’m thinking she needs a little exposure to equities.
Why?
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Re: MIL Portfolio- safe as possible?

Post by Mr. Potter »

Why exposure to equities? Probably because I’ve read a hundred posts on here saying you need some exposure for growth, maybe the 30% is too high but if she lives another 10 years between inflation and low returns on CD’s she could run out of money
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JoeRetire
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Re: MIL Portfolio- safe as possible?

Post by JoeRetire »

Oak&Elm wrote: Sat May 21, 2022 6:57 am Why exposure to equities? Probably because I’ve read a hundred post on here saying you need some exposure for growth, maybe the 30% is too high but if she lives another 10 years between inflation and low returns on CD’s she could run out of money
(shrug)

You haven't provided enough data to determine how much growth she actually needs.
And of course, with pursuit of growth comes risk. That doesn't exactly equal "safe as possible".
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Re: MIL Portfolio- safe as possible?

Post by Call_Me_Op »

JoeRetire wrote: Sat May 21, 2022 7:03 am
Oak&Elm wrote: Sat May 21, 2022 6:57 am Why exposure to equities? Probably because I’ve read a hundred post on here saying you need some exposure for growth, maybe the 30% is too high but if she lives another 10 years between inflation and low returns on CD’s she could run out of money
(shrug)

You haven't provided enough data to determine how much growth she actually needs.
And of course, with pursuit of growth comes risk. That doesn't exactly equal "safe as possible".
Of course, this begs the question of how is the Op defining "safe." He seems to be using at least two different definitions just in his two posts.
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Re: MIL Portfolio- safe as possible?

Post by Mr. Potter »

Let me restate my question.
Would it be reasonable to replace bonds with CD’s for the fixed portion of her portfolio. Last I checked CD’s are always going up in value with no risk to the principal. Bonds can easily drop their nav so one may conclude CD’s are safer than bond funds.
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Re: MIL Portfolio- safe as possible?

Post by retiredjg »

One potential problem I see with this idea is that it leaves the equity portion "exposed" and seeing that one account drop drasticall. might be more worrisome.

Complexity.

CDs have to be "minded". A target income fund requires nothing.

CDs may not pay as much.

Your idea is reasonable, but I don't think it will be much benefit.
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Re: MIL Portfolio- safe as possible?

Post by vineviz »

Oak&Elm wrote: Sat May 21, 2022 6:36 am I helped my MIl move her IRA to Fidelity last year and put her in a conservative TD fund (FKIFX) er .12 30/70 stocks-bonds. Even that conservative fund is down over 10% this year. I’m thinking if the market recovers a bit to try and get a little safer by selling FKIFX and just using CD’s for the fixed part of this and low cost etf’s for the 30% stock allocation. She is 83 and in good health so I’m thinking she needs a little exposure to equities. Does this plan seem reasonable?
I guess you'll have to decide what you think "safe" means.

The current allocation held by FKIFX is probably "safer" if looked at from the standpoint of providing your mother-in-law with stable standard of living for the rest of her life. I'd argue that's the primary goal of most retirement plans.

Not only do the TIPS holdings in the Fidelity fund offer explicit inflation protection that CDs lack, the nominal bond holdings will outperform CDs about 70% of the time.

Overall, the Fidelity fund is well-designed to meet its objective of providing safe and sustainable retirement income. Tinkering isn't likely to create more safety and might, through the power of unintended consequences, create less.
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Re: MIL Portfolio- safe as possible?

Post by vineviz »

Oak&Elm wrote: Sat May 21, 2022 6:57 am Why exposure to equities? Probably because I’ve read a hundred posts on here saying you need some exposure for growth, maybe the 30% is too high but if she lives another 10 years between inflation and low returns on CD’s she could run out of money
It sounds like you are identifying longevity and inflation as significant risks for your MIL.

CDs address neither of those risks and, in fact, probably magnify them.
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Re: MIL Portfolio- safe as possible?

Post by Mr. Potter »

Thank you,
I picked the TD fund in the first place so I could just leave it alone other than sell enough once a year to take her RMD. I agree with not tinkering, like they say your investments are like a bar of soap, the more you handle it the smaller it gets. I will stick with the FKIFX fund and forget the CDs.
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Re: MIL Portfolio- safe as possible?

Post by backpacker61 »

Oak&Elm wrote: Sat May 21, 2022 7:51 am I will stick with the FKIFX fund and forget the CDs.
I think you've made a good decision to leave it well enough alone. Whenever there is turbulence in the equity market, it can be tempting to tinker, but that is usually the worst time to do so.
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Re: MIL Portfolio- safe as possible?

Post by goingup »

Oak&Elm wrote: Sat May 21, 2022 7:51 am Thank you,
I picked the TD fund in the first place so I could just leave it alone other than sell enough once a year to take her RMD. I agree with not tinkering, like they say your investments are like a bar of soap, the more you handle it the smaller it gets. I will stick with the FKIFX fund and forget the CDs.
I think that's the right move. In reading your prior posts about this situation, you were very careful and deliberate in choosing this Fidelity target fund. Your MIL should know that both bonds and stocks are having a rough year and it's best to sit tight right now. Reassess in January if you like.

You did mention (in prior post) that she has 2 years of expenses in cash, and that 75% of expenses are covered by SS. So it seems like this situation isn't dire, just uncomfortable. :|
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Re: MIL Portfolio- safe as possible?

Post by vineviz »

Oak&Elm wrote: Sat May 21, 2022 7:51 am Thank you,
I picked the TD fund in the first place so I could just leave it alone other than sell enough once a year to take her RMD. I agree with not tinkering, like they say your investments are like a bar of soap, the more you handle it the smaller it gets. I will stick with the FKIFX fund and forget the CDs.
I agree with others that this is sound plan.

One tweak I might suggest is setting up an automated plan with Fidelity to have the RMDs withdrawn monthly instead of annually.

https://www.fidelity.com/bin-public/060 ... ctancy.pdf

This reduces the stress of having to worry about whether (or, rather, when) to take the RMDs when the fund is down at the time you log in to make the withdrawal. More importantly, though, taking more frequent but smaller withdrawals is an easy and free way of reducing sequence of returns risk

I'm not sure if this risk is genuinely large for your MIL (if 75% of her expenses are covered by Social Security it might not be), but this step is usually easy to implement and costs nothing.
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Re: MIL Portfolio- safe as possible?

Post by radiowave »

Oak&Elm wrote: Sat May 21, 2022 7:51 am Thank you,
I picked the TD fund in the first place so I could just leave it alone other than sell enough once a year to take her RMD. I agree with not tinkering, like they say your investments are like a bar of soap, the more you handle it the smaller it gets. I will stick with the FKIFX fund and forget the CDs.
If it ain't broke, don't fix it.

Good choice to stay the course.
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Re: MIL Portfolio- safe as possible?

Post by Nowizard »

There is a high probability that this wonderful site will provide a consistent level of focus on expenses, simplicity and conservative investing. The latter does have great appeal, but there are questions I have had about lesser emphasis on individual circumstances. For instance, a conservative stance is demonstrably consistent with longer term investing and the "Stay the course" approach. As an elderly person of approximately the same age as your MIL, there is increasing awareness that the "long term" is quite different from what it was in the past.
Your comment about many stating that some exposure to equities is ideal is accurate. Those speak of portfolios that are 100% bonds compared to a 20/80 allocation frequently. They often conclude the latter is preferred. Others may dispute this, ask where is the "proof," etc. The simple fact is that there are many sustainable ways to invest and that the combination of individual circumstances offer nuance considerations. Some appear to confuse their opinion that how they invest is the best way to invest for all but facts clearly suggest there is no single best approach for all circumstances.
Combine that with the fact that we are in a period of time when investment anxiety is increased and the complexity of thought processes increases. Our friends who are less fortunate than we and who are concerned about funds running out over time are legitimately concerned. Some will decide to pull their assets out of equities entirely, some will stay the course, some will reduce their exposure to equities and some will actually increase their equity exposure with the belief that will aid portfolio recovery when the market turns upward. Some in each category will have made the correct decision though something else was advised. When faced with great uncertainty, a moderate approach would include considering the responses you receive here and consideration of various responses including retaining some degree of equity exposure and accepting the anxiousness that might accompany the decision.

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Re: MIL Portfolio- safe as possible?

Post by dbr »

I wonder if an older person in retirement at 30/70 should not have more in TIPS than the typical TD fund allocates, possibly even the entire bond allocation.

I agree that it is a mistake to eschew equities entirely.

We also need a bot that somehow questions used of the word "safe" though I think posters replied well to that.
Last edited by dbr on Sat May 21, 2022 8:43 am, edited 1 time in total.
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Re: MIL Portfolio- safe as possible?

Post by LeeMKE »

Let me restate my question.
Would it be reasonable to replace bonds with CD’s for the fixed portion of her portfolio. Last I checked CD’s are always going up in value with no risk to the principal. Bonds can easily drop their nav so one may conclude CD’s are safer than bond funds.
It is reasonable, and that is exactly what I just did. BUT I'm 66. By 80, I'll have everything on autopilot, likely in a fund like the one you are in, and set up for auto deposits to the checking account.

The BIG drop in my bonds, alongside the stocks, wasn't pleasant, and I have zero expectation of a recovery in long term bonds, so I made the change. I'm good with sitting on equities bobbling around, but not the bonds. Having a big drop in stocks AND bonds is unusual. CDs held to maturity are better protection of the corpus than bond funds, that jiggle with the market. My CDs are quoted with daily changes in value, but since I hold to maturity, I can ignore that as just noise. But I can't ignore the changes in value of bond funds, because it is not possible for me to decide what to hold.
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Re: MIL Portfolio- safe as possible?

Post by BL »

Ok, I am one data point on her side. Agree that losing money on the fixed income side is frustrating at our age (relatively short recovery time available). Losing over 8% YTD in Wellesley doesn't seem so bad compared to over twice that in Total Stock Market, so there is a feel-good reaction to that, but losing that much in total bond market is more frustrating.

I have been using CDs for fixed income for a few years and they were ok until they now dropped behind what is available at Vanguard, Schwab, or Fidelity in treasury notes and brokered CDs so have been trying out short-term treasuries which seem like a better choice in rising interest rates and no risk of losing money. I like that I can use the brokerage for this and can keep this in one brokerage rather than moving between a bank and a couple credit unions chasing rates. Even Vanguard's Federal Money Market (which has been sitting empty in all our accounts) has a better rate that any CD I can get at our local bank right now. Some of the threads here have good information on treasuries and brokered CDs; I believe a link to The Finance Buff helped me figure out exactly how to do this and Kevin M has shared good information. We are not spending any of this so far so that makes a difference. Consider that trying not to lose too much to inflation may be the best we can do. I like I-Bonds (high rates right now) but not everyone likes to deal with the website https://treasurydirect.gov/ and the limit is 10k/calendar year.

Now, on her side, does she pay attention to all this or just leave it all up to you? How much does she need each year after SS, pensions, other income? That may change if/when health changes.

It is good that you are looking after her. Consider that doing nothing is not the worst thing you could do. Rates may go up in a few weeks/months. I can't tell you what is best. Most folks at this age are not paying much attention but may get nervous about "losing money".

I see there are lots of comments since I started this, but will leave it in case some perspective is helpful.
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Re: MIL Portfolio- safe as possible?

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LeeMKE wrote: Sat May 21, 2022 8:42 am The BIG drop in my bonds, alongside the stocks, wasn't pleasant, and I have zero expectation of a recovery in long term bonds, so I made the change. I'm good with sitting on equities bobbling around, but not the bonds. Having a big drop in stocks AND bonds is unusual. CDs held to maturity are better protection of the corpus than bond funds, that jiggle with the market. My CDs are quoted with daily changes in value, but since I hold to maturity, I can ignore that as just noise. But I can't ignore the changes in value of bond funds, because it is not possible for me to decide what to hold.
If bond durations roughly match the investor's investment horizon, "recovery" is virtually guaranteed for the bonds (assuming the issuer doesn't default, of course). A price drop on bonds means, by definition, that the future expected return of the bonds (i.e. the yield to maturity) has risen.

On the other hand, shortening duration (by switching to CDs) AFTER a drop in price for intermediate and long-term bonds is a way of ensuring that the investor never recovers.
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Re: MIL Portfolio- safe as possible?

Post by JoeRetire »

Oak&Elm wrote: Sat May 21, 2022 7:20 am Let me restate my question.
Would it be reasonable to replace bonds with CD’s for the fixed portion of her portfolio. Last I checked CD’s are always going up in value with no risk to the principal. Bonds can easily drop their nav so one may conclude CD’s are safer than bond funds.
Sure, it's reasonable.
Other than inflationary aspects, CDs are usually considered "safer" than bond funds.
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Re: MIL Portfolio- safe as possible?

Post by LeeMKE »

If bond durations roughly match the investor's investment horizon, "recovery" is virtually guaranteed for the bonds (assuming the issuer doesn't default, of course). A price drop on bonds means, by definition, that the future expected return of the bonds (i.e. the yield to maturity) has risen.

On the other hand, shortening duration (by switching to CDs) AFTER a drop in price for intermediate and long-term bonds is a way of ensuring that the investor never recovers.
Sorry, I should have been more clear. My bond FUND dropped precipitously. And in this environment, it will drop more as the Fed confirmed yesterday they will continue to raise interest rates. If I'd held individual bonds until maturity, like my CDs, I would not have lost any corpus, just future opportunity. As it was, I lost corpus and unfortunately would lose more if I stood still for the next 4 years, which is my planned holding period.
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Re: MIL Portfolio- safe as possible?

Post by vineviz »

LeeMKE wrote: Sat May 21, 2022 9:35 am My bond FUND dropped precipitously. And in this environment, it will drop more as the Fed confirmed yesterday they will continue to raise interest rates.
You can’t possibly know whether your bond funds will drop in price or not, unless you know something about the Fed’s plan that no one else knows.
LeeMKE wrote: Sat May 21, 2022 9:35 am If I'd held individual bonds until maturity, like my CDs, I would not have lost any corpus, just future opportunity. As it was, I lost corpus and unfortunately would lose more if I stood still for the next 4 years, which is my planned holding period.
If you have a planned expense in 4 years then a bond fund with an average duration of 4 years has substantially the same interest rate risk as a bond or CD maturing in 4 years. The only way a recent price drop in bond funds could have set you back would be that your bond fund had a duration greater than 4 years.
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Re: MIL Portfolio- safe as possible?

Post by dbr »

vineviz wrote: Sat May 21, 2022 10:17 am
LeeMKE wrote: Sat May 21, 2022 9:35 am My bond FUND dropped precipitously. And in this environment, it will drop more as the Fed confirmed yesterday they will continue to raise interest rates.
You can’t possibly know whether your bond funds will drop in price or not, unless you know something about the Fed’s plan that no one else knows.
LeeMKE wrote: Sat May 21, 2022 9:35 am If I'd held individual bonds until maturity, like my CDs, I would not have lost any corpus, just future opportunity. As it was, I lost corpus and unfortunately would lose more if I stood still for the next 4 years, which is my planned holding period.
If you have a planned expense in 4 years then a bond fund with an average duration of 4 years has substantially the same interest rate risk as a bond or CD maturing in 4 years. The only way a recent price drop in bond funds could have set you back would be that your bond fund had a duration greater than 4 years.
I'm curious how many investors here hold bonds, CDs*, or whatever for any planned holding period. An accumulation and then spending from a portfolio occurs in an infinity of infinitesimal transactions over a time line longer than any bond instruments last, meaning somewhere in the range 40-80 years, more or less. Even at end of life many people are transitioning their wealth to the interests of heirs or for gifting. If they are in fact nearly spent down, then it doesn't matter a lot anyway.

*The term on a specific CD is not the same as the term for which CDs in general are held.

There is a different conversation when someone is holding assets for a time specific purpose, such as down payment on a house or paying for college educations, or even bridging to delayed Social Security. It also matters a lot if most of the holding rather than small increments will be paid out at once.

But I wish people would be more specific about that rather than just focussing on whether or not a fixed income asset lost money yesterday, last week, or so far this year.
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Re: MIL Portfolio- safe as possible?

Post by backpacker61 »

dbr wrote: Sat May 21, 2022 11:07 am I'm curious how many investors here hold bonds, CDs*, or whatever for any planned holding period.
Not me; I just hold bond funds as a diversifier in conjuction with growth assets, which I expect to hold long term. I do take dividends from some of them to help me service current expenses. As you pointed out, this is in tiny increments and over many years.
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Re: MIL Portfolio- safe as possible?

Post by dbr »

backpacker61 wrote: Sat May 21, 2022 11:33 am
dbr wrote: Sat May 21, 2022 11:07 am I'm curious how many investors here hold bonds, CDs*, or whatever for any planned holding period.
Not me; I just hold bond funds as a diversifier in conjuction with growth assets, which I expect to hold long term. I do take dividends from some of them to help me service current expenses. As you pointed out, this is in tiny increments and over many years.
Right. I personally think it is more helpful for the long term investor to frame the different assets against a range of expected return and variability of return of a portfolio as a whole and then see if that suits what one is trying to do on a long time scale.

The role of asset characteristics there is that credit and term risk affect the expected return and the variability of return of fixed income (also allowing for inflation). In any case it all has to be combined together taking account of the magnitude of risk and return and the (varying) correlation among assets.

This is a very approximate process.
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Re: MIL Portfolio- safe as possible?

Post by Silentnight »

Could you expand on your comment about sequence of returns risk? How and why does it help?
vineviz wrote: Sat May 21, 2022 8:10 am
Oak&Elm wrote: Sat May 21, 2022 7:51 am
I agree with others that this is sound plan.

One tweak I might suggest is setting up an automated plan with Fidelity to have the RMDs withdrawn monthly instead of annually.

https://www.fidelity.com/bin-public/060 ... ctancy.pdf

This reduces the stress of having to worry about whether (or, rather, when) to take the RMDs when the fund is down at the time you log in to make the withdrawal.

More importantly, though, taking more frequent but smaller withdrawals is an easy and free way of reducing sequence of returns risk
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Re: MIL Portfolio- safe as possible?

Post by Wrench »

Oak&Elm wrote: Sat May 21, 2022 6:36 am I helped my MIl move her IRA to Fidelity last year and put her in a conservative TD fund (FKIFX) er .12 30/70 stocks-bonds. Even that conservative fund is down over 10% this year. I’m thinking if the market recovers a bit to try and get a little safer by selling FKIFX and just using CD’s for the fixed part of this and low cost etf’s for the 30% stock allocation. She is 83 and in good health so I’m thinking she needs a little exposure to equities. Does this plan seem reasonable?
One "out of the box" thought: purchase a single premium income annuity (SPIA) that will generate sufficient income together with social security to meet her expenses. Then invest the balance of her funds in a more aggressive stock/bond allocation, e.g., 60/40 or even 80/20 stock/bonds. If you purchase the SPIA with non qualified funds, a fraction of the income will likely be tax free for the initial years at least.

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Re: MIL Portfolio- safe as possible?

Post by vineviz »

Silentnight wrote: Sat May 21, 2022 1:36 pm Could you expand on your comment about sequence of returns risk? How and why does it help?
I don't want to overstate the magnitude of the impact from what I'm describing, but it's worth considering.

Whenever you make infrequent and large contributions to or withdrawals from a portfolio you're doing a little dance with both uncertainty and randomness. An investor who is unlucky enough to make a single yearly withdrawal on a day with especially poor returns will experience less subsequent compounding of returns than an investor who makes the same withdrawal on a day with especially good returns.

Because an investor making annual withdrawals is only, over the course of their retirement, making 20 or 30 such withdrawals a handful "unlucky" withdrawals at the beginning of retirement can have an outsized effect when compared to someone making monthly withdrawals (which means 240 or 360 chances).

In short, taking more frequent withdrawals is a way to ensure a narrower dispersion of outcomes. Put another way, it ensures that the ACTUAL retirement experience is closer to the average or expected experience.

By way of example, imagine a hypothetical investor who retired in December 1979 with Vanguard Wellington fund as their retirement savings. If they took a withdrawal on the 14th market day of January each year their remaining wealth would be 22% less than if they'd taken the same withdrawal on the 12th market day of January each year. And it would be 26% more than if they'd taken it on the 9th day of January each year.

If, instead, they took 1/12th of that withdrawal each month on the 14th day they'd have just 4% less than if they used the 12th day and 10% more than if they'd used the 9th day.

There's no rhyme or reason that makes the 9th, 12th, or 14th day of the month special, of course, so it would have been impossible to know ahead of time which day would be best. But if you're withdrawing monthly (or quarterly) you can worry about "bad luck" a lot less.

Additionally, to the extent that people typically treat their "investments" and their "cash" as being distinct buckets of money there's a real financial benefit in that the monthly withdrawals keep the RMDs invested slightly longer (i.e. an extra six months on average) which helps with portfolio growth.
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Re: MIL Portfolio- safe as possible?

Post by rossington »

We must not forget that portfolio size does correlate with the impact of broad based market swings. A 30/70 1M portfolio will be more affected than a 30/70 2M portfolio in terms of flexibility of shifting between investment options. Definitely stick with what has worked well if your options are fewer or possibly more risky due to the size of one's portfolio.
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