When to sell bond funds or equities for first years of retirement

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Hiram
Posts: 28
Joined: Sun Dec 10, 2017 12:11 pm
Location: Cali and Mexico

When to sell bond funds or equities for first years of retirement

Post by Hiram »

Hi All,
This is my first post, but I have been reading the board for years and have benefited very much from the collective wisdom here.

I am wondering when to sell bond funds (or equities) to pay for our expenses over the next 5 years until my dw starts her pension and my social security kicks in.

I am retiring this summer (yay!). She stopped working during the pandemic but has postponed collecting her pension until June 2024. I plan on taking SS at 70 in 2027. So until then we will rely on withdrawal from our various retirement accounts. We have 250k in cash which is about 2.5 years income (at a comfortable budget for us in a HCOL area).

We will need a further 250k for the second 2.5 years until I receive SS. Should I wait on selling some of our equity or bond funds (while everything is down)? Or, nervous nelly that I am, should I shore up my cash and guaranteed income to cover those years?

Most of our bond money is in bond funds (we have just a couple of i-bonds) which in my ignorance I thought were more stable than they actually are. My inclination is to wait on selling anything until we need it in late 2024 early 2025 in the hope that either the stock market or bond funds recover.

I am not worried about after the years after ss starts since her pension and my SS will cover our bare minimum, at that point I estimate that a 3% or 3.5% withdrawal rate (of what is left of portfolio) will make us very comfortable financially.

Thanks for any and all thoughts,

hiram


Asset allocation: 64%stocks (1/3 intl, 2/3 USA) / 23% Bonds & Bond Funds / 1% fixed income / 12% Cash (240k)

Portfolio size: $2 million (I am still amazed we have that much!)

Debt: Mortgage- 92k (at 2% 9 years left of 10yr)

Tax Filing Status: Married Jointly

Tax Rate: good question… effective is @10%

State of Residence: CA

Age: Me: 64.5 DW: 60



Current retirement assets

Taxable
12% cash
11% SCHF SCHWAB INTERNATIONAL EQUITY ETF
24% SCHB SCHWAB US BROAD MARKET ETF


His 403b
4% VTSNX Vanguard Total International Stock Index Fund Institutional (
19% VITSX Vanguard Total Stock Market Index Fund Institutional
18% VBTIX Vanguard Total Bond Market Index Fund Institutional



Her 403b

1% VOYA FIXED PLUS III
4.5% VBTIX VANGUARD TOTAL BOND MARKET
5% VSMPX VANGUARD TOTAL STOCK MARKET
1.5% VDIPX VANGUARD DEVELOPED MARKETS
User avatar
arcticpineapplecorp.
Posts: 15081
Joined: Tue Mar 06, 2012 8:22 pm

Re: When to sell bond funds or equities for first years of retirement

Post by arcticpineapplecorp. »

welcome to the group.

first, are you planning on taking from taxable or tax deferred (to lessen RMDs when you get to age 72) or some combination of both and if so what amounts?

sounds like you need $500k for the next 5 years (total) and you already have $250k in cash so the other $250k can either be in cash or bonds or some combo of both.

but think about (unless you already know) which account(s) you're planning to pull from over those next 5 years...and why.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
rossington
Posts: 1823
Joined: Fri Jun 07, 2019 2:00 am
Location: Florida

Re: When to sell bond funds or equities for first years of retirement

Post by rossington »

Hiram wrote: Fri May 27, 2022 5:55 pm Hi All,
This is my first post, but I have been reading the board for years and have benefited very much from the collective wisdom here.

I am wondering when to sell bond funds (or equities) to pay for our expenses over the next 5 years until my dw starts her pension and my social security kicks in.

I am retiring this summer (yay!). She stopped working during the pandemic but has postponed collecting her pension until June 2024. I plan on taking SS at 70 in 2027. So until then we will rely on withdrawal from our various retirement accounts. We have 250k in cash which is about 2.5 years income (at a comfortable budget for us in a HCOL area).

We will need a further 250k for the second 2.5 years until I receive SS. Should I wait on selling some of our equity or bond funds (while everything is down)? Or, nervous nelly that I am, should I shore up my cash and guaranteed income to cover those years?

Most of our bond money is in bond funds (we have just a couple of i-bonds) which in my ignorance I thought were more stable than they actually are. My inclination is to wait on selling anything until we need it in late 2024 early 2025 in the hope that either the stock market or bond funds recover.

I am not worried about after the years after ss starts since her pension and my SS will cover our bare minimum, at that point I estimate that a 3% or 3.5% withdrawal rate (of what is left of portfolio) will make us very comfortable financially.

Thanks for any and all thoughts,

hiram


Asset allocation: 64%stocks (1/3 intl, 2/3 USA) / 23% Bonds & Bond Funds / 1% fixed income / 12% Cash (240k)

Portfolio size: $2 million (I am still amazed we have that much!)

Debt: Mortgage- 92k (at 2% 9 years left of 10yr)

Tax Filing Status: Married Jointly

Tax Rate: good question… effective is @10%

State of Residence: CA

Age: Me: 64.5 DW: 60



Current retirement assets

Taxable
12% cash
11% SCHF SCHWAB INTERNATIONAL EQUITY ETF
24% SCHB SCHWAB US BROAD MARKET ETF


His 403b
4% VTSNX Vanguard Total International Stock Index Fund Institutional (
19% VITSX Vanguard Total Stock Market Index Fund Institutional
18% VBTIX Vanguard Total Bond Market Index Fund Institutional



Her 403b

1% VOYA FIXED PLUS III
4.5% VBTIX VANGUARD TOTAL BOND MARKET
5% VSMPX VANGUARD TOTAL STOCK MARKET
1.5% VDIPX VANGUARD DEVELOPED MARKETS
Why not take the dividends and withdraw the difference?
I always recommend a non stressful side gig to bridge the gap and keep one active.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: When to sell bond funds or equities for first years of retirement

Post by KlangFool »

OP,

Stop reinvesting your taxable account dividend and distribution. That may be enough.

You should start Roth conversion now to avoid RMD problem later.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Topic Author
Hiram
Posts: 28
Joined: Sun Dec 10, 2017 12:11 pm
Location: Cali and Mexico

Re: When to sell bond funds or equities for first years of retirement

Post by Hiram »

arcticpineapplecorp. wrote: Fri May 27, 2022 11:54 pm welcome to the group.

first, are you planning on taking from taxable or tax deferred (to lessen RMDs when you get to age 72) or some combination of both and if so what amounts?

sounds like you need $500k for the next 5 years (total) and you already have $250k in cash so the other $250k can either be in cash or bonds or some combo of both.

but think about (unless you already know) which account(s) you're planning to pull from over those next 5 years...and why.
Thanks!


I ran I-Orp to see what that application suggested for which accounts. It has me doing a lot of Roth conversions over the next few years. So I am planning on that. I am hoping my cash in taxable means that I have a lot more room for Roth conversions with bumping into a higher tax bracket.

My question is when to take that additional 250k and from which type of funds.

I had been thinking of taking from the tax deferred for now since we have so much in those accounts.
Topic Author
Hiram
Posts: 28
Joined: Sun Dec 10, 2017 12:11 pm
Location: Cali and Mexico

Re: When to sell bond funds or equities for first years of retirement

Post by Hiram »

KlangFool wrote: Sat May 28, 2022 6:30 am OP,

Stop reinvesting your taxable account dividend and distribution. That may be enough.

You should start Roth conversion now to avoid RMD problem later.

KlangFool
Thanks, both are good suggestions. I will look at what those amount to. I had been planning on starting roth conversions this year since it will be the first year of low income. We have very little in Roth accounts now.
Topic Author
Hiram
Posts: 28
Joined: Sun Dec 10, 2017 12:11 pm
Location: Cali and Mexico

Re: When to sell bond funds or equities for first years of retirement

Post by Hiram »

rossington wrote: Sat May 28, 2022 4:39 am
Why not take the dividends and withdraw the difference?
I always recommend a non stressful side gig to bridge the gap and keep one active.
Yes, that is a good idea. For year I haven't been looking at dividends because I just wanted to reinvest so I hadn't thought of it.

As to the side gig, I may very well do that but I am also thinking of volunteering. But for the first year we are going to spend a lot of time with the grandkids and traveling back east to visit friends and family, (Covid and monkey pox and hurricanes and whatever other disasters permitting)
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: When to sell bond funds or equities for first years of retirement

Post by KlangFool »

Hiram wrote: Sat May 28, 2022 8:17 am

My question is when to take that additional 250k and from which type of funds.

I had been thinking of taking from the tax deferred for now since we have so much in those accounts.
Hiram,

1) You should take from the 250K.

2) You should refill it from your taxable account's dividend and distribution.

"I had been thinking of taking from the tax deferred for now since we have so much in those accounts."

3) Why? You could Roth convert a lot more and save taxes if you spend from your taxable account and cash instead.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
smitcat
Posts: 13304
Joined: Mon Nov 07, 2016 9:51 am

Re: When to sell bond funds or equities for first years of retirement

Post by smitcat »

Hiram wrote: Sat May 28, 2022 8:17 am
arcticpineapplecorp. wrote: Fri May 27, 2022 11:54 pm welcome to the group.

first, are you planning on taking from taxable or tax deferred (to lessen RMDs when you get to age 72) or some combination of both and if so what amounts?

sounds like you need $500k for the next 5 years (total) and you already have $250k in cash so the other $250k can either be in cash or bonds or some combo of both.

but think about (unless you already know) which account(s) you're planning to pull from over those next 5 years...and why.
Thanks!


I ran I-Orp to see what that application suggested for which accounts. It has me doing a lot of Roth conversions over the next few years. So I am planning on that. I am hoping my cash in taxable means that I have a lot more room for Roth conversions with bumping into a higher tax bracket.

My question is when to take that additional 250k and from which type of funds.

I had been thinking of taking from the tax deferred for now since we have so much in those accounts.
IORP is a great tool for quickly comparing many variables and how the interact with your potential future plan - but not great with Roth options.
IORP has a couple of glitches when used to compare models for Roth conversions which could easily mislead your plan. A calculator like RPM is much more time consuming and difficult to use but well worth the time if you want much better accuracy and detail. Even better for modeling Roth conversions is Pralana Gold which costs about $100 to initially purchase and then like half that each year for updates.
IMO time and effort on this is well worth it.
User avatar
ruralavalon
Posts: 26352
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: When to sell bond funds or equities for first years of retirement

Post by ruralavalon »

Welcome to the forum :) .

Congratulations on your retirement.

Hiram wrote: Fri May 27, 2022 5:55 pmMy inclination is to wait on selling anything until we need it in late 2024 early 2025 in the hope that either the stock market or bond funds recover.
Hiram wrote: Sat May 28, 2022 8:17 amMy question is when to take that additional 250k and from which type of funds.
In my opinion your inclination, to wait until the money is needed for retirement living expenses, is the best strategy.

My inclination would be to take from the stock funds in the taxable brokerage account, and do some Roth conversions from the tax-deferred accounts. Decide the exact details when the time arrives.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
User avatar
Kenkat
Posts: 9549
Joined: Thu Mar 01, 2007 10:18 am
Location: Cincinnati, OH

Re: When to sell bond funds or equities for first years of retirement

Post by Kenkat »

There are a couple of strategies I know of (and probably others):
  1. The rising equity strategy: in this strategy, you pull money from your fixed income side as you are only trying to fund a short interval of time. You want to avoid drawing from equities in a down market. This will result in your equity percentage rising as you approach drawing SS. This is presumably ok as you need a lower withdraw percentage by then and can afford to invest what is left over a longer time horizon. Often it might have made sense to have increased the bond percentage in preparation as you approach retirement.
  2. The fixed allocation strategy: this strategy would have you maintain your current allocation percentage by targeting withdraws. If stocks are down, you’d take money from fixed income. If stocks are up, you take money from there instead. A type of reverse rebalancing in a sense - it attempts to avoid drawing money from an asset class that has fallen in value.
mary1492
Posts: 716
Joined: Thu Oct 17, 2019 3:02 am

Re: When to sell bond funds or equities for first years of retirement

Post by mary1492 »

.....
Last edited by mary1492 on Thu Sep 29, 2022 8:14 pm, edited 1 time in total.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: When to sell bond funds or equities for first years of retirement

Post by Marseille07 »

Like the above poster, but my recommendation is to nudge your portfolio instead of proportionally selling across assets.

If you target some asset allocation, your current AA is necessarily above or below your target. Which means you can always nudge one way or the other.
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: When to sell bond funds or equities for first years of retirement

Post by dbr »

I am a little uncertain about your numbers because it is 2 years until your wife starts her pension, not five.

But be that as it may your plan is to spend $100k/year from your portfolio for five years and after that about 3% of the portfolio. So on $2M that $100k is a 5% withdrawal rate. I would not hesitate to just set a fixed asset allocation and withdraw at 5% for five years and then 3% for the duration. As to what to withdraw from just continue to nudge the asset allocation toward target. I would probably not allocate so much to cash, but 12% is not a real problem. If this interpretation of the numbers is wrong then the answer could be different.
Topic Author
Hiram
Posts: 28
Joined: Sun Dec 10, 2017 12:11 pm
Location: Cali and Mexico

Re: When to sell bond funds or equities for first years of retirement

Post by Hiram »

KlangFool wrote: Sat May 28, 2022 8:56 am
"I had been thinking of taking from the tax deferred for now since we have so much in those accounts."

3) Why? You could Roth convert a lot more and save taxes if you spend from your taxable account and cash instead.

KlangFool
Why? It was because I hadn't thought clearly about that step of the process. Your advice and that of the other posters makes much more sense/

Hiram
Topic Author
Hiram
Posts: 28
Joined: Sun Dec 10, 2017 12:11 pm
Location: Cali and Mexico

Re: When to sell bond funds or equities for first years of retirement

Post by Hiram »

ruralavalon wrote: Sat May 28, 2022 9:26 am Welcome to the forum :) .

Congratulations on your retirement.

Hiram wrote: Fri May 27, 2022 5:55 pmMy inclination is to wait on selling anything until we need it in late 2024 early 2025 in the hope that either the stock market or bond funds recover.
Hiram wrote: Sat May 28, 2022 8:17 amMy question is when to take that additional 250k and from which type of funds.
In my opinion your inclination, to wait until the money is needed for retirement living expenses, is the best strategy.

My inclination would be to take from the stock funds in the taxable brokerage account, and do some Roth conversions from the tax-deferred accounts. Decide the exact details when the time arrives.
Thanks on both counts!

I like the idea of waiting and seeing. It fits with my personality which is generally, "don't do today what you put off till 2024...."

It seems like the consensus here is to take from the taxable brokerage account while doing Roth conversions.
Topic Author
Hiram
Posts: 28
Joined: Sun Dec 10, 2017 12:11 pm
Location: Cali and Mexico

Re: When to sell bond funds or equities for first years of retirement

Post by Hiram »

Kenkat wrote: Sat May 28, 2022 10:19 am There are a couple of strategies I know of (and probably others):
  1. The rising equity strategy: in this strategy, you pull money from your fixed income side as you are only trying to fund a short interval of time. You want to avoid drawing from equities in a down market. This will result in your equity percentage rising as you approach drawing SS. This is presumably ok as you need a lower withdraw percentage by then and can afford to invest what is left over a longer time horizon. Often it might have made sense to have increased the bond percentage in preparation as you approach retirement.
  2. The fixed allocation strategy: this strategy would have you maintain your current allocation percentage by targeting withdraws. If stocks are down, you’d take money from fixed income. If stocks are up, you take money from there instead. A type of reverse rebalancing in a sense - it attempts to avoid drawing money from an asset class that has fallen in value.
Those are interesting approaches.
Right now we are basically at our target AA--it is a little off because of the market churning but our plan has us rebalancing annually in the fall. I would be a little concerned to push our equities higher--but it might make sense to rethink our tolerance for risk in those later years.
Topic Author
Hiram
Posts: 28
Joined: Sun Dec 10, 2017 12:11 pm
Location: Cali and Mexico

Re: When to sell bond funds or equities for first years of retirement

Post by Hiram »

mary1492 wrote: Sat May 28, 2022 10:25 am Sell proportionally across the assets to keep AA the same...if that's the AA your investment statement says.

"Hope" is not an investment thesis.
Yes, is about our target AA. We had been pretty aggressive (or at least it felt aggressive to me in 2001 and 2008) and it seems to have paid off! We are/were both teachers so never pulled in the big bucks. To have a comfortable retirement in our HCOL area is something!
Topic Author
Hiram
Posts: 28
Joined: Sun Dec 10, 2017 12:11 pm
Location: Cali and Mexico

Re: When to sell bond funds or equities for first years of retirement

Post by Hiram »

Marseille07 wrote: Sat May 28, 2022 10:31 am Like the above poster, but my recommendation is to nudge your portfolio instead of proportionally selling across assets.

If you target some asset allocation, your current AA is necessarily above or below your target. Which means you can always nudge one way or the other.
I have never been really rigid about my AA. It has changed a lot over the years as I learned more about investing and as our financial outlook came into clearer focus.

I take it that "nudging" means that to take my withdrawals so that my AA tends in the direction of my AA but doesn't necessarily keep it constant at target. Correct?
Topic Author
Hiram
Posts: 28
Joined: Sun Dec 10, 2017 12:11 pm
Location: Cali and Mexico

Re: When to sell bond funds or equities for first years of retirement

Post by Hiram »

dbr wrote: Sat May 28, 2022 10:40 am I am a little uncertain about your numbers because it is 2 years until your wife starts her pension, not five.

But be that as it may your plan is to spend $100k/year from your portfolio for five years and after that about 3% of the portfolio. So on $2M that $100k is a 5% withdrawal rate. I would not hesitate to just set a fixed asset allocation and withdraw at 5% for five years and then 3% for the duration. As to what to withdraw from just continue to nudge the asset allocation toward target. I would probably not allocate so much to cash, but 12% is not a real problem. If this interpretation of the numbers is wrong then the answer could be different.
I am pretty certain those numbers are correct--we will need less for years 3-5 than in the first two because of her pension. But it won't be enough to live on.

We have changing needs to tap the portfolio over those five years which will mean different withdrawal rates for the different years. It is simpler, you are right, to average the needs over the five years. So maybe I am overthinking. For instance, this year because I have a half year salary the WR is quite a bit less--about 3.5% but in 2021 without any salary or pension I am anticipating we will need around 6.4% withdrawal (depending on the size of the portfolio of course).

Your estimates are right. We have more cash than we usually do because of selling a property last month. I haven't invested it because I thought it made sense to keep cash on hand so we wouldn't have to withdraw so much when the markets were down.
Topic Author
Hiram
Posts: 28
Joined: Sun Dec 10, 2017 12:11 pm
Location: Cali and Mexico

Re: When to sell bond funds or equities for first years of retirement

Post by Hiram »

smitcat wrote: Sat May 28, 2022 9:06 am
Hiram wrote: Sat May 28, 2022 8:17 am
arcticpineapplecorp. wrote: Fri May 27, 2022 11:54 pm welcome to the group.

first, are you planning on taking from taxable or tax deferred (to lessen RMDs when you get to age 72) or some combination of both and if so what amounts?

sounds like you need $500k for the next 5 years (total) and you already have $250k in cash so the other $250k can either be in cash or bonds or some combo of both.

but think about (unless you already know) which account(s) you're planning to pull from over those next 5 years...and why.
Thanks!


I ran I-Orp to see what that application suggested for which accounts. It has me doing a lot of Roth conversions over the next few years. So I am planning on that. I am hoping my cash in taxable means that I have a lot more room for Roth conversions with bumping into a higher tax bracket.

My question is when to take that additional 250k and from which type of funds.

I had been thinking of taking from the tax deferred for now since we have so much in those accounts.
IORP is a great tool for quickly comparing many variables and how the interact with your potential future plan - but not great with Roth options.
IORP has a couple of glitches when used to compare models for Roth conversions which could easily mislead your plan. A calculator like RPM is much more time consuming and difficult to use but well worth the time if you want much better accuracy and detail. Even better for modeling Roth conversions is Pralana Gold which costs about $100 to initially purchase and then like half that each year for updates.
IMO time and effort on this is well worth it.
I hadn't been sure which accounts to draw from--that is why I posted here. But It sounds the best idea is to take from the brokerage account and the cash while doing as much Roth conversions in the 403b accounts as possible.

Thanks for the suggestion on Pralana Gold. It looks a very good tool. And with impending retirement I will enjoy obsessing over some new software.

After the very good advice from all of you I will be spending some time planning on how to take the roth conversions.

Thanks again to you and the others for the welcome and for the helpful advice.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: When to sell bond funds or equities for first years of retirement

Post by Marseille07 »

Hiram wrote: Sat May 28, 2022 8:09 pm I have never been really rigid about my AA. It has changed a lot over the years as I learned more about investing and as our financial outlook came into clearer focus.

I take it that "nudging" means that to take my withdrawals so that my AA tends in the direction of my AA but doesn't necessarily keep it constant at target. Correct?
That's correct. If you aim to maintain 70/30 and your AA is currently 60/40, you just continue spending down fixed income. If 80/20, then you sell equities according to your withdrawal methodology (but not resetting your AA).
smitcat
Posts: 13304
Joined: Mon Nov 07, 2016 9:51 am

Re: When to sell bond funds or equities for first years of retirement

Post by smitcat »

Hiram wrote: Sat May 28, 2022 8:31 pm
smitcat wrote: Sat May 28, 2022 9:06 am
Hiram wrote: Sat May 28, 2022 8:17 am
arcticpineapplecorp. wrote: Fri May 27, 2022 11:54 pm welcome to the group.

first, are you planning on taking from taxable or tax deferred (to lessen RMDs when you get to age 72) or some combination of both and if so what amounts?

sounds like you need $500k for the next 5 years (total) and you already have $250k in cash so the other $250k can either be in cash or bonds or some combo of both.

but think about (unless you already know) which account(s) you're planning to pull from over those next 5 years...and why.
Thanks!


I ran I-Orp to see what that application suggested for which accounts. It has me doing a lot of Roth conversions over the next few years. So I am planning on that. I am hoping my cash in taxable means that I have a lot more room for Roth conversions with bumping into a higher tax bracket.

My question is when to take that additional 250k and from which type of funds.

I had been thinking of taking from the tax deferred for now since we have so much in those accounts.
IORP is a great tool for quickly comparing many variables and how the interact with your potential future plan - but not great with Roth options.
IORP has a couple of glitches when used to compare models for Roth conversions which could easily mislead your plan. A calculator like RPM is much more time consuming and difficult to use but well worth the time if you want much better accuracy and detail. Even better for modeling Roth conversions is Pralana Gold which costs about $100 to initially purchase and then like half that each year for updates.
IMO time and effort on this is well worth it.
I hadn't been sure which accounts to draw from--that is why I posted here. But It sounds the best idea is to take from the brokerage account and the cash while doing as much Roth conversions in the 403b accounts as possible.

Thanks for the suggestion on Pralana Gold. It looks a very good tool. And with impending retirement I will enjoy obsessing over some new software.

After the very good advice from all of you I will be spending some time planning on how to take the roth conversions.

Thanks again to you and the others for the welcome and for the helpful advice.

Your strategy sounds pretty good to me - here is an article from KItces that also looks at this issue along with some graphics.
https://www.kitces.com/blog/tax-efficie ... ing-needs/
bpkasl
Posts: 84
Joined: Fri Jul 31, 2020 6:55 am

Re: When to sell bond funds or equities for first years of retirement

Post by bpkasl »

Kenkat wrote: Sat May 28, 2022 10:19 am There are a couple of strategies I know of (and probably others):
  1. The rising equity strategy: in this strategy, you pull money from your fixed income side as you are only trying to fund a short interval of time. You want to avoid drawing from equities in a down market. This will result in your equity percentage rising as you approach drawing SS. This is presumably ok as you need a lower withdraw percentage by then and can afford to invest what is left over a longer time horizon. Often it might have made sense to have increased the bond percentage in preparation as you approach retirement.
  2. The fixed allocation strategy: this strategy would have you maintain your current allocation percentage by targeting withdraws. If stocks are down, you’d take money from fixed income. If stocks are up, you take money from there instead. A type of reverse rebalancing in a sense - it attempts to avoid drawing money from an asset class that has fallen in value.

What happens when both are down?
User avatar
Kenkat
Posts: 9549
Joined: Thu Mar 01, 2007 10:18 am
Location: Cincinnati, OH

Re: When to sell bond funds or equities for first years of retirement

Post by Kenkat »

bpkasl wrote: Sun May 29, 2022 7:18 am
Kenkat wrote: Sat May 28, 2022 10:19 am There are a couple of strategies I know of (and probably others):
  1. The rising equity strategy: in this strategy, you pull money from your fixed income side as you are only trying to fund a short interval of time. You want to avoid drawing from equities in a down market. This will result in your equity percentage rising as you approach drawing SS. This is presumably ok as you need a lower withdraw percentage by then and can afford to invest what is left over a longer time horizon. Often it might have made sense to have increased the bond percentage in preparation as you approach retirement.
  2. The fixed allocation strategy: this strategy would have you maintain your current allocation percentage by targeting withdraws. If stocks are down, you’d take money from fixed income. If stocks are up, you take money from there instead. A type of reverse rebalancing in a sense - it attempts to avoid drawing money from an asset class that has fallen in value.

What happens when both are down?
Under the rising equity strategy, you would still take money from fixed income - ideally cash if you had a cash cushion of 2-3 or more years which many people do.

Under the fixed allocation strategy, you would draw proportionally from each to maintain your AA.
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: When to sell bond funds or equities for first years of retirement

Post by dbr »

bpkasl wrote: Sun May 29, 2022 7:18 am
Kenkat wrote: Sat May 28, 2022 10:19 am There are a couple of strategies I know of (and probably others):
  1. The rising equity strategy: in this strategy, you pull money from your fixed income side as you are only trying to fund a short interval of time. You want to avoid drawing from equities in a down market. This will result in your equity percentage rising as you approach drawing SS. This is presumably ok as you need a lower withdraw percentage by then and can afford to invest what is left over a longer time horizon. Often it might have made sense to have increased the bond percentage in preparation as you approach retirement.
  2. The fixed allocation strategy: this strategy would have you maintain your current allocation percentage by targeting withdraws. If stocks are down, you’d take money from fixed income. If stocks are up, you take money from there instead. A type of reverse rebalancing in a sense - it attempts to avoid drawing money from an asset class that has fallen in value.

What happens when both are down?
The practice of using withdrawals to nudge asset allocations to target pays no attention to whether or not something is up or down. Keep in mind up or down is an ambiguous description as it is relative to some arbitrary previous point in time. Targeting a specific asset allocation is not ambiguous at any time.

A person is welcome to attempt a variable asset allocation based on adjustments to assets based on the current performance of those assets, but it is a tall order to show that any particular system for doing that actually accomplishes anything.

Note that in some cases such things as spending from fixed income when stocks are down or spending from stocks when stocks are up actually are less drastic than standard rebalancing might be. Stocks are generally more volatile than fixed income and when stocks are down one most often would sell more from bonds to rebalance and spend than to merely take a withdrawal, and vice-versa when stocks are up. When both are significantly up or down one basically does nothing.

There are schemes to adjust financial tactics according the portfolio being up or down, but those involve adjusting withdrawals rather than asset allocation. An example would be Variable Percentage Withdrawal (q.v.) or in FireCalc choosing the Percentage of Remaining Portfolio spending model with some particular adjustment limit.

In general shifting asset allocations don't affect withdrawal outcomes very much but withdrawal rates can have a large effect.
BigJohn
Posts: 2627
Joined: Wed Apr 02, 2014 11:27 pm

Re: When to sell bond funds or equities for first years of retirement

Post by BigJohn »

In a similar position when I retired 7 years ago and here’s my approach. Stopped dividend reinvestment and directed straight to checking account. This is my first tranche of spending. I typically keep 3 - 4 months expenses in checking so when the balance gets a bit low I update my asset allocation spreadsheet and sell a bit of whatever is above target. This usually happens about every three months when I need to pay estimated taxes. For most of the last 7 years that’s meant selling stocks but recently it’s meant selling bonds. I started at 50/50 TIPS/nominals but have elected to sell only nominals to let my TIPS allocation rise a bit without actively rebalancing in that direction.

Agree with comments above that now is the right time to be thinking about Roth conversions as well, especially if your assets are skewed to tax deferred accounts.
"The greatest enemy of a good plan is the dream of a perfect plan" - Carl Von Clausewitz
Topic Author
Hiram
Posts: 28
Joined: Sun Dec 10, 2017 12:11 pm
Location: Cali and Mexico

Re: When to sell bond funds or equities for first years of retirement

Post by Hiram »

smitcat wrote: Sun May 29, 2022 7:00 am

Your strategy sounds pretty good to me - here is an article from KItces that also looks at this issue along with some graphics.
https://www.kitces.com/blog/tax-efficie ... ing-needs/
Thanks for the article. It is helpful to see it graphically.
Topic Author
Hiram
Posts: 28
Joined: Sun Dec 10, 2017 12:11 pm
Location: Cali and Mexico

Re: When to sell bond funds or equities for first years of retirement

Post by Hiram »

BigJohn wrote: Sun May 29, 2022 2:41 pm In a similar position when I retired 7 years ago and here’s my approach. Stopped dividend reinvestment and directed straight to checking account. This is my first tranche of spending. I typically keep 3 - 4 months expenses in checking so when the balance gets a bit low I update my asset allocation spreadsheet and sell a bit of whatever is above target. This usually happens about every three months when I need to pay estimated taxes. For most of the last 7 years that’s meant selling stocks but recently it’s meant selling bonds. I started at 50/50 TIPS/nominals but have elected to sell only nominals to let my TIPS allocation rise a bit without actively rebalancing in that direction.

Agree with comments above that now is the right time to be thinking about Roth conversions as well, especially if your assets are skewed to tax deferred accounts.
It's good to hear other's experiences like yours. I have been reading up on Roth conversions--wish i had done it years ago. I like the dividend idea for expenses.
User avatar
Ben Mathew
Posts: 2720
Joined: Tue Mar 13, 2018 11:41 am
Location: Seattle

Re: When to sell bond funds or equities for first years of retirement

Post by Ben Mathew »

As you recognize, the question of what asset category to withdraw from is an asset allocation (AA) question. Withdraw from the asset category that brings you closer to your rebalance targets.

Consider investing the $250K cash in bonds. Cash is just a bond that pays 0% nominal return. If you duration match bonds, then there is no interest rate risk.

An option for your overall strategy: Build a bond bridge till Social Security and pensions start. Maintain a fixed AA on the remaining risk portfolio and use an amortization based variable withdrawal strategy to calculate withdrawals over the course of retirement. See amortization based withdrawal (ABW).

If you use ABW, you would minimize consumption risk by holding a constant asset allocation on your risk portfolio. Because of the bond bridge, this would work out to a rising glidepath till SS and pensions begin. You wouldn't want more rising equity beyond that--that would increase consumption risk in late retirement.
Total Portfolio Allocation and Withdrawal (TPAW)
FlamePoint
Posts: 223
Joined: Wed Nov 11, 2020 9:45 pm

Re: When to sell bond funds or equities for first years of retirement

Post by FlamePoint »

My spouse and I retired the beginning of 2021 with a large tax deferred portfolio, along with $400K in excess cash from the sale of our home. Our all-in living expenses are $100K before taxes, with 50% being non-discretionary. We have a 55/45 AA. Here’s how I’m approaching the gap between now and when SS kicks In for both of us at age 70 (we have 10 years to go):

1) We are currently using our cash for living expenses. I have done 2 large Roth conversions so far (2021 and this year) up to the top of the 24% tax bracket. I plan to do one more conversion to the top of the 24% tax bracket next year, then will move to only going as high as the 22% bracket (or 25% once the TCJA sunsets in 2025) through age 69. My goal is to have 50% of our tax deferred funds converted by age 70.

2) I have turned off interest, dividend, and capital gains reinvestment in our tax deferred accounts. This will help replenish my cash bucket.

3) Additional funds needed beyond what’s provided from interests and dividends will have to come from our portfolio. I plan to pull from whatever bucket is needed to keep our AA at 55/45. Our withdrawal rate for the next 10 years will be around 3.5%. Once SS kicks in it drops to less then 2%.

4) Utilizing this approach will significantly reduce our RMD’s and will allow us to better manage IRMAA costs. Our plan at this point is for our Roth’s to be our kid’s inheritance.

Paying the large tax bill these past couple of years has been a bit painful, but I know I’ll be glad I bit the bullet down the road.
smectym
Posts: 1530
Joined: Thu May 26, 2011 5:07 pm

Re: When to sell bond funds or equities for first years of retirement

Post by smectym »

KlangFool wrote: Sat May 28, 2022 6:30 am OP,

Stop reinvesting your taxable account dividend and distribution. That may be enough.

You should start Roth conversion now to avoid RMD problem later.

KlangFool
This makes sense and I was about to stumble to
the same conclusion in many more superfluous words.
Post Reply