To retirees who hold a high allocation of stocks…

[Ron Scott]

…what is your strategy for avoiding having to sell stocks into a downturn?

I’m 60-40 and have always held my nose when buying bonds, but I have a stay-the-course mentality in general.

[BlueMR2]

I'm not a retiree, but have given that a lot of thought as I prepare.  I don't think you avoid it.  I think you just accept it and trust that the world will be similar enough in the future to the past so that it all works out.  If it doesn't work out, well, we're probably in a truly cataclysmic situation anyways.

[Loren Ver]

FIREd couple mostly stock and then cash/cash equivalent (money market).  We don't really consider our cash and money market as part of our stash since it is for spending not growing but for math we are around 97/3 or something funky like that which doesn't get rebalanced to that percent but to dollar amounts when used.

The cash is specific: two years of mortgage payments + one year of out of pocket maximum medical coverage + emergency fund + 2 years living expenses (this last one is new due to recent market run ups paying out- we are seeing if we like it, if feels.... chunky).

As for your question our plan for a down turn is pretty simple, we don't plan to not sell in a down turn, we intend to sell less.  If the market really starts to tank we deploy our cash to cover the specified expenses while reducing expenses.  On reduced expenses we can really stretch our living expense, by a lot. 

Most downturns last on average 18 months.  We still need to generate some MAGI income or we drop into medicaid territory and we would rather not do that, so we have to sell some stocks to get income.  The amount we need to sell in a down year will never be at a true loss unless they lose over 80-90% (we have choices, pick the least down).  Selling in a year where we lost a few years or even a decades of growth is still better than never having the money in the market to begin with. 

Loren

[friedmmj]

FIREd couple mostly stock and then cash/cash equivalent (money market).  We don't really consider our cash and money market as part of our stash since it is for spending not growing but for math we are around 97/3 or something funky like that which doesn't get rebalanced to that percent but to dollar amounts when used.

The cash is specific: two years of mortgage payments + one year of out of pocket maximum medical coverage + emergency fund + 2 years living expenses (this last one is new due to recent market run ups paying out- we are seeing if we like it, if feels.... chunky).

As for your question our plan for a down turn is pretty simple, we don't plan to not sell in a down turn, we intend to sell less.  If the market really starts to tank we deploy our cash to cover the specified expenses while reducing expenses.  On reduced expenses we can really stretch our living expense, by a lot. 

Most downturns last on average 18 months.  We still need to generate some MAGI income or we drop into medicaid territory and we would rather not do that, so we have to sell some stocks to get income.  The amount we need to sell in a down year will never be at a true loss unless they lose over 80-90% (we have choices, pick the least down).  Selling in a year where we lost a few years or even a decades of growth is still better than never having the money in the market to begin with. 

Loren

Wait, the 3% that you have in cash funds 2 years of living expenses?  so your total stash is like 70x then?

[Omy]

We are FATFIREd and have about 30% in real estate, 10% in cash/bonds, and 60% in the market.

Our rentals and dividends cover most of our expenses and keep us right below the ACA cliff (which is gone in 2021 and 2022 but might return in 2023). By having a large cash buffer, we have flexibility when another real estate opportunity presents itself...and we don't have to sell during a market downturn. It's not optimal, but it helps us sleep at night.

[Villanelle]

I'm spending more and more time trying to figure out a FIRE withdraw plan (we aren't there yet).  Much (likely most) of our funds will come from a pension, so we have a very small bond allocation.  But I'm considering something like a cash buffer, with clearly defined limits on what I do when.  "Make the usual quarterly (?) withdraw unless the market is down 10%+ from the previous withdraw, in which case spend the cash buffer until the buffer is gone or the market returns to [some definition]".  When market returns to [some other definition] level, start replenishing cash buffer with 25% per quarterly withdraw until full buffer is once again in place."  Or something like that.  I may also include something about when to sell only or mostly bonds, vs. an proportional split. 

  For my mindset, I need defined parameters so that the withdraws are as mindless as are current decisions about where to put money are.  They part I struggle with is that this all sounds pretty much like market timing, which I carefully avoid, but the alternative of no cash buffer (because what's the point of having the cash buffer if I'm not going to use it instead of selling if the market is down, which is once again market-timing-y) doesn't feel right either.

[bmjohnson35]

We have a similar ratio and also have enough cash available to cover years of expenses.  This has cost us some gains over the past few years, but we are also trying to look at the long game.  Between income streams and dividends, we will likely pull less than 1% from our stash in 2022.  It's probably not technically accurate, but I don't count collecting dividends as part of our stash, since it doesn't involve selling shares.

If market doesn't flop before the beginning of the next year, you can sell enough stock funds in January to fund the year.  This gives you 12 months of breathing room.  As with most things, this is a trade-off.  If stocks continue to rise, you may lose the opportunity to rebalance brokerage accts later in the year (if watching your MAGI) and you would also lose on some further growth of those funds. 

We tried the funding at the beginning of the year in 2021, but will try to simply pull small monthly amounts in 2022.  If the market tanks, we may switch to cash for awhile. We have some land we are trying to sell and IF it sells, it could also finance our expenses for two years. 

We have been FIRED for 2 yrs as of February, so we are in that critical first 5 yrs or so. 

[reeshau]

I came into retirement unexpectedly (3 years early) just ahead of the pandemic, in Jan 2020.  It came with a severance, and we had home equity squirrelled away in a money market, so we had a ton of cash.  I have been 100% equities for a long time, and individual stocks, not indexes.  With such a portfolio, there are always companies which are "low," and which are "high," so selling isn't so much a matter of poor value, but more investment consideration.  (Think Apple through the 2008-2009 recession, which then "crashed" in 2013)
We bought a house and car for cash, and my goal now is to maintain a year's spending in cash.  In reality, we usually have more, as our investment accounts generally have some "dry powder" from dividends and/or sales.

2020 was an inverse SORR for me.  Best investing year of my life, amidst all the downsides.  I have never had trouble sleeping at night with a portfolio like this, with all the practice I have had, but it definitely is not for everyone.  Not even for most.  But for those wired to think a down market means it is on sale, and the discipline to think of stocks as pieces of companies rather than roulette positions, there are a lot of aspects of retirement risk management that do not apply.  You have a very different set of risks.

[FIRE Artist]

I am going to use VPW, so the answer is that yes, I withdraw stocks in down years, just less dollar value, so really in similar number of stock to up years.  The key isn’t to worry about preserving stock, it is to build a large enough stash that the down years still will give me a reasonable expectation of comfort.

I abandoned the entire concept of the 4% rule when I learned about VPW over at Boggleheads.  As a SINK, it is the best model I have found for decumulation with aim to die with zero. 

[clifp]

…what is your strategy for avoiding having to sell stocks into a downturn?

I’m 60-40 and have always held my nose when buying bonds, but I have a stay-the-course mentality in general.

Initially, the plan was to have enough dividends-paying stocks to avoid having to sell.  As I found out the hard way in 2008/9 dividends also can be cut, (dividend cuts were actually worse in 2008/9 than during the great depression).  I had sufficient cash, and the bear market was short enough it didn't really matter.  The 2010 plan was a CD ladder with about 1/2 of my annual needs in CD ladder. That made sense when Pentagon Federal Credit union was offering 10 year CD with 5% interest rate. 2011+ Plan was to invest in lots of alternative assets, for me that's been a primarily rental property, but also a variety of admittedly high risk Angel investment, some syndicated real estate (apartments, commercial) and a commercial solar project.  This is overkilled for pretty much everyone. 

But as I've posted before IMO bonds offer in the words of Warren Buffett, return-free risk.  At one point in my retirements, I had over 40% of my AA in bonds, now it is practically zero (a small amount of iBonds bought circa 2000) The good news is I'm now eligible for Social security, which reduces my income needs by a good chunk.  (I'm not taking it yet but would start if we have an extended bear market.)

[bmjohnson35]

I just took a look at the VPW spreadsheet.  I can't include spouse's SS (she's 10 yrs older) due to spreadsheet design.  Even if I fudge it by adding in another income for myself to account for it, it's suggesting I pull out more in 2 months than I will the entire year.  I guess I am even more conservative than I thought.

[KarefulKactus15]

I came into retirement unexpectedly (3 years early) just ahead of the pandemic, in Jan 2020.  It came with a severance, and we had home equity squirrelled away in a money market, so we had a ton of cash.  I have been 100% equities for a long time, and individual stocks, not indexes.  With such a portfolio, there are always companies which are "low," and which are "high," so selling isn't so much a matter of poor value, but more investment consideration.  (Think Apple through the 2008-2009 recession, which then "crashed" in 2013)
We bought a house and car for cash, and my goal now is to maintain a year's spending in cash.  In reality, we usually have more, as our investment accounts generally have some "dry powder" from dividends and/or sales.

2020 was an inverse SORR for me.  Best investing year of my life, amidst all the downsides.  I have never had trouble sleeping at night with a portfolio like this, with all the practice I have had, but it definitely is not for everyone.  Not even for most.  But for those wired to think a down market means it is on sale, and the discipline to think of stocks as pieces of companies rather than roulette positions, there are a lot of aspects of retirement risk management that do not apply.  You have a very different set of risks.

I wish I would have done more with pandemic investing.  It wasnt a fear issue... I was just so busy stressing and dealing with my shit employment situation that I couldnt create energy for anything else.    Missed opportunity.  Oh well.

[Morning Glory]

I'm handwaving SORR mitigation right now because I hit my number sooner than expected and I have bigger fish to fry. Right now I have over 1 year expenses in cash that I'm planning to use for a house downpayment in about a year, so If the market crashes I might have to either take on some part-time work or delay buying a house in order to avoid selling low. Once I buy a house I'll have to keep a more formal asset allocation of bonds or whatever. My safety margin is that I am keeping my professional license up-to-date just in case.

[FIRE Artist]

I just took a look at the VPW spreadsheet.  I can't include spouse's SS (she's 10 yrs older) due to spreadsheet design.  Even if I fudge it by adding in another income for myself to account for it, it's suggesting I pull out more in 2 months than I will the entire year.  I guess I am even more conservative than I thought.

I haven’t done too much with the new version that came out a couple months ago, but I heavily modified the last one to meet my personal needs.  If you are still working, and your spouse is already drawing SS, then just add it to your income today, and put it in as another future pension starting the date you will retire. 

Unlike the 4% rule, which is designed to avoid depleting your portfolio, the VPW is intended to deplete the portfolio by 100 so you should expect it to suggest higher withdrawals.  If you don’t need what you can withdraw, donate it or give it away, get the gratitude and good feels while you are alive and able to appreciate it.  What is most important is to look at the 50% market decline projected income, if that income is one that you will be comfortable living on for a couple of years in a marked downturn, then you are good to retire.

[deborah]

I’ve been retired for over 10 years and I’ve never needed to sell stocks. I’m 80% stocks. The income from the other 20% and dividends give me more than enough. You need to work out the income your individual allocation gives you - stocks aren’t all the same, just like any other investment, and different types of allocation will give you different returns.

[friedmmj]

I’ve been retired for over 10 years and I’ve never needed to sell stocks. I’m 80% stocks. The income from the other 20% and dividends give me more than enough. You need to work out the income your individual allocation gives you - stocks aren’t all the same, just like any other investment, and different types of allocation will give you different returns.

I’m not understanding the aversion to selling stocks

[deborah]

No aversion. Haven’t needed to do so. Any capital gains tax tends to be less the longer you hold stocks. Dividends are income, so they have income tax.

[Ron Scott]

I’ve been retired for over 10 years and I’ve never needed to sell stocks. I’m 80% stocks. The income from the other 20% and dividends give me more than enough. You need to work out the income your individual allocation gives you - stocks aren’t all the same, just like any other investment, and different types of allocation will give you different returns.

I’m not understanding the aversion to selling stocks

1. The last 12 years has been a hell of a ride. Just saying…
2. There are obviously pluses and minuses to selling stocks. Being forced to sell stocks in a market downturn, or worse, at a loss, just to keep the lights on, can start a death spiral.

[friedmmj]

I’ve been retired for over 10 years and I’ve never needed to sell stocks. I’m 80% stocks. The income from the other 20% and dividends give me more than enough. You need to work out the income your individual allocation gives you - stocks aren’t all the same, just like any other investment, and different types of allocation will give you different returns.

I’m not understanding the aversion to selling stocks

1. The last 12 years has been a hell of a ride. Just saying…
2. There are obviously pluses and minuses to selling stocks. Being forced to sell stocks in a market downturn, or worse, at a loss, just to keep the lights on, can start a death spiral.

I hear ya but don’t get trapped in a paradigm that you cannot sell stocks.  Stocks are just an asset and if you need to cash some out sometimes so be it.

[Ron Scott]

I’ve been retired for over 10 years and I’ve never needed to sell stocks. I’m 80% stocks. The income from the other 20% and dividends give me more than enough. You need to work out the income your individual allocation gives you - stocks aren’t all the same, just like any other investment, and different types of allocation will give you different returns.

I’m not understanding the aversion to selling stocks

1. The last 12 years has been a hell of a ride. Just saying…
2. There are obviously pluses and minuses to selling stocks. Being forced to sell stocks in a market downturn, or worse, at a loss, just to keep the lights on, can start a death spiral.

I hear ya but don’t get trapped in a paradigm that you cannot sell stocks.  Stocks are just an asset and if you need to cash some out sometimes so be it.

Of course.

But I am talking about the paradigm where you are so top-heavy in stocks, you need to sell in a downturn or at a loss just to find your living expenses—a worst-case sequence of returns problem. There’s a difference between selling stocks when you want to and being forced to sell because of your asset allocation strategy.

In reading the responses it appears people have some good strategies (cash stash for example) to avoid this problem.

[Wolfpack Mustachian]

I'm spending more and more time trying to figure out a FIRE withdraw plan (we aren't there yet).  Much (likely most) of our funds will come from a pension, so we have a very small bond allocation.  But I'm considering something like a cash buffer, with clearly defined limits on what I do when.  "Make the usual quarterly (?) withdraw unless the market is down 10%+ from the previous withdraw, in which case spend the cash buffer until the buffer is gone or the market returns to [some definition]".  When market returns to [some other definition] level, start replenishing cash buffer with 25% per quarterly withdraw until full buffer is once again in place."  Or something like that.  I may also include something about when to sell only or mostly bonds, vs. an proportional split. 

  For my mindset, I need defined parameters so that the withdraws are as mindless as are current decisions about where to put money are.  They part I struggle with is that this all sounds pretty much like market timing, which I carefully avoid, but the alternative of no cash buffer (because what's the point of having the cash buffer if I'm not going to use it instead of selling if the market is down, which is once again market-timing-y) doesn't feel right either.

Just want to say this seems the most logical way to do it. I wonder if anyone else has done a strategy similar to this one who has actually retired, because, again, it makes great sense if your retirement is based on selling stocks for living expenses.

[PhilB]

I've got two different strategies - the one I expected to use and the one I ended up with!

I retired 3 years ago and my original plan was to sell a fixed percentage of stocks every year and use a one or two year cash buffer to smooth out half of the resulting income fluctuation, the other half being a reduction in spending. Obviously a reduction because everything was going to go wrong :)

What actually happened is unexpected part time work, low spending because of the pandemic and a crazy bull run.  I had to sell some stocks for admin reasons and haven't bothered to re-invest on the simple logic that if stocks are fairly valued, then I have more than enough (25% over expected value!).  If they're not fairly valued, then I shouldn't be buying them.  I currently have about 7 years spending in cash and really don't care about the drag or the inflation losses - see already having enough stocks.  If stocks remain above 'budget' I'll keep selling them each year and add any excess income to the cash pile.  If they drop below budget I'll draw from the cash. 

It's not efficient in terms of maximising possible income, but I already have enough income so why should I care?  It definitely helps me sleep at night.

If we have a multi-year depression that puts me back down in the territory I originally planned for then I'll revert to my original plan once the cash gets down to two years.

[Loren Ver]

FIREd couple mostly stock and then cash/cash equivalent (money market).  We don't really consider our cash and money market as part of our stash since it is for spending not growing but for math we are around 97/3 or something funky like that which doesn't get rebalanced to that percent but to dollar amounts when used.

The cash is specific: two years of mortgage payments + one year of out of pocket maximum medical coverage + emergency fund + 2 years living expenses (this last one is new due to recent market run ups paying out- we are seeing if we like it, if feels.... chunky).

As for your question our plan for a down turn is pretty simple, we don't plan to not sell in a down turn, we intend to sell less.  If the market really starts to tank we deploy our cash to cover the specified expenses while reducing expenses.  On reduced expenses we can really stretch our living expense, by a lot. 

Most downturns last on average 18 months.  We still need to generate some MAGI income or we drop into medicaid territory and we would rather not do that, so we have to sell some stocks to get income.  The amount we need to sell in a down year will never be at a true loss unless they lose over 80-90% (we have choices, pick the least down).  Selling in a year where we lost a few years or even a decades of growth is still better than never having the money in the market to begin with. 

Loren

Wait, the 3% that you have in cash funds 2 years of living expenses?  so your total stash is like 70x then?

@friedmmj
It was about 24x when we retired (we pulled the plug before hitting our number).  Since 2019, it has grown to about 50x normal spending.  If we go to more bare bones spending, and have the cash buffer take on the mortgage and OOPM medical (and the student loan) then pretty close to 70x.  The recent  multiyear run up has been crazy for us.

Loren

[friedmmj]

FIREd couple mostly stock and then cash/cash equivalent (money market).  We don't really consider our cash and money market as part of our stash since it is for spending not growing but for math we are around 97/3 or something funky like that which doesn't get rebalanced to that percent but to dollar amounts when used.

The cash is specific: two years of mortgage payments + one year of out of pocket maximum medical coverage + emergency fund + 2 years living expenses (this last one is new due to recent market run ups paying out- we are seeing if we like it, if feels.... chunky).

As for your question our plan for a down turn is pretty simple, we don't plan to not sell in a down turn, we intend to sell less.  If the market really starts to tank we deploy our cash to cover the specified expenses while reducing expenses.  On reduced expenses we can really stretch our living expense, by a lot. 

Most downturns last on average 18 months.  We still need to generate some MAGI income or we drop into medicaid territory and we would rather not do that, so we have to sell some stocks to get income.  The amount we need to sell in a down year will never be at a true loss unless they lose over 80-90% (we have choices, pick the least down).  Selling in a year where we lost a few years or even a decades of growth is still better than never having the money in the market to begin with. 

Loren

Wait, the 3% that you have in cash funds 2 years of living expenses?  so your total stash is like 70x then?

@friedmmj
It was about 24x when we retired (we pulled the plug before hitting our number).  Since 2019, it has grown to about 50x normal spending.  If we go to more bare bones spending, and have the cash buffer take on the mortgage and OOPM medical (and the student loan) then pretty close to 70x.  The recent  multiyear run up has been crazy for us.

Loren

Dang, I'm jealous.  You'll be in great shape when you're 120 years old!

[Ron Scott]

I'm spending more and more time trying to figure out a FIRE withdraw plan (we aren't there yet).  Much (likely most) of our funds will come from a pension, so we have a very small bond allocation.  But I'm considering something like a cash buffer, with clearly defined limits on what I do when.  "Make the usual quarterly (?) withdraw unless the market is down 10%+ from the previous withdraw, in which case spend the cash buffer until the buffer is gone or the market returns to [some definition]".  When market returns to [some other definition] level, start replenishing cash buffer with 25% per quarterly withdraw until full buffer is once again in place."  Or something like that.  I may also include something about when to sell only or mostly bonds, vs. an proportional split. 

  For my mindset, I need defined parameters so that the withdraws are as mindless as are current decisions about where to put money are.  They part I struggle with is that this all sounds pretty much like market timing, which I carefully avoid, but the alternative of no cash buffer (because what's the point of having the cash buffer if I'm not going to use it instead of selling if the market is down, which is once again market-timing-y) doesn't feel right either.

Just want to say this seems the most logical way to do it. I wonder if anyone else has done a strategy similar to this one who has actually retired, because, again, it makes great sense if your retirement is based on selling stocks for living expenses.

Absolutely!

Every retiree I know uses something akin to this—essentially called a withdrawal strategy.

If this is on your mind, I highly recommend The Bogleheads Guide to Retirement book. They have a meaningful section on withdrawal strategies that cover a variety of personal situations and layout various sequences of withdrawals from typical investment accounts.

There are many free sites that can guide you through this too. Well worth the time looking into.

[Ron Scott]

FIREd couple mostly stock and then cash/cash equivalent (money market).  We don't really consider our cash and money market as part of our stash since it is for spending not growing but for math we are around 97/3 or something funky like that which doesn't get rebalanced to that percent but to dollar amounts when used.

The cash is specific: two years of mortgage payments + one year of out of pocket maximum medical coverage + emergency fund + 2 years living expenses (this last one is new due to recent market run ups paying out- we are seeing if we like it, if feels.... chunky).

As for your question our plan for a down turn is pretty simple, we don't plan to not sell in a down turn, we intend to sell less.  If the market really starts to tank we deploy our cash to cover the specified expenses while reducing expenses.  On reduced expenses we can really stretch our living expense, by a lot. 

Most downturns last on average 18 months.  We still need to generate some MAGI income or we drop into medicaid territory and we would rather not do that, so we have to sell some stocks to get income.  The amount we need to sell in a down year will never be at a true loss unless they lose over 80-90% (we have choices, pick the least down).  Selling in a year where we lost a few years or even a decades of growth is still better than never having the money in the market to begin with. 

Loren

Wait, the 3% that you have in cash funds 2 years of living expenses?  so your total stash is like 70x then?

@friedmmj
It was about 24x when we retired (we pulled the plug before hitting our number).  Since 2019, it has grown to about 50x normal spending.  If we go to more bare bones spending, and have the cash buffer take on the mortgage and OOPM medical (and the student loan) then pretty close to 70x.  The recent  multiyear run up has been crazy for us.

Loren

Dang, I'm jealous.  You'll be in great shape when you're 120 years old!

This is typical for a large number of retirees. You EXPECT your net worth to grow for MANY years in retirement before heading down…but for many retirees IT NEVER HEADS DOWN.

The silly concept where you draw your last breath and cash your last check on the same day is just that.