Should I wait until the recession hits or invest now?

[lwid]

Hi friends! I've recently received a fairly large windfall payment, that is now sitting in my bank account. I've also taken the steps to retire (the amount allowed me to do so!). I'm now looking to put the money into a very conservative 20% stocks, 80% bonds Betterment portfolio and take out 3% a year to live off of and let the rest do it's thing and accumulate. I've read and feel personally too that right now, it seems like the stock market is at an all time high, so I'm unsure if I should invest now or wait until the next recession hits. Would love advice on what to do, I just feel terrible having such a large amount of money that's just sitting around doing nothing, but I'm also worried that now is just not the right time to invest. Thanks!

[dandarc]

If you want a 20/80 portfolio, Vanguard Life Strategy Income is likely quite a bit less expensive than Betterment will be.

If you're 80% in bonds, why does the "stock market being high" matter much to you at all?

[dandarc]

https://personal.vanguard.com/us/funds/snapshot?FundId=0723&FundIntExt=INT

Assuming you've got a $1 million portfolio (WAG based on your 3% withdrawal rate), saving 0.1% on fees is $1,000 every year, and increasing as the account grows.  Looks like you'd save at least .15% against anything betterment will offer. 

[myrrh]

You seem to be asking the age-old question of "how do I time the market?" The answer is, "you can't." The market could crash tomorrow, or it could go another eight years or so. No one has a crystal ball (or at least not a working one.) The question you should ask yourself is, do you believe that the market will go up on a long-term basis? Most people do or they wouldn't invest at all. And if you are really going to have only 20% stocks then the highs and lows of rises and crashes from stocks will be very muted. I'd go in now.

Personal anecdote: I had a overly large emergency fund and thought I would start investing some portion of that. I asked at that time if I should lump sum or put it in a little at a time. I was told "lump sum!!!!" and chose not to listen. That was four years ago now, and the market has gone way up since then. Don't be kicking yourself like I am. LOL

[ixtap]

There are threads at least 5 years old asking this same question. There are people who admit to sitting out the gains of the last 5 years.

[ysette9]

A 3% withdrawal rate and 80% bonds makes me think that either you are exceptionally afraid of volatility as well as conservative, or you don't really understand how markets work long term. I recently listened to a podcast where the Mad Fientist interview Michael Kitces. If you don't know his name, he did a lot of fundamental research on safe withdrawal rates for retirement and is a well know and well respected name in the online community. I recommmend seeming out this podcast and giving it a listen. It can be dense but has an excellent discussion on risk, FIRE, safe withdrawal rates and asset allocation, and so forth.

[Laura33]

You are actually asking the wrong question.  You are apparently no longer in the "accumulating assets" phase -- you now have a chunk of assets that is sufficient to allow you to FIRE.  So congratulations!

As a result, you need to be focusing more on how you are going to manage your assets and income now that you are in the withdrawal phase.  You should check the threads on those issues.  But fundamentally, you need to figure out your long-term asset allocation that provides both reliable income in the short-term and growth in the long-term.

My advice for you is to think of your money as separate "buckets."  The first bucket is your short-term bucket -- this is what you use to hold anywhere from 2-7 years of living expenses, depending on how conservative you are (your proposed 20/80 split suggests the answer to this is "very").  This goes into something like a bond ladder or CD ladder -- e.g., if you want a five-year bond ladder, you buy bonds that would mature in 2018, 2019, 2020, 2021, and 2022.*  The second bucket is your long-term growth bucket -- this you simply put in something like VTSAX. 

The way it works is that every year when your bonds/CDs mature, you cash them and use that money to live off of.  Then you sell the equivalent (+inflation) from your long-term bucket and use that to buy new bonds/CDs that mature in 2023.  But if the market has crashed, you don't do this -- you hold tight and let those shares sit until the market recovers.  And you don't have to worry, because you still have several years of living expenses left in bonds/CDs, so even if it takes years to turn around, you can afford to ride it out.

So the answer to your specific question is that you figure out how you want to set up your income/long-term investments, and then you execute that now.  But the important part is how you structure those investments to avoid having to cash out at the bottom of the market.

*These are individual bonds, not bond funds.  Bonds lose value when interest rates rise.  You don't want your short-term money to be subject to the whims of other fund-holders selling out, or to have to sell that when the value is down.  With individual bonds, yes, the value of the bond will fluctuate daily based on interest rates, but you are guaranteed to get the face value of the bond when it matures.

[GuitarStv]

Now.

[lwid]

Thank you very much Laura, this is all very helpful - how do you feel about Betterment as a system for that? My understanding is that they would do all the rebalancing, etc., that you've suggested automatically, and whatever I take out, they will just figure it out. Would love your gut on that!

How much would you suggest I keep in cash in general? Right now, I was thinking to hold maybe 3-5 years of living expenses in cash, but it sounds like that'd be too much, maybe I should rather keep only 1-2 years or so? I'll also research this more!

Separately, thanks so much everyone for your great suggestions and ideas - I'm taking away that the 20/80 split seems a bit too conservative, so I think I'll ponder that a bit more and see how I feel about that. One thought I'm having is that I might leave it as is, and when the market crashes in a couple of years, I'll change it to something like 40/60 (which is what betterment suggests).

You are actually asking the wrong question.  You are apparently no longer in the "accumulating assets" phase -- you now have a chunk of assets that is sufficient to allow you to FIRE.  So congratulations!

As a result, you need to be focusing more on how you are going to manage your assets and income now that you are in the withdrawal phase.  You should check the threads on those issues.  But fundamentally, you need to figure out your long-term asset allocation that provides both reliable income in the short-term and growth in the long-term.

My advice for you is to think of your money as separate "buckets."  The first bucket is your short-term bucket -- this is what you use to hold anywhere from 2-7 years of living expenses, depending on how conservative you are (your proposed 20/80 split suggests the answer to this is "very").  This goes into something like a bond ladder or CD ladder -- e.g., if you want a five-year bond ladder, you buy bonds that would mature in 2018, 2019, 2020, 2021, and 2022.*  The second bucket is your long-term growth bucket -- this you simply put in something like VTSAX. 

The way it works is that every year when your bonds/CDs mature, you cash them and use that money to live off of.  Then you sell the equivalent (+inflation) from your long-term bucket and use that to buy new bonds/CDs that mature in 2023.  But if the market has crashed, you don't do this -- you hold tight and let those shares sit until the market recovers.  And you don't have to worry, because you still have several years of living expenses left in bonds/CDs, so even if it takes years to turn around, you can afford to ride it out.

So the answer to your specific question is that you figure out how you want to set up your income/long-term investments, and then you execute that now.  But the important part is how you structure those investments to avoid having to cash out at the bottom of the market.

*These are individual bonds, not bond funds.  Bonds lose value when interest rates rise.  You don't want your short-term money to be subject to the whims of other fund-holders selling out, or to have to sell that when the value is down.  With individual bonds, yes, the value of the bond will fluctuate daily based on interest rates, but you are guaranteed to get the face value of the bond when it matures.

[lwid]

https://personal.vanguard.com/us/funds/snapshot?FundId=0723&FundIntExt=INT

Assuming you've got a $1 million portfolio (WAG based on your 3% withdrawal rate), saving 0.1% on fees is $1,000 every year, and increasing as the account grows.  Looks like you'd save at least .15% against anything betterment will offer.

Yes, great point, I hadn't thought of this - so looking at this fund, this looks pretty much perfect for what I'm looking for (I think!). Do you know of any other similarly conservative funds, but maybe slightly riskier? I hearing that your gut is that maybe I could go a bit more risky, which would make sense to me too the more that I think about it.

[robartsd]

Yes, great point, I hadn't thought of this - so looking at this fund, this looks pretty much perfect for what I'm looking for (I think!). Do you know of any other similarly conservative funds, but maybe slightly riskier? I hearing that your gut is that maybe I could go a bit more risky, which would make sense to me too the more that I think about it.

Vangaurd has a range of similar funds in their Life Strategy series:
Vanguard LifeStrategy Conservative Growth Fund is about 40% stocks, 60% bonds.
Vanguard LifeStrategy Moderate Growth Fund is about 60% stocks, 40% bonds.
Vanguard LifeStrategy Growth Fund is about 80% stocks, 20% bonds.

Vanguard Balanced Index Fund Admiral Shares (VBIAX) is also about 60% stocks, 40% bonds but has lower expense ratio and higher minimum investment than the LifeStrategy fund (it also lacks the international exposure).

[dandarc]

https://personal.vanguard.com/us/funds/snapshot?FundId=0723&FundIntExt=INT

Assuming you've got a $1 million portfolio (WAG based on your 3% withdrawal rate), saving 0.1% on fees is $1,000 every year, and increasing as the account grows.  Looks like you'd save at least .15% against anything betterment will offer.

Yes, great point, I hadn't thought of this - so looking at this fund, this looks pretty much perfect for what I'm looking for (I think!). Do you know of any other similarly conservative funds, but maybe slightly riskier? I hearing that your gut is that maybe I could go a bit more risky, which would make sense to me too the more that I think about it.

There are 4 of these life strategy funds at Vanguard.  https://investor.vanguard.com/mutual-funds/lifestrategy/?lang=en#/?lang=en

Basically, you've got 20/80, 40/60, 60/40, and 80/20 portfolios available.  These are very simple investments to manage - doesn't get much easier than "just buy 1 fund".  If you are interested in a little more work, you can construct a 3 or 4 fund portfolio that mimics these for even less at Vanguard - the life-strategy funds use investor shares, whereas rolling your own you can get Admiral shares for some or all of the components.

[Laura33]

Thank you very much Laura, this is all very helpful - how do you feel about Betterment as a system for that? My understanding is that they would do all the rebalancing, etc., that you've suggested automatically, and whatever I take out, they will just figure it out. Would love your gut on that!

How much would you suggest I keep in cash in general? Right now, I was thinking to hold maybe 3-5 years of living expenses in cash, but it sounds like that'd be too much, maybe I should rather keep only 1-2 years or so? I'll also research this more!

1.  Why pay someone to do something that you can do yourself for a shit-ton less?  After all, you'll have plenty of extra free time now.  :-)

More importantly:  the whole point of the CD/bond ladder option is that you never have to change funds over time anyway.  The big risk that everyone worries about is having to sell stocks in a downturn; it is pretty clear that if you experience a major crash early in retirement, that increases the odds of outliving your money pretty significantly (because you have to sell a higher proportion of your total assets to meet immediate needs and so have fewer shares left that can continue to grow to cover your future needs).  Most money management companies will offer a "fix" for that:  they will change your asset allocation over time, so that as you get older (and are less able to do things like work to make up any shortage in your income), more and more of your money is invested in income-producing investments, like bonds, that are more likely to provide the continuing income stream you need in the event of a crash.  And then charge you five-figures (or more) in fees for the privilege.

But look at what the ladder does:  if you put 5 years' expenses in a 5-year bond ladder, you already have all of your income needs completely guaranteed for the next five years (or more, if you can cut back in a pinch).  So if the market does crash, why would you even think about selling?  You are totally safe and can afford to just ride it out until prices come back up -- then sell some shares to replenish your ladder so you're prepared for the next crash.  The bond ladder means that you don't ever need to worry about changing to more conservative funds over time at all, because you have already protected yourself against the very risk that the management companies are promising to protect you from.  Instead, just pick an asset allocation you are comfortable with (if you aren't comfortable with VTSAX, then choose something like a 60/40 fund), and then leave your long-term money in that exact same fund for eternity -- happily ignoring all of the market gyrations in the interim. 

In sum, you would be paying Betterment five figures in fees, every year, to change your asset allocation over time, when you can accomplish the same thing for free by just setting up a two-bucket system and leaving it alone, except to buy/sell once a year.  So, yeah, hard no on that.

2.  I don't think 3-5 years in a CD/bond ladder is unreasonable, if it is going to keep you from panicking and selling when the market drops.  This is where your risk tolerance comes in. 

3.  When you are considering funds, don't forget to consider the CD/bond ladder as part of your "cash/bond" allocation.  For example, assume your total 'stache is 25x your annual expenses, and you decide to do a bond ladder that will cover the next five years' worth of expenses.  That means you are already investing 20% (5x/25x) of your 'stache in bonds.  So if you now put the remaining 80% of your 'stache in a 20/80 fund, my back-of-envelope math says you'd be at 84% bonds/16% stocks (your 80% long-term fund is 80% bonds [so those bonds are 64% of total 'stache], and your 20% short-term ladder is 100% bonds, so 64% + 20% = 84% bonds).  Which means that if you intended to create a 20/80 portfolio, you are now invested too conservatively.  The key is the overall allocation of your entire portfolio, not what you hold in a specific bucket.

[robartsd]

Personally, I wouldn't mind annual (or even quarterly) rebalancing of a 3-4 fund portfolio. I do like the idea of a 3-5 year CD ladder to meet regular expenses. With a 3% WR you are very safe, so your asset mix outside the ladder doesn't need to be very high performing, but I'd still hesitate to recommend less that 50% stocks. With 15% (3% x 5 years) in the ladder, and 85% in a traditional 60/40 balanced fund your total allocation would be just over 50% stocks.

I don't plan as safe of a withdraw rate for myself, so I would need more stocks to provide higher average returns. I might put 12% in a CD ladder (4% x 3 years) and invest the rest in a 80/20 growth allocation for a net stock allocation of just over 70%.

[boarder42]

i'd wait as the market is currently closed but when it opens tomorrow you should buy a bunch of VTSAX or whatever AA you choose personally i choose some VTSAX with alotta small cap and mid cap beside it.

[ysette9]

I'm now looking to put the money into a very conservative 20% stocks, 80% bonds Betterment portfolio and take out 3% a year to live off of and let the rest do it's its thing and accumulate.

This has been discussed a number of times in different threads before, but I think it is very important to rehash. It is critical to identify what risk you are trying to defend against when you say "conservative". Usually in financial circles "conservative" = "fewer equities" = "lower volatility". However, we here on this forum are all about early retirement and making sure that our money will outlast us, or at least run out just as we cross the finish line at the end of life. The biggest risk an early retiree faces is longevity of his of her portfolio, not volatility. The rational investor understands that markets can and will go up and down, and that as long as you don't panic and cash out at a market bottom, volatility really has little impact to your long-term success and is just the price to pay for the returns the stock market gives, provided you remain rational*. (*yes, there is sequence-of-returns risk, but that is another discussion all together)

Back to your point: at a ridiculously conservative withdrawal rate like 3% it doesn't really matter, but for those of us who don't want to spend an extra 7-10 years of our life working, choosing an asset allocation with more equities allows us to exit the work force earlier AND have a portfolio that will go the distance. Check out the table in this article: https://www.forbes.com/sites/wadepfau/2015/06/10/safe-withdrawal-rates-for-retirement-and-the-trinity-study/#60d355d66fc1

• A 40-year retirement with 100% stock allocation at a 4% withdrawal rate has 88% chance of success
• A 40-year retirement with 50% stock allocation at a 4% withdrawal rate has 86% chance of success
• A 40-year retirement with 25% stock allocation at a 4% withdrawal rate has 42% chance of success

I've seen this table elsewhere with slightly different success probabilities coming from different data sets that show lower success probabilities for 50% equities, but I can't find it at the moment. The point is, having a decent amount of equities in your portfolio is critical to guard against the risk of portfolio failure over long time periods. Bonds smooth out volatility but do not reduce "risk" in a portfolio if "risk" is defined to be success over longer time periods.

Another note: other people have touched upon it, but there is zero reason to pay the extra $ for something like Betterment when you can get the same or better results for a significant discount through Vanguard or Fidelity.

[JLee]

Planning on changing your investment strategy "when the recession hits" is a bad plan.  Nobody can predict it, and whenever we do get the next one, nobody can predict how far it will go or how long it will last.

People have been talking about the impending recession for years -- they've missed out on a lot of gains by staying out of the market.

[GuitarStv]

• A 40-year retirement with 100% stock allocation at a 4% withdrawal rate has 88% chance of success

• A 40-year retirement with 75% stock allocation at a 4% withdrawal rate has 92% chance of success

[/b]

• A 40-year retirement with 50% stock allocation at a 4% withdrawal rate has 86% chance of success
• A 40-year retirement with 25% stock allocation at a 4% withdrawal rate has 42% chance of success

You forgot to list the most important one.  :/

[xpauliber]

You are actually asking the wrong question.  You are apparently no longer in the "accumulating assets" phase -- you now have a chunk of assets that is sufficient to allow you to FIRE.  So congratulations!

As a result, you need to be focusing more on how you are going to manage your assets and income now that you are in the withdrawal phase.  You should check the threads on those issues.  But fundamentally, you need to figure out your long-term asset allocation that provides both reliable income in the short-term and growth in the long-term.

My advice for you is to think of your money as separate "buckets."  The first bucket is your short-term bucket -- this is what you use to hold anywhere from 2-7 years of living expenses, depending on how conservative you are (your proposed 20/80 split suggests the answer to this is "very").  This goes into something like a bond ladder or CD ladder -- e.g., if you want a five-year bond ladder, you buy bonds that would mature in 2018, 2019, 2020, 2021, and 2022.*  The second bucket is your long-term growth bucket -- this you simply put in something like VTSAX. 

The way it works is that every year when your bonds/CDs mature, you cash them and use that money to live off of.  Then you sell the equivalent (+inflation) from your long-term bucket and use that to buy new bonds/CDs that mature in 2023.  But if the market has crashed, you don't do this -- you hold tight and let those shares sit until the market recovers.  And you don't have to worry, because you still have several years of living expenses left in bonds/CDs, so even if it takes years to turn around, you can afford to ride it out.

So the answer to your specific question is that you figure out how you want to set up your income/long-term investments, and then you execute that now.  But the important part is how you structure those investments to avoid having to cash out at the bottom of the market.

*These are individual bonds, not bond funds.  Bonds lose value when interest rates rise.  You don't want your short-term money to be subject to the whims of other fund-holders selling out, or to have to sell that when the value is down.  With individual bonds, yes, the value of the bond will fluctuate daily based on interest rates, but you are guaranteed to get the face value of the bond when it matures.

I realize this is a dated post but I'm wondering what the tax implications are for purchasing say a 5-year bond ladder at the beginning of your retirement.  Let's say you need $50,000/year and so you sell $250,000 worth of stock a year before you retire and purchase five $50,000 bonds with staggered maturities. 

Do you owe taxes on the full $250,000 of securities that you sold?  Or do you pay taxes once the bond matures?

If you have to pay taxes on the sale of the security in the year you sell it, would it make more sense to begin your bond purchasing 5 years prior to when you want to retire?  So when you're 5 years out, you only have to sell $50,000 and buy 1 bond with a 5 year maturity.  Then 4 years out, sell another $50,000 and buy another bond with a 5 year maturity, etc. 

[robartsd]

Do you owe taxes on the full $250,000 of securities that you sold?  Or do you pay taxes once the bond matures?

Yes, if this is occurring in taxable accounts, you would owe the capital gains tax on the securities in the tax year they are sold. If in a tax deferred account you can sell the securities and buy the bonds in within the account then take the money out as the bonds mature - paying ordinary income taxes.

[xpauliber]

Thank you.  My understanding is that when you structure the bond ladder, you are NOT buying bond funds but rather individual bonds.  How do you do that in a tax-deferred account such as a 401k?   

Also, being 34 years old and strictly in securities at the moment, I'm a newbie to buying bonds.  Can you buy individual bonds in any denomination; like a $50,000 bond?  Or do you buy multiples of a smaller denomination; like ten $5,000 bonds?

[Laura33]

FWIW, my plan is that for the five years before my planned RE date, I would redirect the appropriate amount of my savings into a 5-year bond or CD.  Once I stop earning income, then yes, I would need to sell some assets to do so.  But the CG tax rate is currently 0 if your income is below $77K -- so in your $50K/yr scenario, I could sell that amount of securities and not trigger any CG tax at all (and really, the CG tax isn't that high even if you're above $77K).  I also plan to have enough in different tax buckets (e.g., 401(k), Roth, brokerage accounts, plain-old cash) so that I can change which place I pull the money from to stay below the various tax thresholds.  Once I have to start taking RMDs, I will then use that money to fund the bonds/CDs -- at that point, I have to withdraw the money and take the tax hit anyway, so might as well use it to implement my plan.

And yes, you can buy individual bonds through brokerages, although the market is not nearly as transparent as buying stocks.

[xpauliber]

FWIW, my plan is that for the five years before my planned RE date, I would redirect the appropriate amount of my savings into a 5-year bond or CD.  Once I stop earning income, then yes, I would need to sell some assets to do so.  But the CG tax rate is currently 0 if your income is below $77K -- so in your $50K/yr scenario, I could sell that amount of securities and not trigger any CG tax at all (and really, the CG tax isn't that high even if you're above $77K).  I also plan to have enough in different tax buckets (e.g., 401(k), Roth, brokerage accounts, plain-old cash) so that I can change which place I pull the money from to stay below the various tax thresholds.  Once I have to start taking RMDs, I will then use that money to fund the bonds/CDs -- at that point, I have to withdraw the money and take the tax hit anyway, so might as well use it to implement my plan.

And yes, you can buy individual bonds through brokerages, although the market is not nearly as transparent as buying stocks.

Excellent information.  Thank you!  I've put a lot of thought/research into the wealth accumulation strategy that I'm using but I've never had a solid understanding of what a good withdrawal strategy would be and it was bothering me because that could certainly affect how I invest my funds now.  Thanks again.