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.