AA in taxable accounts during first 5 years of Roth rollover ladder

[Mr. Green]

Our portfolio is $1 million. We're targeting a 40k spend in retirement but we have the ability to scale back to 30k if we absolutely had to. Our taxable accounts represent 25% of our portfolio, or 250k. At the moment we're 90/10 stocks/bonds in both our taxable accounts and IRAs/401ks. During the first 5 years, while we're establishing our Roth IRA rollover ladder, we would ideally spend 200k (40k x 5). The amount we'd spend during those first 5 years is fairly close to the total of our taxable accounts so I'm a little concerned about a big market drop that doesn't recover fairly quickly.

I'm wondering if I shouldn't change the AA in our taxable accounts to something more conservative like 60/40 stocks/bonds. Doing that would change our overall AA closer to 80/20, and it would also have the side effect of causing a taxable event (selling stocks and buying bonds) thanks to the run up.

Has anyone else looking closely at the immediate post-FIRE spend plan considered this? If our taxable account balance wasn't so close to what we'll need over the first 5 years I wouldn't care; I'd leave everything as is. Maybe I should still leave everything as is. I just wanted to toss this out there for feedback.

[MustacheAndaHalf]

You might look into "bucket" style retirement planning.  Rather than have an asset allocation, one bucket handles ~5 years of spending, maybe in bonds or CDs.  I'm not that familiar with it - it's not my approach.

With regards to a more conservative 60/40 investment in taxable, that makes sense to me.  When looking at the risk of running out of (taxable) money, does the growth matter than much over a 5 year time frame anyway?  Not to get too political, but the most volatile election might not be followed by the smoothest stock market - and you're counting on your money being there for expenses in 4 years.  I'd lower the risk level of the money you need very soon, and keep risk higher in the retirement accounts.

[Mr. Green]

You might look into "bucket" style retirement planning.  Rather than have an asset allocation, one bucket handles ~5 years of spending, maybe in bonds or CDs.  I'm not that familiar with it - it's not my approach.

With regards to a more conservative 60/40 investment in taxable, that makes sense to me.  When looking at the risk of running out of (taxable) money, does the growth matter than much over a 5 year time frame anyway?  Not to get too political, but the most volatile election might not be followed by the smoothest stock market - and you're counting on your money being there for expenses in 4 years.  I'd lower the risk level of the money you need very soon, and keep risk higher in the retirement accounts.

I think having 5 years of spending in 100% bonds or CDs is too conservative. As 25% of our portfolio that would make our overall portfolio too conservative during the most important part of a retirement (the first 10 years). The money needs to keep growing because the 4% SWR success rate is affected when a portfolio drops below 80/20 but I'm also thinking about the downside risk in the immediate term too.

[dandarc]

Have you made any Roth contributions over the years?  If so, you can withdraw contributions tax and penalty free, which would give you a bit more padding.

[Rubyvroom]

Do you have any money in an emergency fund that you could dip into during a down market? Do you have an HSA, and if so, have you been saving medical receipts that you could cash in on in the future? Both of those scenarios might help to mitigate the risk a little.

I plan on having 1 year of expenses saved in an E-fund when I retire to combat the very situation you're worried about. I have not been as good about saving medical receipts. We simply don't have very high medical expenses yet.

[Mr. Green]

Have you made any Roth contributions over the years?  If so, you can withdraw contributions tax and penalty free, which would give you a bit more padding.

Only my wife has a Roth account and it only has $16,500 in contributions in it, $5,500 for 3 years. I'm not sure if we'll be contributing any more to it. $5,500 is still a decent part of $40,000 but it's not a huge amount, and I would only have that option for 3 of my 5 years. However, we could certainly say that a recession with a large drop in the market that hasn't recovered in 3 years would pose larger problems for the overall chances of the success of a 30 year retirement period.

My wife's Roth is 100% VTSAX though, so that would be affected by a large drop as well. I could certainly move that small amount of money to a bond heavy AA to have that money available. The combination of $5,500 from a Roth, scaling back expenses to 30k, and a part-time job would largely cover the risk that a big market drop poses to our taxable accounts, but I was trying to consider what other options would be available beyond scaling back spending and getting a job. Not that I'm above doing that, I just like to know what cards are on the table.

[Mr. Green]

Do you have any money in an emergency fund that you could dip into during a down market? Do you have an HSA, and if so, have you been saving medical receipts that you could cash in on in the future? Both of those scenarios might help to mitigate the risk a little.

I plan on having 1 year of expenses saved in an E-fund when I retire to combat the very situation you're worried about. I have not been as good about saving medical receipts. We simply don't have very high medical expenses yet.

I do have ~22k in CDs that could be left as cash instead of moved into equities. I also have an HSA with 20k+ in it. Of course the HSA is 100% VTSMX so that would be a consideration.

[brooklynguy]

I'm wondering if I shouldn't change the AA in our taxable accounts to something more conservative like 60/40 stocks/bonds. Doing that would change our overall AA closer to 80/20

If you want to stick with your current 90/10 allocation, you can increase the equity exposure in your tax-sheltered accounts to counterbalance the decreased equity exposure in your taxable accounts.

I think having 5 years of spending in 100% bonds or CDs is too conservative. As 25% of our portfolio that would make our overall portfolio too conservative during the most important part of a retirement (the first 10 years). The money needs to keep growing because the 4% SWR success rate is affected when a portfolio drops below 80/20 but I'm also thinking about the downside risk in the immediate term too.

Your point about success rates suffering when equity exposure drops below 80% assumes a static asset allocation for the entirety of the retirement period, but there are arguments for using a variable, shifting asset allocation (a "glidepath") with decreased equity exposure in the years immediately following retirement.  See the discussion in this thread, and the Kitces articles cited therein.