bond tent/glide path - nuts and bolts questions

[mistymoney]

So - I moved to 60/40 last month in anticipation of potentially retiring next year.

My plan is glide to 80/20 by the time I get to 70 and social security. About 11/12 years.

How is this accomplished? How frequently is rebalancing done? Do you have a table that has the AA progression mapped out as a yearly, quarterly, or monthly change?

I will be using up from fixed income and *hopefully* stocks are increasing. When do I purposefully rebalance out of equities into more fixed income? Do I adjust to the new target regardless of how slight the deviation may be? Or do I wait for the usual trigger of 5% off of the new AA?

Or do you try mostly to rebalance on where you take WR from each month? If stocks on a tear like now, do you just keep taking from stocks?

And only rebalance if that doesn't fix the AA? Over how many month would you wait with an AA out of balance?

[MustacheAndaHalf]

The following article compares periodic rebalancing to rebalancing bands.

"Finding The Optimal Rebalancing Frequency – Time Horizons Vs Tolerance Bands"
https://www.kitces.com/blog/best-opportunistic-rebalancing-frequency-time-horizons-vs-tolerance-band-thresholds/

Personally, my original plan was to withdraw quarterly.  And then withdraw slightly more when the markets were performing well, in order to withdraw slightly less during a downturn.  But I moved out of a VHCOL area and the whole plan didn't matter much after that.  I was concerned with sequence of returns risk, but hadn't yet read about bond tents.

[ChpBstrd]

Good article @MustacheAndaHalf .

If you rebalance during a bull market, you sell risky assets that are rising faster and buy low-risk assets that are rising slower. Thus you get lower returns than if you'd done nothing. Call this type 1 conditions.

If you rebalance at the end of a bull market, you sell risky assets right before they fall. Thus you get higher returns than if you'd done nothing. Call this type 2 conditions.

Stocks are usually in a bull market and so more frequent rebalancing only helps if and when the losses from rebalancing during type 1 conditions are offset by the savings from rebalancing during type 2 conditions.

I.e. maybe you rebalance annually, and the next five years are destined to be four bull market years (+10% per year) followed by one bear market year (-25% that year). For the first four years, you move money out of the things gaining 10% per year, and into bonds earning 2%. Thus you are worse off than if you'd left them invested in those years. But then in year 5, you avoid a 25% loss on all the assets you moved to the 2% bonds. Do a spreadsheet, change the returns, and observe that sometimes you come out ahead and other times you don't. Quarterly rebalancing would work the same way, on a smaller scale.

My suggestion is to hold your semi-conservative AA until a bear market comes. It will eventually come, and you'll know it when it does! Take that opportunity to switch to your long-term 80/20 AA. By doing so you will have accomplished the practical objective of avoiding some of the damage from the first bear market close to your retirement time. EarlyRetirementNow.com's research suggests most failed retirement paths happened due to a market event within the first few years of retirement, and a glance at a chart of the S&P500's total returns suggest that years of positive returns typically follow years of negative returns. So I figure why not just wait for that fat pitch. The tent is theoretically more graceful, and doesn't require leaping into the teeth of a bear, but I think my suggestion might work better against SORR.

[mistymoney]

The following article compares periodic rebalancing to rebalancing bands.

"Finding The Optimal Rebalancing Frequency – Time Horizons Vs Tolerance Bands"
https://www.kitces.com/blog/best-opportunistic-rebalancing-frequency-time-horizons-vs-tolerance-band-thresholds/

Personally, my original plan was to withdraw quarterly.  And then withdraw slightly more when the markets were performing well, in order to withdraw slightly less during a downturn.  But I moved out of a VHCOL area and the whole plan didn't matter much after that.  I was concerned with sequence of returns risk, but hadn't yet read about bond tents.

thanks! this was very informative!

[Wintergreen78]

I spent 3 years not working. I set my capital gains/dividend distributions to go to cash instead of being automatically reinvested. Once a quarter I’d pull out however much extra I needed for the next quarter. I’d pull from whichever investment was higher than my target allocation.

I had plans to re-balance if my allocations got too far from my targets, but they never got far enough off for me to bother.

When I retire for good I’ll probably do the same.

I’m sure there are fancier ways to do it, but who has time for that when you are retired? There’s too much to do!

[mistymoney]

My suggestion is to hold your semi-conservative AA until a bear market comes. It will eventually come, and you'll know it when it does! Take that opportunity to switch to your long-term 80/20 AA. By doing so you will have accomplished the practical objective of avoiding some of the damage from the first bear market close to your retirement time. EarlyRetirementNow.com's research suggests most failed retirement paths happened due to a market event within the first few years of retirement, and a glance at a chart of the S&P500's total returns suggest that years of positive returns typically follow years of negative returns. So I figure why not just wait for that fat pitch. The tent is theoretically more graceful, and doesn't require leaping into the teeth of a bear, but I think my suggestion might work better against SORR.

That is certainly one way to handle it! Will give some thought to it. I'm ok with balancing out of stocks to retain 60/40 a bit longer, I worry taking out of fixed into falling stocks would impact my ability to weather a lost decade.

[mistymoney]

I spent 3 years not working. I set my capital gains/dividend distributions to go to cash instead of being automatically reinvested. Once a quarter I’d pull out however much extra I needed for the next quarter. I’d pull from whichever investment was higher than my target allocation.

I had plans to re-balance if my allocations got too far from my targets, but they never got far enough off for me to bother.

When I retire for good I’ll probably do the same.

I’m sure there are fancier ways to do it, but who has time for that when you are retired? There’s too much to do!

sounds good! glad that worked well for you and something I can consider

[BicycleB]

Following to learn. :)

PS. I like @Wintergreen78's approach!

[mistymoney]

Following to learn. :)

PS. I like @Wintergreen78's approach!

It does have its merits for sure!

I was loosely planning on having any stock dividends reinvest while I take from fixed income, but I don't knwo why that would make me feel like I was still "investing"!

[Heckler]

Bond tent/glide path

How is this accomplished? How frequently is rebalancing done? Do you have a table that has the AA progression mapped out as a yearly, quarterly, or monthly change?

You make a plan, write it down in your IPS and stick to it for rebalancing to your AA as you decumulate.  (full disclosure, I'm not decumulating yet, but nearing peak impact and have maintained a constant 70/30)

https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

[mistymoney]

Bond tent/glide path

How is this accomplished? How frequently is rebalancing done? Do you have a table that has the AA progression mapped out as a yearly, quarterly, or monthly change?

You make a plan, write it down in your IPS and stick to it for rebalancing to your AA as you decumulate.  (full disclosure, I'm not decumulating yet, but nearing peak impact and have maintained a constant 70/30)

https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

Yes - exactly. I'm trying to formulate and write down the plan before execution is needed.

that graph is surprising though. I don't know why anyone would feel the need to drop down to only 25% equities? That seems scary-risky to me!

And maybe why the whole portfolio goes to hell after age 80! ><

I think I will just check once per year near this time, and rebalance if allocation is off by 5% or more from the target for the next calendar year. I'll have about 11 years till social security, so on an 11 year glide path will start at 60/40 first year and then increase stock allocation by 2% each each till I get to 80/20 and social security. If all goes to plan and I retire in 2025, then whatever remainder of 2025 and 2026 will be 60/40, and then 2027 will be 62/38, and so on.

Seems good on paper. Seems over 11 years stocks should double, providing 2 or so rebalancing ops along the way. A lost decade would be a concern. but think I'm getting as prepared as I can be.....without working extra years!

[Radagast]

Or do you try mostly to rebalance on where you take WR from each month? If stocks on a tear like now, do you just keep taking from stocks?

I set my capital gains/dividend distributions to go to cash instead of being automatically reinvested. Once a quarter I’d pull out however much extra I needed for the next quarter. I’d pull from whichever investment was higher than my target allocation.

This is how I'd do it. Leave it invested as long as possible, don't withdraw if you don't need the money. Don't reinvest dividends and instead use them for expenses, and cover any shortfall by selling whichever asset is farthest over target. I'd follow a 40%-10% bonds glide path.

Generally doing less is doing more, so I wouldn't try to rebalance or anything else other than the above except if things got crazy. I've been basically doing this in accumulation: buy whichever is lagging, and rarely rebalance otherwise.

[Heckler]

that graph is surprising though. I don't know why anyone would feel the need to drop down to only 25% equities? That seems scary-risky to me!

And that is why I was surprised to see a bond tent thread here, but no responses actually referring to a bond tent.  The linked blog has Kitces reasoning for a bond tent. 

[Heckler]

The Withdrawal Method you chose to employ is equally important. The 4% constant dollar (inflated) method, not so great once you dig deeper into it.   Variable Percentage VPW is the method I plan to follow, using a variable percentage of total value based on age, rebalancing via withdrawals (sell equity when they exceed 70% AA, use fixed income or cash when equity is below 70% AA).

https://www.bogleheads.org/wiki/Withdrawal_methods

That link also has a glide path AA section.

[mistymoney]

that graph is surprising though. I don't know why anyone would feel the need to drop down to only 25% equities? That seems scary-risky to me!

And that is why I was surprised to see a bond tent thread here, but no responses actually referring to a bond tent.  The linked blog has Kitces reasoning for a bond tent.

My AA was at 100% stocks for decades. A few years ago I started adding fixed income with new savings and some sales but was only at 90% stocks. So last month I went to 60% in anticipation of retiring next year. The down side of the tent will go to 80% stocks by 70/social security.

In today's dollars, my estimated benefit will pay about 40% of expenses at 70, I expect this to be similar at 70 with inflation on spending and col adjustments on ss. I will likely start off at a higher than 4% WR, around 4.5-5.5%. But after social security comes in it is looking to be sub 3%. So something of a short term risk (11 Years), hence the bond tent idea.