Author Topic: Early retiree looking for advises on asset allocation & withdrawal strategies  (Read 1439 times)

moneytaichi

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Hi MMM investor gurus,

DH and I went into FIRE mode 2 months ago. We need some help to figure out asset allocation and withdrawal strategies.

Me: 47 years old; DH: 55 years old.

The target overall portfolio is stock 70%, bond 25%, cash 5%.

Our asset allocation and withdrawal strategies are planned as the following:
1. Cash (bank+Health saving account+ Money market): 5% of net worth, covering expenses from mid 2018 to mid 2019 (year 1). We expect to live loose a little for the 1st year, plus some buffer.

2. Vanguard intermediate bond: 7% of net worth, covering expenses from 2019 to 2021 (year 2 and 3). We plan to live more frugally after the first year. SO the average yearly withdrawal rate is 4% for the first 3 years.

3. Vanguard Extended Market Index (all stocks) and Target 2025 (currently 63% stocks / 37%bond): 28% of net worth, covering expenses from 2021 to 2028. DH will be 62 on 2025 and eligible for SSN $15K per year. We should be able to withdrawal under 4% of net worth starting from 2025. Plan to move Vanguard Extended Market Index to Target 2025 in 2019 because our tax rate will be lower. As years go on, we will exchange parts of Target 2025 into bond and money market.

4. Retirement assets in 401k, IRAs, Roth IRA: 60% of net worth, covering expenses starting from 2028. I will be eligible for SSN $23K per year on 2033. My 401k and Roth IRA are in 2040 Target fund, and DHs IRA are in 2035 Target fund, Roth in Target 2025. Our withdrawal rate should fall further down from 4%.

Does this allocation and withdrawal strategy make sense? What would you do if you were in our shoes?

Many thanks for your time and advises!
« Last Edit: June 26, 2018, 09:59:09 PM by moneytaichi »

Financial.Velociraptor

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It's hard to say without knowing the stache size and projected spending in dollars (that would help put the SSN in context).

15k per year in 2025 is a hell of a boost for most people.  15+23 = 38k in 2033 would more than cover my entire FIRE needs plus provide for quite a few luxuries (I current budget 25k a year and have come in under 5 years in a row.) 

Unless your spending is outrageous, I think almost any allocation and withdrawal strategy will work if all you have to do is cover the bridge until SSN.

MustacheAndaHalf

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Instead of designating cash and bonds for years 1-3, I'd favor a single portfolio that always has a few years in cash/bonds.  You can even separate the emergency fund from your stocks / bonds, since you want to keep that money ready for expenses.

So an idea using this approach: you would sell 1% per quarter (for a 4% / year withdrawal rate).  If stocks go up from 70% to 72% of your portfolio, you'd sell them back down to 71% and use that cash.  You wind up with your emergency cash being unused, and cash for expenses coming from whatever part of your portfolio does best.  That requires less juggling of which funds are for which years (like your intermediate bond fund).  You pick an allocation, the number of years expenses you want in cash, and then "sell and rebalance" to get cash.

Does that sound easier to maintain, and more flexible?

MDM

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Appears you are both planning to take SS at age 62.

Might be worth trying Open Social Security: Free, Open-Source Social Security Calculator to see if that is indeed best.

clarkebarry

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If I was 47 years old and would be thinking of retirement I would ask myself "How do I want to live in the "far" future?"
I would calculate a good retirement plan which will be based on 4 essential indicators, such as how much is my current annual income, how much are my expenses, the return on investments, and what is taken away by inflation. This would, in turn, maximize the income, reduce expenses and protect against the inflation can be the key to safe retirement.

Here are some general factors that will give you an insight on what can affect your retirement income.

  • LOCATION - Do you and your partner intend to stay in the same place or move around? A shared vision for retirement whether you want to age in the same place, downsize, or relocate to a new home, can give you the thoughts for planning. Also, consider how your home equity might be the part of your retirement plan.
  • RETIREMENT AGE - What age do you want to retire? Retiring at the age of 67 or 68, instead of 64 or 65 can mean working a bit longer, but you also get the advantage of seeing your Social Security benefits increasing every year.
  • EARLIER SAVINGS - Another aspect of pension plan need is the saving itself.  The earlier you start saving and investing, the less we need to contribute.
  • RETIREMENT PLANNING - You cannot rely solely on a company's pension plan or Social Security. Invest in pension plans like 401k, IRAs, Roth IRA. Your investments pension plans, however, make sense. Many people also use a more flexible way of saving- Individual Savings Accounts (ISAs). You can even craft your own with retirement pension fund, automatic contributions from your savings account.
  • TARGET A WITHDRAWAL PERCENTAGE - A rule of thumb suggests that even if you withdraw 3 to 5% of your total account balance every year then you won't run out of money. Use 4% withdrawal of your initial retirement portfolio as a starting point, calculate back into an amount that a retiree would need to save in order to retire. For example, if the need is $100,000 per year, the amount needed to retire will be $2,500,000.
  • SCHEDULE A MEETING WITH A TRUSTED INVESTMENT ADVISOR - Meet up with an investment advisor and discuss a retirement strategy that is currently in the market which could provide you with a stable income. You can read more on early retirement and retirement planning schemes on https://en.samt.ag/retirement

DreamFIRE

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If I was 47 years old and would be thinking of retirement I would ask myself "How do I want to live in the "far" future?"
I would calculate a good retirement plan which will be based on 4 essential indicators, such as how much is my current annual income, how much are my expenses, the return on investments, and what is taken away by inflation. This would, in turn, maximize the income, reduce expenses and protect against the inflation can be the key to safe retirement.

Here are some general factors that will give you an insight on what can affect your retirement income.

  • LOCATION - Do you and your partner intend to stay in the same place or move around? A shared vision for retirement whether you want to age in the same place, downsize, or relocate to a new home, can give you the thoughts for planning. Also, consider how your home equity might be the part of your retirement plan.
  • RETIREMENT AGE - What age do you want to retire? Retiring at the age of 67 or 68, instead of 64 or 65 can mean working a bit longer, but you also get the advantage of seeing your Social Security benefits increasing every year.
  • EARLIER SAVINGS - Another aspect of pension plan need is the saving itself.  The earlier you start saving and investing, the less we need to contribute.
  • RETIREMENT PLANNING - You cannot rely solely on a company's pension plan or Social Security. Invest in pension plans like 401k, IRAs, Roth IRA. Your investments pension plans, however, make sense. Many people also use a more flexible way of saving- Individual Savings Accounts (ISAs). You can even craft your own with retirement pension fund, automatic contributions from your savings account.
  • TARGET A WITHDRAWAL PERCENTAGE - A rule of thumb suggests that even if you withdraw 3 to 5% of your total account balance every year then you won't run out of money. Use 4% withdrawal of your initial retirement portfolio as a starting point, calculate back into an amount that a retiree would need to save in order to retire. For example, if the need is $100,000 per year, the amount needed to retire will be $2,500,000.
  • SCHEDULE A MEETING WITH A TRUSTED INVESTMENT ADVISOR - Meet up with an investment advisor and discuss a retirement strategy that is currently in the market which could provide you with a stable income. You can read more on early retirement and retirement planning schemes on https://en.samt.ag/retirement

Simply delaying SS benefits increases the benefit even if you don't work those extra years.  I found that each year I work between 50 and 60 will add very little to the SS benefit I can draw at 62, but delaying benefits until 70 increases the benefit amount significantly even if I retire before 62 (or in my low 50s).

401k, IRAs, Roth IRA are retirement plans/savings, but they are not actually "pension" plans.   But some people have some pretty sweet pension plans and could rely on them completely.  I've even calculated that delaying my SS benefits until 67 to 70 would allow SS benefits to cover my barebones expenses with money left over (based on current law/calculators), although I already have a stash in investments for additional income.

The 4% SWR needs to cover your taxes also.

« Last Edit: June 23, 2018, 08:54:47 AM by DreamFIRE »

moneytaichi

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@MustachandaHalf: Your suggestion has a beauty of simplification, which is indeed quit tempting for me. However, I have read many early retirees put aside a big chuck of cash to protect the sequence of returns risks, meaning you don't want to sell your stock shares when stock market crashes right after your retirement (worst-scenario). I understand putting 3 years of living expenses in cash and bond may be too conservative for many people, but it makes me less nervous if a stock market crash happens. See a good article on this:
https://ournextlife.com/2018/02/07/sequence-risk/
(They use 70% stock and 30% bond asset allocation, and keep 3 year expenses in cash too.)

I bought intermediate bond and extended market index a few years back before thinking through our FIRE and withdrawal plan. Selling them will trigger long-term capital tax. I plan to use them after bank cash is used up. If the market is down, I can do some rebalance then.

Still trying to figure if I want to invest this cash cushion into savings, CDs, money market or ST/MT bonds.

Fully aware of our 2-person budget may be outrageous for some people. But our healthcare insurance is $1K for two of us per month (from COBRA), and we love travel. There are lots of uncertainty right after FIRE: sold our house and plan to move to California temporally (HCL area). At dust settles down, I am hoping that we can focus more on lowering expenses.

MustacheAndaHalf

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Actually my suggestion includes the idea you mention: 
cash, 3 years worth, outside your portfolio
70% stocks
30% bonds

When your portfolio grows, you periodically sell some for living expenses.  When the market crashes, you call that an emergency and start spending down your emergency cash.

DreamFIRE

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If you have a cash buffer, replace the bonds, not the equity.

So something like:

75% stocks
25% bonds & cash equivalents

And if you want to be very conservative:

60% stocks
40% bonds and cash equivalents

Why having a Cash Buffer Does Not Increase the Longevity of Wealth in Financial Independence

http://investmentmoats.com/financial-independence/why-having-a-cash-buffer-does-not-increase-the-longevity-of-wealth-in-financial-independence/

moneytaichi

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@MustacheAndaHalf, now I got what you were saying. If I count my cash as emergency cash, my stocks and bonds would be 73%/27%, which sounds  reasonable for me. I will look into how to simplify our taxable investment, which will be used for our mid-term expenses (year 4 to 10). My current thought is to keep them into 2 investments (60% VTSAX /40%VBTLX), instead of lumping them into a single Target 2025 fund. This will allow me withdrawal bond portion if the market is down. If the market is up, I can withdrawal them equally.

Having 3 year cash makes me sleep better. We can always come other ways to increase income (with side hassles or part time consulting), or reduce risks.

Thanks everyone for your time and advises! To the least, it's invaluable experience to put ourselves in a FIRE status for a while because it triggers lots of questions that I have not thought about before :) When I was blindly working without an idea of an end date, many issues never bubble up, e.g. healthcare insurance and withdrawal strategies. Living through these issues is the best teacher!


MustacheAndaHalf

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Glad that has the potential to simplify things.

Note if you compare after-tax yield of bond funds, you might select tax-exempt:
Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX) has SEC yield of 2.5%
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) has SEC yield of 3.1%

So if your tax rate is less than (1 - 2.5/3.1 = 0.19) 19%, tax-exempt might be better.  Note for 2018, if you make over $22,000/year ($12k deduction + $9.5k income) you are already in the 22% bracket.  Doesn't matter if all your assets are in retirement accounts, but for assets outside retirement accounts tax-exempt bonds are typically better based on the numbers above.

MDM

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So if your tax rate is less [greater] than (1 - 2.5/3.1 = 0.19) 19%, tax-exempt might be better.  Note for 2018, if you make over $22,000 [(for a single filer) $50,700]/year ($12k deduction + $9.5k[$38,700] income) you are already in the 22% bracket.
But the general point is valid.