CD/Bond/other ladder for Post Fire Drawdown/sequence of returns risk mitigation

[dividendman]

Hello all,

For those of you who have FIRED or will soon and have a CD/Bond or some kind of laddering for drawdown and sequence of returns risk mitigation how did/will you implement it?

Right now I'm debating between using treasury direct (combo of Series I, since it only has a 10k/yr limit) and other instruments or the simpler CD ladders (and tools) provided by Ally: https://www.ally.com/bank/cd-ladder/quick-calculator.html

The more I look into the various ways to implement this the more I'm getting to analysis paralysis. I'm even asking some very fundamental questions like... WTF a 5 year treasury bond is yielding 1.84% but a 5 year CD from Ally is 2.25%... what's going on here?

Anyway... just curious as to what others are doing (if anything). My basic plan is to have half of my yearly minimum spend in a CD/some guaranteed instrument that matures that year and the other half from my dividends/interest on my other investments. This would be a 5 year ladder so 2.5x one year of expenses in total.

This way if the market takes a shit I won't have to deplete that much of the principle (if any). If it doesn't take a shit I will renew the ladder and liquidate some of my portfolio. It's similar to what Dr. Doom described for those that are familiar with it.

[dividendman]

And to add to my woes Synchrony Bank seems to have slightly higher CD rates than Ally... sigh.

Is nobody else doing this CD/bond laddering?

Another plan I was thinking of doing was just keeping that much money in BSV (Vanguard short term bond index) but that still fluctuates quite a bit.

[BigEasy]

Will be setting up a CD ladder soon in my IRA,  ranging from 3-10 year maturities with 50% of my assets. The remainder will be a split between a small cash emergency fund and the rest in Total Stock Market.

I've been through many market declines that took too long to recover...I'll call this my "Sleep Well Portfolio!"

Big Easy

[dividendman]

Will be setting up a CD ladder soon in my IRA,  ranging from 3-10 year maturities with 50% of my assets. The remainder will be a split between a small cash emergency fund and the rest in Total Stock Market.

I've been through many market declines that took too long to recover...I'll call this my "Sleep Well Portfolio!"

Big Easy

How are you implementing the CD ladder? What Bank?

[BigEasy]

Vanguard...Look up the rates under "Investing"

Big Easy

[DTaggart]

I'm keeping roughly 1 year of cash in CDs at Ally. This is split across 4 12-month CDs, set so one matures every 3 months.

It's likely not the most optimum solution, but it is easy and helps me sleep at night to know I'll have easy access to cash in the event the market takes a dive.

[CanuckExpat]

We have a lot in cash, essentially just online savings accounts. Ally (a little more complicated, but that's roughly good enough).
Our situation is slightly different in that we sold our primary residence before FI/RE. I keep the cash liquid for if/when we settle somewhere else. Otherwise we will just spend the cash and not replenish it.

[Greystache]

In most cases, it takes 2 to 5 years for stocks to recover from a serious correction/recession.  I want to have enough cash and bonds in my portfolio to ensure that I don't have to sell stocks when they are down, so I keep about 5 years worth of living expenses in cash and bonds.

[Spork]

Mostly posting to follow.  We are not really optimized in this area.  We've got quite a bit in money market accounts earning a little under 1%.

[BBub]

I love the idea of a 5yr ladder.  I have a small one seeded & will plan on adding to it over the years between now & FIRE to build it up somewhere between 2.5-5x living expenses.

I think it's a wise plan for sequencing risk mitigation.  Especially in the current fixed income environment, where many ER portfolios seem to be drifting towards higher equity exposure. Of course the naysayers will point out that the ladder may be unnecessary & you are guaranteed to lose some extra time building the ladder.  But that's good too.  Nice to have multiple perspectives.

[Financial.Velociraptor]

I have a good slug (about 40% by cost basis) in closed end funds, mostly focused on bonds and other debt instruments.  The yields are high thanks to structural leverage that averages 35%.  The distributions are unlikely to be cut in a recession and I meet most of my budget needs from those distributions.  I could probably cut back to live off just the CEF income in a pinch.  This part of the portfolio is expected to underperform the broad market over long periods of time but I can afford such underperformance and it brings me great comfort.  YMMV.

[dividendman]

I've decided to just increase my bond allocation and sell when needed. I'm not going to keep much extra cash.

Currently I have 50/30/20, VTI/VEU/BND.

I'm going to increase the bonds by 5% (mostly by adding new funds) and decrease the allocation of the other two by 2.5% so it will be:

 VTI/VEU/BND = 47.5/27.5/25 at the start of FIRE

Then I'll use the rising equity glide path for the first 10 years (lowering my bond allocation by 2% every year) until bonds rest at 5% of my target allocation, the final allocation would be:

VTI/VEU/BND =  57.5/37.5/5

This allows me to:
1) Maximize interest in BND instead of a lower interest rate on a CD
2) Mitigate sequence of return risk since for the first 10 years the 4% drawdown should come mostly from selling bonds as well as dividend/interest
3) Avoid more accounts and things to keep track of (I get free trades at wells fargo and all of my accounts are with them)
4) Use the rising equity glide path to enable more gains in the future

Risks are:
1) Bonds tank
2) Lowering portfolio returns slightly with a higher bond allocation for a couple of years
3) 10 years is a long time, lots of things change :)

Thoughts?

[WannaGoOutside]

I've decided to just increase my bond allocation and sell when needed. I'm not going to keep much extra cash.

Currently I have 50/30/20, VTI/VEU/BND.

I'm going to increase the bonds by 5% (mostly by adding new funds) and decrease the allocation of the other two by 2.5% so it will be:

 VTI/VEU/BND = 47.5/27.5/25 at the start of FIRE

Then I'll use the rising equity glide path for the first 10 years (lowering my bond allocation by 2% every year) until bonds rest at 5% of my target allocation, the final allocation would be:

VTI/VEU/BND =  57.5/37.5/5

This allows me to:
1) Maximize interest in BND instead of a lower interest rate on a CD
2) Mitigate sequence of return risk since for the first 10 years the 4% drawdown should come mostly from selling bonds as well as dividend/interest
3) Avoid more accounts and things to keep track of (I get free trades at wells fargo and all of my accounts are with them)
4) Use the rising equity glide path to enable more gains in the future

Risks are:
1) Bonds tank
2) Lowering portfolio returns slightly with a higher bond allocation for a couple of years
3) 10 years is a long time, lots of things change :)

Thoughts?

I think that is a solid (as solid as we know how to be : ) plan.  We are doing something similar, but with me being a decade older than you, and DH another +8 beyond that, we're planning on gliding BND/Cash (cash from our primary house sale) from ~40% down to ~25% over the next 10 years.  The cash will be used first and is in Ally savings at 1.05% right now.  I'm sure we could do better, but again, I sleep easier with it there.

AND as you say, I reserve the right to change things over time and we become even older and wiser!