When did you start building your sequence of return risk stash?

[elysianfields]

I've read a lot of ERN's writing and considered adding bonds to our 100% equity portfolio - I can pull the ripcord on my U.S. Foreign Service gig in 2026 - until I read his admonishment not to hold bonds if you have a mortgage, which we do on our rental.  We plan on carrying the mortgage, or even refinancing it just before retirement while we have earned income, so bond investments most likely wouldn't earn enough to cover that mortgage interest.  We also probably wouldn't move back into the rental, so we'll probably also carry a mortgage if we buy another place.

I looked at our numbers again, and realized:

- We'll have a mostly-inflation-indexed pension income + the I'm-too-young-to-take-SS-yet annuity supplement;
- We'll also have FEHB health insurance (we'd pay the employee contribution, the USG would pay the lion's share);
- We have several double commas and another five years to grow some more;
- Our draw will most likely fall in the 2-2.5% range, which does fine even in the crappiest backtests;
- Two mortgages would make an awful lot of leverage;
- We'll probably hold off taking SS until we hit 70.

Obviously we'd want to keep the risks low, I'm wondering whether two mortgages raises our risks too high, even if we have investments with which we could pay them off at any time.

[SwordGuy]

We sold our old, fully-paid for house the month we retired.   Solved that problem.

Had originally intended to pay off the mortgage on our new house with that money, but as we learned more, we decided against it.  Kept our 2.75% fixed rate mortgage instead.

I got to thinking about this answer.   While it's true, that's exactly what we did, it's not really the most accurate answer to the question.

I was 55 when I learned about MMM.   I binge read his blog and then double-checked what he claimed.

We decided to go into rental real estate investing in addition to upping our stock and bond portfolio.    My wife is a bit older and would hit social security age by the time we retired.    Our goal was to increase non-stock passive income so that we wouldn't have to withdraw very much from our portfolio.    At the time, our home was already paid for, so between social security, our handicapped daughter's disability, and the rental house income, we intended to cover $50k of a $60K post-FIRE budget from non-stock/bond sources.   With only a $10K or less draw we would be at a very low SWR.   That was our plan.    Because our mentally handicapped daughter wasn't able to take care of herself we couldn't risk drawing down the stock stache during our lifetimes.

Well, things changed as we moved towards our FIRE goals    We moved into a new home that was better suited to aging in place, so now we had a mortgage again.   

Now we've FIRED, moved to another house, sold the new-old home (but not the rentals) and paid off the mortgage.   And our SWR is less than 0% if we stay in budget. :)

[jim555]

Loaded question, I reject the premise of the question.  Buckets are useless.

[ardrum]

Ramping up bond allocation relative to multiples of living expenses invested. 

17x = 80/20
18x = 75/25
19x = 70/30
20x = 65/35
21x = 60/40

I may permanently maintaing 60/40, or otherwise potentially add more stocks once at ~30x depending on risk tolerance.  I doubt I'll go above 75/25 though in the long run.

[sherr]

Loaded question, I reject the premise of the question.  Buckets are useless.

Can you explain what you're talking about? The premise is temporarily changing your asset allocation to protect against early-retirement sequence of return problems, not "buckets". It does not seem to me like the premise is useless.

[jim555]

Loaded question, I reject the premise of the question.  Buckets are useless.

Can you explain what you're talking about? The premise is temporarily changing your asset allocation to protect against early-retirement sequence of return problems, not "buckets". It does not seem to me like the premise is useless.

It is a form of bucketing.  Holding a "sequence of return stash" is a short term bucket.  The only thing a bucket strategy does is give you lower returns.  If you need more money just sell some assets, don't hold the assets in a dead money account.

[lutorm]

I have a dumb question about this: How do you actually go about building this "bond tent"? If you liquidate your equity to buy bonds in the last few years before retiring, when your income presumably is the greatest, won't you take a massive cap gains hit? It seems like the worst time to sell anything.

[secondcor521]

I have a dumb question about this: How do you actually go about building this "bond tent"? If you liquidate your equity to buy bonds in the last few years before retiring, when your income presumably is the greatest, won't you take a massive cap gains hit? It seems like the worst time to sell anything.

If (a) your least appreciated shares still had "massive" unrealized capital gains, (b) you made the trades in non-tax-deferred accounts, (c) you traded instead of just shifting new purchases, and (d) you did this while still working.

I didn't do a bond tent at all, but if I had done so I'd probably do some combination of the opposite of those four things.  Probably mostly (b) and (c).

[Retire-Canada]

I have a dumb question about this: How do you actually go about building this "bond tent"? If you liquidate your equity to buy bonds in the last few years before retiring, when your income presumably is the greatest, won't you take a massive cap gains hit? It seems like the worst time to sell anything.

You can direct new contributions towards buying bonds as well as dividends. In my case I sold equities in tax advantaged accounts with no tax implications and bought bonds there and I also directed a portion of new contributions towards cash in a taxable account.

[Malossi792]

It is a form of bucketing.  Holding a "sequence of return stash" is a short term bucket.  The only thing a bucket strategy does is give you lower returns.  If you need more money just sell some assets, don't hold the assets in a dead money account.

Reverse equity glide path. Same thing as a bond tent actually just a different name for different folks.  It's not a bucket, it's a temporary AA for a few years around the start of your retirement to protect against catastrophic failure. If you retire into a 10 year bull run, sure, it will cost you money but that's one sweet problem to have. If, however, mr. Bear comes knocking at the end of your first year and overstays his welcome, you'd be glad to have one. Like all hedges/insurance, it costs you when you're lucky but helps when needed the most. At least in theory, YMMV and all the other usual disclaimers (mine's just another random stanger's opinion on the internet).

[lutorm]

I have a dumb question about this: How do you actually go about building this "bond tent"? If you liquidate your equity to buy bonds in the last few years before retiring, when your income presumably is the greatest, won't you take a massive cap gains hit? It seems like the worst time to sell anything.

You can direct new contributions towards buying bonds as well as dividends. In my case I sold equities in tax advantaged accounts with no tax implications and bought bonds there and I also directed a portion of new contributions towards cash in a taxable account.

You can obviously direct new contributions into bonds, but given that the asset allocation people seem to be talking about (like in https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/) is something like 70% bonds at the "bond tent apex", you won't get anywhere near that amount with just new contributions right before RE unless you're accumulating a substantial fraction of your stash in a few years right before RE.

Same with secondcor's suggestion about using the least appreciated shares. That would obviously work but won't get you to 70% bonds.

Since you can't access the tax advantaged accounts early in RE without negating the tax advantages, it doesn't seem like that would be a good option either.

[sherr]

You can obviously direct new contributions into bonds, but given that the asset allocation people seem to be talking about (like in https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/) is something like 70% bonds at the "bond tent apex", you won't get anywhere near that amount with just new contributions right before RE unless you're accumulating a substantial fraction of your stash in a few years right before RE.

Same with secondcor's suggestion about using the least appreciated shares. That would obviously work but won't get you to 70% bonds.

Since you can't access the tax advantaged accounts early in RE without negating the tax advantages, it doesn't seem like that would be a good option either.

70% bonds at peak would be an extremely large bond tent, that's certainly not what I'm considering.

But anyway you're not withdrawing a single penny from a tax advantaged account, so there are no tax disadvantages. It goes like this:
a) Sell stocks and buy bonds in your tax-advantaged accounts to achieve your desired tent AA, which is a non-event as far as the IRS is concerned.
b) Bear market comes, your stocks (including the ones in non-tax-advantaged accounts that you're currently living off of) are down 50%.
c) You need money to pay for groceries, you sell your non-tax-advantaged stocks at a 50% loss.
d) You then sell an equivalent amount of bonds in your tax-advantaged accounts and buy stocks with them in your tax-advantaged accounts, which again is a non-event according to the IRS.
e) You now have for all intents and purposes just sold bonds instead of stocks to fund your groceries, even though they were in your IRA and you "couldn't access them".

[Ishmael]

I'm not yet retired, although I am able to at any time. I had switched over to having bonds in my portfolio (VAB) a couple of years ago from 100% stocks, but then COVID hit and Apple (a company I follow fairly closely) dropped down to what seemed to me to be silly-low levels. I sold the bonds and bought Apple, for which I was handsomely rewarded only a few months later. I then sold Apple (and a bit of Tesla), and rolled that money back into bonds. I thought it was as close to a guaranteed investment as I've ever seen, but I expected it to take longer to play out.

My eventual retirement (in 2.5 years, most likely) will consist of a period of 10 years which I'll need to finance from investments alone. Then, I'll be eligible for my pension(s), so most of my income will be stable and adjusted for inflation. It was important to me to have strong stability for those 10 years, to protect against SOR and sudden drops, etc, so I wanted the core money required to get through those 10 years to be in cash and bonds. Between my current holdings, and projected dividends (mostly from very stable blue chips), I have 8-ish years of base income in cash and bonds. I'll probably try and optimize the amount of income I can have during those 10 years by setting an investment value floor, i.e. I want to have a minimum nest egg amount to top up my pensions with when they start paying out, but there's really no point in holding onto more than that for tax reasons (and OAS clawbacks).

It's a very simplistic model, but it works for me. I'm using my extra cushion to sleep comfortably knowing I don't have to plan or pay any real attention to any major market drops for the next decade at least.

In 2008, I wasn't anywhere near than level, and it was gut-wrenching watching my portfolio drop like a stone, and thinking of the extra years of working I'd have to do. Luckily, I was armed with the knowledge that the best thing for me to do was to do nothing except stop paying attention, so I came out the other end just fine, and no extra years were actually added after all. I don't want to experience those emotions again though.

[Sandi_k]

I laid it out so that I moved from 80/20 to 65/35 over three years.

- First, I sold 5% of stocks to get to 75/25 when we hit a high in 2017 (8 years out).
- Second, I redirected my contributions for awhile in 2018 and 2019 to the TIPS fund until I got to 70/30. (6 and 7 years out).
- Third, I sold another 5% of stocks when we rebounded from the crash in July 2020 (5 years out).

I am now at 67/33, but I have enough in cash/TIPS/GNMAE funds to cover 10 years of withdrawals. If our WR is at 3.5%, we have enough for 12 years. So we're done.

Now I don't have to think about the stock portion - I can let it ride, knowing that we have our minimum needs already in non-volatile investments.