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Now that I am 70 years old and financially independent and retired I have converted my retirement portfolio to 50% Total Stock Market, 25% Total Bond Market and 25% CD's.
I read somewhere that the experts say you should not sell stocks or stock mutual funds that have lost money as part of your retirement withdrawals. Instead, you should sell your bond funds or cash equivalents while you wait for the stock market to recover. Sounds good but the devil is in the details.
Here is an example:
I retired on January 1st, 2018 with $500K in a Total Stock Market Fund $250K in CD's and $250,000 in a Total Bond Market Fund. I plan an annual withdrawal of 3% of his Million Dollar starting portfolio, adjusted each year for inflation. My plan is to take a year worth of withdrawals on December 31st of each year going forward. Let's say the stock market drops 30% in 2018. (Estimate only for this example question) And my CD's and Bond Funds go up 3%. So now I have $350,000 in my stock fund (down from $500,00) on December 31st. And have $515,000 in my bond funds and CD's (Up from $500,000 at the start of the year.) I have not taken any withdrawals yet.
I do not want to sell anything from my total stock market fund because I would now have a real loss instead of a paper loss. So I decided to sell $30,000 from my bond mutual fund on December 31st.
Moving ahead a year: It is now December 31st, 2019, and the stock market has gone up 10%. But while my stock portfolio is up from the start of the year it is still down from the date I retired (January 1, 2018). My CD's and Bonds went up 3% again in 2019 for this example.
What investment should I sell now? (On December 31, 2019) Should I sell 3% from my total stock market fund because they did go up 10% in 2019, or continue to sell from the bonds and CD's because my stock portfolio is still down in total? (Yes, the stocks went up 10% but they are still down because a 30% drop in 2018 would need a 60% gain to break even.)
Should I wait until my stock portfolio finally breaks even or increases in total from the January 2018 starting point) on his stock portfolio before I start selling this investment to fund my retirement? How should this work?
Last edited by Seventy Years Old; 12-25-2018 at 07:50 AM..
in the constant draw method you sell off what went up the most . so lets take 50/50% bonds / cash .
you take 3% from the bonds and cash to live . so now you have spending going on , you have interest coming in and you have stocks varying .
you simply take the total dollars left at the end of the year and divide by 2 .
then you buy what went down the most to get things back to 50/50 . so end of year one you need 432,500 in each..
year 2 you have 445,475 in bonds and 519 in stock ...
now you rebalance selling stock . each year you rebalance not based on the year before , you base it on each years performance .
selling stock is not an issue even in returement . a retiree who even went 100% equities still only had a 2% less success rate then 50/50 did .
the bigger up years left a bigger cushion for the down years .
this is no different than the opposite case . stocks have 5 great years in a row , they are up a lot . each year you rebalanced buying lots of bond fund each year . . now the 6th year stocks are down and your bonds are higher . you would still sell bonds even though the last few years you had up years in stocks .
so each year stands on it's own .
Last edited by mathjak107; 12-25-2018 at 09:31 AM..
Thanks Mathjak107 but that does not answer my question.
Yes, I know that you sell the thing that goes up the most but what about the next year? In my example stocks went up 10% the next year after dropping 30% the year before. If I sell the stock funds at the end of year two I am still selling them at a loss because they need to go up 60% to make up for the 30% loss.
I would think logically I would keep selling my bond funds until the year the stock funds break even, which could be 5 years or more.
each year is rebalanced on its own . remember in up years you already took gains and moved it to bonds so your stocks are really starting out lower dollar wise than had you not rebalanced typically .
the fact you are down year one means typically u would have reduced your bond levels from where they were and bought more stock .
the next year if stocks are up the stocks get sold and bonds bought . it has nothing to do with previous years which typically are already rebalanced. each year you want to end at 50/50 regardless of prior years action .
the part you are forgetting is in year one you rebalanced your bonds when stocks fell 30% and in effect bout a lot more stock ....
well lets suppose you did not rebalance and left things as they were . if stocks went up 10% your bonds would still be a head and had you not bought all that new stock at those lower prices you would still be selling bonds to rebalance .
in essence that 2nd year if stocks are a head what really is a head is the shares you bought rebalancing so those are up and if you have to sell some of those gains then so be it . so each year is on its own . ..
I'm not sure how to handle RMD's in 2019. This year, we've been taking them on a monthly basis. I'm thinking that for 2019, we'll defer taking anything out for now---waiting to see what happens with the market.
Another thought I've had is to take dividends and capital gains only which by the end of the year should amount to the RMD.
In my opinion, the Bucket method helps with RMD's and was designed to function in the current environment.
A Long-term Bucket holds your Equity Allocation. All your Mutual Funds, ETFs and Stocks. You no toucha these.
Intermediate-term Bucket holds a portion of your Bond Allocation. Don't just dump it into a Total Bond Index, be mindful of the Duration. Sprinkle into this Bucket a few longer CD's with a duration that you are comfortable with.
Your Short-term Bucket holds money you would be withdrawing over the next 2 or 3 years. It's parked in one of the better Money Market Funds which are currently paying 2% or maybe a CD Ladder paying a little higher.
You can re-balance these Buckets.....I take a look at this in the August/September time-frame. October can be a cruel Month, as we all know. I'm thinking I might take my RMD's as a monthly draw, like a Pension or SecSec Deposit.
Should I wait until my stock portfolio finally breaks even or increases in total from the January 2018 starting point) on his stock portfolio before I start selling this investment to fund my retirement? How should this work?
There are three ways that I know of (there are no doubt others):
1) Ignore the past when making a decision. You have a 50/50 target AA, so always take a withdrawal in the same proportion as your target AA, i.e., 50% from equities and 50% from bonds. You can rebalance to try to bring the actual AA up to the target AA, or just let it ride for awhile. This is easy to manage, is very commonly done, but you will sell equities that are under water. Most people think that doesn't matter although that point is argued a lot.
2) Since your target AA is 50% equities, simply take your withdrawal from equities if your actual AA is greater than 50% equities, and take from bonds if it is less. After a couple of years of a bear market, the bond portion will drop to be less than the equity portion (because you've been selling bonds), at which point you will start selling equities. So this scheme also could end up selling under-water equities, but not for a while. It would work well in a short bear market. In a longer bear market it is more like scheme #1.
3) Pick a market high point (for equities) that you want to return to and as long as your current equity holding is less than that value, sell bonds (or CDs) to fund your withdrawal.
Personally I use scheme #2, except I rebalance equities into bonds, but not bonds into equities.
In my opinion, the Bucket method helps with RMD's and was designed to function in the current environment.
A Long-term Bucket holds your Equity Allocation. All your Mutual Funds, ETFs and Stocks. You no toucha these.
Intermediate-term Bucket holds a portion of your Bond Allocation. Don't just dump it into a Total Bond Index, be mindful of the Duration. Sprinkle into this Bucket a few longer CD's with a duration that you are comfortable with.
Your Short-term Bucket holds money you would be withdrawing over the next 2 or 3 years. It's parked in one of the better Money Market Funds which are currently paying 2% or maybe a CD Ladder paying a little higher.
You can re-balance these Buckets.....I take a look at this in the August/September time-frame. October can be a cruel Month, as we all know. I'm thinking I might take my RMD's as a monthly draw, like a Pension or SecSec Deposit.
Either the bucket or the constant dollar method of withdrawal work . Neither has an advantage over the other .. it is just mentally our brains like buckets .
But remember when using buckets your equity allocation is variable . It can go very high before refilling . One popular one uses 7 years of safe money , 7 years of bonds and the rest equities . If you delay refilling buckets one and 2 until the end you can be 80 years old and 90% equities .. on the other hand refilling buckets 1 and 2 to often will hurt long term performance.
If anything the constant dollar method has shown an edge performance wise
You need a safety bucket of a couple of years of, say CD's so you do not sell equities when they are down.
I would place my "annual" sell order at the beginning of the year and make it a limit order so I get the benefit of appreciation. Probably make it several orders.
Bond funds may tend to lose a little money going forward so be sure to watch them and keep them short term.
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