Rebalance Portfolia

I am retired and drawing RMD but do not need it for living expenses.Portfolia 85% ( 80% pre tax; 5% Roth) mutual funds, 15% cash most in savings account at 5.15%. Three years ago reduced my investments in bond funds and increased in small-cap and real estate.The later two have grown substantially and now is 35% of the portfolia and bonds 5%. My question; Do I increase the investment in bond funds or to savings? Any suggestions appreciated.

Reply to
sligorm
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Thanks to all that responded. RMD is from the 80% pre-tax (Rollovers and IRA's) Roth 5% is in Vanguard RE Index Present positions. Large cap 20% Mid cap 15% Small cap 15% R.Estate 20% Int 10% Bonds 5% Cash 15% Emigrantdirect pays 5.15% on saving accounts. go to emigrantdirect.com Age 73

Reply to
sligorm

Not sure of overall portfolio size... if this were $250k I would change the answer than if it were $2,000,000.

cash- 15%- is this one year's income, two year's income, or more than

3-7 year's income? This changes all answers below.

I would drop Real estate from 25% to around 10%. I would drop small caps from 15% to around 10% some of the extra (~15-20% of total) should be in short term bonds some of the extra might go to cash some of the extra might go into dividend paying stocks some of extra might go into emerging markets stocks or bonds (no more than 5% of total) and some of extra could also increase international exposure (around 15% of total)

My ultimate goal when I'm retired is to have 7 years income in CA$H, then have a portfolio of stocks and bonds which replaces one year of cash at a time. If market goes down, I do not replace the cash that year, and replace 2X the amount when the market goes back up. Hence my answer changes knowing "how much cash" exists relative to how much you plan on drawing down/ spending.

Reply to
jIM

jIM, I'm now working with an 80 year old, who has longevity in her family, and trying to explain that she's actually still investing 'long term'. I'm curious how you arrived at the 7 year cash number? And would that translate to 28%? (4% per year withdrawal rate). I'm looking at a stock portfolio yielding near 2.2% in dividends, and so the 4% spending only requires about an extra 2% cash availability per year, or 14% of the total portfolio value. I do like your approach, to not sell in a year where the market was down, this isn't addressed often enough in the "4% initial withdrawal rate" discussions. (Unless it was in the recent 'layer cake' article which I have yet to fully, er, digest.

JOE

Reply to
joetaxpayer

Joe-

The strategy is to avoid selling low as the way to **ensure** success. I came up with this plan. I have around 30 years of people shooting holes in it to refine it.

The 7 years cash plan was more that the stock market can recover in 7 years. it could probably recover in 6, but I don't want to depend on recovering in 5. 7 years is the WORST CASE, where market crashes and takes 7 years to recover.

The 7 years in cash would probably be 1-2 years in a money market, 1-2 years worth in a CD and some type of bond mix, real estate mix or more CD's depending on what I learn between now and then. I could see TIPS playing a huge role in this cash allocation as I learn more about them.

I am not suggesting this be 28% of portfolio or 75% of portfolio or 10% of portfolio. it's an absolute number- the amount of money needed to live off of for 7 years... this gives another 7 years for rest of assets to grow as well. If someone is in retirement they know how much they spend, and I would think if the next 7 years of expenses is in cash and secure, the other portion of portfolio can take on more risks than normal for a traditional retiree (like small cap stocks, emerging market stocks, etc...).

In an effort to transition to this type of structure I have a thought to put 10 years of cash aside prior to calling it quits at work. With the idea being a stock market downfall the first 2-3 years of retirement is the biggest risk this plan faces. I want to give the market time to recover before cashing in.

The biggest holes I see right now- this plan requires LOTS of assetts. It also does not take into account that some of this $$ is in a 401k and some is in a Roth and some is in taxable accounts... not sure what to withdraw when from where... YET.

Poke holes and ask questions... that is how I came up with what I have so far.

Reply to
jIM

Seven years as the worst case seems a reasonable assumption but as I recollect the down market lasted more than that in the '70s...maybe 10 yrs was it? ...hopefully it won't happen again in our livetimes.

Reply to
The Guy

The 70's got an undeserved bum rap. These are the returns of the S&P with dividend yields added back in. The annualized return is about 5.8% per year. Admittedly, it didn't keep pace with inflation, just underperforming. When jIM's plan is run through these returns, he comes out just fine, the two killer year are sandwiched between two pair of two good years. (and he replenishes cash only after good years). And lest one think himself bright enough to time the market, he likely misses some or all of the 75/76 recoveries.

70 3.56 71 14.22 72 18.76 73 -14.31 74 -25.90 75 37.00 76 23.83 77 -6.98 78 6.51 79 18.52

JOE

Reply to
joetaxpayer

Well, even adjusting for dividends you have the 1929 - 1945 crash/recovery...

-Will

Reply to
Will Trice

Will, see

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enter 1929 - 1945You get 7.2% annual return.You need to quit in 42 to drag it down to 2.9%. And the CPI barely budged during this timespan. (17.1 in 1929, 17.8 in 1945) JOE

Reply to
joetaxpayer

Joe, this is the *arithmetic* average. The S&P was at 31.3 in September of 1929. It didn't return to that level until September of 1954. If you adjust for dividends, you get back to even by January of 1945, for a whopping 0% annualized return over the course of 15 years.

-Will

Reply to
Will Trice

The risk is you don't know next year's return when the decision is to be made (take gains out or leave them in). 73 and 74 would be definite no's, taking two years cash out in 75 would still deplete a portfolio quite a bit.

assume 75k needed each year in income

$1,000,000 down 14.31% is $857,000 $857,000 down 25.9% is $635,000

$635,000 increases to 870,000 take out $215,000 (3 years expenses) down to $655,000

Not sure is 1,000,000 portfolio is "large enough" to generate a 75k income stream using any technique, I'd think so, but I don't have all my financial spreadsheets on this computer to look. The portfolio is

2/3 of its start value after 3 years. That appears to be weak.

thoughts?

Reply to
jIM

Well, if they say 4% is the safe withdrawal rate, then it should be safe to take only $40k annually from a $1 million portfolio. No? If you need $75k, then, by this theory, you should have a portfolio worth about $1,875,000. Of course this is just ball parking it. I only used a regular calculator. I'm sure with a spreadsheet you could get a little closer.

Elizabeth Richardson

Reply to
Elizabeth Richardson

That complicated math gets me every time (payment/interest rateprincipal amount needed).

2 Questions on PV type calculations (which assume draw down of principal)-

1) Does the withdraw rate in a PV calculation take into account portfolio growth between the periods of withdraw?

Meaning I draw down 3% in year 1, then portfolio increases 6% and I withdraw 3%+ inflation index.

2) Is their a simple spreadsheet function to allow for portfolio percentage withdraw increases (each period increases amount withdraw by 1%, for example).

Thank you

Reply to
jIM

jIM, There were a number of studies that came to the 4% conclusion. A number of links can be found at

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Question 1 answer - the presumption is that you start with say, $1M, and may have a first year withdrawal of $40,000. The next year, you may withdraw $41,200 regardless of what the market does. The studies were based on Monte Carlo analysis and going through 'worst case' scenarios. Tinkering, say adding the rule "do not take an inflation adjustment after a down year", will allow a slight increase to the initial withdrawal rate.

Question 2 answer - No. I can write a spreadsheet which adjusts for inflation to the desired withdrawals by X% per year, but has a fixed annual % increase to portfolio. As you proved, an average 8% per year forecast has issues with a series of bad years as occurred in the 70s and early 00s. I don't know of a spreadsheet function that can handle that type of random generation. Although I suppose you could create pseudo-random numbers based on an 8% average and 14% standard deviation, and then, after creating a series of 30 long number sequences, feed those into the spreadsheet.

The math needed to save is far easier (to me). I need 20 times my annual withdrawal needs, and can do the math using certain assumptions. Each year, I adjust my assumptions a bit. For example, my 10 year return forecast is for 8% growth, lower than the historical 10%, due to multiple factors. I don't calculate how much I'll retire with, that number is fixed. I calculate at what age I'll hit that goal, and I watch that date move out in a bad year, and get accelerated in a good one. JOE

Reply to
joetaxpayer

If anything suggested I was questioning the 4% withdraw rate, I did not mean to imply this. I understand this number has been proven by others and I accept 4% as standard withdraw rate (and I use 3% to make my calculations more conservative).

My question was directed at PV... the PV calculation itself does not account for change in principal balance from year n to year n+1, correct?

The PV calculation has a percentage in it, but it's a static percentage, my questions was specific to PV and if this static percentage could be changed to a dynamic percentage. I have an idea I will try and get back to you.

I have similar "rules of thumb" I use.

for example if I make $X now and will retire in 36 years, I assume inflation will double twice (72/4%, so inflation doubles every 18 years). Meaning in 36 years I need income equal to 4*$X to maintain my current standard of living. Take 80% of this number (I can live on less than I make now), and that is income I need to generate from a portfolio of value $Y.

How to achieve $Y is another set of calculations and check points (like savings percentage, assett allocation, rates of return). In the end is comes out to about 20-30x my annual income now.

Reply to
jIM

I'd like to see what you discover. Any PV calculations I've seen are used for Mortgage payments and/or Bonds. The principal value would change, that's not the issue. It's the payment/withdrawal rising over time that these calculators would not handle. JOE

Reply to
joetaxpayer

Only way I can think of is an immediate fixed annuity (and a person old enough to get that rate). That leaves nothing for heirs, of course, but if that's all you have and you really need that $75k, it's do-able, though probably without an inflation adjustment. Play with some of the numbers you get from

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example.

I'm not too comfortable with folks putting all of their eggs into the annuity basket, but for someone with a million dollar portfolio, putting 25-50% into annuities guarantees a pretty decent base income (on top, presumably, of social security) and would let them take some greater risk (ie. heavier load of equities) with the remainder of their portfolio.

Reply to
BreadWithSpam

I gave up on PV for the time being... I could not get numbers which worked backwards and forwards.

I worked up an "easy" spreadsheet with known inputs:

amount needed for first year's income $X, amount of principal in account at start $Y, inflation percentage (to increase income) a%, yield on investments b%, growth of capital c%. In addition retirement age and death age are input.

If you want to see it I can e-mail it or post it somewhere.

Reply to
jIM

I'd love to seewhat you came up with, and offer some kind comments/suggestions. I'm @comcast.net

JOE

Reply to
joetaxpayer

There is someone on an excel usenet group helping me. If you use Google Groups to read the forum, my profile should link you to the post. The spreadsheet has been done by someone else, I cannot duplicate it YET. My formulas have an error. I will e-mail J O E T A X P A Y E R at the domain above when completed.

Reply to
jIM

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