On January 1st we conducted our Annual Financial Review for our retirement portfolio.
I’m smiling.
Since I retired in June 2018, the S&P 500 has had a nominal annualized return (including dividends) of 14.62%! On an inflation-adjusted basis, it’s 10.73%. Our retirement appears to be solid, and our net worth is ahead of our projections.
Even with the smile, however, there’s always fear lurking around the corner:
- Market revert to the mean over time.
- After years of above-average returns, the future will involve some corrections.
- Bear markets are unavoidable, and we’ll likely face one in the next few years.
- What if inflation continues to be a problem, increasing our spending?
As if reading my mind, Goldman Sachs recently made a bearish forecast that raised many eyebrows. As quoted in this article on Investopedia, GS is projecting:
“The S&P 500 will return just 3% a year for the next decade and 1% after adjusting for inflation.”
Scary stuff, indeed. Sure, it’s just another bank’s useless forecast, but what if they’re right? What if stocks only return 3% over the next decade? To further strengthen the point, it’s worth mentioning that Vanguard came out in December with a similar forecast, projecting a growth of 3-5% for US Equities over the next decade.
As early retirees, what should we do about it? Are there steps we should be taking, regardless of market conditions, which improve the odds of our money lasting longer than we do?
Today, I share my thoughts on “What if stocks only rise 3%?”…
What if stocks only return 3% over the next decade? As retirees, what should we do to prepare? Share on X
What If Stocks Only Rise 3%
For the record, I suspect Goldman Sachs and Vanguard are probably right. The surprising thing is, I’m not too worried about it.
They may be off by a percentage or two, but after the run we’ve had it’s realistic to expect future returns will be low. Reversion to the mean is legitimate, and we’d be naive to think the market will continue to return 15% for the next 6 years of our retirement.
A long stretch of low returns certainly wouldn’t be unprecedented.
The S&P 500 had a negative return of -0.72% during “The Lost Decade” of 2000 – 2009.
I got that number from this handy calculator. I suspect many of you have already forgotten that decade, right? Looking at my favorite chart during the same timeframe (thanks, Ben Carlson), you won’t find “Large Cap” in any of the top 3 spots over the entire decade (in fact, you’ll only find it above the #6 spot once in the entire decade):
We’re all susceptible to “Recency Bias”, a risk distortion due to a focus on recent performance. Using that same calculator, we can see that the S&P 500 has returned 13.56% from 2015 – 2024, and Large Cap dominates the top segments of the related asset return table (thanks again, Ben Carlson, for updating your great charts!):
What a difference a decade makes, right?
So, let’s assume GS is right. Let’s ask ourselves, “What if stocks only rise 3%?” In effect, we’re saying that the 2000 – 2009 chart is more reflective of our future than the 2015 – 2024 chart.
Seems reasonable to me. I’m not all doom and gloom, I’m just a realist.
Nothing goes up forever. (Likewise, nothing stays down forever – remember that in the next bear market)
If you think a bit longer about reversion to the mean, it’s not all bad. Sure, it means the S&P 500 likely has some downside as it resets after a decade of outperformance. It also means that those asset classes with sub-par performance are due for their time in the sun.
If only we could see the future, this portfolio management stuff would be a lot easier.
So….what to do?
Here are 5 things I’d encourage you to think about:
5 Things To Always Remember (Especially Now)
None of us know the future, and we never will. Regardless, we should always keep 5 principles of personal finance in mind. These are sound principles, regardless of what’s happening in the market. They’re particularly relevant now, with several years of above-average returns in the market.
1. The Power of Asset Diversification
As we prepare our portfolios for retirement, we must diversify our assets to mitigate our risk. If you’re depending on your portfolio to fund your spending, what are you going to do when the next bear market hits? If you’re too heavily invested in stocks, you could be forced to sell stocks after a downturn, which exposes you to a sequence of return risk.
It’s critical to diversify your assets among a broader class of assets, including cash, bonds, and alternative assets (REITS, commodities, etc). A common asset allocation for retirees is 60% stocks / 40% Bonds & Cash, though your asset allocation should be determined based on your specific needs and risk tolerance. For further detail, read 10 Steps To Prepare Your Finances For Retirement. As part of our annual financial review, we update our Asset Allocation, and you should, too. It’s an important element in managing your portfolio and a critical waypoint on your retirement map.
One way to think about your asset allocation is to consider the “Time Segmentation” approach, where you place assets in various classes based on when you’ll need to withdraw the funds. I discuss this in detail in my Bucket Strategy Series. For example:
- Cash: To cover the next 1-3 years of spending
- Bonds: To cover years 4-7
- Stocks: To cover spending beyond 7 years
This oversimplified example can be complemented with smaller holdings in “Alternative” assets, such as Real Estate (REITS) and commodities. If stocks decline, you can draw down your cash or other asset classes (based on relative performance), mitigating your sequence of return risk.
Looking back at that table of returns from 2000 – 2009, a diversified approach would have given you some exposure in the asset classes that performed well during that timeframe (REITS, International Stocks, and Bonds), which could have been sold to fund your retirement expenses.
A final point about the bonds used in Bucket 2. As I wrote in How To Build A Bond Ladder, I’ve been restructuring some of my bond holdings into a bond ladder, eliminating the interest rate risk that bond mutual funds are exposed to. We currently hold ~50% of our annual income needs in bonds with known maturities through 2030 (with one rung as far out as 2033), which reduces my anxiety about a below-average stock market over the next 8 years. Some of the “rungs” in the ladder are held in TIPS, (2028 iShares IBIE fund) which also reduces our inflation risk. This will allow us to draw down the cash in Bucket 1 as we approach bond maturities, knowing exactly how much (and when) our “replenishment” cash will be available from the bonds. If stocks continue to do well, we can easily “roll” the bond rungs out to future years and use stock sales for our cash replenishment.
Options are good, and diversification is how you create them.
2. Beware Home Market Bias
We are all at risk of having a home bias, which works against our goals of maintaining a diversified portfolio. As this article states “U.S. equities represent about 60% of the global market…but Americans invest 85% of their portfolios in domestic equities.” Not only should you be diversified among asset classes, but you should be diversified geographically. Many argue that many stocks in the S&P500 are globally diversified, and they’re protected as a result.
I prefer a more intentional approach and maintain specific holdings to meet my diversification goals. For example, I hold ~30% of my stock position in VFSAX (Global Small Value) and VTIAX (Global Large Cap). Holding my international exposure in standalone funds allows me to sell whichever fund outperforms as part of my rebalancing process, which would be difficult if my international exposure was only through an S&P 500 fund.
Yes, international stocks have lagged domestic funds for years, but I’m ok with that. I’ve replenished my cash bucket through sales of the domestic funds (sell the winners) while maintaining my position (and targeted asset allocation percentage) in the international funds. That’s the whole point of a diversified portfolio. If “reversion to the mean” is a valid theory, one could expect international stocks may outperform domestic stocks at some point in the future, at which point I could sell the international funds for cash and maintain my domestic holdings.
As mentioned, Vanguard came out with a forecast consistent with GS, with a 3-5% range for US Equities. What I liked about their article was the inclusion of the following table, which includes their forecast for other asset classes (click on the link to see the entire table, including forecasts for bonds, commodities, and inflation – it was too large to include the entire table below).
Their forecast suggests global returns could outperform domestic equities in the next decade:
Forecasts are worthless, but it is reasonable to assume that international stocks could outperform domestic stocks at some point in the future, and having a fully diversified portfolio provides the opportunity to reap the rewards when and if that happens.
3. The Value of Rebalancing
Having a diversified portfolio is the first step, but you must structure a regular rebalancing routine into your portfolio management process to reap the full benefits of a diversified portfolio. As you’re withdrawing funds from your portfolio to fund retirement spending, it’s essential to “Sell The Winners” to restock your cash needs. Have you sold any of your stocks after the last two years of above-average returns? If not, you’re doing it wrong. Rebalancing sells the winners automatically, as it “forces” you to sell assets when they exceed your targeted allocation %’s, and buy those that are below target.
In How To Manage The Bucket Strategy, I shared the following chart from Michael Kitces which shows the value of regular rebalancing:
As part of our Annual Financial Review, I update our Asset Allocation and compare it to our target allocation. Since we’ve spent down cash over the year, our cash allocation will be below target. To refill it, I look for whatever asset class exceeds its target, and liquidate sufficient funds to refill the cash bucket. This year, for example, I sold some of our S&P 500 holdings and redirected the proceeds to our CapitalOne360 Money Market account. At the same time, I’ll analyze the number of years I have in each “Bucket” and rebalance accordingly.
I’ve noticed an interesting phenomenon since retiring that’s worth noting. This one takes some explaining, so stick with me. Remember my goal is to hold 3 years of cash in Bucket 1 and 4-7 years of bonds in Bucket 2. Everything else is Bucket 3, which we’ll call equities for simplicity. When the market returns more than your SWR, and you maintain a constant value in Buckets 1 and 2, the growth (by default) occurs in Bucket 3 (stocks). If your goal is to maintain 3 years of cash and 5 years of bonds, your asset allocation of stocks gradually increases as your overall portfolio grows. Kitces refers to increased exposure to equities throughout retirement as a rising glide path and states that a “rising equity glide path actually does improve retirement outcomes!” Without being aware of it, my bucket strategy has resulted in exactly this outcome, and I consider it an unexpected bonus of the bucket strategy. My focus is on maintaining (and rebalancing to) the “years of spending” targets in Bucket 1 and 2, and I expect our stock allocation will continue to increase whenever the market exceeds our 3.25% SWR. From a risk perspective, I’m comfortable with the higher asset allocation to stocks since I know I have 8 years of spending covered in the “safer assets” in Buckets 1 and 2.
Interesting, and worth a mention. I welcome your thoughts on the phenomenon in the comments.
4. The Need For A Flexible Spending Plan
What if stocks only rise 3% and we’re withdrawing 4%?
Two points to make:
1) Even if stocks only rise 3%, there’s a chance our other asset classes will deliver more than our Safe Withdrawal Rate, so we may not lose much ground.
2) We’ve built a flexible spending plan into our retirement strategy to mitigate the risk of lower-than-expected returns.
Every year during our annual review, I update our Net Worth and calculate our new Safe Withdrawal Rate boundaries (3%, 3.25%, 3.5%, and 4% of our 12/31 spendable assets). If the entire market tanks, we can increase our SWR from its current level of 3.25% to 4% to offset some of the impact. If the market has declined to the point that it requires a smaller “paycheck” the following year, we’re fine with that.
As we were planning for retirement, we made sure that our spending estimates included some “wants” in addition to “needs.” Worse case, we can forgo some of the “wants” for a few years.
As I mentioned in How Much Can You Safely Spend in Retirement, having a flexible spending plan based on the prior year’s market performance greatly increases the odds that your money will last throughout your retirement. Considering that it’s human nature to cut back when the markets are performing poorly, it seems reasonable that we can reduce spending as a last resort if Goldman Sachs ends up being correct with their forecast.
5. Don’t Panic
I sincerely doubt a forecast from Goldman Sachs will make any of you panic. I can’t say the same about your reaction to a bear market. As the following chart shows, we’ve had two downturns since I retired in 2018:
Both times, the tone of the comments I received on this blog changed dramatically.
Interest in The Bucket Strategy always skyrockets after a downturn. Folks get nervous and worry that the bear market will impact their retirement. It shouldn’t be that way.
As you’re preparing for retirement, you MUST build a plan that will endure market downturns. There WILL be bear markets during your retirement, and we shouldn’t be surprised when they occur. My strategy is to hold 3 years of cash and 4+ years of bonds and includes an allowance to draw those balances down if the market underperforms (to avoid selling stocks after a downturn). I’ve taken it a step further and built a bond ladder to reduce my risk over the next 7 years. I didn’t even blink during the two downturns of my retirement, and I won’t blink at the next one. That’s exactly why I stated earlier:
I suspect Goldman Sachs and Vanguard are probably right. The surprising thing is, I’m not too worried about it.
Here are a few warning signs for you to consider. :
- Have you held onto all of your stocks (no rebalancing) over the past 12 months?
- Did you get nervous during the market downturns of 2020 and 2022?
- Did you question the way you’re funding your spending during those downturns?
If you answer “yes” to any of the questions above, it’s time to revisit your plan. Take action now, while the market is still strong and you have an opportunity to prepare for the next storm. Remember, you should be happy right now – the market has just experienced two of the strongest years in our lifetime. Lock in some of the gains, and prepare for the likely reversion to the mean. It’s all part of the game.
What if stocks only rise 3% over the next decade? Even if GS is wrong, the markets will experience a downturn at some point in the next 10 years. Since 1929, bear markets have occurred on average every 4.8 to 5.7 years and last about 9.6 months. It’s the nature of the beast, and we have to learn to live with it.
The sun has been shining, but there’s rain in the forecast.
Do you have your umbrella ready?
Conclusion
Markets go up, and markets go down.
It’s our job to prepare a strategy that allows us to enjoy our retirement regardless of what the market is doing. While I don’t pay any attention to forecasts, it is a valid question to ask what you’ll do if GS and Vanguard are right.
What if stocks only rise 3%?
For fun, I put the question on my X account and promised to post my favorite response in this article. Congratulations lifeaftersales, you win with the following response. The final two points of your Tweet are great reminders of what matters, though I’d also add Spirituality to the list (I also loved that you touched on knowing how much you spend, being conservative, building a bond ladder, and rebalancing – all topics I touched on in this post. You’re a mind-reader!):
If you’ve done your homework and have a plan in place, your response should be the same as lifeaftersales, which was consistent with what I wrote earlier in this post…
“I’m not too worried about it.”
What about you?
Your Turn: Ok, no bashing forecasts. I consider them useless, but thought the GS forecast was a good jumping-off point to discuss the realities of market volatility, and how we should build our plans accordingly. What are you doing to protect against the next downturn? Let’s chat…
No trust in forecasts especially from institutions as they have a bias to under forecast to over deliver.
What will be will be . Diversify, control spending , dont worry .
Very sound advice, particularly the don’t panic, diversify, and have a flexible spending plan (if you are financially able to). I would add a larger point: the more significant risk is the multi-year drawdowns (e.g., as occurred in the early 1970s and the decade following the dot.com bubble 2000- 2009/10). These are the periods that introduce the most problems for retirees living on their portfolio. Does not change your advice but a short-term value decline, even a large one as occurred in 2022, is not the greatest risk to try to mitigate…
Daniel, valid point about a long-term drawdown being our biggest risk. As you said, it doesn’t change the advice, but I certainly hope it isn’t something we have to deal with…
Despite forecasts I’m wondering about your bucket strategy and your 3.25% withdrawal.
1) If I retired in 2025 with a 5m portfolio and used your strategy, I’d have a 64/36 portfolio with 3 years of cash in a money market. I’m happy with a 60/40 portfolio with a year less of cash and more money in my 10 year Treasury ladder, + 1 corporate.
2) Isn’t Bengen’s 4% rule a base case and conservative% It’s a 50/50 portfolio that includes the great depression. I feel like your low spending means limiting yourself. As long as this is by choice, great. If not, I believe the 4% rule works continually. Thanks!
Ah, the old 4% rule, subject of endless debate on the internet!
Jeff, I’d be comfortable to go to 4% if we needed it, but with the market’s over-performance since I’ve retired, we’re living well beyond our needs and satisfying all of our wants at 3.25% for the moment. We even have an Arctic Cruise planned for this August, so we’re comfortable at the 3.25%. BTW, Morningstar just reduced their suggest SWR to 3.25% based on the market’s current high valuation, so there are differing opinions on what a SWR should be given the market’s valuation. The debate continues…
Great article Fritz. I may be misinterpreting but I think Morningstar adjusted their SWR recommendation to 3.7% (based on 30 years, 90% probability, and 20-50% equities). Their SWR recommendations become more conservative for higher equity percentages (e.g., SWR for 70/30 is 3.5%).
Oh yes, the kids may not get as much 🙂
These are excellent reminders that nothing goes up forever. The recent great performance of US large cap is a reminder that at some point we’ll see mean reversion and other asset classes outperform. The hardest thing in investing is putting money in under-performing assets but that is exactly what you have to do to manage the risk profile of your portfolio. It’s especially tough these days when it comes to putting money into bonds. I recently implemented a TIPS ladder with specific cash flow requirements that I intend to hold until maturity. That way I don’t have to worry about changing bond prices at all. I also don’t have to spend time on that portion of my portfolio. At the end of the day my advice to investors is always the same – know when to be aggressive (when everything looks bleak), when to be defensive (when everything looks to be too good to be true), and most importantly know when to stick to your pre-defined asset allocation and ignore the noise of markets. By the way, 90% of the time you should not do much more than rebalancing and watch your money from afar.
Eric, good point about “the hardest thing.” Every year, I have portions of my portfolio that under-perform. That’s the nature of diversification, and I’m fine with that. Like you, I spend very little time managing our portfolio and ignore the noise 95% of the time.
Another thing that many people suffer from: “Chasing the winners,” a strategy that almost never works out. Better to build your strategy, cover your shorter term spending needs (bond ladders for the win!), determine your targeted Asset Allocation, and rebalance regularly…
Thanks Fritz, great reminder to stay diversified. One benefit of a rocky equities market is tax loss harvesting. Selling some equities for a loss allows for reductions in current income taxes and you can carry some of the losses for future years. This might provide an additional reduction in yearly spending and your safe withdraw rate during down years. We’ve had great markets for many years it’s easy to forget some of the options available during those bad years.
Good point about Tax Loss Harvesting, but we have a long way to fall before that strategy will come into play (especially after the two strong years in the market). Good reminder for when those bad years arrive (because we all know, at some point they will).
Fritz,
Thanks for the “shout-out”. My comments were completely in-line with your post, even without knowing what you wrote – partially because I’ve read great content from you and others over the years, partially because I understand the power of diversification.
When you’re winning the game, no need to swing for the fences…I’ll take singles and doubles all day!
Congratulations on winning my “contest” on X, ex-salesman! As I mentioned in my reply to you on X, it’s almost like you had read a draft of the post. Amazing minds…
Aloha Fritz!
Another good article to get folks to think about their retirement futures!
We are currently selling our equity winners, reducing from 70% holdings of various ETF’s/individual companies down to about 55%. Selling lots has only gotten us to 61% so far. I find it much easier to decide on when to invest than I do when time to sell! How about the rest of you?
We will have far too much in cd’s and cash and I don’t really care. When we claim our 2 SS checks, we really won’t have to draw down any funds. So gifting and giving time for us! Our 60% equity holdings contains more and more international and small cap value holdings now. We don’t invest much in bonds but do have I bonds and long term CD’s that return btwn 4-5% – laddered them to mature over the next 6 years. Definitely reducing our tech stocks and funds. It is difficult to let go some of your 1200% and 500% winners!
We are grateful for folks like you that educate and inspire others to learn and act. We feel like we have “won the game” since retiring in 2015. Our cash holdings will go back into ITOT or similar ETF upon S&P slide of 10% and then more if it drops another 5%. That is what I did in 2019 and again in 2022. Was a great decision to buy then, but it is hard to let go of your winners.
Grateful and blessed here in the great Midwest, Steve
You’re doing it right, Steve. Wink.
And yes, I agree it’s harder to decide on when to sell than it is on when to buy. That’s why rebalancing to targeted Asset Allocation works for me, it makes the decision for me. Thanks for your loyalty to my writing, much appreciated!
I think there is a reasonable chance stocks will lose value over the next decade, and that when you add in the inflation loss, they’ll really lose. I’m not concerned, it won’t affect my lifestyle at all, but it would be an issue for many who have based their retirement funding on a 10% average increase. By almost any analytical metric stocks are just way way overpriced. A decade of no growth or negative growth is what it may take to restore reasonable, earnings based, prices for stocks.
Personally, I’ll be thrilled if stocks manage a 3% annual gain over the next ten years. Of course, anything can happen and stocks may average 20%, I’d be even more thrilled then.
We’re kindred spirits, Steveark. It’ll be interesting to look back on this post in a few years and see how things have played out. Like you, I’m not concerned…
There have been 8 times where the S&P returned back to back 20%+ years. In 6 of 8 of those scenarios, the S&P was up the third year. I have no crystal ball but betting against the US economy is generally a losing proposition.
Everyone likes to point out the ” Lost Decade ” but you needed a 50%+ loss in 2009 to make it a lost decade.
Excellent article Fritz. My wife and I are fast approaching retirements in 2025 and 2026. I would love to see an analysis and your thoughts on how your first six years of retirement would have been different had you retired into 3% returns. Your perspective on both the numbers and how it may have impacted your life decisions would be very valuable.
Congratulations on your rapidly approaching “Starting Line,” Jamie. Good question. It’s relevant to know that when I retired, I had no idea we’d have strong market performance in my early years of retirement. Therefore, I structured my retirement portfolio the same as I recommend in the post.
As for how it would have played out, I don’t think my life would have changed much. Most likely, we’d be at a 4% SWR instead of our current level of 3.25%, and I’d be selling other asset classes to refill Bucket 1’s cash. We’d have reduced our discretionary spending a bit, but I don’t think it would have changed things in a meaningful way. We’ve built a plan for the long-term, and we expect there will be some bumps along the way. When the market first turned down those two times I talked about, we had no way to know they’d bounce right back up. In hindsight, it was minor, but we didn’t know that at the time. And yet, I had no worries during those downturns. Build a plan your confident in, then get on with living your life.
Good luck on your journey across the line!
Thanks Fritz. I’m hoping for a continuing AI productivity fueled continuing bull market but have things structured for (almost) anything. Appreciate the response.
I am just starting Roth conversions and am actually hoping for that next bear market to transfer in low. With every risk comes opportunity. You just need to think about what to do ahead of time.
I love the charts as a reminder to lighten up on large caps.
Good point about bear markets offering some advantages for Roth conversions. I’d still rather have strong markets, but there’s always a positive angle in every situation. Thanks for pointing one out.
Same here. I did my first conversion in late 2024. I only have a few years to finish my Roth conversion schedule before SS and then RMDs begin, and 2024 was a very low income year for me with high write-offs yielding an overall effective tax rate of less than 9% including the conversion, so I figured all that offset doing a conversion near the multi-year top of the market.
I’d definitely hop on a large Roth conversion during a down year if the overall financial picture supported it.
Good reminder that we should all do periodic reviews of our retirement plan. You touch on a topic that is top of mind for many of us. The GS forecast is as worthless and random as any other out there, and as you say “I SUSPECT they are PROBABLY right” does not lend much confidence to its validity. Of course, you are aware the 2000-2009 period you quote contains both the dotcom crash of 2000 and the credit crash of 2008….so yes those returns were terrible. It’s very easy to cherry pick periods to make a point. I see it every time I participate in one of those “free” investment firm dinners when they try to sell me a FIA! In my opinion, if a person is considering any actions to “time” the market, such as “lock in gains”, other than rebalancing you do not have a very resilient plan. We’ve seen time and time again, no one can consistently time the market. Build a resilient plan, don’t tinker with it, and LIVE as the X guy advises.
“No one can consistently time the market.” Exactly, Allen, I agree that you must develop a resilient plan, hopefully these 5 principles will help folks do that. And yes, I love that the “X Guy” added the reminder to enjoy life.
The longer I live in my retirement years, the more I realize the non-financial stuff is what really matters.
I cringe when I read forecast. Note that they never provide a summary of their past forecasts. The current long term bull market has been “forecast” to break for over a decade. Even a pandemic did not make it fall! But yes, a good reminder to stress test one’s portfolio.
Hey, didn’t you see my warning: “Ok, no bashing forecasts.” Wink.
Lived/invested through that lost decade, I was in my 30s into 40s by GFC. it was hard but not as hard as it would be today, retired with significantly larger balances. This is something being retired 3 years now (late 50s) we think about. when equities go up so much, it makes me nervous. we were originally going to slowly ramp into more bonds over the next 10 years a few % increase a year, a linear shift over time, but decided to accelerate our glidepath given the last 2 years. Curious if others think having a non-linear glide path is ill advised and why.
As did I, Wade. I was also in my 30-40’s, didn’t bother me a bit. In hindsight, we were fortunate to be in a situation where we were starting to make some decent money and investing heavily in the market during “The Lost Decade.” It’s served us well.
As for a non-linear glide path, I don’t have any issues with it at all. Build a plan, then execute. Nobody said things need to be linear. If you see an opportunity given the current high valuations of stocks to move a bit faster into your bond strategy, I see no reason not to do it. “The Red Zone” (search on my site for articles) start 5+ years before retirement, so being 3 years out is a reasonable time for the move.
The years between 2004 and 2015 were when I made the heaviest contributions to my 401K and Roth.
It took some intestinal fortitude to hang tight and stay the course while the market dropped, but it paid off in a big way.
Good article Fritz.
Retired in 2023 and created my 30-year plan using three different market scenarios: Significantly Below Average, Below Average and Average. My plan is based on SBA, since it is the safest. My buckets are 1/3 Protection (Social Security / Annuity), 1/3 Growth (70/28/2 – Stocks/Bond/Crypto) and 1/3 Short Term (Cash and Money Markets).
It’s been a pretty good start, but since my spending plan is based on significantly below average, it’s been a very pleasant retirement so far and I’m not worried at all, especially since my Protection bucket covers 95% of my monthly spend.
Time to start shifting to the “Average” strategy, perhaps? Enjoy that money while you’re still young enough to do the things you want to do. The market’s been kind, no need to be overly conservative, IMHO. You can always revert back to “SBA” if things turn South. Get out and live a little. Smiles
Yep – good point. You’re right. My wife tends to be the one that is more adventurous; she keeps saying we can’t take our money with us when we kick the bucket…lol.
My wife and I are not sophisticated investors. We use Retirement Target Date funds for the bulk of our portfolio. We adjust the target dates based on how aggressive we want to be in our stocks/bonds allocation. We are fortunate to have pensions that help offset some of the market risk you described but we’d be interested in any thoughts you have on how to manage target date funds that would allow us to achieve the kind of diversity you get with your bucket strategy approach.
Walt, I had a ton of Target Date Funds in my 401k, but moved them into individual bond and equity funds (in the same % as the Target Date Funds) when I closed my 401k.
Why?
They’re great in the Accumulation Phase, but tough to manage in the Withdrawal Phase. For example, if Stocks are up and Bonds are down, they don’t allow you to sell “only” the stock portion for your spending needs. That’s why I changed, but many folks use them throughout retirement. The choice is yours. The benefit is automatic rebalancing, the challenging part is “selling the winners” to replenish the cash needed to fund your retirement.
As I account for future returns, I place significant more value on mytime in my 60’s and 70’s. As such, i am personally working very hard to spend at least 4%, and would not change it until it is obvious that plan needs change.
I would rather have significant memories, less regrets in my 80’s rather than a large nest egg, while I sit and watch tv.
As a lifelong safer, i need to keep this in the forefront.
Sound strategy, Big Mike. You’re wise to recognize the potential for future regrets if you don’t do the things you want to do, while you can still do them. 4% is a good SWR, no issues.
I’ve kept buckets 1 and 2 steady since 2020, filling bucket 1 last year from TSP. Bucket 2 is mostly REITs and some bonds, though. Yes, bucket 3 has grown much, tilting me harder to stocks. I’m not overly concerned, as cash of bucket 1 is actually almost 4 years and I’ll start SS in 3. Besides, I think the “insurance premium” cost of bonds is too much vs the market growth opportunities. We’ll see.
The TSP (fed govt) plan is nice, except every withdrawal is pulled proportionately from each TSP investment. So if the C account (S&P 500) is 50%, any withdrawal will be 50% from big stocks. Makes rebalanced challenging.
I understand, Kev. Similar to the earlier comment regarding my views of Target Date Funds. Having to sell based on the % of holdings definitely makes it more challenging to “sell the winners.”
This article resonates very much with our plan with one exception. We chose to partially annuitize our portfolio in lieu of bucket 1. This self-funded pension along with our SS benefits covers almost all our expenses except for major travel. We then have a 5-yr CD/bond ladder to support our discretionary travel “wants” along with an additional five years of bond funds/buffered ETFs. These assets (in our bucket 2) cover 10 years of potential discretionary spending and constitute 30% of our portfolio. The remaining 70% (bucket 3) can then be invested in the long-term in diversified equities. We are almost 12 years into retirement and our bucket 1 (SS benefits and annuity income) still covers most of our expenses (even as our annuity income has no COLA). We have a SWR of 3%, all of which is discretionary and can support a variable SWR if needed (since it is mostly travel expenses). In combination with our retirement income plan, we also worked on expense management where our personal rate of “inflation” has been near zero. This is a bit misleading but mathematically resulted in that outcome due to paying off mortgage at beginning of retirement, installing solar to eliminate electrical bills, switching to heat pump (from propane gas) for heating/AC, transitioning to electric vehicle to reduce gas costs, paying five-figure Roth conversion taxes (for years), and recently eliminated paying IRMAA premiums. We lucked out that our property tax over the past 11 years only increased 10% (cumulative) due to business growth in our town. The bottom line is that our (total) recurring costs are lower today than when we retired.
Thanks for bringing annuities into the discussion, Glen. Certainly a viable tool, and one I discussed in my recent post on the 10 things you should do to prepare your finances for retirement. It sounds like you’ve got a solid, and conservative, plan. Well done.
I rarely see RMD’s mentioned in how to manage your investments if market drops. This will be my first year of having to take money out of IRA to satisfy RMD. What to do with the money, how to invest it, what if the market drops, do I dollar cost average withdrawals? My RMD will be about $67,000! That’s a big chunk to think about and I really never gave it a thought until I turned 73!
Hi Laurel. It may be behind a paywall, but if not, this article from former WSJ reporter and editor Glenn Ruffenach might help: https://www.wsj.com/articles/ira-withdrawals-rmd-tips-11662146809?st=k2NRbo&reflink=desktopwebshare_permalink
Laurel, ah, the pain of facing those dreaded RMD’s! You’re not alone in “never giving it a thought,” a lot of people are surprised by the impact the RMD’s have on your tax bill. I’ll be the first to admit optimizing your RMD withdrawal isn’t something I haven’t written about (I’m 61 years old, so quite a few years from having to face that problem. My focus at this point has been on minimizing the future problem by maximizing my Roth conversions “while I still can”). I know there’s a lot written about the topic, would suggest you do a Google search.
In short, without thinking too deeply about it, I don’t think it makes much difference how you do the withdrawals. Theoretically, you’d get more shares out of the IRA if you sell after a downturn, but if you do that I’d suggest you reinvest the money in a similar asset class in your after-tax account to avoid “selling stocks when they’re down”. Alternatively, you can just sell throughout the year and use the proceeds to fund your retirement expenses, keeping them in cash if you need the money. Ideally, you’ll sell them at the highest possible price (“selling the winners”) if you’re going to be moving it to cash.
So, if you need it, put it in cash. If you don’t need the cash, reinvest in a similar asset class in your after-tax account. Again, I haven’t put much thought into it, but that’s what my instinct would tell me. Please do some research and don’t rely on my quick answer, I only spent 60 seconds thinking about it.
One Note: You will need to increase your Quarterly Estimated Tax payments to reflect the higher tax bill you’ll owe with the additional $67k of “income” from a tax perspective.
Thank you. Your suggestion about taking RMD out and reinvesting in same fund in brokerage account is what I’m considering. I’m also considering dividing it 50% in Money Market and 50% in a total stock fund. I did some ROTH conversions, but not enough to really make a difference because the market kept going up!
Fritz, would you consider writing an article about exactly how you went about creating your bond ladder? I have lots of bonds, all in a passive Total U.S. Bond Index fund in my taxable brokerage account. I’m wondering how I’d go about creating a ladder, especially considering the tax consequences involved. Thank you kindly! (By the way, I will be retiring next year after 23 years in the Air Force)
Your wish is my command – I actually wrote the following:
https://www.theretirementmanifesto.com/how-to-build-a-bond-ladder/
Hope it helps! Congratulations on your rapidly approaching “Starting Line,” and thanks for your service.
Hi Fritz! I must have read your Bucket Strategy posts 10-15 times over the last few years. It’s certainly my favorite. I’m just now completing my 1st year of retirement. My company offered an early retirement package which I took advantage of last year. I retired at the end of February 2024. After Easter Sunday last year, we left church, hooked up our 5th wheel camper and headed north to Alaska. Spent 7 1/2 months traveling across country, through the Canadian Rockies, spent the summer in Alaska, and the fall camping along the Oregon coast. My wife and I are now resting up and spending some time on the couch before our next adventure.
I’ve spent this month finetuning my retirement budget and getting the automatic transfers setup with Capital One to implement a ‘retirement paycheck’. I have 3 years of cash saved, and replenish bucket 1 with dividends. My portfolio in retirement is 100% stocks with REITS and Utilities being around 20%. We’re able to live off dividends and social security without selling anything. Should their be dividend cuts during a downturn, we have 1-2 years to adjust and prepare.
We’ll be taking our 5th wheel to Michigan this year to explore the Upper Peninsula and Mackinac Island. This will be around a 3 month trip ending with a family camping meeting up. Our two kids both have campers and we pick a central location and all camp together for a long weekend. It’s so much fun.
Thanks for your passion and thought provoking articles.
Chris, glad to hear my Bucket Strategy resonates with you, and that the series I’ve written on the strategy is helpful. Congrats on landing an “early out” package, I was always hoping I’d get one of those, but it wasn’t meant to me.
As for Michigan (my home state), you’ll LOVE the Upper Penisula! We spent some time there a few years back with our RV, in case you missed it, I’ve put the link below. Enjoy your trip!
https://www.theretirementmanifesto.com/the-great-escape/
Hello Fritz – First off, all GREAT advice! Thanks for your work and the contributions from others. I find this all very useful and valuable. I have a conceptual question with your approach, but first some context.
I’ve been 65/35 at Vanguard for years (decades?) and moved to 60/40 in the past couple years. I’m three months away from the “starting-line” as you call it! If I adopt your three bucket approach at retirement, then in one year, I’ll have 2 yrs in cash, the bond ladder will have rungs maturing at 3, 4, 5 and 6 years, with the balance in equity.
So here’s the question: do I add a new “7-year” rung to the ladder (presumably with liquidations from the equity holdings) at this first anniversary? If so, I presume when it rolls around to the second anniversary, I’d repeat adding a new 7-year rung like we did at the first anniversary. And then when I reach my third anniversary – I’d simply use the first maturing bond rung from my ladder for my fourth-year cash needs (and keep adding a 7-year rung at each anniversary and so on, and so forth).
Do I understand this correctly?
Jeff, Congratulations on your final 3 month sprint, you’ll love crossing that line!
Since you have a Bond Ladder in place, I agree with your layout on how you’d handle things over time. When I first implemented the Bucket Strategy, I didn’t have a bond ladder, but have now added it. Now that it’s in place, I’ll do exactly as you’re thinking. The only note is that I won’t automatically add another rung at the end of the year. If equities are down (using Asset Allocation as my guide), I wouldn’t sell equities to buy a 7th year run. Rather, I’d bypass the “rung addition” until equities rebound, allowing Bucket 1 and 2 to buffer against selling stocks after a downturn (which is one of the objectives of the strategy). Trust that makes sense.
What If Stocks Only Rise 3%?
1. Set your “Safe Withdrawal Rate” at 3%.
2. Have fun and be kind and/or useful with your set budget.
Have a wonderful retirement everyone, you have earned it!