Growth portfolio in retirement

Investing Strategies Retirement Investing
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I have an individual stock portfolio that I want to derive income to cover all my expenses in retirement.
It is composed of mainly growth stocks. The portfolio has sunk 50% since its last high attained last November 2021.

I am preparing to retire. I need this portfolio to last >40 years and I hope I can pass it to my child (or grandchild) after that. So I need growth in this portfolio and some short term stability so I can draw income ‘regularly’.

I can stretch the meaning of ‘regularly’ beyond one year by use of an initial cushion I would maintain. I want to maintain a cushion of about 3 to 5 years of regular expenses and projected large items expenses.

The ‘regular’ draw would replenish this cushion when the portfolio is doing well. I would be able to hunker down during down drafts and wait (~2 or 3 years) until better times in the market.

I am now wrestling with the best composition of this portfolio to meet my objectives in retirement.
I have some dividend paying stocks but the yield would only pay ~20% of my regular annual expenses so I would need to take strategic capital gains.

I would like to hear from more retirees who might have similar strategies on how it worked out for them. Is it possible to live only from a stock portfolio for >40years. My portfolio meets the 4% rule criteria in terms portfolio size vs how much I can(=need to) draw annually for a retirement period (>30years?).

I want to get guidance on the composition of such a portfolio. In general, stocks (growth) are more volatile than other stocks, and than bonds. But I saw studies that indicate that in the long term, volatility is reduced while returns increased for any stock/bond composed portfolios. Adding in (more) bonds would reduce the volatility of the portfolio but in the very long term (20 years+), a portfolio with 100% stocks becomes less volatile than one that has some bonds in the portfolio while still having bigger returns.

So knowing that I am wondering how that applies to a particular portfolio? If you do go with 100% stocks, could you make it work with the need to take some off the table at various point in time? You would skim and trim rather than sell any position entirely unless that particular business encounters issues of its own.
One would adhere to buy and hold + trimming some once every 1-3 years unless the business has become unattractive.

For this to work, the basic composition of the portfolio would have to be a good one for the long term ‘buy&hold and never sell’. But you would have to sell some for income. How would that affect the portfolio? if it get to an escape growth, I would imagine that taking some off the table from time to time would be ok to maintain or to grow the portfolio further?

Do one really need a less volatile portfolio?

What do you think?

p.s. some associated risk with volatility but I think one needs to define risk in retirement more like losing portfolio value so much that you don’t have enough to derive the income you need.
Beyond psychological tolerance for volatility, I am looking for some sort of way that despite high volatility one could still use his or her growth portfolio to generate the income he or she needs through a long retirement period (>40 years).

tj

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The traditional TMF answer is to keep five years of living expenses in a laddered maturity bond portfolio. You live off of the maturing bond and the portfolio interest. And sell 4% of invested assets each year to replace the 5-yr bond.

This gives you a buffer against market downturns. It saves you from selling stocks in a down market which usually lasts three years or less.

When the market is down, you defer replacing the maturing bond until the market recovers.

Over time, growth investing gives the best returns and the best chance of keeping up with inflation. But of course, occasional market downturns are to be expected. You need to be prepared to deal with them.

And note that 5 yrs of 4% living expenses gives you a 20% bond position. Far less than many recommend. This is an aggressive position.

And note this is with the minimum assets to retire on 4% of assets. Some do very well and have far more. They may find a number much less than 4% will cover their living expenses. And then an even smaller bond position.

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I have an individual stock portfolio that I want to derive income to cover all my expenses in retirement.
I am preparing to retire. I need this portfolio to last >40 years … I need growth in this portfolio and some short term stability so I can draw income ‘regularly’.

Read up on the 4% SWR (safe withdrawal rate) strategy. That’s all you need.

The ‘regular’ draw would replenish this cushion when the portfolio is doing well. I would be able to hunker down during down drafts and wait (~2 or 3 years) until better times in the market.

Okay, this doesn’t work. It is a thing that people want…but it does not work. It’s a fantasy. It sounds good, certainly would be appealing. If it worked. Unfortunately it doesn’t.
Just google “cash bucket” or better yet, “problems with cash bucket”.

Here is a spreadsheet that shows cash bucket withdrawal strategies in operation. https://www.dropbox.com/s/xf4ma5blug27aws/SPY_Withdraw_by_Ca… It does not work.

I am now wrestling with the best composition of this portfolio to meet my objectives in retirement.
I have some dividend paying stocks …

Dividend paying stocks seem like a free lunch. They aren’t. Many articles & papers delve into this. The authoritative/academic writers – unlike the popular journalists & internet scribblers – explain why focusing on dividends is a bad idea.

Mungofitch (Jim) has written a number of times on TMF about a strategy of buying BRK and selling ~1% it annually. Something like that, I don’t recall the details. Probably he posted it on either or both the Berkshire board or the Mechanical Investing board. Sorry, I don’t have a link. Find some post by him and click on his name and read his posts until you find it. IIRC, he’s mentioned it a couple of times in recent weeks.
(When/if you find it, please post the link here.)

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The traditional TMF answer is to keep five years of living expenses in a laddered maturity bond portfolio. You live off of the maturing bond and the portfolio interest. And sell 4% of invested assets each year to replace the 5-yr bond.

Yeah, I’m not sure this works either. It’s basically a variation of the cash-bucket. What you are doing here is selling stocks every year and spending the money from the stocks you sold 5 years ago. You are just cycling the money from the stocks through a 5 year pipeline.

In addition to the fact that right now bonds are return-free risk and not risk-free return. So this is a BAD time to start buying bonds.

This gives you a buffer against market downturns. It saves you from selling stocks in a down market

Well, no it doesn’t.

And if you are doing annual rebalancing a balanced 60/40 or 80/20 portfolio, you are not selling stocks in a down market. In the rebalance you are selling bonds and buying stocks.

Just like there is no clever way of arranging potatoes so that you can fit 10 pounds in a 5 pound bag.

Again, look at the cash bucket spreadsheet I posted the link to. If you set the bond allocation to 10 yr T-bill, that’s equivalent to a bond ladder. Play with the parameters all you want. Nothing works.

Actually, I think the best variation is to start with your preferred cash/bond allocation and never refill that bucket.

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“And note that 5 yrs of 4% living expenses gives you a 20% bond position. Far less than many recommend. This is an aggressive position.”

Is that from where the 80/20 stock/bond composition comes from? I did not know that. But this would only replenish one year after 5 years.
On the 4% rule, aren’t you drawing that expense amount adjusted for inflation every year?

I am talking about it a bit differently…

My cash cushion will be completely separate from my portfolio which a ( up to <20%) portion could be in cash depending market conditions at any point in time. The cash cushion is a separate thing where I keep my 3 to 5 years of regular spending and some large items I expect to buy in the next 3 to 5 years. That can be managed separately from my portfolio using CD ladder, Treasury bills and notes, bonds etc…). I have this 5 year cushion on hand already and want to start my retirement with it. I want to be able to maintain (plus adjusting for inflation) that 3 to 5 year cushion throughout my retirement of 40 years +.
So I want to draw from the portfolio to replenish moving forward. I could take more or less depending on market and my portfolio’s condition at different times during that 3 to 5 years buffer.

My question is what do you think of this 100% stock portfolio being able to provide that replenishment for >40years?

tj

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Read up on the 4% SWR (safe withdrawal rate) strategy. That’s all you need.

The person may need more than that since the 4% SWR is a 30 year strategy and the poster wants 40 or more years.

PSU

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Ray Mungofitch (Jim) has written a number of times on TMF about a strategy of buying BRK and selling ~1% it annually. Something like that, I don’t recall the details. Probably he posted it on either or both the Berkshire board or the Mechanical Investing board. Sorry, I don’t have a link.

Here is one post on MI, where Jim discusses the concept.
He reiterates it several times in several posts.
Jim describes it at the bottom of this post.

https://discussion.fool.com/we-are-putting-a-major-portion-into-…

:alien:
ralph

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I have a portfolio on which I can do the 4% rule. The cash cushion is in addition and separately managed. There is a question of if that is the most efficient way to invest but for a retirement there is some stability that is needed how ever you achieve it (stock/bond composition, re-balancing or some other ways…).

For the portfolio, you still have to decide when to take the money out during the year. It has to occur sometimes during the year. So why would it not be an advantage if you have the flexibility to take what you need over 1 to 3 or 4 or 5 years if you can?

The goal is not to time anything. It is just to say that during major down draft, I choose not to draw while drawing more regularly on up markets. We never know when the bottom or the top are reached but we can have some bounds in terms of how long bear markets occurred historically and how fast they rebound or fall into one. These could be used as guidelines and expectations would not be completely open. The 4% rule is also based on historical market statistics.

The goal is to minimally affect the portfolio’s growth by drawing on it minimally or as much as I need at different times that could be irregularly spaced. Ideally you want the market cycles to be synchronized with your need to draw to replenish your cushion. It may not be, and despite that how well or how badly could we do over a 40+ years of retirement using such a strategy?

tj

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What I’ve done over the past 20 years is hold about 5 year’s worth of living expenses in short-term bonds, and the rest of the portfolio in stock (individual stocks and index funds.) As the retirement portfolio has grown over the years, the 5 years’ worth of expenses in bonds has become a smaller percentage of the portfolio, I’m about 97% stock, 3% fixed income today. My living expenses after 28 years of compounded investment returns are now well below a 1% of assets withdrawal.

If you retire early with the “4% rule”, you’re much more likely to leave a bundle to your heirs or charitable beneficiaries than run out of money – no matter how long you live. That’s the big thing folks don’t understand about the 4% rule and why Wall Street is so hot to sell you an annuity to solve the “problems of the 4% rule”. The biggest problem with the 4% rule is that Wall Street isn’t making any money off it if the retiree is implementing it correctly.

intercst

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My question is what do you think of this 100% stock portfolio being able to provide that replenishment for >40years?

Over time growth stock portfolios do very well. And should be able to cover your needs. But you must avoid selling stocks in a down market. Use whatever method you choose to avoid that. Bond ladder, CD ladder, dividend stocks. Just plan for occasional bumps in the road.

The 4% discussions and models seem to anticipate constant withdrawals. But in reality most will adjust spending accordingly. Maybe defer the big vacation or the new auto in a bad year. And wait for a good year. No big deal. You can adjust as you go along.

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What you are doing here is selling stocks every year and spending the money from the stocks you sold 5 years ago. You are just cycling the money from the stocks through a 5 year pipeline.

In addition to the fact that right now bonds are return-free risk and not risk-free return. So this is a BAD time to start buying bonds.

Clearly you defer selling stocks in a down market. You use the bonds as a buffer. And then replace the bonds after the market recovers.

Agreed, now is a bad time to buy bonds. Now is a bad time to retire. But plan ahead and accumulate some appropriate assets to cover the down market situation.

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The person may need more than that since the 4% SWR is a 30 year strategy and the poster wants 40 or more years.

As my wife-to-be liked to say, “People in hell want icewater.”

Look, the 4% SWR rule isn’t even 100% safe. But that’s okay, once the portfolio survival rate up is in the high 90’s, then other non-portfolio events dominate the possibilities.
Not to mention that 4% SWR isn’t a prediction, it’s what happened in the past. The future is not guaranteed to be exactly like the past.

Firecalc says there is 95.1% 30-year success rate for a 75/25 portfolio. https://firecalc.com/index.php?wdamt=40000&PortValue=100…

It also says, “Research seems to suggest about 50% equities for a 10 year term, almost 70% for a 20 year term, and around 85% for a 60 year term.”

80/20 for 40 years at 4% SWR is 86.6% success rate.
3.8% SWR is 92.9%
3.7% SWR is 94.6%

A key point is that if you have some sort of variable withdrawal strategy to reduce your spending in a bear market, then 4% SWR will do just fine. I like the Guyton-Klinger strategy, but there are plenty of others.

FWIW, I used Guyton-Klinger starting in 2007 – just in time for the 2008/9 bear market – and followed it for 10 years. At the 10’th year I gave it up, because the portfolio value grew so large that we didn’t come anywhere near 4% withdrawal.

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The 4% discussions and models seem to anticipate constant withdrawals. But in reality most will adjust spending accordingly. Maybe defer the big vacation or the new auto in a bad year. And wait for a good year. No big deal. You can adjust as you go along.

Actually, I did the opposite. When everyone got afraid to spend on cruises and travel after the 2008 Economic collapse, I doubled my spending and started taking 3 or 4 cruises per year to take advantage of the bargains. I did a 21-day cruise of South America and Antarctica for less than $5,000. A 7-day Adriatic Sea cruise from Venice was less than $500. When prices and my stock portfolio returned to more normal levels, I found I had less of an appetite for travel.

intercst

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Indeed, those with the resources can do very well in hard times like recession. Your money will go further.

But that’s not for people just barely scraping by on 4%. That’s for those with adequate reserves.

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I have an individual stock portfolio that I want to derive income to cover all my expenses in retirement.
It is composed of mainly growth stocks. The portfolio has sunk 50% since its last high attained last November 2021.
…
I can stretch the meaning of ‘regularly’ beyond one year by use of an initial cushion I would maintain. I want to maintain a cushion of about 3 to 5 years of regular expenses and projected large items expenses.
…
My portfolio meets the 4% rule criteria in terms portfolio size vs how much I can(=need to) draw annually for a retirement period (>30years?).

Realize that the 4% Safe Withdrawal Rate is based on a mix of SP500 stocks and US bonds. There’s also an inflation increase annually, but of course that’s the US-based inflation rate.

If you use other assets, like making the stocks all dividend stocks, or growth stocks, or something else, it goes outside the bounds of the study. It may even be beneficial to add something like a 10% REIT allocation, but again, that’s outside the bounds of the original study. There are periods where growth outperforms value, but the catch is that if you’re in the “wrong” assets when inflation goes up, you end up withdrawing more in that period to maintain your “real value” of spending, then the money isn’t there when the “right” assets that you own become the better performers.

Luckily, that 4% should result in you having a lot more than 30 years of portfolio survival in average or somewhat worse than average situations, since it’s “worst case.” Again, tinkering with the formula may improve your results, and the “worst case” SWR may let you survive a sub-optimal allocation in less-than-worst-case conditions. You’re just outside the bounds of what was studied.

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Paul Eckler wrote But you must avoid selling stocks in a down market

I would like to reinforce there is a serious weakness in the Buy High - Sell Low investment model.

My approach for this is to have investments that produce cash. The distributions are taxable events. I have used mutual funds whose holdings are geared toward stocks whose dividends grow in both up and down markets. I also avoid sovereign debt (in particular US government bonds and notes). I used Vanguard’s High Yield bond fund. Compared to the category, it is mediocre or worse. But during downturns its holdings have had far lower bankruptcy rates. I keep cash and cash equivalents equal to 2 years worth of spending.

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Now is a bad time to retire.

Dang! Retiring September 1.

PSU

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So this is a BAD time to start buying bonds.

Quibble.

Six months ago was a bad time to be buying bonds. Right now is actually not bad. Bond prices are up and yields are down over the last month. With the inverted yield curve, the market is predicting rates will fall in the next 2-3 years. That is usually a good time to buy bonds - before rates fall.

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Dang! Retiring September 1.

Ditto. October retirement here. (I was shooting for September, but I’m committed to staying on until I get replaced and the replacement is trained, and that’s looking like October. So I’m deprived of having that set date to look forward to. I don’t recommend this nebulous approach to anyone who’s considering it–I wish I would have given a concrete date a long time ago.)

Morale-boosting post:

https://discussion.fool.com/just-thought-i39d-let-ya39ll-know-35…

Given my timing on other major financial moves, I’ve known for the last 20 years that whenever I retire would end up being bad timing in terms of the markets/economy, so I’m not surprised. But I’m ready, and I have the ability to live simply and cheaply if needed.

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Now is a bad time to retire.

Any time is bad time to retire if you are looking to retire with .01 over a certain sum and/or you don’t enjoy your work. Otherwise, the pronouncements about what other people should do lean toward silly.

And sometimes the circumstances of retirement have nothing to do with money.

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