Managing Asset Location in Early Retirement
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- Опубліковано 10 лют 2025
- A viewer emailed me the following question:
"Rob - I hope this finds you well. I'm a fellow large law firm attorney, and I find your approach relatable and sound. I have a question regarding early retirement. I'm contemplating retiring in my early 50s. Currently all my bonds are held in 401K/traditional IRA vehicles, which ideally I would like to not touch until much later in retirement (i.e., when RMDs kick in) to take advantage of the tax deferral benefits. Since my brokerage account is 100% in equities, this could leave me exposed in early retirement if the market tanks and I don't want to have to sell equities at a low price. Is the answer just to build up 5 to 7 years worth of expenses in cash and municipal bonds in my brokerage account or am I missing something obvious? Thank you!"
It's a great question. And I do think there is an easier approach. Simply sell the stock funds in the brokerage account each year as necessary for distributions. And then rebalance. If stocks are down, this will involve selling bond funds in retirement accounts and using the proceeds to invest in stock funds.
Rebalancing after taking annual distributions avoids the problem of selling stocks in a down market. And this is true even if the distributions are taken from stock funds.
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ABOUT ME
While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
I'm also the author of Retire Before Mom and Dad--The Simple Numbers Behind a Lifetime of Financial Freedom (amzn.to/3by10EE)
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So glad I came across your channel. I have been agonizing over SRR for a little while now and was on the cusp of scheduling a meeting with a financial advisor (1% AUM at my acct balance). I have watched a number of your videos over this past weekend and feel much more comfortable continuing with my own self-management approach. Thank you so much!
Rob another great video. It also highlights the importance of having pretty sizable after tax investments if you plan to retire early. My after tax accounts are nearly as large as my retirement accounts.
It would be interesting to run this idea through a spreadsheet and compare using a couple different scenarios. Sometimes the actual numbers don’t turn out as expected. Great channel Rob and your book is excellent,!
Another great but simple short video. You explained rebalancing with a simple example.
Strongly agree with this rebalancing approach in early retirement. I'm 100% equities with a barista FIRE types thing going on so I only really have to rebalance between U.S. and international stock in my case.
Excellent video. Concise and very helpful.
I like the approach of first creating an income floor composed from SS income along with annuity and the rest invest
Hi I follow your channel from India. A lot of specifics that you teach don't apply here but the the general investing wisdom remains the same everywhere doesn't it?
In my opinion this video is one of your bests
The only thing to be wary of is you are growing your tax deferred account by doing this and may have larger rmds in the future.
I’m close to retirement and just reallocated some of my pension to increase cash funds and reduce global index equities. After the last year I’m not sure I want to hold bonds at the moment, but I’ll keep an eye on them.
I like the approach to sell bonds from retirement account - I personally subscribe to Michael Kitce's "Bond Tent" where I am increasing amount of bonds while approaching retirement (to avert retirement date risk) and start decreasing bonds once I retire (avert sequence of returns risk). I am currently 60 with a plan to retire at 62 and currently have a bond tent with 4.5 years of expenses in bonds with a plan to be at 7 years of expenses in bonds at 62 through reallocation (not rebalancing).
love the bucket system
That is exactly what I was thinking. But it still is a good idea. :)
Is it better to keep my bonds in my Roth IRA or my taxable account. if I keep them in my Roth IRA, I will lose some tax-free growth, but in my brokerage account, they are less tax efficient.
Same question, but assume he’s 59 1/2+ in age with the same desired allocation of 70/30.
Would you recommend he maintain all equities in his taxable account (maybe also one year’s worth in money market cash) and Stocks and Bonds in tax-deferred/free accounts for an overall 70/30.
But…
Rather than selling depreciated stocks for annual spending from his taxable account, he could sell whatever asset (stocks or bonds) from his tax deferred account that has appreciated…and then rebalance.
Tax efficient allocation with a sequence of return risk hedge.
Am I on track here, or what am I missing? And would you just keep one year of spending needs in cash to minimize interest tax?
Thank you!
For a given portfolio (80% stocks) does this also work if both stocks and bonds are down? For example - stocks down 20%, and bonds down 10%
Hey Rob, how about a balance fund like VBIAX or VSMGX and let Vanguard do the rebalancing?
I like the vanguard balance funds. They do a good job and this one in particular only has a 07% annual expense.
Recently found your channel and very glad I did! In the vein of asset allocation and cash in retirement I was curious about your thoughts utilizing leverage in a brokerage during down markets in retirement. You’ve mentioned pulling equities and then rebalancing (bonds -> equities) and also spoke about cash buffers but what are your thoughts on utilizing leverage instead of selling anything (or even for PART of retirement expenses and still selling some assets for retirement costs). For instance, a $500k brokerage account with M1 would allow for $150k-$200k in leverage at a very reasonable rate that could go a long way for someone during a down market while limiting the amount of equities being sold. Thanks for any thoughts from you or the community!
What if your bond portfolio is also down? Would you still sell both stocks and bonds at a loss? I'm facing this right now. My bond funds are down 4-8% from when I purchased them.
This is definitely a more straightforward way to go about this.
One question though, if you were in a severe, protracted downturn, it is conceivable that constantly taking money out of a brokerage account each year, after it has already dropped significantly because equities are down, could exhaust your brokerage account before you reach 59.5. Then what?
Then you could use the 72T rule, Roth IRA conversions, and/or Roth contributions.
In early retirement, would you keep a non-qualified deferred comp paying out over 15 years as just part of your overall asset allocation? Or would you keep it more conservative since it’s drawing down? I guess as long as rebalancing doesn’t matter?
What if you were at the end of the year in 2008. Would you automatically buy some stocks or wait a bit to see what happens?
Is the point of selling stocks to take advantage of losses? You don’t mention it but I assume if the market is down that would be a benefit.
Is this not a wash sale
Your strategy will ensure that the asset allocation remains what it needs to. But it does not address the fact that if you hit sequence of returns risk in early years of retirement and you sell stocks while they are low, you could end up with a depleted corpus which may not survive until you do. The idea of keeping cash is that when the equity market is down, you are not selling equity and permanently lowering your corpus.
This approach could be somewhat of a wash for someone with a small amount of assets that has low ordinary income, but I think it could be very harmful to someone in a higher tax bracket.
Using this strategy effectively rotates you out of an account that will be taxed at cap gains, and into an account where everything will be taxable at ordinary income rates. If the market falls and you are rebalancing your IRA into equities while selling equities in a taxable account, then you are selling stocks as they lose value in the taxable account and buying stocks in the IRA at depressed levels. In time, when the market rebounds, you will have regained a disproportionate amount of your losses back in the IRA. You could actually bump yourself into a higher ordinary income tax bracket by doing this which would be incredibly suboptimal over the long run (particularly once your RMDs start).
Even at lower levels of wealth and income I think this still hurts you because if you increase your ordinary income, you may even accidentally escape the 0% bracket that you might normally get on cap gains.
You are most likely better off keeping a small allocation to fixed income (perhaps two years of expenses) in your taxable account to avoid this situation. I think even a mirrored allocation between your accounts would be better than enacting the strategy you suggest, particularly if you can find some decent munis. Although your asset location suffers slightly in this scenario, you avoid a potentially much more costly tax mistake that continues in perpetuity.
In this example, during a market downturn you recommend selling stocks from the 70/30 portfolio, then rebalancing to get you back to 70/30. That makes a lot of sense. When the market falls making your bond allocation rise to say 40%, cant you sell bonds to get you back to 70/30 ? How does this scenario compare to yours? Thanks.
The bonds are inside of a 401k that he can't access so that's why he sold stocks and rebalanced the 401k. If you have full access rebalance any way you want the net result is the same.
What about the taxes you have to pay when you sell the stocks from taxable account?
I don't find the bucket strategy all that difficult. I have developed a spreadsheet that I use to rebalance three time and three tax buckets. I rebalance quarterly but in stages. I am not forced to bring it into full balance because I recognize my time buckets give me some protection against having to sell in a down market. I've bought $100K in down market YTD and I sell to rebalance when prices are higher.
Are you only going to have one year of expenses in cash per year? I don't understand why people would keep 3-5 years of cash. Sooner or later you have to replenish. I like the idea of 1 year. Maybe replenish in June with 6 months instead of December. If stocks are way up, why wait until December.
Vanguard Wellington fund!
What if you only have an IRA? Would you sell the bonds to rebalance back to a 70/30 portfolio?
Yes but in that case you would not be retiring early, or else pay the 10% penalty.
@Cathy G - the answer to your question is yes. You will be buying stock shares at a discount allowing faster equity growth when the market returns. After the market returns, sell some stock and repurchase bonds. Rinse and repeat with future downturns.
The next question is how often do you rebalance - quarterly, every 6 months, or a year? I'm pretty sure one of Rob's longer videos discussed using a range or guide rails to determine when to rebalance. Maybe you don't rebalance until it reaches 60/40 or greater.
My initial rebalancing during Q1 was using some of my cash position and buying several stocks that were down significantly.
I also did a Roth conversion at the end of last year and a few weeks ago trying to take advantage of the lower share prices.
@@charlielipthratt7291 Thank you so much for the response.
Isn't it unrealistic to think that you will never sell some stocks when the market is "down"? It is down from where? He is probably way up if he has been in stocks for decades in the taxable account.
That's the beauty of rebalancing. It takes care of all that. At the end of the day you don't have to perfectly time what get bought and sold when. You just get back to your asset mix and it takes care of it for you.
In which case the real question to ask yourself in that scenario is, how much do I want to spend overall when "the market" is down?
Rob, I will be 35 in 3 months. I need to generate 18K per year from my investment until I die. I have 450,000 cash. What is the best way to invest this money right now?
You're rotating yourself out of your taxable account into your tax advantaged account. Given enough money you'll get slaughtered by RMDs when the time comes.
But perhaps in an early retirement scenario there are enough years to conduct Roth conversions that theoretically could be done before RMD age in order to reduce huge RMD ‘tax spikes’?
@Rob Berger Based on using a rebalance strategy… How often and/or what triggers cause you rebalance?
Rob answered my question on a q&a… opportunistic rebalancing he has a video on it.
I know Rob is not that keen on dividends, but this is a situation where dividend-paying blue chip stocks are your friend. Barring economic catastrophe, large companies will continue paying, and you can get $30-40K per $1 million invested.
Wouldn’t a large cap value index such as SCHD give you 30K a year in dividend for $1,000,000 plus the price appreciation close enough to VTI over the long haul? Also, smooth out your income so maybe you sell less stock each year when you rebalance?
@Lazy Way - This would be true if the companies didn't grow through reinvestment of earnings. But if you buy a company at 10 times earnings paying a 3% dividend, the other 7% that you're not paid will be reinvested in the business. This will increase the price of the stock and the dividend in the long run.
Why not just hold Berkshire???
no dividend. holding it will not give them money to spend. need to sell some to live. just kidding. i know that's not what you meant.
You don't want to hold just Berkshire Hathaway because of the single stock risk that that would entail. Yes Berkshire holds many underlying investments but still it's a single stock. Why not be more diversified? And what happens when Mr Buffett and Mr monger pass away? Who's going to take over the reins at Berkshire? They are in their 90s.