As before, comments are in red.
4 Asset allocation after retirement
Living expenses will be paid from my cash reserves. 2% cash is about $56K. I will withdraw money twice a year by selling positions. Choosing the position should be based on my allocation goal (rebalancing).
Rebalancing will be done once a year, on the shortest day of the year (Dec 21st):
ñ I will actively rebalance once a year all assets that deviate 10% or more from their goal.
ñ I will grow my bonds allocation by 2 points every year, targeting an allocation of my age*2-70: age 45 → 20% bonds allocation, 55 → 40%, 65 → 60%, 75 → 80%.
ñ For example, in Dec 2011 I’ll be 44.5, setting the bonds goal to 19%.
Rebalancing is extremely important. Besides making sure you remain on track, it's a neat way of forcing yourself to sell high and buy low - you sell your "winners" (assets that have appreciated more than your average portfolio) and buy the "losers" (assets that have appreciated less than your average, or even lost value.) It's counter-intuitive for most investors. We all want to keep our winners and get rid of the losers. But when it comes to investments, this instinct is dead wrong.
Tax swaps: if an investment accumulated losses, it may be a good idea to sell it and buy an equivalent – but not identical – investment. For example, SCHB is identical to any other index fund investing in the broad US market, but not to an S&P 500 index fund (or Russell 3000 ETF). To make it acceptable by the IRS, these funds should be managed by different companies and track different indexes. Harvesting these losses will enable me to offset gains, or offset up to $3,000 of income tax annually. This may be difficult/impossible without allocating specific tax lots.
I'm on the fence regarding this tax strategy. It will make my tax returns much more complicated. I'll need to evaluate the potential annual benefit against the cost of hiring a professional to do my taxes.
5 To-do list after retirement
ñ Roll-over 401K into IRA (enable more investment options)
ñ I will track my portfolio against the expenses and the plan annually, and adjust the maximal allowed withdrawal.
ñ I will track my expenses on a calendar year and make sure I live within my means.
ñ I will update this plan as needed.
The last bullet is perhaps the most important. Things change - your financial situation, family status, income, etc. It's important to maintain a good balance between "staying the course" and being flexible. Too much change and you risk abandoning your strategy. Too little, and you ignore life-changing events. By setting an annual review of the plan, independent of recent market turmoils, you'll give yourself a chance to weigh your situation with a cool head.
6 Withdrawals
My first withdrawal is going to be the lower between $93,750, adjusted to inflation, and 3% of the portfolio (all the sums are pre-tax and taxes will be paid from the withdrawals, not from the investing accounts). I still need to work out the methodology for further withdrawals.
The sources for withdrawals will be chosen according to the following goals:
ñ Rebalance the portfolio
ñ Minimize taxes
ñ Avoid penalties in retirement accounts (avoid 401K and IRA until I'm 70 ½; this gives the money the maximal time to grow tax-free without penalties)
ñ Keep it simple
7 Other issues to consider
At some point I need to consider the following issues:
ñ Is it worth paying off the mortgage? With a lower tax bracket, mortgage interest deduction may not be as attractive. Wait and see until the first tax return after retirement to see if I still itemize deductions.
ñ When to start taking Social Security benefits?
ñ Update will: add a document listing my property, bank accounts, Fidelity, 401K, RE, insurance policies, etc.
ñ Consider creating AD/LW (Advanced Directive/Living Will) or naming a DHCS (designated health-care surrogate).
This section is a good place to park any ideas/questions you have during the year. During the annual review, pay close attention to the items here and determine what you can incorporate into your plan.
Last note: I'm going on vacation for a few weeks (Tel Aviv and Paris). I'll start reposting when I'm back in June.
