KCallie,
There are lots and lots of ways of doing this and many of them work. Think about the accumulation phase - your AA determined your returns but there would have been no AA to determine if you had saved and put the money in investment accounts to grow over the years. There was lots of talk about AA, but no discussion about whether you should cut your grocery bill or your vacations to save to have the money to invest. Factors within you and your desires determined where you made your cuts. I wore KMart slacks and good shoes. I cooked chuck, chicken, rice and beans and we took the kids to every National park in the country with PB&J sandwiches at roadside picnic benches.
The SS and 3% gives you a lot of room for various methods. The trinity study uses 4% + annual inflation of 3% and is considered the gold standard. Various things float around which suggest ways to achieve a 5-6% (6 is pushing IMO) retirement withdrawal.
The buckets approach is very popular. Lorna essentially uses it in keeping 5 years of RMD's in cash equivalents b/c she is taking RMD's. I'm curious whether Lorna counts that cash as part of her AA or as a separate pot; some do, some don't. I don't need to take RMD's yet so I keep about 5 years of living expenses without SS as the base amount of my bond allocation. It also works out that the interest on that amount will provide for all of our living expenses, mostly extra's, beyond SS. I do count that money as part of my bond allocation.
In both cases, we have plans to cover our cash withdrawals during a down market. As retirees, we can't just wait out a bear market and not sell equities. Some of us are no longer putting new money into the market and taking advantage of DCA. We are essentially DCAing out of the market.
I am working on turning enough of our portfolio to the dividend model so that will provide enough income to cover some, if not all, of our RMD's I prefer this way of handling the necessary outflow b/c it increases my total return with more of more of our portfolio in equities and b/c my cash flow needs are covered, I can wait out volatility and be more aggressive. This correlates with my risk level and needs and I end up with an 80/20 which is quite risky but o.k. for us.
So the basic question is how are you going to handle and plan for 2% annual withdrawals from your portfolio? Do you intend to sell 2% each year? Is it part of the rebalancing process. Are you going to go for a portfolio that yields the 2%? Is that going to come from stocks or bonds or equity income funds or some combination? Remember, you also need to "grow" 3%/yr to compensate for inflation, so we're talking about a minimum total return of 5%/yr. A 50/50 will average 8%/yr but where and how will you handle withdrawals and how will you compensate for the fact that now your portfolio is your paycheck and an average 8% does not mean 8% each and every year!
The greatest danger is going into preservation mode when the market dips and going totally to cash or bonds. You've been in the market long enough that you know what I'm talking about and it's not some theory to you that you can blithely quote academic studies. The question that you have to account for is how you will react when you see the source of your paycheck going down the tubes. Your AA has to take that into account plus how you're going to manage the money to pay the bills.
Roberta
