My First Dip Into Principal: Market Timing or Cash Management?

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This isn’t one of those full-disclosure "reality" blogs where I document every lurid detail of our financial life. I’m a pretty private person by nature and it’s been a long, drawn out process just for me to talk about our finances as much as I do. I got to this point because it became clear that I couldn’t help people with my story, if I was afraid to tell it in public….

So this week I’m going to lift the veil a bit on our personal finances to reveal some decisions I made for our portfolio recently, because I want to share, to some extent, the actual experience of being an early retiree. Here then is a snapshot of one significant investment decision in our early retired life, now that we are a year and a half out from financial independence….

This will also be a reminder that I’m not a financial adviser, just an engineer who became financially independent. I’m figuring this out as I go along. Specifically, I might be a "real world" accumulation expert, given that I did build a substantial portfolio and retire at age 50, but I’m not a distribution expert. I’m at the very beginning of my understanding of how to best structure a retirement portfolio for lifetime income.

So here was the problem at the end of this summer: When I early retired in the spring of 2011, I set aside about 2 years of living expenses in cash. We’d eaten into about half of that cash, and would probably need more sometime in the next 6-12 months. What should I do?

At the time I retired I knew little about the the process of living off a nest egg. I was familiar with the hallowed 4% rule (now under serious attack) and had a vague sense that we’d take a “total return” approach, consuming our investment income each year plus selling some holdings to meet our living expenses.

In the time since, I’ve learned quite a bit about the distribution problem, writing posts such as A Floor with an Upside: The Best Strategy for Lifetime Income? and Why an Annuity Could Be in Your Future…

I’ve gradually changed my militant anti-annuity stance to accept that simple fixed income annuities will likely play a role in assuring our retirement income. I even got quotes from ImmediateAnnuities and Vanguard for Joint Life annuities — one inflation-adjusted, one not — for a couple like us in their early 50’s.

And, if I was willing to believe that serious inflation wouldn’t be an issue over the next few decades, we could lock in a very comfortable lifetime income with an annuity right now. Unfortunately, I’m not willing to make that leap of faith. And the payout on the inflation-adjusted annuity, about 2% lower, wouldn’t be enough for a comfortable retirement.

With annuity rates based on bond rates, and those at all time lows, things are unlikely to improve until interest rates have normalized. When will that be? Ask the Fed.

Even if rates were more favorable, after just a few months of researching the annuity marketplace, I doubt I’d be comfortable enough yet to pull the trigger on a 6-digit transaction that would irrevocably hand over control of our financial future. I expect that time to come, but it isn’t now.

In that case, what should I do about our need for cash?

The default option, for now, is to manage our investment portfolio for retirement income. And, though I’ve staked out some research and future articles on systematic withdrawal strategies, I’m still a newcomer to that territory.

So what exactly did I do?

Simple: I sold stuff. Over the last two months I gradually cashed out some positions, and moved others into bonds. The total changes involved about 5% of our portfolio. I sold small amounts of a real estate fund and a natural resources fund, and moved some international and domestic broad market index holdings into my favored all-weather investment vehicle: Vanguard Wellesley Income (a low-cost balanced fund with an emphasis on dividend-paying stocks). The net effect was to add a year or two to our cash and liquid holdings plus shift our overall allocation away from stocks to bonds, by a few percent.

Why did I do this now? Well, there were three factors:

  1. As noted, we would probably need cash sometime in 2013.
  2. Learning more about retirement income and the perils of distribution portfolios has made me even more careful about protecting against losses early in my retirement.
  3. The market has been near multi-year highs, plus we are approaching the end of the well-known election-year market cycle.

Hey, some will object, that last point sounds like market timing!

I don’t care. I view these recent sales of mine no differently than I do the many purchases I made during my accumulation years. During my working career, I had a substantial pipeline of cash coming in to be invested. And, naturally, I always pointed that cash at the investments that seemed to be doing worst — buying at their lows. Yes, I also kept an eye on my asset allocation. But, to be honest, that ruled my decisions far less than a simple understanding of whether stocks or bonds were currently out of favor.

Now, as I tap my holdings for retirement income, I’m doing exactly the same as I did during the accumulation years, but the equation is reversed. Instead of buying at lows – adding to assets that have done the worst, I’m selling at highs — pulling from the assets that have done the best.

Hey, some will object: you should have an investing plan, buckets or something, and stick with it.

Plans are great. You should make them. But I’ll tell you — and this is coming from one of the world’s most obsessive planners — that, despite all the strategic planning you do, real world financial life is full of tactical decisions. That’s what this was.

No matter how much planning you do, pay attention to reality.

Long-term strategies sometimes don’t work for the simple reason that they are long-term. Everything in the world around them, including you, changes. Sure, you do your best to plan and implement some core principles, but then the world proceeds on its way, regardless of your plans. You gain experience, and change your opinions. This happens all the time.

So, after planning, I try to focus on the few key behaviors that have done well for me over the years. Behaviors represent wisdom that adapts to different situations. Here are the important ones for me:

  1. Don’t act rashly: move in small steps
  2. Don’t react out of fear or greed
  3. Don’t follow the herd

In this recent scenario, I sold positions using about 6 separate small transactions over a period of about two months. Rather than trying to make a killing, or reacting to a sudden fall in the market, I was simply selling asset classes that had done well, and locking in another few years of retirement living expenses. And rather than following the herd to bid stock prices higher right now, I pocketed some gains.

Until I have a more comprehensive plan for retirement income in place, if such a plan is even possible, I’m content with this approach….


  1. Sounds good to me.
    No need to apologize.
    Thanks for sharing.
    I understand the decision not to annuitize the whole nut, but why not annuitize a small part (15-25%)? The cost of the annuity, or the bond market bubble, or low returns?
    Just asking.

  2. I appreciate this article. It is difficult to "unveil" financial dealings as they are so personal. But the insight gained is very helpful. Thanks for writing this.

  3. Thanks for sharing this example of how things work in the real world — or how you made it work given your circumstances. As someone phasing into retirement, I found it very helpful to see how you handled the cash flow puzzle. To me, your methodology isn't market timing, any more than it's market timing to take gains to finance any other pre-planned expenditure, such as a down payment on a house or a kid's college. Makes sense to harvest when the fruit has ripened.
    Am I right in assuming that all of these transactions involved non-retirement accounts? Great post.

  4. Excellent post, Darrow. You've clarified the challenge of translating a plan into action, especially when it comes to making those crucial sell decisions during the first few years of retirement.

    We keep pretty loose rebalancing bands around our asset allocation, we watch the economic cycles, and in the past we've sold call options to help us force a sell decision. But when you're one year into a two-year cash stash, it's time to sell for another year of cash– no matter how profitably the assets are doing in their allocations.

    Having been through two recessions during a decade of retirement, I can attest that loss aversion is a much more powerful emotion than it seems…

  5. This sounds like a rebalancing approach, which is a wise way to do it.

  6. Darrow Kirkpatrick says

    Rob: many thanks. Buying a small annuity, or starting a ladder of annuities, is appealing to me. But I need to do more research and writing on the timing of annuity purchases before I'll be comfortable making that decision. And because I'm not yet 59, there are also probably tax implications I'd have to negotiate. But, if I do make a decision, I'll likely write about here. So thanks for the question!

  7. Darrow Kirkpatrick says

    VK: thank you, I really appreciate that.

  8. Darrow Kirkpatrick says

    Chris: thanks very much for that feedback. The transactions were split between retirement and non-retirement accounts. The ones in the retirement accounts were aimed at reducing risk (factor #2 above) instead of for immediate cash needs.

  9. Darrow Kirkpatrick says

    Nords: thanks for sharing your experience. Ditto to all you said….

  10. Darrow Kirkpatrick says

    grsfop: Yes an argument could be made that I was doing a kind of rebalancing. Though truthfully that wasn't my intent: I was harvesting cash and making my asset allocation a bit more conservative. Thanks for the support.

  11. Great post Darrow. My situation is pretty close to yours; age, interests, approach to investing, etc… Much like yourself, I've read lots of material on living off a portfolio and my biggest takeaway is the need to be flexible and that nobody is a "distribution expert". Lots of tools to use but they're just that, tools with no absolutes. Will past investment performance repeat itself? Who knows? Where do we go from all time low interest rates and mind boggling federal debt? Inflation? Not enough emphasis on our own personal rate as the aggregate number out of convenience is wrong. Annuities? I look to consider them much further down the road as longevity insurance when the option of returning to some kind of work is not as feasible as a potential backup. My guess is you'll do just fine.

  12. Darrow Kirkpatrick says

    Thanks Scott. You summed up the questions, and my views, pretty well. Appreciate the comment!

  13. This is how my dad does it and he's been retired for 16 years. When the market is up, he sells some stuff to fund the next year's worth of cash. Sounds like you are on the right track!

  14. Early Retired Engineer says

    Darrow, follow the link below to a paper you might find interesting. The conclusion of the paper says in part,

    "In this article, we introduce a new concept called “Gamma.” We define Gamma as the additional value achieved by an individual investor from making more intelligent financial planning decisions. While Gamma varies for different types of investors, in this article we focus on five types of Gamma relevant to retirees: using a total wealth framework to determine the optimal asset allocation, a dynamicwithdrawal strategy, incorporating guaranteed income products, tax-efficient allocation decisions, and liability-relative portfolio optimization."

    Lots to think about especially for DIY investors. I would love to hear your thoughts in a future post perhaps?

  15. I think you've made a good decision by the sounds of it. (I presume you've already taken steps to reasonably reduce your expenditure if you consider that a decent option, to get you through the cash trough).

    I also agree with others (and yourself!) that these sorts of blogs have 100x more value if you're willing to be candid about exactly what decisions I've made.

    My only hesitation would be that readers don't draw a conclusion that "selling stuff" to meet unexpected cash calls is a good strategy in retirement.

    You're selling as you say after a good few years in the market but somebody could have reached this point a few years before you and be looking at selling at levels 30-50% lower from here.

    In general, you never want to HAVE to sell any volatile marked-to-market investment unless you want to because of its valuation, in my view. Better to draw income from it (dividends, interest etc) as the main distribution strategy.

    Thanks for an interesting post, which is going into my weekend roundup today! 🙂

  16. Darrow Kirkpatrick says

    Thanks Tara. Sometimes dads do know best!

  17. Darrow Kirkpatrick says

    ERE: thanks for the link. I just skimmed it to start, looks fascinating. Makes intuitive sense that certain more optimal planning decisions (different from better market timing) would increase retirement income. But fascinating that somebody set out to quantify this. And the numbers they report (29% more income, 1.82% return increase) are an attention-grabber. I'll try to incorporate this into some future article(s) about dynamic withdrawals and optimizing total returns.

  18. Darrow Kirkpatrick says

    Monevator: Thanks for the comments. Yes, we are in control of our expenses, with the ability to cut back or downsize if necessary (no need, yet). You're right, readers shouldn't interpret this as unplanned selling. I knew the cash need was coming and we were just entering the time period when I could do something about it: elected to pull the trigger sooner than later. I also have a very diverse portfolio: all kinds of equities, bonds, commodities so could likely have sold something else that was up if we were in different economic conditions. I agree an income-based strategy can be ideal, and I lean to it, but my portfolio was created from a total-return perspective and that would be difficult to change now without a great deal of selling and unwanted capital gains.

    Thanks for the link in your roundup!

  19. Early Retired Engineer says

    Here's a link to another excellent paper

    "Optimal Withdrawal Strategy for Retirement Income Portfolios"

    There's no need to reply.

  20. I came across an article on yahoo about your early retirement. Congratulations but… I think that your wife still working is the major success for your early retirement. How would the flowchart on your main web page change if she were to retire early as well?

  21. One of my favorite quotes – "In preparing for battle I have always found that plans are useless, but planning is indispensable." – Dwight D. Eisenhower

    I'm on the same path. I'm an engineer, 47, who saves and invests over 50% of my GROSS income and have done so for many years. And I'm lucky enough to have landed my job in the mid 90s way before the company stopped offering pensions to new hires, so I have that income stream to look forward to. Three years more and I should be ready to pull the trigger on semi-retirement, because I still think I'll need to do something (maybe start a blog :-). However, I believe I'm taking on too much risk in my portfolio. The closer I get to my goal the more I feel the risks. I really appreciate the information you're providing here. It helps to learn from those who are living it.

  22. I like your blog. I am still working because I have a great job but when it stops being fun I have the financial ability to quit. We have put a very small percentage of our portfolio into a traded REIT that currently pays between 17 and 19%. The key is a "small" percentage. Every month the dividend is $10.00 per hundred shares. We bought the shares in an IRA so we won't be taxed on the income. We monitor it closely but for 18 months the dividends have been consistent and help boost our savings. I am ready any day to sell but so far so good. The other place I have found interesting information is on the Ray Lucia radio show and in his books. Keep on enjoying your retirement. Oh the REIT is ARR

  23. Darrow Kirkpatrick says

    Hi nb. See my FAQ with answers to this and related questions. Thanks.

  24. Darrow Kirkpatrick says

    frijac: Thanks for those details, and congrats on your retirement preparations. It's great to get your perspective too. Stay in touch.

  25. Darrow Kirkpatrick says

    Hi Lorraine. Thanks for the comment, and congrats on your financial position. I think those who love their work are the most fortunate of all!

    (Note Ray Lucia has recently been accused by the SEC of misleading investors.)

  26. just found you through your post on MMM. nice blog. did you mention the tax impact of this rebalancing. did taxes have any impact on your moves? read you went on a trip to Acadia. amazing place right? the hiking and biking are really nice there. I don't like or trust annuities for another reason…fallability of insurance companies (AIG leaps to mind). why trust an insurance company with your future income for a fee??? seems nutty to me in I have a big enough stash in Wellesley Income…anyway that's my two cents. FWIW.
    really like the blog and will be back.

  27. Darrow Kirkpatrick says

    Hi lurker, good comment, thanks. I haven't talked about tax impacts much but I can say I made a good chunk of this move (the part addressed at reducing risk), in a retirement account. The rest I debated waiting until next year when our tax rate might be lower, because we didn't really need the cash just yet, but decided I'd rest easier locking in the cash now.

    Yes Acadia is amazing. The bus and carriage road system there is killer if you like to do long, non-technical, off-road rides. We really fell in love and actually would consider living there, if not for the winters.

    I shared your unease about insurance companies/annuities, but I'm not sure it stands up to close inspection. Almost anything you do with your money involves trusting some institution. I have more research to do, but my understanding is that there has been no default on an annuity in the U.S. for the last couple of decades (including AIG). And insurance companies do bring one concrete advantage to the table: mortality credits/larger risk pool for your money — they can pay a lifetime income stream.

    P.S. I'm a Wellesley Income fan too….