Replenishing the First Bucket
In a recent post I discussed the importance of setting up a fixed income ladder as your first bucket of the Buckets Strategy. As a follow up to that concept, I would like to introduce another skill that a retiree managing his own portfolio for income should know. That is when you should sell your equity funds to replenish the first bucket to maintain your annual income. In this post I will introduce you to a free online tool that will help you develop this skill.
ISG, Inc. sells a software planning tool called the “Income Simulator.” It is designed to help you manage your portfolio withdrawals for steady income in retirement. However, their web site contains a simplified free online version of the tool. I think this free online version is very helpful in developing the decision making skills to know what equities to sell and when in order to replenish your first bucket. I will briefly describe the free tool and then provide you the link to the online tool.
The tool uses Microsoft’s Excel spreadsheet software to perform all the calculations. The tool is set up with four general asset categories: Fixed Rate (representing your fixed income allocation), High yield equities (representing slow growth equities such as REITs), Blue Chip equities, and Growth equities (representing small cap stocks).
The first thing the user must enter into the tool is their total investable financial assets that will be available to fund retirement expenses (i.e., no illiquid assets like real estate). Other data that is required is the initial annual amount that you would like to withdraw (i.e., your 4% to 5% Safe Withdrawal Rate), the expected inflation rate, the average percent yield of each asset category, and your portfolio asset allocation percentage breakdown. The tool provides a default value for each entry, but to make the tool more meaningful, you should enter data specific to your situation.
Once these entries have been made, the next step is to click on the link “Advance Year” at the top of the spreadsheet. When you click on this link, the tool subtracts your initial annual income amount from the fixed income category and then randomly generates the return for each of the equity asset categories for the first year. The tool applies the generated return to each asset category and calculates the new balance for each category. You keep clicking on the “Advance Year” link until the fixed income ending value is almost exhausted. The user now has a choice to make; which of the equity asset categories should the user sell to replenish the fixed income category.
The tool has another important feature. At the bottom of the spreadsheet, the tool calculates the Compound Average Annual Rate of Return (CAARR) for each asset category. This is important because the CAARR for each category provides you an indicator about which equity asset category should be sold in order to replenish the fixed income category. If you elect to sell some equities in a particular year, you enter the amount to sell in the appropriate column under the “Transactions” section of the spreadsheet. After advancing one or more years, you will have to make another equity selling decision. This process is repeated until you either exhaust your portfolio assets or you reach 30 years. The goal of the tool is to see if you can make your initial income withdrawal, adjusted annually for inflation, last 30 years without exhausting your retirement assets.
The above description may be a little confusing. Once you see the tool it will be clear how it works. To open the free tool, you should click on this link to go to the ISG, Inc. web page. On this page scroll down and click on the link “IncomeSimulator.xls” to launch the spreadsheet (you need to enable macros to run the tool). When the spreadsheet opens, you will be on the “License Agreement” tab. From here you should go to the “Instructions” tab and read how the tool works in detail. When you finish the instructions, click on the “Advanced Version” tab to start using the tool.
I have probably run over 100 simulations on the tool over the last few years. The more simulations you run, the better you will develop your skill for deciding when and what equities to sell to replenish your fixed income category to maintain your retirement income. You should try it out.
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