AssetBuilder Inc. Registered Investment Advisor - Simple Investing. Smart Future.

 Scott,

 I'm 60, single, and expect to retire in 3 to 5 years with one million dollars in mainly tax deferred accounts. That's my only asset. Currently I have my holdings invested in the 10 speed portfolio. I'm a little unclear what is the best way to manage things as retirement approaches. I plan to wait until 70 to take social security, and in the mean time withdraw $40,000 a year from my retirement accounts.

In specific here's my question: Should I have a $200,000 ladder of CD's, I-Bonds, and T-bills to guarantee 5 years of income at $40,000, and put the remaining $800,000 in the 10 speed portfolio, or is it reasonable to leave the whole $1,000,000 invested in the 10 speed portfolio and count on the 20% of the 10 speed portfolio that's invested in TIPS and international bonds to see me through market down turns?

JJ Ramos
San Antonio, TX 

JJ,

 The 10 Speed portfolio is only 20 percent fixed income (TIPS and International Bonds) so most advisors would consider it pretty aggressive unless you are expecting to have other bond-like assets such as a corporate pension. Also, both TIPS and International Bonds can be volatile and the purpose of building a ladder is to avoid volatility by having scheduled maturities--- that way you'll never have to sell in the down market.

That suggests that you should have $80,000 to $200,000 in a ladder--- since each $40,000 is 4 percent of your portfolio, your fixed income allocation would increase in this way as you increased the ladder:

No ladder, 20 percent fixed income

1 year: $40,000, 23.2 percent

2 years: $80,000, 26.4 percent

3 years: $120,000, 29.6 percent

4 years: $160,000, 32.8 percent

5 years: $200,000, 36.0 percent

Note that it would take 4 to 5 years of ladder to get your fixed income allocation down to the typical level of endowment portfolios and balanced funds.

Scott

Yes, that's exactly what I'm saying. That way you'll always have a maturity in the wings, you'll be averaging interest rates over a relatively long period of time, and the value of your holdings won't be as vulnerable to increases in interest rates. When you build a 5 year ladder, for instance, your average maturity is only 2.5 years--- so you're getting a 5 year yield at considerably less risk.

If you'd like to read more about ladders, here are the columns that come up when you search for "ladder" on the "Scott's Articles" portion of the website:

http://assetbuilder.com/search/SearchResults.aspx?q=ladder&g=6 

Scott