The journey from the “Accumulation” phase to the “Drawdown” phase in retirement demands careful consideration and strategic planning. It marks a profound shift in investment strategy, one that necessitates a well-thought-out approach. Today, we delve into the annals of our original retirement drawdown strategy and assess its evolution since our retirement in 2018.

With a commitment to coherence, we shall present each of the charts from the initial drawdown strategy, supplemented by updates that capture our present status as of December 31, 2021. This analysis will retrace our original strategy while offering insights into our subsequent actions. This exposition will mirror the sequence of the original drawdown strategy, commencing with Asset Allocation.

Asset Allocation: Fortifying Stock Exposure

Our original drawdown strategy outlined our intention to enhance stock exposure:

“When there’s a market correction, we’ll likely rebalance a bit back into equities.” – June 2017

Grade: A

Our stock exposure has risen from 48% to 57%, aligning seamlessly with our targeted trajectory. Capitalizing on the “COVID Correction,” we capitalized on the bear market, making substantial equity investments, notably on March 23, 2020, when the S&P 500 reached its nadir at 2,237. As of January 25, 2022, the S&P 500 stands at 4,348. Despite the year-to-date downturn of around 9%, my gains of 94% since my last significant equity acquisition confirm the value of rebalancing in a downturn.

In addition to our burgeoning equity portfolio, we augmented our “Alternative” asset category from 6% to 15%, reflecting our pivot from bonds to real estate following the acquisition of a second home near our daughter in Alabama. The anticipation of selling this home in the future has led us to include it as part of our investment portfolio, setting it apart from our primary residence, which remains excluded.

Tax Allocation: Transforming Before-Tax to Roth

Akin to many Baby Boomers, our Before-Tax accounts harbored an excess, an artifact of the unavailability of Roth options in our 401(k) plans during our working years. To rectify this, curbing the risk of punitive Required Minimum Distributions upon reaching 72, we devised a strategy of annual Roth conversions from our Before-Tax accounts.

Grade: B

Since 2018, we have executed Roth conversions annually, as documented in “How (And Why) To Execute A Before-Tax Rollover Into A Roth.” The impact of these conversions manifests in the pie charts above, succinctly summarized below:

  • Roth holdings elevated from 24% to 37% of our investment portfolio.
  • Before-Tax portion reduced from 56% to 51%.
  • After-Tax holdings diminished from 20% to 12%.

Furthermore, our net worth burgeoned by 45% from 2017 to 2021, fueled by the surging bull market. It’s worth noting that while our investments have ceased contributions, their value has surged. The endeavor to pare down our Before-Tax allocation has proven to be more arduous than anticipated. The robust market, coupled with the prevalence of equity investments in our Before-Tax accounts, has paradoxically inflated the value of these holdings, offsetting our Roth conversions. This unexpected outcome underscores my rationale for assigning a B grade to this facet. Essentially, the growth has outpaced the Roth conversions.

Consider a scenario where we convert $50k in a given year, yet the value of our Before-Tax investments swells by $75k. Despite the $50k conversion, the net effect on Before-Tax amount is a gain of $25k due to investment performance. The shift from 56% to 51% is attributable to the entire pie expanding more rapidly than the Before-Tax segment. To counteract this, we might need to adopt a more aggressive stance on annual conversions, perhaps targeting the apex of the 24% marginal tax bracket, as elucidated in “The New Tax Law Loophole That Benefits Retirees.”

Paying the taxes mandates tapping into After-Tax funds, also instrumental in sustaining our retirement. Notably, the After-Tax slice has dwindled from 20% to 12%, reflecting our utilization of these funds for both retirement expenses and Roth conversion taxes. In due course, a decision awaits on when to transition to Before-Tax or Roth withdrawals to finance a portion of our retirement expenditures. The sufficiency of After-Tax resources to bridge the gap is reassuring, and I am content with the prospect of delving into retirement accounts as the need arises.

Delaying The Pension

In the original blueprint, contemplation was given to delaying my pension to facilitate further growth. However, this course was eventually discarded.

Grade: A

Dissimilar to Social Security, our pension payments lack inflation adjustments. Once initiated, they remain fixed throughout my lifetime, subsequently reduced for my wife’s lifetime. Given that withdrawal from investments would have been necessary to fund our retirement during this delay, we opted against it. This decision hinged on the desire to preserve our investments, enabling their continued expansion, thereby securing more comprehensive inflation protection than a non-adjusted pension increment. While the logic may appear intricate, our conviction is steadfast – we did the math, and for the long haul, abstaining from pension delay is optimal for maximizing our retirement spend.