Retirement Allocation & Rebalancing
Allocating Your Assets
Retirement Allocation (now)
Liquid versus Growth
Set Ratios based on risk tolerance, and rebalance if they shift over time
How much near term flexibility do you need? in the [Contingency Fund]
Buffer for bad assumptions
How do you create your paycheck for the next 5 years? [Income Reserve or Income Floor]
Psychological cover
How will you grow your future self? [Upside or Long Term Portfolio]
Define Your Gap between Guaranteed Income and Annual Spending need (X)
X is what you plan to withdraw from your assets each year—rebalancing and filling your paycheck
Have 1X-2X in Cash or High Yield MoneyMarket (Emergency)
Pre-fund paychecks with 5X Income Reserve (5 years) for Down/Bear Market. To avoid selling equities when they are at a low. Instead, let them recover over a few years and pull your paycheck from the reserve. When markets recover, then refill those reserves. CDs, bond ladders, short-term bond funds, T-bills.
Rebalance no more than once a year
e.g. Annual budget of $170k, - $160k salary+deferred, + $50k tax, + $40 529 & HSA = $100k/yr gap
$200k Emergency Fund (5%)
$500k Income Reserve (13%)
$M Longterm Upside (82%)
Refined Discussion on Rebalancing/Refilling
Your 2X emergency reserve should generally be treated separately from the retirement-income bucket (1X). I would not routinely draw it down just because stocks are down and your Income Floor needs replenishing. Its job is to protect you from unexpected capital needs, not to become a second source of normal retirement income.
The exception is a major, genuinely unexpected expense—say a large home repair, family emergency, or uninsured event. Then yes: use the emergency fund regardless of whether equities are up or down. You don’t want to sell stocks at a 20% decline to pay for an emergency simply because the emergency fund is psychologically “off limits.”
This separation is important because otherwise your 2X emergency reserve is really just another retirement bucket, and your actual emergency reserve is smaller than you think.
Morningstar’s framework similarly distinguishes the cash needed for spending from the separate amount needed for emergencies, then layers high-quality bonds and longer-term growth assets beyond that.
The most important question: When should you refill the Income Floor?
Green zone: Equity markets are healthy
Equities are at or near previous highs / portfolio is above target allocation
→ Refill Paycheck account
→ Refill Income Floor
→ Refill Emergency Fund if it has been used
→ Rebalance if necessary
This is essentially “sell high to replenish your safe assets.”
Yellow zone: Moderate decline
Equities down roughly 5–10%
→ Continue normal spending
→ Continue using Paycheck account
→ Do not automatically sell equities merely because the calendar says it’s time to refill the Income Floor
→ Look first for:
bond maturities
CD maturities
interest/dividend income
taxable-account gains
overweight asset classes
rebalancing opportunities
If those sources aren’t sufficient, I would generally allow the Income Floor to remain partially depleted.
I would not regard a 5% decline as a reason to panic or make a major tactical change. Five percent is normal market noise.
Orange zone: Significant decline
Equities down roughly 10–20%
→ Stop discretionary equity sales for bucket replenishment
→ Continue funding spending from Paycheck + Income Floor
→ Let the Income Floor decline as planned
→ Reassess spending and the portfolio’s overall allocation was
→ Consider reducing discretionary spending temporarily if appropriate
→ Refill from equities only if required by your overall asset-allocation/rebalancing policy
This is where your bucket strategy is doing its job.
The objective isn’t to predict whether the market will fall another 10%. The objective is to give your equity portfolio time to recover without forcing you to sell it at depressed prices.
Morningstar describes this as the fundamental purpose of the longer-term buckets: assets that have suffered a downturn are allowed time to recover while spending is funded from safer assets.
Red zone: Severe or prolonged bear market
Equities down 20%+
→ No discretionary equity sales to refill the Income Floor
→ Spend from the remaining Income Floor
→ Consider reducing discretionary spending
→ Use emergency reserves only for actual emergencies
→ Reevaluate your asset allocation and retirement spending plan
→ Refill the Income Floor when markets recover or when the portfolio provides a favorable rebalancing opportunity
This is the situation your $500k Income Floor is primarily designed to protect against.
Recommends a “two-trigger” system
Trigger A: Time trigger
Every 6 months, review the Paycheck account.
If the next 6–12 months of spending are not funded:
→ refill Paycheck from Income Floor.
Don’t worry about market performance. Your paycheck account exists to create a smooth cash-flow experience.
Trigger B: Portfolio trigger
Once or twice a year, evaluate the entire investment portfolio, not just the S&P 500.
If equities are above target:
Sell/rebalance equities → refill Income Floor → refill Paycheck.
If equities are within normal tolerance:
Refill Paycheck from Income Floor, but don’t necessarily refill the entire Income Floor.
If equities are materially below target:
Don’t sell equities just to restore the Income Floor.
Instead:
Income Floor → Paycheck → spending.
“Should I sell stocks when they’re down?”
Best answer
Sell stocks when your portfolio allocation tells you to rebalance—not because you need to refill a bucket on a particular date.
5-year Income Floor actually accomplishes
You have approximately: (X being the annual gap)
2X emergency reserve
5X Income Floor
1X Paycheck account
substantial equities and long-term investments
The key question is how much of your annual spending gap the Income Floor actually represents.
If, for example, your retirement spending is $155k/year but one spouse continues earning $110k and you have $50k of deferred Abbott income, your portfolio-funded gap in the early years may be considerably smaller than $155k.
That’s important.
Your Income Floor isn’t necessarily a “5-year retirement bucket.”
It may be a 5-year portfolio-income-gap bucket.
If your actual portfolio draw is, say, $50k–$80k/year during the first several years, then $500k could potentially cover 6–10 years of portfolio-funded withdrawals, depending on taxes and spending.
That would give you an exceptionally strong sequence-of-returns buffer.
This is one reason I would be cautious about automatically treating the Income Floor 5X as something that must be replenished every year. You don’t necessarily need to keep it at exactly $500k if the remaining portfolio is healthy and your future income sources are intact.
Suggested Retirement Bucket Policy
Emergency Fund — 1X gap target
Used only for genuine unexpected expenses.
If used, replenish over time.
Do not invest this money in equities.
Don’t use it merely because the stock market is down.
Paycheck Fund — 6–12 months
Maintain enough for the next 6–12 months of planned withdrawals.
Refill from Income Floor twice a year or annually.
This is a cash-flow management tool, not an investment strategy.
Income Floor — target 5X gap
Maintain 4–5+ years of expected portfolio-funded spending, not necessarily total household spending.
Fund Paycheck from here.
Replenish opportunistically.
Growth Portfolio
Continue long-term investing.
Rebalance according to a predetermined allocation.
Don’t sell solely because the Paycheck or Income Floor needs replenishing.
But these are planning guidelines, not market-timing signals. I would not literally sell at –4.9% and stop at –5.1%. The point is to create a behavioral framework around normal volatility vs. a meaningful bear market.
Don’t replenish the Income Floor because the market is up. Replenish it because your portfolio has enough risk capacity to do so.
Don’t avoid selling equities because the market is down 5%. Avoid selling equities when doing so would push your portfolio below its intended recovery capacity or violate your sequence-risk plan.
A 5% decline is not really a bear market. A 10% decline is common. A 20% decline is a meaningful bear market. But even those percentages don’t tell you exactly what your portfolio should do.
Your portfolio allocation, remaining Income Floor, future guaranteed income, and spending flexibility should determine that.
I would not sell equities simply because your six-month refill date arrives. I would first ask:
Is my Paycheck funded?
How many years of portfolio-funded spending remain in my Income Floor?
Is my equity allocation above, at, or below target?
Has the portfolio experienced a meaningful decline?
Can I refill using dividends, interest, bond maturities, or rebalancing?
Is this a true emergency or normal planned spending?
If equities are down 2–5%, I would generally follow the plan and not make a special adjustment.
At ~10% down, I would become more selective about replenishing the Income Floor.
At ~20% down, I would generally stop discretionary equity sales for bucket replenishment and live off the Income Floor while allowing the equity portfolio to recover—unless your overall allocation rules actually call for rebalancing into equities.
The last point is crucial: the most sophisticated version of your strategy may actually buy equities during a bear market rather than sell them. Your Income Floor is what gives you the freedom to do that.