I'm new to rebalancing but as best as I can say right now in my non property assets I want to maintain:

- 10 years expenses in "cash and cash equivalents" (*)
- Bonds of various durations to take my non equities allocation to 50%
- 50% equities

I would "rebalance" if equities got to 40% or 60%

My blended yield is around 3% - 3.5% so I get plenty of opportunities from income to make changes to keep within the 40% to 60% equity range.

Also when individual gilts mature I can tweak here and there.

So I haven't needed to formally "rebalance" in the last 2 years since the above structure has been in place.

* "Cash and cash equivalents" are cash, MMFs, ERNS, Individual Gilts maturing within 10 years, Short Duration Bond Funds

Context
Aged 56, two kids are financially dependent for 7 years (ish) so sequence of returns risk a big issue with expenses high in the near term.

My sense is that 50% equities is too conservative and that I will lift this over time as the sequence of returns risk reduces. In the meantime I am increasing my allocation to high yield bonds to lengthen bond duration.

Yes definitely, please, Harry. I would be grateful for more information.

No problem Jay P, thanks for the interest, I've done some notes. I would be very happy for any questions and challenges from anyone on the following. My approach is unique to me and so it would be good (as ever) to use the forum as a sounding board.

By way of background, I’ve been developing this for around 18 months and it started as a pretty simple budgeting exercise, just a few cells in a spreadsheet. However, it’s got more involved and detailed over time as I find new uses for it.

James Shack of YouTube land does some very good videos on this subject by the way.

From experience I would say don’t let perfection be the enemy of the good. The biggest value I got from doing it was the broad brushstrokes in the early days, not the goal seek stuff that I mention towards the end of the notes - that just satisfies my enjoyment of all things spreadsheeting.

Step 1 – What’s The Plan?

We are happy with “pass the house on to the kids and don’t run out of money”.

So the model is testing whether, given certain simple assumptions, we ever run out of money. I roll the model out in columns for years to aged 100 which is highly unlikely to be achieved but I find it helpful to work to a fixed point for monitoring whether we are moving forwards or backwards over time.

Step 2 – Calculate “Balance Sheet” Total

For years I have drawn up a family “balance sheet” once a year to see where we are. I use the tax years because back along there was a chunky tax provision in there. For the model I use 1 April 2022 as a start point.

I take this total and deduct the value of the house and cars to arrive at an “investment pot” for the model.

Step 3 - Income

I’m “retired” so I have no earned income. State pension is the big one to model, I assume an increase of 3% per annum. The model is very sensitive to this assumption. For example, recent big increases in State Pension had a huge impact on the numbers at aged 100.

Step 4 - Outgoings

Analyse outgoings to get a handle on annual spend but more crucially an approximate level of inflation. The assumption on inflation has a huge impact on the model. I started with 3% per annum but in reality it was 4% while the kids are at home so I use this. I then have it reducing to 3% when the kids leave.

I also model the estimated reduction in outgoings when the kids leave (assumed to be 1 year after University – they are currently mid-teens) This refinement made a huge difference to the model.

Step 5 – Investment returns

To avoid too much hand wringing I chose 3% per annum which is very prudent IMHO when you consider where 30 year gilts are and long term equity returns.

Some context here is that we have a big sequence of returns risk issue with the kids 7 years from financial independence and (in my view) toppy equity markets right now. So I have a 50% : 50% asset allocation in my investment pot for now.

Very Simple Example For Illustration



Once one year is complete, I delete the column and replace the B/f figure with actuals from the annual exercise in Step 2.

Everything runs off single cell parameters shown in blue that I can toggle. So as well as looking at whether we are going to run out of money, a couple of goal seeks that I run in Excel are:

1. What rate of return gets us to £0 at aged 100?; and

2. At 3% investment return how much can we afford to budget for a new house after the kids have left (we plan to move from the city to the country)

Summary

Obviously nothing is certain about future costs or investment returns but I’ve found that building the model has given me confidence that I don’t need to return to work and (taking Neminem’s points above) maybe we should be spending with more confidence.

It’s also allowed me to settle into the 50% : 50% allocation.

Again, happy for anyone to critique any of the above notes. There are a lot of other complexities I could build in such as future inheritances, taxation on state pension, life insurance policies but I’m not sure of the value at this time.

I'm no good at "waiting until it gets a bit cheaper" though it appears to suit some on here

I'm keeping an allocation of 50% equity / 50% non equity and have guardrails at 40% and 60% to rebalance

I've been doing this since January 2022 when I went heavily to "non equities" and since then have built a portfolio yield of 3.3%.

That yield funds top ups in moments like this. Nothing big, just nibbles but enough to keep me engaged and enjoying the process.

Particularly on Vanguard where I've just placed an order this morning for a few VUSA with no transaction fee to give me pause

The investing equivalent of the "no look pass" in football

I like no look passes - less thinking, more stick to the process

I've not come close to the guardrails yet .......