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My question is, what strategy should I use to sell the stock mutual funds to replenish the fixed-income investments as they are used up?

My only "complaint" about your set up is bond funds. I'm totally against bond funds. You run the risk of losing principle just like an equity fund. Plus you can almost match the bond fund return with a CD.

My suggestions.

One, put 5 years living expenses in a CD ladder. You've pretty much done this, just need to move 2008 and 2009 monies. The advantage of a 5 year ladder, you now exactly what you have available 5 years out. Plus, "the market" rarely has a down 5 year period, so enough time to recover from any down turn.

As far as replenishment, if you're set on a 65/35 split, it is simple. At the time of rebalance, just sell enough equities to get back to 65%. Then buy a 5 year CD with 4%.

For example, 7 years from now, your portfolio has grown to $2.75 million after withdrawls. You have 4 CDs of laddered maturities worth $100k, $103k, $103k, and $107k. You have $1.975 million in equities. To get back to 65%, you'd need to sell $187,500 of equities. Then buy a 5 year CD worth $110k. You'd still have $439,500 to put in money market fund or 1 year CDs to be ready for next years rebalance.

Personally, 4% withdrawl is for someone not wanting to spend down principle. Some studies and Monte Carlo examples have shown 5-6% can be easily done if you're willing to spend down.

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