Annual withdrawal or?

[swodo]

I'm recently retired. A financial advisor suggested it best to take the entire annual withdrawal at the beginning of the year thereby avoiding market swings during the year. Seem to me that this also avoids any gains for the year.Wouldn't semi annual or quarterly be better?
Monthly best of all?

What are the pros and cons and what do you do?

 

[Gone4Good]

I have more than one year of cash on hand and will replenish the balance opportunistically and / or by withdrawing from stable investments, cds, st bonds, etc.

 

[GregLee]

A financial advisor suggested it best to take the entire annual withdrawal at the beginning of the year thereby avoiding market swings during the year.

I think that advice is dumb. More frequently should reduce the variation in your withdrawals.

 

[walkinwood]

Most of the SWR studies take the annual withdrawal at the beginning of the year.

I think that in the long run, it doesn't matter if you take it in the beginning or quarterly or whatever. Some years you'll be ahead, others behind.

Put yourself in the frame of mind of a person without an income, withdrawing money from a portfolio. Now, put the portfolio through the events of 2008/2009 & 2001-03 and see how much cash on hand you would have needed to feel comfortable. I think this will give you the answer you seek.

I felt good that I had more than 12 months cash in hand, and many years of ST. bonds when the market dropped in 2008.

All the best.

 

[mickeyd]

I'm recently retired. A financial advisor suggested it best to take the entire annual withdrawal at the beginning of the year thereby avoiding market swings during the year. Seem to me that this also avoids any gains for the year.Wouldn't semi annual or quarterly be better?
Monthly best of all?

What are the pros and cons and what do you do?

Hey swodo,

I assume that were talking about qualified money that you are withdrawing. If you take out the entire annual amount on Jan 1, what will you do with your stash? Put it in a checking account? MMF? Coffee can in the back yard under the rose bush? With short term rates being so bad (close to 0%) it might be better to make w/d on a monthly basis but keep the flexibility to w/d the balance at any time later on in the year.

I have not begun w/d my own stash and have thought about this a number of times and always seem to come up with a seemingly different answer. It's a nice problem to have and indicates that you have a nice chunk to play with.

 

[W2R]

I'm recently retired. A financial advisor suggested it best to take the entire annual withdrawal at the beginning of the year thereby avoiding market swings during the year. Seem to me that this also avoids any gains for the year.Wouldn't semi annual or quarterly be better?
Monthly best of all?

What are the pros and cons and what do you do?

I take the entire annual withdrawal at the beginning of the year. I have several years' worth of expenses in a Vanguard Money Market account as part of my asset allocation. I think many of us allocate 5% - 10% cash in our AA. In early January I move the entire year's withdrawal from Vanguard to my "bricks and mortar" bank. After that I rebalance and the rest of my cash allocation is available if needed for rebalancing.

Personally I like doing this because it is simple. This method helps me to know exactly what I have left to spend for the year. I can just move 1/12th of it from savings to checking each month, like a paycheck. No matter what the market does, I know that I have enough to meet my expenses for the rest of the year.

I suppose theoretically I am losing dividends, but since that money was in Money Market that really isn't the case. During the year, dividends from the rest of my portfolio are funneled into Vanguard Money Market, so it is replenished by the end of the year.

 

[wcv56]

Mid March trim over a bit of over weight positions, that should last at least 6-9 months and play it by ear on when to get what else you need. You may be able to stretch a few extra months out and help conserve a bit when cash gets lower, might even help you from buying on a whim as most of us do.

 

[Rambler]

When I finally get around to pulling the plug, 5/7ths of my stash will be in taxable accounts and 2/7ths in deferred comp, like a 401k. I can't begin touching the def comp for 6 years , and then it is paid out over 10 years. Our plan is to have about 18-24 months of cash in mm and CDs, and enough income from bond interest and dividends to keep the mm and CDs topped off until we begging receiving the def comp. At that point, all of the dividend and interest income will be reinvested (and we will be rebalancing here and there along the way of course), and we will have 10 years of income from the def comp, which, if all goes to plan, will cover all of our expenses during those 10 years. That will take us to age 70. Then we start back on the taxable accounts, which should have grown during those 10 years, and we will likely use the same methodology. The dividend and interest income is not the same every month, thus the need to have a cash stash to rely on.

That's our plan. Flexibility is key though, as the tax laws are likely to change.

R

 

[Animorph]

When my (nominally 100% equities) portfolio value is above my retirement assumptions I take out the excess in cash. That has been happening the last few weeks! I now have about a year's worth of cash sitting around. I don't plan to exceed about 3 years cash. When that cash runs out, I convert equities to cash as needed, pretty much monthly. That's what I was doing most of the past couple of years. If the market drops more than 10-20% I start putting any excess cash back into equities. At the bottom of the recession I borrowed on my HELOC and added it to equities, trying to minimize spending so I could leave it in as long as possible.

I started with about 3 years cash when I started retirement (in late 2007), since you want to avoid that bear market at the start of retirement problem. That turned out to be extremely handy, and was fully invested during the bear market.

Obviously I haven't been doing this for long, and it will depend on your portfolio return assumptions, but I'm flexible and like how it has worked so far.

 

[jebmke]

If you have other income and normally need to make estimated tax payments during the year you might want to do the withdrawal from the qualified accounts at the end of the year and true up your tax payments by having taxes withheld in December. Withholding tax is treated as if it was uniform throughout the year even if it come out of a lump sum. Doesn't mean you have to have the whole net amount sitting around in cash -- just reinvest it in something on the taxable side that meets your needs (CDs?) during the year.

 

[donheff]

I take the entire annual withdrawal at the beginning of the year. I have several years' worth of expenses in a Vanguard Money Market account as part of my asset allocation. I think many of us allocate 5% - 10% cash in our AA. In early January I move the entire year's withdrawal from Vanguard to my "bricks and mortar" bank. After that I rebalance and the rest of my cash allocation is available if needed for rebalancing.

Personally I like doing this because it is simple. This method helps me to know exactly what I have left to spend for the year. I can just move 1/12th of it from savings to checking each month, like a paycheck. No matter what the market does, I know that I have enough to meet my expenses for the rest of the year.

I do the same thing, except I move the withdrawal to a MMF with the bank I have checking with. From there I do automatic monthly transfers to checking (less than 1/12). At the end of the year, the excess goes into my mad money fund (theoretically - I really just take a smaller withdrawal the following year).

 

[chinaco]

IMO - segmenting the asset classes (at least for more near term money) is best for dealing with volatility and managing stable income. So called buckets or ladders.


I think there are many ways to effectively manage it... with advantages and disadvantages to each way.

IMO - There are considerations other than volatility that should factor into the overall approach to managing your cash inflow. Especially as one ages.

I am beginning to see value (and wisdom) in the use of bond ladders to fund an income stream. The bonds can be sold early if need be or if there is some reason to reposition the money.

 

[teejayevans]

I'm recently retired. A financial advisor suggested it best to take the entire annual withdrawal at the beginning of the year thereby avoiding market swings during the year. Seem to me that this also avoids any gains for the year.Wouldn't semi annual or quarterly be better?
Monthly best of all?

What are the pros and cons and what do you do?

This implies that you should be taking money out of the stock/bond market funds, I would fired this financial advisor for stupidity, short term funds should be in MM, CDs, or maybe short term bond fund, not in volatile market funds, thereby eliminating the market swings entirely.
TJ

 

[swodo]

Thanks to everyone,
The consensus seem to be to start with ( and keep) a couple of years of cash in a money market and withdraw that. Rebalance annually on January 1st.

 

[rayvt]

There's a bit of psychology here. If you withdraw from your investments monthly, you have 3 stumbling blocks.
1) The nuisance of having to sell something at the 1st of every month.
2) If the market is down, you bemoan that you are selling at the bottom.
3) If the market is up, you bemoan that you are getting out of a rising star.

It is much easier on your state of mind to just take all the money out at the beginnning of the year, plunk it in a MM or savings account, and then automatically transfer your monthly amount each month, just like getting a paycheck.

 

[GregLee]

There's a bit of psychology here. If you withdraw from your investments monthly, you have 3 stumbling blocks.
1) The nuisance of having to sell something at the 1st of every month.
...

No, if you invest in a mutual fund (e.g. TRPrice), you can have them send you a monthly check (or automatic deposit), and they take care of the selling. No psychology.

 

[SVHoper]

When my (nominally 100% equities) portfolio value is above my retirement assumptions I take out the excess in cash.

Hi Animorph,

Would you mind elaborating on this strategy? Is it a fixed dollar amount that needs to be exceeded? I am not at the withdrawal phase yet and just assumed I would have to increase my bonds in preparation for retirement, but it seems you decided to go with stocks/cash? Just hoping that you wouldn't mind sharing how you came to the no bonds decision.

Thanks.

 

[MichaelB]

I like to keep our investing portfolio (Vanguard and Fidelity) separate from our budget and cash reserves (bank), and the year's budget fully funded. We transfer the funds before Jan 1.

At the bank the money stays in an interest bearing account which earns close to what we would be getting at Vanguard. I don't see the issue with taking out the lump sum in January.

 

[easysurfer]

For me:

- rebalance at beginning of year
- any gains (hopefully) I put in a money market fund
- each month transfer money from money market fund to checking

Have 2 years living expenses in money market fund. If no gains, hopefully the next year I will and would replenish that back to two years worth.

I like to automatically transfer from the money market to checking each month (though don't see why I can't do it all in one shot) because this feels like a monthly paycheck (old habits die hard ).

 

[Ted_Shepherd]

Swodo wrote "Seem to me that this also avoids any gains for the year. Wouldn't semi annual or quarterly be better? Monthly best of all?" I have accumulated cash in my IRA from dividends not reinvested lately. From that cash, Vanguard will send a monthly amount to my taxable account at Schwab and a monthly amount to IRS as my required IRA distributions for 2011. The dividends at about 2% are not enough to cover the required distribution at about 4%, so I have to start selling assets in the IRA. Other than a little cash, it's entirely in the Vanguard S&P 500 index fund. Selling a particular dollar amount each month would undo the advantage I got in dollar cost averaging during the accumulation phase. That is, I used to invest the same amount of money each month, getting more or fewer shares depending on market action. Now, in the distribution phase, I choose instead to sell a fixed number of shares each month, retaining the resulting cash in the IRA along with the dividends to build up cash for withdrawals in future years. Of course, this means that the cash accumulating in the IRA is not predictable. I can handle the uncertainty.

 

[GregLee]

Selling a particular dollar amount each month would undo the advantage I got in dollar cost averaging during the accumulation phase. That is, I used to invest the same amount of money each month, getting more or fewer shares depending on market action. Now, in the distribution phase, I choose instead to sell a fixed number of shares each month, ...

The Wikipedia discussion of dollar cost averaging (http://en.wikipedia.org/wiki/Dollar_cost_averaging) claims that, since the market trends upwards, it's better, when you have a choice of whether to invest sooner or later, to invest in stocks sooner. Following the logic of that, when you have a choice of selling sooner or later, it should be better to sell later. So selling in an IRA to satisfy the IRS distribution requirement should be done at the end of the year.

 

[rescueme]

Being conservative, DW/me keep 3-4 years in tax-deferred MM accounts, held within our respective IRA's. I've been retired since early '07 (DW will be next May), and in '07 & '08 I did the annual withdrawal bit at the beginning of the period.

However, in '09 I decided to switch to a monthly withdrawal scheme (in which I have federal tax directed to the government at the same time).

Is there any difference, from my POV? Not really. However, the monthly withdrawal supports my "anal nature" of budget (income/expense) changes. Since expenses do change over a 12-month period, I change my withdrawals (both up/down) to reflect actual expenses (did I mention that I'm a bit anal ?)

Also, being retired over three years, I also sell those areas that have shown significant gains to add to my "cash bucket", if I'm below my target (in a way, that's rebalancing). If my bucket is full but I'm still outside my target AA, I'll do the necessary movement between equity/bonds, as needed. When still in the accumulation stage I would only do re-allocation (re-balance) en masse once a year, and small moves via my annual contributions to my then 401(k) and IRA's. I've learned to harvest gains earlier, since I've learned a good lesson with the 2008 downturn. I don't wait for "good" to become "better" (and "better" to become "excellent"). In retirement, cash flow is the name of the game.

Just our way of doing it...

 

[Animorph]

Hi Animorph,

Would you mind elaborating on this strategy? Is it a fixed dollar amount that needs to be exceeded? I am not at the withdrawal phase yet and just assumed I would have to increase my bonds in preparation for retirement, but it seems you decided to go with stocks/cash? Just hoping that you wouldn't mind sharing how you came to the no bonds decision.

Thanks.

This will be long, but I've never really described the whole thing before.

During 2007 - 2009 my main concern was putting more money into cheap equities, to the extent that I used home equity line of credit money to add to my equities at what turned out to be the bottom of the market. Some people on the forum here didn't even want to rebalance excess bond balances into equites to maintain their normal allocations during the same time period. So I don't think my strategy would work for too many here.

I dislike holding bonds and rebalancing to a fixed target because bonds (normally) don't return as much as stocks. For a 30 year retirement, that's a bunch of money sitting in bonds for 30 years. I don't want to do that. Same thing for cash of course. So I'm nominally 100% equities, though very diversified there.

I expect the value of my portfolio to increase in value over time, faster than inflation, even with my withdrawals. That means I'm pulling out a smaller percentage of my portfolio when I'm 100 than when I started, even assuming no other income. What could be safer than that? Why should I be all in bonds at age 100 if I only need to pull out 4% per year? When we die and the estate goes to the kids, does it make sense that that we were heavily in bonds for 10 to 30 years and then the kids inherit, who should move it back equities then?

But I still need to account for the swings of the market. I retired (DW is still working but could have retired with me) in 2007, with severence pay into 2008. Wanting to avoid the retirement horror story of the bear market at the start of retirement, and already concerned about the obvious housing problem and the less obvious consumer spending funded by a negative savings rate, I pulled out 3 years worth of cash to start. That was actually way more than 12% of the portfolio since I was paying for out of state college for one DS (and now the next DS) and of course covered that as well. No SS or pensions yet, but there will be. The idea was to spend the cash until it was gone and then to sell equities. That does not impact lifetime returns too much and provides significant early retirement safety (thankfully it worked). I'm about 7% off my portfolio peak value (including cash), with some moderate withdrawals.

From there, I projected portfolio values at the end of each year using simple average market gains as paart of my retirement plan. In those calcs I sell equities at the start of the year to cover expenses for the year, just to be conservative. What I want to do now is try to even out the market swings that are not part of the plan (though FIREcalc says I'm at a reasonable SWR also). So if my portfolio value ever exceeds the coming end of the year projected value, I sell equities to match the projected year-end value and essentially remove that cash from the portfolio. This might happen often during the year. It was a daily thing in the most recent upturn, if the market went up I sold since I was already at the desired end of year portfolio value. That keeps my plan on track, actually ahead of plan since the portfolio has hit the target value and I have extra cash that was not planned. That cash will be used for expenses, delaying the need to sell equities. So if the market is above "average" I'm pulling out cash.

If I run out of cash (some of 2009 and 2010 as a matter of fact) I sell equities as needed (any time of the year), and may try to avoid unnecessary expenses if the portfolio is particularly low. I tried to leave as much as I could in equities as the market bottomed and started to rise.

If I have medium or long-term cash available (> 1 year expenses) and we hit a bear market, I'll put that back into the market in chunks that are sized to run cash out (reserving the 1 year expenses) at my best estimate of the market bottom. So I was investing all the way down in 2008-2009 from -20% to -40% with existing cash and below that with HELOC funds, all roughly equal chunks at equal percentage steps. We delayed expenses, used up the reserved cash for living expenses while the market finally improved, and then finally had to begin selling equities. By that time stocks were well above the bottom and we had some nice gains already from the cash we had been investing as it went down. It never felt bad to sell at that point, even though we were still way down from the peak.

That just leaves a bear market with no excess cash to spend to contend with, one that does not happen after an over-exuberant market bull where I've pulled out lots of cash. In that case I'll just be taking a hit. If it occurs late in retirement I expect I'll already have increased spending (no bears), have more flexibility to cut spending, and have fewer years of retirement to fund (smaller portfolio is OK). Early on I'll still have some flexibility in spending during a long retirement and some hope of a quick market recovery instead of a permanent hit. That's the risk I take for running closer to the optimum median outcome instead of the optimum safest outcome.

Right now I've got about 1 year of cash pulled out, some of which I used to pay off the HELOC since that offered a better return than just holding cash. I expect to withdraw that money from the HELOC before selling equities again sometime in 2012 if things stay as is. If the market goes up more than about 2% or so I'll be selling equities again and raising more cash. I'll probably stop selling if my cash balance exceeds about 3 years, but keep topping-off to keep it at 3 years if the market is still over target.

So I'm trying to even out market swings while staying nominally 100% in equities. It's easy to tell when you should buy equities (in a bear market). I am using my average market gain projections to know when maybe the market is a little overvalued and I should sell. Barring those conditions, I'm just selling equities as needed to meet expenses.

I'm in cash because it is easy for short-term moves (no trading commissions or short-term redemption fees) and I don't expect to hold significant amounts for long periods. You could also use bond funds or ETF's. The key is that you're always spending it down to zero before selling equities. There is no permanent allocation to cash or bonds. Sort of a double bucket approach with a zero permanent allocation to the cash bucket. Probably sensitive to your average market gain assumption too.


That's it. It's strictly my own design, so there is no article that describes it and gives backtested or Monte Carlo results. I'll find out how it works in about 30 years. Subject to changes before then if I find something better.

 

[Animorph]

I've may have skimmed over some of the posts and missed this, but there is one important reason to sell at the beginning of the year that I didn't see mentioned.

If you are subject to the RMD, it is calculated on the value of your IRA/401k as of the end of the previous year. It that one case even I might be tempted to convert that RMD amount to cash, still within the account, as in a stable value fund if available. I heard many people took big hits in 2008 if they waited until the value of their IRA was way down before taking their RMD. The RMD is pretty much a short-term "expense" to an IRA account and needs to be carefully managed to avoid being forced to sell equities or even bonds at a bad time.