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Annual withdrawal or?
Old 11-12-2010, 03:56 PM   #1
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Annual withdrawal or?

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?
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Old 11-12-2010, 04:08 PM   #2
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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.
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Old 11-12-2010, 04:10 PM   #3
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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.
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Old 11-12-2010, 04:31 PM   #4
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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.
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Old 11-12-2010, 05:01 PM   #5
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Quote:
Originally Posted by swodo View Post
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.
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Old 11-12-2010, 07:41 PM   #6
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Quote:
Originally Posted by swodo View Post
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.
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Old 11-12-2010, 08:47 PM   #7
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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.
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Old 11-12-2010, 09:22 PM   #8
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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.

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Old 11-12-2010, 10:36 PM   #9
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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.
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Old 11-13-2010, 12:52 AM   #10
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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.
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Old 11-13-2010, 07:04 AM   #11
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Quote:
Originally Posted by W2R View Post
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).
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Old 11-13-2010, 11:29 AM   #12
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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.
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Old 11-13-2010, 01:04 PM   #13
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Quote:
Originally Posted by swodo View Post
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
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Old 11-14-2010, 07:50 PM   #14
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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.
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Old 11-16-2010, 09:32 PM   #15
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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.
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Old 11-16-2010, 10:10 PM   #16
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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.
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Old 11-17-2010, 04:04 PM   #17
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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.
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Old 11-17-2010, 05:02 PM   #18
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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.
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Old 11-17-2010, 08:39 PM   #19
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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 ).
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Old 11-20-2010, 09:36 PM   #20
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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.
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