Decumulation experiences

[Cap_Scarlet]

I'm not sure if decumulate is a word or if there's another word I should use!

Anyway, I am interested to know if there are early retirees who are consciously planning to eat into their capital or who are already eating into their capital. Does that make you feel nervous? How have you set your portfolio up to deal with that?

Our situation is that we are early 50's (52 & 54) and about to stop work (three months). We will have around $2.5 million of invest-able funds and once we hit 60 should have enough income from pension schemes to meet the vast majority of our needs. However, until then the savings are pretty much all we have.

I've set up the portfolio so that it should throw off around $50,000 per year in income (dividends and interest) which means are remaining expenses will need to be met from capital (we estimate our annual expenses around $80-90k per annum).

We will be keeping around $500k in cash or secured funds (i.e. 6 years) means the rest we will not need to touch.....

....but after year of saving it still makes me nervous to start digging into those hard earned pennies.

What's your setup and how do your deal with the psychology of spening your stash?

 

[Meadbh]

I follow the total return approach. I am not worried in the least, because my total return exceeds my expenses, and my net worth today is higher than when I retired 4 years ago.

 

[2017ish]

First, you are in good shape!

We are mid-50s and also stopping in three months.

This is a common theme. Income investors who take only dividends/interest out of portfolio (including rents from real estate), versus total return investors, who have no qualms in taking principal. Those in the former category tend to have pensions or have accumulated (in my subjective opinion) more than needed for their particular idea of retirement. Those in the second category see a X% withdrawal rate as safe, even if it includes capital drawdown.

We'll be in total return category from day one. I don't care if it is called "interest," "dividend," or "capital appreciation." it is all coming from the portfolio one way or the other.

FWIW, no pensions or retiree health insurance.

 

[joylesshusband]

I think that everyone who is unsure on this subject, or feels uncomfortable about consuming more than just the dividends and interest, should postpone retirement and keep working.

 

[pb4uski]

If you have equities, it is unlikely that you will be dipping into "capital" (IOW, your balance will be declining from what it is the day you retired), but you will occasionally be selling shares to capture gains from appreciation.

$90k/$2.5 million = 3.6%... it is very likely that your portfolio will earn more than that... but if the income is only $50 then you will need to sell shares occasionally to raise the extra $40k difference. No need to fret... only total return matters.

So for example, if your portfolio earns 5% in the first year that is $125k and you spend $90 of that but your portfolio still goes up by $35k... what's the matter with that?

Also see:https://vanguardblog.com/2016/11/29/withdrawal-strategies-for-retirees/

When thinking about how much to spend from a portfolio, many investors want to apply the income-only withdrawal strategy and never intend to deplete touch their principal. In today’s low-yield environment, that approach isn’t possible for most investors. The average investor won’t generate enough income to cover living expenses.

A [-]different[/-] more realistic approach

We would suggest taking a total return approach to retirement spending. With this approach, after considering your goals, time horizon, income, and expenses, you establish a percentage that you’ll need from your portfolio.

 

[pb4uski]

I think that everyone who is unsure on this subject, or feels uncomfortable about consuming more than just the dividends and interest, should [-]postpone retirement and keep working[/-] read and learn.

FIFY

 

[Out of Steam]

I concluded that 4% was a bit too high a withdrawal rate before 60, and possibly in our early 60s. At 65, I'm comfortable enough with 4%.

I'm not going to work extra years over the possibility that the 20-25% of our retirement income that we plan to come from savings will run out after 90.

 

[pb4uski]

In OP's case it will only be 3.6% for 8 years and then will plummet as their pensions and SS start.

 

[walkinwood]

Timely . Kitces addresse this in an article on his blog
https://www.kitces.com/blog/four-pi...s-interest-dividends-capital-gains-principal/

We have been ER'd for almost 9 years and take the "total return" approach (much like Kitces advocates above). Luckily for us, after a sharp downturn in our portfolio values right after we ER'd, there has been a steady uptick in our portfolio value. It is now higher, in real terms, than our initial portfolio. The stock market performance is the main driver, but our withdrawals as a percentage of the portfolio has been lower than what we expected it to be. In the early years, we were definitely taking money from our "principal" since our portfolio value was less than what we started out with.

 

[DrRoy]

I will RE NEXT WEEK! We have a modest pension, and interest, dividends, plus cap gains distributions will cover most but not all of our desired spending. When the account cash gets low, I will need to sell off a few shares of something. No problem. Our portfolio burn rate (WR) will only be about 1.5%. We plan to travel a good bit, and I am trying to decide if we should fly business class. We have the $, but for the cost of international business class, we could pay for another whole trip somewhere, so it seems a waste. Still, we have the $ . . . . . .

 

[Cap_Scarlet]

We plan to travel a good bit, and I am trying to decide if we should fly business class. We have the $, but for the cost of international business class, we could pay for another whole trip somewhere, so it seems a waste. Still, we have the $ . . . . . .

I've struggled a little with this as well and concluded it just is not worth it. We will however fly premium which is slightly less than double the cost of coach and feels an acceptable trade!

 

[DrRoy]

I've struggled a little with this as well and concluded it just is not worth it. We will however fly premium which is slightly less than double the cost of coach and feels an acceptable trade!

We fly Delta a lot (we're in the Detroit area) and they have the premium coach offering. I still have a problem with the value vs. cost equation.

 

[athena53]

I think that everyone who is unsure on this subject, or feels uncomfortable about consuming more than just the dividends and interest, should postpone retirement and keep working.

Not necessarily. For many of us who spent our entire working life accumulating money with the iron-clad rule that retirement savings were NOT to be touched, it's hard to shift gears. Especially hard knowing that in bad years in the market, we're not throwing in large chunks of our wages to buy more at bargain-basement prices, which certainly helps the portfolio recover.

I retired in 2014 at 61, 4 years earlier than planned. I'm gradually getting used to taking money out, especially since my net worth is higher than it was when I retired. That's how it should work, of course- you withdraw less than the portfolio is making so your withdrawals can be adjusted for inflation. Having just finished the last of the upgrades to the house DH and I bought almost 2 years ago, having replaced the heating AND A/C and with a 50-year roof installed 4 years ago, I HOPE I'm done with major house projects for awhile and that will help, too. I've kept the annualized W/D rate under 4%.

 

[imoldernu]

Whether by plan, or luck, our withdrawals have been under the state and federal tax level for our age since retiring in 1989. In the early years, it was a cash burn through, but after 65 withdrawals were tax free, due to IRA's. In two more years, we'll begin paying taxes again as we begin breaking into taxable accounts

Probably more because of dumb luck.

 

[kcowan]

Our first couple of years (2002-3) were a drain because we traveled a lot, then we bought our snowbird place in 2007 and watched the portfolio decline. But we held on and 2 pensions kicked in so after 8 years, we were just fine.

We appreciate sequence of returns and sequence of spending but we just had faith.

 

[Danmar]

I retired about 10 years ago and until recently only spent my pension and income generated from my portfolio. Markets have been very good and my portfolio has almost doubled so have recently just started liquidating small amounts on top of the dividends. I also had a reluctance to " spend principal
" but have relented. As others have mentioned it's total return that matters. My divs yield about 3.5% which seemed like a reasonable SWR for the first 10 years but given my investment results, I figured I better spend or give more.

 

[FIREd]

We made the decision to stay in San Francisco after DW retired two years ago to explore the West Coast. It was an expensive luxury. Our withdrawal rate has therefore been higher than I would normally like, which forced us to sell some equities to pay the bills. But our portfolio performed very well during that time, fortunately, and our balance is now higher than it was on DW's retirement day.

In a couple of weeks, we will move to a lower cost of living area and reset our withdrawal rate. Our expenses will drop, as will our WR, which will remain a bit higher than our current portfolio's paltry yield of 2.6%. So we will still have to sell some assets every year to pay the bills, but not as much. I am fine with that.

I used to believe in income investing but I found a number of issues with it (including the temptation to chase yield). At the end of the day, it does not matter how much income my portfolio throws, the amount that I can spend is still dictated by total return.

 

[Hermit]

When I realized I would need to spend more than originally planned on building my house in 2013 about the time I retired, I shifted enough money in my 401k (my primary source of investment funds) to a stable value fund in case I needed construction cash in a down market. My basic living expenses are covered by pension and SS. I have been taking annual distributions from the 401k at a level that keeps me from paying more in Medicare premiums and rebalancing slowly away from the stable value funds as the construction project gets closer to completion. The effect has been the stable value fund has remained fairly constant in dollar value and my additional construction costs have been covered out of the annual distributions. My total 401k value has grown some over the last 4 years so all is good.

I make no distinction between funds for withdrawal purposes other than the stable value fund. When I make my annual withdrawal I also rebalance to my original allocation with the stable value fund being part of the bond fund allocation.

 

[kgtest]

In OP's case it will only be 3.6% for 8 years and then will plummet as their pensions and SS start.

Nailed it. For some reason I picture you looking like Sheldon from big bang lol. You are right a lot and thats the truth.

 

[pb4uski]

Thanks. Maybe look a little like him... I wish I was as thin as he is... but to be fair I guess that I was back when I was his age.

 

[NW-Bound]

I hold many individual stocks, and have been selling/buying them, so the definition of principal is not defined the same way as people who hold MF shares or some stocks and never sell them. If my stash in dollar amounts goes up despite my withdrawals, I am happy. I do not have a constant number of shares of anything to worry about having fewer shares. If anything, as I sell high-flying stocks to buy downtrodden ones, I tend to have more shares over time.

And speaking of withdrawals, it has been almost 5 years since my earned income stopped. And when I looked at what I have drawn out from my stash to live on, I could not help thinking how much more money I would have if I were still working, and did not have to withdraw.

Yes, switching from the accumulation mode to the distribution mode takes some getting used to.

 

[audreyh1]

I will RE NEXT WEEK! We have a modest pension, and interest, dividends, plus cap gains distributions will cover most but not all of our desired spending. When the account cash gets low, I will need to sell off a few shares of something. No problem. Our portfolio burn rate (WR) will only be about 1.5%. We plan to travel a good bit, and I am trying to decide if we should fly business class. We have the $, but for the cost of international business class, we could pay for another whole trip somewhere, so it seems a waste. Still, we have the $ . . . . . .

We haven't done this simply because the cost difference is so large, that we could fund several more weeks of staying in Europe by settling for economy plus instead of business class. We might use reward miles, but not all cash.

As we get older, we may choose to do otherwise, if our retirement portfolio seems high yet our travel years left looks like they're shrinking. Our neighbors do this - they are late 70s/early 80s, so I get that!

But until then there are always other things we can spend those considerable funds on.

Fortunately domestic first class has is often available for small upcharge at the last minute and/or you get a freebie now and then if you have status.

 

[Ronstar]

I retired 3 years ago, but have been doing a draw down for approximately 5 years due to part time work before I retired. So far I haven't been too worried about dipping into the stash.

2 reasons - like others, my portfolio value is at an all time high, and I've only been drawing from the cash portion of my portfolio.

That said, I'm having a problem pulling the trigger on buying a new truck. I'll probably finance it at a low rate and this payment would replace DW's car loan that I just paid off. Still I can't get over taking on debt in retirement.

 

[sengsational]

For me, the biggest difference has been having to maintain strategic and tactical plans for funds to use for spending. This simply wasn't a a requirement when I had a constant flow of funds coming in.

For instance, because for me at this point, everything is in a tax advantaged account, I need a strategy that dictates which accounts to pull from that will minimize taxes. i-orp provided me a starting point for that plan. On the tactical side, I have a cash-flow spreadsheet that has one column per month, and in each column is always the rough monthly burn rate, but I also have additional rows to include big stuff that's not in the normal budget (bonds coming due, cars being purchased, large tax refunds, etc). I simply do a "cash out re-balance" in December that should be all of the taxable income I need for the next calendar year (not in January because otherwise the non-optional withholding would be held for over 12 months!).

 

[pb4uski]

.....That said, I'm having a problem pulling the trigger on buying a new truck. I'll probably finance it at a low rate and this payment would replace DW's car loan that I just paid off. Still I can't get over taking on debt in retirement.

I had not had a car loan for 25 years until we bought in late 2015... I just couldn't resist 1.9% for 60 months so I did the loan and set up an autopay for the payments... easy peasy... doesn't bother me one bit. According to Quicken, from when I took the loan out until today our portfolio has earned 10.2% per annum, so it looks like a good decision so far.