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Old 04-13-2013, 07:18 PM   #21
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I'm trying to develop a better system and was wondering how you ERs handle your funds for annual living expenses, assuming that your pension & SS are not sufficient to cover all of your expenses and you need to draw from your savings/investments.

Do you forecast what your expenditures for the year will be (and, if so, what is this based on? (like % drawdown of portfolio or last year's detailed tracking or ?))
Good question! For me this is a work in progress, starting from a fairly conservative position and slowly inching out from there.

I retired in late 2009, and initially thought 3.5% sounded like a nice, conservative SWR... So, for 2010, I withdrew 3.5% but spent less. Each year I have withdrawn a lower percentage than the year before, but still have a surplus. I guess this is due to a combination of abundant caution and being used to a certain spending level.

This year my withdrawal was 2.5%.

My spending also turned out to be less than my dividends each year. It looks like a good upper ceiling for my spending is an amount that is BOTH under 3.5% and also under my total dividends for the previous year. With this ceiling I still have a surplus to either spend on unexpected big expenses, or carry over.

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Do you then put those monies in a separate account someplace, and draw them down during the year? Or do you have the monthly draw deposited monthly into a checking account?
During the first week in January, I move the entire year's money from money market at Vanguard (where my dividends and capital gains are directed), to my checking account. Then I rebalance. I do not withdraw any more money from Vanguard again until the following January. I do it this way to make it very simple and clear to me what I can spend.

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Do you include large anticipated "one time" (new roof, kitchen remodel, major trip, etc.) expenses in your annual forecast (or how do you handle those)?
And

What about unanticipated major expenses? How are those handled?
I save as I go along, and most of these can be paid for out of money that I saved earlier in the year. I am paying for my dental implant (unexpected) and new TV (anticipated) that way. If I wanted to, especially in the case of unanticipated large expenses, I could spend money intended for later in the year and then tighten my budget to pay for it after the fact. My budget is not too tight so that makes this easier than it might otherwise be.

Overall, my surpluses during these first three years were enough to more than cover my next SUV and a new roof, for example. I have not needed either, however, and should not for another ten years so they remain surpluses.

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And if you have a surplus at the end of the year, do you use that to "seed" next year's spending account or ?
For example, this year I decided my withdrawal should be 2.5%. I then computed how many dollars a 2.5% withdrawal would be, subtracted the surplus from last year, and only transferred the resulting difference from Vanguard to my local bank. That transfer plus the surplus money that was already in my local bank, made up the 2.5%.
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Old 04-13-2013, 07:30 PM   #22
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And if you have a surplus at the end of the year, do you use that to "seed" next year's spending account or ?

omni
Anything left over is moved to a short-term bond fund available for any large expenses, a splurge, or to help buffer a shortfall if my portfolio has a bad year.
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Old 04-13-2013, 07:59 PM   #23
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Audrey, I think you've got some good ideas...I'm go to review them in the morning again when I'm fresh. Thanks for sharing.
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Old 04-13-2013, 08:15 PM   #24
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That is very nice and simple.

Do you ever worry whether the dividends Vanguard sends you are too high a percent of your portfolio? For example, if one year Vanguard paid out 10% in distributions, would you reinvest some of it?
We would probably just hang onto it and use it first before taking from the cash at Vanguard for taxes, etc. We readily admit to being financial idiots and really my main goal is to not use the dividend-producing funds but at this point, approaching our mid-60s, to use/enjoy the dividends rather than reinvest them. Most people here are so financially savvy with great methods, but I wanted to share what has worked for us for almost 5 years now.
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Old 04-13-2013, 09:13 PM   #25
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My system is beyond basic and a throwback to the dinosaur days. Cash my monthly pension check, live off it, and send what's left over to Vanguard to build up. I was talking to my 83 year old neighbor and he made a comment today "seems like people don't retire early like they used to" ( he has been retired for almost 30 years on a company pension). I told him " don't you think maybe it's because people aren't has as lucky as us to have pensions?" He thought for a second and said, "you are probably right".
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Old 04-13-2013, 09:15 PM   #26
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I ER'ed 18 months ago at 47. I had tracked my spending for many years using Quicken. I set aside 2 years of spending plus an emergency reserve in a savings account and CDs. As I spend down one year's expenses, I replenish the savings accounts with dividends and capital gains from my taxable accounts. Essentially the money my portfolio is throwing off now is funding my 2015 spending. This bucket approach will give me some room to react in the case of a big market downturn so I can avoid cashing out stocks in a down market.

I only withdraw what I intend to spend in a given year. This has the added benefits of minimizing taxes and allowing me to keeping more $ in my investments so they can keep growing.
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Old 04-13-2013, 09:41 PM   #27
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We would probably just hang onto it and use it first before taking from the cash at Vanguard for taxes, etc. We readily admit to being financial idiots and really my main goal is to not use the dividend-producing funds but at this point, approaching our mid-60s, to use/enjoy the dividends rather than reinvest them. Most people here are so financially savvy with great methods, but I wanted to share what has worked for us for almost 5 years now.
Some people spend the dividends, but reinvest any capital gains distributions.
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Old 04-13-2013, 09:49 PM   #28
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I keep close track of my expected dividend and interest income. That forms the basis of my budget. Every month I transfer ~1/12, into my checking account from my brokerage account. Most years there is money left over. This year I had some major expenses, solar panel, car, electrical work and probably a kitchen model. Which I am justified by saying the last few years I've had some great returns in the bull market and you can't take it with you.

After 13 years being retired I have more money than I started (although after inflation not really) so I can't be screwing up too bad.
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Old 04-13-2013, 09:55 PM   #29
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Great responses. Gave me some good ideas to mull over.

Thanks, everyone.

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Old 04-13-2013, 10:08 PM   #30
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Some people spend the dividends, but reinvest any capital gains distributions.
We do not reinvest those either.
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Old 04-14-2013, 01:02 AM   #31
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I vaguely remember a similar thread but I am too lazy to go off searching.
I have a link to it in OneNote: http://www.early-retirement.org/foru...ies-65087.html

(which now I'll have to supplement with a link to this one... )

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Old 04-14-2013, 07:04 AM   #32
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Just to elaborate on donheff's point about timing on when to sell equities or bonds to cover cash withdrawal - my approach is different.

I always have at least 5% cash in my retirement portfolio AA, so clearly this would cover more than one year's expenses if needed. This cash % also helps lower the volatility of the portfolio and gives me something to buy other assets with in the event that BOTH equities and bonds have a bad year (like 2008). It has always been part of my AA design.
I would prefer that approach but my situation keeps me uncomfortable applying it as simply as you do so I take a round about approach. DW was able to pile up big amounts in tax differed accounts and we used large taxed sums ($400K) to pay off two mortgages before ERing. Thus we have 4/5 of our portfolio in tax advantaged. For now we are withdrawing exclusively from the taxed account which is 100% equities. I hate liquidating those equities earlier than I have to and can't get any kind of return in traditional money markets or savings accounts so I keep my "cash" in the TSP G fund (government bonds guaranteed to never lose principle, also tax differed). If I need a cash infusion at a bad time that is when I buy equities with some of that "cash" in tax differed.
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Old 04-14-2013, 07:14 AM   #33
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We have a pension that pays for the normal living expenses and then some, but not a lot of extra. I'll apply for SS next year or the year after at 64 or 65. We've been saving the bulk of what I earned the last five years at my job so that will more than make up the difference.

We also have a set-aside for annual expenses like property taxes, house & car insurance and the like, and to cover the things that will break and need repair/replacement such as a water heater or A/C. DW's car mileage is over 157k so that is getting to near replacement time and we have the cash earmarked for that too.
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Old 04-14-2013, 08:51 AM   #34
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Always nice to hear from you, omni.

I am not retired yet, but I have planned the forecast of my expenditure for each entire year. Say $100,000 for example until age 95. I do not plan on including one time expenses. If such a large expense does occur, then I expect to spend less on other items that same year.

If there is truly a very large expense, say $90,000 in one year, then I guess I will sell a few CDs and pay the fees.

If there is a surplus, then it is more money I can put in SPIAs at a later age.

Hope this helps. Take care.

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Do you forecast what your expenditures for the year will be (and, if so, what is this based on? (like % drawdown of portfolio or last year's detailed tracking or ?)) Do you then put those monies in a separate account someplace, and draw them down during the year? Or do you have the monthly draw deposited monthly into a checking account?

or

Do you include large anticipated "one time" (new roof, kitchen remodel, major trip, etc.) expenses in your annual forecast (or how do you handle those)?

omni
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Old 04-14-2013, 10:44 AM   #35
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Some people spend the dividends, but reinvest any capital gains distributions.
The big bond fund I am in sometimes generates cap gain distributions. I reinvest those, too. Back in 2010 the fund threw off a huge short-term cap gains distribution which caused me some angst with my estimated income taxes (it was a midyear distribution), as I did not want to use any of those reinvested funds to pay the tax bill. I used another fund instead.
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