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How do ERs fund their annual expenses?
Old 04-13-2013, 11:50 AM   #1
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How do ERs fund their annual expenses?

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 ?)) 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)?

And

What about unanticipated major expenses? How are those handled?

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
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Old 04-13-2013, 12:22 PM   #2
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I am in my first year of ER, so experience will tell whether this is an effective approach.

First, I have tracked my personal expenses for a few years now, so I have a ballpark figure to use as a baseline. Next, I developed a budget on Excel. Using the budget as a baseline, I developed a monthly expense tracking sheet, which calculates monthly totals as well as cumulative spending and variances from budget in each category. I have populated this spreadsheet with all the known expenses for the year, e.g. car payments. Below it I have notes, e.g. "Don't forget, property taxes are due in June". I keep all receipts and calculate actual expenses at the end of each month.

For several years I have not had a salary and have been paying myself corporate dividends, so on January 2 I wrote a check for an ordinary corporate dividend for 2/3 of my expected annual expenses. That went into a high interest savings account. I have set up a monthly transfer from the HISA to my checking account. Later in the year, when my corporate taxes are done and I have a clearer forecast for annual expenses, I will pay myself some more, but tax considerations will determine whether that will be a dividend or salary. I have several years' worth of expenses in cash or cash equivalents within my corporation. Changes to the tax code in 2014 mean that non-eligible dividends will be subject to a slightly higher rate of federal income tax than previously, so it may be beneficial to take a bigger dividend in 2013. The benefits will have to be balanced against the opportunity cost of deferred taxation. My accountant and I will do the math later this year once future provincial tax rates are known.

The spreadsheet makes it easy to forecast ongoing expenses. My budget has a line item for travel, and that will increase after the car is paid off. As for unanticipated major expenses, I would probably pay myself an additional dividend to cover them, as my budget is tight. I did have a surplus last year and I used it to pay down mortgage debt on a rental property.
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Old 04-13-2013, 01:39 PM   #3
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I retired 6 years ago at 48. Most of my money was in IRAs, so I use 72t withdrawals to keep refilling my aftertax savings each quarter or so. All this is at my stock brokerage. I have no pension or SS.

Each month I transfer a pile into my checking acct - normally 1/12 of my 72t for that year, more or less as needed. There is enough excess to handle unanticipated expenses. I do not budget, and when there is a surplus it just piles up at the stock brokerage, as my 72t withdrawals are now equation based (annual recalc) and not in my hands.
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Old 04-13-2013, 01:59 PM   #4
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Most of the time I have had cash in my brokerage account and transferred it to the checking account as needed. Not really what I expected, but I raised the cash level temporarily when I retired and again as the portfolio value began to exceed retirement projections.

During 2010, after I had reinvested all my spare cash and the market was recovering, I sold equities as needed to cover expenses, roughly monthly, until the market had recovered enough that I was supposed to start taking extra cash out again. As a nominally 100% equity portfolio, that should be the more normal procedure for me. We just haven't done it much so far. I just sold off whatever I had too much of, keeping the portfolio balanced according to the AA. Theoretically, the longer it stays invested the slightly better off you will be, on average. Across 30 years or so, that's plenty of time for things to average in your favor.

When I have to start taking RMD's I'll probably reserve some cash inside the IRA or invest the RMD outside the IRA at the start of the year to avoid a big RMD late in a crashing market.

And if I get too old to be actively involved in this, I'll probably have to simplify and automate a bit more.
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Old 04-13-2013, 02:00 PM   #5
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I retired in 2008 at age 45. I have a big pile of money in a bond fund which pays me monthly dividends I use to pay my bills. Some of my bills not not monthly so I have to plan out my expenses and dividends so surpluses from the lower expense months are carried forward into the months which have higher expenses.

For the rare, larger expenses which can't come from my regular budget, I have other bond funds I can tap into to cover those bills.
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Old 04-13-2013, 02:05 PM   #6
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Good question, and I'm interested in the answers

DW must make RMDs from an inherited IRA, and a I was planning to withdraw another 12k once a year to supplement our pensions; choosing from different funds depending on their share value. If all the funds looked crappy, just draw from a 3 year cash reserve.
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Old 04-13-2013, 02:09 PM   #7
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Muni interest and dividends feed the brokerage cash acct. Brokerage cash acct feeds checking acct and short/mid term accrual acct. Excess cash (cash in excess of an approx 2-3 year basic expenses cushion) is reinvested...

...theoretically. I've only been retired 3 months and still collecting income on a non-compete agreement, so I'm still accumulating. Also note that the bulk of my savings/investments are in taxable accts.

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Old 04-13-2013, 02:10 PM   #8
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I've been retired for 8 years now. Before I retired, I had enough cash for 3 years expenses in CDs, so I run my expenses on a 3 year schedule.

During the year I save all income in a savings account until I get enough to fund a 3 year CD. I have CDs at both Ally and Penfed.

Annually I fund one savings account with the money for that year when the CD comes due. I transfer a certain amount to my local checking account every month for monthly expenses. I keep the remainder in that account along with the money for the annual expenses like property taxes or insurances. When I have those larger bills, I transfer the larger amount to my checking account that month. I only need to do that a few times a year.

I keep a spare $5,000 in a MM account in my local account and $10,000 in another savings account at Ally for unexpected expenses.

If I knew I was going to be short on money one year, I would sell whatever had gained that year. But, at this point I haven't needed to touch my Vanguard account.
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Old 04-13-2013, 02:28 PM   #9
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I have an annual budget. It is less than my annual draw from the retirement fund.

At the beginning of the year, I move my standard X% from my retirement fund (a brokerage account) to a FDIC insured savings account. I then realance my retirement fund.

There are monthly transfers from that savings account to my bank account to cover my monthly expenses. Also withdrawals to cover taxes.

If I have more than I need to meet the years expected expenses, the excess is put in some short-term bond funds. I can draw on these if I have an unexpected large expense or a large planned purchase.
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Old 04-13-2013, 02:42 PM   #10
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Quote:
Originally Posted by audreyh1 View Post
I have an annual budget. It is less than my annual draw from the retirement fund.

At the beginning of the year, I move my standard X% from my retirement fund (a brokerage account) to a FDIC insured savings account. I then realance my retirement fund.

There are monthly transfers from that savings account to my bank account to cover my monthly expenses. Also withdrawals to cover taxes.

If I have more than I need to meet the years expected expenses, the excess is put in some short-term bond funds. I can draw on these if I have an unexpected large expense or a large planned purchase.
audrey,

For [my] clarification, on what is your "standard X%" calculation based?

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Old 04-13-2013, 02:49 PM   #11
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This is a great thread and I'm learning alot from it.

I need to start thinking about this right away (ER date is Aug 2013). Right now I have 4 years of expenses in cash (When the DOW was at 12,000 I thought a 10 - 20% correction was coming !! - once again proving to myself that trying to time the market is a losing proposition). I have another 2 year expenses in a short term bond ETF (BSV) which I plan to use for "one time" type expenses - new roof, major car repair, etc.

I like the idea of the 3 year CD ladder, assuming they pay more than my CapitalOne checking account does.

I would like to have approximately 5 years of expenses in less volitile holdings. My thought was I would keep 3 years of expenses in savings and replenish the BSV holdings to keep to the 2 year expense level. I was thinking of moving the funds quarterly.

I have a feeling figuring all this out in ER is going to be a part time job !
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Old 04-13-2013, 02:55 PM   #12
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I take dividends as cash rather than reinvest. To cover the rest, so far I've had ESPP stock and other individual stocks I've sold off. Just sold the last of those so now I'll start selling whatever of stocks/international/bonds I'm heavy in.
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Old 04-13-2013, 03:03 PM   #13
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Quote:
Originally Posted by omni550 View Post
audrey,

For [my] clarification, on what is your "standard X%" calculation based?

omni
Our ages (mid-50s), and portfolio survival for 40+ years. It's currently 3.33%. Portfolio AA is around 53% equities, 47% fixed income.

But we don't use the classic "SAFE" withdrawal amount from inital start of portfolio adjusted for inflation that all the studies are based on. We use a % of end of year portfolio value each year. If our portfolio grows, so does our withdrawal. If our portfolio shrinks, so does our withdrawal. We don't mind having variable income year-to-year, and we prefer not to blindly adjust for inflation.
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Old 04-13-2013, 03:37 PM   #14
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I have an annual budget that I put into mm fund at beginning of each year. Monthly transfers to checking for expenses. Anything left at end of each month stays in checking for unanticipated expenses. Monthly dividends are put into the mm fund each month. At the end of the year I fill the balance of mm fund up to next year's expense estimate and start the process over again.
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Old 04-13-2013, 04:13 PM   #15
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DH retired almost 3 years and I semi-retired (I work very part-time). We do draw from his IRA. I keep a detailed budget in You Need a Budget. In excel I project out a budget over the next several years. I recognize that this won't be exactly accurate but gives a ballpark. For first 2 years DH was retired it was off quite a bit as we were in the process of selling one house and downsizing and didn't have a firm grasp on certain expenses. Now, things are more settled.

Anyway, I determine at the start of the year how much we need to withdraw monthly to cover expenses and set this up as a monthly withdrawal (we did it this way as we knew we would be getting a small mortgage on the downsized house and this is how lenders want to see it).

For the past couple of years we haven't really kept much in cash, may 2-3% of the portfolio. I was convinced by the articles showing that people who keep a couple of years expenses in cash do worse than those who don't. So we transferred living expenses from the short term bond fund.

I've gotten a bit more skittish about the bond funds and I just transferred enough from the total bond found to a money market to fund our needs for the rest of this year and I will probably do that again at the start of next year.

We have a budget category of about $5000 for irregular expenses that we don't know when they will occur. That category rolls over if not used. For unanticipated expenses beyond that we have $15k in an IRA at the bank that we could easily get to and have several thousand in money market in our taxable account that we could get to easily.
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Old 04-13-2013, 04:46 PM   #16
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I vaguely remember a similar thread but I am too lazy to go off searching. The OP might profit from looking. My approach is similar to Audrey's. I use a 3.5% figure and have run a bunch of calculation on my spreadsheet tracking 3.5% EOY; 3.5% initial year+ inflation, Guyton, and several others. My intent is to take the lower of the amounts I track.* Last year, the lowest amount was one that Vanguard recommended based on a fixed amount (in my case 3.5%) but capped to not increase more than 5% over the previous year. Like Audrey, this approach has left me with excess (so far about 1/4 the amount of the SWR). I return or leave the excess in the portfolio and track it as a virtual account and subtract it from the total I use to calculate the SWR. getting a little anal, maybe?

So far I have withdrawn only from taxable which is all equities. Taxable accounts for about 1/5 of our portfolio and will likely be fairly depleted by the time we both hit RMDs. My one bit of market timing relates to when I withdraw. I try to hit high points and have been fairly successful so far. I always insure that I have a 20 - 40 cash cushion in a savings account that feeds checking. This week, for example, I sold $4K in equities on each of two big up days which also coincided with high points in my portfolio. A couple of years ago when I had to replenish cash during an August low, I sold about $20K in equities and simultaneously exchanged $20K from bonds to equities in a 401K to keep from selling low from the total portfolio perspective.

* The reason I run several different calculation is to provide some food for thought in the future. If we have a big downturn that takes 3.5% EOY significantly below what I would like to be able to spend I will consider some of the implications of more flexible approaches to cut myself some slack. I'm not sure how comfortable I would be giving myself much slack in a bad downturn - I have plenty of room to cut back. If the market does well and I find myself capping the increases and dropping the real percentage way below 3.5% EOY (or even higher as we get into our 70s) I may consider splurging on us (business class seats, anyone?) and/or gifting the kids/grandkids up to the $13.5K limit, and increasing charitable giving.
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Old 04-13-2013, 04:53 PM   #17
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Our approach is similar to AudreyH1.

We are late 50's, ER 3 1/2 yrs. Being a retired CPA & Finance guy, I run a tax estimate late in the year to see where we are in our tax bracket - what "room" I have to take any needed cash before year end. I then move money from tIRA and have the choice of putting into a rIRA or our taxable acct, depending on expected cash needs. Then, when we need operating cash (if you will) we hit the rIRA or taxable account.

That smooths out the tax burden from the tIRA while still providing us with needed play money.

Our thing is travel. We love to GO. So far only 26 countries. Have to work on that.
we JUST had a conversation over snacks and coffee on the patio about the topic, and mutually agreed, what? Do we really want to just leave it for the kids? Or do we need to redouble our efforts and stimulate the economy more?
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Old 04-13-2013, 06:26 PM   #18
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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.

In addition, during each year, any dividends and distributions paid out by my mutual funds are not automatically invested where they would be subject to volatility, but allowed to accumulate in cash. So by the end of the year the cash in my portfolio will have risen by a few %, sometimes enough to cover the annual withdrawal. The main reason to do this is to minimize taxes for a taxable investment account, but it tends to simplify the mechanics over all.

So by January, I take the withdrawal from cash, and then I rebalance the portfolio if the AA is still out of balance. This cleans up all the little messes left behind by mutual fund distributions. The nice thing about rebalancing is that it trims a bit from what has done well over the past year, and adds a bit to what has underperformed for the year. You don't have to worry about when is the optimal time to sell an asset, it all works together in proportion.
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Old 04-13-2013, 06:54 PM   #19
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We have a very simple system. DH's pension and the dividends from our Vanguard holdings cover most of our day to day stuff. Those get sent to our checking account. We have a big chunk of cash also parked at Vanguard that we pull from as needed. I'll transfer enough to cover our property taxes, for example, and to cover any travel expenses, or if we need to replace a car or a roof. We don't transfer anything from it til it's needed.
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Old 04-13-2013, 07:09 PM   #20
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We have a very simple system. DH's pension and the dividends from our Vanguard holdings cover most of our day to day stuff. Those get sent to our checking account. We have a big chunk of cash also parked at Vanguard that we pull from as needed. I'll transfer enough to cover our property taxes, for example, and to cover any travel expenses, or if we need to replace a car or a roof. We don't transfer anything from it til it's needed.
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?
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