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How do you plan your withdrawals?
Old 09-15-2016, 12:45 AM   #1
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How do you plan your withdrawals?

We will RE very soon and initially will not draw any pensions or SS. We'll be funding our lifestyle with a combination of dividend and interest income plus sale of assets. Our monthly spending varies quite a bit depending on travel and other large expenditures. On average we spend about 55% on necessities and 45% on discretionary items.

Do you take a regular "paycheck" from investments (i.e. a constant amount each month) based on your average spending, or do you figure out each month what you need to withdraw? It's going to be stressful for me at first not to have a paycheck, so please share your cash management tips.


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Old 09-15-2016, 05:05 AM   #2
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This is my first year, so I haven't settled into the groove yet. We've been whittling down our "after tax" assets, and I've chosen to take SS, which I started a few months after my 62nd birthday. I have a smallish inherited IRA from which I will take the smallish MRD.

Probably, some time next year the after-tax assets will be spent down as far as I am comfortable with, and then I'll take money from the IRAs. My WR will be about 3.4% for a year or so until DW starts getting her SS. My plan is to, probably in November, pull the money out of the IRAs, by re-balancing. If there were to be a large run-up during the year, I may take some of my distribution along the way.

Like you, I have uneven spending month to month due to large ticket items like Real Estate Taxes, and Auto Insurances, and the BIG ONE, health insurance premiums. When I have those big months I have to remind myself "it's in the budget". I only get a little nervous when a large "non-budgeted" expense occurs, like happened in 2016 for me ( major engine work on DW's car and a big deck repair).
It's definitely a different mind-set, when you can't just look forward to a few paychecks to get you back to "square". But that's the value of knowing your expenses and your budgets BEFORE you FIRE, and having a bit of fat in the larder, for the unscheduled, yet inevitable bumps in the road.
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We Prefer the Paycheck Method
Old 09-15-2016, 05:58 AM   #3
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We Prefer the Paycheck Method

Short Answer:

DW and I FIREd five years ago. We prefer the "paycheck" method.

Long Answer:

We looked at our annual spending to come up with a typical number. This is the same "number" we used to understand if we were FI so we could RE. I suspect you have (or should) a number in mind. Our annual number includes month-to-month bills as well as estimates on unexpected things like a new roof, car repairs, etc. Based on that we issue two paychecks per month to our checking account. From that monthly amount we still "save." Save in this case is the extra in any given month that allows us to work through the months that spending exceeds income.

Distributions come to us from two sources - our after tax investments and once-a-year distribution from my rollover IRA. We choose to make distributions from our after tax account once a quarter. The distribution from the IRA is via a 72-t arrangement. These two sources of money go into a holding account and we don't look at it regularly - it's just a money market. This is the account we use to aggregate our money and from here we issue the "paychecks."
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Old 09-15-2016, 05:58 AM   #4
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Just FIRE'd myself. For the first year, we're living on savings, so this is set up for a biweekly 'paycheck' from the savings account to the checking. Once this is spent down, then it'll be a similar transfer from Fido to the checking account biweekly. This will all be taxable accounts first.
I'm using the VWR method to determine withdrawal amounts, although (for now) this calculated number is more of a suggested maximum amount. Time will tell.

And YES, it's stressful at first.
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Old 09-15-2016, 06:32 AM   #5
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I have set up a monthly paycheck in the form of an automatic monthly dividend transfer from one large bond fund I own into my local bank's checking account. Furthermore, to supplement that monthly inflow, I have a quarterly dividend from a stock fund also transferred into my local bank's checking account. Until a few years ago, that dividend was reinvested. But, due to the monthly bond fund dividend dropping a little and my overall expenses increasing a little, I need this quarterly boost to keep my cash flow balanced while maintaining my desired cushion in my checking account to cover me for small, unforeseen expenses.
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Old 09-15-2016, 07:43 AM   #6
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I no longer reinvest dividends and CG distributions, so those provide much of the cash flow needed. And when I rebalance my asset allocation I look at my cash situation for the next few months and take that opportunity to grab some cash to live on. Often I just sell from the heavy portion and take the money to rebalance, rather than buying in the light portion.


I don't like the idea of regular withdrawals, especially automatic, because I don't want an automatic sale of an asset without being able to pick which investment and which shares. Even with control I don't want to deal with this every 2 weeks or month. Not sure that anyone actually does that but I couldn't tell from the OP if that was being considered.


Some people seem to be talking about regular movement from savings to checking. Right now PenFed checking is paying better interest than savings so I keep it in checking. When it's not, I just move it over as needed, and use overdraft protection in case I miss it.
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Old 09-15-2016, 08:14 AM   #7
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I'm in the final phase of planning, just waiting on a layoff that is supposed to come about shortly where I'll get about 6 months of paycheck which will then fund my first 6 months of retirement and have been looking at the mechanics of a drawdown. I will roll my 401K to IRA so I can control the investments better. Then I am thinking of periodic movement from IRA to checking or money market account, and finally move into my bill paying account every 2 weeks to maintain the discipline of spending we have today.


This leaves the periodic withdraw from the IRAs to consider. I could take a draw at the end of the year, when I know what my income is for this year and draw for next year's spending. This should allow me to manage the tax hit. For which asset to liquidate to fund the draw, I'm thinking of a reverse dollar cost average. A sell order every month or every quarter of a fixed dollar amount that goes into a cash fund in the IRA. Then I can take the year end draw from the cash fund in the IRA.
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Old 09-15-2016, 08:19 AM   #8
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I no longer reinvest dividends and CG distributions, so those provide much of the cash flow needed. And when I rebalance my asset allocation I look at my cash situation for the next few months and take that opportunity to grab some cash to live on. Often I just sell from the heavy portion and take the money to rebalance, rather than buying in the light portion.


I don't like the idea of regular withdrawals, especially automatic, because I don't want an automatic sale of an asset without being able to pick which investment and which shares. Even with control I don't want to deal with this every 2 weeks or month. Not sure that anyone actually does that but I couldn't tell from the OP if that was being considered.


Some people seem to be talking about regular movement from savings to checking. Right now PenFed checking is paying better interest than savings so I keep it in checking. When it's not, I just move it over as needed, and use overdraft protection in case I miss it.
+1, pretty much describes our methodology. I want as few taxable events as possible every year, so we rely on dividends and capital gains, and then I keep a cash account to fill up as needed. We sell once or year or less to replenish the online cash account. Regular withdrawals or 'paychecks' don't appeal to us. YMMV
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Old 09-15-2016, 09:10 AM   #9
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I manage my own money. The dividend payments come in quarterly and bond interest payments semi-annually. The income therefore is not uniform throughout the year. I just set up a spreadsheet that forecasts my interest and dividend payments by month. Every month I sweep up the cash and transfer it to an AMEX savings account that pays 0.9 % versus the brokerage account that pays next to nothing. You can do the same thing and just withdraw from a savings account every month like a paycheck.

I have a DB pension that started paying at 55 that covers most of my expenses. Any shortfall is transferred into my checking from my AMEX account to cover any shortfalls. The income from my IRA account is re-invested in bonds, corporate notes, or preferred stocks. When I find suitable investments for my regular trading accounts, I transfer the cash back from my AMEX account to my brokerage accounts. So far my capital has continued to grow during the first 14 months of retirement.
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Old 09-15-2016, 09:40 AM   #10
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Originally Posted by Scuba View Post
Do you take a regular "paycheck" from investments (i.e. a constant amount each month) based on your average spending, or do you figure out each month what you need to withdraw? It's going to be stressful for me at first not to have a paycheck, so please share your cash management tips.
I take my full year's withdrawal during the first week in January each year, and based on a percentage of my portfolio's 12/31 value and on my previous year's dividends (which I prefer not to exceed). I like withdrawing just once a year because it is more clear cut and harder to make any errors due to wishful thinking. I withdraw by moving the full year's spending money from Vanguard money market to my local bricks-n-mortar bank. After withdrawing, I rebalance my Vanguard accounts. (Throughout the year, all my dividends and capital gains go to Vanguard money market so there is enough there for my withdrawal, although I then sell and buy mutual funds during rebalancing.) I do not normally withdraw more than my dividends for the previous year or more than my maximum WR of 3.5%. Usually it ends up being around 2%.

Originally I gave myself a "paycheck" each month by moving 1/12th of the annual withdrawal money from savings to checking. But, over time I have found that I track my spending closely enough that this is not necessary.

BTW my bank account does not yield much in interest compared with the yields on my investment portfolio, but I think that in my case I'd rather go for nearly zero interest than to complicate things. Also I like having the full year's amount there in the bank, so that if I have a big irregular expense early in the year then I can just pay it and cut back for the rest of the year to make up for it.

If there is any left over at the end of the year, I subtract that amount from what I intended to withdraw for the following year. By doing that I have effectively returned the excess to Vanguard.

I know this all probably sounds complicated, but honestly it is not. I am just a "worry wart" and need everything to be simple so most of what I described is actually simplification, to my way of thinking. Something that I didn't mention is that I keep a "buffer" of $8K in my checking account that I never spend and that is always there throughout the year. This buffer is just in case some emergency comes up during the last days of the year.
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Old 09-15-2016, 09:51 AM   #11
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Each month I figure out what I'll need for the next month. Then I raise that cash from my investments.

I also keep a small reserve of cash in case my calculations are off.

Only rarely have I needed to sell investments at odd times to meet unexpected expenses.
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Old 09-15-2016, 10:41 AM   #12
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We withdraw when our checking account gets "too low". No particular timing.

I have an idea of our "normal" monthly expenses. Then add in anything unusual that's coming up.

When I was working, we had regular paychecks, but we rarely spent the whole amount. We always spent "what seemed reasonable" rather than "what's in the paycheck". So retirement didn't really change our spending decision making.

We always had "enough" in the checking account to handle a surprise expense. We continued that approach in retirement.

The exact timing of withdrawals isn't a big deal. It's easy to get money quickly from Vanguard mutual funds. There's very little loss in having "too much" in a checking acct these days. So we've got room to err on either side.
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Old 09-15-2016, 11:22 AM   #13
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We have pensions, rentals, and taxable dividends that cover about 75% of our ongoing, non-discretionary spend. For the rest, we keep a sufficient cash balance at Ally earning 1%. This covers large items like year-end property tax, insurance premiums, travel, home improvements, or large unexpected repairs. We just transfer from Ally to checking as needed. When the Ally account falls below a certain threshold, we sell equities in the taxable account to replenish. Then rebalance in tax-deferred if needed. No specific timing to this; it's dictated mainly by non-discretionary spending patterns.

Our plan is to operate in this mode until 70 when SS and RMDs would begin. This should be possible if inflation and market performance are both reasonable. One pension is non-COLA, the other has partial COLA, and we've got 15 years to go. In the meantime, we're doing Roth conversions to the top of the 15% bracket. But if the taxable account starts getting uncomfortably low, we'll either take SS a little early or start using the tax-deferred funds.
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Old 09-15-2016, 11:36 AM   #14
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We have pensions, rentals, and taxable dividends that cover about 75% of our ongoing, non-discretionary spend. For the rest, we keep a sufficient cash balance at Ally earning 1%. This covers large items like year-end property tax, insurance premiums, travel, home improvements, or large unexpected repairs. We just transfer from Ally to checking as needed. When the Ally account falls below a certain threshold, we sell equities in the taxable account to replenish. Then rebalance in tax-deferred if needed. No specific timing to this; it's dictated mainly by non-discretionary spending patterns.

Our plan is to operate in this mode until 70 when SS and RMDs would begin. This should be possible if inflation and market performance are both reasonable. One pension is non-COLA, the other has partial COLA, and we've got 15 years to go. In the meantime, we're doing Roth conversions to the top of the 15% bracket. But if the taxable account starts getting uncomfortably low, we'll either take SS a little early or start using the tax-deferred funds.
I would recommend taking SS at 62. This is what I plan to do. The break even is 78 if you wait until 66 to collect and higher if you wait until 70.
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Old 09-15-2016, 11:59 AM   #15
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Earlier, when I had plenty of after tax funds, I just kept the cash on hand balance within the target range when a asset allocation event was triggered (could be that low cash triggered the event, but usually something else was further away from target and caused the event).

Once the after tax accounts were about gone, it became more interesting.

My 401k has a 20% withholding (mandatory), and my Federal tax rate is negative. So to minimize the interest free loan to the Treasury, December is when I get out everything I expect to need during the next year. This is done within the context of a rebalance event.

As to how much that will be, I just use actual historical spending as a base. I do a little cash flow calculation with the base, plus Federal and state tax cash flows, and big, non-regular expenses and incomes.
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Old 09-15-2016, 01:11 PM   #16
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I withdraw only as needed. Prior to the end of a year, I will try to have enough cash in my retirement accounts to cover expenses for the first 6 months of the following year. That way I'm never in a forced sell position. We pay about 90% of expenses (not including mortgage), by credit card, so I know what needs to be transferred for the following month to pay off the cards. As long as we're not travelling, income sources exceed expenses. That will change once my wife retires later this year.
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Old 09-15-2016, 01:16 PM   #17
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We will RE very soon and initially will not draw any pensions or SS. We'll be funding our lifestyle with a combination of dividend and interest income plus sale of assets. Our monthly spending varies quite a bit depending on travel and other large expenditures. On average we spend about 55% on necessities and 45% on discretionary items.

Do you take a regular "paycheck" from investments (i.e. a constant amount each month) based on your average spending, or do you figure out each month what you need to withdraw? It's going to be stressful for me at first not to have a paycheck, so please share your cash management tips.


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We opted for SS at 62 and this is our monthly check (if you want to call it that). We also live off taxable account dividends direct deposited to our bank account quarterly. We keep around 1.5 - 2 yrs expenses in cash in our bank accounts (local and online) for emergencies and use it as our steady cash resource. If we should need to replenish the cash funds (used more than we planned during the year), we take taxable account year end CGs. With SS rolling in monthly and dividends quarterly, cash situation stays relatively constant other than large purchases. Cash (actual cash in wallet) has been an issue for us during our 7 years of early retirement. Seems stupid, but we always seem to run short of it - even though we use credit cards extensively. Would suggest you evaluate how to maximize tax avoidance and consider working off a cash reserve to avoid selling during any trying period.
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Old 09-15-2016, 01:32 PM   #18
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I get "Paid" every two weeks, DB plan pays on the last day of the month and the 457 plan pays on the 16th of the month.
Oh tomorrows pay day, woo hoo.
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Old 09-15-2016, 02:14 PM   #19
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7 1/2 months into ER. only SI is small DB pension. Started with 2 to 3 yrs of cash in MM and withdrawing from that as needed. Most of the est of after tax I take dividends and CG from. it has all been more than enough so far, and the cash may last longer than predicted. If not, start selling assets. Have one relatively large after tax account with all income re-invested that i will only touch for the "expected unexpected" significant items like a new car, roof, etc. So, that makes the budget fairly predictable. I think this is key for peace of mind, at least it is for me. Have not had to touch that account yet, but a new car is "scheduled" for next year, However I expect my little Prius will soldier on quite nicely to at least its 15th "birthday" if not 20th, so will likely wait on that purchase. If not, the money is there. Will take SS at 62 (longevity issues in my family). And will likely start IRA withdrawals sometime between 60 and 62. May do ROTH conversions, will assess that when I get that far, if i do, like I said longevity issues.
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Old 09-15-2016, 02:51 PM   #20
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I take a corporate dividend and withdraw from two tax sheltered accounts in early January, and deposit the funds into a savings account. I top up my checking account from savings as required during the year.

If necessary I can withdraw additional funds from non-tax sheltered accounts, or take an additional dividend. Now that I no longer have an auto loan, additional withdrawals have not been necessary for the past two years.
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