How to draw income from accounts for expenses

[Danmar]

We're not in any disagreement, I don't think.

But in the case where the dividends cover everything, there really isn't any meaningful question. You don't touch the principal, because you don't need to. No math involved, no real decision to make.

Doesn't make any difference if you look at total return or not.

-ERD50

Agree. Have generally just spent divs since retirement but in my case the portfolio has grown a lot after 10 years of retirement, so have started to supplement my divs with small sell downs. I expect the portfolio will still grow over time but not as much. Again, to think that a hard wired withdrawal rate set at the beginning of the withdrawal phase would be optimal, seems a little suspect. Need to be flexible.

 

[kcowan]

What amazes me is that the fundamental premise behind Firecalc is to spend away everything before death. With any reluctance to dip into principal for extraordinary events, this does not work.

Maybe we should have 2 kinds of membership here: believers and pretenders?

 

[ERD50]

What amazes me is that the fundamental premise behind Firecalc is to spend away everything before death. With any reluctance to dip into principal for extraordinary events, this does not work.

Maybe we should have 2 kinds of membership here: believers and pretenders?

Maybe it's just semantics, but I don't see that as the "fundamental premise behind Firecalc" at all.

I'd say the fundamental premise is that with defaults, historically you would have spent away everything before death in only ~ 5% of the cases. In many cases you have more buying power than you started with, and in quite a few cases, way more than you started with.

But yes, you have to accept that historically, this involves dipping into principal to some extent, I think even in many of the 'good' runs, during bad times of those overall 'good' runs.

It's not easy to spend away everything just before death, unless your income is almost totally from pensions and annuities, or you know your date of death.

-ERD50

 

[travelover]

I kind of like the idea of 2+2 equaling 5. This allows for the expenses of a good financial advisor.

 

[MRG]

I kind of like the idea of 2+2 equaling 5. This allows for the expenses of a good financial advisor.

It also keeps O'Brien happy.

 

[rayvt]

hahaha , i tell my child that im spending his inheritance hahah

Ha! We've told our kids that their inheritance will be a sports car wrapped around a tree.

Which, it turns out, isn't a good thing to say to them just before suddenly going on an unannounced trip out of town without your cell phone.

 

[rayvt]

It's pretty simple for me. I was brought up to never touch the principal. In my case this is multi generational wealth where my predecessors didn't touch the principal either and lived on their dividends and interest.

I'm not blind to the total return approach but for me this is easier, cleaner and has nothing to do with 2+2=5

The term "principal" doesn't apply to stocks, only to bonds. It's like assessing a baseball team in terms how may yards they gained rushing. It is nonsensical.

Nonetheless, if you want to discuss it in "2+2=5" terms, what is the "principal" of a stock portfolio? The amount you put in? The portfolio value when you retired? The highest portfolio value?

If you bought, say,1000 shares of BRK-B at $71 and BRK-B is now at $163, and you sell 10 shares to raise $1,630 of cash, have you touched principal or not?

Suppose instead you bought 1000 shares of some dividend-paying stock at $71 and reinvested the dividends and now have 2000 shares now at $71, and you sell 20 shares to raise $1,620 cash. Have you touched principal or not? And what is the dollar amount of the "principal"?

If you drop dead before giving your answer, what does your heir say the amount of the principal is?

 

[Danmar]

The term "principal" doesn't apply to stocks, only to bonds. It's like assessing a baseball team in terms how may yards they gained rushing. It is nonsensical.

Nonetheless, if you want to discuss it in "2+2=5" terms, what is the "principal" of a stock portfolio? The amount you put in? The portfolio value when you retired? The highest portfolio value?

If you bought, say,1000 shares of BRK-B at $71 and BRK-B is now at $163, and you sell 10 shares to raise $1,630 of cash, have you touched principal or not?

Suppose instead you bought 1000 shares of some dividend-paying stock at $71 and reinvested the dividends and now have 2000 shares now at $71, and you sell 20 shares to raise $1,620 cash. Have you touched principal or not? And what is the dollar amount of the "principal"?

If you drop dead before giving your answer, what does your heir say the amount of the principal is?

Agree. That's why I say "only spend dividends". Some people might interpret this to mean "never spend principle" but that isn't correct as you pointed out.

 

[Chuckanut]

We fund both of their annual Roth contributions and if there's any money left for them when we croak it will be gravy....

I have to think this is a good idea, especially if one's children have chosen professions that are not "High Income" jobs. The kids are being setup for a good retirement and the parents can spend, spend, spend and not feel guilty. Win-Win!

 

[kcowan]

If you bought, say,1000 shares of BRK-B at $71 and BRK-B is now at $163, and you sell 10 shares to raise $1,630 of cash, have you touched principal or not?

Suppose instead you bought 1000 shares of some dividend-paying stock at $71 and reinvested the dividends and now have 2000 shares now at $71, and you sell 20 shares to raise $1,620 cash. Have you touched principal or not? And what is the dollar amount of the "principal"?

In both cases, your original portfolio is $71000 and your SWR @ 4% is $2840 per year. Forever.

In good times, you will make more than 4% but that will compensate for the bad times when you will make less than 4%. If your portfolio averages 7% per year for 10 years, then you can handle a portfolio decline of 25% and still be on plan.

It is the simple math of compounding. If you spend any portion of those above average gains, then your ability to handle a decline will be less.

 

[braumeister]

It is the simple math of compounding.

If there is one thing I've learned on this forum it's that nothing is simple.

 

[REWahoo]

If there is one thing I've learned on this forum it's that nothing is simple.

Other than "Psst: Wellesley"

 

[marko]

The term "principal" doesn't apply to stocks, only to bonds. It's like assessing a baseball team in terms how may yards they gained rushing. It is nonsensical.

Nonetheless, if you want to discuss it in "2+2=5" terms, what is the "principal" of a stock portfolio? The amount you put in? The portfolio value when you retired? The highest portfolio value?

If you bought, say,1000 shares of BRK-B at $71 and BRK-B is now at $163, and you sell 10 shares to raise $1,630 of cash, have you touched principal or not?

Suppose instead you bought 1000 shares of some dividend-paying stock at $71 and reinvested the dividends and now have 2000 shares now at $71, and you sell 20 shares to raise $1,620 cash. Have you touched principal or not? And what is the dollar amount of the "principal"?

If you drop dead before giving your answer, what does your heir say the amount of the principal is?

I take your point but within the context of my comment the point was to live off of dividends and interest and not spend the base funds/shares that provides those dividends whether they've been diluted by dividend payouts.

Over time the principal grows despite distributions which may/may not deliver larger distributions.

The same position holds for a multi generational trust fund that sends regular checks to beneficiaries but the base holdings are seldom (if ever) sold themselves to meet those obligations. Shares may be sold in order to access other opportunities but the payout to beneficiaries remains the same as does the base holding amount.

Maybe a better way to put it is "Never reduce the principal "

 

[kcowan]

Maybe a better way to put it is "Never reduce the original principal "

FIFY

 

[petershk]

To ERD's point.
If you need $x/mo or year no matter what, and there's no tax benefit by choosing one account over another it makes no difference where it comes from.

However, if you ARE flexible and in your mind $s spent in excess of dividends are more valuable and thus you'd change your spending habits rather than sell equities then it does make a difference.

However you could just as easily lower the $/mo and be back at step one anyway .

My own opinion is to choose the process that let's you sleep at night and avoids actions that are value destructive. Those two things seem to be the biggest dangers for me.

H