How to withdraw

[swodo]

I've not seen this addressed anywhere..

From a neophyte's perspective, how exactly do you withdraw from invested funds after retirement to get a monthly/quarterly income?
Do you simply sell securities on an monthly/quarterly basis?
Is there some kind of automatic withdrawal setup if you don't want to be that involved?
Is there a better/best way to withdraw?

 

[ziggy29]

Personally, my plan (when I get there) is to withdraw as much as I can from conventional IRAs and 401Ks (and taxable capital gains) to use up low tax brackets, then supplement this income with Roth and taxable account withdrawals.

Right now that would mean using up as much of the 10% and 15% brackets as I could, and then switching to Roth withdrawals and taxable amounts already taxed which incur no additional taxes at the 25% bracket. Of course, I expect taxes to be quite a bit higher across the board when I get there...

 

[swodo]

So you go through your investments monthly and sell the worst performers to achieve you desired monthly income?

 

[brewer12345]

So you go through your investments monthly and sell the worst performers to achieve you desired monthly income?

I think most retirees here have a cushion of 2 to 7 years' worth of living expenses in cash or bonds taht they use first. Every year, most use whatever cash the portfolio throws off (interest, dividends, etc.) and then rebalance to their target allocations, reserving as much cash as they need to top up the "buffer" of cash and bonds.

 

[Animorph]

I'll sell as needed, trying to keep my asset allocation balanced at the same time. With taxes, I've probably withdrawn more than I contributed for the last 2 to 3 years before retiring anyway. I have enough cash right now to last a couple of years, just in case the market went/goes south. I'll spend that first, since it's not part of my permanent asset allocation. I'll start with taxable accounts, then tax-deferred accounts, then hopefully a Roth if I get to do one or more IRA conversions in the next few years.

Dan

 

[youbet]

I think most retirees here have a cushion of 2 to 7 years' worth of living expenses in cash or bonds taht they use first. Every year, most use whatever cash the portfolio throws off (interest, dividends, etc.) and then rebalance to their target allocations, reserving as much cash as they need to top up the "buffer" of cash and bonds.

Sort of....... But when you use a year of your cash or cash-like stash you also need to decide if you're going to replinish it that year or wait. So the sell equities or not question is always there whether you're buffering through a cash or cash-like allocation or not. It's just that with a cash or cash-like allocation you can postpone the sale if desired hoping the next year or the year after that will be a better time to sell.....

To OP - There are a seemingly infinite number of ways to decumulate during retirement. I'm two years into it and have changed my mind eleven times so far as to the best way. But having a portfolio AA that generates some/most of what you need through interest and dividend paying holdings seems to be common to most scenarios. After that, there are dozens of forks in the road as to how to best do it.

Yes there are automatic withdrawal plans. MF companies such as Vanguard are introducing MF's designed to pay out monthly and there are other similar products.

 

[W2R]

I will retire in late 2009. My tentative withdrawal plan is as follows.

Every three months I'll receive dividends from a big chunk of VWIAX Wellesley (big to me, anyway). Dividends will go directly into my Vanguard money market account, and I can access the money from there. Wellesley is a balanced fund that is roughly 2/3 bonds. Should the dividends fall to unusually low levels, I'll still have enough in cash/CDs/MM to replace the dividends for a number of years. Dividends arrive every three months.

Also I will receive monthly checks from my tiny semi-COLA'd pension and SS. Also, I will withdraw 3.5% of my TSP (=401K) account every year, in the form of monthly payments. It is invested in government securities.

My mortgage will be paid off, and my expenses for necessities will be very low. I won't ever need to sell my equities for living expenses. The equities are just there in the hopes of counteracting inflation. However, I will rebalance at least once a year, and that may involve selling equities in most years and beefing up the Wellesley and cash reserves.

 

[Rambler]

Similar to W2R, my plan is to live on the interest from Muni bonds-currently 5% yield (no tax, thank you), interest from California tax-free MM cash sweep fund - currently about a 2% yield, and dividends - targeting somewhere around 2-2.5% on average.

I am trying to engineer an AA somewhere between 65/35 and 60/40 equity/bonds + MM + cash. This will give me somewhere around 3-3.2% withdrawl rate, but won't be touching the principal. The dividends and interest will go into the sweep fund, where they will continue to earn interest until I move them into the checking account, which earns taxable interest. I will have about 3 years of living expenses in the MM sweep/cash accounts at all times, and the interest and dividends will re-plenish those accounts.

I have a couple years (I think) to get the plan in order and the assets in their correct buckets, but I am targeting June of net year for my FIRE asset allocation, just in case. This should provide for all of our needs with the exception of any large expense. The 3-3.2% WR includes depreciation for cars, RV, and major home maintenance. Current thinking is to use those amounts to re-invest in munis and maybe equities, and when replacement time came, I would sell a few stocks as necessary to cover them. My WR also includes charitable donations of about 10% of my interest and dividend income each year, and an effective overall tax rate of about 10% (estimated, fed and state, on the dividends and a tiny amount on the interest from checking, munis and sweep are tax free).

Hope that helps.

R

 

[Bestwifeever]

I asked a similar question in my first post to these boards and got some very, very helpful responses. You can find that thread here:

http://www.early-retirement.org/forums/f26/breathing-down-our-neck-30078.html

 

[Rambler]

PS: Almost everything we have in the form of assets held for retirement funding are in taxable accounts of one form or another. My 401k didn't get much funding in it as I have worked overseas for so long, and I also have a non-qualified plan that will be half eaten by tax when it is distributed. I'm just counting the half that remains fior my planning. My taxes are relatively low, because I will live off of tax free munis and lower taxed (as of right now anyway) dividends that are outside of 401ks and IRAs. The tax would be higher (i.e., current income) if it were in the tax deferred accounts. For us, leaving the workforce somewhere between 47 and 50, this works fine for us.

R

 

[ESRBob]

I rebalance every year (generally) and when I do I put 2% in the money market asset class. Then I have dividends and other distributions from funds during the year also trickling into the money market fund. Together that gives me at least the 4.3% I need to spend each year. But if I had a big % in IRA and was pre-59 1/2 it would be more complicated.

If I do need extra money, I try to get a sneak preview of the next rebalancing and sell some of that asset class. For instance if I know my small international stocks are way ahead this year, I suspect I'll be selling some of them at the next rebalancing, so I just get a headstart and sell enough now to cover my cash needs.

You'll find detailed explanations of this including the spreadsheets for doing the rebalancing in Chapter 3 of that wonderful book on ER, Work Less, Live More or its companion workbook;-) (Full disclosure, I make 90 cents if you buy one, but if you get it from the library you'll be living the true ER LBYM lifestyle and it'll be free!)

 

[Marquette]

You'll find detailed explanations of this including the spreadsheets for doing the rebalancing in Chapter 3 of that wonderful book on ER, Work Less, Live More or its companion workbook;-) (Full disclosure, I make 90 cents if you buy one, but if you get it from the library you'll be living the true ER LBYM lifestyle and it'll be free!)

I bought the book and the workbook. Very much worth the money, but now I wish I had gotten it from the library and just sent you a 5 spot instead

 

[explanade]

Similar to W2R, my plan is to live on the interest from Muni bonds-currently 5% yield (no tax, thank you), interest from California tax-free MM cash sweep fund - currently about a 2% yield, and dividends - targeting somewhere around 2-2.5% on average.

I am trying to engineer an AA somewhere between 65/35 and 60/40 equity/bonds + MM + cash. This will give me somewhere around 3-3.2% withdrawl rate, but won't be touching the principal. The dividends and interest will go into the sweep fund, where they will continue to earn interest until I move them into the checking account, which earns taxable interest. I will have about 3 years of living expenses in the MM sweep/cash accounts at all times, and the interest and dividends will re-plenish those accounts.

I have a couple years (I think) to get the plan in order and the assets in their correct buckets, but I am targeting June of net year for my FIRE asset allocation, just in case. This should provide for all of our needs with the exception of any large expense. The 3-3.2% WR includes depreciation for cars, RV, and major home maintenance. Current thinking is to use those amounts to re-invest in munis and maybe equities, and when replacement time came, I would sell a few stocks as necessary to cover them. My WR also includes charitable donations of about 10% of my interest and dividend income each year, and an effective overall tax rate of about 10% (estimated, fed and state, on the dividends and a tiny amount on the interest from checking, munis and sweep are tax free).

Hope that helps.

R

What kind of muni bonds are these? Do they pay interest regularly or at some maturity?

Or do you own muni bonds through some funds which distribute dividends periodically?

Do people go from doing DRIP (dividend reinvestment) to taking dividends to their cash accounts when they retire?

 

[clifp]

Turn off automatic reinvestment

As other regulars have said there are a zillion ways of mechanism for funding withdrawal.

Let me add a few suggestions. First a couple of assumptions. The ratio of your taxable assets and retirement assets is roughly 50/50. Your equity percentage is 50-70%. The remainder is in bonds, CD, and money markets.

1. Add up all your ultra dependable source of income pensions, government bonds, multi year CD interest, annuity payments, Social Security.
2. Add up your reliable source of income, dividends, money markets, short term CDs, rents.
3. Estimate (or better yet track) your annual expenses.
4. Add 1 and 2 (less a fudge factor as approrpiate)and subtract 3 this is your annual shortfall.
5. Establish a money market fund with at least 1 year and up to 3 years of shortfall
6. If you want more stability set up a CD ladder of two to five years.
7. During your annual or so rebalancing replenish your Money market and CD ladder. Be more aggressive about doing so during bull markets, more cautious during or right after a bear market.

Like many people I have all my dividends and interest flow into a money market fund, and then pay bill as needed from that. One simple way to increase the reliable income stream (#2) is to turn off the automatic reinvestment of dividends and interest (and I believe capitals gains) on mutual funds etc.

 

[Rambler]

What kind of muni bonds are these? Do they pay interest regularly or at some maturity?

Or do you own muni bonds through some funds which distribute dividends periodically?

Do people go from doing DRIP (dividend reinvestment) to taking dividends to their cash accounts when they retire?

I am in the process of buying bonds, doing it thru Schwab, online. I am focusing on california (where our residence will be) so they are fed, state, and AMT tax free. I was having dividends reinvested on my equity mutual funds, but have shifted to taking the cash dividends and cap gains and investing it as I see fit...helps with finalizing AA prior to FIRE.

R

 

[bigla]

My dw and I have been retired for 5 years. I have periodically taken profits mostly from stock funds but sometimes from the bond funds and into a money market to build a 3-5 year fund to augment our pensions etc. I continue to have all dividends, interest etc reinvested. As this gets lowered, I will (hopefully) have the time to take more out when the market has been up. This has worked so far. I rebalance yearly or when needed keeping a 55-45 AA.
Good luck
Larr

 

[jIMOh]

I forsee having 9 years expenses in cash when I FIRE. If market goes up year 1, I will spend 1 years cash, then invest another years cash. If market goes up year 2, I will spend a years cash and invest another years cash. Same with year 3.

Goal is 3 years expenses in cash. If Market goes down the first 3 years of FIRE, I will be cash rich (6 years expenses still in cash) waiting for market to recover.

Once I get by year 3, the plan is for dividends and interest to be sent to a money market account and withdrawn to replace the cash needed. Withdraws will be once per year (maybe twice if I need to do tax planning).

I second the comment about seeing where the 15% bracket (cap) is, and using that strategically on 72(t) withdraws, taxes on dividends and taxes on LTCG. I plan to delay Roth withdraws as long as possible during ER and try to convert as much of my 401k/Rollover monies to a Roth during FIRE.

 

[explanade]

I am in the process of buying bonds, doing it thru Schwab, online. I am focusing on california (where our residence will be) so they are fed, state, and AMT tax free. I was having dividends reinvested on my equity mutual funds, but have shifted to taking the cash dividends and cap gains and investing it as I see fit...helps with finalizing AA prior to FIRE.

R

Can you list some of the ones which are yielding 5% tax free?

I'm also in CA.

Are these yields typical or is it a special situation?

 

[Rambler]

Can you list some of the ones which are yielding 5% tax free?

I'm also in CA.

Are these yields typical or is it a special situation?

These are a few that I've picked up in the past few weeks. The yield was between 4.9 and 5.1 for each of them when I bought them. With equities dropping in the past few days, it seems bond prices have increased, dropping the yields a little bit, but it looks like there are still quite a few out there between 4.7- 4.9 in the AAAs, and even a few 5%ers in the AAs. These are between 20-30 year maturities with twice yearly interest payments. The ones listed below are all fed, state and AMT exempt.

CALIFORNIA STATE 5.75%47REV DUE 07/01/47CMNTYS SU CUSIP: 130795SE8

CALIFORNIA STATE 5.75%47REV DUE 07/01/47CMNTYS SU CUSIP: 130795SE8 CALIFORNIA STATEW 5.5%41REV DUE 07/01/41CMNTYS DEV A CUSIP: 130795TV9

CALIFORNIA STATEW 5.5%41REV DUE 07/01/41CMNTYS DEV A CUSIP: 130795TV9 OAKLEY CALIF REDEV 5%38REV DUE 09/01/38AGY TAX CUSIP: 673639BV1

OAKLEY CALIF REDEV 5%38REV DUE 09/01/38AGY TAX CUSIP: 673639BV1 ROSEMEAD CALIF 4.375%33REV DUE 10/01/33CMNTY DEV CUSIP: 777510BP2

ROSEMEAD CALIF 4.375%33REV DUE 10/01/33CMNTY DEV CUSIP: 777510BP2 SAN DIEGUITO CALIF 5%32REV DUE 08/01/32PUB FACS AUT CUSIP: 797494CN9SAN DIEGUITO CALIF 5%32REV DUE 08/01/32PUB FACS AUT CUSIP: 797494CN9

Hope thiis helps.

R

 

[explanade]

How much does Schwab charge in commissions for getting these?

Can these be sold at any time or do they have to be held through maturity?

If we get a bull market, I guess these could drop after you buy them?

 

[Rambler]

I think the commission is $1 per thousand, $25 minimum, can't remember exactly.

They can be sold, the price can go up or down, and you may owe tax if you sell it higher than you bought it for...check your tax advisor on that one.

Yes I believe the selling price could drop if we had a bull run in equities. But remember, we buy bonds primarily for stability and income rather than the capital gains (unless you are a professional trader of these sorts of things). If the bear continues to rampage, and the fed continues to drop interest rates, bonds could also go up...good if you want to sell, bad if you want to buy. The yield moves opposite to the price, so when the price of a bond goes up, the cash percentage rate that the bond throws off is lower because you had to invest more money to get the same amount of "fixed income".

R

 

[explanade]

I tried to search the bonds you listed in Google and they didn't come up.

But one of the results was zionsdirect.com, which I guess is a broker. They advertise $10.95 per trade but you can't search for specific bonds until you sign up.

I left Schwab years ago because they have account maintenance fees if you balance drops below some threshold. I'm guessing they still take money unless you maintain a certain balance of assets.

 

[rs0460a]

I think most retirees here have a cushion of 2 to 7 years' worth of living expenses in cash or bonds taht they use first. Every year, most use whatever cash the portfolio throws off (interest, dividends, etc.) and then rebalance to their target allocations, reserving as much cash as they need to top up the "buffer" of cash and bonds.

Yes - just to confirm your statement (that's what I do).

Did my "sell" in Dec '07 to fund my gross budget for '08.
I keep this in Fidelity's IMA account and transfer to my bank accounts (from where I pay bills) once a month.

Current cash is at 2-3 years (beyond the '07 "bucket").

Only "dumb thing" I did this year was to pay the Federal tax in January. Being ER'ed less than a year, I thought you had to do the quarterly tax thing, and I thought I would be "smart" to eliminate the "hassle". Now I know I don't have to make any payment (at all) till year end. Next year, I'll schedule the tax payment (one transaction via Fidelity) in December '09.

You always learn something on these boards!

- Ron

 

[Rambler]

I tried to search the bonds you listed in Google and they didn't come up.

But one of the results was zionsdirect.com, which I guess is a broker. They advertise $10.95 per trade but you can't search for specific bonds until you sign up.

I left Schwab years ago because they have account maintenance fees if you balance drops below some threshold. I'm guessing they still take money unless you maintain a certain balance of assets.

I just joined schwab a couple years ago, and have never had to pay any maintenance fees, but I think there is a minimum of $5000 to buy munis or other bonds. If you have your accounts at Vanguard or Fidelity, I'm sure they have similar offerings. I don't think you will find these on google or yahoo.

I think your comment abouut not being able to search for bonds probably applies everywhere...can't do it on schwab.com either unless you have an account.

R

 

[ESRBob]

Yes - just to confirm your statement (that's what I do).
).

Only "dumb thing" I did this year was to pay the Federal tax in January. Being ER'ed less than a year, I thought you had to do the quarterly tax thing, and I thought I would be "smart" to eliminate the "hassle". Now I know I don't have to make any payment (at all) till year end. Next year, I'll schedule the tax payment (one transaction via Fidelity) in December '09.

You always learn something on these boards!

- Ron

Ron,
my turn to be dumb -- can you point me to a thread on this? I didn't pay tax (or enough to have to worry about estimated payments) for the first 5 years of FIRE but have had to for the past year or two. Is there a provision for non-wage-earners that exempts us from having to make quarterly pre-payments? I didn't know about this.