IRA Withdrawal Strategy Questions

[mountainsoft]

I'm new to the forum and still 12 years away from retirement. But I am trying to learn as much as I can while I wait.

I have an IRA with Vanguard. They recommend creating a money market account and transferring a years worth of funds from the IRA to the money market account. Then transferring the money to my bank account as needed to pay my bills.

1. What are the advantages/disadvantages of transferring a years worth of distributions from the IRA as opposed to withdrawing distributions monthly? I would think it would be smarter to leave as much money in the higher interest IRA as long as possible? I would also think it would balance out market swings. Who's to say the market is going to be on an up swing when I need to withdraw a years worth of funds?

2. What is the purpose of the intermediate money market account? Why wouldn't I just have the IRA distributions go directly to my checking account? Yeah, the money market account earns a tiny bit of interest, but it's not going to amount to much in one year with a small balance I'm withdrawing from.

Enlighten me!

Anthony

 

[GrayHare]

Holding cash (or equivalent) for the year's expenses reduces the risk you'll need to sell a different asset after a drop in its price and before it has had time to recover.

 

[mountainsoft]

Holding cash (or equivalent) for the year's expenses reduces the risk you'll need to sell a different asset after a drop in its price and before it has had time to recover.

If the market is down when I withdraw the years cash, I lose money.

If I only withdraw one month of funds when the market is down, this gives the market time to recover during the year for the remaining distributions.

Of course, there's no saying the market won't drop further over the year. So in that case it would be smarter to withdraw the year's worth at once. With no way to predict the future it seems a gamble to take a huge distribution all at once.

What am I missing?

 

[GrayHare]

If the market is down when I withdraw the years cash, I lose money.

Most people sell an appreciated asset from a diversified portfolio so as to lock in the gain rather than risk its loss.

 

[Hermit]

Lots of people on this forum seem to have several years' expenses kept in cash type accounts. I think it is just to keep from worrying about the market ups and downs. Some refill the cash bucket once a year on a certain date and some refill when the market is up somewhat. I am sure others do a monthly withdrawal. Just like a monthly withdrawal smoothing out market ups and downs, annual withdrawals will do the same thing over a longer period of time.

I take a withdrawal from retirement accounts when I need an infusion of cash, but I always take my allotted withdrawal sometime during each year. For me, trying to squeeze the last penny out of returns is more effort in managing my nest egg than I care to.

 

[mountainsoft]

Some refill the cash bucket once a year on a certain date and some refill when the market is up somewhat. I am sure others do a monthly withdrawal.

I suppose I could meet in the middle somewhere. Keep a years worth of cash and do quarterly withdrawals from the IRA to keep it topped up. I'm not the type to constantly monitor the market and try and time withdrawals on a high.

I still don't understand the point of the intermediate money market account though? I guess it makes sense for the folks keeping a few years worth of cash on hand, but I don't know if I would do that. We'll see. Something to think about.

 

[GrayHare]

I still don't understand the point of the intermediate money market account though?

Well, that part is probably the brokerage trying to keep its finger in your stash. While money market rates are low, I move soon-needed funds into a checking account.

 

[RunningBum]

If the market is down when I withdraw the years cash, I lose money.

If I only withdraw one month of funds when the market is down, this gives the market time to recover during the year for the remaining distributions.

Of course, there's no saying the market won't drop further over the year. So in that case it would be smarter to withdraw the year's worth at once. With no way to predict the future it seems a gamble to take a huge distribution all at once.

What am I missing?

IMO you are missing nothing. Human nature is that people kick themselves harder over taking a loss than missing a gain. I swear there are people who take money out, watch the market rise 30%, then drop 10% and declare "Aha! I was right!" If you can live with the occasional loss while staying invested through the rises, I think you'll be fine.

People have other reasons for doing it too. Some may think there's a downturn coming, and either want to lock in on where they are at, or even have cash on hand to reinvest in that case. Both are forms of market timing, which is not an essential strategy. Others will talk about an emergency fund, but I'm not sure when I'll ever need $50K right now. I can always get to my money within 3-4 days. It may not be an optimal time to sell, but since I've never needed a large amount in an emergency I'd rather be keeping it invested.

Disclaimer: I don't necessarily follow this. I have a lot in a taxable account and don't reinvest divs and CGs, so come December I have a pretty hefty balance. And even at this point I tend to keep 3-4 months on hand. I don't want to do automatic selling because I want to control whether I harvest gains or losses, and I don't want to deal with what to sell every month. I haven't started to pull anything from IRAs yet.

 

[UpAnchor]

I still don't understand the point of the intermediate money market account though.

Well, that part is probably the brokerage trying to keep its finger in your stash. While money market rates are low, I move soon-needed funds into a checking account.

I use an "intermediate" after-tax MM account at Vanguard. I move withdrawals from my IRA over to the MM two or three times a year on a case-by-case basis. But auto-transfers from the MM to my outside bank checking account take place the first of every month thus simulating a regular paycheck. The MM balance is normally a year's worth of withdrawals or more but varies quite a bit. I call it my "flywheel" account. Others call it a "buffer" account.

Yes, I could move my IRA withdrawals directly to something like an online checking or savings account for ~1% interest and eliminate the "intermediate" account. But I save enough keeping the portfolio in low e.r. funds at Vgd/Fido that I just don't sweat the inefficiency of using the MM account. I figure I can always revisit that should I become increasingly frugal in retirement.

 

[mountainsoft]

I use an "intermediate" after-tax MM account at Vanguard. I move withdrawals from my IRA over to the MM two or three times a year on a case-by-case basis. But auto-transfers from the MM to my outside bank checking account take place the first of every month thus simulating a regular paycheck.

Simulating a regular paycheck is basically what I had in mind.

Is it possible to auto-pay bills directly from the Vanguard money market account, or do you have to transfer the money to your checking account first? Not a big deal either way, just fewer transfers involved.

I previously had my IRA at my local bank. They made ANY change ridiculously difficult, requiring signed paperwork to be sent back and forth. That's one of the reasons I moved to Vanguard. With the hassles of that old IRA I can see an intermediate money market account being a huge advantage. With Vanguard it seems just as easy to take regular monthly or quarterly withdrawals.

 

[UpAnchor]

I believe Vanguard does have some sort of bill pay function if you have a Vanguard Brokerage Services account. I don't so can't speak to any specifics.

 

[DrRoy]

I suppose I could meet in the middle somewhere. Keep a years worth of cash and do quarterly withdrawals from the IRA to keep it topped up. I'm not the type to constantly monitor the market and try and time withdrawals on a high.

I kind of like middle of the road solutions as well.

 

[grasshopper]

Unlimited check writing and billpay is included with a VanguardAdvantage account, no fee for Flagship clients.

 

[pb4uski]

Simulating a regular paycheck is basically what I had in mind. ...

Here is what I did. Prior to retirement I carried zero cash. When I retired and rebalanced, I changed my AA from 60/40/0 to 60/34/6 with 6% in an online savings account that pays 0.95%. I have a monthly automatic transfer from the online savings account to the local bank account that I use to pay our bills... my monthly "paycheck".

When I rebalance, I top up the cash as necessary. The 6% cash, along with taxable account dividends and capital gain distributions that I take in cash, should be sufficient to cover 2-3 years of withdrawals and provides ballast to my portfolio, but still earn almost 1% with no credit or interest rate risk.

Been almost 5 years now and it works well for us.