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Managing early retirement investments and income?
Old 12-20-2018, 11:10 AM   #1
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Managing early retirement investments and income?

Hello all, I joined a week or so ago, I知 a Brit, late 40s, ready to retire. While my situation relates to the UK, I知 sure the questions or considerations equally apply to all countries.

I知 interested to understand how others manage their income and investments in early retirement. As well as a bunch of work pensions that値l start paying out in 15 years or so, I have a whole range of share-ISAs, index funds, corporate bonds, shares and cash. My retirement plans, and financial modelling, are all based on the non-pension investments and assume roughly 4% return, which would provide plenty income for living well, while not eating into the capital (when they materialise, the pensions will be a pleasant bonus).

For people in a similar situation, how do you manage or withdraw your income? Do you structure funds as 訴ncome to provide the dividends to live off? Or, perhaps just sell shares/ units? I would attempt to balance my income with capital gain to minimise tax burden. Presumably this is how you all structure your finances?

Finally, given the extremely volatile last few months, and probably volatile markets through US-China trade dramas, Brexit etc would you typically withdraw your income while your capital may be declining? Presumably everyone just accepts the short-term volatility or capital declines, while assuming the long term will deliver 4% plus?

Thanks in advance for any pointers ... this is a very helpful forum to find!
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Old 12-20-2018, 11:45 AM   #2
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Of course opinions vary, but many are total return investors and just withdraw yearly from a mixture of stocks and bonds. How much from each is based on trying to keep a steady asset allocation (ratio of stock to bonds). Though it is argued periodically, I'm convinced that dividends are not free money and simply have them reinvested and take spending needs from the total pot.
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Old 12-20-2018, 11:48 AM   #3
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I'm about to start my fourth year of ER. Not the same situation as I do have a pension that supports about 48% currently of my spending. Until I take SS, which will be anywhere from 4 to 7 yrs from now depending on the market condition at the time, early if it it still in a downturn, later if it is stable or up. At that point i expect my SI (safe income) will support at least 75% of my needs then and going fwd.

I made sure to slowly but steadily build up cash reserves that would, along with interest dividends and capital gain income from the taxable portion of my portfolio, last at least 3 yrs. Looks like with the income being to the high side of estimates that those monies will last at least five yrs (2 more yrs from now), maybe six depending on if/when I purchase cars, travel more, etc.

Once I need more cash, or at least six months before, will start to sell/plan to sell those assets that have appreciated, such as bonds. Selling anything that is losing money, significantly at least, would not be a choice for me, would start SS early instead if i have to.

Assume you have run FIRECALC. Also I'm sure a mod or someone will be along shortly with the references to other useful threads, such as one I think on "can I retire"
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Old 12-20-2018, 12:10 PM   #4
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Originally Posted by Adventurer View Post
Hello all, I joined a week or so ago, I知 a Brit, late 40s, ready to retire. While my situation relates to the UK, I知 sure the questions or considerations equally apply to all countries.

I知 interested to understand how others manage their income and investments in early retirement. As well as a bunch of work pensions that値l start paying out in 15 years or so, I have a whole range of share-ISAs, index funds, corporate bonds, shares and cash. My retirement plans, and financial modelling, are all based on the non-pension investments and assume roughly 4% return, which would provide plenty income for living well, while not eating into the capital (when they materialise, the pensions will be a pleasant bonus).

For people in a similar situation, how do you manage or withdraw your income? Do you structure funds as 訴ncome to provide the dividends to live off? Or, perhaps just sell shares/ units? I would attempt to balance my income with capital gain to minimise tax burden. Presumably this is how you all structure your finances?

Finally, given the extremely volatile last few months, and probably volatile markets through US-China trade dramas, Brexit etc would you typically withdraw your income while your capital may be declining? Presumably everyone just accepts the short-term volatility or capital declines, while assuming the long term will deliver 4% plus?

Thanks in advance for any pointers ... this is a very helpful forum to find!

normally, for US-based potential retirees I would have said a combination of short term treasuries (currently under 1yr is best return for risk-adjustmented) and CD ladder for three (plus) years- - BUT for UK, I really don't know what gilts will do, given Brexit and the need for the UK to refinance a very large amount of those from ten years ago (and really don't know what rates will end up at). I am hesitant to suggest any dollar-denominated bonds since we also don't have a good idea of what the exchange rates will be in that timeframe.

Also, are you thinking 4% real or nominal? 4% nominal is certainly within the expected yield while real may be a bit of a concern over the shorter term. I'll take it if it comes, but I expect a more muted return over the next couple of years ( under 6% nominal for a balanced (50/50) portfolio).

I would also be concerned about UK-centric funds in the short term, as I would expect volatility to be higher than normal; there's a difficulty of finding "someplace to hide" for a UK based investor especially when the pound-euro and pound-dollar exchange rates could go anywhere. As a US investor, I keep a minimum of 30% in international and don't use foreign bonds, even those that are hedged, as I'm not sure that they give adequate returns for the risk. I suspect that you would need a higher percentage (~40-50%) but you're more familiar with the local thinking.
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Old 12-20-2018, 02:06 PM   #5
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As was discussed above, many investors keep 1 to 3 years of assets in readily accessible cash-equivalent investments (that usually earn low rates, but aren't subject to principal decline)...in down market years, instead of tapping equities, you tap these assets. Mine are in a simple money market account paying a whopping 2.15%, but you can buy bond ladders/bonds, etc. This is part of the 'bucket' approach to retirement, and offers some SORR protection, at least for 3 years.
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Old 12-20-2018, 08:48 PM   #6
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For people in a similar situation, how do you manage or withdraw your income? Do you structure funds as 訴ncome to provide the dividends to live off? Or, perhaps just sell shares/ units? I would attempt to balance my income with capital gain to minimise tax burden. Presumably this is how you all structure your finances?
I'm FIREd. I make no attempt to "balance income with capital gains". Or, at least, I'm not really sure what you mean by that?

I'm a total return investor. The reality, though, is that dividends -- even if you're not a dividend investor -- are going to make up something like 50% of your income, at least in the earliest days. After all, if you're living on 4% of your portfolio and the dividend yield is 2%....that's half right there.

So I still need to pay attention to dividends at least a little bit, just from a cash flow perspective. If I'm going to get $8,000 in dividends next month then maybe I wait a few weeks before booking that big vacation, instead of selling shares to pay for it right now. Q4 dividends are always bigger than other quarters. Q1 & Q3 dividends are always a bit lower, because international funds usually only pay dividends twice a year. That kind of thing.

I don't want to suggest that this is some complicated, massive time investment, though.

Quote:
Finally, given the extremely volatile last few months, and probably volatile markets through US-China trade dramas, Brexit etc would you typically withdraw your income while your capital may be declining? Presumably everyone just accepts the short-term volatility or capital declines, while assuming the long term will deliver 4% plus?
Any retirement is going to see phases when things go up and down. The last few months hasn't been "extreme" volatility -- it is just normal. If you think it is extreme you need to research what historical market movements are actually like. Everyone always think they're living in some uniquely volatile period but they're not. Real life just always has stuff happening.

Anyway, yes, I have no problem withdrawing income while my capital is declining. Obviously, my plan calls for me to lower the amount of withdrawals somewhat when things go down, though.
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Old 12-20-2018, 10:00 PM   #7
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My approach is pretty simple. My AA is 60/35/5 stocks/bonds/cash. What I spend comes out of cash. At the end of the year I replenish cash when I rebalance. Simple.
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Old 12-20-2018, 10:49 PM   #8
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I have set up my portfolio to generate monthly income from a big bond fund to provide me a steady supply of cash dividends to pay my expenses. This big bond fund is just over half of the taxable part of my portfolio, the only part I have unfettered access to because I am not old enough (55) to access my rollover IRA.


I have a large stock fund which not only has growth but also has quarterly dividends which supplement the big bond fund's monthly income. That is most of the remainder of the taxable portfolio.


And I have that rollover IRA which is just over half bond fund and just under half stock fund. It is growing nicely and is waiting for me to access as early as age ~60, 5 years from now.
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Old 12-21-2018, 12:42 AM   #9
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I was able to comfortably retire early on a modest income because I was debt-free including my house.
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Old 12-21-2018, 03:54 AM   #10
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Cash flow for us: I take out my entire annual income in January and invest it in short term funds, mostly high yield savings accounts.

I don’t worry about capital gains or losses in the portfolio. According to the models, as long as I don’t have an excessive withdrawal rate, long term things eventually recover. It’s OK if the portfolio shrinks for a while.

I never assumed anything about the future long-term return of our portfolio. Instead I ran models like Firecalc to help choose my asset allocation (AA) and a reasonable (for me) annual withdrawal rate.

I’m a total return investor, so I don’t care about income versus capital gains or losses. I just maintain a target AA and rebalance if needed at my annual withdrawal.

I do use the % remaining portfolio method which means my withdrawal is based on portfolio value, on Dec 31 for me. So as the portfolio shrinks, so does my income. So there is a small proportional adjustment there.

Which means it looks like a pay cut for me this year. But that’s OK because we had a huge run up going into this.
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Old 12-21-2018, 04:05 AM   #11
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My approach is pretty simple. My AA is 60/35/5 stocks/bonds/cash. What I spend comes out of cash. At the end of the year I replenish cash when I rebalance. Simple.
Perhaps a silly question.
Many posts about spending cash/bond ladder in a down market. If one has a 60/40 AA and then spends some of the "40" Bond AA portion to protect against SORR, won't one just end up selling some stocks anyway as one would otherwise be out of balance in their AA?
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Old 12-21-2018, 04:17 AM   #12
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Perhaps a silly question.
Many posts about spending cash/bond ladder in a down market. If one has a 60/40 AA and then spends some of the "40" Bond AA portion to protect against SORR, won't one just end up selling some stocks anyway as one would otherwise be out of balance in their AA?
Not if the stocks dropped considerably during the year. You may be 60/40 after withdrawal and rebalance on Jan 1, but your AA will drift during the year, plus your bonds and stocks will throw off dividends during the year, increasing the cash in the portfolio. So your fixed income allocation % could easily end up quite a bit higher by the end of the year if stocks have dropped, allowing you to draw mostly from fixed income.
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Old 12-21-2018, 04:26 AM   #13
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Not if the stocks dropped considerably during the year. You may be 60/40 after withdrawal and rebalance on Jan 1, but your AA will drift during the year, plus your bonds and stocks will throw off dividends during the year, increasing the cash in the portfolio. So your fixed income allocation % could easily end up quite a bit higher by the end of the year if stocks have dropped, allowing you to draw mostly from fixed income.
Nice comprehensive answer.
One more for you.
I could your concept for a taxable account scenario.
Does the concept really work for a TIRA in which any dividends are reinvested and one can rebalance in a non taxable event?
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Old 12-21-2018, 05:13 AM   #14
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Nice comprehensive answer.
One more for you.
I could your concept for a taxable account scenario.
Does the concept really work for a TIRA in which any dividends are reinvested and one can rebalance in a non taxable event?
Well it’s up to you whether or not to automatically reinvest your dividends in your IRA during the year......
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Old 12-21-2018, 05:34 AM   #15
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I have a pension for 1/4-1/3 of spending, then interest and dividends, maturing bonds, and equity sales if needed.
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Old 12-21-2018, 07:58 AM   #16
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Perhaps a silly question.
Many posts about spending cash/bond ladder in a down market. If one has a 60/40 AA and then spends some of the "40" Bond AA portion to protect against SORR, won't one just end up selling some stocks anyway as one would otherwise be out of balance in their AA?
Not necessarily. An example. Start the year with $100 and a 60/35/5 AA.. Spend 3, bonds are stable, but stocks decline by $9 to $51.... so before rebalancing you have $51 of stock, $35 of bonds and $2 of cash...$88 in total.

Sell $2.4 of bonds to bring cash from $2 to $4.4. Sell $1.8 of bonds to bring stocks to $52.8.

Now $52.8/$30.8/$4.4 = $88 in total but AA is 60/35/5.

Effectively used bonds for spending and rebalancing.
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Old 12-21-2018, 08:11 AM   #17
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Not necessarily. An example. Start the year with $100 and a 60/35/5 AA.. Spend 3, bonds are stable, but stocks decline by $9 to $51.... so before rebalancing you have $51 of stock, $35 of bonds and $2 of cash...$88 in total.

Sell $2.4 of bonds to bring cash from $2 to $4.4. Sell $1.8 of bonds to bring stocks to $52.8.

Now $52.8/$30.8/$4.4 = $88 in total but AA is 60/35/5.

Effectively used bonds for spending and rebalancing.
Yes helpful thanks. @audreyh1 also gave a non numerical somewhat similar response.
I didn't think of it conceptually in this manner at first.
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Old 12-21-2018, 10:19 AM   #18
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Thanks for the responses, much appreciated. Given I’m from the UK, I’m not familiar with some of the US acronyms used ... but I got the general drift.

A large part of my question revolved around minimising tax liability, so that’s part of the driver for balancing income vs capital gain (income and capital gains taxes are different in the UK). This will be a big determinant re asset balancing. From most answers, tax optimisation doesn’t seem to be a big consideration?
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Old 12-21-2018, 10:48 AM   #19
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Thanks for the responses, much appreciated. Given I知 from the UK, I知 not familiar with some of the US acronyms used ... but I got the general drift.
Feel free to ask for clarification, we are glad to explain acronyms.

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A large part of my question revolved around minimising tax liability, so that痴 part of the driver for balancing income vs capital gain (income and capital gains taxes are different in the UK). This will be a big determinant re asset balancing. From most answers, tax optimisation doesn稚 seem to be a big consideration?
In the US, stock long term gains and dividends are taxed at just 15%, and 0% for lowest income bracket. Bond gains are taxed as earned income, so we tend to try to keep bonds in deferred tax devices like IRAs and 401(k)s which are taxed as earned income when withdrawn. Perhaps it would help if you summarized how different investments are taxed in the UK.
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Old 12-21-2018, 10:48 AM   #20
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tax on most dividends and on capital gains is different and much lower in US too compared to other income such as pensions. So, the approaches described above, on such income in taxable accounts (for tax deferred it does not matter, all including earnings is treated as "ordinary" income, except for ROTH accounts of course, but that's a whole other thread to explain or you can do a search, does not matter if you do not have a similar type account in UK?) minimizes taxes by default
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