Practical Questions about Withdrawals from a pending FIREr

[petershk]

HI all,
I've received really great advice from everyone here. I have my FIRE details in the HI I'm thread, so I won't repeat that here. I gotta, say, I have the same nervousness everyone else seems to have, which is comforting... but I haven't heard answers to a few practical questions:

1) How do you withdraw your money? Do you pull it out once a year, monthly? Do you have a "cash reserve" for 2 years and draw that when the market is terrible, and sell equities when it's great? (This was kinda my thought). Do you stop reinvesting dividends and just pull from your brokerage account on a credit card?

2) How do you REALLY behave when terrible things happen and how do you protect against madness? I can sit here with my gushy job and say "I would have held everything the same and reinvested in 2008/9, I'm not "selling low" like those other morons. I'm being dishonest if I tell you guys it'd be a cakewalk and I wouldn't think of "selling low." How did the people who were FIREd around that time deal with it?


3) What makes you change your withdrawal rate? I've been spending roughly 8400/mo for about the past 3 years... I mean real $$, not inflation adjusted. Most of that is mortgage and honestly, there's a lot of wiggle room in that so even though "inflation" happens, it hasn't mattered. I'm not a very disciplined person... hell... without Mint I would really have a hard time tracking my spending. But I also remove money from my greedy irrational hands through an auto-savings mechanism. I'm sure if 10k was available, I'd spend that... so I just keep the money out of my hands . But at some point, I'll spend more (I guess)... when you have a job, that's easy cause you get raises and stuff. But when you pay yourself it's gotta be brutal because by definition FIREd people are crazy savers I would think.

Thanks guys!

 

[Choices]

Great questions! DH still works so we aren't in the decumulation stage quite yet. After years of saving I dread the spending down part.

 

[DROPOUT]

following ....

 

[marko]

I think you'll find that many people here have their dividends--and sometimes capgains--deposited into a holding/savings fund from which they draw as needed; most likely yearly or twice a year. Then, sell tax advantaged equities to fill any gaps.

As far as dealing with downturns, I just white-knuckle it down and wait for the (inevitable/eventual) upturn. The only time I sell in a downturn is to buy something interesting that has become a bargain; never sell to put money on the sidelines.
Nobody likes the downturns and naturally it's a challenge to stay the course but lately I've found myself saying: "next downturn I'm going to buy X"; so I've come to see them as opportunities.

For us the withdrawal rate is determined by a fairly unchanging annual budget...we "take what we need and leave the rest" but we do not go over the SWR.

 

[grasshopper]

I like Marko's thinking, we also never out spend our max possible SWR.

Everyone is different my way works for me. First off I have a Vanguard Advantage brokerage account, (any cash management account would work,) that uses my money market account as a sweep account. So I currently have what I will call 3 years of spending in it as cash. Not that if I never had any money going into it that it would last 3 years. I have all dividends go into my brokerage account. I also have but don't always count on LTCG that I periodically take to reset my cost basis, otherwise at 70.5 RMD's my LTCG my be taxed at more than 0%. Second I have auto payment on every bill I have taken from this account. Never been late on a CC payment in full yet.

I get a great view of my spending every month of my spending because it all comes out of this one account. Now the reason for the 3 year buffer is that almost all my dividends are quarterly, and also because I like cash. My expected return is low so I do better with equities, but count my bonds and cash as fixed income.

 

[Midpack]

I've received really great advice from everyone here. I have my FIRE details in the HI I'm thread, so I won't repeat that here. I gotta, say, I have the same nervousness everyone else seems to have, which is comforting... but I haven't heard answers to a few practical questions:

The mechanics of withdrawal have been discussed several times, this might get you started (the FAQ section or Search are often good places to start). Best of luck.

http://www.early-retirement.org/forums/f47/what-drawdown-method-do-you-use-57777.html

 

[petershk]

Interesting. Thanks for the detail.

I was thinking basically have my investment accounts like I do now... And then add a "reservoir" account that has 2-3 years of living money. Then I auto move my monthly "salary" from that to my spending account. Basically my life doesn't change from a financial perspective at the day to day level. (Whatever I don't spend goes back into savings each month just like today). What iS different is that the majority of my salary goes into investment accounts and that goes away .

So... Then near the end of the year I have to refill the reservoir. Based on market performance, rebalancing, and tax needs I would sell equities as needed to do so. If the market is terribad... Say 20% drop I would NOT sell equities and let the year roll over. I could do that for 3 years before I HAVE to sell. I'm assuming that would impact my spending and maybe stretch it out... Figure out income or something else.

The thing this DOESNT allow for is BUYING when the market dies... But I guess this isn't that big a deal.

For me the key goal is psychological well being. By separating the "investing" from the "spending" I feel like it avoids the need to check the damn stock market all the time. By having a 3 year reservoir it prevents me from over reacting to a dive.

The HUGE down side is having 300k (about 8% in my case) of liquid assets cash... Not earning dividends etc. Financially it seems like kind of a bad plan but emotionally it feels good.

But I haven't ever done this so your guys' experience will be super valuable here.

Sent from my HTC One_M8 using Early Retirement Forum mobile app

 

[foxfirev5]

You will get many opinions and advice regarding what works for different people. The problem is that you need to figure out what will work for you. For example I have never sold any equity holdings for a loss and ridden out every downturn. However my low cost of living, small pension, and stable value/st bond/cash would enable me to go beyond 10 years without liquidating other holdings.
What I do may or may not fit your situation. Do your homework, find what works for you and enjoy.

 

[REWahoo]

petershk, the plan you describe is similar to what many of us do. One key difference in my plan is I hope to never sell equities in a down market, choosing to sell bond funds instead. Haven't needed to do so in the 10 years I've been retired, and hope that trend continues.

 

[nun]

I ER'ed a year ago at 53....so I had 7 years to cover until I could get to my IRAs. I had enough in taxable accounts and a 457 to cover those years. I started out with a 60/40 AA, 1 year's money in my bank account and 3 years money in stable value earning 2%....I wanted to have enough to cover the worst bear market I could think of. The plan was to take dividends and sell equites in good times and reinvest dividends and use the stable value in bad times, taking income twice a year when my bank account was down to around 6 months of spending.

However, I got the chance to buy into my ex-employers defined benefit pension plan which I did using a bit less than 20% of my money. So my withdrawals are all set for a while as at 55 I'll get a monthly check. I've moved the stable value back to equities and I'm automatically reinvesting dividends and capital gains again and my AA is around 75/25.

 

[audreyh1]

We let all distributions accumulate in cash in our retirement account. Then the next January we withdraw our % of portfolio for income and rebalance. The distributions usually cover the amount we withdraw, but if they didn't we would just sell whatever was needed to rebalance the portfolio. This keeps the mechanics pretty simple as by then we have a good idea of how much of our withdrawal will go to taxes, plus it's an easy time to rebalance since most of the distributions are paid out in Dec.

We withdraw the annual amount into a high-yield savings account (FDIC insured , and they pay around 1% these days which is way better than money market) and have automatic monthly deposits into our checking account from there.

We also keep an extra year of cash outside our retirement account as a buffer for down years or an emergency or whatever. We let our unspent funds accumulate there as well, and have some funds earmarked for other short-term spending such as extra travel or a new vehicle.

We don't "take what we need and leave the rest". In the interest of using the funds while we are alive and still healthy, we take as much as our current safe withdrawal rate will allow. If we don't spend it all this year it's available for next year, or for a splurge or gifting or whatever. We use % of remaining portfolio (the value each Dec 31) as our withdrawal amount. Some years we're going to experience a "pay cut", and some of the unspent funds from prior years will help make up the difference.

Personally I don't sweat the few extra % we have set aside in high-yield savings and short-term CDs as a cash "buffer". It represents less than 2 years of withdrawals - it covers 2 years or so of our spending budget after taxes, since we've already paid the taxes on those funds. IMO it creates little "drag", and I don't worry about drag from fixed income otherwise I would have any in my retirement account! Since we don't include the cash buffer in our withdrawal calculation, it is immaterial, IMO.

 

[audreyh1]

So... Then near the end of the year I have to refill the reservoir. Based on market performance, rebalancing, and tax needs I would sell equities as needed to do so. If the market is terribad... Say 20% drop I would NOT sell equities and let the year roll over. I could do that for 3 years before I HAVE to sell. I'm assuming that would impact my spending and maybe stretch it out... Figure out income or something else.

The thing this DOESNT allow for is BUYING when the market dies... But I guess this isn't that big a deal.

Understand that when you are doing rebalancing, you would not sell equities after a 20% drop. You would be selling fixed income (bonds and/or cash) to both fund your withdrawal AND buy more equities. As long as equities underperform fixed income by a wide enough margin you will be drawing down on the fixed income only. If you stick to rebalancing after withdrawals you will buy stocks after bad equity years and sell them after good equity years.

Michael Kitces explains why people who rebalance don't need to worry about selling equities in an down market here. https://www.kitces.com/blog/are-cash-reserve-retirement-strategies-really-necessary/

We still keep a cash buffer - but that's to smooth our income year to year and have funds available for splurges regardless of market conditions, NOT because we're concerned about "selling equities in a down market".

BTW - rebalancing in Jan of 2009, selling some of my remaining fixed income to buy stocks was one of the hardest things I have ever done. Having that cash buffer, plus knowing I still had X years left in fixed income even after I rebalanced was what made me psychologically able to rebalance at such a scary time. I was richly rewarded by the end of the year, but I also recognize that it all could have dragged out much longer.

 

[rodi]

I'm new to the RE club - having retired last June. I have 1 years worth of cash set aside from the rest, which I transfer 1/12th of on a monthly basis to my checking. That simulates an income stream like from a paycheck. This is supplemented with DH's soc. sec. and rent from our tenants. By doing a monthly transfer it makes me gut check that we aren't overspending. At some point I'll have the confidence to just transfer as needed... but for now, the monthly transfer works for me.

 

[WannabeRetired]

Petershk, do you have that $300k in a CD ladder or just straight cash in a money market?

 

[pb4uski]

It took me a couple years to get to a process that is comfortable for me. After I retired, I changed our target AA from 60/40/0 stock/fixed income/cash to 60/34/6. The cash is in an on-line savings account. My monthly "paycheck" is a transfer from the on-line savings account to my local bank account from which I pay my bills. In addition, I changed our taxable account investments from reinvesting dividends to sending dividends to my cash account. The cash account gets replenished from investments as part of my annual rebalancing, usually in December to mesh with my tax planning.

I retired 3 years ago and investment performance has been really good so its not clear how I would respond to a severe downturn, but I am pretty seasoned equity investor and would probably stay the course. I was still working during 2008/9 and while my AA was screaming at me to sell bonds and buy more equities, I lacked the courage, but I didn't sell and just stayed the course. If I had the courage to sell bonds and buy equities back then rather than just stay pat, I would be much richer today.

I haven't given us a raise since we retired because the amount that I have designated as a paycheck seems to be sufficient to cover our normal spending. We do occasionally have special expenses (loan to DD, garage we built, etc.) that we do transfers for above and beyond our "paycheck" just like we would have used savings to pay for special items when I was working.

Of course, YMMV.

 

[Cobra9777]

I'm only 1.5 years into ER, so still learning and adapting. We have a cash management account (CMA) at Fidelity that accumulates pension annuity payments, rental income, and cash distributions from our taxable brokerage account, which had been reinvested prior to ER. That covers most of our expenses, and the CMA functions like a regular bank account for spending.

We also have 2-3 years cash (5% of our AA) at Ally Bank earning 0.99%. When the Fidelity CMA falls below a certain threshold, I make a transfer from Ally to replenish. Likewise, when the Ally account falls below a certain threshold, I sell some equities in the taxable account and transfer the proceeds to Ally. I then rebalance to my target AA by moving between bonds and equities in the tax-deferred accounts.

Unlike many here, we don't follow any specific timing, nor do we have a target withdrawal rate. It's all done on an as-needed basis. We just spend what we need, when we need it, and replenish the cash accounts as described above. The timing tends to be driven by large, irregular expenses like international travel or home improvements. Periodically, I update our retirement spreadsheets and run our numbers through FIRECalc and RIP to make sure the spending profile is sustainable. But I do that a lot less now, as I'm gaining confidence that everything is working well. If anything, I probably need to loosen the purse strings a bit, as my LBYM instincts kicked into overdrive when the paycheck stopped.

Lately, after reading Kitces, I've started thinking that the 5% cash balance at Ally is an unnecessary step in the process and a drag on performance. If you're going to rebalance immediately after selling equities to replenish cash, there's not really any detrimental impact from selling in a downturn, nor advantage to selling in an upturn. So, the oft-quoted reason for holding cash really doesn't hold up, unless you'll be using it for making opportunistic timing moves rather than automatic rebalancing. Some of the forum members here advocate the calming psychological effect that cash can have during a downturn. So for now, I'm hanging on to cash... plus the drag on performance is fairly minor.

I have no experience being retired in a major downturn, so can't offer any advice. I was an on-again/off-again market timer during the accumulation phase, with mixed success. So I'll need to avoid some of the old instincts. But because we paid off the mortgage and elected the annuity option for our pensions, we have a very limited reliance on withdrawals to meet our expenses and that should help us get through the rough patches without doing anything silly.

 

[nun]

Lately, after reading Kitces, I've started thinking that the 5% cash balance at Ally is an unnecessary step in the process and a drag on performance. If you're going to rebalance immediately after selling equities to replenish cash, there's not really any detrimental impact from selling in a downturn, nor advantage to selling in an upturn. So, the oft-quoted reason for holding cash really doesn't hold up, unless you'll be using it for making opportunistic timing moves rather than automatic rebalancing. Some of the forum members here advocate the calming psychological effect that cash can have during a downturn. So for now, I'm hanging on to cash... plus the drag on performance is fairly minor.

I have no experience being retired in a major downturn, so can't offer any advice. I was an on-again/off-again market timer during the accumulation phase, with mixed success. So I'll need to avoid some of the old instincts. But because we paid off the mortgage and elected the annuity option for our pensions, we have a very limited reliance on withdrawals to meet our expenses and that should help us get through the rough patches without doing anything silly.

I'm in the habit of keeping about between 6 months and 1 year of spending in my bank account. Like you I will have my expenses covered by rent and pension income so the only reason to make withdrawals from investments is to cover large unexpected expenses. I also think it will help me in avoiding silliness and a lot of worry.

 

[ERD50]

...

We also have 2-3 years cash (5% of our AA) at Ally Bank earning 0.99%. When the Fidelity CMA falls below a certain threshold, I make a transfer from Ally to replenish.

...

Lately, after reading Kitces, I've started thinking that the 5% cash balance at Ally is an unnecessary step in the process and a drag on performance. ...

Backing in to your numbers, your WR is ~ 5%/3 to 5%/2, so ~ 1.7% to 2.5%. In a downturn, you won't have much, if any, selling to do, as the dividends on your portfolio are about in that range. And if you do have to sell, it can just be combined with re-balancing (stocks are down, you are selling fixed income to re-balance, not selling stocks at lows).

I agree that cash is just a drag, but people need to do what feels right to them (but just accept it for what it is, don't try to 'sell' it to me as some miraculous approach that will create money from nowhere ).

-ERD50

 

[W2R]

So far, to meet my expenses I haven't ever had to extract more from my nestegg than the dividends provide (knock on wood!). I also have a few years' expenses in cash to fall back on. If all goes as planned, then I won't have to sell low during future market crashes.

Each year during the first week in January, I withdraw the year's spending money. It is covered by the prior year's dividends, which I took in cash.

Then I don't withdraw any more until the next year.

Last year I started Social Security, so I have a lot more wiggle room now than I had in the past.

 

[pb4uski]

So far, to meet my expenses I haven't ever had to extract more from my nestegg than the dividends provide (knock on wood!). I also have a few years' expenses in cash to fall back on. If all goes as planned, then I won't have to sell low during future market crashes.

Each year during the first week in January, I withdraw the year's spending money. It is covered by the prior year's dividends, which I took in cash.

Then I don't withdraw any more until the next year.

Last year I started Social Security, so I have a lot more wiggle room now than I had in the past.

Do you have any interest in adopting a 60 year-old?

 

[W2R]

Do you have any interest in adopting a 60 year-old?

Nah, I think I'm going to adopt some version of my "dream house" instead, if I can just find it. I have been looking and looking, but nothing has come on the market in my target neighborhood since the holidays. Weird.

 

[Cobra9777]

Backing in to your numbers, your WR is ~ 5%/3 to 5%/2, so ~ 1.7% to 2.5%. In a downturn, you won't have much, if any, selling to do, as the dividends on your portfolio are about in that range.

There's still a cashflow gap after dividends because they mainly hit the tax-deferred account, which is not spendable at the moment. The taxable account is smaller and mostly growth-oriented equities. But yeah, any selling will be relatively small, and mainly to cover large discretionary expenses. Even more reason to stop sitting on cash, or at least reduce it.

I agree that cash is just a drag, but people need to do what feels right to them (but just accept it for what it is, don't try to 'sell' it to me as some miraculous approach that will create money from nowhere ).

Agreed. I think it was something LOL! posted a while back that finally motivated me to read up and think this through. I may or may not continue holding cash at this level, but at least I can now approach the question more intelligently.

 

[audreyh1]

I never read anyone claiming that holding cash was a miracle approach that created money from nowhere. Was that some bucket approach claim?

 

[mathjak107]

It took me a couple years to get to a process that is comfortable for me. After I retired, I changed our target AA from 60/40/0 stock/fixed income/cash to 60/34/6. The cash is in an on-line savings account. My monthly "paycheck" is a transfer from the on-line savings account to my local bank account from which I pay my bills. In addition, I changed our taxable account investments from reinvesting dividends to sending dividends to my cash account. The cash account gets replenished from investments as part of my annual rebalancing, usually in December to mesh with my tax planning.

I retired 3 years ago and investment performance has been really good so its not clear how I would respond to a severe downturn, but I am pretty seasoned equity investor and would probably stay the course. I was still working during 2008/9 and while my AA was screaming at me to sell bonds and buy more equities, I lacked the courage, but I didn't sell and just stayed the course. If I had the courage to sell bonds and buy equities back then rather than just stay pat, I would be much richer today.

I haven't given us a raise since we retired because the amount that I have designated as a paycheck seems to be sufficient to cover our normal spending. We do occasionally have special expenses (loan to DD, garage we built, etc.) that we do transfers for above and beyond our "paycheck" just like we would have used savings to pay for special items when I was working.

Of course, YMMV.

i am first going into retirement in july but my plan is pretty much doing what you are.

50/44/6 allocation , channel all interest and distributions into cash and keep our fingers crossed the ride isn't to bumpy.

aince i follow a newsletter for my allocations my funds change from time to time to better fit wht is happening in the world .

if bonds falter there are plenty of more appropriate types of income funds to change too but that will play out as it unfolds.

boy, if fridays bond action was any sign of whats to come that drop was very scarey.

longer tem bond funds like TLT saw the equal to a 360 point drop in the dow while corporate bond funds fell 3/4's of a point or the equal of 135 points on the dow just in one session with that strong jobs report. .

 

[nun]

if bonds falter there are plenty of more appropriate types of income funds to change too but that will play out as it unfolds.

boy, if fridays bond action was any sign of whats to come that drop was very scarey.

I'm reading the forecasts for the next 10 years of the bond market and it look rocky......what are these "more appropriate types of income funds" you mention?