Preserve Principal or draw it down?

[UserRequested]

Just curious to know how others have planned their finances for RE.
Do you: only spend from investment returns and do not touch the principal, add to principal to account for inflation, or slowly draw it down over your retired lifetime.
I suppose the other way of looking at it is, how much you leave to your kids.

Cheers

 

[pb4uski]

Kids get whatever is left over after DW and I pass on. While it is projected to be a substantial amount, it could vary depending on actual investment results.

Prior to SS coming on board at age 70 we would be dipping into principal.

We'll simply spend what we need to and monitor the nestegg as we go.

 

[jarts98]

Probably will be beginning ER later this year. My plan is to use two investment pools. One (the taxable account) I will draw down over the next 10 years or so while the other bucket (TIRA and Roth IRA) grows (hopefully somewhat nicely over the next decade). Then begin to tap into the IRA's. My plan is for the income from the IRA's will outlast me and my DW.

 

[W2R]

I am retired, in my sixties, and my dividends cover my spending completely.

If I have any desire to spend more, I have "given myself permission" to spend up to 3.5%. However I do not see this happening so far. I like my present lifestyle and I am used to it and do not like change much. I like the sense of security I feel due to spending no more than dividends.

 

[Katsmeow]

DH's retired 2 1/2 years ago. I see our spending in 4 phases:

Phase 1 - Ended at the end of 2012. During this phase we downsized and got rid of a house that was upside down and that we had to bring money to close and then to buy our downsized house. In the meantime we had kids at home and in college. We also needed to replace two cars. Some of the extra costs were covered by my part-time income but we expected to invade principal during this period (and did).

Phase 2 - While we still have kids at home or in college. This is ongoing for another 3 years or so. For this year our withdrawal rate from the portfolio will be probably a little less than 4% as I still work part time. For the next couple of years after that if I didn't work our withdrawals would likely eat into principal as they would well exceed 4%. However, we expect this phase to reduce principal by some amount.

Phase 3 - Kids gone, me not taking SS yet. Phase 2 will likely end about the time I turn 62. I could take SS then in which case there is no Phase 3. On the other hand, if I decide to wait until later to take it, we will temporarily withdraw more so that I can wait for SS

Phase 4 - Both DH and I on SS. At that point, I expect our portfolio to be less than it is now. I plan to set withdrawals for a 95% survival which will be periodically revised. In a given year it might or might not invade principal to some extent. Whether we have principal left at the end is not important. Having enough money to meet our needs to the end (of the last survivor) is important, but having extra left over isn't.

 

[FIREd]

I plan on living only on rents, dividends, and interests. No dipping into the principal.

 

[Midpack]

No kids, draw down principal and die broke if possible. But most likely we'll end up with some residual that will go to charity and/or nephews & nieces...

If I do achieve the 'die broke' objective it would be with a SPIA & Soc Sec covering at least our basic expenses if necessary, and we'll also want to leave a small bequest for charity/family. But there may be no portfolio beyond that. There's no real chance of 'living under a bridge eating crunchy* cat food' at the end.

And as I said, the odds of actually making it work out are remote at best.

 

[rodi]

Like pb4uski - The kids will get whatever we don't spend. But our plan calls for spending some before SS comes online.

Since I'm basing my plan on both Firecalc and Quicken Lifetime planner - and did not set aside a set amount when the plan expires... if the markets are unfavorable, they'll get less.

But I'm also operating from a plan that my house will be paid off - and the equity is *not* part of the plan (other than low cost shelter). So the kids will get that... unless the market takes a much nastier turn - and I have to turn to plan B - reverse mortgage or downsize. Real estate in San Diego is pricey - so this is not an insignificant inheritance.

Also, I'm planning on giving the kids a debt free college education at California public schools. Since I'm in CA public schools include Berkeley, UCLA, UCSD etc... With a good education and no student loans - hopefully they'll be launched to support themselves going forward. This isn't an inheritance, but it's also not an obligation... so I feel fortunate to be able to do this for them.

I remember in college, my dad paid my bills - but required I come home on weekends to do grunt labor as part of the terms. He'd laugh and say he'd pay for me to live at a poverty level in college (think ramen as a staple) - but strings were attached - including mowing the lawn. Later, when he was planning for his own retirement he'd comment that he had enough money to not become a burden on his kids till age 90. I'd laugh and tell him that I'd happily support him... at a poverty level... and he'd have to mow my lawn. We'd both chuckle over that.

 

[scrabbler1]

My investment returns hve been exceeding my expenses in the 4 years I have been ERed, so that surplus is reinvested. If I end up having to touch principal between now and when I turn ~60 (which is in 10 years) that is okay because my "reinforcements" consisting of unfettered access to my TIRA, my frozen company pension, and Social Security will provide me with a big boost starting in 10 years from now. But with the PPACA beginning next year that will ease my medical insurance costs until I turn 65.

 

[UserRequested]

I remember in college, my dad paid my bills - but required I come home on weekends to do grunt labor as part of the terms. He'd laugh and say he'd pay for me to live at a poverty level in college (think ramen as a staple) - but strings were attached - including mowing the lawn. Later, when he was planning for his own retirement he'd comment that he had enough money to not become a burden on his kids till age 90. I'd laugh and tell him that I'd happily support him... at a poverty level... and he'd have to mow my lawn. We'd both chuckle over that.

What a lovely story. You're dad sounds like a great guy

 

[haha]

I plan on living only on rents, dividends, and interests. No dipping into the principal.

I've also been doing this for >25 years. No rents now, but if a cheap condo turns up in my building I might buy it.

It's the only way I would feel secure. Seems like more than few of ur members feel the same way. I do not attempt to get high dividend paying stocks, but almost all my securities produce some income.

Ha

 

[obgyn65]

I have a mathematical scenario for each possibility. The WR and end balance will depend on 1) how well I manage my money 2) how frugal I am 3) luck.

Do you: only spend from investment returns and do not touch the principal, add to principal to account for inflation, or slowly draw it down over your retired lifetime.

 

[heeyy_joe]

We plan on spending down the principal, 80% of it, over 20 years. By then our requirements will diminish immensely.

 

[ejman]

I have been harvesting all dividends and CG from my taxable accounts since ER in 2002. That + SS has been sufficient except for 2009 and 2010 when dividends and CG took a dive. I did invade some principal in my taxable accounts those 2 years. 2011 and 12 have been OK, helped by the start of SS. I plan on letting IRA's continue untouched until RMD's start and then it's party baby!

 

[mickeyd]

We don't plan on dipping into principal unless we make it to 100, then it's probably going to be tapped.

 

[UserRequested]

We don't plan on dipping into principal unless we make it to 100, then it's probably going to be tapped.

If you can live on investment returns only until you reach a 100, I doubt you will be touching your principal then.
Unless of course you want to go off with a bang

 

[samclem]

We won't make any distinction between principal, the return from appreciation of assets, and dividends/interest. It's all in one pot and we'll take a certain percent of the year-end total. I'm not sure why I'd treat assets differently depending on where they came from.
No one can accurately predict how share prices will grow over the coming decades, they might climb (and boost our portfolio) to very high levels: seems a pity to not spend that money just because I decided only to live on dividends.
The real question for us will be how we change our WR as we get up in years. We'll probably use Bengen's suggested WR based on expected life expectancy +10 years.

 

[urn2bfree]

We won't make any distinction between principal, the return from appreciation of assets, and dividends/interest. It's all in one pot and we'll take a certain percent of the year-end total. I'm not sure why I'd treat assets differently depending on where they came from.
No one can accurately predict how share prices will grow over the coming decades, they might climb (and boost our portfolio) to very high levels: seems a pity to not spend that money just because I decided only to live on dividends.
The real question for us will be how we change our WR as we get up in years. We'll probably use Bengen's suggested WR based on expected life expectancy +10 years.

The choice of which assets to draw from could significantly affect your taxes. $120,000 withdrawn from an IRA is all taxed as ordinary income. it would put you in the 25% tax bracket for the amounts above $70,000 (approximately) and make your dividends and cap gains be taxed at 15%. Instead if you take the same $120,000 from an after tax account, some will be return of principle some cap gains maybe dividends too...and if the cap gains and dividends part is below $70,000 (appprox) none of it will be taxed at all at withdrawal. You might even have room left in the 15% bracket to convert funds in the IRA to a Roth and only pay 15% on the converted amount. that Roth would then be tax free at withdrawal (if certain rules are met.)

 

[samclem]

The choice of which assets to draw from could significantly affect your taxes.

I think I didn't communicate well. Yes, I'll do the tax management things. I was referring to the "total return" approach we are taking to investing. We'll base our withdrawals on the total year-end balance of our portfolio, and whether the gains came from interest, dividends, appreciated shares, or a lucky day at the racetrack won't make any difference.

 

[mpeirce]

I'm a "total return" person as well. Money is fungible.

 

[ERD50]

We won't make any distinction between principal, the return from appreciation of assets, and dividends/interest. It's all in one pot and we'll take a certain percent of the year-end total. I'm not sure why I'd treat assets differently depending on where they came from.

No one can accurately predict how share prices will grow over the coming decades, they might climb (and boost our portfolio) to very high levels: seems a pity to not spend that money just because I decided only to live on dividends. ...

Agreed, I'm scratching my head over some of these distinctions. Taxes are a factor, but other than that it's all about total returns. Anything else seems like an 'illusion' to me. A $ is a $.

One can invest in dividend paying stocks, and plan to only spend the dividends. Fine, but what leads them to believe those are going to keep up with inflation? If not, you are dipping into principal.

Of course I'm not saying it can't work, I just don't see where there is any inherent advantage over a total return approach with a wide mix of stocks/bonds in your AA of choice. Now, if you feel confident you have skills in picking individual stocks, maybe that means you can pick a great stable of dividend payers. But why not a stable of total return stocks? I don't get it.

Maybe people are saying they will adjust spending down if divs decrease? There are other ways to skin that - stick with whatever divs you get from a wide portfolio, and take any additional out as a % of the portfolio, rather than inflation adjusted WD.

-ERD50

 

[audreyh1]

Total return person here too, although I do like to see my portfolio keep up with inflation even after withdrawals.

I don't mind drawing the portfolio down some in my older years.

 

[Animorph]

Didn't we just do this? But I can't find the thread.

I expect my portfolio will grow in real value, as indicated by the majority of outcomes in FIRECalc. However, if we get stuck in one of the less happy outcomes I will spend down as necessary, in addition to cutting expenses a bit.

+1 on total return investing.

 

[bbbamI]

Total return person here too, although I do like to see my portfolio keep up with inflation even after withdrawals.

I don't mind drawing the portfolio down some in my older years.

What Audrey said..... That's our plan.

No kidlets in the bbbamI household. However, I'm sure our niece and nephew will inherit at least a little something from us.

 

[clifp]

Agreed, I'm scratching my head over some of these distinctions. Taxes are a factor, but other than that it's all about total returns. Anything else seems like an 'illusion' to me. A $ is a $.

One can invest in dividend paying stocks, and plan to only spend the dividends. Fine, but what leads them to believe those are going to keep up with inflation? If not, you are dipping into principal.

Of course I'm not saying it can't work, I just don't see where there is any inherent advantage over a total return approach with a wide mix of stocks/bonds in your AA of choice. Now, if you feel confident you have skills in picking individual stocks, maybe that means you can pick a great stable of dividend payers. But why not a stable of total return stocks? I don't get it.

Maybe people are saying they will adjust spending down if divs decrease? There are other ways to skin that - stick with whatever divs you get from a wide portfolio, and take any additional out as a % of the portfolio, rather than inflation adjusted WD.

-ERD50

I should say I have no problems with total return investing. In fact for the person who is primarily investing in index mutual funds I think it is superior and certainly simpler. I don't even think that dividend stock produce superior returns. Not owning Apple stock this last decade other than through index funds has certainly put a drag on my performance.

I do think that a portfolio of dividend stocks produce lower volatility returns than none dividend stocks This is in part because of the nature of dividend paying stocks, more mature, stable, and in slower growth areas. Historically dividends have more than kept up with inflation. For instance the income on IVV (SP500 index fund) rose 12.8% from 2008 to 2012 despite a significant income drops in 2009. Inflation is 6.6% over the same period. Over longer period the gap between dividend growth and inflation is even more pronounced.

As a 1999 retiree, a 4% SWR would have been devastating, even a 3.5% WR I think would have left me in panic in 2008. I didn't stumble into this strategy until around 2002/3 a few years into my retirement.

The ah ha moment came when I realized that I could construct a portfolio of stocks and bonds, that provided enough income to adequately fund my spending needs. At this point my withdrawal rate is pretty much an academic interest. The real answer to the question of how much do I withdraw each year, is "less than my dividend and interest income." Is there a guarantee that my income will keep up with inflation, no. But as long as I maintain this strategy I also know I'll never run out of money.

Now in 2009, I withdrew a bit more than I earned cause of combo of lower interest rates and my banks stock slashing dividends. But considering all the year I spent less than my income it wasn't a great concern

This year with a new expensive car, and kitchen remodel I'll be dipping into my principal. At some point when I am in my 70s or 80s I know there is a decent chance that I'll have to buy into an assisted living center and use principal for that.