Primers, FAQs, Guides for drawdown strategies

[BBQ-Nut]

So, I am approaching that 'go for launch' sequence into retirement - have done all the right things (mostly) by stashing and squirreling away money into taxable assets, 401k, and a rollover IRA from a previous job's 401k -even started doing some ROTH conversions on the IRA accounts.

I'm diversified in all those areas into bonds & equities (balanced, small cap, growth, international, etc)

But now that I'm at that point to go into retirement - where can I find good sources on what my drawdown strategy should be for my expenses?

My assets are not currently structured to generate income via interest, dividends, or STCG sufficient to cover all of my expenses, so needed amounts would have to come from the sale of equities.

I'd like to start soaking in some good advice on how post retirement assets should be structured to preserve capital, generate income, and minimize taxes.

Thanks!

[ronin]

Congrats! That is exciting.

You might check out some of this stuff. There is a lot of basic info.

bogleheads.org:Portfolio_withdrawals

[SteveL]

Am glad you can stop working soon.
You sound well prepared for this step. If you have done the following, then you shouldn't have trouble.

Do a cash flow plan for the first five years. This plan would show the cash you will need to spend to live each year for the next five.

In the plan you would then detail what sources of cash you will have available to fund your needs for each of these years.

For example if your cash need is $70k for the first year, under it you would list any pension, annuity pmts, SS pmts etc. Then you would list dividends and interest from your taxable account. Any remainder that is left must be sourced from some kind of draw down. Where it would come from would depend on what the tax impact might be. Suppose you were in the 10-15% tax bracket. You could sell some shares and some or all of any capital gain could be tax free!

You can model some of these possibilities using the What-If feature in TurboTax if you have that.

I think the general rule is to put off taking funds from tax deferred if possible. However, only in looking at specific possibilities and then modeling the taxes will you find the right choice for your situation.

Obviously, the lower your cash need, the less you need to deal with drawing down.

[sanfanciscotreat]

Do not forget Long Term CG's. These are subject to much less tax unless you have tax free dividends or other tax free income. I have some money in a fund that pays 5% tax free.

[BBQ-Nut]

I've crunched a lot of numbers, and I've been reading some articles on-line.

After accounting for a modest pension that I can draw on as soon as I plan to retire at 55, my sources of income would first be from my after tax assets and my 401K (preferred plans allow withdrawals w/ no penalty at 55, from what I've read).

Even so, I can't find any investment strategies that would create a stream of income from just interest and dividends that would cover all remaining expenses.

That means I would need to use a systematic withdrawal approach from both after tax and my 401k to pay for expenses (after pension checks). This is one of the reasons where I may elect to take SS at 62 because this helps keep the withdrawals from my savings at/under the 4% 'guideline'.

I've read things about fixed and variable annuities, but most people shake their head when I mention that.

I guess I need to sit down with my financial planner (CFA) and just go over my portfolios and 'tweak' them for best efficiency and lowest taxes.

[LOL!]

Your income tax rate should go to zero with the proper plan. Without the proper plan, you will pay a ton of taxes.

Here's link to a family that planned:
Bogleheads • View topic - How to pay ZERO taxes in retirement with 6-figure expenses

It has links to things folks should read if they haven't already.

Also one expense that is probably not needed is a financial planner. I have to ask why your portfolio is already not tweaked for best efficiency and lowest taxes that will go to zero when you retire.

[Htown Harry]

Dirk Cotton just finished a very nice primer on four withdrawal strategies. As usual, it was well written, informative and accessible to folks with a range of financial knowledge.

Quote:

the four major classes of strategies for funding your retirement: Systematic withdrawals Purchasing a life annuity Floor-and-upside, and Time-Segmentation.

The Retirement Cafe: Build a Floor, Place a Bet

Wade Pfau is an academic who writes extensively on withdrawals, but his topics go into great detail on particular strategies or optimization techniques. It's not the first place to go if you are early in the learning curve, but the breadth and depth of his analysis is excellent.

Wade Pfau's Retirement Researcher Blog

[Ed_The_Gypsy]

I am not sure if this addresses your question but it might help: http://www.early-retirement.org/foru...use-57777.html

An alternative to the Safe Withdrawal Rate idea is the MRD (Minimum Required Distribution) method the IRS requires of traditional IRA owners.

(There are a couple of interesting references in this thread already. I have to think about them. Thanks, all.)

[shortstop14]

Interesting stuff ... I'm in pretty much the same situation, except already retired. And I thought my drawdown strategy was reasonable, but seems like there are some areas I could be even smarter.

It's a little hard to figure out whether Roth conversions are smart, when keeping income very low has impact on capital gains paid and ACA subsidy (if I chose to use that). Started an HSA this week, funding that for 2013 and 2014. Wish I could get paid for the uncompensated accounting services the IRS makes me provide myself.

[InParadise]

Quote:

Originally Posted by SteveL I think the general rule is to put off taking funds from tax deferred if possible. However, only in looking at specific possibilities and then modeling the taxes will you find the right choice for your situation.

I am starting more and more to challenge this general rule. In a couple of years we are looking to retire at 56 for DH, 52 for me, with a decent 401K that he can draw down penalty free. About half our assets are in this 401K and non retirement accounts, the other half in 9/10s TIRA, 1/10 Roth. There is also a pension that backs out what you make in SS for down the road.

Initially, my thought was to put off taking SS or pulling from the retirement accounts as long as possible, living off already taxed accounts and creating a situation where we could convert the TIRA assets to Roth at a 15% tax rate. We will get slammed with taxes when RMDs hit at 70 if we don't do something.

But why wouldn't drawing down the 401K have a similar result to Roth conversions? Should we save our already taxed funds for greater flexibility, allowing us to control our tax rate by maxing out our 401K draw to the 15% tax rate and then supplementing as needed with the cash? Obviously we would have to factor the taxes on the non-retirement funds as well to our income. Only after the 401K was gone would we then use our funds to do the Roth conversions.

At such a low tax rate, I am less worried about keeping funds in retirement accounts, and more worried about the lack of control we will have over the matter when RMDs require us to have a much higher taxable income.

[Htown Harry]

I have used the freeware program Forecaster to model different what-ifs regarding withdrawal sequences. (You can save up to 10 scenarios for free. After that there is a cost.) The program downloads to your computer, which I like.

The input screens cover most every flavor of income, taxable assets and tax-deferred assets. Firecalc is superior for projecting investment returns using Monte Carlo methods and historical data, but I like that the Forecaster output screens include annual tax bills by income type or asset withdrawal. I also like that I can export the results to Excel for further customization.

I've mentioned the program here a few times, with no responses from the other board members. Also, it's rarely mentioned in media reviews or lists of calculators. Understandably, the very fine Firecalc has many advocates and the more mainstream retirement calculators are more widely used.

The OP's questions require a committment to modeling to answer fully, and building spreadsheets from scratch is a big time committment. I'd use Forecaster as a short-cut to a plan if I was in his spot. YMMV.

Forecaster - Retirement And Estate Planning

[BBQ-Nut]

Thanks for all of the good leads on things to read, so I've got some more homework this week.

To date, my AA has been more skewed to equities and have ridden the roller coaster, but reaped some good gains last year and am hopeful for this year. And that has been my approach for quite some time.

That being said - this is what my biggest target is for 2014 - to look at my AA and rebalance or re-structure it so that I don't get whacked with taxes after retirement.

My wife will still be working in a 6 figure job for another 5 years, so even if I retire first, we will still be in at least the 25% tax bracket (probable 35% combines since we live in CA).

More questions to come...I'm sure!

Thanks again for the info.

[Htown Harry]

Here's an article that you will find useful, BBQ-Nut.

Crafting A Withdrawal Policy Statement For Retirement Income Distributions | Kitces.com

It includes links to the original academic article and to a sample withdrawal policy.

Quote:

...Similar to an Investment Policy Statement (IPS), the goal is to articulate a series of parameters and guidelines about how retirement withdrawals will be funded from the portfolio, to clarify how to respond when a market calamity strikes and determine, in advance, what steps will be taken to keep the plan on track... Key Provisions Of A Withdrawal Policy Statement (WPS) So what exactly would a Withdrawal Policy Statement contain? Guyton suggests that a WPS cover 5 key areas: (1) the client income goals to be met via withdrawals; (2) the client assets to which the WPS applies that will fund those income goals; (3) the initial withdrawal rate; (4) the method for determining the source of each year's withdrawal income from the portfolio; and, (5) the method for determining the withdrawal amount in subsequent years, including both the trigger points for adjustments other than an inflation-based increase and the magnitude of the adjustment itself.

[BBQ-Nut]

Quote:

Originally Posted by Htown Harry Here's an article that you will find useful, BBQ-Nut. Crafting A Withdrawal Policy Statement For Retirement Income Distributions | Kitces.com It includes links to the original academic article and to a sample withdrawal policy.

Thanks!

[Which Roger]

Quote:

Originally Posted by InParadise I am starting more and more to challenge this general rule. In a couple of years we are looking to retire at 56 for DH, 52 for me, with a decent 401K that he can draw down penalty free. About half our assets are in this 401K and non retirement accounts, the other half in 9/10s TIRA, 1/10 Roth. There is also a pension that backs out what you make in SS for down the road. Initially, my thought was to put off taking SS or pulling from the retirement accounts as long as possible, living off already taxed accounts and creating a situation where we could convert the TIRA assets to Roth at a 15% tax rate. We will get slammed with taxes when RMDs hit at 70 if we don't do something. But why wouldn't drawing down the 401K have a similar result to Roth conversions? Should we save our already taxed funds for greater flexibility, allowing us to control our tax rate by maxing out our 401K draw to the 15% tax rate and then supplementing as needed with the cash? Obviously we would have to factor the taxes on the non-retirement funds as well to our income. Only after the 401K was gone would we then use our funds to do the Roth conversions. At such a low tax rate, I am less worried about keeping funds in retirement accounts, and more worried about the lack of control we will have over the matter when RMDs require us to have a much higher taxable income.

Since the future is cloudy, it's important to remember that saving a dollar today is more valuable than maybe saving a dollar in the future. I have similar concerns about getting slammed with taxes when RMDs kick in. However, if I do get slammed with taxes then, it will mean that my portfolio has performed pretty well between now (age 52) and then, so I will have "won the game" in that my portfolio will very likely survive my lifetime. (and portfolio survivability, rather than leaving something for heirs, is my primary goal).

If I don't get slammed with taxes when RMDs kick in, it will be because either I'm no longer alive, or because my portfolio has performed very poorly and I risk outliving my money. In the latter case, I will look back and be happy that I paid as little in taxes as possible early in my ER years.

[pb4uski]

I'll relay what has worked well so far for us (two full years in - ERd at age 56).

Our portfolio is very tax efficient. All fixed income is in retirement accounts. The non-retirement accounts that we are living off are all domestic equity funds that are predominately qualified dividends and international equity funds that have qualified dividends and foreign tax credits. Our average tax rate (federal tax divided by income) was 0% in our first year of retirement and 5% last year.

My AA across all my accounts is 60/34/6. The 6 in cash is in an online savings account that pays 0.8% (not much but better than many). We live off 1) a "paycheck" that is a fixed monthly transfer from the online savings to our checking account, 2) dividends and capital gain distributions from our taxable investments and 3) if needed for special expenses additional transfers from online savings.

When I rebalance annually I replenish the cash back up to 6% and repeat. We also do Roth conversions to the top of the 15% bracket beginning last year. The year before (our first year in retirement) we focused on 0% tax gain harvesting but last year I decided that Roth conversions were preferable given potential taxes after age 70 once SS and RMDs start.

Also, remember that it is your ultimate withdrawal rate (after pensions and SS are on line) that is important. Our current WR is in the high 3% range, but will be much lower once our pension and SS kick in.

As always, YMMV.

[BBQ-Nut]

I've noticed that several members use a withdrawal strategy where they take out 1 or 2 years worth of expenses in lump sum distributions.

Was wondering if this has actually worked out to be advantageous over time.

If the predominant 'rule of thumb' on wealth accumulation in stocks and bonds is to dollar cost average and not market time (and the preponderance of data seems to support DCA > market timing), then wouldn't the same apply on the 'back end' when taking money out...to 'dollar cost average' withdrawals?

My 401k can be set up for monthly distributions so I could get monthly deposits - just like how I get deposits now from my paycheck...just seems something to consider for my situation.

[LOL!]

Quote:

Originally Posted by BBQ-Nut I've noticed that several members use a withdrawal strategy where they take out 1 or 2 years worth of expenses in lump sum distributions. Was wondering if this has actually worked out to be advantageous over time.

Here are some things to read that suggest these lump-sum distributions are not good:
Are Cash Reserve Retirement Strategies Really Necessary? | Kitces.com

Research Reveals Cash Reserve Strategies Don't Work... Unless You're A Good Market Timer? | Kitces.com

[pb4uski]

Quote:

Originally Posted by BBQ-Nut ....My 401k can be set up for monthly distributions so I could get monthly deposits - just like how I get deposits now from my paycheck...just seems something to consider for my situation.

If you're going to live on retirement account distributions and pay the taxes on them then monthly makes as much sense as annual to me.

However, part of my tax strategy is to limit my taxable income to the 15% bracket so in my case living off taxable accounts and doing Roth conversions annually to the top of the 15% bracket makes more sense for me. I don;t know how much I can convert and stay within the 15% tax bracket until I know what my taxable account dividends and capital gain distributions are for the year and they vary so a pre-programmed monthly conversion (or distribution) would not work for me. I think that there are many other ER members in the same boat.

[BBQ-Nut]

Quote:

Originally Posted by pb4uski If you're going to live on retirement account distributions and pay the taxes on them then monthly makes as much sense as annual to me. However, part of my tax strategy is to limit my taxable income to the 15% bracket so in my case living off taxable accounts and doing Roth conversions annually to the top of the 15% bracket makes more sense for me. I don;t know how much I can convert and stay within the 15% tax bracket until I know what my taxable account dividends and capital gain distributions are for the year and they vary so a pre-programmed monthly conversion (or distribution) would not work for me. I think that there are many other ER members in the same boat.

In my case I will have an income stream composed of a modest pension, after tax accounts and my 401k. At about age 60, I will have the option of drawing on a Roth IRA as I will have met the requisite 5 yr period. Then at 62 I may decide to take SS, then I will have that as income as well.

Unfortunately, once in a 401k or IRA, when you take distributions they are taxed as 'ordinary income'...I've yet to read of a way to get around that - it is what it is.

So, yes, I have more work to do on when and how much to tap the 401k to cover expenses based on the rest of my assets, and my wife's current job income vs her plan to retire in about 5 years.

My question was more in general for when someone has to take distributions from their 401k or IRA, to do it monthly or in big 1 yr chunks.

It seems to make more sense to do this monthly with respect to share price, the market and the 'power' of dollar cost averaging.