Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
retiree cash flow managment
Old 08-04-2005, 09:10 AM   #1
Moderator Emeritus
Martha's Avatar
 
Join Date: Feb 2004
Location: minnesota
Posts: 13,212
retiree cash flow managment

Let me see if I can ask these questions in a way that makes sense. For retirees that are living off of their investments, how do you turn your investments into cash to pay your expenses? Do you just live off of dividends and interest ala the Norwegian Widow method? Do you keep a pile of cash around and live off of that? If so, how do you make the pile? Do you generate cash as part of rebalancing? From selling assets like mutual fund shares?

A related question is moving from the acquisition phase to a distribution phase. At a high tax bracket due to earnings, a person might chose to minimize assets that pay an income since so much of that income goes to taxes. Do you gradually drift into a new type of portfolio?

Any thoughts would be helpful as I contemplate quitting my job.
__________________

__________________
.


No more lawyer stuff, no more political stuff, so no more CYA

Martha is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: retiree cash flow managment
Old 08-04-2005, 09:34 AM   #2
Thinks s/he gets paid by the post
grumpy's Avatar
 
Join Date: Jul 2004
Posts: 1,321
Re: retiree cash flow managment

Martha,

We need about $20K (pretax) to supplement our pension income. The bulk of that comes from dividends from individual stocks, large cap value mutual funds and a money market (tax free) fund. I try to keep three years worth in the money market fund. When it falls below that level I sell some of whatever is at or near its historical high and put that into the MM fund. If the whole market is down, I just wait for a better opportunity.

On your question re minimizing assets that pay income during accumulation phase - the dividends I received were taxed at a maximum of 15% not the marginal rate at which my regular income was being taxed. They were not enough to throw my total income into a higher marginal rate.

Grumpy
__________________

__________________
...you can check out any time you like, but you can never leave...
grumpy is offline   Reply With Quote
Re: retiree cash flow managment
Old 08-04-2005, 09:53 AM   #3
Moderator Emeritus
Martha's Avatar
 
Join Date: Feb 2004
Location: minnesota
Posts: 13,212
Re: retiree cash flow managment

Thanks Grumpy, that makes sense. I'd be interested in what others say too.

Unfortunately, in the preretirement phase we have been hit with AMT so the lower tax rate on dividends hasn't helped us a lot.
__________________
.


No more lawyer stuff, no more political stuff, so no more CYA

Martha is offline   Reply With Quote
Re: retiree cash flow managment
Old 08-04-2005, 10:52 AM   #4
Thinks s/he gets paid by the post
greg's Avatar
 
Join Date: Jun 2005
Posts: 1,071
Re: retiree cash flow managment

Quote:
Originally Posted by Martha


Unfortunately, in the preretirement phase we have been hit with AMT so the lower tax rate on dividends hasn't helped us a lot.
Martha, I hate to stick my nose in other people's affairs , but I think you should tell your DH to buy more munis.

Dan Tien, as for you, Sam Spade and I are still watching out for any melding that might happen on this board.

--DH
__________________
Compounding: Never forget! Never not remember!
greg is offline   Reply With Quote
Re: retiree cash flow managment
Old 08-04-2005, 11:08 AM   #5
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 42,142
Re: retiree cash flow managment

Quote:
Originally Posted by Martha
Let me see if I can ask these questions in a way that makes sense. For retirees that are living off of their investments, how do you turn your investments into cash to pay your expenses? Do you just live off of dividends and interest ala the Norwegian Widow method? Do you keep a pile of cash around and live off of that? If so, how do you make the pile? Do you generate cash as part of rebalancing? From selling assets like mutual fund shares?
Martha, I'm very interested to see the responses you will get as I've been pondering the same questions. I realize I am fortunate because, unlike you, I do not have a DW who advocates converting all our assets to gold and hiding it in a hole in our back yard due to the imminent meltdown of the world economy, followed by plague, pestilence, yadda yadda. So our distrubution phase will not involve a shovel (I hope).

I retired at 58 1/2 and have enough after tax savings to fuel my budget until I begin a 4% (or less) withdrawal from IRA's at 59 1/2. I will combine my IRA withdrawals with spending after tax savings from 59 1/2 to 62 to "replace" the SS income I expect to begin drawing at age 62. This should keep me in the 15% tax bracket until SS kicks in.

When I rolled over my 401(k) from mini-megacorp to an IRA at Vanguard, I kept enough in a money market account to fund the first year of IRA withdrawals. But from 60 1/2 forward, I need to have a plan that addresses the questions you are asking.

One option I've considered is to start by withdrawing from a couple of small IRA's we have outside Vanguard. They have higher expenses than I would like but have perfomed OK for the past several years so I have not taken the time to consolidate. They would fund the second and third years of my IRA distribution phase. After that, I'm considering using a combination of the Norwegian Widow method and the sale of fund shares to maintain a cash fund equal to one to three years of expected drawdown. I would hope to do a little market timing of the sale of those funds in conjuction with rebalancing whenever possible.

Other suggestions?

REW
__________________
Numbers is hard

When I hit 70, it hit back

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Re: retiree cash flow managment
Old 08-04-2005, 12:29 PM   #6
Recycles dryer sheets
 
Join Date: Nov 2003
Location: Charlotte
Posts: 360
Re: retiree cash flow managment

Have been taking from roll-over IRA for almost a year.* Vanguard makes handling this very easy.* Since retiring 5 years ago have* rebalanced and planned budget annually.* Most of anticipated* expenses are now in money markets (one in and one outside IRA).* Also route dividends within the IRA to its money market.* *For past year have exchanged $ from IRA to taxable money market monthly with minimum federal and state tax withholding. I skip this in December to take a one time withdrawal of the $ i deem appropriate and with the tax withholdings needed to "true up" with anticipated taxes.

Portfolio is slice and dice, but have learned to appreciate those dividend stocks, including REITs.* Non-equity is split between intermediate term bond funds (GNMA and High Yield Corp) which throw off dividends in IRA, and IBonds and a 5 year CD ladder.* The maturing CD can be reinvested in the ladder each year or kept to fund expenses in a bad market year ala Frank Armstrong.

Bill* *
__________________
WilliamG is offline   Reply With Quote
Re: retiree cash flow managment
Old 08-04-2005, 12:47 PM   #7
Thinks s/he gets paid by the post
 
Join Date: Feb 2003
Location: Mesa
Posts: 3,588
Re: retiree cash flow managment

Well . . . I can talk about plan A, plan B and reality.

plan A:* I originally set April 2001 as my target retirement date.* My plan was to sell a small amount of my great equity gains in the last year before I retired and buy a 5 year bond ladder.* But, of course, a year before I retired many equity gains disappeared.* I was not comfortable retiring into the economic mess of 2001, so I postponed retirement.

plan B:* During my extended work period, I built a 5 year bond ladder and also added to my I-bond position.* The sum of these investments represents about 7 years worth of spending.* My plan was to move the funds from maturing bonds into my mm account and live off of this.* The I-bonds were emergency funds.* Each year when I rebalanced, I would replenish my bond ladder (1 year's spending) with bonds that mature in 5 years. If at rebalance time the investment climate was such that I did not want to sell anything to buy 5 year bonds, I could always delay replenishing -- as much as 6 years.

reality:* DW and I did not really completely retire and we have other income streams.* I now tell people that I am 3/4 time retired.* I work almost 1/4 time for a local start-up and after retireing from her engineering career, DW finds that she enjoys substitute teaching when we're in town.* Add this income to the royalties from my books and we have not had to use this bond ladder-to-mm-to expenses method.* So I've simply recycled my maturing bonds back into 5 year bonds.* *
__________________
sgeeeee is offline   Reply With Quote
Re: retiree cash flow managment
Old 08-04-2005, 12:55 PM   #8
 
Posts: n/a
Re: retiree cash flow managment

My current thoughts on what I will do when in the distrubution phase are based on (1) no market timing allowed, (2) reverse DCAing, and (3) maintaining target allocation. *

So, that would mean at the beginning of the year I decide how much we will take out, and every month we take out 1/12th of that, and choosing from whichever fund or asset is above its target allocation.


__________________
  Reply With Quote
Re: retiree cash flow managment
Old 08-04-2005, 01:02 PM   #9
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,620
Re: retiree cash flow managment

Quote:
Originally Posted by Martha
Let me see if I can ask these questions in a way that makes sense.* For retirees that are living off of their investments, how do you turn your investments* into cash to pay your expenses?* Do you just live off of dividends and interest ala the Norwegian Widow method?* Do you keep a pile of cash around and live off of that? If so, how do you make the pile?* *Do you generate cash as part of rebalancing?* From selling assets like mutual fund shares?
If you're not happy with the answers will you be keeping your job? *That's a lot of pressure! *(Just kidding.)

All our retirement portfolio's dividends & interest are distributed to our brokerage account's MM fund. *We do the same with Tweedy, Browne's distributions (our only mutual fund) via EFT. *Most of our bills are paid from the brokerage account (Fidelity's free electronic bill paying) and the rest are paid from my checking acount (EFT). *It's pretty well balanced. *My military pension is direct-deposited into my checking account and the mortgage payment is deducted a few days later. *I also pay the property taxes & estimated federal taxes from checking. *We transfer some cash from checking to the brokerage account once or twice a year for the higher interest rate.

At the beginning of each year we want to have a year's expenses in the brokerage's MM and another year's expenses in a CD. *On the first business day of January (an arbitrary choice) I'll liquidate enough of whatever's had the best year to bring us up to those levels. *We skipped 2003 liquidations but for the last two years we've sold Tweedy from our taxable account. *Tweedy took off like a rocket last month and unbalanced the asset allocation so we liquidated another years' worth of expenses last week. *We'll probably skip next January's sale. *

If our portfolio tanks next year (no 2006 gains from any of our investments) then we'll use up the MM and start in on the CD. *After the CD is gone we'd sell whatever investments had lost the least. *If our portfolio kept losing money then in "bear year" #4, #5, #6... we'd probably think about cutting back on expenses.

I'm glad Tweedy is doing so well because that makes it easy to liquidate our only actively-managed fund (with the highest expenses). *We're selling off the taxable account first to let the IRAs continue compounding. *The vast majority of the shares were purchased in the '90s so all taxes are long-term cap gains.

Our household's in-depth financial analysis discussions go something like this:
Me: *"Wow, look at how much this fund has risen!"
Spouse: *"Sell!"

Quote:
Originally Posted by Martha
A related question is moving from the acquisition phase to a distribution phase. *At a high tax bracket due to earnings, a person might chose to minimize assets that pay an income since so much of that income goes to taxes. *Do you gradually drift into a new type of portfolio? *
Ah, the baby-boomer liquidation question, where the retiring boomers kill the stock market by fleeing it en masse. *When you ER are you guys going to sell all your stocks and buy bonds? *Can you let us know a couple days beforehand?

But seriously, we haven't moved anything for retirement reasons although I can understand the desire to do so. *We bought the DOW Dividend ETF (DVY) because it looked like an underpriced large-cap value fund but I've been surprised at my happy emotional reaction when the dividends pop up in our account. *

You saw TH completely overhaul his portfolio last month for their life circumstances and I think he tries to preserve his principal while living entirely off the dividends.

Hopefully one of you qualifies for the IRS term "real estate professional" if you need more deductions from rental real estate losses. *I started putting that on our tax returns the year after I retired.
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Re: retiree cash flow management
Old 08-04-2005, 01:04 PM   #10
Thinks s/he gets paid by the post
charlie's Avatar
 
Join Date: Mar 2004
Location: Dallas
Posts: 1,211
Re: retiree cash flow management

Martha, my approach is similar to those above. *I have Vanguard
transfer a regular monthly amount from my IRA money market
account to a taxable money market. *My wife then writes checks
on the taxable MM for household expenses. *All dividends and
cap gains in my IRA are deposited in the IRA MM account. *I keep
about 3 years of draw down in the IRA MM and use it to rebalance
the stock funds and maintain the overall allocation to 50/50
stocks/bonds and cash. *

Our after tax funds are also allocated 50/50. *All dividends and
cap gains are deposited in a separate MM which I use to pay
the big expenses like insurance and taxes.

As you may recall, I own a laundromat which provides a modest
monthly cash flow. *I maintain a separate checking account for
the business which is used to pay all business related expenses.
The cash flow is used to pay down a home equity loan and fun
expenses like meals out, gifts and trips. *

Cheers,

Charlie *
__________________
charlie is offline   Reply With Quote
Re: retiree cash flow managment
Old 08-04-2005, 01:12 PM   #11
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 42,142
Re: retiree cash flow managment

Quote:
Originally Posted by TromboneAl
My current thoughts on what I will do when in the distrubution phase are based on (1) no market timing allowed, (2) reverse DCAing, and (3) maintaining target allocation.
If one of the selling points of DCA in the aquisition phase is that you buy more shares when the price is low an fewer shares when the price is high, doesn't reverse DCA work against you for the very same reason? Why wouldn't you at least attempt to do some limited market timing? (If your answer is your nest egg is so large it doesn't really make any difference, don't bother to respond. ).

REW
__________________
Numbers is hard

When I hit 70, it hit back

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Re: retiree cash flow managment
Old 08-04-2005, 01:16 PM   #12
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: retiree cash flow managment

I have found that life (and investments) are unpredictable, so I take a pretty flexible approach.

We use a traditional bank checking account with ATMs, walk-in branches, etc. * *When the balance drops below about 1 month's expenses, I refill the account to cover expenses for about the next 3 months.

Sometimes the account magically fills itself (e.g., if I sold a car, got paid for some part-time gig, etc).

In the background, various investment accounts are cranking out cash (including a 10-year bond/cd ladder). * Periodically, I decide what to do with the cash (reinvest, transfer to checking, etc).

I don't want anything to be too automatic, because I like market timing. *

Although, I do tend to automatically reinvest dividends for two reasons: 1) the tax hit on dividends is relatively low, and 2) my brokers/funds are pretty good at figuring out my cost basis even with all those little dribs and drabs.
__________________
wabmester is offline   Reply With Quote
Re: retiree cash flow managment
Old 08-04-2005, 01:17 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Dawg52's Avatar
 
Join Date: Feb 2005
Location: Central MS/Orange Beach, AL
Posts: 7,444
Re: retiree cash flow managment

My plan as of now is to put one years worth of required living expenses in a money market account. The balance will be divided between a ladder of cd's/bonds and the rest in mutual funds for growth. Now my mutual funds will be balanced funds so my overall split will be something like 34% stocks, 33% bonds, 33% cash(cd's). I can easily live off the income from the bonds and cd's. I know that is a pretty conservative mix but it works for me. If cd rates tank from now to 1/2007 I may have to adjust a little. Hopefully cd rates will go up some from here. Time will tell. *
__________________
Retired 3/31/2007@52
Full time wuss.......
Dawg52 is offline   Reply With Quote
Re: retiree cash flow managment
Old 08-04-2005, 01:47 PM   #14
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,620
Re: retiree cash flow managment

Quote:
Originally Posted by REWahoo!
If one of the selling points of DCA in the aquisition phase is that you buy more shares when the price is low an fewer shares when the price is high, doesn't reverse DCA work against you for the very same reason? Why wouldn't you at least attempt to do some limited market timing?
Well, DCA as a quantitative investment strategy is flawed whether you're buying OR selling. Its behavioral advantage is that it counteracts investor psychology by forcing disciplined periodic investment without having to decide whether the market's going up or down that month.

So theoretically reverse DCA should counteract investor psychology just as well. And while DCA may miss out on a rising market, reverse DCA in a rising market will keep you from getting piggish. There's no solution for reverse DCA in a declining market, unless you count "reduce expenses" as a form of solution.

Quote:
Originally Posted by DOG51
My plan as of now is to put one years worth of required living expenses in a money market account. The balance will be divided between a ladder of cd's/bonds and the rest in mutual funds for growth. Now my mutual funds will be balanced funds so my overall split will be something like 34% stocks, 33% bonds, 33% cash(cd's). I can easily live off the income from the bonds and cd's. I know that is a pretty conservative mix but it works for me. If cd rates tank from now to 1/2007 I may have to adjust a little. Hopefully cd rates will go up some from here. Time will tell. *
My parents-in-law have felt a little cramped over the last few years with a 100% bond/CD portfolio. Stocks are a good idea.
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Re: retiree cash flow managment
Old 08-04-2005, 04:01 PM   #15
Recycles dryer sheets
SteveL's Avatar
 
Join Date: Aug 2005
Posts: 380
Re: retiree cash flow managment

Okay,
If it costs X to live each year including your travel and fun $$, you look ahead and mentally figure out how you will fund say the first five years. I make a list which shows what I plan to use to pay for each of the next five years. Obviously, interest and dividends are the first dollop in the annual pot. I funded a big portion of the need with a 5yr ladder. Generally, there isn't much point going out more than five years because the yield curve has been so flat. Since I know I will need the bucks, these funds are in sure things like either treasuries, or CD's. As a CD Matures, I split off the part I need for the year, and buy another CD for the ladder with what is left. Of course, I have the usual 60/35/5 allocation, and consider the ladder part of the 35% bond allocation.
__________________
Retired -- 2001
SteveL is offline   Reply With Quote
Re: retiree cash flow management
Old 08-04-2005, 10:22 PM   #16
Thinks s/he gets paid by the post
charlie's Avatar
 
Join Date: Mar 2004
Location: Dallas
Posts: 1,211
Re: retiree cash flow management

REW, I agree with you about reverse DCA being a bad thing in the
distribution phase. In theory, one should sell an equal no. of
shares each month ...... thus receiving more when the market is
up. In practice, I think that is too complicated for me and I don't
like the uneven cash flow. Instead, it seems better to me to
just withdraw a regular amount from the MM and replenish the pot
at the end of the year if the market has been good or bring the
stock funds back up to the mark if the market was bad.

We sort of got used to the discipline of living off a regular salary
during my working years and that seems comfortable.

Cheers,

Charlie
__________________

__________________
charlie is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Rental Property: Buy for cash flow, or for appreciation? bearkeley FIRE and Money 8 04-20-2006 03:23 PM
Cash Flow (Spendable Income) in Retirement robert FIRE and Money 15 11-21-2005 08:26 AM
Re: Cash Flow After Expenses & Investment eryx Young Dreamers 8 11-09-2004 08:33 PM
Funding your cash flow WilliamG FIRE and Money 1 04-15-2004 08:05 AM
Retire early, live longer dory36 Other topics 6 02-27-2004 09:36 AM

 

 
All times are GMT -6. The time now is 03:42 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.