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Retirement Income: fixed income, systematic withdrawals or annuities?
Old 02-24-2014, 08:32 AM   #1
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Retirement Income: fixed income, systematic withdrawals or annuities?

Just curious to see how members here structure their AA for funding expenses in retirement.

Do you have enough to totally fund retirement expenses from fixed income sources?

Do you have to rely on systematic withdrawals to cover all expenses - and do you use the 4% 'guideline' or a variation of it?

Or, did you go the low risk route and buy an annuity?

Or - maybe a combination of these?

Looks like for my situation, I will use the systematic withdrawal approach - just not enough saved to go fixed income and cover all expenses.
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Old 02-24-2014, 08:58 AM   #2
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Originally Posted by BBQ-Nut View Post
Looks like for my situation, I will use the systematic withdrawal approach - just not enough saved to go fixed income and cover all expenses.
With the exception of those who have significant pensions perhaps combined with SS, I think you'll find relatively few who don't follow your planned path.
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Old 02-24-2014, 09:18 AM   #3
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I plan my annual withdrawals based on anticipated expenses, which are less than 3% of investable assets. As I have a corporation, first I take a dividend from corporate assets to optimize the use of my capital dividend account and minimize corporate taxes (my accountant advises me on this). I have several years' worth of corporate withdrawals in a GIC ladder, so these dividends come from fixed income. I top this up with personal portfolio withdrawals from my non-tax sheltered account, using the total portfolio approach. This year I am also considering a withdrawal from my RRSP (tax sheltered) in order to capitalize on being in a low tax bracket; my objective is to reduce taxes later in life when the RRSP will be subject to RMDs. If I need additional money later in the year, I can take it from my TFSA (where I have a GIC maturing late in the year) and can reinvest that early the following year.

I know it sounds complicated. I withdraw funds in tranches two or three times per year and do not make systematic monthly withdrawals. I do not have an annuity or a pension.
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Old 02-24-2014, 09:18 AM   #4
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There's no universal answer, I am sure there are some in each camp you describe (and other alternatives) and combinations of sources would be most common. There have been various related polls over the years if you care to do a search.

Relative to the general chart below, I get the impression ER.org members withdrawals from
- savings & investments would be more than 11%,
- earnings less than 30% and
- pensions more than 18%
Not sure where the charts put annuities, maybe with pensions? FWIW...
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File Type: jpg MajorSourcesRetireIncome_Figure.jpg (94.6 KB, 35 views)
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Old 02-24-2014, 10:31 AM   #5
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Looks like for my situation, I will use the systematic withdrawal approach - just not enough saved to go fixed income and cover all expenses.
This is our situation. Our withdrawal rate right now is 4% and the plan is to keep inflation adjusted spending at current levels.

Even if we had enough for all fixed income / annuities, I wouldn't do it, because the inflation risk to too great. Many of the challenges we have faced were easier to deal with because we had the cash reserves.
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Old 02-24-2014, 10:42 AM   #6
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Originally Posted by BBQ-Nut View Post
Just curious to see how members here structure their AA for funding expenses in retirement.

Do you have enough to totally fund retirement expenses from fixed income sources?

Do you have to rely on systematic withdrawals to cover all expenses - and do you use the 4% 'guideline' or a variation of it?

Or, did you go the low risk route and buy an annuity?

Or - maybe a combination of these?

Looks like for my situation, I will use the systematic withdrawal approach - just not enough saved to go fixed income and cover all expenses.
Last year 78% of my spending came from my portfolio. My portfolio spending was slightly less than my dividends, which were 2.43% of my total portfolio this year.

I think that 3.5% would be fine for someone like me, but did not happen to spend that much. I admit that I do feel a lot safer spending less than my dividends, and I have never spent more than my dividends so maybe there is a mental barrier to exceeding that amount. The "Norwegian widow" mentality has been discussed on the board in the past and perhaps that is my viewpoint. However, logically I know I can spend more so I may intentionally expand my lifestyle a bit in future years.

When I claim SS, I won't have to rely on my portfolio much at all, assuming my spending does not rise beyond inflation. But then, it just might.

Each year during the first week in January I withdraw an amount from my portfolio that I estimate will cover my spending for that entire year. This year I optimistically withdrew 2.8%. If I spend less than my January withdrawal (which I always have), then I will effectively return the remainder to my portfolio next January. If I spend more (which is allowable! as explained above), then I guess I will have to make another withdrawal later in the year.
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Old 02-26-2014, 10:25 AM   #7
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My retirement income will change as I age and things like SS and pensions begin. Here are the planned stages of my retirement income.

52 to 55
Rental income plus withdrawals from taxable accounts. The annual withdrawals will be 3% of my total portfolio. IRA to ROTH rollovers

55 to 59.5
Rental Income and state pension and IRA to ROTH rollovers

59.5 to 66
Rental Income, state pension and more rollovers.

66 to...........
Rental Income, state pension, company pension, UK and US SS.
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Old 02-26-2014, 09:41 PM   #8
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My retirement income will change as I age and things like SS and pensions begin. Here are the planned stages of my retirement income.

52 to 55
Rental income plus withdrawals from taxable accounts. The annual withdrawals will be 3% of my total portfolio. IRA to ROTH rollovers

55 to 59.5
Rental Income and state pension and IRA to ROTH rollovers

59.5 to 66
Rental Income, state pension and more rollovers.

66 to...........
Rental Income, state pension, company pension, UK and US SS.

You bring up an excellent point about situations changing over time.

In my case - if I retire at 55, then my expenses will be covered by a modest pension and systematic withdrawals from after tax assets and my 401k.

From 55 to 62, my withdrawal rate will be 5.5% across after tax and 401k assets (3.75% across all assets that include my Roth IRA).

But if I take SS at 62, along with some planned expenses going down and access to my Roth IRA, then my withdrawal rate will be 3.5%. However, if I delay SS benefits to 70, then my withdrawal rate will be over 4%.

Our house will be paid off when I turn 70 and the joyous RMD will kick in. Then between my forced 401k withdrawals, SS, and Pension benefits will cover all planned expenses with no further need to draw down on remaining after tax assets or my Roth, so my overall withdrawal rate will be mandated by the RMD.

If I haven't lost you - my point is that the 4% 'guideline' really doesn't 'fit' with what I see as different phases with different needs.
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Old 02-26-2014, 09:49 PM   #9
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You bring up an excellent point about situations changing over time.

In my case - if I retire at 55, then my expenses will be covered by a modest pension and systematic withdrawals from after tax assets and my 401k.

From 55 to 62, my withdrawal rate will be 5.5% across after tax and 401k assets (3.75% across all assets that include my Roth IRA).

But if I take SS at 62, along with some planned expenses going down and access to my Roth IRA, then my withdrawal rate will be 3.5%. However, if I delay SS benefits to 70, then my withdrawal rate will be over 4%.

Our house will be paid off when I turn 70 and the joyous RMD will kick in. Then between my forced 401k withdrawals, SS, and Pension benefits will cover all planned expenses with no further need to draw down on remaining after tax assets or my Roth, so my overall withdrawal rate will be mandated by the RMD.

If I haven't lost you - my point is that the 4% 'guideline' really doesn't 'fit' with what I see as different phases with different needs.
When I reach 66 I'll probably take SS....although I might defer. Anyway if I do take the money my entire spending should be more than covered by fixed income so I'll be back in the accumulation phase and reinvesting dividends and capital gains.

US SS =$ 20k (after WEP)
UK SS = $18k
Company pension = $5k
State pension = $26k
Rental income =$20k

The best thing is they are all COLA'ed
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Old 02-26-2014, 10:33 PM   #10
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Just to reinforce others' point that "it isn't just one approach or one number"...

Retired at 50: DW working with health insurance, burning about 3.5% of portfolio per year (lucky so far that good markets have resulted in growing portfolio.)
At 55: Pension kicks in, burn drops to near zero
At 57: DW retires, burn at 2%
At 67: Social Security plus no mortgage, burn about 0.8%
Slowly rises to 2% by the time I'm 100 due to non-COLA pension.

These are all rough approximations as I learn about ROTH conversions, decide how to optimize SS for our situation, insure for long term care, and successfully launch two DD from the nest. Plus the occasional financial crisis, tax law change, and the like. Make a plan, but stay flexible!
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Old 02-26-2014, 10:49 PM   #11
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It's always interesting to see how folks attack this problem. I started ER 8 months ago with 2 years of expenses in an Ally savings acct. Each month I have an automatic transfer to my checking account to cover living expenses. After a year I will rebalance my lazy portfolio and replenish the Ally acct. Helps me to sleep better knowing I have that buffer in the event I need to change course; i.e. return to the working world.

Once I'm 62 my pension and SS will fully cover expenses and then some. As such, current withdrawal rate is 5.27% of total portfolio. My plan is to use the Guyton SWR spreadsheet to adjust WR if needed. So far off to a good start and spending well below what ESPlanner says I could spend.
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Retirement Income: fixed income, systematic withdrawals or annuities?
Old 02-27-2014, 03:20 AM   #12
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Retirement Income: fixed income, systematic withdrawals or annuities?

I am planning for a combination of deferred annuities, SPIAs, and systematic withdrawals. I expect my conservative AA to remain the same until I die.
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Old 02-27-2014, 06:20 AM   #13
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Although not yet retired, the plan is to base my withdrawal rate on 3.5% of investments and increase the number each year by 3% to cover inflation. I currently hold a 70/30 allocation with the bond portion in a qualified account. I plan on building a 3 year fund buffer in a combination of a high yield savings account and very short term bond fund (VFSUX) shooting for a 2% yield.
The 3% withdrawal number will be revised each year based on market performance. If the market is up, the number will revise upward to a maximum of 4.5%. If the market is down, the number will revise downward to a low of 1.5%. The attempt is to smooth my annual budget by drawing on or adding to the cash portion of the portfolio while reducing the drawdown of the overall account. I am still studying various approaches but this one appears the most viable to me.
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Old 02-27-2014, 07:21 AM   #14
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Most of my monthly income in ER comes from dividends generated from a bond fund I began investing in after I cashed out a big blob of company stock. However, some of my expenses are not monthly so I have to build up a surplus from one or more months to cover those expenses.

I have additional dividends from other sources, some monthly and some quarterly, I can tap into to cover expenses if my cash flow becomes too uneven. I went on a small spending spree in the last 2 months and have some other big bills between now and early April so I will invoke this backup plan temporarily to stabilize things. Still, all of this without having to tap into my principal holdings is all good.
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Old 02-27-2014, 07:42 AM   #15
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Dividends and Interest from Taxable Acct. 37%
Withdrawals from Tax Deferred 36%
DW's SS 14% I am waiting till 70.
CG from Taxable 13%
Effective Fed Tax Rate 5%
Withdrawal rate 2%

When I first retired, we lived entirely on income from the taxable account. Since the fall of interest rates to zero, we have employed a range of sources each year. It is never the same. I keep 7 to 8 % in cash or near-cash which mostly just sits there providing a security blanket against the next recession.
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Old 02-27-2014, 08:18 AM   #16
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Although not yet retired, the plan is to base my withdrawal rate on 3.5% of investments and increase the number each year by 3% to cover inflation. I currently hold a 70/30 allocation with the bond portion in a qualified account. I plan on building a 3 year fund buffer in a combination of a high yield savings account and very short term bond fund (VFSUX) shooting for a 2% yield.
The 3% withdrawal number will be revised each year based on market performance. If the market is up, the number will revise upward to a maximum of 4.5%. If the market is down, the number will revise downward to a low of 1.5%. The attempt is to smooth my annual budget by drawing on or adding to the cash portion of the portfolio while reducing the drawdown of the overall account. I am still studying various approaches but this one appears the most viable to me.
So, I gotta ask - aren't you concerned about the exposure to risk of the bond principal if rates rise - and relative to how equities are doing - wouldn't it be more prudent to be more heavy on equities for the short term?
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Old 02-27-2014, 08:24 AM   #17
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Heavy on equities? Aren't you afraid that equities will drop by 10% or more? That's what equities do: they go down, they go up, they go down, they go up.

Wouldn' it be more prudent to have a set asset allocation of equities and fixed income to meet one's needs?
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Old 02-27-2014, 08:57 AM   #18
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Heavy on equities? Aren't you afraid that equities will drop by 10% or more? That's what equities do: they go down, they go up, they go down, they go up.

Wouldn't it be more prudent to have a set asset allocation of equities and fixed income to meet one's needs?
You're correct in saying equities go down, then go up, then go down and up. Over time the trend is up. The problem is bonds aren't as volatile. With interest rates so low and bond prices so high, the bond market may see a sharp drop in value (15% for a 2% interest rate increase for intermediate term bonds) but are unlikely to rebound within a few months or years as stocks typically do. The key with equity investing is to not be forced into liquidating assets while the market is down, so IMHO cash should replace bonds for now, but maintain the equities in your AA.
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Old 02-27-2014, 04:41 PM   #19
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So, I gotta ask - aren't you concerned about the exposure to risk of the bond principal if rates rise - and relative to how equities are doing - wouldn't it be more prudent to be more heavy on equities for the short term?
I am committed to my asset allocation based on my portfolio value and risk tolerance. Allocating more to equities is tantamount to market timing which I am trying to avoid. My 3 years of cash equivalent will let me ride out the drawdowns without influencing my standard of living. Asset allocation works whether you like it or not!
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Old 02-27-2014, 05:24 PM   #20
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I am committed to my asset allocation based on my portfolio value and risk tolerance. Allocating more to equities is tantamount to market timing which I am trying to avoid. My 3 years of cash equivalent will let me ride out the drawdowns without influencing my standard of living. Asset allocation works whether you like it or not!

There are reasons to change an asset allocation, one of which is a fundamental change in the reasons you chose that asset class in the first place. Bonds are in a bubble and the nation's debt is out of control with no hope of a political solution. The national debt is growing faster than the GDP or inflation. To me, this all adds up to a fundamental change in the worth of bonds. Eventually, people will stop buying our bonds or inflation will take a severe toll on the value of bonds by forcing interest rates up.
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