Retirement withdrawal variability

[TwoByFour]

I retired in 2013. Before retiring I did a lot of research on optimum withdrawal strategies and settled on a modified fixed-percentage scheme.

Basically, I take a percentage of our total assets, liquidate it, and transfer that into our checking account once a quarter. If the checking account has unspent funds from the previous quarter, I discount the amount to transfer by that amount and leave it invested. I determined the percentage we use from a budget based on past spending and how we planned to spend our retirement.

What I have found out is that we always have left-over money from the previous quarter, often by a substantial amount. The reason why is partly because our assets have grown since we retired (which is a good thing) but more so because of the variability in spending.

Our spending is about 60% recurring costs, that is, predictable monthly costs. The rest is non-recurring costs like a new roof or replacing the car, plus big-ticket discretionary spending like traveling. But the latter are infrequent, maybe every few years.

What I have found is that because we always have left-over funds each quarter that I tend to think we have extra money to spend and we are living under budget and I am tempted to spend up to the amount of the withdrawal. But that is not the case because the extra is really unspent non-recurring costs which need to be banked up for when it is needed. I should only be withdrawing the amount to cover recurring costs.

So basically, I have recalculated our withdrawal percentage based on recurring costs rather than total budget. Money for infrequent non-recurring costs stays invested, to be grabbed not as part of a scheduled withdrawal but when needed. Part of our portfolio is very liquid so I can get at it quickly if need be.

I believe that dealing with the variability in spending is an issue no matter what withdrawal strategy is being used. This whole experience makes me wonder if a withdrawal strategy is even needed. Some people just take out money on an as-needed basis and don't really have a strategy. I am curious what others are doing.

 

[Souschef]

That is basically what we do. Our SS and small pensions cover our fixed expenses. I use my RMD to cover all other things.

 

[treeofpain]

Sounds like a very reasonable plan.

 

[Sunset]

We track our spending, and take out enough to pay the bills.

Since we track the spending, we can see if we are starting to go hog wild or need to spend some more.

 

[marko]

We track our spending, and take out enough to pay the bills.

Since we track the spending, we can see if we are starting to go hog wild or need to spend some more.

We've found that our spending year over year is almost the same; within a few thousand bucks.

Aside from our core spending (taxes, food, utilities, travel) our variable spending also remains the same even though it's for different things each year (roof, new kitchen, new car, boat repairs).

Seems that our lifestyle regulates our spending more than the other way around. We live a certain way and coincidentally it figures out to a 4% WR.

 

[Bryan Barnfellow]

I used to live in a condo in the US and learned how the Homeowners' Association would budget (and set aside) each year a certain amount for projected long-term capital costs--infrastructure updates, replacements, etc.

My wife and I use the same approach. In our budget every line is coded as either current expense or long term, and each has a Rollover (Y/N) notation. That way, we project/estimate long term costs -- for example our plan to apply for Swiss citizenship will cost about 7,000 Swiss Francs altogether -- and then divide by the number of years until projected expenditure. The Rollover notation reminds us that at the end of the each year, we need to be sure to rollover the funds and not spend them as "surplus".

-BB

 

[RunningBum]

I calculate my withdrawal amount "available" each year based on my VPW plan, but I only withdraw what's needed, when needed. It works for me because I've been under the amount available each year. I track the total outflow out of my checking account (including CC payments) each month on a rolling 12 month basis to keep track of how I'm doing, and note large special expenses that could put me over for a little while or even a full year. If I was regularly over, I'd need a more disciplined method. Since I'm not, I don't worry about it. And between the underspending and good investment returns, with VPW I'm getting further ahead each year.

 

[OldShooter]

... Some people just take out money on an as-needed basis and don't really have a strategy. ...

Yup. Guilty. Your point about varying needs is, I think, underappreciated here.

Our spending varies a lot due to charitables, travel, a car once in a while, etc. Also, as we age and stay home more, I expect that our needs will drop. So at each year end I will eyeball our draw as a % of assets but I don't lose any sleep if it is a bit over 4%. If things were to ever get tight, the 30% or so of our spending that is charity and travel is an easy target for belt-tightening.

 

[audreyh1]

Our retirement income varies greatly as it depends on the annual value of our retirement portfolio.

We draw annually. We have an annual budget and track our spending.

We take out the full amount allowed by our % of portfolio method, and at the end of the year leave the unspent funds in our short term accounts to use whenever we please or however we may need in the near future.

We don’t have any direct heirs (children), and I personally don’t believe in reinvesting withdrawn funds back into long-term riskier investments. Our goal is to draw down a good chunk of the retirement portfolio during our lifetime. We also hope to gift much while we are still alive.

We’ve been retired 19 years. Our spending has gradually increased as our assets have grown. I don’t think we’ve gone hog-wild and we are still living well below our means.

 

[Bir48die]

I "pay" myself twice a month. Set amount each time that comes from a budget that I put together while I was working (had started to lose interest like we all do). Try as best I can to adhere to that throughout the year.

This year got more back from taxes due to over taxation of my deferred comp (corrected now) so threw that into my travel fund and gave us a couple of interim trips to help keep our sanity.

Interesting point: A couple weeks ago I thought I would "true up" some spreadsheets that I put together three years ago. Showed various pieces of my portfolio and in total plus estimated withdrawals by year. Three years in all my assumptions were within $10k for the portfolio which was 1/2 of 1%. Kind of proud of that.

 

[walkinwood]

We do more or less what the OP does with one difference.
We have an "emergency fund", which is also fully invested, but isn't included when we determine the fixed percentage withdrawal for the year.


The fund is large enough to fund a few years of Out of Pocket expenses for our bronze plan, a roof, a new car etc. That's where the unexpected expenses come from if the total for the year exceeds the fixed percentage withdrawal.



Its just mental accounting, but it worksfor us.

 

[TwoByFour]

OP here. By the replies, it sounds like everyone has his/her own way of handling things, and they all seem to be working. Which is good. Makes me think that all the books and discussions about complicated withdrawal strategies are interesting but maybe not as important as I once thought.

 

[Cut-Throat]

I believe that dealing with the variability in spending is an issue no matter what withdrawal strategy is being used. This whole experience makes me wonder if a withdrawal strategy is even needed. Some people just take out money on an as-needed basis and don't really have a strategy. I am curious what others are doing.

Of course Spending is all over the map, but withdrawals don't have to be! .... That is what a lot of people confuse....


I follow a strict VPW withdrawal system. Moving my Withdrawals to a 'Cash Spending Account' never to be re-invested again.... This Cash account funds spending from mundane annual expenses to One Time Car Purchases or Home Remodeling. It is a simple matter of Budgeting from the Cash Account... Something we've all done our whole working lives.. Retirement is no Different.


Again, Don't confuse Spending with Withdrawals. --- Two completely different things.

 

[pb4uski]

.... I am curious what others are doing.

When I am assessing whether we "have enough", I include in our annual spending our "every-day" spending, plus provisions for periodic car replacements (cost of car divided by years we keep them) plus periodic roof and furnace replacements, travel, etc.

When I transfer money from our retirement assets to our checking account, it is based on the every-day spending needs (fixed amount per month)... if we have something beyond that I do a special transfer.

 

[Eagle43]

Of course Spending is all over the map, but withdrawals don't have to be! .... That is what a lot of people confuse....


I follow a strict VPW withdrawal system. Moving my Withdrawals to a 'Cash Spending Account' never to be re-invested again.... This Cash account funds spending from mundane annual expenses to One Time Car Purchases or Home Remodeling. It is a simple matter of Budgeting from the Cash Account... Something we've all done our whole working lives.. Retirement is no Different.


Again, Don't confuse Spending with Withdrawals. --- Two completely different things.

Your cash account. Is that a money market account, CD s, or just a bank savings account? I've reinvested RMD money because I don't need it. That's over. I've got cds with Navy Fed CU and Pentagon Fed CU. I like your idea of never reinvesting withdrawals because to do so leaves you at risk of a market downturn. So, next years RMD comes out and get put somewhere safer. At 75, the pile doesn't need to grow anymore, just last for 20 years or so.

 

[Cut-Throat]

Your cash account. Is that a money market account, CD s, or just a bank savings account? I've reinvested RMD money because I don't need it. That's over. I've got cds with Navy Fed CU and Pentagon Fed CU. I like your idea of never reinvesting withdrawals because to do so leaves you at risk of a market downturn. So, next years RMD comes out and get put somewhere safer. At 75, the pile doesn't need to grow anymore, just last for 20 years or so.

It has been at Ally - (Savings Account), now getting about 1.8% --- But I have been toying with the idea of moving back to the Vanguard Prime Money Market which is a shade over 2% yield now...

 

[audreyh1]

Your cash account. Is that a money market account, CD s, or just a bank savings account? I've reinvested RMD money because I don't need it. That's over. I've got cds with Navy Fed CU and Pentagon Fed CU. I like your idea of never reinvesting withdrawals because to do so leaves you at risk of a market downturn. So, next years RMD comes out and get put somewhere safer. At 75, the pile doesn't need to grow anymore, just last for 20 years or so.

I do the same as Cut-throat for the same reasons you mention, and I use a combination of high yield savings accounts, short-term CDs, treasury-bills and even short-term bond funds. Spread over several durations.

 

[NW-Bound]

I believe that dealing with the variability in spending is an issue no matter what withdrawal strategy is being used. This whole experience makes me wonder if a withdrawal strategy is even needed. Some people just take out money on an as-needed basis and don't really have a strategy. I am curious what others are doing.

Yes, I draw money as needed.

My WR for the trailing 12 months is 2.6%, and I have not claimed SS yet.

Do I really need a strategy?

PS. I had large non-recurring expenses in the past. I do keep an eye on these, and look at expenses over the past 3 and 5 years to make sure that the total expenses did not exhibit a bad trend. For example, if I find myself spending a lot of money on home repair/remodel, then it tells me that I should not have 2 homes, or that I need to downsize.

 

[Dd852]

I track both a past 12-month spend and a past 60-month spend, figuring that most big surprise items - new computers, repainting the house, emergency repairs - will get captured in the five year net. As long as both numbers annualized are below 3% of liquid assets I don’t worry any further.

 

[TwoByFour]

I follow a strict VPW withdrawal system. Moving my Withdrawals to a 'Cash Spending Account' never to be re-invested again.... This Cash account funds spending from mundane annual expenses to One Time Car Purchases or Home Remodeling. It is a simple matter of Budgeting from the Cash Account... Something we've all done our whole working lives.. Retirement is no Different.

But retirement is different - cash flow is dependent upon investments (and SS, but for us income from investments dominate our cash flow) so it is crucial to keep investments well funded. This is why I keep money that is budgeted for withdrawal but unspent, invested. The key to make that work, I believe, is to maintain a range of liquidities in those investments. Cash of course is the most liquid but the least return. But our next most liquid is 1-year bond (or CD) ladder, and so on.

The other part of this is I don't do liability-matching. That is, there is only one investment pool rather than separate ones for each liability. In this low interest climate, equities are going to be the top performer, and my one investment pool is 60% equities, so why wouldn't I put as much as I can into that pool? The fixed income portion has a variety of liquidities, so I am not worried about needing to pull money out of the pool in an emergency.

 

[Cut-Throat]

In this low interest climate, equities are going to be the top performer, and my one investment pool is 60% equities, so why wouldn't I put as much as I can into that pool?

Risk.... Why put up with unnecessary risk, when you've already won the game? I keep reading these 'Equities always go up posts'.



Risking Money that you need for money that you don't need is a very bad strategy.

 

[RunningBum]

Risk.... Why put up with unnecessary risk, when you've already won the game? I keep reading these 'Equities always go up posts'.



Risking Money that you need for money that you don't need is a very bad strategy.

This is excess money, money you clearly didn't need, being reinvested. Few of us can be certain we've won the game, so I like to keep playing (investing) to add to my stash in case something bad does happen--like high inflation, for example. Sticking to my AA is what reduces my risk. I don't think there's anything that will eliminate my risk.

 

[OldShooter]

Risk.... Why put up with unnecessary risk, when you've already won the game? ...

Well, I think it depends on what game you're playing or maybe who you are playing the game for.

If you're playing strictly for yourself then stopping may well be a wise strategy.

In our case we are playing for our two sons' trusts and the charities in our estate plan. Since the trust funding is very much a long term game, market volatility is not risk. It is just something to be expected and ridden out. So in continuing to play, we not only don't have "unnecessary" risk we really don't have much risk at all. Probably no more risk than there is in a 100% fixed income strategy due to possible high future inflation.

 

[thatguy]

With younger DW the last RMD & SS won't phase in till I'm 81. I take my RMD late in the year and stick it a dedicated savings account. I

 

[Cut-Throat]

This is excess money, money you clearly didn't need, being reinvested.

Money that is not needed?