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Setting up my Retirement Paycheck
Old 01-18-2020, 01:30 PM   #1
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Setting up my Retirement Paycheck

In a few weeks, I am retiring and will receive the last paycheck of a 37 year career. Phew! (really, phew!)
It just occurred to me my checking account aka "my working account" is going to dwindle!

What did you do to "replace" your paycheck?

Did you start drawing from specific accounts? i.e. taxable or tax deferred?

Did you sell assets and move cash into your checking account?

I am just trying to wrap my head around all of this.
Thank you in advance for any comments!
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Old 01-18-2020, 01:40 PM   #2
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By the end of the month I pretty much know what next month's cash needs are. At that point, I sell off some taxable assets to fund the next month. I recently started my pension which covers about 40% of our expenses so I only need to cover the other 60% from taxable assets. I don't reinvest dividends so if there is money in the sweep account I pull from there first, then sell something else.
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Old 01-18-2020, 01:50 PM   #3
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This is somewhat related to the other thread you started, in that even though it's a different topic, a lot depends on your asset mix.

First, turn off any reinvestment you have for dividends and cap gains distributions in your taxable account. Send that money to your bank account. You also have your govt pension. Figure out what the shortfall is after those two, this is what you'll need to fund. Some people set up so that dividends and interest cover all of their expenses. From the other thread I'm not sure you have enough assets to do that, at least not without investing in some lower grade bonds, which have some risk.

Generally, what I do is sell from my taxable account, first harvesting any losses, and then taking any small gainers. You may be able to generate a lot of money from this but yet have small taxable income.

You could withdraw from tax-deferred instead, but every dollar you take from there is taxed. I prefer instead to convert that money to a Roth, where you pay taxes on the conversion but future gains are tax free.

One exception is if you have highly appreciated assets in your taxable account that you'd have to use. If you think you'll leave something for heirs, this is the best asset to leave for them since they'll get a stepped up basis when they inherit.

A lot of all this is up to you. Some people like the feel of a "paycheck" every month. What you might do in that case is to sell when you need to for the year and then transfer a set amount each month. Other people just sell as needed and transfer it to their account as needed. This works fine if you don't need budget discipline to keep from spending too much.

I recall from the other thread that you are cash heavy so you probably don't need to sell equities for some time.

Hope this gives you some direction.
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Old 01-18-2020, 02:50 PM   #4
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I think RunningBum pretty much nailed it.

In my case, I have an auto monthly sell from a bond fund in my after tax account (fund is close to par, so minimal cap gains). This is automatically sent to our checking account, and is about 75% of our annual spend, excluding taxes and lumpy expenses. It provides a base. Dividends, interest and cap gain distributions go to cash in the after tax brokerage account. Periodically (3-4 times a year) I transfer some of this to the checking account, to make up for shortfalls, taxes, and lumpy expenses.

With little cap gains from the selling, I then have more room for Roth conversions in the 12% bracket. I also buy CD's in the tIRA to offset the bonds being sold and keep the AA fairly stable.

The above will change when we both take SS at FRA. SS will more than compensate for the bond sales, so they will stop.

FWIW, I also have an after tax MM account, and a few CD's for an emergency fund (about 7% of total AA)
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Old 01-18-2020, 02:50 PM   #5
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When I was new to this retirement thing, I had a relatively healthy allocation of cash... initially 6% and then 5%... in an online savings account that would pay 1.7%-2.0% interest. I had a monthly automatic transfer on the first of the month from the online savings account to my local checking account that I pay my bills from. In addition, I changed my taxable account dividends to be transferred to the local bank account rather than paid in cash. The automatic transfer and taxable account dividends are sufficient to cover most of out exepenses, supplemented by occasional special transfers as needed. I would rebalance in December, with replenishing the cash being part of rebalancing.

Now, after 8 years of experience, I'm taking a slightly different tack. In December, I used what was left of the cash allocation to pay off our mortgage and a small balance on a car loan, trading receiving 1.7% for not paying 3.375% and 1.9%, respectively.

Rather than replenish cash in 2019, I just did a larger Roth conversion. Beginning in 2020, what I have a monthly automatic redemption from my Roth to the local bank account that I use to pay our bills of the same amount that is has been for the past few years.

I'll actually be able to make my annual Roth conversion a little higher because I'll have less taxable account interest and I think my overall structure will be a little more tax-efficient and simpler. I'll no longer have any tIRA distributions... only Roth conversions and then withdrawals from the Roth for spending.

Like RunningBum wrote, we also have some highly appreciated equities in our taxable account that generate tax-free qualified dividends that we also use for spending and my pension. We will leave the taxable account equities alone to grow an mot likely never get taxed becaused of the stepped up basis rules.
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Old 01-18-2020, 03:57 PM   #6
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In January, I withdraw a years worth of income and park it it in a high yield savings account. From there I send an amount to my checking account every month.

This really helped during the first two years when I had to get used to not having a “paycheck”. Then it becomes old hat.
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Old 01-18-2020, 04:01 PM   #7
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In January, I withdraw a years worth of income and park it it in a high yield savings account. From there I send an amount to my checking account every month.
+1. This is what I do, except that I make the withdrawal in December. I like to wait until the 4th quarter's dividends have been paid, so that I can sell the right amount of mutual funds in order to stay within certain income limits for HI purposes.
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Old 01-18-2020, 04:15 PM   #8
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Most of my etf's pay dividends about the same time, end of the quarter, so that's when I transfer taxable divs to my savings and reinvest (or not) the divs in my tax deferred. It still (after 4 years of ER) does feel odd to get influx of money only every 3 months instead of twice a month.
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Old 01-18-2020, 04:54 PM   #9
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I withdraw a years worth of income

This could involve liquidating equities or bonds or?
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Old 01-18-2020, 05:00 PM   #10
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Just do whatever works the best for your situation tax-wise, ACA premiums, etc. Doesn’t have to be nice and smooth like a paycheck.

For example I just prepaid a bunch of insurance and utilities to get 80,000 delta miles. Now no bills for awhile.

All the money comes from the nest egg or pensions or whatever so forget about the timing of things.
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Old 01-18-2020, 05:07 PM   #11
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I withdraw a years worth of income

This could involve liquidating equities or bonds or?
Whichever is overweighted in your AA plan. This is an easy way to rebalance.

Cash is another option. In http://www.early-retirement.org/foru...ns-101653.html a week ago you said you are 22% cash, 31% stocks, 47% bonds.

In October, http://www.early-retirement.org/foru...ns-101653.html says you were 50/50, considering going to 40/60. I guess you decided to go with even less in stocks.

So I'm not sure what your plan is, but my advice is to have a plan and withdraw from whatever you have more of than your plan says. Even if you decide to do some market timing, you should have a plan for where you want to be at any given time.
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Old 01-18-2020, 05:46 PM   #12
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Originally Posted by SunnyOne View Post
I withdraw a years worth of income

This could involve liquidating equities or bonds or?
It might, I’m also rebalancing.

By the end of Dec I usually have received a lot of distributions in cash, and this often covers my Jan annual withdrawal.

But I still need to rebalance which usually means selling some equities or bonds.
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Old 01-18-2020, 07:49 PM   #13
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I would start drawing on dividends and interest first since you already need to pay tax on them. You than can sell off any losing positions in your non-qualified accounts working your way toward more profitable positions. This will minimize taxable events. An inevitable but high class problem. Asset allocation should be considered at this time as well.
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Old 01-19-2020, 06:50 AM   #14
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There is a psychological aspect to not having that regular deposit into your account. “Taking” money from investment accounts, even if only interest and dividends, was contrary to a lifetime of saving and growing investments. Getting over that was hard!

Sisters and I inherited some real estate that was income reducing. Was able to convert it using a 1031 to new properties that generate about 5k a month for each of us. That regular deposit each month helped us all get over the drop in steady income at retirement.

But if it is any consolation to the OP, while my income dropped when I retired from a high paying job my expenses and cost of living dropped tremendously after moving and reorganizing my life and priorities. Actually saving more now than I ever did from that big paycheck! (Of which half went to state, Fed, local taxes and FICA anyway!)
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Old 01-19-2020, 07:15 AM   #15
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This blog post helped me map out my strategy: https://www.theretirementmanifesto.c...ment-paycheck/

He just updated it to address rebalancing:
https://www.theretirementmanifesto.c...cket-strategy/
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Our Retirement "Paycheck"
Old 01-19-2020, 07:17 AM   #16
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Our Retirement "Paycheck"

DW and I each have small pensions that cover about 50-60% of our expenses. Another 20-25% is covered by dividends from our taxable brokerage account and a small amount of rental income. These cash inflows go directly into our Fidelity cash management account (CMA), which functions as a checking account, and serves as our "paycheck", covering most ongoing, routine expenses. Everything is monthly except dividends, most of which pay quarterly.

Then, 2 or 3 times per year, I sell equities in our taxable account as needed to cover larger items like property tax, as well as discretionary items like travel and home improvements.

Meanwhile, we do Roth conversions to the top of the 22% bracket, paying tax from the taxable account. According to my projections, the taxable account will start getting very low a few years before SS and RMDs start at 70/72. So we'll either draw on the Roth or take DW's SS at that point. We also plan to start using the HSA around 65 to cover medical expenses and premiums.

At 70/72, with SS plus small RMDs added to our "paycheck", and easily covering all expenses, the taxable account will start growing again and I don't expect we'll ever need to touch the Roth again, except possibly to cover LTC late in life.
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Old 01-19-2020, 08:53 AM   #17
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In October, New Retiree/Need a Withdrawal Strategy/Suggestions? says you were 50/50, considering going to 40/60. I guess you decided to go with even less in stocks.

I just received (30 days ago) an unexpected lump sum distribution from a 401k plan with a previous employer. It's in cash now in an IRA and I am also working on that question. Lots of issues for me right now.
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Old 01-19-2020, 08:55 AM   #18
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There is a psychological aspect to not having that regular deposit into your account. “Taking” money from investment accounts, even if only interest and dividends, was contrary to a lifetime of saving and growing investments. Getting over that was hard!

Yes, I am trying to work on this....I have always been an earnest saver....the idea of now spending down those accounts is taking some time to wrap my head around.
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Old 01-20-2020, 06:21 AM   #19
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Originally Posted by SunnyOne View Post
I am just trying to wrap my head around all of this.
Thank you in advance for any comments!
I used to make a simple diagram for in-laws each year, in order to show cash flow from income to expenses. It helped them to know there was a positive flow.

The early sketches were just by hand. It helped me also as we (spouse and I) sat down to ponder the immense expenses to come, like more expensive LTC for in-laws.

Simple sketches will do, and you can modify as more detail comes into focus.

Below is a recent one I made with draw.io (available through google account). Income on the left, expenses on the right. Our real situation is much more complicated in the center, so this version is a simplified version for the future.
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File Type: png Income Expenses Diagram.png (104.7 KB, 76 views)
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Setting up retirement "paycheck"
Old 01-20-2020, 07:10 AM   #20
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Setting up retirement "paycheck"

I just did this last May when I retired. It is kind of a cash flow "waterfall". Basically, I set up a twice a month (mirroring my old pay dates) transfer from my money market account to my checking equal to my expected expected expenses.

The money market account is replenished by maturing CDs.

The maturing CDs are replenished by transfers from my taxable brokerage account, which contains equities and short-term bonds, harvestable as needed tactically, or in the case of equities, as I decide to sell for market reasons. Most of my highly appreciated stocks I have transferred to our donor advised fund for charity. The remainder have manageable levels of gains.

It will work this way for the next 7-10 years. No pension so you do get the feeling of spending down, though not really in this current market environment.

Good luck.
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