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Systematic Withdrawals: a year at a time or monthly?
Old 03-05-2014, 06:47 PM   #1
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Systematic Withdrawals: a year at a time or monthly?

Another question for the experienced here.

I'm still constantly crunching scenarios to stretch my retirement savings to the max.

I've read from quite a few people here about how they withdraw one or two years worth of expenses from their retirement savings at a time.

And that got me wondering - is that really the most beneficial?

During younger years and 'wealth accumulation' the financial advice has always been to 'dollar cost average' and not market time. The expert analysis seems to back that with case studies, or hypothetical scenarios.

So.....

Wouldn't the same apply on the back end as we draw down on our savings - to make smaller monthly withdrawals...like a monthly 'paycheck' to dollar cost average?

Also, what about potential earnings during a given year if expenses are drawn monthly?

I found some on line withdrawal calculators and when I plug in numbers for monthly vs annual distributions with the same 'real return' (I used 2%) compounded annually, the monthly approach results in tens of thousands more at 'end game'.

Do people not factor this, or are there other considerations?
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Old 03-05-2014, 06:59 PM   #2
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One difference is that when you are dollar cost averaging into the market, you are usually buying something with a higher beta (more volitile). The higher beta makes DCA more effective. When you're pulling money out, you are likely pulling from cash or stable value. That pot of money is typically designed to weather a long market down turn. If the market stays healthy, your annual asset allocation would build up the cash. If the market is doing poorly, the investor may choose to deviate from the standard allocation, allowing the allocation to cash be smaller, with the plan to get back to the target allocation after the storm passes.
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Old 03-05-2014, 07:35 PM   #3
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We pull out our entire annual amount at the beginning of the year. This is mostly drawn out of distributions most of which were paid out in Dec of the prior year. The withdrawal goes into a separate high yield savings account. We draw monthly off that savings account for monthly expenses.

I never wanted to deal with the complications of monthly withdrawals directly from the retirement fund and the volatility of the fund during the year. Our X% of retirement fund calculation is done once a year - whatever the fund is on Jan 1, and that's what we withdraw.

In fact - we keep at least two years of cash available in the savings account and some other very short term investments, so theoretically we could wait out a very bad market year if we needed to.
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Old 03-05-2014, 07:45 PM   #4
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Re "dollar cost averaging". If I understand the concept correctly, you buy the same $$ of stocks every month. Therefore, you will buy more shares when the market is down and fewer when it is up. Your average cost per share purchased will be a little lower than the average cost per share available. That has a nice sound, but I'm not sure if it really means much (other than that you shouldn't stop buying just because the market is down).

On the selling side, if you sell the same $$ every month, you will sell more shares when the market is down and fewer when it is up. Again, this seems to reduce the average selling price. But, that doesn't sound so good.

We just withdraw when our checking balance is below $x. Our spending isn't level during the year. And, I'm convinced that I'm a lousy market timer and that in the long run short term cash will yield less than longer term assets.
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Old 03-05-2014, 08:07 PM   #5
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We pull out our entire annual amount at the beginning of the year. This is mostly drawn out of distributions most of which were paid out in Dec of the prior year. The withdrawal goes into a separate high yield savings account. We draw monthly off that savings account for monthly expenses.

I never wanted to deal with the complications of monthly withdrawals directly from the retirement fund and the volatility of the fund during the year. Our X% of retirement fund calculation is done once a year - whatever the fund is on Jan 1, and that's what we withdraw.

In fact - we keep at least two years of cash available in the savings account and some other very short term investments, so theoretically we could wait out a very bad market year if we needed to.
I wish I had enough assets to create a stream of income from either dividends or gains to fully offset planned expenses.

I do have enough saved if I drawn down on principal - therefore my question on DCA. And the bulk of those are not cash but a blended portfolio of bonds and equities.

It just seems that making one big withdrawal is a 'market time' - sometimes in January the market may be up or down. But monthly withdrawals would 'average out' over time.
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Old 03-05-2014, 08:25 PM   #6
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I'm nominally 100% equities. My planning uses a beginning of the year equity sale to fund that year's expenses. In practice, I sell as we go, so that's roughly monthly. The longer you are in the market the better, if you do it often enough to average out.

To smooth things out, especially the first few years of big withdrawals, if my portfolio grows to match any of the future start of year values per planning projections, I go ahead and sell equities to raise cash for that year. I already have cash for 2014. Another 2% or so up from today and I'm selling for 2015 expenses. That way if the market gets ahead of itself I'm raising cash and may have some extra if the market dips. That might leave some growth on the table, but only when things are going better than planned.
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Old 03-05-2014, 08:35 PM   #7
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I have not started yet but I have a plan. For the first 3 or 4 years, I will be converting tIRA to Roth. Since I will have to pay quarterly estimated taxes, I figure to withdraw quarterly. The first quarter will be fat as it will include the conversion for that year. Each quarterly withdrawal will include living expenses net of SS and the quarterly tax payment. It is hairy, but it looks like it will work.

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Old 03-05-2014, 08:36 PM   #8
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I figure to have a small surplus that will go in the bank.

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Old 03-05-2014, 08:46 PM   #9
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I wish I had enough assets to create a stream of income from either dividends or gains to fully offset planned expenses.

I do have enough saved if I drawn down on principal - therefore my question on DCA. And the bulk of those are not cash but a blended portfolio of bonds and equities.

It just seems that making one big withdrawal is a 'market time' - sometimes in January the market may be up or down. But monthly withdrawals would 'average out' over time.
No, it's not market timing when it's done on the same date every year, LOL! Early Jan works best me for administrative purposes including rebalancing and tax paying since most of my dists are paid out in December and I always take them in cash.

I said distributions - a lot of which are cap gains distributions, which I don't consider "income". I'm a total return investor.

Sorry - I didn't quite finish my post above. I rebalance in Jan as well, and if the distributions do not cover my annual income needs, I would sell whichever are the best performing funds to cover my needs then rebalance the remainder.

I have no need to "average out" the months. Most of the withdrawal studies are based on annual withdrawal.

Then the rest of the year I leave things alone unless there is a sudden gain or sell off putting me way out of balance from my target AA.
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Old 03-05-2014, 08:52 PM   #10
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It just seems that making one big withdrawal is a 'market time' - sometimes in January the market may be up or down. But monthly withdrawals would 'average out' over time.
If monthly withdrawals feel more comfortable to you, then go ahead and withdraw each month, then!

I like withdrawing during the first week in January, because I feel like I am less likely to make mistakes that way, and because it just feels safer and more comfortable to me. Also, like Audrey I get distributions in December and have to rebalance anyway during the first week in January so the timing seems good. But I am surely not pushing for anybody else to do what I choose to do wrt withdrawal timing.
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Old 03-05-2014, 09:06 PM   #11
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My estimated tax dictates how much I move out of the 401K (Vanguard) to savings (Schwab) - Every December, I move that max amount I can to remain in the 15% tax bracket to savings. In January, I will rebalance the portfolio. For daily use, I will keep 3 months in my checking and transfer as needed from Schwab. My goal is to reduce RMD to a manageable amount.
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Old 03-05-2014, 09:32 PM   #12
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If monthly withdrawals feel more comfortable to you, then go ahead and withdraw each month, then!

I like withdrawing during the first week in January, because I feel like I am less likely to make mistakes that way, and because it just feels safer and more comfortable to me. Also, like Audrey I get distributions in December and have to rebalance anyway during the first week in January so the timing seems good. But I am surely not pushing for anybody else to do what I choose to do wrt withdrawal timing.
Oh - I do appreciate folks contributing their thoughts and their experiences - I find the forum a great sounding board for questions.

So, I hope people don't feel like I am pushing one methodology or another.

As yet, I have not found anything definitive by way of financial 'experts' if one approach is 'better'.

But - money is money - and I sure would sleep better knowing if one was statistically 'better'.
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Old 03-05-2014, 09:37 PM   #13
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Oh - I do appreciate folks contributing their thoughts and their experiences - I find the forum a great sounding board for questions.

So, I hope people don't feel like I am pushing one methodology or another.

As yet, I have not found anything definitive by way of financial 'experts' if one approach is 'better'.

But - money is money - and I sure would sleep better knowing if one was statistically 'better'.
Well, is "better" defined to you as having the last possible cent you could possibly get from your investments? Then, assuming that we invest (as opposed to putting money under the mattress) in order to make money, then I think that probably the more frequently you withdraw, the "better" it would be. The reason for this is because the money would have a few more days in your portfolio to make (or lose) money, and we do assume a generally upwards trend.

To me, "better" includes being more cautious and having more as a cushion, on average, during the year in my bank account. I also like simplicity because I am less likely to make mistakes. So, I am not inclined to withdraw frequently.
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Old 03-05-2014, 11:02 PM   #14
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I rebalance into a cash target of 6% of assets into an online savings account that earns about 0.8% and have a fixed monthly "paycheck" that goes from that online savings account to our checking account where it is inevitably spent. That plus any taxable dividends and interest goes to checking as well.
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Old 03-05-2014, 11:46 PM   #15
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I use basically the same withdrawal plan as pb4uski with the exception that I start with 2 years of expenses and replenish at each ER anniversary. For me that is Jul 1 of each year. I also use this date to rebalance if needed.

I believe this method gives me plenty of leeway should I have to fallback to Plan C, going back to work. Since I re-evaluate the plan each July, this is when I'll make the decision to go back to employed status. This plan gives me a year's worth of expenses while I'm looking for a job. That helps me sleep a little better at night.
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Old 03-06-2014, 07:27 AM   #16
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Re "dollar cost averaging". If I understand the concept correctly, you buy the same $$ of stocks every month. Therefore, you will buy more shares when the market is down and fewer when it is up. Your average cost per share purchased will be a little lower than the average cost per share available. That has a nice sound, but I'm not sure if it really means much (other than that you shouldn't stop buying just because the market is down).

On the selling side, if you sell the same $$ every month, you will sell more shares when the market is down and fewer when it is up. Again, this seems to reduce the average selling price. But, that doesn't sound so good.

We just withdraw when our checking balance is below $x. Our spending isn't level during the year. And, I'm convinced that I'm a lousy market timer and that in the long run short term cash will yield less than longer term assets.
+1 It does seem that any fixed monthly sale runs the risk of reverse dollar cost averaging. I tend to practice lite market timing by selling after markets make what look like big gains. So far that has worked out since they seem to tumble a bit after I have made withdrawals. We haven't had a bear since I started so I haven't had to sell in the face of general equity declines. My plan for that situation is to simply sell equities in taxable and buy equities to match in IRAs.
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Old 03-06-2014, 08:34 AM   #17
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It is not "better" to rebalance monthly. Statistically one needs at least a year to see some benefit. You need time for asset class divergence to occur. Ideally in a taxable account, rebalancing every 18 months has been shown to be better (more time for divergence and less taxes paid due to rebalancing), but that doesn't match so well with the annual withdrawal needs. For many of us rebalancing (if needed) and withdrawals are completely tied together.

Ideally, reinvesting all distributions and then taking withdrawals by selling mutual funds keeps the money "working longer". But unfortunately this approach has worse tax consequences in taxable accounts - tax on the distribution and then tax on realized gain from any sale. So many of us take all distributions in cash. This is not an issue in tax-deferred accounts.

I suspect when it comes down to it, ease of implementation with less chance of making errors drives the method ultimately used.
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Old 03-06-2014, 12:01 PM   #18
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Good thread thanks to all.

ON a slightly more general point... now that I'm three years into this, many of the details I had been concerned about optimizing seem not to matter as much as I thought they would.

The question being debated here is one of them. Id note that the issue of having to sell in a down market can be addressed a number of ways: Multiple years cash on hand is not the only approach. For me a HELOC might supply cash in case of a severe market hiccup.

I also learned this when trying to be clever and DCA my lump sum into the market last year. I knew that "on average" the market goes up. However, I tried to minimize risk by DCA'ing. In 2013 it turns out that this was a very bad move. I sacrificed some up-side. Did it significantly affect my financial status- NO.
In the context of the volatility in markets over time and given a globally diversified AA managed portfolio this was a second order effect.

Here's another observation. As Ive become totally diversified ive noticed how the correlation between the US based market news and my portfolio value has declined.
I seen the dow down 100+ and my net worth hang steady.
Bonds and foreign securities really can help to stabilize a portfolio.
Given this Ive truly come to appreciate the virtual impossibility of making timing based strategies work for a diversified portfolio.

I think the most important thing is not to get spooked and act foolishly regarding AA. Much of the rest are second order effects.
That's my $.02
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Old 03-06-2014, 01:14 PM   #19
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My big bond fund pretty much generates enough dividends every month to cover my expenses. (I have some other funds, bond and stock, which generate dividends I now reinvest but can tap into if I need more funds, like I will do next month with a stock fund to cover a small spending spree.) My goal is to not have to liquidate any principal as long as I can but if I have to, I will.
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Old 03-06-2014, 03:17 PM   #20
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I sweep dividends to an account monthly. If that isn't enough, I sell something.
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