Systematic Withdrawals: how do you decide what to sell?

[MichaelB]

All of our fund distributions are taken in cash, not reinvested, and are the primary source of new budget funding. When we have needed to cash from the portfolio we use a bond fund, then decide if we want to rebalance the portfolio.

A prerequisite for this is to have an asset allocation target.

 

[pb4uski]

I guess I'm not wording my question very well.

I am not asking about what methodology folks use for their drawdown, but what specific funds you decide to sell as part of your systematic withdrawals.

How do you decide to draw on your bond fund vs an overseas or emerging market, a small cap or your index ETF?

Or does everyone do equal portions across all their funds to preserve your desired AA?

Drawdowns will only marginally affect your AA. My IRA is where we rebalance things so it has 5 different asset classes within it, but two (emerging markets equities and fixed income) are pretty small. If I were drawing down from that account I would probably just do automatic redemptions to the two largest asset classes (domestic equities and domestic investment grade bonds) proportionally and then sort out the rest of it when I did my annual rebalancing.

I look at my AA compared to target monthly anyway (takes about 2 minutes as I have it set up) so if my overall AA started to stray more than I want I could simply adjust the automatic redemptions as needed.

WADR, I think you might be overcooking your redemption strategy, it doesn't need to be that complicated.

 

[target2019]

I guess I'm not wording my question very well.

I am not asking about what methodology folks use for their drawdown, but what specific funds you decide to sell as part of your systematic withdrawals.

How do you decide to draw on your bond fund vs an overseas or emerging market, a small cap or your index ETF?

Or does everyone do equal portions across all their funds to preserve your desired AA?

What I say is hypothetical, but at whatever time necessary, I'd look at my asset allocation. Is something out of band? We have 20 funds, and I automatically calculate a dollar amount and percentage out of target. If I was retired, I would take x from the fund(s) which would get me back to target. In the same spreadsheet I have what-if columns, and can manually enter the dollar amount to be withdrawn, and view its impact on AA. This is useful to us, as there are five investment spaces, and international components are in 3-4 spaces.

The short answer: we have a spreadsheet! I started this so that I could look ahead to end of year and see what impact certain contributions have on the ending AA.

 

[Alan]

I take dividends from taxable accounts, some of which are qualified and taxed at 15%.

I have a couch potato selection of 4 Vanguard index ETFs and I'll sell some from those funds while maintaining my AA of that group. I have Wellington and Wellesley in my IRAs so I will exchange between them to maintain their AA, but I am not drawing down from them yet.

I will also do some tIRA to ROTH conversions using my IBonds to pay the taxes due on the conversion.

My target AA is 50/50 for both my after tax and IRA accounts and a simple spreadsheet suffices to see where I stand since I only have 4 funds in my taxable, and 2 funds in my IRA funds.

 

[audreyh1]

I guess I'm not wording my question very well.

I am not asking about what methodology folks use for their drawdown, but what specific funds you decide to sell as part of your systematic withdrawals.

How do you decide to draw on your bond fund vs an overseas or emerging market, a small cap or your index ETF?

Or does everyone do equal portions across all their funds to preserve your desired AA?

Preserve AA. If you do the withdrawal right, you end up rebalanced to your target AA.

 

[Alan]

I guess I'm not wording my question very well.

I am not asking about what methodology folks use for their drawdown, but what specific funds you decide to sell as part of your systematic withdrawals.

How do you decide to draw on your bond fund vs an overseas or emerging market, a small cap or your index ETF?

Or does everyone do equal portions across all their funds to preserve your desired AA?

Here is a simple spreadsheet covering 4 funds plus the sweep money market fund. Quite easy to see which funds are over/under their target AA when making contributions or withdrawals.

 

[Animorph]

Preserve AA. If you do the withdrawal right, you end up rebalanced to your target AA.

+1. Your AA is there for a reason.

However, if the market is down 20% I would then sell only bond funds (and reinvest equity dividends) until it recovered to something above -20%. Of course if the market is down, your AA rebalancing may require something leaning towards that anyway.

I myself am nominally 100% equities, with sometimes a cash buffer. If I have any cash it is used for expenses until gone, then I start taking dividends and selling equity shares. My AA specifies the percent allocation of each equity fund in the portfolio. When I sell to raise cash, it is simply a rebalancing exercise. Anything else is market timing.

 

[BBQ-Nut]

Lot's of good info - thank you everyone for sharing - I have lot's of more reading to do...but, I still have more questions. Stay tuned!

 

[donheff]

I guess I'm not wording my question very well.

I am not asking about what methodology folks use for their drawdown, but what specific funds you decide to sell as part of your systematic withdrawals.

How do you decide to draw on your bond fund vs an overseas or emerging market, a small cap or your index ETF?

Or does everyone do equal portions across all their funds to preserve your desired AA?

I think you need to follow the first suggestion and read a variety of threads on this topic so you get a good feel for the pros and cons of various approaches and then decide in the context of your circumstances. The default concept is that you withdraw from funds that have done the best naturally leading toward a return to your desired AA. In cases of broad downturns this can be difficult to deal with. Some of us keep cash or cash like reserves that we hope to turn to to avoid depleting equities (or even bond funds) while they are depressed. Some of us (generally with high enough pension income to move us past the 15% bracket) pull only from funds in taxable accounts while we can, rebalancing in the tax differed. Some (not me, mainly engineers) have this down to a science. Others (including me) operate on a bit of a wing and prayer. I figure a good DFA advisor could probably save me a few bucks by more rigorously monitoring how I go about withdrawals but not enough to pay back the fees. Anybody who thinks differently, I CAN'T HEAR YOU.