Vanguard looks at withdrawal strategies

[M Paquette]

We did a survey a while back. I think something like a third of the folks on this board were 'investments only.'

It's probably the hardest way to retire early, with the most pre-planning. I got way too familiar with the various 'what if' simulators out there, including FIRECalc, and stared at health plan information for a good long time, eventually drawing up decision trees (a sort of flow chart device) to plan out the path for getting and keeping medical coverage.

 

[steelyman]

Thanks very much for posting that article - very interesting.

It seems that for most of my investing life (begun mid-1990s) there's been no shortage of articles/advice geared towards the accumulation phase. Now it appears there is increasing emphasis on how to approach the decumulation phase. Guess that's a by-product of the beginning of the exodus of the boomers. That's a good thing... for the longest time I never really thought about it at all.

I've been assuming I would follow the percentage approach once I start drawing down, but the hybrid approach makes intuitive sense to me. The trick, though, could be settling on the ceiling and floor that work for you.

 

[jacob]

I follow a "never spend principal value"-rule. It's all dividends and interest for me. Makes me sleep better. This is a lot more stable than the vagaries of stock market capital gains much of which---in my opinion---is driven by greater fool theory in the short (<10 years) term and Ponzi-like funding from popularizations of stock market based retirement plans in the long (>30 years) term.

 

[SunsetSail]

I follow a "never spend principal value"-rule. It's all dividends and interest for me. Makes me sleep better. This is a lot more stable than the vagaries of stock market capital gains much of which---in my opinion---is driven by greater fool theory in the short (<10 years) term and Ponzi-like funding from popularizations of stock market based retirement plans in the long (>30 years) term.

At what point do unspent dividends and interest become untouchable principal? End of the month when they were received, another time frame, or some other metric?

 

[Midpack]

Is there a group on this forum that specializes in those who plan to retire early but have nothing but social security (later on) and investments today? IE no pension, no retirement plan from Megacorp, etc. (And no health care right now, will have to buy it on the open market.)

Seems to this group has the most difficulty in planning their retirement with the gyrations in the market.

Me:
No pension, hoping to retire on 56th birthday a little less than 3 years from now.

Doesn't seem to be a group identified, but I think it was about 1/3rd from a previous poll too. I am in the same boat as you, about to retire, with what I consider a very conservative WR. And I plan to be flexible, even work again if possible.

 

[jacob]

At what point do unspent dividends and interest become untouchable principal? End of the month when they were received, another time frame, or some other metric?

Investment income > expenses. The buying and selling of stocks, bonds, and REITs is done independently of consumption spending but in according with market evaluations like P/E. So I think the precise answer is "whenever an asset is bought" (which is usually when I got enough surplus investment income to add a round lot, 100 shares of something) but it's kinda besides the point.

I realize that my model doesn't really fit mesh well with the concept of withdrawal as it is traditionally thought of. I consider a 3% real return to be safe. Given my 60+ year time-horizon I consider it too dangerous to rely on technical/programmatic trading like predetermined withdrawal rates or asset allocation. It makes for great academic studies though.

It's just a matter of details. I prefer to receive 100+ dividend payments per year from roughly 30 different sources instead of liquidating part of an index fund and hoping that it will grow back again. To me it's a bit like preferring to sell the apples from a fruit tree compared to saving off branches and selling those under the assumption that the tree will gain mass fast enough to compensate for the sawing.

 

[SunsetSail]

Investment income > expenses. The buying and selling of stocks, bonds, and REITs is done independently of consumption spending but in according with market evaluations like P/E. So I think the precise answer is "whenever an asset is bought" (which is usually when I got enough surplus investment income to add a round lot, 100 shares of something) but it's kinda besides the point.

It was really a question of mechanics and cash flow, but after reading your response I now assume that you have liquid cash balance from which you pay expenses and that is replenished as you take profits/receive distributions. I haven't figure out all the details for myself yet and lately I've been interested in learning the arcane details about how people deal with cash flow when living completely off an investment portfolio.

 

[jacob]

... lately I've been interested in learning the arcane details about how people deal with cash flow when living completely off an investment portfolio.

I quickly found that the asset allocation/total return approach didn't work for me (too much emotional pain selling at market bottoms just because I need money) but that receiving regular dividends did. I spread them out so that I tend to get enough income in each month (although currently the January cycle quite a bit higher and the February cycle is quite a bit lower).

I use individual issues, but you can implement this with funds as well. Just be careful that the fee is really low. If you get a 3% yield on a 0.25% fee, 0.25/3=8.3% of your income is still going to fees.

I also try to pick my issues so that the actual payout isn't too much higher than what I actually consume as expenses. This avoids taxes. As I get wealthier, I can pick increasingly lower yielding issues. As it is, I still refuse to own a stock that doesn't pay any dividends.

 

[mickeyd]

Nice article. I read it earlier on the VG monthly e-letter that they send out. My leanings are toward the third method mentioned in the article but I would still tweak it to fit my style.

 

[Ken11]

I follow a "never spend principal value"-rule. It's all dividends and interest for me. Makes me sleep better. This is a lot more stable than the vagaries of stock market capital gains much of which---in my opinion---is driven by greater fool theory in the short (<10 years) term and Ponzi-like funding from popularizations of stock market based retirement plans in the long (>30 years) term.

Emphasizing dividends and interest may cause your portfolio to sacrifice long term appreciation. Depending on the numbers this may leave you with an uncovered long term inflation risk.

With todays very low interst/dividend rates you may be over-conservative in the near term. When rates peak (someday) it will be a totally different scenario.
The planning needs to account for all this variability.
How do you handle that?

 

[nun]

The VCMM is a proprietary financial simulation tool developed and maintained by Vanguard's primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960.

Someone's been playing with the MATLAB toolkit again

 

[nun]

Interesting article.

I was lucky that the last 2 bears happened while I was accumulating so I haven't been put to the test yet. I was also lucky that my company held onto to its DB pension so that I am now in the position where I have pensions to cover the essentials and a maximum % ceiling that I won't exceed, If the portfolio really takes a big dive I can ramp down the withdrawal to zero and hopefully ride it out.

I'm in a similar position. I have a rental property that will cover 50% of my expenses once I ER. Having this income producer that keeps pace with inflation is an excellent hedge against poorly performing investments. It means I'll only need a 2% annual portfolio withdrawal to cover the rest of my expenses. Once SS, UK state pension and company pension start I should be in the accumulation phase again.

If things get really bad I can always trim my expenses and also move into my one bedroom rental apartment and rent out my 3 bedroom apartment and cover all my expenses. Finally if health care costs become totally ridiculous I can always move back to the UK.

 

[JmfromTx]

Keep em coming. This kind of thread with real life experience is better than all the expert authors combined IMO.

 

[haha]

They all work...

This is a giant guess presented as a fact.

One hopes you are correct, but I see no reason why that would have to be so.

Ha