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Old 04-29-2015, 04:09 AM   #41
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Originally Posted by ERD50 View Post
I can't see how this is any advantage, in fact, it seems like a disadvantage.

Essentially, you are creating 'buckets' of cash. In the long run, cash will under-perform a balanced portfolio. So why not just keep the money invested until you need to spend it (unless that causes a tax 'bubble' and would be taxed at a higher rate)?

How are you 'throwing off the budget' for a year? For example, I include a 'phantom' amount in my budget that includes amortized expenses (cars, big maintenance items on the horizon, etc). So what if I spend $X0,000 more one year because I bought a car and replaced a roof? Do I say - Oh no, I can't afford a new car and/or roof, that's half (or whatever) my budget! Makes no sense to me. It's $30,000 in one year, or $3,000 over ten years, etc. Same thing really. Money is money, when it's spent it's gone.

I think this is too much 'compartmentalization', with no benefit.

-ERD50

depends how much cash is kept. many times buckets vs equal systematic withdrawals perform the same since the equities in a bucket system are actually increasing as you spend down and maintain higher levels ..

in a 3 bucket system with years of cash and bonds as those are depleted you may be 80 years old and 80% equities until you refill.

so you may have more cash and bonds in the beginning but more equities down the road before refilling .

usually there is no difference using buckets of cash and bonds vs maintaining the same allocation year after year pulling from all pieces of the pie.
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Old 04-29-2015, 06:18 AM   #42
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Anyone care to comment on the second part of the question?

If you only withdraw 1% one year from a calculated 4% SWR/A, does that mean you've banked 3% and could withdraw 7% the next year?

Not that you would, but could you, and still keep the original model assumptions in place?
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Old 04-29-2015, 06:23 AM   #43
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It was actually so we could spend a lot extra on travel the first few years beyond what was covered in our initial budget. It was just to fund excess travel as wanted. It doesn't impact how much I take from my retirement portfolio each year, just how much I have available to spend on travel. I withdraw 3.5% from my portfolio each year regardless of how much I spend.
But if you don't spend the entire 3.5 percent what happens to the unspent $$$. Wouldn't it technically be reinvested or decrease the next year's 3.5 percent withdrawal?
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Old 04-29-2015, 06:33 AM   #44
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I too "sequester" extra funds similar to Audrey. I don't keep a separate cash account, I just maintain a line item on my portfolio spreadsheet to track the "mad money" account. The funds are simply part of the portfolio. At the end of the year I adjust the amount up or down to reflect overall portfolio growth over the year. I tapped it to the tune of $20K last year to make some upgrades to my weekend house preparatory for sale. I would also tap it if I wanted to take an excessive trip of a lifetime like a Antarctica trip with National Geographic or something. In theory, this fund will level spending somewhat in prolonged downturns. In reality, I suspect that with a big enough, long enough downturn I would forget about spending it and just roll it in to cushion the losses.
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Old 04-29-2015, 06:36 AM   #45
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Originally Posted by ERD50 View Post
I can't see how this is any advantage, in fact, it seems like a disadvantage.

Essentially, you are creating 'buckets' of cash. In the long run, cash will under-perform a balanced portfolio. So why not just keep the money invested until you need to spend it (unless that causes a tax 'bubble' and would be taxed at a higher rate)?

I think this is too much 'compartmentalization', with no benefit.

-ERD50
Earmarked funds is just a different method of budgeting. Budgeting is compartmentalization, whether it's done by earmarked funds, or amortizing costs over several years, or setting aside ("saving") unspent annual income toward some goal. And the last thing anyone needs to worry about is the long term performance of funds they have set aside for short term goals - stability is the key. One must just make sure that funds for long term goals such as the retirement portfolio have good enough performance to survive inflation and withdrawal. And it only needs to be good enough - it doesn't have to be optimal.
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Old 04-29-2015, 06:40 AM   #46
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I think we are in the same boat. I don't sequester funds but some aspects do intrigue me, and I just wanted to learn more about it. The advantages seem to be that you can more easily account for certain major expenses that you know will occur. I do not amortize major expenses like you do, and that's a good idea as well.
We do include a monthly contribution for big ticket items as well which go into a special sequestered account that is not included as part of our portfolio. The sequestered account also holds money deposited monthly for items that are not evenly spent throughout the year, e.g real estate taxes, charitable contributions, travel, kennel, dental, etc.
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Old 04-29-2015, 06:51 AM   #47
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"When does SWR really begin?"

Reminds me of the question of when life begins. I'm pretty sure that occurs when the last kid moves out and the dog dies...
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Old 04-29-2015, 07:01 AM   #48
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But if you don't spend the entire 3.5 percent what happens to the unspent $$$. Wouldn't it technically be reinvested or decrease the next year's 3.5 percent withdrawal?
Neither. I don't put unspent funds back in the retirement portfolio. I still take the same percent out the next year.

Any withdrawn funds not spent last year can be spent this year however I want! Or put towards some other short-term goal.

Say you had $5000 left of from last year's spending. Do you:
  • Keep it to spend soon, or
  • Put it back in your retirement portfolio where now theoretically 3.5% of that $5000, or $175, might be available for the rest of your life, subject to market fluctuations of course.
More questions:
  • Do you only take out of the retirement portfolio what you actually spend each year, or
  • Do you take out what is considered "safe" by the withdrawal method of choice regardless of whether you spend it all during the same year.

It depends on your goals. If you are trying to leave a legacy, you will probably minimize your withdrawals. If you want to avoid leaving much of a legacy, you might want to not reinvest unspent funds.
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Old 04-29-2015, 08:28 AM   #49
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I think this will be the first year of withdrawals for us - not sure yet, as residual income from a business wind down plus pensions, ss, etc may exceed our anticipated spend rate. I still have yet to decide how to pull the $$ out next year. I think we will create an automatic monthly w/d of something less than our anticipated spend to supplement penions and take more out if necessary toward the end of the year. I guess the legacy piece is the important consideration. I also don't trust this market and fear that our initial WD may coincide with a market slide. Fortunately our planned withdrawal rate is much lower than it could be.

So many decisions!!
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Old 04-29-2015, 11:49 AM   #50
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Anyone care to comment on the second part of the question?

If you only withdraw 1% one year from a calculated 4% SWR/A, does that mean you've banked 3% and could withdraw 7% the next year?

Not that you would, but could you, and still keep the original model assumptions in place?
The 4% concept is for people who really want level spending. They want to start at some dollar amount and be confident they will never need to spend less than that. Because they have no downside flexibility, they need to be cautious at the start. Hence, they take only 4% in the first year, even though they can see that their mix of assets has historically averaged 6%.

To me, if that person only takes 1% in some year, that means he/she does in fact have downside flexibility, and has shown a willingness to use it. This person does not fit the profile assumed by the calculators that spit out the 4% SWR. This person should have a different spending strategy.

Here's one possibility. Maybe this person has SS plus a COLA'd pension that meets all of his/her "basic" spending. Withdrawals from the portfolio are used entirely for "nice to have" spending. In this case, the individual has unlimited downside flexibility on withdrawals. If this person takes 1% in one year, he/she could take 0%, 4%, 7%, or 100% in the next year. He/she has no need to be conservative to protect some minimum withdrawal amount.
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Old 04-29-2015, 12:15 PM   #51
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Here's one possibility. Maybe this person has SS plus a COLA'd pension that meets all of his/her "basic" spending. Withdrawals from the portfolio are used entirely for "nice to have" spending. In this case, the individual has unlimited downside flexibility on withdrawals. If this person takes 1% in one year, he/she could take 0%, 4%, 7%, or 100% in the next year. He/she has no need to be conservative to protect some minimum withdrawal amount.
Lol, this is my target scenario. No SS but COLA'd pension.
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Old 04-29-2015, 01:34 PM   #52
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Earmarked funds is just a different method of budgeting. Budgeting is compartmentalization, whether it's done by earmarked funds, or amortizing costs over several years, or setting aside ("saving") unspent annual income toward some goal. And the last thing anyone needs to worry about is the long term performance of funds they have set aside for short term goals - stability is the key. One must just make sure that funds for long term goals such as the retirement portfolio have good enough performance to survive inflation and withdrawal. And it only needs to be good enough - it doesn't have to be optimal.
[Emphasis added]

This. All of it.
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