Where do I take teh 4% withdraw from?

[Shabber2]

Simple question, but when I retire with my nest egg and it is in a nice asset allocated slice and dice potpori of index funds, where and when do I get my 4% withdrawl to live on?

Stop reinvesting dividends? Sell some winners on rebalancing and keep 4% out?

- Chris

 

[mathjak107]

people do it that way but its not for me. to hard to plan for extended down turns, generally makes me want to invest more conservatively.

i plan a round a system of 3 buckets , an income bucket with 7 years of withdrawls, a bond/untraded reit bucket with another 7 years of withdrawls. and a equity bucket. with not having to worry about a down turn and selling stocks at a loss i invest very aggressivly


the buckets are rebalanced not so much by gains but by years of money left in the buckets.

you can use the on line bucket planner to see how much in each.

Raymond J. Lucia Companies, Inc. - Buckets of Money Planner

 

[2B]

The "buckets" is one approach. The "classical" approach and the one I plan on using is to take the living expenses for the coming year out of the portfolio when rebalancing. It would be held in a money market account and spent during the year. Where the money comes from out of the portfolio would depend entirely on how the different asset classes performed during the year.

If you have a dependable income stream coming in like bond interest or dividends, you could plan to have these sent into the "spending" account as they come in. You would then reduce your initial transfer of cash when rebalancing.

Don't make it complicated.

 

[OAG]

I see from your profile you will be 41 next month. So I think you would have to answer a few questions for yourself. When do you plan to retire? Will you have a pension, and if so, will it be COLA'd? Any other sources of income? If you can you may be able to let your "nest egg" just grow and tap the other sources. Will you really need 4%? What are/will be your anticipated annual expenses in "retirement"; at your age you may find the biggest unknown will be medical care/insurance. For example I have found SS and part of my retired pay take care of all expenses, and then some, so I use that and the "nest egg" is left alone. Of course I am older so that changes our situations considerably. Standby there will be a lot of very insightful suggestions coming soon.

 

[rs0460a]

the one I plan on using is to take the living expenses for the coming year out of the portfolio when rebalancing. It would be held in a money market account and spent during the year.

Don't make it complicated.

I'm retired, and this is what I do (what should U do? Don't know - don't care! That's your decision )

- Ron

 

[73ss454]

I'll be 59 1/2 this year so I could start taking money from my taxadvantaged accounts but not sure if I will. What I've been doing is having all dividends from taxable put into my MM and have X dollars everymonth go into my checking account for living expenses.

About 1/3 of my money is in taxadvantaged and at some point I'll have to make a decission on how to us that money and when.

 

[Rich_by_the_Bay]

My unscientific impression is that most here use Armstrong's approach of withdrawing from bonds vs stocks depending on what their returns were for the previous year. Sell each according to its performance, with an end result of restoring your asset allocation. An important exception here is to avoid selling stocks when they are down, even if this means selling bonds/cash for several years in a row during a prolonged bear market. If both are down, tighten your belt and tilt toward selling the one which is losing the least. As for withdrawing dividends, not a big deal one way or the other.

Another group - including the Lucia Buckets adherents - take withdrawals from cash first, then sell bonds into cash, burning that down quite a ways before replenishing it from their stock holdings. There are academic reports which shows this strategy to yield better returns over many years (withdrawing bonds/cash first, then stocks) but it adds an element of adventure that some are not comfortable with (that is, a very high stock allocation 10-12 years down the road esp if you are pushing 65 or more at that time).

And in the underworld of investors you have proponents of purchasing single premium immediate annuities (SPIAs) to meet your bare minimal expenses, using future nest egg withdrawals for discretionary and supplemental income only. Caveats here include the need to supplement the annuity for inflation (buying inflation protection with the policy or adding more annuities as time goes on), spreading the solvency risk over several carriers, etc. This is more appealing if you are older and in seemingly good health. Most advise limiting this to no more than 25% of your initial retirement assets. Be aware that this strategy has robust opponents here, and does NOT refer to variable annuities (which are usually a very bad idea). I'd guess it will be popular with boomers.

While there's no right or wrong, the main thing is to keep enough cash and conservative stocks on hand to cover expenses for a long time so you don't have to sell stocks low or panic during brief but steep corrections. And ease into your desired asset allocation over a few years so you don't have to rebalance at a time when returns are working against you.

Hope this summary helps.

 

[mathjak107]

andfor me i like ray lucias approach just for that reason, it makes me keep a higher stock allocation then i might left to my own devices. the 15 year time frame makes me very comfortable with it.

 

[rs0460a]

[While there's no right or wrong, the main thing is to keep enough cash and conservative stocks on hand to cover expenses for a long time so you don't have to sell stocks low or panic during brief but steep corrections./quote]

Rich brings up an important point (and one of which I do in my retirement financial management).

I keep 3-4 years gross income in MM (tax advantaged) accounts to "bridge" those times that the market performs in a "less than desireable" manner.

For some folks (primarily those that are young and/or not retired) would think that this would be "foolish" to leave this amount of money out of the market.

They will learn (hopefully) as when you get older (and retired) 3-4 (or more) years in cash is a very small part of your total portfolio , and it certainly lets you have a good "sleep factor".

I guess I can say (for the first time in my life) "it's good to be old"...

- Ron

 

[mathjak107]

heck i have 7 years in a money liquid cash another 7 in bonds and a very aggressive stock bucket

 

[ziggy29]

Rich gave some pretty detailed ideas about how you do it. Another way might be a hybridization of the Armstrong and Lucia approaches. It uses "buckets" but refills them based on what outperformed in (say) the prior year. Some years you might not replenish the bucket at all, which is why you'd want several years of "safe" income in one of the buckets.

If you expected stocks to rise 10% a year, you could withdraw excess returns to the "safe income" bucket to lock in solid gains and a lot more income. For example, if you have $1M in stock allocations and (say) $250,000 in the safer bucket (let's say for five years of income at $50K per year), if the market rose 25% (about what it did in 2003), you could take $150,000 of the $250,000 gain in stocks and put it in the safe income bucket. Your stock portfolio still gained 10% after withdrawing the excess return, but your "safe" bucket just gained three more years of secure income to allow you even more time to weather a down stock market in the future.

There really are a lot of legitimate ways to do it, but as Rich said, the most important thing NOT to do is create income by being forced to sell stocks in a down market. That's pretty much true regardless of the method you choose.

 

[megacorp-firee]

They will learn (hopefully) as when you get older (and retired) 3-4 (or more) years in cash is a very small part of your total portfolio , and it certainly lets you have a good "sleep factor".

... one would hope

I guess I can say (for the first time in my life) "it's good to be old"...
- Ron

Amen brother ... you youngsters listening out there?

 

[W2R]

The "classical" approach and the one I plan on using is to take the living expenses for the coming year out of the portfolio when rebalancing. It would be held in a money market account and spent during the year. Where the money comes from out of the portfolio would depend entirely on how the different asset classes performed during the year.

If you have a dependable income stream coming in like bond interest or dividends, you could plan to have these sent into the "spending" account as they come in. You would then reduce your initial transfer of cash when rebalancing.

Don't make it complicated.

I am not ER'd yet but have been puzzling over this question as well and I am probably over-complicating the procedure in my own musings. I have 30% in Wellesley, which sheds some very nice dividends quarterly, and of course other funds shed some smaller dividends and capital gains.

I am thinking of using the procedure you describe above.

All dividends and capital gains from my nestegg at Vanguard go to VMMXX (money market). At the end of the year, I would calculate the amount of my SWR, decide if I would rather spend that much or less than that for the coming year, and transfer my next year's income from my Vanguard nestegg to my savings account. After that, I can use the rest during the rebalancing process.

By transferring my Wellesley dividends at the end of the year, instead of quarterly, I could smoothe the size of my monthly nestegg income in case one quarter paid higher than another. Plus, it would be clearer to me what I could spend and what I couldn't, since that entire year's spending would be in my bank account (and I could move 1/12th of it from savings to checking each month, just like a paycheck). I'm not really sure about this, because there are very good and logical reasons to move the Wellesley dividends quarterly instead, and I am puzzling over it as mentioned above.

It's difficult to imagine not receiving a regular paycheck!

 

[rs0460a]

It's difficult to imagine not receiving a regular paycheck!

Don't worry about it. It will take you a few months (up to a year) to establish your "paycheck" from your own resources/funds.

Luckly, you don't have a j*b to go to and you'll have the rest of your life to figure it out!

- Ron

 

[Moemg]

All dividends and capital gains from my nestegg at Vanguard go to VMMXX (money market). At the end of the year, I would calculate the amount of my SWR, decide if I would rather spend that much or less than that for the coming year, and transfer my next year's income from my Vanguard nestegg to my savings account. After that, I can use the rest during the rebalancing process.

Why not just skip the savings account step and leave the money in Vanguard Money Market and transfer from there to your bank account monthly ?

 

[W2R]

Don't worry about it. It will take you a few months (up to a year) to establish your "paycheck" from your own resources/funds.

Luckly, you don't have a j*b to go to and you'll have the rest of your life to figure it out!

- Ron

You're right!! Thanks.

 

[W2R]

Why not just skip the savings account step and leave the money in Vanguard Money Market and transfer from there to your bank account monthly ?

That would be a good option, too.

 

[TickTock]

I'm only 40, so much more researched in accumulating vs. drawdown, but my present thought is to sweep all non-tax-advantaged dividends/interest/distributions to a money-market account, check at the end of the year how close to filling the account with next year's estimated expenses it is, then rebalance. Tax-advantaged accounts will have all distributions re-invested in the funds they come from.

 

[Jarhead*]

Rich: Excellent summary concerning the different approaches to withdrawing.

The takeaway for me personally, regardless of which approach you consider taking is to stay consistent, and not let your "3:00 in the A.M.
"gut" make decisions for you.

If one is working without a safety net, cola"d pension, etc.etc., then you just have to roll your own. (And stay consistent)

We discussed this before on another thread, but for me personally, I've always kept a pretty good distance (7 years when I first retired, before tapping into equities). I've eventually worked my way up over the years distance wise).

Regardless of what approach you consider, I think knowing yourself is the most important consideration.

When I retired, there were two things I knew for sure. Our net worth was marginal, and I didn't want to spend a lot of time agonizing about the state of the "Stock Market. I retired early to pursue activities that were important to me, and following the stock market wasn't even close.

That being said, history has been in favor of "staying the course" with equities.

There

 

[Bestwifeever]

In my first post I asked how to get the money out too and received many very helpful replies, several from some of the above posters. That thread is here:

http://www.early-retirement.org/forums/f26/breathing-down-our-neck-30078.html

 

[clifp]

Simple question, but when I retire with my nest egg and it is in a nice asset allocated slice and dice potpori of index funds, where and when do I get my 4% withdrawl to live on?

Stop reinvesting dividends? Sell some winners on rebalancing and keep 4% out?

- Chris

I am advocate of trying to generate as much income as possible, which reduces the hard choices of when to sell stocks to pay for living expenses and provides greater visibility into income. So as a first step, I'd say yes stop reinvesting dividends. Probably the same thing for capital gains on mutual funds.

For instance take a look income generated on a $1 million portfolio

30% Total Stock Market 2% yield = $6,000
20% International Stocks 2% yield = $4,000
30% Total bond market @4.3% = $12,900
10% Money market @3% = $3,000
10% CD ladder @4% = $4,000
Total Income $29,900

So now the problem is reduced from where do I withdraw $40,000 to where do I get $10,000. The good news is you can be relatively certain of your income regardless of how the stock or bond markets fair since both bond payments and dividend payments don't fluxuate a lot even if the share price of the fund does. The major exceptions are money market rate which do drop (5%+ to 3% in a year) .

Logistically there are lots of approaches, but I personally use a brokerage checking account, and arrange for monthly electronic transfers.

 

[Shabber2]

my present thought is to sweep all non-tax-advantaged dividends/interest/distributions to a money-market account, check at the end of the year how close to filling the account with next year's estimated expenses it is, then rebalance. Tax-advantaged accounts will have all distributions re-invested in the funds they come from.

This seems to make the most sense to me. And while I am only 40, I still plan on FIRE'ing in 1-3 years with a mostly non-tax advantaged nestegg. Thanks everyone for your input.

 

[megacorp-firee]

I am one of the lucky ones with a pension. So big part of my income needs comes from that.
I have preferreds and muni's and oil trusts that generate income. I have the brokerage firm send a check to my bank every month for a set amount.
I have 5 years of mm and cds that I draw on for any gaps I may have.
I replenish my 5 years of mm and cds from equity portion of my portfolio given that the market is good and I actually have gains (something I don't have this year and so far have watch 2007 gains evaporate).

So my answer is
pension + div. & int + mm & cds = swr

 

[Ed_The_Gypsy]

Tax-advantaged accounts will have all distributions re-invested in the funds they come from.

TickTock,

In my IRA, Vanguard lets me choose where the dividends from each fund will go. (I have wondered how well it would work if I sent the dividends from, say, a total stock market fund to a bond fund and vice versa. I must spreadsheet this one day.) At the moment, I am sending all dividends to a MM account and I take my time rebalancing. I don't know, but I'll bet Fidelity and others allow the same...unless it is inside a company retirement plan. Those tend to be designed for the convenience of the employer, not you.

 

[youbet]

While there's no right or wrong, the main thing is to keep enough cash and conservative stocks on hand to cover expenses for a long time so you don't have to sell stocks low or panic during brief but steep corrections.

Even the seemingly straightforward idea of keeping a large cash allocation can be challenged and, depending on the actual financial conditions you retire into, might be "wrong."

To OP - About two years into RE, I'm finding planning and executing the withdrawal phase to be much more "interesting" than the accumulation phase was. Most interesting is the fact that there seems to be no way to guard against both portfolio value variation and inflation without tradeoffs.