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Withdrawal question- how, not how much
Old 10-17-2013, 05:34 PM   #1
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Withdrawal question- how, not how much

As I prepare to retire end of year, I have a basic question about withdrawal procedure as it relates to AA. If I plan to withdraw say 20k in year 1 based on my planned SWR, do I withdraw from assets to maintain my planned AA balance? Meaning, simply sell 10k out of bonds and 10k out of equity accounts if I'm 50/50?

thanks for any input!
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Old 10-17-2013, 05:52 PM   #2
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Originally Posted by Tailgate View Post
As I prepare to retire end of year, I have a basic question about withdrawal procedure as it relates to AA. If I plan to withdraw say 20k in year 1 based on my planned SWR, do I withdraw from assets to maintain my planned AA balance? Meaning, simply sell 10k out of bonds and 10k out of equity accounts if I'm 50/50?

thanks for any input!
That's the right idea, but I find it's a good time to rebalance. So if your AA target is 50/50, but stocks have grown faster so you have 510K in stocks and 500K in bonds, you'd take 15K out of stocks and 5K out of bonds so that you are left with 495/495 in each.

You may very well find yourself taking all out of one asset class and still being out of balance, so you can then decide if you're out of balance enough to sell some of one to buy the lower, or just leave it alone if it's close enough.

I also stopped reinvesting dividends and cap gains and that provides much of what I need, without having to sell.
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Old 10-17-2013, 06:03 PM   #3
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Check out this thread - it has links to other discussions on the subject.

Books on Strategies for Withdrawals

Congratulations!
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Old 10-17-2013, 06:04 PM   #4
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At Vanguard, all my dividends and capital gains are sent to my Vanguard Money Market account, where they add to the cash already there.

During the first week in January, I withdraw my year's spending money from this same Vanguard Money Market account. After the money is withdrawn, I do not consider it as part of my portfolio for rebalancing purposes.

Immediately after I make my withdrawal, I sell and buy as necessary at Vanguard to rebalance my portfolio. That's all!
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Old 10-17-2013, 07:06 PM   #5
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excellent info.. will take some time reading through previous posting.. gracias!
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Old 10-17-2013, 07:26 PM   #6
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Do most FIRE'd people stop reinvesting dividends and cap gains, so that they can withdraw that money?

Do most calculators account for the fact that you're not reinvesting, when they project returns for decades out? I don't recall seeing such options.


Slightly different question, I have accounts all over the place. Is it a good idea to consolidate or just sell off the smaller accounts first?
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Old 10-17-2013, 07:41 PM   #7
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Do most FIRE'd people stop reinvesting dividends and cap gains, so that they can withdraw that money?
Quite a few of us do.

Quote:
Do most calculators account for the fact that you're not reinvesting, when they project returns for decades out?
If the calculator is figuring in your spending level, it should not be assuming further dividends on what is already spent.

Quote:
Slightly different question, I have accounts all over the place. Is it a good idea to consolidate or just sell off the smaller accounts first?
Up fo you. Some people prefer to simplify their lives that way. Others have reasons for keeping a larger number of accounts.
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Old 10-17-2013, 07:43 PM   #8
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I thought I had my withdrawal strategy for 2014 all worked out, but following a discussion with my accountant I have changed it. I have a professional corporation, and investment gains within it will be taxed unless I withdraw them as a dividend (which will be taxed at a very low personal tax rate). I can save quite a bit of money on corporate taxes this way. If I took the remainder of the money that I need from my after tax funds, I would pay almost no personal tax. However, I also want to begin drawing down on my RRSP (like an IRA) soon, in order to avoid punitive taxes on RMDs when I am in my 70s. There will be some taxes withheld, and I will convert some of those funds to a TFSA (like a Roth). Opinion is divided about whether the benefits of leaving the RRSP alone to compound for ~16 years outweigh the tax liability, but clawback of OAS is also an issue. So my current plan is to withdraw from a combination of three sources in order to meet both long and short term goals. Having a corporation definitely complicates taxation issues and an astute accountant is worth her weight in gold!
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Old 10-17-2013, 11:37 PM   #9
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Quote:
Originally Posted by Tailgate View Post
As I prepare to retire end of year, I have a basic question about withdrawal procedure as it relates to AA. If I plan to withdraw say 20k in year 1 based on my planned SWR, do I withdraw from assets to maintain my planned AA balance? Meaning, simply sell 10k out of bonds and 10k out of equity accounts if I'm 50/50?

thanks for any input!
Sort of, but if you have taxable and tax-deferred accounts and are living off of taxable funds (as many of us who ER before 59 1/2 do) it can get more complicated. Let's say you have $1m that is 50/50 with 700k in tax-deferred and 300k in taxable and your annual withdrawal is $40k.

At the beginning you would typically had $500k in bonds and $200k of equities in the tax deferred and the $300k of taxable would be in equities to result in 50/50. For simplicity, I'll assume that your living expenses are in cash outside of your investments. Also, let's say that your investments have 0% return during the year and by the end of the year your cash has been spent any you need to make a withdrawal of $40k for next year's living expenses.

You would sell $40k of equities from your taxable account and send it to your checking account, so after that transaction you would have $260k in equities in your taxable account and $500k in bonds and $200k in the tax deferred for a total of $960k. You want your rebalanced AA to be $480k of bonds and $480k of equities. So in your tax-deferred account you need to sell $20k of bonds and buy $20k of equities to get back to 50/50.
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Old 10-18-2013, 07:16 AM   #10
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Sort of, but if you have taxable and tax-deferred accounts and are living off of taxable funds (as many of us who ER before 59 1/2 do) it can get more complicated. Let's say you have $1m that is 50/50 with 700k in tax-deferred and 300k in taxable and your annual withdrawal is $40k.

At the beginning you would typically had $500k in bonds and $200k of equities in the tax deferred and the $300k of taxable would be in equities to result in 50/50. For simplicity, I'll assume that your living expenses are in cash outside of your investments. Also, let's say that your investments have 0% return during the year and by the end of the year your cash has been spent any you need to make a withdrawal of $40k for next year's living expenses.

You would sell $40k of equities from your taxable account and send it to your checking account, so after that transaction you would have $260k in equities in your taxable account and $500k in bonds and $200k in the tax deferred for a total of $960k. You want your rebalanced AA to be $480k of bonds and $480k of equities. So in your tax-deferred account you need to sell $20k of bonds and buy $20k of equities to get back to 50/50.
+1

Very helpful post.
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Old 10-18-2013, 08:42 AM   #11
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Do most FIRE'd people stop reinvesting dividends and cap gains, so that they can withdraw that money?
Not sure about others but I know some do. Reinvesting is just like buying, so it doesn't make sense to me to buy when you are selling.

Then there is the tax consideration. You are already taxed on the dividends and having to sell more might cause more capital gains. If I need $40K and get $20K dividends, I'd probably rather subject just $20K more to whatever capital gains are on them instead of buying $20K of something and selling and subjecting $40K to cap gains. And anything new I reinvest has to be held for a year before selling to avoid short term gains. Furthermore, if I'm harvesting any losses, new reinvestments can thwart that due to wash sale rules.
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Do most calculators account for the fact that you're not reinvesting, when they project returns for decades out? I don't recall seeing such options.
I don't see how it would make a difference in a retirement calculator. If I didn't take the dividends, I would have to sell more of other shares so it works out the same.

If you're looking at a chart or graph of returns that a mutual fund publishes, no, it does account for this. Their chart that says $10,000 invested last year is now worth xxx includes reinvestment; if they had 2% divs and the share price went up 8% they would call it a 10% gain and state that the 10K was now worth 11K. However, my account would be $10,800 because I put $200 in my pocket.
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Slightly different question, I have accounts all over the place. Is it a good idea to consolidate or just sell off the smaller accounts first?
Your choice.
It's simpler to have a smaller number of accounts (especially at tax tme), easier to move money between investments for rebalancing or otherwise changing investments, and often you get additional services (like Vanguard Flagship) when you have more assets with a company. On the other hand, I think a lot of people split between at least 2 places just in case they can't access their money from one place. If you have everything in one place and their website and phones are down, your account gets hacked, or they go under, you may not be able to get money when you need it.
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Old 10-18-2013, 01:49 PM   #12
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Originally Posted by explanade View Post
Do most FIRE'd people stop reinvesting dividends and cap gains, so that they can withdraw that money?

Do most calculators account for the fact that you're not reinvesting, when they project returns for decades out? I don't recall seeing such options.


Slightly different question, I have accounts all over the place. Is it a good idea to consolidate or just sell off the smaller accounts first?
I stopped reinvesting once I retired since that dividend income is part of what we live off.

It doesn't matter to a calculator since it will increase your nestegg for return and reduce it for withdrawals, the result wouldn't be any different. In real life the difference to me is that it makes my taxes easier than if I reinvested dividends and then sold other lots for my withdrawals.

I think consolidation is good - simple is usually better. Even so between, taxable, tIRAs, an old employer DC plan, Roth IRAs, HSAs for me, DW and sometimes joint, we still end up with 10 different accounts.
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Old 10-18-2013, 03:50 PM   #13
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Quote:
Originally Posted by Tailgate View Post
As I prepare to retire end of year, I have a basic question about withdrawal procedure as it relates to AA. If I plan to withdraw say 20k in year 1 based on my planned SWR, do I withdraw from assets to maintain my planned AA balance? Meaning, simply sell 10k out of bonds and 10k out of equity accounts if I'm 50/50?

thanks for any input!
If you're AA target is 50/50, presumably your actual allocation will change over the course of a year (between withdrawals). I'd always consider scheduled withdrawals an ideal time to also rebalance. If you started the year with $500K in stock funds and $500K in bond funds and found yourself with $530K and $510 respectively a year later when you plan to make a withdrawal - I'd sell $30K from stock funds and $10K from bond funds. The fewer selling and buying rebalacing events, you will often lower your gains and taxes for that year.

In an off year, one or both asset classes may go down, and you may have to buy one or the other. Best of luck...
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Old 10-18-2013, 04:25 PM   #14
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If I am within my normal rebalancing bands (ie, not indicating rebalance), I will generally avoid a withdrawal that triggers a capital gain if I can. So even if my equity is above my target, I might let it ride rather than book a gain.
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Old 10-18-2013, 05:29 PM   #15
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During the first week in January, I withdraw my year's spending money from this same Vanguard Money Market account.
Any reason why you have to withdraw the whole year's expense at one time? Can one instead plan to do a quarterly (or monthly) withdrawal and withdraw only the amount that one expects to spend till the next withdrawal?
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Old 10-18-2013, 06:02 PM   #16
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Any reason why you have to withdraw the whole year's expense at one time? Can one instead plan to do a quarterly (or monthly) withdrawal and withdraw only the amount that one expects to spend till the next withdrawal?
I don't HAVE to (nobody has a gun to my head! ), but I choose to do so. I choose to withdraw once annually from Vanguard, and other than that, not a penny moves from Vanguard to me all year long. It makes the process very simple and easy.

Many choose to withdraw quarterly or monthly and do so effectively. Besides them, there are also some whose posts tell me that they withdraw in a seemingly capricious style throughout the year, with convoluted justifications for how much and when. For myself I prefer what I regard as a more lucid, hardnosed, and completely foolproof withdrawal process. And indeed, there are some others here who also prefer to withdraw annually as I do.

I have only been spending around 2% (2.12% last year, 1.98% the year before), so I don't really have to sweat the small stuff, as my brothers would describe it. What time of year I withdraw my money would fall in this category (for me), I believe. It really doesn't make much difference to me if it sits in a cash account at my neighborhood bank, or sits in a cash account at Vanguard.
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