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Withdrawal rate even in bad years?
Old 11-16-2015, 02:56 PM   #1
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Withdrawal rate even in bad years?

I am trying to determine what may be the best strategy withdrawing from my taxable account as I wish to leave TAx deferred accounts alone until RMD's are required. I am 56 and my wife is 55. Both of us are recently retired. Currently have $4.3 million with about a 50/50... equities/fixed income AA.

In taxable I have about 900K in VAnguard index stock funds and $800k in a muni bond fund. The rest is TRad and Roth IRA's. By running a BAcktest Portfolio AA even starting in 2008 , an awful year to retire as we know, and withdrawing 4% annually just from the taxable equity funds.... the balance in 2015 was still
ahead of the starting balance by $100k. Obviously, 2013 was a great "recovery" year as 2008-2009 resulted in a 38% drop in portfolio value. THis leads me to believe that it is indeed safe to withdraw 4% form the equity portion of my taxable account no matter what market returns are. Or is it more prudent to suspend withdrawals during down years and instead take from a cash bucket to meet expenses until markets recover?

We will also have pensions and SS waiting for use starting in 5-6 years.
Also the muni bond fund (intermediate) from which I take monthly distributions as cash to also help with monthly expenses.
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Old 11-16-2015, 03:54 PM   #2
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There have been quite a few threads on variable withdrawal rates and also on buckets. Here is one on variable withdrawals:

Firecalc in Scott Burns column

and one on buckets:

Kitces & Guyton on SWR, Buckets & Essential/discretionary methods of withdrawals

There are lots more - just put either "variable withdrawal" or "bucket" in the search box near the top of each page and you'll get lots of opinions.
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Old 11-16-2015, 03:58 PM   #3
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Originally Posted by MrLoco View Post
I am trying to determine what may be the best strategy withdrawing from my taxable account as I wish to leave Tax deferred accounts alone until RMD's are required..........
Have you estimated taxes once RMDs kick in? Some of us are trying to spend down deferred accounts and / or do Roth conversions to minimize taxes on RMDs.
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Old 11-16-2015, 04:40 PM   #4
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Or is it more prudent to suspend withdrawals during down years and instead take from a cash bucket to meet expenses until markets recover?
I keep 5.5% in cash, to use during bad times in case my dividends are not enough to keep me afloat.

In the past I have spent less during bad times, as well. With the cash available, I can sort of ease into that without suddenly being so frugal that it hurts.
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Old 11-16-2015, 08:54 PM   #5
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I believe the trinity study says yes. YMMV.
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Old 11-16-2015, 10:16 PM   #6
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Originally Posted by MrLoco View Post
I am trying to determine what may be the best strategy withdrawing from my taxable account as I wish to leave TAx deferred accounts alone until RMD's are required. I am 56 and my wife is 55. Both of us are recently retired. Currently have $4.3 million with about a 50/50... equities/fixed income AA.

In taxable I have about 900K in VAnguard index stock funds and $800k in a muni bond fund. The rest is TRad and Roth IRA's. By running a BAcktest Portfolio AA even starting in 2008 , an awful year to retire as we know, and withdrawing 4% annually just from the taxable equity funds.... the balance in 2015 was still
ahead of the starting balance by $100k. Obviously, 2013 was a great "recovery" year as 2008-2009 resulted in a 38% drop in portfolio value. THis leads me to believe that it is indeed safe to withdraw 4% form the equity portion of my taxable account no matter what market returns are. Or is it more prudent to suspend withdrawals during down years and instead take from a cash bucket to meet expenses until markets recover?

We will also have pensions and SS waiting for use starting in 5-6 years.
Also the muni bond fund (intermediate) from which I take monthly distributions as cash to also help with monthly expenses.
Was it 4% of your portfolio value each year or did you adjust the initial withdrawal for inflation?

Most of the studies use a US Bond Index for the bond portion, not municipal bonds. I suggest you plug in your numbers into firecalc and see how it works. (I can't remember if firecalc has a muni-bond asset class). You can choose to use a fixed percentage of your portfolio or an inflation adjusted value.

In the Bengen papers (also trinity etc.) a ~4% withdrawal adjusted annually for inflation survived over 30 years with at least 40% in equities (S&P500 was used, I think) and the rest in a US Bond index.

We use a percentage of portfolio value and we did retire in 2008. So far, so good, but we spend less than our planned withdrawal. It works for us.
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Old 11-16-2015, 10:47 PM   #7
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Personally, I plan on going with the Taylor Larimore method.
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Old 11-17-2015, 02:31 AM   #8
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This page examines the 4% withdrawal rate of a 28/72 portfolio starting right before the 3 worst times to retire. Just how risky are stocks?
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Old 11-17-2015, 05:56 AM   #9
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Have you estimated taxes once RMDs kick in? Some of us are trying to spend down deferred accounts and / or do Roth conversions to minimize taxes on RMDs.
Than you for your suggestion as well as others who responded. The one wrinkle is that my wife and I will be shopping for a healthcare plan on our state's ACA healthcare exchange. In order to maximize subsidies, we will delay ROTH conversions until age 65 when MEdicare kicks in and then convert as much as we can.
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Old 11-17-2015, 06:02 AM   #10
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i use bob clyatt's 95/5
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Old 11-17-2015, 08:17 AM   #11
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There are so many scenarios that you have to be flexible. Keep some cash on hand (maybe a years worth) for emergencies and market corrections. If the equites in your taxable are way down it might be best to sell some fixed income in tax deferred even if you have to pay income tax on it, although the health subsidies also come into play there. The easiest strategy IMHO is to just cut back spending in lean times......so I would have a plan for that.

I think 4% is a bit optimistic given the headwinds for fixed income.
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Old 11-17-2015, 09:04 AM   #12
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THis leads me to believe that it is indeed safe to withdraw 4% form the equity portion of my taxable account no matter what market returns are.
If I'm reading your post correctly, you are withdrawing 4% from a asset class that makes up 25% of your total assets. So, your overall withdrawal rate is 1%.

I don't know how you define "safe", but that sure looks safe to me.

Or, maybe you mean you're withdrawing 4% of your entire portfolio, and taking all of it from your taxable equities?

Or, you're withdrawing 4% from your taxable accounts, and nothing from your tax deferred, which would give you an overall withdrawal rate of 2%?
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Old 11-17-2015, 09:11 AM   #13
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My understanding is that the SWR principle takes into account up years and down years and your SWR is an average safe amount. There could be up years where a 6% W/D could be considered prudent and down years where 2% is safe.

Once you've come to terms with your own SWR (yes, it can be a bit flexible, need occasional review and 'less is more') shouldn't you just hold the line and maintain your SWR regardless of current market performance?

What's the point of determining a SWR if it must be adjusted with every market twist?
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Old 11-17-2015, 09:19 AM   #14
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the back stop is most of us will not need the inflation adjusting yearly that the 4% swr builds in . eventually we reach a point what we no longer do , buy or go to offsets the rises in what we continue to do .
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Old 11-17-2015, 09:21 AM   #15
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I believe the trinity study says yes. YMMV.
+1

OP - it's important to note that the 4% generally thrown about is not something that works most of the time, but historically has worked even during the worst situations.
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Old 11-17-2015, 09:29 AM   #16
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This page examines the 4% withdrawal rate of a 28/72 portfolio starting right before the 3 worst times to retire. Just how risky are stocks?
of course a 40 year bull market in bonds except for some relatively short bumps in the road really helped .

the next 40 years may look very different from these low levels going back up . even 5 year cd's had a good run .
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Old 11-17-2015, 10:11 AM   #17
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My understanding is that the SWR principle takes into account up years and down years and your SWR is an average safe amount. There could be up years where a 6% W/D could be considered prudent and down years where 2% is safe.

Once you've come to terms with your own SWR (yes, it can be a bit flexible, need occasional review and 'less is more') shouldn't you just hold the line and maintain your SWR regardless of current market performance?

What's the point of determining a SWR if it must be adjusted with every market twist?
The 4% SWR is based on historical US market performance. We don't know if the future will surprise us with something even worse. I reckon SWR is primarily useful as a ballpark for determining how much you should save. Once you're in decumulation, I think some common sense when it comes to annual withdrawals would be in order.

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Old 11-17-2015, 05:06 PM   #18
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+1

OP - it's important to note that the 4% generally thrown about is not something that works most of the time, but historically has worked even during the worst situations.
Well, depending on the inputs, not necessarily 100% of the historical cases.
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Old 11-17-2015, 05:19 PM   #19
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of course a 40 year bull market in bonds except for some relatively short bumps in the road really helped .

the next 40 years may look very different from these low levels going back up . even 5 year cd's had a good run .
1969 onward featured rising interest rates. The 4% rule held up just fine.
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Old 11-17-2015, 06:00 PM   #20
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The 4% SWR is based on historical US market performance. We don't know if the future will surprise us with something even worse. I reckon SWR is primarily useful as a ballpark for determining how much you should save. Once you're in decumulation, I think some common sense when it comes to annual withdrawals would be in order.

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This is me. We don't plan to employ SWR methodology beginning the second half of 2017(fingers crossed), but it definitely is one of my planning tools.
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