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Withdrawal strategies?
Old 02-11-2013, 10:19 PM   #1
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Withdrawal strategies?

I only have accumulation experience. I am wondering how people balance the use of rebalancing vs dividends and interest in creating their yearly nome.

First do you draw out what you need for a whole year all at one time and park in a bank for the year? Or do it twice ahead? Quarterly?

Second- How to deal with dividends? Our accounts currently generate 75% of what we might spend each year, but if we let them reinvest there is no trading cost generated and most of the returns n equities are made by including reinvestment of dividends. SO is it better to only partly cash out dividends or not at all and then just sell off the right mix of bonds and stock funds to make the total income and keep the AA in line? AND how often? I am not sure there even is a way to cash out only some dividends and reinvest others...

...and of course there is the question of cash reserves that has been discussed in other threads...using it as a safety net or parachute in bad times, but then how to replenish?

I would love to know real world examples from the happy with drawers out there.
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Old 02-11-2013, 10:29 PM   #2
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I'm only about a year into this using phase and the markets have been very kind, but here is what I do.

I target about a year of expenses in an online savings account and another year in a short term bond fund. Dividends and capital gain distributions (about 25% of our annual cash needs) now go to my bank account rather than get reinvested. I have a monthly transfer from the online savings to my checking account that is my "paycheck".

When I rebalance (usually in the 4th quarter) I replenish the online savings account. If for some reason when I rebalance I didn't want to take money out of investments then what is left in the online savings and the short-term bond fund would provide the subsequent year's living expenses.

If we had an extend period of poor investment results then I would do some belt tightening and have some hard decisions to make.
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Old 02-12-2013, 03:13 AM   #3
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Quote:
Originally Posted by urn2bfree View Post
I only have accumulation experience. I am wondering how people balance the use of rebalancing vs dividends and interest in creating their yearly nome.

First do you draw out what you need for a whole year all at one time and park in a bank for the year? Or do it twice ahead? Quarterly?
I transfer what I will need for the year, from Vanguard to my bricks 'n' mortar bank, during the first week in January. Probably most people don't. The reason I take it all at once, is perhaps out of an abundance of caution. I think it is simpler this way, and I am less likely to err or overspend.

Quote:
Second- How to deal with dividends? Our accounts currently generate 75% of what we might spend each year, but if we let them reinvest there is no trading cost generated and most of the returns n equities are made by including reinvestment of dividends. SO is it better to only partly cash out dividends or not at all and then just sell off the right mix of bonds and stock funds to make the total income and keep the AA in line? AND how often? I am not sure there even is a way to cash out only some dividends and reinvest others...
I suspect that most of our retired members take their dividends in cash, instead of reinvesting; at least I do. Mine are directed to a money market account at Vanguard.

Quote:
...and of course there is the question of cash reserves that has been discussed in other threads...using it as a safety net or parachute in bad times, but then how to replenish?
Mine gets replenished partly from dividends, but also in rebalancing since my asset allocation includes a percentage of cash at Vanguard.
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Old 02-12-2013, 07:01 AM   #4
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I transfer what I will need for the year, from Vanguard to my bricks 'n' mortar bank, during the first week in January. Probably most people don't. The reason I take it all at once, is perhaps out of an abundance of caution. I think it is simpler this way, and I am less likely to err or overspend.

I suspect that most of our retired members take their dividends in cash, instead of reinvesting; at least I do. Mine are directed to a money market account at Vanguard.

Mine gets replenished partly from dividends, but also in rebalancing since my asset allocation includes a percentage of cash at Vanguard.
How do you know how much to transfer if you are also cashing the dividends? What I mean is, if you expect to spend $60,000 this year, how much would you transfer knowing that some of that $60,000 will be made in dividends for the year, but not sure how much exactly ahead of the dividend payouts?
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Old 02-12-2013, 07:02 AM   #5
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I FIRE'd four years ago @ 50 and have all distributions pay out. My asset allocation is lighter on equities though than probably most here (30 equity, 67 FI, 3 Cash) so throws off a fair amount of cash, twice the amount needed for annual living expenses. Firecalc gives me a 100% success probability for 40 years with a 3.5% WR. Between the bond/stock market rich valuations, a lot of years ahead of me and to increase my success probability, for now my annual WR cap is 2.5% which easily meets my needs/wants. On a quarterly basis, I'll reinvest the excess cash in whatever fund that is below it's target. I'm with VG so don't have any reinvestment costs. This approach allows me to stick to my allocations without worrying about price fluctuations, leverage underperforming funds and sleep well.
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Old 02-12-2013, 07:17 AM   #6
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Virtually all my funds are in an IRA at Vanguard. My withdrawal process consists of an automatic monthly transfer from my Vanguard MMkt account to my checking account. I keep a couple of years expenses (net of anticipated SS and dividend income) in that account and my quarterly dividends are also paid into the MMKt.

Paying myself monthly instead of withdrawing my anticipated needs for the year up front allows me to do some end of year adjustments. Last year I found my expenses were less than planned so I was able to skip the last month withdrawal and reduce my taxable income a bit.

So far I've managed to keep the cash account topped up by selling appreciated funds as part of a rebalancing strategy.
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Old 02-12-2013, 08:05 AM   #7
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This is where I have done a little unsophisticated market timing. Most of our portfolio is in tax differed accounts but for the next decade or so we are withdrawing from the taxable, all equities account. I like to have close to a year in a MMF for living expenses but when I cash in equities depends on the market. So far I have successfully picked temporary peaks to liquidate chunks of change. The reduction of equities leaves me still within my AA because of increases in value over the preceding months. If I blow it (or in the eventual downturn when equities are low) I plan to pull what I need from equities and simultaneously buy back an equivalent amount of equities in tax differed accounts to maintain my AA.
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Old 02-12-2013, 08:07 AM   #8
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This thread links to several others on the subject, just thought I'd add them What drawdown method do you use?
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Old 02-12-2013, 06:29 PM   #9
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If you are in retirement and withdrawing money from a taxable account it is probably a good idea to NOT re-invest the dividends. This makes it very messy for the person stuck doing your taxes. I volunteer doing taxes and every so often someone comes in with a mutual fund they have had for 20 years and always re-invested the dividends and doesn't have a clue what the cost basis is. It takes a bunch of time to re-create all the money and dividends that flowed into the account and to do it once is enough, but if you continue this technique into retirement you have to revisit the cost basis every year, when it really isn't necessary. Just have the dividends paid to the money market in the account and take your distributions from there.
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Old 02-12-2013, 07:01 PM   #10
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If you are in retirement and withdrawing money from a taxable account it is probably a good idea to NOT re-invest the dividends. This makes it very messy for the person stuck doing your taxes. I volunteer doing taxes and every so often someone comes in with a mutual fund they have had for 20 years and always re-invested the dividends and doesn't have a clue what the cost basis is. It takes a bunch of time to re-create all the money and dividends that flowed into the account and to do it once is enough, but if you continue this technique into retirement you have to revisit the cost basis every year, when it really isn't necessary. Just have the dividends paid to the money market in the account and take your distributions from there.
+1 Not worth the hassles reinvesting creates.
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Old 02-12-2013, 07:01 PM   #11
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I would also recommend you NOT take large withdrawals from your IRA's at the beginning of the year. Take too much and you will have to make a quarterly IRS tax payment, better to take large withdrawls in 4th quarter if possible.

Also, if you are going to need PPACA coverage, best to have a cashe of post tax savings so you can control your taxable income and increase your federal premium support.

I plan on doing this as well as having equity dividends roll out monthly into my local bank account.
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Old 02-12-2013, 07:04 PM   #12
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My retirement fund (at least the part I draw from) is all in taxable accounts.

1. I let the dividends/distributions paid out during the year accumulate as cash (not reinvested) within my retirement portfolio. Most of my distributions are paid out in December.

2. At the end of the year, I calculate the amount to withdraw based on a % of the ending portfolio value. I withdraw this amount in cash, and transfer it to an FDIC-insured high yield savings account for my year's spending money.

3. I then rebalance my portfolio some time between the 2nd and 15th of the new year. This will replenish my portfolio cash % (if needed) as well as rebalance my other asset classes.

4. If what I withdraw is in excess of what I actually need for a year, or if I have spending money left over from the prior year, that goes into a short-term bond fund as a "reserve" available for whatever might come up.

Notice that at the end of each year, I am taking my withdrawal from the prior year's distributions + whatever extra cash I need to meet the withdrawal. I don't try to anticipate receiving dividends/distributions for current year income.
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Old 02-12-2013, 07:09 PM   #13
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I would also recommend you NOT take large withdrawals from your IRA's at the beginning of the year. Take too much and you will have to make a quarterly IRS tax payment, better to take large withdrawls in 4th quarter if possible.
The correct procedure is to have the tax withheld by your broker at the time of withdrawal, this avoids all those headaches.

Taking a large withdrawal in the 4th quarter does not avoid you having to pay the quarterly tax.

If you file your taxes and you haven't withheld at least last years obligation or 90% of this years obligation, you will most likely be forced to pay an under withholding penalty.
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Old 02-12-2013, 07:12 PM   #14
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My retirement fund (at least the part I draw from) is all in taxable accounts.

1. I let the dividends/distributions paid out during the year accumulate as cash (not reinvested). Most of my distributions are paid out in December.

2. At the end of the year, I calculate the amount to withdraw based on a % of the ending portfolio value. I withdraw this amount in cash, and transfer it to an FDIC-insured high yield savings account for my year's spending money.

3. I then rebalance my portfolio some time between 1/2 and 1/15 of the new year.

4. If what I withdraw is in excess of what I actually need for a year, or if I have spending money left over from the prior year, that goes into a short-term bond fund as a "reserve" available for whatever might come up.

Notice that at the end of each year, I am taking my withdrawal from the prior year's distributions + whatever extra cash I need to meet the withdrawal. I don't try to anticipate receiving dividends/distributions for current year income.
Great plan, and easy on the tax preparer -- which I suspect is maybe you.

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Old 02-12-2013, 07:42 PM   #15
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My retirement fund (at least the part I draw from) is all in taxable accounts.

1. I let the dividends/distributions paid out during the year accumulate as cash (not reinvested). Most of my distributions are paid out in December.

2. At the end of the year, I calculate the amount to withdraw based on a % of the ending portfolio value. I withdraw this amount in cash, and transfer it to an FDIC-insured high yield savings account for my year's spending money.

3. I then rebalance my portfolio some time between the 2nd and 15th of the new year. This will replenish my portfolio cash % (if needed) as well as rebalance my other asset classes.

4. If what I withdraw is in excess of what I actually need for a year, or if I have spending money left over from the prior year, that goes into a short-term bond fund as a "reserve" available for whatever might come up.

Notice that at the end of each year, I am taking my withdrawal from the prior year's distributions + whatever extra cash I need to meet the withdrawal. I don't try to anticipate receiving dividends/distributions for current year income.
Ok, sorry for not completely getting it, but if your portfolio is throwing off say 2.5% in dividends and you plan to take 4% WR, do you then take 1.5% of the total portfolio value left at the end of the year or 4% or what?
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Old 02-12-2013, 07:47 PM   #16
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Great plan, and easy on the tax preparer -- which I suspect is maybe you.

Well, yeah, us. I do the estimated, DH the annual. But I have reinvested dividends in the past, and Fidelity uses the average cost basis method which is just fine with me. Fidelity does great basis tracking.

Probably the biggest headache after my withdrawal is guesstimating the amount of money to set aside for paying estimated taxes during the year.
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Old 02-12-2013, 07:51 PM   #17
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Ok, sorry for not completely getting it, but if your portfolio is throwing off say 2.5% in dividends and you plan to take 4% WR, do you then take 1.5% of the total portfolio value left at the end of the year or 4% or what?
No, I take 4% (actually 3.33%) of the total portfolio value. The dividends/distributions accumulated during the year contribute part of that total portfolio value. This is a total return point of view.

All safe withdrawal studies are based on the total return of a portfolio, not on the % of dividends it generates.

I don't bother to separate out my dividend distributions from my short or long-term capital gains distributions. It all is just treated as part of the total gain for the year along with the gains (or losses) of all the assets in the portfolio.
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Old 02-12-2013, 08:02 PM   #18
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No, I take 4% (actually 3.33%) of the total portfolio value. The dividends/distributions accumulated during the year contribute part of that total portfolio value. This is a total return point of view.

All safe withdrawal studies are based on the total return of a portfolio, not on the % of dividends it generates.
But aren't dividends and their reinvestment a very large part of the calculated historical returns of any portfolio? Also since the dividends are paying out to your savings account throughout the year, wouldn't they not be part of the portfolio value from which you are calculating whatever percentage you decide to use?
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Old 02-12-2013, 08:14 PM   #19
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But aren't dividends and their reinvestment a very large part of the calculated historical returns of any portfolio? Also since the dividends are paying out to your savings account throughout the year, wouldn't they not be part of the portfolio value from which you are calculating whatever percentage you decide to use?
No, my dividends are not paying out to my savings account during the year. They stay accumulating as cash in the portfolio until the end of the year. That may not have been clear from my original post (and I will correct it). Then at the end of the year, I know how much my portfolio grew (or shrank) including the dividends, and I calculate the withdrawal amount based on the total portfolio value at the end of the year.
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Old 02-12-2013, 08:24 PM   #20
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I transfer what I will need for the year, from Vanguard to my bricks 'n' mortar bank, during the first week in January. Probably most people don't. The reason I take it all at once, is perhaps out of an abundance of caution. I think it is simpler this way, and I am less likely to err or overspend.


I suspect that most of our retired members take their dividends in cash, instead of reinvesting; at least I do. Mine are directed to a money market account at Vanguard.


Mine gets replenished partly from dividends, but also in rebalancing since my asset allocation includes a percentage of cash at Vanguard.
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How do you know how much to transfer if you are also cashing the dividends? What I mean is, if you expect to spend $60,000 this year, how much would you transfer knowing that some of that $60,000 will be made in dividends for the year, but not sure how much exactly ahead of the dividend payouts?
(emphasis mine) Sorry to take so long to answer! Today is Mardi Gras, and I am in New Orleans....

I know what my entire 2012 dividends were by January 4th, and that money was sitting in money market at Vanguard as part of my cash reserve. So, before I withdrew my 2013 spending money on January 4th, I knew what they were. Having a cash reserve gives me a certain amount of flexibility in that respect. Since I only withdraw once each year, that withdrawal only required consideration of the entire prior year's dividends, and/or the size of my portfolio on 12/31/12.

That will be the last money my bank account will see from Vanguard until 2014, since I only do an annual withdrawal and since my dividends stay in my Vanguard MM account through the year.
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