Withdrawing funds in retirement

[Lsbcal]

We are both 61 a year away from early SS and are living exclusively on IRA withdraws. We are invested with Vanguard in a 3 fund portfolio (total stock market, total international stock market, and total bond market). Our ratio is around 60/40 equities to income.

My question is in a down market should you withdraw from the income side only in order to wait for equities to improve or just try to keep the same percentage equities to income?

We currently have around $900k and our monthly burn rate is currently about 5k gross. At 62 we will be able to receive about $3800 per SS.

I think this is an excellent question. The answer is probably very individual.

Here is what I did in 2009. I was 61 at the time and that downturn was very worrisome. What if it kept going down? It did do that in the 1930's. Of course, now we know we had a great rally and rebalancing into stocks would have worked just fine. But in January 2009, nobody knew that. So I decided to spend from FI and not rebalance.

Since we didn't have SS because we were too young at the time, that was even harder emotionally. So anther point is that having SS or some other income makes spending from FI and not rebalancing an easier decision.

Our stock allocation which had been 55/45 in 2008 went down to something like 44/56. I did eventually rebalance (July 2009, see on the chart below) but only after the market started up again. I had done some backtesting and came up with a method to determine when the market had some upward momentum. This wasn't necessarily a brilliant idea, just a point to put money back into the market after a business recovery was under way. The market pricing (SP500) tells us when a recovery is coming and not necessarily the current newspaper headlines -- at least that is the thesis. NOTE: I am not claiming any formula will work to determine when a market bottom is behind us.

I'll finish this reply with a chart. It shows 3 different market declines. They are arranged so that their peaks coincide. Notice that they all went down somewhat similarly but 2 recovered and the other went down disastrously for some years. Sure, eventually even the 1930's decline recovered but if you were an older retiree you would have been really-really scared and might have done something even stupider in maybe 1933. So that is why, as an older retiree, I will not rebalance into a declining market.

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[CaliforniaMan]

My Asset Allocation is 60/32/8 where the 8% is in CD's, checking, savings and MM accounts. Those cash accounts represent about 2 - 2.5 years of living expenses. Depending on where the stock market is in early January I will sell investments equal to another 1/2 year of expenses for 2 years out. If the stock market is low, I'll sell bond funds for the CD and then rebalance to my target allocation. If the stock market is up I may sell both to keep my target allocation. Regardless of which fund I tap for the cash withdrawal, I'll rebalance to my target allocation after.

If you rebalance immediately after your withdrawal it doesn't matter whether you withdraw from equities or from bonds or from some combination of the two. Mathematically it is the same because of the rebalance.

 

[lem1955]

If you rebalance immediately after your withdrawal it doesn't matter whether you withdraw from equities or from bonds or from some combination of the two. Mathematically it is the same because of the rebalance.

Good Point. It wouldn't be immediately after.