Withdrawing funds in retirement

[crispus]

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.

 

[lem1955]

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.

 

[rayvt]

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?

No, keep it balanced.

The problem with withdrawing from the income side only, is that your asset allocation shifts heavier to stocks the longer the bear market goes on. In an extreme, you could wind up 100% in stocks in the 4th year of a bear market, and be selling stocks for a huge loss that you could have sold 3 years earlier at a small loss.

 

[W2R]

The act of rebalancing makes these decisions for you properly, so I recommend sticking to your rebalancing criteria and plan.


Also, I would suggest that you take your dividends in cash and then use that cash as part of your withdrawal and/or for rebalancing afterwards.

 

[Animorph]

I run my Mom's investments with a very similar portfolio to OP. Although she does not make any regular withdrawals. The plan is to rebalance normally unless the S&P 500 is more than 20% down from its peak. At that point any withdrawals will come from bonds and any rebalancing will not add to bonds but can add to stocks, until the S&P is back to within 10% of its peak.

I do roughly the same with my portfolio, normal operation until there's a bear market. Then I try to leave equities alone or add to them. I was busy buying equities through 2008 and 2009 after having built up a big cash allocation for retirement.

 

[Totoro]

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?

Withdrawing only from the income side effectively increases your equity percentage. Since your equity % is down, the net effect is the same as (slowly) rebalancing towards your previous percentage.

Depending on tax etc .. if therefore might be easiest to indeed withdraw from the income side until you hit your previous (desired) ratio equities/income.

Obviously if the market drops a bunch and your withdrawal rate is low that rebalancing approach might take too long. Conversely, if you keep withdrawing from the income part you'll overshoot your ratio, which is also not good.

[Edit] Guess what I'm saying is: consider rebalancing through withdrawing from fixed only, but your desired ratio is priority #1

 

[Birchwood]

The classic answer is to withdraw from the Bond fund, and wait for the stock funds to go up. I follow a "bucket" approach. Money to support 2-3 years living expenses should be in CASH or short term bonds, or money market only. For longer term needs, they can be in stocks, and intermediate grade bond funds. Slowly move money as you need to replenish the cash position.

 

[pb4uski]

....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?....

While I prefer to rebalance annually, you could rebalance by skewing future withdrawals to bonds which over time will get you back to 60/40. The inverse if at some future point you are overweight in equities.

 

[mathjak107]

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.

pretty much our plan but at 40-50% allocation and 2 years cash . . only difference is if we are still down in january i may take my ss earlier .

 

[crispus]

Speaking of SS. We are approaching 62 and the decision weather to take early SS or not. Is it worthwhile checking out social security solutions? For $500 they consult with you over the phone and come up with the best plan based on your average life expectancy and burn rate.

 

[GrayHare]

A cash bucket is a form of insurance that protects you from having to sell during a downturn. The Morningstar folks concluded leaving everything on "reinvest" and selling periodically yielded more money for you than being paid dividends as they are issued, but the difference was small.

 

[mathjak107]

but depending how assets are set up not spending the dividends in a taxable account and instead reinvesting them and spending money from an ira will get you taxed 2x that year on the income ,

 

[mathjak107]

A cash bucket is a form of insurance that protects you from having to sell during a downturn. The Morningstar folks concluded leaving everything on "reinvest" and selling periodically yielded more money for you than being paid dividends as they are issued, but the difference was small.

got a link on this ? because in a video i saw on morningstar they said they saw no difference whether a cash bucket was used vs systematic withdrawals from all parts of the pie maintaining your allocation .

the reinvested dividends while spending down other assets will increase equity allocations but that won't happen if you rebalnce .

 

[Birchwood]

$500 to determine how to draw SSS benefit, based on life expectancy and burn rate?
That's a joke. There's a lot of factors that are unknown. Save yourself a bundle, just for to the public library and there is always a reference book on Social security, or the best is to go to your local social security Office at any federal building. They are very knowledgeable and will tell you your real score.

 

[GrayHare]

got a link on this ? because in a video i saw on morningstar they said they saw no difference whether a cash bucket was used vs systematic withdrawals from all parts of the pie maintaining your allocation .

the reinvested dividends while spending down other assets will increase equity allocations but that won't happen if you rebalnce .

not handy, but the M* video I described is a couple years old and has been discussed on the board several times

 

[jazz4cash]

Speaking of SS. We are approaching 62 and the decision weather to take early SS or not. Is it worthwhile checking out social security solutions? For $500 they consult with you over the phone and come up with the best plan based on your average life expectancy and burn rate.

Yes it is worth checking out solutions, but spending $500 is not worth it. I see and hear a lot about Soc Sec guidance these days, mostly from folks that are selling annuities. There are many resources online that show results for various claiming strategies, but here the one I like the best so far.

Social Security Benefits Evaluator - T. Rowe Price

 

[pb4uski]

To begin with, it isn't $500 and they offer less expensive options depending on how much work you want to do. See Social Security Solutions

Also, I thought this was a pretty good source for free.... SSAnalyze - Bedrock Capital Management

 

[jerome len]

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.

Take a look at your total stock percentage and compare it to your international. Look at your gains in recent years and look to the future of total stock compared to International. I think you'll find that you've had your gains in TS, Less profits or even big losses in INt.......today, the financial guru's are saying USA will do better in the future, China....Int forcasted weaker. I've drastically downsized my Int.....Vanguard, I think, now recommends 20% Int, it used to be 40%...... I will own even less........THIS IS A BUNCH OF YOUR MONEY....LOOK HARD AND GOOD LUCK.

 

[crispus]

To begin with, it isn't $500 and they offer less expensive options depending on how much work you want to do. See Social Security Solutions

Also, I thought this was a pretty good source for free.... SSAnalyze - Bedrock Capital Management

Thanks for the free calculator, but it doesn't take your current portfolio into account. As for the cost of the integrated plan here is pdf of the frequently asked questions that was emailed to me.
https://bd105.infusionsoft.com/app/linkClick/13773/842264634a16d019/1111395/28a6c2accca085e0

 

[pb4uski]

I don't see why your investments would be an input to optimizing SS. I concede that the amount of your retirement assets might make certain strategies more or less feasible, but what you have isn't an input to optimization.

 

[mathjak107]

it can take more years to break even using tips than a 60/40 mix as an example .

so opportunity cost is a factor if deciding to delay . how you invest can be an important bit of information if it isn't taken in to consideration . spousal adders are another factor that have to be counted . i am under fra so i can't file and suspend . for every year i delay my wife does not get 2600.00 added to her early benefit .

 

[marko]

A cash bucket is a form of insurance that protects you from having to sell during a downturn. The Morningstar folks concluded leaving everything on "reinvest" and selling periodically yielded more money for you than being paid dividends as they are issued, but the difference was small.

But if you're in need of cash now and need to sell equities, the difference might be a bit larger.

I put my dividends into a cash account and draw as needed as we're able to live on dividends/cap gains alone. Having to sell in the current market would be horrible!

 

[mathjak107]

reinvesting the dividends would be akin to increasing your equity allocation . because you would spend down cash and bonds that would have the effect of putting equity's on a rising glide path .

it is only after you sell some equity's and refill at some point down the road that you would regain your original allocation percentages .

so it isn't reinvesting the dividends that make a difference , it is the fact you are increasing your equity allocation.

just spending down from cash and bonds with a portfolio of growth stocks and no dividends would do the same thing assuming the total returns were the same or greater .

spending cash and bonds down against either reinvesting 20k in dividends or a an equity portfolio that grew 20k with no dividends would be the same .

it is only the mechanics of rebalancing and refilling that make a difference not the sources of income taken ..

 

[GTFan]

A cash bucket is a form of insurance that protects you from having to sell during a downturn. The Morningstar folks concluded leaving everything on "reinvest" and selling periodically yielded more money for you than being paid dividends as they are issued, but the difference was small.

One other thing to consider is if you are getting ACA plan subsidies and are intent on limiting cap gains to minimize income, take all divs and CGs as they are paid instead of reinvesting because they all count against your MAGI. Then you need to WD less (with less CG on sales) to get to your required income to live on (and/or to replenish cash).

 

[mathjak107]

if the dividends and cap distributions are going in to a brokerage account whether you spend or reinvest wouldn't make any difference . you get taxed the same .

unless you were going to be double taxed by reinvesting the dividends and cap distributions in the brokerage account while withdrawing money from ira's and getting double taxed on the income that year .

that would make little sense to do in the first place . .