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Old 04-07-2015, 09:42 PM   #21
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My true "cash" is less than 2%. The rest of it is in I-bonds paying 2.7% last year, and stable value funds paying 1.2%. Altogether, it's 25% of portfolio, as I am leery of bonds right now.
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Old 04-08-2015, 04:51 AM   #22
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this will be our first year retired when i pull the plug in july . i am still wrestling with a lot of the structuring ideas and eventually i will likely post our finances in a thread shortly and use all your collective brains together to find the best way of working with the ira's and taxable accounts to blend them for best tax efficiency. the endless possibilities are making my hair hurt so i will be open to some more brain storming.

we are starting off with about 2 years withdrawals in place in cash and are channeling dividends , and distributions in to cash too but so far only doing in this with the funds in our mutual funds in our taxable account. assets are about 50/50 iras and taxable account with about 2.8 million total and another 300-400k in co-op apartment profits still due us if we can sell them , not likely at the moment since they have stabilized tenants who are not taking a lease buy out offer. rents are close to break even. so i don't count them ....


i am still trying to wrap my arms around the projected finances. we are looking to get about 130-140k a year income as we live in ny .

the plan is to take ss at 63 in january. that will give us about 36k in ss combined , a 20k pension and an average of 50-70k in distributions from the funds in our taxable account at fidelity.

we still have some money owed us on some lease rights we sold so we get another 4k in interest until a balloon payment is due in 3 years.


so that takes us pretty close to goal without even using ira distributions yet.


so year two we will relook at things and see what we need but i think we will refill what we are short every jan . with a goal of holding 2 years needs at a time.
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Old 04-08-2015, 07:02 AM   #23
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I have read numerous posts where one will withdraw from their portfolio in January to supplement pensions, SS, etc. for the entire year.
I have also noticed that most of those who say they take withdrawals annually, most say they do it in January. Are there particular benefits to doing it that time of year, or is it just a convenient time? It occurred to me that December might make tax planning easier if one is also juggling Roth conversions and distributions in taxable accounts in addition to taking withdrawals from tax-deferred accounts.

(I have yet to take withdrawals myself as DW is still working.)
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Old 04-08-2015, 07:22 AM   #24
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About half of our retirement assets are in the Federal Thrift Savings Plan and half in IRAs.

The TSP has limited withdrawal options, among which are a fixed monthly amount which can be changed annually (an open season towards year's end). A monthly withdrawal is how we handle our TSP portion.

From the IRAs, we set a fixed percentage of the previous year end value as our target and generate that cash when we rebalance in Jan/Feb of the current year. We normally take that withdrawal out of the IRAs mid to late Summer when we can adjust the withholding to best fit our total tax burden.

It's worked for us thus far, but everyone's situation is unique.
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Old 04-08-2015, 08:27 AM   #25
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I include 6% cash in my AA and don't see the drag as very significant. If it wasn't in cash it would be in bonds earning say, 4% compared to 0.9% in my online cash account so the difference is 3.1% but on 6% of my portfolio I take a hit to my portfolio return of 0.186%.

So historically a 60.40 portfolio earns 8.9%, but lets say prospectively it is only 7%. My holding 6% cash rather than bonds drops that return to 6.8%. So on a $1 million portfolio my average return is $68k rather than $70k but I sleep well at night. Besides, at the end of the day the $2k a year is just coming out of my heirs pocket.

That said, carrying 15% cash/st bonds would be more like $5k a year on $1 million and too much of a drag for my taste.
I'm relatively new to ER, and really struggling with the question of holding cash in the AA. I've gone through similar rationalization math. I compare total portfolio performance with and without cash, so it's a slightly larger impact than your method, which assumes you would own bonds if not cash. Either way, it's sub-$5K per year per $1M, which may be small, but still spendable cash. Regardless of how it's calculated, or how small it is or isn't, or whether you or your heirs would ultimately spend it... my real question is: Why? I won't spend $50 at Home Depot without a good reason. Several $K every year requires a REALLY good reason. You say you "sleep well at night." That implies you are protected from some risk. I wonder if you might elaborate on that?
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Old 04-08-2015, 08:32 AM   #26
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As 2B stated, everyone has their own method. I don't withdraw anything until I have bills to pay.
+1

I withdraw when I spend the money. I don't try to time the market.
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Old 04-08-2015, 09:16 AM   #27
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I have also noticed that most of those who say they take withdrawals annually, most say they do it in January. Are there particular benefits to doing it that time of year, or is it just a convenient time? It occurred to me that December might make tax planning easier if one is also juggling Roth conversions and distributions in taxable accounts in addition to taking withdrawals from tax-deferred accounts.

(I have yet to take withdrawals myself as DW is still working.)
Many of us have distributions paid out by our mutual funds, and most of these are paid in December. This pretty much drives all the other considerations as well as Dec 31 being the end of the tax year. Most of our investments are in taxable accounts.

Also, I use my portfolio value on Dec 31 as the base for what I withdraw the next Jan. I use the % of remaining portfolio method.

It works out well in terms of both withdrawals, rebalancing and taxes to withdraw in January. You have a new tax year, so you aren't adding to the prior year's income if you sell some mutual funds to rebalance.

I can usually meet my withdrawals from the distributions that have been paid out the prior year - most of which were paid out in Dec. In fact 3/4 of my mutual fund distributions are paid out in late Nov and Dec. Once I have taken my annual withdrawal, I then usually need to rebalance the portfolio.

In January I have a pretty good idea of what I am going to owe for the prior year in terms of taxes, so I can set that aside.

December would be a difficult time especially for rebalancing as I would not know until the very end of the month what all my distributions will be. I really have to wait until the start of the next month.
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Old 04-08-2015, 09:50 AM   #28
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Also, I use my portfolio value on Dec 31 as the base for what I withdraw the next Jan. I use the % of remaining portfolio method.

It works out well in terms of both withdrawals, rebalancing and taxes to withdraw in January. You have a new tax year, so you aren't adding to the prior year's income if you sell some mutual funds to rebalance.
+1

I also use the Dec 31 value for calculating spending and use the % of portfolio for spending. I don't reinvest dividends in my taxable accounts but these fall well short of meeting my spending needs. The amount I move to cash is something less than 5% of my portfolio since my spending is 5% of my net portfolio (after escrow fun) plus my small pensions and future SS (from escrow fund).

By Dec 31 I have a very good idea of how much I'll have to spend for that year's taxes and what my estimated payments should be for the coming year. I also will be determining how much of an IRA to Roth rollover I plan on doing. Since money is moving around, it's a good time to rebalance and be done with it.

I used to do it on my birthday but I found I was also having to do a certain amount of moving in January anyway. I thought about doing quarterly funding and rebalancing but decided to not commit myself to so much extra work.
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Old 04-08-2015, 10:06 AM   #29
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Besides, at the end of the day the $2k a year is just coming out of my heirs pocket.

Child abuser!!

Do you count things like a 5 year PenFed 3% CD as part of cash? Or is it more like a bond? It seems a bit of both to me, but what do I know.
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Old 04-08-2015, 10:22 AM   #30
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My distributions are from a market fund where dividends were deposited, so market movement isn't my concern.

I do sometimes straddle two years (December and January withdrawals) if I'm running low and if I made smaller/larger withdrawals in the previous year; to perhaps help me in the coming year. IOW, if I made smaller WDs in one year, I might make another WD in December if I know that I'd need a larger WD in the coming year.
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Old 04-08-2015, 10:44 AM   #31
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I withdraw in January right before my annual rebalancing. Aside from the reasons others have cited like taxes, December dividends, and choosing to compute my WR based on my 12/31 portfolio balance each year, also I like starting the new year this way - - with a nicely rebalanced portfolio and with my entire year's spending money withdrawn and available. Often I buy myself a delayed Christmas present in January too.

Originally, after withdrawing to a high yield savings account, I would move money regularly into checking each month just like a paycheck. That was helpful to me when I first retired. Over the years, that has morphed into moving money into checking when checking gets low, instead. I don't need the paycheck simulation any more for some reason.
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Old 04-08-2015, 01:37 PM   #32
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...

Originally, after withdrawing to a high yield savings account, I would move money regularly into checking each month just like a paycheck. That was helpful to me when I first retired. Over the years, that has morphed into moving money into checking when checking gets low, instead. I don't need the paycheck simulation any more for some reason.
I can see moving away from paycheck simulation happening. OTOH, I've noticed any time I don't have some sort of structured means of spending (i.e., spreadsheet showing monthly income/outflow), I tend to spend more. A couple of years ago I tried going from using cash for weekly spending to only using a debit card for spending. My budget was always off, regardless of how hard I tried to mentally track spending while using debit. Needless to say, I returned to using cash and haven't looked back (forfeiting lots of cash rewards in the process, I know).
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Old 04-08-2015, 04:04 PM   #33
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I'm relatively new to ER, and really struggling with the question of holding cash in the AA. I've gone through similar rationalization math. I compare total portfolio performance with and without cash, so it's a slightly larger impact than your method, which assumes you would own bonds if not cash. Either way, it's sub-$5K per year per $1M, which may be small, but still spendable cash. Regardless of how it's calculated, or how small it is or isn't, or whether you or your heirs would ultimately spend it... my real question is: Why? I won't spend $50 at Home Depot without a good reason. Several $K every year requires a REALLY good reason. You say you "sleep well at night." That implies you are protected from some risk. I wonder if you might elaborate on that?
The first year I was retired I tried to think of my liquidity fund as being separate from my retirement funds and just found it too confusing so I decided to change my AA from 60/40/0 to 60/34/6 and that is what I did. Silly perhaps, but it works for me. I guess the sleep at night part is that if the turd hits the fan like it did in 2008 that I can get along for at least a couple years without having to make any particular moves with the bonds and stocks in my portfolio and I won't be forced to sell at a loss just to meet our living expenses. Besides, if something like that happened and I had more courage than I did back then I could even use some of those funds to buy more equities at depressed prices (but I doubt that I would).

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Child abuser!!

Do you count things like a 5 year PenFed 3% CD as part of cash? Or is it more like a bond? It seems a bit of both to me, but what do I know.
Please don't give the children any ideas for a civil action.

I view the 34% as an allocation to "fixed income" so it would include bonds and CDs and I include the Penfed CD in that 34% of fixed income. The struggle that I have is what to assign to it as a duration in calculating my fixed income duration and I finally just gave up and assign it a zero duration since its value does not decline when interest rates increase like bonds do.
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Old 04-08-2015, 04:28 PM   #34
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I used to do it on my birthday but I found I was also having to do a certain amount of moving in January anyway. I thought about doing quarterly funding and rebalancing but decided to not commit myself to so much extra work.
Yeah, it's enough work once a year. I'm glad I don't try to do it quarterly!
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Old 04-08-2015, 04:38 PM   #35
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I don't think anyone who has >50% of their portfolio in equities needs to worry about any "drag" from cash being part of their fixed income. Think of it as a bar bell strategy. Heck, some folks might even be comfortable living with a higher equity allocation if they have a bit more in cash.

You don't need to have each component of your AA beat inflation. You just need to total AA to beat inflation. And according to the above graph, 40% equities has been good enough for a portfolio to be drawn from and still hold up to inflation during some very challenging periods.

Pb4uski - if you don't have your cash buffer in a separate account it can get tricky to maintain and AA and a buffer. Your approach should be good enough, IMO.
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Old 04-08-2015, 06:44 PM   #36
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I don't think anyone who has >50% of their portfolio in equities needs to worry about any "drag" from cash being part of their fixed income.

...
Yes that's my thinking (although I'll be moving to 40% equities quite soon). It's the 2 years cash/3 years ST bonds mix I was questioning. To your point, it won't make much difference and will probably be what I end up doing anyway.
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Old 04-09-2015, 04:44 AM   #37
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Many of us have distributions paid out by our mutual funds, and most of these are paid in December. This pretty much drives all the other considerations as well as Dec 31 being the end of the tax year. Most of our investments are in taxable accounts.

Also, I use my portfolio value on Dec 31 as the base for what I withdraw the next Jan. I use the % of remaining portfolio method.

It works out well in terms of both withdrawals, rebalancing and taxes to withdraw in January. You have a new tax year, so you aren't adding to the prior year's income if you sell some mutual funds to rebalance.

I can usually meet my withdrawals from the distributions that have been paid out the prior year - most of which were paid out in Dec. In fact 3/4 of my mutual fund distributions are paid out in late Nov and Dec. Once I have taken my annual withdrawal, I then usually need to rebalance the portfolio.

In January I have a pretty good idea of what I am going to owe for the prior year in terms of taxes, so I can set that aside.

December would be a difficult time especially for rebalancing as I would not know until the very end of the month what all my distributions will be. I really have to wait until the start of the next month.

if markets are down alot do you still run with the balance or do you do something like bob clyatts less 5% than the year before ? i am going to use a real end of year balance to base on but i was going to follow bob's idea.
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Old 04-09-2015, 05:40 AM   #38
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if markets are down alot do you still run with the balance or do you do something like bob clyatts less 5% than the year before ? i am going to use a real end of year balance to base on but i was going to follow bob's idea.
Yes, I still run with the fixed percent of Dec 31 value even with the portfolio down. We don't spend currently everything we withdraw, so hopefully we'll have some left over from the prior good years to help us through a bad year or two.
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Old 04-09-2015, 07:23 AM   #39
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mj107, I also rebalance as planned, market up or down, at the beginning of the year. Theoretically, a down year gets me the chance to balance into Equities when they are at a lower price. I'm a fixed percentage type of guy for withdrawals, so the lower portfolio value from previous year's end would reduce the amount. However, as you suggest, I could set aside even less cash for withdrawal than my normal percentage if I decided that made the most sense.
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Old 04-09-2015, 08:30 AM   #40
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For people who use a fixed percentage of present portfolio value, if you withdraw then set aside the cash but not spend it all after a good year, it may not be different from the people who use the fixed percent of portfolio at start of retirement but who spend it.

That is, except for another detail. You are increasing your cash AA after a string of good years, expecting to use it as reserve to spend in future bad years. It's a form of tactical AA.
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