FIRE withdrawal strategies

[Options]

I read recently that there is no perfect investment, strategy, or plan. It's also expressed here:

https://thefinancebuff.com/stress-goes-away-when-you-stop-wanting-the-best.html

Back to our usual topic of investing. You can go crazy in trying to figure out what will work the best “in this environment” or you can just go indexing and own the entire market. Indexing is not going to be the best. You can stress about whether to go with small cap and value tilts, the newfangled quality and momentum factors, or plain vanilla indexing, or the choices among target date funds, lazy portfolios, Vanguard PAS, Fidelity Go, Schwab Intelligent something, Betterment or Wealthfront or you can just pick one that you can stick to and move on. Whatever you choose, it’s not going to be the best.

Emphasis added

 

[Live And Learn]

I confess to being a yield chaser. As someone said, it makes me feel more comfortable. In my taxable accounts my divs / interest cover 50% of my expenses; in my tax deferred I cover another 35%. I'm ok with funding the remaining 15% out of principle in my non-div driven investments. Right or wrong - who knows - but its what keeps me sleeping well.

 

[CardsFan]

In the accumulation phase, I was a total return investor. Now that I am retired, nothing has changed in that regard. But I have realized that between the after tax account and the primary IRA account, the portfolio is generating more than my desired WR in interest, dividends and cap gains.

So, for simplicity, I have these put into cash and periodically move them to the checking account. I have taxes withheld from the IRA distribution (sufficient, I think, to cover the after tax income as well), so I do not need to worry about quarterly payments. Will make Roth conversions to the top of the 15% bracket, if there is room.

This will be the first year of trying this, so I expect there will be some changes along the way.

I realize this is no different than re-investing and then selling as needed. I just seems to be simpler, at least to me.

 

[braumeister]

I read recently that there is no perfect investment, strategy, or plan.

Nonsense!
Just ask any Ameriprise rep.

 

[duckcalldan]

I'll be FIREing in just over a month. We'll be living on our taxable portfolio (60% of total assets) until I take SS/RMDs in 17 years. My dividends/interest/CG has been reinvested but will be transferred to my Alliant savings account. This will cover about 40% of our spending. The other 60% will come from savings, short-term bonds or asset sales, all depending on the market at the time and rebalancing needs. We've got over 3 years of spending in cash/ST bonds, so I think my fairly simple plan works well. Thoughts?

 

[Ronnieboy]

This is interesting. I'm 5 years to FIRE and I have been focused on building up a dividend-based portfolio. My rationale is that I predict when I retire I will fall into the 15% tax bracket, and thus, those dividends are tax-free. Of course, this might change if Trump/Congress consolidate the tax brackets. But, assuming things stay the same, isn't it better to build a portfolio based on dividends if they are tax free? And, if your portfolio is high enough, then you can live off of dividends vs having to depend on the price growth of your funds/ETFs/stocks?

This is true, if you have qualified dividends and stay under the 15% tax bracket. So as of 2016 returns, you could in theory have up to $75,300 in qualified dividends as your only income and not pay a dime of income taxes as long as you are filing as Married/Joint.

I have been working towards a dividend type of portfolio also because to me they are the same. If I have $1m and I need $40k a year, I either sell $40k worth of stock or if the portfolio generated 4% of qualified dividends I have $40k. I have achieved the same thing.

The big difference is I still have $1M plus growth in dividend portfolio and 960,000 plus growth in the total return (as far as we know they could both grow at the same rate or one could do better than the other). Not to mention in the total return I would probably have CG taxes if I sold any of the winners while no taxes on the qualified divy's. And hopefully with dividend growth you will get a raise every year.

I have no qualms about leaving $0 to the kids, as I am working for my retirement not theirs And I would have no hesitation selling stocks if I needed to, but why do it if you don't have too?

 

[Montecfo]

I think it is.

Say you have two companies that are exactly the same in everything important, except that one issues dividends and one re-invests the money in the business. Theoretically, the one that keeps the money will have it's share price go up by the amount of money it keeps. If all of that is true, and I think generally it is, then the person owning the non-dividend company would sell a few shares to fund their retirement, whereas the person owning the dividend paying company would fund their retirement through dividends.

Correct. So if you are investing for total return (after taxes) you should also achieve higher investment balances after withdrawals than if you seek higher dividends.

Which I think is what we all want.

I have also noticed some people view that if you sell a share you are "spending the principal". People can view this in whatever way is convenient, but it has different implications if your principal is growing, than if it is not.

I would view that if, for example, you have a 5% total return on an investment and you withdraw 3%, you are not spending principal whether you sell shares or not.

To put a finer point on it, if you have a 2% total return (consisting of a 4% dividend and a 2% loss of investment value) and you spend 3%, I would view that as spending principal, even if you are just "spending the dividends" . The earning power of your investment and its balance in dollars would have declined, and that is the measure as I see it.

 

[NW-Bound]

This is true, if you have qualified dividends and stay under the 15% tax bracket. So as of 2016 returns, you could in theory have up to $75,300 in qualified dividends as your only income and not pay a dime of income taxes as long as you are filing as Married/Joint...

Don't forget that a married couple have at least 2 personal exemptions at $4,050 each, and the standard deduction of $12,600.

So, one can have up to ($75,300 + 2 x $4,050 + $12,600) = $96,000 worth of tax-free income.

To get that just from the dividends of the S&P and no capital gain would require a portfolio of about $5M. I wish I have that much in my after-tax account.

 

[nun]

Not sure if this is good place to put this but what the heck I'm going to do it anyway. Here's my break down, and my target to retire in June 2017:

- net pension 2292 month inc health insurance
- brokerage #1 = 60k
- brokerage #2 = 200k
- IRA = 290k
- Roth = 60k
- USAA bonds = 25k
- savings = 15k
- no debt

Regular expenses 1300 month

Add annual:
+ 2982 prop tax
+ 700 earthquake insurance
+ 500 apx holidays
+ 2500 my 1 overseas trip per yr
+ 15k family trip (1 week, 8-10 of us)

Don't know what Restricted SSA will be but SSA @ 66 would be 1703 / 2319 @ 70

Do I have enough? Would like to avoid taking SSA until 70 to self insure for LTC

Best strategy ��

I've organize my retirement income in a similar way.

Monthly expenses (everything including re taxes, health etc) $2500

Monthly rental income $1600
Monthly COLA'ed pension $1700

I let the excess accumulate in my bank account for unforeseen expenses and eventually sweep it into VTSAX.

 

[exnavynuke]

Not sure if this is good place to put this but what the heck I'm going to do it anyway. Here's my break down, and my target to retire in June 2017:

- net pension 2292 month inc health insurance
- brokerage #1 = 60k
- brokerage #2 = 200k
- IRA = 290k
- Roth = 60k
- USAA bonds = 25k
- savings = 15k
- no debt

Regular expenses 1300 month

Add annual:
+ 2982 prop tax
+ 700 earthquake insurance
+ 500 apx holidays
+ 2500 my 1 overseas trip per yr
+ 15k family trip (1 week, 8-10 of us)

Don't know what Restricted SSA will be but SSA @ 66 would be 1703 / 2319 @ 70

Do I have enough? Would like to avoid taking SSA until 70 to self insure for LTC

Best strategy ��

Depends on how much you spend on having a life outside of once a year expenses, but if your non-essential spending isn't quite extravagant (relative to your essentials) then your numbers look pretty good imo.

 

[Running_Man]

I think it is.

Say you have two companies that are exactly the same in everything important, except that one issues dividends and one re-invests the money in the business. Theoretically, the one that keeps the money will have it's share price go up by the amount of money it keeps. If all of that is true, and I think generally it is, then the person owning the non-dividend company would sell a few shares to fund their retirement, whereas the person owning the dividend paying company would fund their retirement through dividends. Withdrawal rates include dividend and interest, so it's not like you get your dividends and then you get to sell 3.5% of your nest egg.

This is all theory and not true in reality, the best performing stock since 1920 is also one of the highest yielding over that entire time Philip Morris at least if you track it back. SDOG takes the 5 highest yielding stocks out of 10 sectors in the S&P 500 and has outperformed the S&P500 despite a relatively high .6% expense fee. It has outpaced the S&P 500 from it’s inception 98 percent to 83 percent. Dogs of the Dow has outperformed the Dow for both the long term (1970’s) since 2000 and since 2009.

Jeremy Siegel did an in depth study of the S&P500 performance in 2005 from 1956 to 2002 and found when sorted by quintiles of dividend yield the high dividend quintile performed best. As a matter of fact investing in the highest 20% of dividend stocks in the S&P500 saw $1,000 grow to $462,750 while the lowest 20% in dividends grew only to $64,930 while the S&P 500 itself grew to $130,768. The long term returns were 14.27 percent, 9.50 percent and 11.8 percent.

http://www.mhinvest.com/files/pdf/NF_future_for_investors_2005.pdf

SDOG so far from inception has beaten the S&P500 16.91 percent to 13.96 for the S&P500 — the difference is almost entirely the difference in dividend yield between the two indexes

http://www.alpsfunds.com/performance/SDOG

 

[Ronnieboy]

Don't forget that a married couple have at least 2 personal exemptions at $4,050 each, and the standard deduction of $12,600.

So, one can have up to ($75,300 + 2 x $4,050 + $12,600) = $96,000 worth of tax-free income.

To get that just from the dividends of the S&P and no capital gain would require a portfolio of about $5M. I wish I have that much in my after-tax account.

Or about $2m in AT&T stock

 

[NW-Bound]

I don't know about having $2M of after-tax money and putting it all in T.

But it is true that a basket of dividend stocks will let one live well with a few $M in after-tax accounts, while paying little taxes.

 

[samclem]

I would view that if, for example, you have a 5% total return on an investment and you withdraw 3%, you are not spending principal whether you sell shares or not.

I think that is correct if the returns are inflation-adjusted (i.e. "real"). But if the account went up 5% (nominal), inflation was 3%, and you withdrew 3%, you are spending principal (because, in real terms, your account is worth less at the end of the period than it was at the start).

 

[Sunset]

By default we are a mixture, many of our investments pay dividends, but when needed we will sell stock.
I don't chase divs, so maybe that makes us a total return type investor.

The nice thing about divs is even if the market tanked 40%, most divs would remain the same, but selling any stock then would hurt !

 

[marko]

Both arguments make sense depending on one's situation.

In my personal case it's been drilled into me since childhood to "never touch the principal" with examples pointed to where "things got so bad for them they had to go into the principal! (horrors)"

 

[NW-Bound]

By default we are a mixture, many of our investments pay dividends, but when needed we will sell stock.
I don't chase divs, so maybe that makes us a total return type investor.

The nice thing about divs is even if the market tanked 40%, most divs would remain the same, but selling any stock then would hurt !

Having to sell stocks low certainly hurts, hence most people keep some cash or bonds.

 

[bmcgonig]

Both arguments make sense depending on one's situation.

In my personal case it's been drilled into me since childhood to "never touch the principal" with examples pointed to where "things got so bad for them they had to go into the principal! (horrors)"

I think I read somewhere that the idea of never touching principal came from an earlier era e.g., 1800-1900, when there was no inflation and bank rates were around 4%. Certainly made sense then.

 

[NW-Bound]

I think that is correct if the returns are inflation-adjusted (i.e. "real"). But if the account went up 5% (nominal), inflation was 3%, and you withdrew 3%, you are spending principal (because, in real terms, your account is worth less at the end of the period than it was at the start).

+1

Money is fungible. If your stash can keep up with inflation after withdrawals, then why do you care whether the withdrawals come from dividends or cap gains?

Now, there are arguments that dividend-paying or rather value stocks are better at providing long-term total returns than growth stocks, but that is a different issue.

 

[socca]

I get psychologically that if your dividends can support your SWR than you may feel "safe" or like you are not touching your principal (regardless of its value, including a devalue), but isn't this smoke & mirrors?

It appears that you are elevating SWR to a position as supreme conceptual framework for retirement financial management, and then trying to fit the old-fashioned approach of defining financial independence as being able to live comfortably within one's income (mostly passive) into the SWR framework. I don't think that this valid. I don't bother calculating my WR because the number has no utility for me (I use the old-fashioned approach). I'm definitely not suggesting that this approach is right for everyone, however.

 

[Montecfo]

It appears that you are elevating SWR to a position as supreme conceptual framework for retirement financial management, and then trying to fit the old-fashioned approach of defining financial independence as being able to live comfortably within one's income (mostly passive) into the SWR framework. I don't think that this valid. I don't bother calculating my WR because the number has no utility for me (I use the old-fashioned approach). I'm definitely not suggesting that this approach is right for everyone, however.

You were responding to another poster. But it seems to me if I understand you correctly, that it is the definition of "income" that is the hangup.

If your accounts have lost value, you have a loss. This is true whether the dividend was cut, or not. If your dividends that you are living on exceed your total return, you are spending principal. As the OP suggested, there may be psychic benefits from ignoring this, but it is true nonetheless.

 

[socca]

If your dividends that you are living on exceed your total return, you are spending principal.

A specific example (with numbers) would clarify your point (which I currently don't understand). Don't forget that there can be other sources of passive income than just dividends from stock, but if you want to concentrate on that - fine.

 

[Montecfo]

A specific example (with numbers) would clarify your point (which I currently don't understand). Don't forget that there can be other sources of passive income than just dividends from stock, but if you want to concentrate on that - fine.

See post 32, there is a simple example in the last paragraph. I used a stock and dividend example, but the concepts hold for other securities.

 

[socca]

To put a finer point on it, if you have a 2% total return (consisting of a 4% dividend and a 2% loss of investment value) and you spend 3%, I would view that as spending principal, even if you are just "spending the dividends". The earning power of your investment and its balance in dollars would have declined, and that is the measure as I see it.

No - stock dividends are paid per share, not based on current market value.

More generally, for an income-oriented investor fluctuation in the market value of income-producing assets is largely irrelevant as long as such fluctuation doesn't suggest future impairment of income producing ability. I have been income-oriented since the day I started investing some 36 years ago, and have never regretted it. The many asset-valuation-oriented investors on this board may find the income-oriented investor perspective a bit odd, but variety is the spice of life.

 

[scrabbler1]

No - stock dividends are paid per share, not based on current market value.

More generally, for an income-oriented investor fluctuation in the market value of income-producing assets is largely irrelevant as long as such fluctuation doesn't suggest future impairment of income producing ability. I have been income-oriented since the day I started investing some 36 years ago, and have never regretted it. The many asset-valuation-oriented investors on this board may find the income-oriented investor perspective a bit odd, but variety is the spice of life.

+1.

The monthly income from my big bond fund is based on the number of shares I own and the number of cents per share the fund pays, not the NAV of each share. The NAV mattered the most when I first bought most of my shares back in late 2008. And at that time, when all markets were tanking, I was able to buy LOTS of shares at dirt-cheap prices. Since that time, the NAV has risen and fallen (mostly risen) but the dividends per share have mostly fallen slightly. I have been able to buy more shares in that time to offset the decline in dividends per share.