Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Spending Methods
Old 02-24-2018, 11:25 AM   #1
Dryer sheet wannabe
 
Join Date: Feb 2018
Posts: 22
Spending Methods

I am new to the concept of actually spending the money. For the past 25 years I have been in the asset accumulation mode. So here is my question; If I have a portfolio that is 80% Total Stock Market index and 20% total bond market index and I plan to withdraw $120k/year in the earlier part of retirement, understanding sequence of returns risk, how do you all do that? Seems like it is market timing in reverse. If the market looks like it might have a good year, better to give bonds the haircut etc but who really knows? So do you w/d the money all at once for the year or make redemptions every month depending on changing market conditions ie. working your strategic asset allocation? Thanks. J
__________________

joel2125 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 02-24-2018, 11:31 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Sunset's Avatar
 
Join Date: Jul 2014
Location: Spending the Kids Inheritance and living in Chicago
Posts: 5,647
I would take out from each to maintain my AA proportions or AA goal.

So in a year after stocks have done really well, this would mean taking out more stocks. Nobody can really predict the future so I would base it on what has happened, not what I suspect will happen.

I do allow dividends to remain as cash and withdraw them whenever the amount is large enough to bother doing it.
__________________

__________________
Fortune favors the prepared mind. ... Louis Pasteur
Sunset is offline   Reply With Quote
Old 02-24-2018, 12:27 PM   #3
Dryer sheet wannabe
 
Join Date: Feb 2018
Posts: 22
Thanks. But let's say it has been a very poor year for stocks. Why not whittle down the bonds over the next ? years to mitigate sequence of returns risk? Rebalance when the market recovers. Also, do you take all the money out once a year, once a quarter? Thanks again.
joel2125 is offline   Reply With Quote
Old 02-24-2018, 12:36 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 9,203
Take some out monthly. It will also depend on how things are taxed. If you really want to know, then read the ERN series:
https://earlyretirementnow.com/2016/...-part-1-intro/

Don't forget you get bond dividends monthly and Total Stock dividends quarterly which you can spend if you want.

A poor year for stocks means rebalance from bonds to stocks.
LOL! is offline   Reply With Quote
Old 02-24-2018, 12:45 PM   #5
Moderator
braumeister's Avatar
 
Join Date: Feb 2010
Location: Northern Kentucky
Posts: 10,759
Quarterly works best for many of us because that's when most dividends are paid. Taking out those dividends reduces the amount of (whatever) you need to sell.
braumeister is offline   Reply With Quote
Old 02-24-2018, 12:48 PM   #6
Dryer sheet wannabe
 
Join Date: Feb 2018
Posts: 22
Fantastic. The study looks like a winner. I will read it. Thanks for the advice!
joel2125 is offline   Reply With Quote
Old 02-24-2018, 12:56 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 19,007
Quote:
Originally Posted by joel2125 View Post
I am new to the concept of actually spending the money. For the past 25 years I have been in the asset accumulation mode. So here is my question; If I have a portfolio that is 80% Total Stock Market index and 20% total bond market index and I plan to withdraw $120k/year in the earlier part of retirement, understanding sequence of returns risk, how do you all do that? Seems like it is market timing in reverse. If the market looks like it might have a good year, better to give bonds the haircut etc but who really knows? So do you w/d the money all at once for the year or make redemptions every month depending on changing market conditions ie. working your strategic asset allocation? Thanks. J
I rebalance as I withdraw. That tells me how much to take from stocks versus bonds. I withdraw annually which makes it easier for me as I prefer to rebalance once a year. Annual funds go in a high yield savings account - currently earning around 1.5%. From this money is sent to my checkout account monthly.
__________________
Retired since summer 1999.
audreyh1 is offline   Reply With Quote
Old 02-24-2018, 02:27 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 18,931
Quote:
Originally Posted by joel2125 View Post
Thanks. But let's say it has been a very poor year for stocks. Why not whittle down the bonds over the next ? years to mitigate sequence of returns risk? Rebalance when the market recovers. Also, do you take all the money out once a year, once a quarter? Thanks again.
That is the beauty of rebalancing... if stocks have a poor year then your AA will have you whittle down bonds... if stocks have a good year then your AA will have you whittle down stocks.

What I did since retiring is added a cash component... in my case 5% in an online savings account that earns 1.5% (I just noticed that it went up ). During the year, I have a monthly automatic transfer from that savings account to my local bank checking account that I use to pay bills.

Then I periodically rebalance... replenishing the cash to 5% and selling stocks or bonds or both, as the case may be to get back to my overall AA.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...60/35/5 AA
pb4uski is online now   Reply With Quote
Old 02-25-2018, 06:18 AM   #9
Full time employment: Posting here.
VanWinkle's Avatar
 
Join Date: Oct 2017
Location: Brighton
Posts: 613
Quote:
Originally Posted by pb4uski View Post
That is the beauty of rebalancing... if stocks have a poor year then your AA will have you whittle down bonds... if stocks have a good year then your AA will have you whittle down stocks.

What I did since retiring is added a cash component... in my case 5% in an online savings account that earns 1.5% (I just noticed that it went up ). During the year, I have a monthly automatic transfer from that savings account to my local bank checking account that I use to pay bills.

Then I periodically rebalance... replenishing the cash to 5% and selling stocks or bonds or both, as the case may be to get back to my overall AA.
Same method here except that I have a rewards checking account that pays 1.95% so send the re-balancing proceeds to the checking account directly from my brokerage account with Vanguard. I slowly reduce my short term bond fund in my taxable account and re-balance as needed in my tax deferred TIRA. I can't currently sell stocks in the taxable account due to capital gains and the ACA.
__________________
Retired May 13th(Friday) 2016 at age 61.
VanWinkle is offline   Reply With Quote
Old 02-25-2018, 06:28 AM   #10
Full time employment: Posting here.
 
Join Date: Nov 2014
Posts: 510
Take a look at VPW over on bogleheads.com It's a variable withdrawal method. The percentage withdrawn increases monotonically each year. Still, if your portfolio is up, you withdraw more, if it's down you withdraw less...
big-papa is offline   Reply With Quote
Old 02-25-2018, 06:39 AM   #11
Thinks s/he gets paid by the post
 
Join Date: Jan 2018
Location: Tampa
Posts: 1,577
Quote:
Originally Posted by big-papa View Post
Take a look at VPW over on bogleheads.com It's a variable withdrawal method. The percentage withdrawn increases monotonically each year. Still, if your portfolio is up, you withdraw more, if it's down you withdraw less...
Hi Big Papa
What do you think of the Clyatt 4/95 rule vs. the VPW? To me, it seems a little more conservative on the downside, while the VPW could cause a very large drop in withdrawals in a 2008 type scenario.
Looking at variable WR scenarios myself, so wondering....
__________________
TGIM
Dtail is offline   Reply With Quote
Old 02-25-2018, 07:23 AM   #12
Thinks s/he gets paid by the post
Cobra9777's Avatar
 
Join Date: Jul 2012
Location: Texas
Posts: 1,434
Two small pensions, some rental income, and dividends from the taxable account cover most of our routine monthly expenses. For larger discretionary items like travel and home improvements, we withdraw on an as-needed basis. Usually, I pull from our Ally savings account and then sort-of opportunistically replenish it at whatever point, and in whatever amount, seems appropriate at the time... considering tax impact, balance in the Ally account, market timing, and other probable near-term cash needs. At this point, we generate replenishment funds by selling stock in the taxable account (which is all stock) and then rebalance if necessary in tax-deferred (which is a mix of stocks and bonds).
__________________
Retired at 52 in July 2013. On to better things...
AA: 55% stock, 15% real estate, 27% bonds, 3% cash
WR: 2.0% SI: 2 pensions, some rental income, SS later
Cobra9777 is offline   Reply With Quote
Old 02-25-2018, 07:25 AM   #13
Full time employment: Posting here.
 
Join Date: Nov 2014
Posts: 510
Quote:
Originally Posted by Dtail View Post
Hi Big Papa
What do you think of the Clyatt 4/95 rule vs. the VPW? To me, it seems a little more conservative on the downside, while the VPW could cause a very large drop in withdrawals in a 2008 type scenario.
Looking at variable WR scenarios myself, so wondering....
I played around with Clyatt 4/95 and it does work. But based on a couple of other threads over on bogleheads, I modified VPW for the very concern you have. I even applied Clyatt 4/95 on top of VPW to try and smooth it out, but to get decent historical results, I had to up the 95 to around 98%+ before I saw really noticeable smoothing to VPW.

First, VPW as originally conceived by the author uses the entirety of the historical record for inflation adjusted stock returns. Likewise, it uses the entirety of the historical record for inflation adjusted bond returns. siamond, and others, have pointed out that you might have smoother withdrawals if you instead take valuations into account since even long term returns can fluctuate wildly from the historical averages.

Assuming you use a total stock market fund or SP500, 1/PE10 is a decent approximation for long term, inflation adjusted returns looking forward. Note this isn't really market timing in the traditional sense, it's just an attempt to take into account valuations when calculating your withdrawal. You're not changing your AA. And VPW does correct somewhat if you get it horribly wrong. Also a number of brokerage houses post long term forward looking returns for various asset classes as well, so if you don't use TSM or SP500, there is some data there. I actually know one fellow use uses 1/PE10 and averages it with at least one or two predictions from brokerage/research houses. Most brokerage houses give future nominal returns, so you'll need to adjust those for predicted inflation. Fed is targeting around 2.25% these days, so that's something you can use. Or you can use the average of, say, the last 3 year's inflation rate. Precision in any of this isn't required - you're not trying to maximize the withdrawal, only smooth it.

For bonds, it turns out that the current yield is a decent approximation of long term returns. Again, you'll need to adjust for inflation. Now one can never predict when/how the fed will change interest rates, but this still helps.

What I describe above helps with what we call "long term smoothing". It helps with "big waves" in withdrawals over long periods of time. There is still the matter of year-over-year smoothing. Clyatt's method is one way to address this within VPW.

However, both the original author (who really dislikes any smoothing at all) and siamond both proposed a short term smoothing method, which seems to work quite nicely.

1. Calculate the ideal VPW % withdrawal. Best to use the PMT function in excel:
PMT(expected return, # years remaining, -1, 0, 1) where expected return comes from the long term, forward looking return calculation described above.

2. Multiply the number calculated in step #1 by the amount in your portfolio to get the ideal VPW $ withdrawal.
If this amount is greater than the previous year's withdrawal, then for the actual $ to be withdrawn, take the previous year's withdrawal and add, say, 75% of the difference between last year's withdrawal and the ideal VPW withdrawal. That's your actual withdrawal for the year.

Likewise, if the amount is less than the previous year's withdrawal, then for the actual $ to be withdrawn, and subtract, say, 75% of the difference between the ideal VPW and last year's withdrawal. That's your actual withdrawal for the year.

75% isn't cast in stone, you can use anything you like. You can also make it one sided only (like Clyatt's) and remove the limits on upside. Or you can make the upside and downside assymetrical.

If you do anything different than what is in the VPW spreadsheet available on bogleheads, whether it's smoothing or using different assets, then you're either going to have to modify the spreadsheet or create your own.

Good luck!
big-papa is offline   Reply With Quote
Old 02-25-2018, 08:08 AM   #14
Thinks s/he gets paid by the post
 
Join Date: Jan 2018
Location: Tampa
Posts: 1,577
Quote:
Originally Posted by big-papa View Post
I played around with Clyatt 4/95 and it does work. But based on a couple of other threads over on bogleheads, I modified VPW for the very concern you have. I even applied Clyatt 4/95 on top of VPW to try and smooth it out, but to get decent historical results, I had to up the 95 to around 98%+ before I saw really noticeable smoothing to VPW.

First, VPW as originally conceived by the author uses the entirety of the historical record for inflation adjusted stock returns. Likewise, it uses the entirety of the historical record for inflation adjusted bond returns. siamond, and others, have pointed out that you might have smoother withdrawals if you instead take valuations into account since even long term returns can fluctuate wildly from the historical averages.

Assuming you use a total stock market fund or SP500, 1/PE10 is a decent approximation for long term, inflation adjusted returns looking forward. Note this isn't really market timing in the traditional sense, it's just an attempt to take into account valuations when calculating your withdrawal. You're not changing your AA. And VPW does correct somewhat if you get it horribly wrong. Also a number of brokerage houses post long term forward looking returns for various asset classes as well, so if you don't use TSM or SP500, there is some data there. I actually know one fellow use uses 1/PE10 and averages it with at least one or two predictions from brokerage/research houses. Most brokerage houses give future nominal returns, so you'll need to adjust those for predicted inflation. Fed is targeting around 2.25% these days, so that's something you can use. Or you can use the average of, say, the last 3 year's inflation rate. Precision in any of this isn't required - you're not trying to maximize the withdrawal, only smooth it.

For bonds, it turns out that the current yield is a decent approximation of long term returns. Again, you'll need to adjust for inflation. Now one can never predict when/how the fed will change interest rates, but this still helps.

What I describe above helps with what we call "long term smoothing". It helps with "big waves" in withdrawals over long periods of time. There is still the matter of year-over-year smoothing. Clyatt's method is one way to address this within VPW.

However, both the original author (who really dislikes any smoothing at all) and siamond both proposed a short term smoothing method, which seems to work quite nicely.

1. Calculate the ideal VPW % withdrawal. Best to use the PMT function in excel:
PMT(expected return, # years remaining, -1, 0, 1) where expected return comes from the long term, forward looking return calculation described above.

2. Multiply the number calculated in step #1 by the amount in your portfolio to get the ideal VPW $ withdrawal.
If this amount is greater than the previous year's withdrawal, then for the actual $ to be withdrawn, take the previous year's withdrawal and add, say, 75% of the difference between last year's withdrawal and the ideal VPW withdrawal. That's your actual withdrawal for the year.

Likewise, if the amount is less than the previous year's withdrawal, then for the actual $ to be withdrawn, and subtract, say, 75% of the difference between the ideal VPW and last year's withdrawal. That's your actual withdrawal for the year.

75% isn't cast in stone, you can use anything you like. You can also make it one sided only (like Clyatt's) and remove the limits on upside. Or you can make the upside and downside assymetrical.

If you do anything different than what is in the VPW spreadsheet available on bogleheads, whether it's smoothing or using different assets, then you're either going to have to modify the spreadsheet or create your own.

Good luck!
Thanks Big Papa for your detailed response. Very helpful.
Not a big fan of creating an involved (for me) spreadsheet. That is some of the reason for liking the Clyatt rule. On a related note, I was planning to start with a 3/95 rule instead of 4/95 to help smooth Sequence of returns, as I just retired last year, plus have 7 years to medicare and limiting my ACA for subsidies.

Application of 95% in a single year would translate to ~ 7.5k downsizing. My discretionary is over 30k, so thinking this could work. Lastly using 2.5% of fixed currently, so even 3% of current would be ~10k raise.

Am I making sense at all?
__________________
TGIM
Dtail is offline   Reply With Quote
Old 02-25-2018, 08:41 AM   #15
Full time employment: Posting here.
 
Join Date: Nov 2014
Posts: 510
Quote:
Originally Posted by Dtail View Post
Thanks Big Papa for your detailed response. Very helpful.
Not a big fan of creating an involved (for me) spreadsheet. That is some of the reason for liking the Clyatt rule. On a related note, I was planning to start with a 3/95 rule instead of 4/95 to help smooth Sequence of returns, as I just retired last year, plus have 7 years to medicare and limiting my ACA for subsidies.

Application of 95% in a single year would translate to ~ 7.5k downsizing. My discretionary is over 30k, so thinking this could work. Lastly using 2.5% of fixed currently, so even 3% of current would be ~10k raise.

Am I making sense at all?
Totally makes sense if that works for you. As I've said many times if there was one perfect solution, we'd all be using it. In your case, you appear to have plenty of buffer to work with. Because Clyatt's method is a subset of a fixed nominal percentage withdrawal method in addition to your buffer, then there's a good possibility you'll leave this world with a large amount unspent. That's great if you want to leave a bequest or you if you're willing to trade that possibility off for additional safety. Others want to optimize for different things.
big-papa is offline   Reply With Quote
Old 02-25-2018, 08:48 AM   #16
Thinks s/he gets paid by the post
 
Join Date: Jan 2018
Location: Tampa
Posts: 1,577
Quote:
Originally Posted by big-papa View Post
Totally makes sense if that works for you. As I've said many times if there was one perfect solution, we'd all be using it. In your case, you appear to have plenty of buffer to work with. Because Clyatt's method is a subset of a fixed nominal percentage withdrawal method in addition to your buffer, then there's a good possibility you'll leave this world with a large amount unspent. That's great if you want to leave a bequest or you if you're willing to trade that possibility off for additional safety. Others want to optimize for different things.
Yes, understand.
Thinking of using the 3% substitution just until Medicare, due to if ACA goes away, I will not have any currently known non expensive alternative. Then at 65, will increase to range of 3.5% - 4%.
Thanks so much again for your thoughts.
__________________
TGIM
Dtail is offline   Reply With Quote
Old 02-25-2018, 08:51 AM   #17
Full time employment: Posting here.
 
Join Date: Nov 2014
Posts: 510
Quote:
Originally Posted by Dtail View Post
Yes, understand.
Thinking of using the 3% substitution just until Medicare, due to if ACA goes away, I will not have any currently known non expensive alternative. Then at 65, will increase to range of 3.5% - 4%.
Thanks so much again for your thoughts.
Yep. We all have inflection points like Medicare starting, SS and/or pension starting, RMD's starting, paying off the house, etc. Always good to have a plan.
big-papa is offline   Reply With Quote
Old 02-25-2018, 09:59 AM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 19,007
Quote:
Originally Posted by big-papa View Post
Totally makes sense if that works for you. As I've said many times if there was one perfect solution, we'd all be using it. In your case, you appear to have plenty of buffer to work with. Because Clyatt's method is a subset of a fixed nominal percentage withdrawal method in addition to your buffer, then there's a good possibility you'll leave this world with a large amount unspent. That's great if you want to leave a bequest or you if you're willing to trade that possibility off for additional safety. Others want to optimize for different things.
I’ve compared Clyatt’s method to the straight %remaining method in a few scenarios and found that, because the 95% of prior year income is a nominal calculation, it doesn’t behave much different from the plain %remaining method during periods like from 1966 where high inflation is eating away at the purchasing power of the portfolio. It tracks rather closely in fact.

It would help right after a sudden big drop year like 2008.
__________________
Retired since summer 1999.
audreyh1 is offline   Reply With Quote
Old 02-25-2018, 10:01 AM   #19
Full time employment: Posting here.
 
Join Date: Nov 2014
Posts: 510
Quote:
Originally Posted by audreyh1 View Post
I’ve compared Clyatt’s method to the straight %remaining method in a few scenarios and found that, because the 95% of prior year income is a nominal calculation, it doesn’t behave much different from the plain %remaining method during periods like from 1966 where high inflation is eating away at the purchasing power of the portfolio. It tracks rather closely in fact.

It would help right after a sudden big drop year like 2008.
One thing that helps is to modify Clyatt to use 95% of the previous year after inflation. A few more calculations to do but it helps the 1966 case quite a bit.
big-papa is offline   Reply With Quote
Old 02-25-2018, 12:55 PM   #20
Thinks s/he gets paid by the post
 
Join Date: Jan 2018
Location: Tampa
Posts: 1,577
Quote:
Originally Posted by audreyh1 View Post
I’ve compared Clyatt’s method to the straight %remaining method in a few scenarios and found that, because the 95% of prior year income is a nominal calculation, it doesn’t behave much different from the plain %remaining method during periods like from 1966 where high inflation is eating away at the purchasing power of the portfolio. It tracks rather closely in fact.

It would help right after a sudden big drop year like 2008.
Audreyh1,
If I may ask, in the end why did you use the straight % of portfolio vs. the Clyatt methodology? Portfolio survival would seem better, but it doesn't appear to be that issue for you from your posts.
__________________

__________________
TGIM
Dtail is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Firecalcs Inflation Methods Semiretired2008 FIRECalc support 2 04-01-2013 05:49 PM
Periodic Table of Visualization methods donheff Other topics 0 09-07-2010 06:27 AM
Depreciation Methods MountainMedic Other topics 7 09-12-2008 10:03 AM
Bill paying methods gwix98 Other topics 40 06-02-2005 08:08 PM
Saving methods azanon Young Dreamers 26 08-12-2004 07:52 AM

» Quick Links

 
All times are GMT -6. The time now is 10:41 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2018, vBulletin Solutions, Inc.