How to draw income from accounts for expenses

[Cheesehead]

Now is the time for us to start withdrawing and it's more complicated than we thought. From $600K in various Fidelity and Vanguard stock and bond funds, with an AA 50/50, mainly indexes, we would like to withdraw 3% a year which is $18K annually, $1500 per month. I am starting to understand that there are three ways to do it, but I'd rather not dip into the principal or cause more tax events than needed. All the funds are in IRAs, 401K and 403B. Here's my options from Fidelity and I assume Vanguard is the same:

1) Request a 3% withdrawal, which is .25% monthly, sent to a MM account.
2) Request a specific dollar amount, in this case $1500 monthly.
3) Request that the dividends, interest and cap gains be sent to the MM account.

It seems that option 3 would not dip into principal, but in lean times or market downturns it may not provide the $18K per year. Options 1 and 2 may dip into principal during a bad market or recession.

What do you all do in this case? Thanks for your advice.

 

[bingybear]

If all your funds are in traditional IRA, 401k and 403b--- not roths, then I don't see really any "extra taxes". You would be taxed on the withdraw independent of if the $ were dividends, capital gains or basis (principal).

If you want to spend the time you could take your withdraw so the it keeps your AA where your intend it. If not every withdraw... maybe every 6 months or a year.

I don't withdraw anything from my "retirement accounts" other than for roth conversions. I'm over a decade away from RMDs. I get my living $ from taxable accounts. I really do not have a grandiose plan. Some of my after tax investments reinvest and others throw off cash and I have a cash buffer if I need to draw from it. The cash buffer is there to handle living expenses if a market crash occurs. It is mostly in laddered CDs.

 

[Cheesehead]

Thanks bingybear.

 

[pb4uski]

I would pick the least desirable account (in terms of fund choices, fees, etc) and set up a $1,500/month automatic redemption that is sent to my local bank account. Then rebalance across all accounts annually as needed.

What do you mean by "dip into principal"? One view would be that you don't ever want your balance to be less than your aggregate contributions.... in most cases that is extremely unlikely. Another view would be that you don't want the balance to ever get less than it is when you retired. With a 3% WR it is unlikely, but possible, that your balance might decline.

In any event, get over it and enjoy your retirement.

 

[ERD50]

Now is the time for us to start withdrawing and it's more complicated than we thought. ...

What do you all do in this case? Thanks for your advice.

As can be seen by the previous posts, it's not complicated. You are making it more complicated than you thought...

Think in terms of total return. There is no magic, money is fungible. In an IRA a dollar in divs or a dollar in appreciation is the same dollar. Recognize that all withdrawals are taxable. then it becomes simple.

edit/add:

It seems that option 3 would not dip into principal, but in lean times or market downturns it may not provide the $18K per year. Options 1 and 2 may dip into principal during a bad market or recession.

And the alternative is?

If you don't get enough from the dividends, interest and cap gains , then you need to dip into principal. Or decide you can get by on less. Is there any other answer, other than "magic"? If you know of one, please share! I sure would like to fund any shortfalls, from "somewhere".

-ERD50

 

[ImReady]

I'm been debating the same thing. Psychologically, I'm more comfortable drawing from the dividends and capital gains so that's my plan. If I need more I'll take the opportunity to rebalance and sell some funds.

 

[marko]

And the alternative is?

If you don't get enough from the dividends, interest and cap gains , then you need to dip into principal. Or decide you can get by on less. Is there any other answer, other than "magic"? If you know of one, please share! I sure would like to fund any shortfalls, from "somewhere".

-ERD50

I think the OP is simply saying that he/she would prefer to live off dividends, and if the dividends don't cut it during a bad dividend/CG year, would reluctantly dip into principal.

Many forum members (myself included) live off dividends and an occasional CG draw. Yes, I know that it doesn't matter vs total return but there is a certain comfort (however flawed) in viewing it that way, and, if it doesn't matter anyway, well....

Plus, having automatically set aside two years worth of dividends allows me to avoid having to make hard decisions when my withdrawal needs collide with a market downturn.

 

[Z3Dreamer]

I am with ERD50. Money is fungible.

I wish to comment on the mechanics. I just set up a regular monthly withdrawal from my Vanguard IRA. Pretty easy and complete, once you find the right section of the website. So once a month I am getting money, net of whatever taxes I specify, sent directly to my checking account.

 

[bingybear]

What do you mean by "dip into principal"? One view would be that you don't ever want your balance to be less than your aggregate contributions.... in most cases that is extremely unlikely. Another view would be that you don't want the balance to ever get less than it is when you retired. With a 3% WR it is unlikely, but possible, that your balance might decline.

In any event, get over it and enjoy your retirement.

I RE in early 2015 and watched my my stash sink with the market... not from being withdrawn. Remember oil crashing, the China scare in late Aug '15 and remember 1st quarter '16 when the floor seemed to be falling from under the market... or that is what it felt like. By then end of this 1st year of RE my portfolio was lower with a lower WR than 3%. So, don't be surprised if your portfolio goes below the value at retirement. It happens if the market doesn't behave. Note that 2016 not only made up for the earlier described dips plus a nice chunk.

If you don't get enough from the dividends, interest and cap gains , then you need to dip into principal. Or decide you can get by on less. Is there any other answer, other than "magic"? If you know of one, please share! I sure would like to fund any shortfalls, from "somewhere".
-ERD50

+1

OP -- I assume you ran firecalc, RIP or some other modeling software. If firecalc. Even if you had 100% successful, did any of the lines dip lower than the starting value? Most likely yes... especially ones like modelling early 70's start points...or starting just before any other large dip. It is possible to get a dip in portfolio value. I don't think most like it. But you plan for it... it is modeled in firecalc. Its not really a buying opportunity in RE if you are already fully invested, but is an opportunity for re-balancing. Now if you are not always fully invested, it may be an opportunity.

Enjoy your retirement... and don't stress the simple things. Asking questions here is a good way to understand the simple from the complex as there are many knowledgeable people here. Sometimes there are different opinions that some or all have merit.

 

[donheff]

Since all the usual calculation concerning taxable and tax differed are off the table I am with the money is fungible crew. It is going to cost the same in income tax no matter where the withdrawals come from. I would focus on pulling in such a manner that my desired AA is maintained (selling winners in effect). I also like pb4uski's suggestion to clear out the worst of your accounts first.

 

[ERD50]

I think the OP is simply saying that he/she would prefer to live off dividends, and if the dividends don't cut it during a bad dividend/CG year, would reluctantly dip into principal.

Many forum members (myself included) live off dividends and an occasional CG draw. Yes, I know that it doesn't matter vs total return but there is a certain comfort (however flawed) in viewing it that way, and, if it doesn't matter anyway, well....

But it does matter if the dividends don't supply the needed annual funds. If the divs are way higher than needs, there's really nothing to discuss anyhow.

I just don't understand the value of seeking comfort in a flawed view. If someone posted "I know that 2 + 2 = 4, but I just feel more comfortable thinking that 2 + 2 = 5", should we support the OP, and help them feel more comfortable with 2 + 2 = 5? Maybe suggest they squint a bit, or write that 4 a little sloppy until it looks like a 5? I don't get it.

It's not that I don't understand that emotion and comfort sometimes play a role in decision making. But don't use the emotion to try to alter facts, just accept it as an emotional thing separate from the facts. Facts are facts.

-ERD50

 

[marko]

But it does matter if the dividends don't supply the needed annual funds. If the divs are way higher than needs, there's really nothing to discuss anyhow.

I just don't understand the value of seeking comfort in a flawed view. If someone posted "I know that 2 + 2 = 4, but I just feel more comfortable thinking that 2 + 2 = 5", should we support the OP, and help them feel more comfortable with 2 + 2 = 5? Maybe suggest they squint a bit, or write that 4 a little sloppy until it looks like a 5? I don't get it.

It's not that I don't understand that emotion and comfort sometimes play a role in decision making. But don't use the emotion to try to alter facts, just accept it as an emotional thing separate from the facts. Facts are facts.

-ERD50

It's pretty simple for me. I was brought up to never touch the principal. In my case this is multi generational wealth where my predecessors didn't touch the principal either and lived on their dividends and interest.

I set aside dividends along with a healthy cushion in a separate account. That's what I live on.

Yes I could do the same with regular stock sales but the dividends do it for me.

I'm not blind to the total return approach but for me this is easier, cleaner and has nothing to do with 2+2=5
[emoji1]

 

[audreyh1]

It's pretty simple for me. I was brought up to never touch the principal. In my case this is multi generational wealth where my predecessors didn't touch the principal either and lived on their dividends and interest.

I set aside dividends along with a healthy cushion in a separate account. That's what I live on.

Yes I could do the same with regular stock sales but the dividends do it for me.

I'm not blind to the total return approach but for me this is easier, cleaner and has nothing to do with 2+2=5
[emoji1]

So this is inherited wealth that you are passing on to the next generation, following a long established family tradition?

I think many of us who did not inherit wealth, but managed to amass it during our lifetime feel just fine about spending a big chunk of it down.

 

[dtbach]

I am with ERD50. Money is fungible.

I wish to comment on the mechanics. I just set up a regular monthly withdrawal from my Vanguard IRA. Pretty easy and complete, once you find the right section of the website. So once a month I am getting money, net of whatever taxes I specify, sent directly to my checking account.

+1
Exactly what I do. I just keep about 1.5 years of cash in the money market and it's funded by dividends and CG distributions from the funds I own. Occasionally I sell a few shares to keep it funded.

 

[REWahoo]

I just keep about 1.5 years of cash in the money market and it's funded by dividends and CG distributions from the funds I own. Occasionally I sell a few shares to keep it funded.

^ This.

It has worked well for the past 10+ years.

 

[W2R]

So much of this depends on the individual's psychology and what works for you. What works for me is this:

(1) All dividends and capital gains are taken in cash and directed towards my Vanguard money market account. After my annual withdrawal (see step 2), I rebalance.

(1) At the beginning of the year, those dividends and capital gains have been building for an entire year. The first week in January I withdraw from that money market account, a certain percentage that would be OK with me for the entire year's spending (3.1% this year). I never seem to spend that much, but if I did then it is an amount that I suppose would be perfectly OK with me. This money goes to my bricks and mortar savings account and I spend from it throughout the year.

(2) Then at the end of the year, I figure out what I actually DID spend and return the excess.

I don't mind having the year's spending money in my bricks and mortar savings account, but you might due to the low interest. To me that loss of yield is pretty much peanuts, and knowing that my year's spending money is right at hand, keeps me from doing stupid things out of panic during market dips. I am not tempted to overspend just because the money is in the bank, but if I were, this method would probably be less than ideal.

It's all in the psychology, and you know yourself better than any of us do.

 

[Blue Collar Guy]

if you need 18 thousand a year, remember the tax man has been waiting years to get his hands on this money, ask your tax preparer if u withdraw 18 k a year , will you have any tax liability, i suspect it is yes, so u need to take out more , and have the custodian withhold this for you.

 

[ERD50]

It's pretty simple for me. I was brought up to never touch the principal. In my case this is multi generational wealth where my predecessors didn't touch the principal either and lived on their dividends and interest.

I set aside dividends along with a healthy cushion in a separate account. That's what I live on.

Yes I could do the same with regular stock sales but the dividends do it for me.

I'm not blind to the total return approach but for me this is easier, cleaner and has nothing to do with 2+2=5
[emoji1]

We're not in any disagreement, I don't think.

But in the case where the dividends cover everything, there really isn't any meaningful question. You don't touch the principal, because you don't need to. No math involved, no real decision to make.

Doesn't make any difference if you look at total return or not.

-ERD50

 

[candrew]

How to draw income

DW & I began just this month taking the first of regular withdrawals from our tIRA's we have at Fidelity. We keep it simple:

- Upon establishing our SWR, we set up recurring monthly withdrawals ($ amount) from our accounts. Fidelity has an option to take those "proportionately", which we are doing, from our various index funds.

- We elected to have state tax withheld, however, for Federal we've decided to make quarterly estimated payments. We've already set ourselves up with EFTPS so we can make payments electronically. Those quarterly estimated payments will also serve as our reminder to rebalance investment accounts as needed.

We are about keeping things simple and expect this process to work well for us. YMMV.

 

[pb4uski]

^ This.

It has worked well for the past 10+ years.

+1 but only 5 years in my case. I saved this money for my retirement... if there is something left for my kids then it is estimating error on my part.. given that SWR is somewhat of a worst case scenario and our WR will be relatively low once SS starts it is likely that we will die rich.

Total return or BUST!

 

[Corporateburnout]

+1 but only 5 years in my case. I saved this money for my retirement... if there is something left for my kids then it is estimating error on my part..

+1.

Our SWR for the 3 years since we retired is over 5%. We have no plan to reduce it until SS for DW and I in a few years.

I told my kids not to count on an inheritance expect for the house we live in and the summer place down the Cape. We fund both of their annual Roth contributions and if there's any money left for them when we croak it will be gravy....

 

[Blue Collar Guy]

+1.

Our SWR for the 3 years since we retired is over 5%. We have no plan to reduce it until SS for DW and I in a few years.

I told my kids not to count on an inheritance expect for the house we live in and the summer place down the Cape. We fund both of their annual Roth contributions and if there's any money left when we croak it will be gravy....

hahaha , i tell my child that im spending his inheritance hahah

 

[CardsFan]

+1 but only 5 years in my case. I saved this money for my retirement... if there is something left for my kids then it is estimating error on my part.. given that SWR is somewhat of a worst case scenario and our WR will be relatively low once SS starts it is likely that we will die rich.

Total return or BUST!

Only 1 year into FIRE in my case, but this pretty much sums up our status, as well. We have always told DS that anything left at the end was an error. That being said, based on current spending the income and cap gains from the after tax account could fully supplement SS in 4 years. Cash would supplement any required extras and inflation adjustments, and the IRA's (2/3's of our portfolio) could basically go untouched. Of course Uncle Sam has a thing or two to say about that so RMD's probably will just be a withdrawal and re-investment, with some gifting.

Some here would say that means I worked too long. Could be, but I look at it as insurance for the unexpected. It is one reason why the cost of Health Care for the next 3-4 years does not scare me (much). And we did not deprive ourselves in the 10 years prior, so we have enjoyed our efforts.

Or, maybe we will blow a pile on an adventure .

 

[rodi]

I move the amount I plan to withdraw for the year from my inherited IRA at the beginning of each year. (usually the RMD amount since my dad was already drawing when I inherited it.). I pay taxes on it. If I have enough cash (from dividend and capital gain distributions) all is good, if not I draw some extra cash in the process of rebalancing.

Monthly I move my post tax cash to my checking account.

This works for me.

 

[UnrealizedPotential]

What I do is have 3 different bond funds and they pay monthly. They provide more than I need to live on, so I can put some money back in the market. The rest of my portfolio is in stocks , and this has worked well for me.