What drawdown method do you use?

[Hiredgun]

Now that I'm getting closer to "the date", I find that there is very little on draw down methods (versus a myriad of books and articles on accumulation methods).

I've read Lucia's buckets and also articles from others who live off the interest.

What method do you use? Why do you think it is best?

 

[Ed_The_Gypsy]

You may find this old thread interesting:
http://www.early-retirement.org/forums/f28/withdrawal-rate-mechanics-43947-2.html

 

[Ed_The_Gypsy]

Or these:
http://www.early-retirement.org/for...ution-decumulation-withdrawal-plan-47108.html
http://www.early-retirement.org/forums/f28/semi-fixed-minimum-withdrawal-starting-at-3-a-49968.html

Best of luck.

 

[Nords]

We keep two years' expenses in cash. During good years we replenish the cash stash. During not-so-good years we keep spending it and wait for the market recovery.

 

[rescueme]

We keep two years' expenses in cash. During good years we replenish the cash stash. During not-so-good years we keep spending it and wait for the market recovery.

Same here, but we keep slightly more (3-5 years) in cash, depending on the short term returns and our decision to "harvest" (in our case, anything above $5k) along the way, that shows a gain since my retirement on May 1, 2007.

As for DW (who still choses to be employed, but expected to retire at the same time as me), we keep her aound the 5 year gross income level in cash. If she wishes to retire tomorrow (or keep on wor*ing), it's up to her.

Being a bit more conserative, it fits our needs for a good night's sleep...

 

[easysurfer]

We keep two years' expenses in cash. During good years we replenish the cash stash. During not-so-good years we keep spending it and wait for the market recovery.

I do the same currently. But might bump my stash up to three or four years as extra chicken money.

 

[lemming]

I don't like to take out money when the market is up. I need more money and letting it ride might make more. I don't like to take funds out when market is down. I could have had more money if I had planned better...
And I need $$ in October...to last til end of January-so 4 months.
I was going to take it out of a growth fund but am annoyed that the value is down so I am probably going to take it out of IRA bond fund that is large enough to re-grow. Oh-and I'm spending the quarterly dividends from a utility stock. My withdrawal rate is about 4.6% until I collect SS then it drops to 3.5%

As you see I don't have an answer for you, but I feel your pain and confusion.

 

[Coolius]

A hypothetical question.....

If someone was able to live within their income from all sources for that year ( SS, Pension, interest & dividends ) , would it be correct to say that their SWR for that year is zero?

Of course, as inflation bites, this situation may not be possible, so the SWR would tend to slowly rise.

 

[LOL!]

^No. You said "interest & dividends" and they count towards SWR since they were not re-invested. So do investment expenses like that 1.5% you pay your advisor.

 

[scrabbler1]

I use almost exclusively interest and dividends. A few times I have needed to withdraw principal to cover somewhat large (and not originally budgeted for) expenses when the cash flow from the I&D was not there at the moment. But at the same time, I am adding to principal by reinvesting excess I&D (and cap gains distributions) in the other months. Overall, the net inflow/outflow from principal is in my favor, much more reinvested than withdrawn.

Thia was always part of my ER plan when I was first devising it in 2008.

 

[GregLee]

Of course, as inflation bites, this situation may not be possible, so the SWR would tend to slowly rise.

The withdrawal amount should rise with inflation, to pay for higher living expenses. But since the amount of your investment is hopefully appreciating as well, the withdrawal rate won't necessarily rise. The Safe Withdrawal Rate shouldn't change unless you change your mind about your retirement plan.

 

[Animorph]

I'm nominally 100% equities. I invest for total return. I raise cash when the portfolio value is above retirement projections, which would always be in a market hitting new highs. I do not reinvest fund distributions. I sell equities to meet expenses if I don't have cash sitting around, in a way that rebalances the portfolio equities. If I have excess cash and the market drops more than 20% I will begin buying equities, which would always be when the market is hitting new lows, adding more in steps if the market continues down.

I started retirement in 2007 when the economy was looking shaky so I had about 3 years of cash to start just in case. That came in handy. I was able to buy as the market declined and have hit new portfolio highs since then. If the market had gone up instead I would have used all the cash for expenses before selling any more equities, so I wouldn't be carrying lots of cash for a long time period.

 

[Alan]

A hypothetical question.....

If someone was able to live within their income from all sources for that year ( SS, Pension, interest & dividends ) , would it be correct to say that their SWR for that year is zero?

Of course, as inflation bites, this situation may not be possible, so the SWR would tend to slowly rise.

I pay divs and interest to a sweep account and then spend them as part of my income needs. I calculate the WR each year and this includes these payments as I no longer re-invest them.

 

[Nords]

If someone was able to live within their income from all sources for that year ( SS, Pension, interest & dividends ) , would it be correct to say that their SWR for that year is zero?
Of course, as inflation bites, this situation may not be possible, so the SWR would tend to slowly rise.

You're a dividend investor. The SWR is your dividend yield. SS and pension would cover some of the fixed expenses and the SWR from the portfolio of interest/dividend income would only have to cover the "expense gap" not already filled by SS and pension.

The advantage is no principal consumption, which is very handy for extreme ERs of 5-6 decades. However a typical dividend portfolio might have to be 30-35x your annual spending instead of 25x. Of course that depends on your asset allocation, too-- for TIPS or Treasuries it might be higher than 40x.

Incidentally your heirs will be a lot happier, too.

 

[utrecht]

I'm nominally 100% equities. I invest for total return. I raise cash when the portfolio value is above retirement projections, which would always be in a market hitting new highs. I do not reinvest fund distributions. I sell equities to meet expenses if I don't have cash sitting around, in a way that rebalances the portfolio equities. If I have excess cash and the market drops more than 20% I will begin buying equities, which would always be when the market is hitting new lows, adding more in steps if the market continues down.

I started retirement in 2007 when the economy was looking shaky so I had about 3 years of cash to start just in case. That came in handy. I was able to buy as the market declined and have hit new portfolio highs since then. If the market had gone up instead I would have used all the cash for expenses before selling any more equities, so I wouldn't be carrying lots of cash for a long time period.

Serious question. Whats the difference between "nominally 100% in equities" and "100% in equities"?

 

[Animorph]

Serious question. Whats the difference between "nominally 100% in equities" and "100% in equities"?

I do end up with a cash balance at times with this method, so I can't really claim 100% equities. Just no permanent allocation to cash or bonds. I have about 12% "cash" at the moment, most of which is actually in a GNMA bond fund trying to earn a little more. As stated, that will be spent down before I sell equities, or may be reinvested in a bear market. I was down to $0 cash in 2009, all in at the market bottom and then selling equities as needed while the market was rising.

 

[jebmke]

Spend divs and interest in taxable. When that runs out, I sell something.

 

[Free To Canoe]

This is interesting. I am looking at galeno's method of withdrawal / cash buffer.
http://www.early-retirement.org/forums/f26/hi-im-galeno-13957.html

One thing that doesn't add up to me is this:
He keeps 6 years of cash in the pipeline and this is 25% of the total.
To replenish, he withdraws 4% of the 75% in equities.
6 years into 25% is about 4%. 4% of 75% is about 3%. I estimate he needs to take out about 5.7% each year to keep even.
What am I missing / wrong about here?

 

[REWahoo]

What am I missing / wrong about here?

He's still around, you might send him a PM and ask.

 

[Animorph]

Probably just meant 4% of the total of 25% cash plus 75% equities.

 

[fritz]

I pay divs and interest to a sweep account and then spend them as part of my income needs. I calculate the WR each year and this includes these payments as I no longer re-invest them.

Follow Alan's dividend sweep account method - we're targeting a rolling two years cash reserves. Also somewhat utilize Nords method in that we don't sell investments to make up any dividend shortfalls in down years (letting cash reserves fall off two year reserve target, until market improves).

 

[SteveR]

Ours is a bit more complicated than just a straight SWR withdrawal from a single account. Essentially, we started out ER with 4 years in cash and the
rest in various IRAs and after tax accounts. Due to some family issues, buying a business and feeding it from our cash accounts, we will be starting
distributions earlier than I wanted from one of the IRAs. Another reason is to avoid a huge RMD later in the life of the IRA with a corresponding huge tax bill.

Our ER budget was designed to spend more earlier in ER for a variety of reasons. In 10 years or so our demand for cash flow will be half or less than our current cash flow and our plan reflects this in the withdrawal rates. Over the long haul it will even out as we continue to spend our kid's inheritance.
Some income streams will eventually move from IRA back to After Tax account later in the plan as RMDs are in excess of our expenses. Once the IRAs are exhausted, the Ater tax accounts will again create an income stream.

By then I will be too old to travel, too old to RV, too old to do yard work, too old to do photography, and too old to care much about anything. When you get that old, you don't spend much except on healthcare and that is covered unless Congress destroys the entire Healthcare system; then we will move to Canada...it they still have any money by then. If not, then there are less expensive solutions to check out of the California Hotel.

 

[galeno]

Wife and I are 56 years old. Our investment horizon = 39 years. We use a 60/35/5 portfolio. We are retired.

We withdraw 3.0 + portfolio expenses per year. Our portfolio expenses are: ER+TR=0.15+0.43=0.58%. So our SWR=3.58%. i.e. TR=tax ratio.

As we gradually shift costless 5yrCD money into (offshore bond fund) PTTAX.lw which costs 0.85% per year, our portfolio costs will eventually climb to 0.75% of port.

firecalc.com says we can safely (95%) withdraw 3.44% per year. We're in the ballpark.

 

[Options]

Wife and I are 56 years old. Our investment horizon = 39 years. We use a 60/35/5 portfolio. We are retired.

We withdraw 3.0 + portfolio expenses per year. Our portfolio expenses are: ER+TR=0.15+0.43=0.58%. So our SWR=3.58%. i.e. TR=tax ratio.

As we gradually shift costless 5yrCD money into (offshore bond fund) PTTAX.lw which costs 0.85% per year, our portfolio costs will eventually climb to 0.75% of port.

firecalc.com says we can safely (95%) withdraw 3.44% per year. We're in the ballpark.

Please tell me what you based your TR on? How did you calculate that? Would be most interested. Thanks!

 

[dtbach]

We take out $5K a month from taxable and non-taxable accounts (It's my salary) which comes up to about a 3.6% WR. I also get $2.5K for a military retirement each month. All my dividends and interest get swept into the cash account which is withdrawn from each month. Has worked so far, no worries. . .