Article: Withdrawal Policy Statement

[Moemg]

After all we've been through together (and still are), I consider myself the "lucky one" ...

...

You are both sooo lucky to have found each other . They say nurse's are saints but we get to leave our work after our shift not so for parents of disabled children . You are on duty 24/7 and you both deserve all the happiness in the world . Thanks for a great post !

 

[rescueme]

Thanks for a great post !

No, thank you for a kind word....

 

[FUEGO]

He adds a "discretionary fund" of 5% to 10% of your assets to do whatever you want to with, so you don't have to argue about 3.5%, 4% or 4.5% SWR in some years.

I'm thinking we will end up wanting 5-15% in a discretionary fund on top of whatever our portfolio needs to be to support a reasonable SWR. The higher range of 15% would be necessary if the SWR is tied to a percent of portfolio value each year instead of annual guaranteed CPI raises.

We will have some known/expected lumpy expenses in ER. But the magnitude of those expenses won't necessarily be known with a great deal of certainty. Our kids will probably be in elementary or middle school when we FIRE, and the teenage expenses of cars, insurance, and eventually college expenses will come up shortly after FIRE. We will have some dedicated 529 plans that have sizeable amounts by FIRE, but might not be quite adequate for what we want to pay for. Added to these lumpy expenses would be large travel expenses for a possible long trip around the world. Or not.

I'm thinking maybe $50,000-$100,000 in the discretionary fund to allow a little flexibility in withdrawals and to fund some lumpy expenses on an as-needed basis if the regular portfolio withdrawals weren't keeping up. Or to pay for SIL's gambling habit .

 

[FIREd]

I was thinking about having a pre-funded "slush fund" (the level of funding has yet to be determined). We plan on spending 3-3.5% of portfolio value each year. In bad years, we will have to cut expenses but the slush fund might allow smaller cuts than otherwise dictated by our plan. In good years, when the 3-3.5% withdrawal exceeds expenses, the slush fund will be topped off.

 

[rayvt]

The folks who advocate delaying SS in order to maximize the monthly SS checks you'll eventually collect implicilty assume that you'll: a) be in good enough health to do the things you want to do with that larger income, and b) will still be alive.

We live in a community where there is a high percentage of retirees. You will be unsurprised to learn that retirees tend to be older and their health tends to be poorer than most working age people. There are a LOT of them who are now single because one spouse has died, and a lot of them where one spouse has significant health problems---heart attack, stroke, bad legs/knees/hips, Parkinson's, etc.

Hiking Machu Picchu in your 40's or 50's? Piece of cake. At 70? Not so much. When you hit retirement age, there is less of your life ahead of you than behind you. And your health and physical abilities are only going to go downhill----you are already on the downward slope, and it gets progressively steeper (worse) with each passing year.

Whatever you call it, I think that a large pot of "discretionary money" when you begin retirement is a great idea. Use it to do those things that you can do now, rather than delaying them so long that you might well be unable to do them.

 

[W2R]

Hiking Machu Picchu in your 40's or 50's? Piece of cake. At 70? Not so much.

I was surprised to learn yesterday that my brother just got back from hiking Machu Picchu at age 67, and he has never been athletic. He said it was "rigorous"...

He also said that he had never seen such a spectacular setting and he loved it.

But taking social security or not had nothing to do with it. His spending money is the same as it was before taking SS. Like me, he simply withdrew more from his investments prior to age 66 when he took it.

 

[mickeyd]

I concocted something that I call my Liquidation Plan several years ago. It sets out general and specific financial resources that we have and puts them in a decreasing sequence to make it easy to pick them off one at a time. I probably should tweak it again, but its still pretty accurate. Here is part of it (altered)~

All future required minimum distributions (RMD) that are received from IRA investments at Vanguard will be directed the Prime Money Market fund.


Our assets will be liquidated in the following order:

• Checking Account
• Prime Money Market Fund (Joint)
• Vanguard Short Term Bond Index Fund (Joint)
• Less than 1000 Shares of corporation common stock
• Cash value of old LI policy
• Vanguard Total Stock Market Index Fund~ Taxable~ Specific Shares (Joint)
• IRA Rollovers @ Vanguard
• Roth IRAs @ Vanguard
• Proceeds from sale of house
• Value of any other remaining assets of value not named above

 

[endthefed]

The folks who advocate delaying SS in order to maximize the monthly SS checks you'll eventually collect implicilty assume that you'll: a) be in good enough health to do the things you want to do with that larger income, and b) will still be alive.

We live in a community where there is a high percentage of retirees. You will be unsurprised to learn that retirees tend to be older and their health tends to be poorer than most working age people. There are a LOT of them who are now single because one spouse has died, and a lot of them where one spouse has significant health problems---heart attack, stroke, bad legs/knees/hips, Parkinson's, etc.

Hiking Machu Picchu in your 40's or 50's? Piece of cake. At 70? Not so much. When you hit retirement age, there is less of your life ahead of you than behind you. And your health and physical abilities are only going to go downhill----you are already on the downward slope, and it gets progressively steeper (worse) with each passing year.

Whatever you call it, I think that a large pot of "discretionary money" when you begin retirement is a great idea. Use it to do those things that you can do now, rather than delaying them so long that you might well be unable to do them.

+1 for this post. very insightful -

 

[jdw_fire]

The folks who advocate delaying SS in order to maximize the monthly SS checks you'll eventually collect implicilty assume that you'll: a) be in good enough health to do the things you want to do with that larger income, and b) will still be alive.

i disagree, many years ago i provided an example of how delaying SS could actually allow the 62 yo to spend more between the ages of 62 and 70 than s/he would have if SS had not been delayed. (the amout spent after 70 was the same whether you delayed or not.) given that the increase in spending happens immediately you are not assuming a) anything about your health (you know what your health is in the present) or b) that you are alive (you know you are alive in the present).

here it is:

OK, let me set the stage: You are coming up on your 62nd birthday and you need to decide if you are going to take SS at 62 or wait. You have no desire to leave an estate when you die and are reasonably healthy. Your experience and calculations tell you that you need $1979/mo (CPI adjusted annually) to have a reasonable lifestyle from now till you die but you would like to spend more than that the next several years if possible. You have a portfolio worth $256,500 in a TIRA and your SS matches CFB’s

Originally Posted by Cute Fuzzy Bunny
My statement says $1124 at 62, $1979 at 70.

What do you do? Well your portfolio will produce $10260/yr ($855/mo) CPI adjusted annually using a 4% SWR, which should last 30 yrs. That $855/mo plus SS of $1124/mo will provide you with the $1979/mo you are looking for.

OR you could wait and start SS at age 70 which will provide you CPI adjusted $1979/mo from age 70 until you die, but what about the time between age 62 and age 70? Well you still have $256,500 which you decide to divide into eight equal portions (for the eight years between 62 and 70) giving you $2671.87/mo to spend. You also decide to put the money in a money market account so that all eight portions keep up with inflation. Now granted if you do this you will have zero money to pass on when you die (provided you live longer than 70yo) but you do get to spend more in the next 8 years than if you took SS at 62. Also if you delay taking SS your income after age 70yo is protected by the full credit and faith of the US government (which is kind of like investing in T-bills), unlike the taking SS at 62yo plan where 60-75% of your portfolio would be invested in stocks.

With that example explained let me provide another very related example. In this example the $1979/mo number is your bare-bones retirement number, i.e. the number you absolutely need to have. But you would like a budget of $3979/mo so that you also have plenty of discretionary money. Also you have a $856,500 portfolio and the same SS options as above. If you take SS at 62 and use a 4% SWR on your portfolio you will get your $3979/mo but if you delay taking SS until 70yo then you get the same income stream after 70yo but you get $4671.87/mo (CPI adjusted) to spend between age 62 and 70. This has the same advantages as were pointed out above and the $600k of your portfolio that is producing your discretionary money has the same chance of surviving you that your entire portfolio has if you take SS at age 62.

doing something similar could instead create a pot of "discretionary money" ($66,516 in the example above) while keeping a constant (in real terms) spending level ($1979/mo in the 1st part of the above example or $3979/mo in the 2nd part)

 

[rescueme]

The folks who advocate delaying SS in order to maximize the monthly SS checks you'll eventually collect implicitly assume that you'll: a) be in good enough health to do the things you want to do with that larger income, and b) will still be alive.

I would suggest that each person must make the SS decision, based upon their personal situation, and lifestyle.

As I wrote before, in our case I'm not delaying SS till age 70 to maximize the amount received for me, but rather for my DW (assuming I'll pass first). Additionally, I'm not going without SS. I'll be claiming 50% of her FRA benefit, when I turn my FRA age (we're the same age, within a few months).

To your point of having "good enough health", I accept the idea of I will not be able to do the same things I do today (age 62). But I also accept the idea that as I age, I will have to pay others to do what I do today (example, home maintenance - both interior/exterior). The expense level will still be there, and possibly higher since I'll need to pay for services that i currently do on my own - however, what those expenses are will change.

As far as "being alive"? Money is for the living - not the dead. I'm only concerned about maximizing what I can get/spend while still on this "mortal coil".

We live in a community where there is a high percentage of retirees. You will be unsurprised to learn that retirees tend to be older and their health tends to be poorer than most working age people. There are a LOT of them who are now single because one spouse has died, and a lot of them where one spouse has significant health problems---heart attack, stroke, bad legs/knees/hips, Parkinson's, etc..

I would suggest that your observations (correctly) are based upon where you live. Live in an old age/retirement area/complex? Sure; more of a chance to see folks whose spouses have passed. Nothing unusual about that, IMHO.

As to health problems? Again, normal for that stage of life. Nothing unusual there, either. It will cost you more to live in old age if you still want the kind of lifestyle you had at a younger age (e.g. you will have to pay somebody else to do it for you, from driving to the doctor, to driving you to the grocery store).

Hiking Machu Picchu in your 40's or 50's? Piece of cake. At 70? Not so much. When you hit retirement age, there is less of your life ahead of you than behind you. And your health and physical abilities are only going to go downhill----you are already on the downward slope, and it gets progressively steeper (worse) with each passing year..

I'll certainly agree. That is one of the reasons that we travel extensively and have done so for many years (BTW, we're off again in a few days ).

As far as Machu Picchu? Too many tourists. Anyway, our desired travel has never been of the backpack variety. After our first trip to Hawaii (where we had a condo for a few weeks), my DW said "I'm not here to cook". OK, so we stay in better accommodations than Hotel 6/8. That's just what we want (OK, it's what my DW wants - and I want what she wants ).

As to your comment on the "downward slope"? I agree. I also believe that slope gets more expensive as time goes on. Another reason to have more (guaranteed) income as you age - not less.

Whatever you call it, I think that a large pot of "discretionary money" when you begin retirement is a great idea. Use it to do those things that you can do now, rather than delaying them so long that you might well be unable to do them.

That's why we didn't delay anything in our wor*ing years. We traveled extensively then - we do the same now, in retirement (Well, I'm retired - my wife may soon may be)...

As to that "large pot of discretionary money"? Heck, we have that now, and don't need SS to supplement it at this time of our lives. Just another advantage of the LBYM lifestyle for many, many years (yes, it works)...

We're leaving SS till later on when we need it to ensure a quality lifestyle when we will need somebody else to do many things we do for ourselves, now.

If we pass before that time? I'm sure we won't be worrying about "what we left on the table". It can go to others.

 

[Independent]

The folks who advocate delaying SS in order to maximize the monthly SS checks you'll eventually collect implicilty assume that you'll: a) be in good enough health to do the things you want to do with that larger income, and b) will still be alive.

I suppose you would say that people who buy homeowners insurance "implicitly assume" that their houses will burn down. I'd prefer to say that both groups see a non-zero probability and think that insurance is a good way to deal with that fact. JDW-fire's example shows that this can be the better approach for some people.

We live in a community where there is a high percentage of retirees. You will be unsurprised to learn that retirees tend to be older and their health tends to be poorer than most working age people. There are a LOT of them who are now single because one spouse has died, and a lot of them where one spouse has significant health problems---heart attack, stroke, bad legs/knees/hips, Parkinson's, etc.

Hiking Machu Picchu in your 40's or 50's? Piece of cake. At 70? Not so much. When you hit retirement age, there is less of your life ahead of you than behind you. And your health and physical abilities are only going to go downhill----you are already on the downward slope, and it gets progressively steeper (worse) with each passing year.

Whatever you call it, I think that a large pot of "discretionary money" when you begin retirement is a great idea. Use it to do those things that you can do now, rather than delaying them so long that you might well be unable to do them.

I had a co-worker who said that retirement comes in three phases: Active, Passive, and Dependent.

I agree that it's a good idea to have a pot of money to spend for the "extras" during the Active phase. But, it's possible that your spending is going to ramp up again in the Dependent phase. I'm not comfortable assuming a steady decrease in spending.

 

[rayvt]

This discussion kinda reminds me of the "should I pay off my mortgage / refinance my mortgage?" discussions. It is extraordinarily easy to get caught up with all the possible scenarios & details that you can't see the forest for the trees.

In this instance, the topic was whether to take SS at 62 or to wait until FRA or 70 and get a large monthly payout. The fact that you may have other investment portfolios (TIRA, etc.) has no bearing on the SS matter. None.

Other retirement assets may have a bearing on whether you can afford to delay or not, though. Nobody wants to eat Alpo for a few years in order to wait until the SS checks will be large enough to cover sirloin.

I grant there is one small area where the total lifetime family SS benefits can be maximized by clever footwork, but this is pretty uncommon. It's when the younger spouse is significantly younger than the other.

The Ryan article in FPA mentions a couple of key points that summarize why I think it is generally better to take SS early, and to not do a subsequent reset. (After you cease working, of course. Otherwise the taxes are very large.)

1) Reductions or increases to retirement benefits are actuarially equivalent for the person with average life expectancy.

2) After repaying benefits, time must elapse before the retiree breaks even on the transaction.

In the example he shows, the break-even period is 7 years. Much too long to interest me.

 

[rayvt]

I went back and updated my spreadsheet, putting in the SS-estimated figures for age 62/66/70 benefits using "future dollars" instead of "today's dollars". As was said in a related thread, this is what you should use when making comparisons. The annual SS statement they send shows today's dollars---which is where I went wrong.

I used these numbers, and figured my break-even points of 66 vs. 62, assuming 3% COLA and different earnings rates on the amount collected between 62 & 66.
At 0% earning, my BEP is age 78 (191 months after my 62'nd birthday)
At 2%, 80 (214 months)
At 4%, 83 (249 months)
At 5%, 85 (275 months)
At 6%, 88 (311 months)
At 8%, 102 (479 months)

To get a feeling for the length of the break-even periods, I note that a 30 year mortgage is 360 months, and a 15 year mortgage is 180 months.

I then looked at SS's life expectancy table, for my year of birth at various ages.
At 60, l.e. is age 81
At 65, 82
At 70, 84

So.......if I can earn an average of 4% or more, my 66 vs. 62 break-even point does not occur in my lifetime. Note that this is *not* 4% SWR, it's 4% earnings.

Of course, things may change in the future, but I will take note that my current portfolio of (investment-grade) preferred stocks has an average yield of 9%. And the "typical" yield of new preferred stock issues is about 6%.

 

[ejman]

I went back and updated my spreadsheet, putting in the SS-estimated figures for age 62/66/70 benefits using "future dollars" instead of "today's dollars". As was said in a related thread, this is what you should use when making comparisons. The annual SS statement they send shows today's dollars---which is where I went wrong.

I used these numbers, and figured my break-even points of 66 vs. 62, assuming 3% COLA and different earnings rates on the amount collected between 62 & 66.
At 0% earning, my BEP is age 78 (191 months after my 62'nd birthday)
At 2%, 80 (214 months)
At 4%, 83 (249 months)
At 5%, 85 (275 months)
At 6%, 88 (311 months)
At 8%, 102 (479 months)

To get a feeling for the length of the break-even periods, I note that a 30 year mortgage is 360 months, and a 15 year mortgage is 180 months.

I then looked at SS's life expectancy table, for my year of birth at various ages.
At 60, l.e. is age 81
At 65, 82
At 70, 84

So.......if I can earn an average of 4% or more, my 66 vs. 62 break-even point does not occur in my lifetime. Note that this is *not* 4% SWR, it's 4% earnings.

Of course, things may change in the future, but I will take note that my current portfolio of (investment-grade) preferred stocks has an average yield of 9%. And the "typical" yield of new preferred stock issues is about 6%.

Thank you. I've been leaning very strongly towards the take it at 62 camp (I'm currently 60) and I find your findings very convincing.

 

[jdw_fire]

In this instance, the topic was whether to take SS at 62 or to wait until FRA or 70 and get a large monthly payout. The fact that you may have other investment portfolios (TIRA, etc.) has no bearing on the SS matter. None.

This is soooo not true. If you dont have any other retirement assets you dont have a choice, which has great bearing on the decision.

When to start taking SS really depends on several things, some of which follow. First, how you are funding your retirement i.e. do you have a large pension and almost no portfolio or are you funding via a portfolio only or do you have both? Second, what are your spending goals i.e. do you want to maximize your ability to spending in your retirement or do you have more than enough income to produce your desired spending money and therefore dont need to produce anymore; also do you want to be able to spend more early in your retirement? Third, how healthy are you? Fourth, do you want to leave an inheritance to someone i.e are you interested in continuing to build wealth and preserve wealth at all costs, even if it means less spending money in retirement?

Motivation is very important since some motivations can require actions that would go against other motivations eg. maximizing your spending conflicts with maximizing the inheritance you pass on. The example i gave in my last post deals with this trade off while attempting to not increase the risk of your retirement "failing". Of course the risk is different and which is more risky depends on whether the retiree feels depending on the "4% rule" (i.e. the stock and bond markets) is more risky than depending on SS.

Many analyses of when to take SS focus on how will you get the most money out of SS (as seen in the below quote). When analyzing SS this way average life expectancies (LEs) are integral. However when planning for retirement maximum LEs are usually more important (nobody wants to run out of money). Therefore i submit that analyzing SS using your average LE is inappropriate unless you have such great assets that there is no danger of you ever running out of money and in essence your main goal is to maximize your estate for future generations. More often than not the concerns expressed by posters on this board revolve around when will they have enough assets to be able to retire safely with some given spending plan and therefore, IMO, the best approach to deciding when to take SS is to use it as longevity insurance and maximizing its value that way. Now if you have great concerns about our government not paying out on the promises made for SS then that also needs to be taken into consideration.

I grant there is one small area where the total lifetime family SS benefits can be maximized by clever footwork, but this is pretty uncommon. It's when the younger spouse is significantly younger than the other.

The Ryan article in FPA mentions a couple of key points that summarize why I think it is generally better to take SS early, and to not do a subsequent reset. (After you cease working, of course. Otherwise the taxes are very large.)

1) Reductions or increases to retirement benefits are actuarially equivalent for the person with average life expectancy.

2) After repaying benefits, time must elapse before the retiree breaks even on the transaction.

In the example he shows, the break-even period is 7 years. Much too long to interest me.

 

[WilliamG]

Taxable Impact in Withdrawal Policy

We did significant (for us) Roth conversions this and last year funded largely by inheritance money. Had tentatively planned that Roths would be there as last resort monies. How are other folks thinking of w/d strategy with taxable/IRA/Roth monies? Am now thinking of at least taking dividends from Roths each year beginning this year. Can see the end run coming on Roth tax advantages. See link below. Graetz has an article in this month's AARP. Sounds like his proposal would basically raise the zero tax bracket margin to $100K!

Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look - washingtonpost.com

 

[jebmke]

We did significant (for us) Roth conversions this and last year funded largely by inheritance money. Had tentatively planned that Roths would be there as last resort monies. How are other folks thinking of w/d strategy with taxable/IRA/Roth monies? Am now thinking of at least taking dividends from Roths each year beginning this year. Can see the end run coming on Roth tax advantages. See link below. Graetz has an article in this month's AARP. Sounds like his proposal would basically raise the zero tax bracket margin to $100K!

Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look - washingtonpost.com

Not sure I follow your point. I didn't see any reference to ROTH IRAs in the article.

 

[WilliamG]

The way VAT would be implemented ( at least by Graetz ) would actually lessen income tax for all but highest earners. Ie, depending on your income needs, future advantage of income tax free Roth is greatly diminished.

"In his 2008 book, "100 Million Unnecessary Returns," Yale law professor Michael J. Graetz estimates that a VAT of 10 to 14 percent would raise enough money to exempt families earning less than $100,000 -- about 90 percent of households -- from the income tax and would lower rates for everyone else."

 

[jebmke]

I can't imagine a VAT implemented except to augment existing revenue in order to close the deficit. Exempting 90% of taxpayers from income tax doesn't seem likely to me.

 

[LOL!]

The way VAT would be implemented ( at least by Graetz ) would actually lessen income tax for all but highest earners. Ie, depending on your income needs, future advantage of income tax free Roth is greatly diminished.

"In his 2008 book, "100 Million Unnecessary Returns," Yale law professor Michael J. Graetz estimates that a VAT of 10 to 14 percent would raise enough money to exempt families earning less than $100,000 -- about 90 percent of households -- from the income tax and would lower rates for everyone else."

That doesn't speak to whether one would pay less tax or more tax. So what if income tax goes to zero when it is replaced by a higher VAT?

 

[rayvt]

That's the day when there will be a snowstorm in hell.
Be realistic----if they put on a VAT it will be in addition to the income tax.

Luckily, a VAT will require a change in the Constitution.

 

[jdw_fire]

That doesn't speak to whether one would pay less tax or more tax. So what if income tax goes to zero when it is replaced by a higher VAT?

i think the point was that "if income tax goes to zero" and "it is replaced by a higher VAT" the people who already paid income tax on their Roths will pay tax twice on it (income tax and the VAT when they spend it) as opposed to people with TIRAs, 401ks who will only pay the VAT.

 

[jdw_fire]

Luckily, a VAT will require a change in the Constitution.

please explain.

 

[rayvt]

please explain.

The Federal government does not have the Constitutional authority to levy a sales tax (or VAT, which is a form of sales tax).

Sec 8: The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, ... all Duties, Imposts and Excises shall be uniform throughout the United States;

Sec 9: No capitation, or other direct, Tax shall be laid...
Modified by 16th amendment: The Congress shall have power to lay and collect taxes on incomes...

Nothing there about taxes on anything besides income.

 

[jdw_fire]

Nothing there about taxes on anything besides income.

and that is gonna require a change to the consitution to allow VAT? i hope you are right.