Do you ever get used to watching cash accounts decline with spending?

[ernow]

The difficult thing for me after the paycheck stopped was initiating transfers from VG to checking. After years of moving money to VG most every month it was hard to take but I've gotten used to it now.

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[grasshopper]

For me I always get a big pay check at the end of June September, and December (VTI and VXUS).

 

[Danmar]

I am starting to feel this way too. Last couple of years we have spent more than plan for a number reasons. Not the least of which is that the portfolio has done so well. Haven't liquidated any of the portfolio other than dividends, so cash has declined. Pretty easy solution is to sell some stock. Don't like doing this but obviously will. Just need to get going on it. Total net worth has increased and that is the important thing.

 

[W2R]

Been retired a couple of months and I am surprised that I get a bit sad watching us spend down our cash reserves after years of watching them grow.

I anticipated the FACT but not the EMOTION associated with the reverse flow. Is this temporary?

Normally I add my entire portfolio and the spending money in my bank account together, to get a total. It is not quite net worth, but close. That total varies a lot more depending on the stock market, than it does due to my spending.

So normally this doesn't bother me at all. I think that the reason it is bothering you, might be that the market is going down at the same time as you are starting your retirement. So, that probably makes it less rewarding to look at net worth.

This year is a little different for me:

Last couple of years we have spent more than plan for a number reasons. Not the least of which is that the portfolio has done so well.

Like Danmar, I am spending a lot more lately than I usually do. In my case, it is because I am buying my dream house, and it seems like every time I turn around there is [-]somebody with their hand out[/-] some other expense associated with buying the house or moving. Plus, I am buying the house in cash, so there go the cash reserves (temporarily, until I sell my present house). I am a bit of a tightwad so I have to remind myself constantly that I can afford this and that this is OK and something that will make me very happy in the long run.

 

[shortstop14]

It bothers me a bit, but after three years it's only a minor bother. But net worth has gone up those years, as others have said, and that's the number I watch.

Now the first year I have a serious investment reversal will likely be a different story, but I have my allocation plan and will stay the course. However, I suspect discretionary expenses will get cut back a bit during tougher times. Some habits just die hard.

 

[tmm99]

For all these folks who spend the dividends, do you just take them out of after tax accounts or also out of tax deferred?


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[Telly]

For all these folks who spend the dividends, do you just take them out of after tax accounts or also out of tax deferred?

We are tapping Divs from some, not all, of our taxable funds. But none from tax-deferred funds. We might tap another taxable fund this year, to help pay for the extra FIT required for Roth conversion up to the top of the 15% bracket.

 

[Danmar]

For all these folks who spend the dividends, do you just take them out of after tax accounts or also out of tax deferred?


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So far just after tax accounts. My tax deferred account is immaterial.
Extra spending on daughter's wedding, renovations, and other lumpy real estate related expenses all seem to be coming up at once. Good thing the market is cooperating.

 

[scrabbler1]

For all these folks who spend the dividends, do you just take them out of after tax accounts or also out of tax deferred?


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I am not old enough (52) to have unfettered access to my IRA. The IRA is part of what I call my "reinforcements" due to arrive starting around age 60. I live off my non-retirement assets and their dividends only.

 

[Ed_The_Gypsy]

I used up all my after-tax money first. Now I take monthly stipends from my Vanguard MMF in my tIRA.

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[tmm99]

Thank you for the posts answering my question. I don't know what would be the best strategy, but I am currently younger than 59.5 years old, and I left my last employer after 55, and according to their 401K summary plan doc, so technically, I can start taking distribution from it penalty free now (before 59.5 years old)... And I am seriously considering taking some money out of there starting next year, so I won't delete all my after tax money first.

 

[Ronstar]

Thank you for the posts answering my question. I don't know what would be the best strategy, but I am currently younger than 59.5 years old, and I left my last employer after 55, and according to their 401K summary plan doc, so technically, I can start taking distribution from it penalty free now (before 59.5 years old)... And I am seriously considering taking some money out of there starting next year, so I won't delete all my after tax money first.

Thanks to you for bringing up the topic, and to the posters. The posts have helped me in planning how/where to withdraw $ in the future.

 

[Meadbh]

As others have said, cash accounts are just one component of the picture. Money is fungible, so the amount of cash in a specific account is important only for cash management: making sure there is enough in the account to cover current expenses and avoid bank charges. To that end, I keep a HISA buffer.

The major financial indicators that I follow are:
1. Net Worth (annually, increasing in ER so far)
3. Liabilities (annually, down over 80% from its peak 5 years ago)
3. Lifestyle expenses (excluding taxes and debt repayment, monthly, more modest than expected)
4. Debt service expenses (monthly, about to drop by 50% as my car gets paid off this summer)

As for taxes, they vary according to the sources of income used. In 2014 I had a very low tax rate, but I am now implementing a strategy of drawing down on tax sheltered accounts for part of my expenses, which will lead to withholding and somewhat higher taxes in the short term. My goal is to avoid ginormous tax grabs due to RMDs from age 71.

 

[sengsational]

Can someone explain to me why this is? I noticed the same thing in i-orp also, but I feel like I want to keep some of my cash reserves and take some tax deferred out at the same time.

Thank you for the posts answering my question. I don't know what would be the best strategy, but I am currently younger than 59.5 years old, and I left my last employer after 55, and according to their 401K summary plan doc, so technically, I can start taking distribution from it penalty free now (before 59.5 years old)... And I am seriously considering taking some money out of there starting next year, so I won't delete all my after tax money first.

The idea is (generally) let Roth accounts build tax free, so leaving those alone is a good idea. That goes for HSA's too, I think. If you think tax rates will be the same later as now, it's probably not a big deal to pull out of your 401k using the 55 rule as opposed to after tax money. But if you can get money out of the 401k any time you want to, then it can become after tax money, but pulling has tax consequences, of course. i-orp is trying to minimize taxes over the entire span of the model, and it WILL suggest pulling big out of pre-tax if you're going to run into big taxes at RMD time. If you had your i-orp parameters accurate, and you didn't have anything that "didn't fit" into the model, I'd be inclined to do what it said unless there's something you know is not going to be good (which would probably fit into the "didn't fit the model" category). For instance, let's say you have some cash you're saving for the zombie apocalypse, then model that using the minimum cash on hand. That will allow you to optimize while obeying that constraint.

 

[samclem]

If you had your i-orp parameters accurate, and you didn't have anything that "didn't fit" into the model, I'd be inclined to do what it said unless there's something you know is not going to be good (which would probably fit into the "didn't fit the model" category). For instance, let's say you have some cash you're saving for the zombie apocalypse, then model that using the minimum cash on hand. That will allow you to optimize while obeying that constraint.

Thanks, that makes sense. One reservation i had about the i-orp recommendations (spend down all after-tax money early) is it can put you in a bad tax spot later if you need a big chunk of cash for something. In that case, it would hurt a lot less to take that money out at the CG rate than to take it from tIRAs as earned income. All this depends on the exact brackets and rates the person is subject to, obviously.

 

[sengsational]

Thanks, that makes sense. One reservation i had about the i-orp recommendations (spend down all after-tax money early) is it can put you in a bad tax spot later if you need a big chunk of cash for something. In that case, it would hurt a lot less to take that money out at the CG rate than to take it from tIRAs as earned income. All this depends on the exact brackets and rates the person is subject to, obviously.

True. I didn't think of that. I've not studied CG stuff because, alas, I have no after tax appreciated assets of any consequence. But I wonder if you could use the illiquid asset feature for that. The model allows a current value, a cost basis, and a time to sell it. It's hard to model a contingency, but you could run one model where you hold your appreciated stock using that technique, faking the large unexpected cash need. Then run it without and see how different the recommendations are. Maybe you pick something in-between to hedge your bet.

 

[Donzo]

It was odd spending and not saving. I was overly careful with spending for the first 6 + months. I had 5 CDs that matured in march of each year for the first 5 years after RE. The CDs were more than enough for yearly expenses and I had planned on spending that money and leaving my investments alone. Thank goodness I had those CDs! I retired in June of 06 and having those CDs during the "crash" kept me sane! Never had to sell any equities.
Spending is not a problem now, I have spending money set up for now, later and way later and rarely worry at all anymore
9 years free and it just gets better!
Just wish time would slow down a little. Thursday is trash day for us.......seems like every other day is trash day, weeks fly by

PS the CDs were at 4.5 - 6.2%........wish I still had em or could get em. If I remember correctly I bought them around 2000 as 5-10 year durations for emergencies.....ER was not on my mind at that point. Love when things fall into place!

 

[grasshopper]

Thanks, that makes sense. One reservation i had about the i-orp recommendations (spend down all after-tax money early) is it can put you in a bad tax spot later if you need a big chunk of cash for something. In that case, it would hurt a lot less to take that money out at the CG rate than to take it from tIRAs as earned income. All this depends on the exact brackets and rates the person is subject to, obviously.

I see this same problem with large amounts of CG's and RMD. I am taking LTCG at 0% in the 15% bracket now. Some folks say don't worry about making Roth conversions if you may be in the same tax bracket. I am splitting my income space with LTCG and Roth conversions. I will be just this side of the 25% bracket with SS and RMD's at 70. Having to take a bunch of CG at 70 might throw my plan under the bus.

If this doesn't make sense blame it on the zinfandel.

 

[orplanner]

Can someone explain to me why this is? I noticed the same thing in i-orp also, but I feel like I want to keep some of my cash reserves and take some tax deferred out at the same time.

The after-tax account goes first because its gains are taxed in the same year that they occur, thereby reducing the annual return on the account and lessening compounding as compared to the IRA or Roth.

If practice some sort of glide path tactic will have you are partly invested in fixed income assets and partly in equities. It doesn't matter if your cash is in your IRA as its there when you need. It compounds better than your after-tax account but when you take it out affects your taxes.

 

[rayvt]

Doesn't bother me a bit.

First, I don't really focus on our cash balance... that would be totally silly.... I focus on the total balance of our retirement savings.... which have grown 20% since I retired.

Second, I know the declining cash balance will be replenished when I rebalance as it has each of the years since I retired.

Same here.

It would be silly to obsess over our cash balance, since the cash balance is whatever I want it to be. Just one login to the brokerage account and one $5 commission --- and the cash balance will grow immensely.

In a way, I've been kinda hoping for a down market for a few years now. That's so it'll hit my bear-catcher signal and tell me to cut my equity positions and shift a bunch of money to cash. I hate to liquidate stocks when the signals still say to buy.

First-world problems.

 

[old woman]

I am older than most people at 67 now so get SS and don't want to pay income tax on it. I am trying to limit my income so this year took about 9K from IRA and took some dividends from taxable to put that money in checking. I am not a spender I don't like to see money go away my SS pays my mortgage so when I put a few thousand in checking I can use it for a very long time for utilities and food and things. This month I will get about 700 in dividends in the taxable account then again in Sept and a bunch in December. In January I might take some more IRA money. I could maybe get by on just dividends but I don't want to have IRA get too big before 70 or leave ROTH when I die since that doesn't have a stepped up basis like taxable. I might start spending the ROTH money if I want some more money.

 

[brett]

Like others, there has been an adjustment period.


This has been lessened by having an after tax monthly budget. So far, after four years, we are right on the money. We need to increase it in the second half by eight percent to reflect inflation over the past four years and our increased spending in certain areas.


While we see our cash balances declining we have also seen the value of our equity position increasing substantially over the past several years.


I think that we would be much more concerned if our cash balances and our equity positions were both declining....and declining at a rate that we felt was not sustainable over the long term.

 

[athena53]

Yeah, it's very hard to get out of the "don't touch the savings, they're for retirement" mindset!


I retired a year ago and it helps that the market has been doing very well, so our net worth has grown. I have a complicated system only an actuary could love, but withdraw from our main brokerage account about every 4 months and then keep it in a "living expenses" bucket on my spreadsheet, releasing a fixed amount into our spendable balance every month.


I also started tracking our expenses, which isn't too hard since nearly everything is put on the credit cards (and paid in full every month). That gives me reassurance that there's a huge chunk of our spending (mostly travel) that enhances the quality of life but could be cut back if necessary. There are plenty of "wants" in our spending (and a charitable budget that's bigger than our mortgage) but we can afford them.


As others have noted, sometimes your heaviest spending is early in retirement. I also remind myself that I've got a small pension ($12K/year) kicking in in 3 years when I turn 65, Spousal SS of $12K at age 66 and my own SS, which will add a net $24K (I'll get $36K but lose Spousal) at age 70. Medicare will be another break; right now DH has it but I'm paying $50/month for a plan with a $6K deductible.

 

[tmm99]

The after-tax account goes first because its gains are taxed in the same year that they occur, thereby reducing the annual return on the account and lessening compounding as compared to the IRA or Roth.

If practice some sort of glide path tactic will have you are partly invested in fixed income assets and partly in equities. It doesn't matter if your cash is in your IRA as its there when you need. It compounds better than your after-tax account but when you take it out affects your taxes.

Thank you for your explanation. I have to think about this some more and try to strategize.

 

[tmm99]

Here is the link to VG webcast transcript that was on yesterday that I meant to join, but i missed.
https://personal.vanguard.com/us/insights/article/live-webcast-retirement-spending-032014
It goes with some posters said here and i-opt says to use the after-tax money first (although some of us may want to keep the after-tax money for special events such as down payment on a vacation home, or some other events that we wouldn't want to incur a huge taxable event by taking extra money out of the tax-deferred.

Anyway, the webcast goes all over the place, but there are some good points in here that I didn't think about before, and there may be some benefits to some of you so I thought I'd post the link.