How to decide if you can live off investments or need to draw them down

[Yoheadden]

It may seem fairly straightforward to some people, but as the DW & I are planning for ER in either 2025/2026 @ the ages of 55/56, we are having a problem deciding which way to go, if there is even a choice. As most folks here, we saved, invested for growth and let the market work its magic. Now, as we start to make the transition to this next phase and start talking buckets and withdrawal strategies, how do you plan this? How do you know if you need to draw down your portfolio or if you can live off of the income it could throw off? We do not have pensions or annuities. We will have a hair above 2 million spread out among SEPs, Roths, Simple iras, HSAs, I-Bonds and taxable accounts. Annual expenses will be around 52,000. DW may take SS (around 18,000) @62 while I will wait until 70 (around 30,000).

Also, where is a good site for a portfolio tester to check different allocations and investments?
Vanguard has one, but it doesn’t show prior performance.
Morningstar now charges for there portfolio X-Ray.

 

[mathjak107]

It may seem fairly straightforward to some people, but as the DW & I are planning for ER in either 2025/2026 @ the ages of 55/56, we are having a problem deciding which way to go, if there is even a choice. As most folks here, we saved, invested for growth and let the market work its magic. Now, as we start to make the transition to this next phase and start talking buckets and withdrawal strategies, how do you plan this? How do you know if you need to draw down your portfolio or if you can live off of the income it could throw off? We do not have pensions or annuities. We will have a hair above 2 million spread out among SEPs, Roths, Simple iras, HSAs, I-Bonds and taxable accounts. Annual expenses will be around 52,000. DW may take SS (around 18,000) @62 while I will wait until 70 (around 30,000).

Also, where is a good site for a portfolio tester to check different allocations and investments?
Vanguard has one, but it doesn’t show prior performance.
Morningstar now charges for there portfolio X-Ray.

firecalc …..if checking success rate

td america has free access to instant x-ray for a portfolio analysis … give it a few minutes to load or it looks like just an advertisement

 

[skyking1]

SS will take a big bite out of your expenses. I broke our situation up into
Before SS
After SS
It is a form of a bucket strategy. I also acknowledge Bernicke's spending curve and plan on spending much more now, and much less later.
Everyone I know, everyone i talk to has been done with big travel by 80. It will be our biggest category of spending until that time.
Firecalc will address all of that for you, including the Bernicke curve if that interests you. Just take your time getting everything put in there.
it does not plot the curve accurately for us because we are well past that age. For you it will work as intended.

 

[Yoheadden]

Thank you for the replies.
I have ran my figures through Firecalc as well as a paid and free FPs. They all said we should be go to go.
I might have muddled my question a bit in my rambling.
I am curious about how people decide if they have enough resources to live off of their investments and thus keeping the principal or use a spend down strategy and use up their investments, hopefully on their last day.
We don’t have any heirs, so 1 way doesn’t necessarily have to win out, but there will be a difference in the way we structure our accounts and the investments in them.

 

[N02L84ER]

If you are planning to get health insurance that is eligible for premium tax credits, you do NOT want to be "forced" to get more income than necessary. For this reason we are happy to sell securities when needed and only have to report 50%+ as income instead of relying on 100% dividends that are 100% income.

 

[Yoheadden]

If you are planning to get health insurance that is eligible for premium tax credits, you do NOT want to be "forced" to get more income than necessary. For this reason we are happy to sell securities when needed and only have to report 50%+ as income instead of relying on 100% dividends that are 100% income.

This is definitely a factor for us as well. The premium tax credits are an enormous help and it’s almost ridiculous how much of a difference they make. Let’s just hope the Government keeps the program going for at least the next 10 years. Lol

I’ve also been building up our cash position to use as a buffer for our income. Of course that’s easy for now since rates are up.

 

[Jeffman52]

SS will take a big bite out of your expenses. I broke our situation up into
Before SS
After SS
It is a form of a bucket strategy. I also acknowledge Bernicke's spending curve and plan on spending much more now, and much less later.
Everyone I know, everyone i talk to has been done with big travel by 80. It will be our biggest category of spending until that time.
Firecalc will address all of that for you, including the Bernicke curve if that interests you. Just take your time getting everything put in there.
it does not plot the curve accurately for us because we are well past that age. For you it will work as intended.

Spot on. I have my finances and budget in personal spreadsheets that include things like SS@65 or @67 or @70 (probably wont wait for 70), taxes on income from taxable accounts and taxes on SS when we start taking that, along with RMDs at 73 using the current tables.


All of that shows me the same thing.. there is before SS and after. SS takes such a large bite our of our expenses that we can plan to take more out prior, than if we would if we had to live off just our investments.

 

[scrinch]

Maybe I'm not understanding your exact question, but...if you want to maintain principal, you can structure your investments in interest and dividend-producing products. You can probably get about a 4% return on those investments now. So to generate $52k, you'd need to invest $1.3M that way. The rest you could invest in growth products to deal with potential future inflation.

Alternatively, if you just figure that all your investments are fungible, you could invest in a moderate portfolio (55/35/10), expect an average return of 6-7% ($120-140k), and withdraw the cash you need during your quarterly/annual portfolio balancing. Any return of over 2.6% will keep your "principal" whole (and growing) and you will be able to live off of the returns.

 

[CardsFan]

OP

There is nothing wrong with "spending down" one bucket (after tax account usually, but not always), while the other ones grow.

Take a look at the total income you get from all accounts (int/div). It is likely over $40k on $2 million, so you are only spending down about $12k. And you (likely) are going to get way more than that in capital growth, on average.

Also, consider Roth conversions in the low tax brackets, though ACA subsidies may make those less attractive.

 

[mathjak107]

it takes at least a 2% real return , that is after inflation ,for the first 15 years of a 30 year retirement as an average to hold a 4% swr from a portfolio.

but you may have a buck left

any ss , pension or annuity just gets added to the portfolio capability

whether you need less then 4% from that portfolio because you have the other income is a different issue from determining the capability of that portfolio

 

[mrfeh]

I am curious about how people decide if they have enough resources to live off of their investments and thus keeping the principal or use a spend down strategy and use up their investments, hopefully on their last day.

You are "living off your investments" whether you sell assets or not. Dividends are not magical; they are a component of the total return of your portfolio.

 

[audreyh1]

Thank you for the replies.
I have ran my figures through Firecalc as well as a paid and free FPs. They all said we should be go to go.
I might have muddled my question a bit in my rambling.
I am curious about how people decide if they have enough resources to live off of their investments and thus keeping the principal or use a spend down strategy and use up their investments, hopefully on their last day.
We don’t have any heirs, so 1 way doesn’t necessarily have to win out, but there will be a difference in the way we structure our accounts and the investments in them.

I decided early on to take a total return approach, withdraw a fixed % annually, and rebalance as needed. So I ignore interest and dividends thrown off by the investments and just look at the total pie. I picked an AA I was comfortable with in terms of annual volatility and long term portfolio survival characteristics.

I don’t use the classic approach modeled by FIREcalc where you adjust the initial portfolio value by inflation. I wasn’t comfortable with automatically adjusting for inflation, instead I take a fixed % of the Dec 31 portfolio value each year. So this effectively lets the portfolio performance decide income as it grows and shrinks and hopefully keeps up with inflation after withdrawals over the long run. Fortunately FIREcalc models this withdrawal method too - it’s called % remaining portfolio method.

A lot of these were personal preferences and knowing my investing personality. A target AA with rebalancing has always appealed to me.

I’m totally OK with spending down. But based on running the models it’s likely to maintain at least 1/2 the remaining inflation adjusted portfolio value after a very long period of time and on average maintain the initial portfolio value inflation adjusted. And that’s for a higher withdrawal % than I am currently using. So IMO belts and suspenders.

 

[tominboise]

At the risk of sounding too geeky, I made a spreadsheet with many tabs that track a lot of stuff, like our budget, our actual spending, our assets by institution, by class, etc, etc, etc. Anyway, it is pretty easy to set up a tab and model cash flows and figure out how you are might accomplish what you need. In our case, we are basically exhausting our after tax investment account prior to taking any tax deferred distributions. I do some TIRA to Roth IRA conversions as our income level and tax burden allows. I hope that the after tax account lasts until I am 70 but it is unlikely, as the last couple of years haven't been that kind to it. I am currently 64 and my wife is 62. SS will start next year for her and I am waiting until 70.

 

[FreeBear]

I decided early on to take a total return approach, withdraw a fixed % annually, and rebalance as needed. So I ignore interest and dividends thrown off by the investments and just look at the total pie. I picked an AA I was comfortable with in terms of annual volatility and long term portfolio survival characteristics.

Nicely stated. We do the same as "total return" investors. Picked a withdrawal rate based on on our assets and porfolio survivability (including odds of death), then just sell funds once or twice yearly to cover expenses. We don't have to leave an estate, so that gives a higher annual withdrawal. Fortunately, we are up 30% from our retirement in 2015 despite the flat market the last 2 years and crazy spending the last 4 years.

We will be lucky to have another 10 active years, so that gives us the"courage" to keep living our lives through covid and the market gyrations in the aftermath. Bottom line: we accept the possible loss of principle in order to fund our desired lifestyle now. No point for us to maintain our starting porfolio value or initial net worth beyond our deaths.

We also pick our asset allocation to help us sleep at night (volatility) and maintain liquidity. Approaching retirement, we added bonds and a cash, although virtually all stock funds when working.

 

[jollystomper]

Also, where is a good site for a portfolio tester to check different allocations and investments?
Vanguard has one, but it doesn’t show prior performance.
Morningstar now charges for there portfolio X-Ray.

On this point, take a look at portfolio visualizer: https://www.portfoliovisualizer.com/


One of their free offerings:

Backtest Portfolio



Backtest a portfolio asset allocation and compare historical and realized returns and risk characteristics against various lazy portfolios.

 

[pb4uski]

....Also, where is a good site for a portfolio tester to check different allocations and investments?...

FIRECalc can do that. Go to the Investigate tab and select the second radio button...Investigate changing my allocation How will changing the allocation -- putting more or less into stocks -- affect the results?... and then Submit.

But generally speaking success rates are similar between 40/60 and 95/5.

What I have done is to use an online savings account for our next 12-18 months of spending and I have a monthly automatic withdrawal from that to the credit union checking account that I use to pay our monthly bills and then I replenish that liquidity account periodically when I rebalance our investments.

 

[audreyh1]

Also, where is a good site for a portfolio tester to check different allocations and investments?
Vanguard has one, but it doesn’t show prior performance.
Morningstar now charges for there portfolio X-Ray.

Yes, I have used FIREcalc extensively to do this. I use a different withdrawal method from the default, and for that I have modeled different time frames, different asset allocations including specific component types, different withdrawal rates. I was looking for max drawdown statistics - the amount and how many years, and worst starting years. As well as ending portfolio statistics. Got a lot of insight from it.

 

[JackJester]

In addition to FIRECalc, like many others here I created a spreadsheet (a row for each year in retirement). It has a column for the needed expenses for the 1st year of ER (this is a conservative # that takes into account the last 5 years of expenses which included big ticket items like new roof, car, 1 big annual vacation, etc). Then that column of expenses increases annually based on inflation (e.g., 3%). I run my spreadsheet to age 95 for DW and I (ER was age 55 for me and 59 for DW) …we are in year 2 of ER now. After expenses, the columns include additional assumptions for taxes and medical (pre and post medicare) to get a total annual expense needed. Then the next columns include various sources of income …cash (e.g., Ally savings account), 401K/IRA, Brokerage, Roth, SS. I start filling in the columns and then subtraction expense need vs income to make sure I’m not negative. For the 401K/IRA I assume a 4% SWR so I only take 4% of the total for that year and increase it based on inflation. In very early ER I try to only use cash for 2 years to help counter SORR and make it closer to 59.5. Then I start to draw from Brokerage account once cash is depleted. When after that I start to draw from our 401K/IRAs at age 59.5. And then Roth. I have Roth conversions happening in the spreadsheet annually until 2026. Then will do some more once the tax rates issue becomes clearer and I better understand my tax impacts. I also have SS rolling in at age 62 for both of us. The spreadsheet has assumptions for additional income….in later years I add income occurring for downsizing the house and selling the vacation condo. While the spreadsheet assumes I deplete a source to 0 before moving to the next source (Cash > Brokerage > 401K/IRA/SS), this doesn't reflect reality. For example, I won’t deplete cash to 0 and then brokerage to 0 before pulling from 401K. I’ll probably always move $ from Brokerage/Roth to Ally to maintain a 1 yr cash reserve. But for simplicity sakes I mostly want my spreadsheet to make sure I can get to age 95 without ending up negative.

One thing this forum taught me was to prepare for ER you have to have multiple sources of income. If ER to you means pre-59.5, then you need $ to get you to 59.5 so you can touch that IRA. That’s where a cash reserve and the Brokerage account plays into the mix. I had wished my Brokerage account was bigger when I ERed, but ultimately it met the primary requirement of bridging me to 59.5. As many others, I was heavily loaded up on 401K ...I hadn’t even heard of a Brokerage account until 5 years before ER. Once income level reduces enough to allow for a Roth then open one up right away. I couldn’t while I was working since my income was too high. And, while my megacorp supported the rule of 55 to access my 401K, I calculated that I could get to 59.5 without needing it. This was good news so I could roll that 401K to an IRA. The IRA has many more investment options than what my megacorp provided. For example, at my Schwab IRA I can buy CDs, individual Bonds, and I have a MM Fund. None of these were available in my megacorp 401K with Fidelity. Also I used https://portfoliocharts.com/ to determine my portfolio AA and backtest what my SWR would be. The tool allows you to actually compare many standard portfolios as well as build your own and put in your specific Schwab, Fidelity, Vanguard ETFs as components of your AA.

 

[Exchme]

You are right that cash flow is important, particularly as you are retiring before 59.5. To determine if you need to sell assets, look at your 1099's from your brokerage, banks, etc. Think through other sources of cash and cash needs and make a cash flow plan.

Cash flow aside, it's irrelevant in terms of survivability of your portfolio whether you are consuming dividends or selling assets, don't get focused on the wrong things.

Don't try to get too cute with your portfolio, just because a particular tilt performed well in some market in the past has nothing to do with the future, it could just as easily hurt you.

Your main investment choice for risk and reward is your stock allocation. That should be high enough to reach your goals without being so high as to keep you up at night. It can even make sense to spend down bonds as you near social security as you are less subject to sequence of returns risk once you claim SS and your withdrawal rate drops.

 

[Out-to-Lunch]

^^^
+1 to Exchme's comments.

Here is a slightly different perspective. You express interest in whether you will "spend down" your stash or maintain it. You can look to history. Historically, if you spend less than about 3.4% WR, you would have maintained your stash even under the worst conditions:

https://portfoliocharts.com/charts/withdrawal-rates/

 

[mathjak107]

You are "living off your investments" whether you sell assets or not. Dividends are not magical; they are a component of the total return of your portfolio.

so many do not understand this point .

dividends are withdrawals like any other method of withdrawal.

whether you take the money out of your account or the company does via a dividend and subtracts it off your invested dollars is the same thing.

all gains must come from share appreciation at the end of the day

 

[marko]

so many do not understand this point .

dividends are withdrawals like any other method of withdrawal.

whether you take the money out of your account or the company does via a dividend and subtracts it off your invested dollars is the same thing.

all gains must come from share appreciation at the end of the day

All true! But I "get" OPs desire to maintain his principal. We've been living off just our dividends (and SS) for almost 20 years and have seen our principal more than double.

Math aside, (yes, there's a certain mental gymnastics and denial here) we derive a level of comfort in not touching the principal-- even though we are--through setting aside and only withdrawing the dividends that are automatically spun off.... no need to decide which funds or stocks to sell or how much, along with the knowledge of how much will be there each month. For us, it's more about the mechanics of withdrawal than anything else.

Rational? Maybe not. Are we hurting ourselves in our self-deception? No. But it works for us. It's just another way to skin the cat.

 

[DrRoy]

Some years, interest, dividends, distributions, and bond maturities provide enough cash for spending. When it does not, I sell equities to make up the difference.

 

[LateToFIRE]

Thank you for the replies.
I have ran my figures through Firecalc as well as a paid and free FPs. They all said we should be go to go.
I might have muddled my question a bit in my rambling.
I am curious about how people decide if they have enough resources to live off of their investments and thus keeping the principal or use a spend down strategy and use up their investments, hopefully on their last day.
We don’t have any heirs, so 1 way doesn’t necessarily have to win out, but there will be a difference in the way we structure our accounts and the investments in them.

I had not been thinking about it the way you posed the question. But, my thinking has evolved as I've planned leading up to recent FIRE. At first, I just assumed would be spending down all our assets in full if we lived to 100. But, with a combo of strong equity markets, working a few years longer since had originally done the calc's, and refining budget (less than had anticipated), it's looking like the longer DW and I live, the bigger the pile grows (setting aside SORR for a moment). So, effectively, the models are showing that will be largely living off of growth and returns from principal, and SS/pension income. On a simple present value basis, seems that should end up about where we start out in today's dollars.

In practice though, not sure how will implement that. Not an urgent concern as have enough cash to fund next couple years of expenses before needing to think about a drawdown strategy. And by the time we use that up, will have cash proceeds coming in from taxable liquidity events, so concern will be more how to minimize taxes and reinvest new funds rather than what or where to WD from.

When we do start WD's from portfolio I don't think I'll focus on a "preservation of principal" strategy so much as a "just don't ever come anywhere close to running out of money" strategy. Fortunately, there is plenty of fluff in our spending plan so we'll be able to cut back in poor market conditions, and I think naturally spend less on travel, eating out, etc over time. As for now, we're ramping up spending on all the travel and BTD we want to fit in while we are still fit enough to enjoy.

P.S. No concerns about how much we leave behind, only reason to pursue a preserve principal strategy would be the sleep better at night factor.

 

[mathjak107]

All true! But I "get" OPs desire to maintain his principal. We've been living off just our dividends (and SS) for almost 20 years and have seen our principal more than double.

Math aside, (yes, there's a certain mental gymnastics and denial here) we derive a level of comfort in not touching the principal-- even though we are--through setting aside and only withdrawing the dividends that are automatically spun off.... no need to decide which funds or stocks to sell or how much, along with the knowledge of how much will be there each month. For us, it's more about the mechanics of withdrawal than anything else.

Rational? Maybe not. Are we hurting ourselves in our self-deception? No. But it works for us. It's just another way to skin the cat.

in the end , it doesn’t matter if what you live on comes from dividends ,interest or appreciation or a combo .

what is important is the overall draw rate and that is true of rmds too .