I retired in 2013. Before retiring I did a lot of research on optimum withdrawal strategies and settled on a modified fixed-percentage scheme.
Basically, I take a percentage of our total assets, liquidate it, and transfer that into our checking account once a quarter. If the checking account has unspent funds from the previous quarter, I discount the amount to transfer by that amount and leave it invested. I determined the percentage we use from a budget based on past spending and how we planned to spend our retirement.
What I have found out is that we always have left-over money from the previous quarter, often by a substantial amount. The reason why is partly because our assets have grown since we retired (which is a good thing) but more so because of the variability in spending.
Our spending is about 60% recurring costs, that is, predictable monthly costs. The rest is non-recurring costs like a new roof or replacing the car, plus big-ticket discretionary spending like traveling. But the latter are infrequent, maybe every few years.
What I have found is that because we always have left-over funds each quarter that I tend to think we have extra money to spend and we are living under budget and I am tempted to spend up to the amount of the withdrawal. But that is not the case because the extra is really unspent non-recurring costs which need to be banked up for when it is needed. I should only be withdrawing the amount to cover recurring costs.
So basically, I have recalculated our withdrawal percentage based on recurring costs rather than total budget. Money for infrequent non-recurring costs stays invested, to be grabbed not as part of a scheduled withdrawal but when needed. Part of our portfolio is very liquid so I can get at it quickly if need be.
I believe that dealing with the variability in spending is an issue no matter what withdrawal strategy is being used. This whole experience makes me wonder if a withdrawal strategy is even needed. Some people just take out money on an as-needed basis and don't really have a strategy. I am curious what others are doing.
Basically, I take a percentage of our total assets, liquidate it, and transfer that into our checking account once a quarter. If the checking account has unspent funds from the previous quarter, I discount the amount to transfer by that amount and leave it invested. I determined the percentage we use from a budget based on past spending and how we planned to spend our retirement.
What I have found out is that we always have left-over money from the previous quarter, often by a substantial amount. The reason why is partly because our assets have grown since we retired (which is a good thing) but more so because of the variability in spending.
Our spending is about 60% recurring costs, that is, predictable monthly costs. The rest is non-recurring costs like a new roof or replacing the car, plus big-ticket discretionary spending like traveling. But the latter are infrequent, maybe every few years.
What I have found is that because we always have left-over funds each quarter that I tend to think we have extra money to spend and we are living under budget and I am tempted to spend up to the amount of the withdrawal. But that is not the case because the extra is really unspent non-recurring costs which need to be banked up for when it is needed. I should only be withdrawing the amount to cover recurring costs.
So basically, I have recalculated our withdrawal percentage based on recurring costs rather than total budget. Money for infrequent non-recurring costs stays invested, to be grabbed not as part of a scheduled withdrawal but when needed. Part of our portfolio is very liquid so I can get at it quickly if need be.
I believe that dealing with the variability in spending is an issue no matter what withdrawal strategy is being used. This whole experience makes me wonder if a withdrawal strategy is even needed. Some people just take out money on an as-needed basis and don't really have a strategy. I am curious what others are doing.