Withdrawal Strategies

[RobLJ]

Most (not all) CEFs use leverage, which is a double-edged sword. I use them in the brokerage account, but the municipal CEFS got hammered last year due to leverage and the Fed raising (duration is usually long), so as Cheesehead indicated, you need to be careful. You can get huge yields, however.



https://www.cefconnect.com/ has the basic data.

 

[G-Man]

Most (not all) CEFs use leverage, which is a double-edged sword. I use them in the brokerage account, but the municipal CEFS got hammered last year due to leverage and the Fed raising (duration is usually long), so as Cheesehead indicated, you need to be careful. You can get huge yields, however.



https://www.cefconnect.com/ has the basic data.

What are some good CEFs to purchase now? How would you know when to sell?

 

[pb4uski]

Actually most of our money is still in 403b (mine) and IRAs (DW's); I withdraw up to the 12% tax limit and scrape what we don't spend into a brokerage, which has grown a lot but is only 15% of the total.

But I agree to use the rebalancing to fund most, where to draw the rest I guess is the question. We are almost exactly on target on our allocations this year, unless something dramatic happens, so I suspect I will figure out what the dividends were in my 403b, as audrey suggests (I have to reinvest them in my 403b, curiously, although it will only take 3 hours or so to figure out what dividends were granted and sell them), then look at gains for the rest.

I think many of the most astute here, like audrey and others, are taking less than 3% so dividends may fund all or most withdrawals. We're taking 5.5 to 7% (at the top), so we're skiing a bit more of an edge, although it has worked out very very well. I was taking almost 10% from my account before DW qualified to make withdrawals, but my account is only about 7% less than when I started withdrawals. I had modeled a 25-50% reduction in my 403b, although the numbers still worked. First World Problems.

When you say brokerage, I assume that you mean a taxable brokerage account? If so, is there a reason why you withdraw rather than do Roth conversions and then withdraw from the Roth?

IOW, rather than withdraw to the top of the 12% bracket and scrape what you don't use into brokerage I would consider doing Roth conversions to the top of the 12% tax bracket and then use Roth withdrawals for spending,

Similiar to what you do but any residual of what you withdraw over what you spend ends up in a tax-free Roth rather than in a taxable account. And for the transition to it you can spend the 15% in taxable and let the tax-free Roth grow. If you are withdrawing 6-7% then you can use the taxable account for 2-3 years and let the Roth money converted from tax-deferred accounts continue to grow tax-free.

Above assumes that you are over 59-1/2 so would have no restrictions on withdrawals from a tax-free Roth.

 

[RobLJ]

I don't have much in Roths. I know most of you on the blog do, but we don't.

I considered doing what you advised, moving the excess into Roths--which I think is very good advice-- in terms of rather than scraping the excess into a brokerage.
But it seemed and seems a shitload of trouble and bother, and once in the taxable brokerage, I can do whatever I want.
I'm now changing the brokerage into ETF indexes and municipals, because the tax issue is a real one, however.
I will admit that moving excess funds into a Roth is a superior strategy. It just seems a pain in the ass, and I can do whatever I want with the brokerage, which is not a good defense of my strategery, which makes me laugh. Actually I'm not that concerned about taxes now or later, which is why I decided to screw the Roth strategy.


I would advise anyone, however, to listen to pf4uski, who is one of about 12 people here who I know know what they are doing. Rather than me. As long as we have enough money, I don't really care about taxes, although I realize this is anathema. And I don't think my view should be your view, in fact I'm sure it is not. I just don't give a drizzling **** about taxes, as long as DW and I can limp into our dotage with money to support us.

 

[pb4uski]

I don't understand the boatload of trouble and bother thing. I have a taxable brokerage account and a Roth brokerage account at Schwab... I can do whatever I want in either one... same investment choices, same interface, etc. Can transfer money out of either taxable or Roth brokerage at will. I'll concede one difference, I can't transfer money into the Roth at will since it has to be a conversion (no contributions allowed for us now that we are retired and have no earned income).

Can you elaborate on the "tax issue"? If the tax issue is a real one would't you be better off with the money in a tax-free Roth brokerage account? No need to chase munis because everything in the Roth brokerage account is tax-free.

No PITA... a few times a year at most do Roth conversions from traditional IRA brokerage to Roth brokerage... you can transfer positions rather than cash so no need to disrupt your AA. Then transfer funds from Roth brokerage to spending as needed.

Full disclosure, I don't do this only because we are still using taxable accounts for spending but once the taxable accounts are drained what I describe above is the plan.

 

[RobLJ]

I'll take SS in a year, so the Roth strategy is close off, largely, although I could eek out 15-20k I suppose.
Since i was withdrawing 5-8% a year, using the "excess" into a Roth seemed problematic to me, from 5 years ago to now.
However, your point is right; I just wasn't sure 5 years ago when I was taking 5-7.5%. What would be excess to go to a Roth and what wouldn't?
In retrospect I could have scraped 80k into a Roth. Looking forward, however, that decision would have taken golden gilded balls.
Unlike many here, I was taking semi-retirement and retirement pretty much to the edge. I think a lot of posters here had a lot more margin than I had:
I gather that a lot are taking below 2 or 3% but I could be wrong about this. If you are taking 5-7% like we have been, I think the calculus changes, even though
when SS kicks in we are below 3%.

This does not gainsay what Pfusky has posted, in fact he or she is correct, just to put this in another context. The brokerage was a garbage heap in case we got in trouble.
I'm taking SS next year, however, largely to encourage DW to spend more. This is irrational, but however true. If we get 3300 a month coming in, she will spend more before I croak.

 

[RobLJ]

My one critique on Early Retirement is that a lot of post assume that you are really well prepared for retirement. And taking just dividends or less than 2%. This was not my experience, although the blog helped me immensely in preparing.

So if you are withdrawing 2% or less, you probably aren't helping me or many here. If you are withdrawing 5% or more, you are probably in the position where you may help.
I'm not criticizing the below 3% people, just suggesting that you may want to consider your advice. If you are withdrawing 2-3%, you aren't very helpful to me, in my experience, although some of you are.

Supposedly, this is an Early Retirement Forum, just to remind you. I'm 65 so now I am an old fart and as problematic as old farts are. This sounded way too snarky and it wasn't meant to be.
What is your advice for people withdrawing 5-7% before SS? I don't care if you are withdrawing 2%--what would YOU do? That was the question. Perhaps the response is not to retire, but that was not my experience.
Navigating the period before SS is, I think, much neglected here, even though most of you have done it. That was the point of my original post. In a year, it won't matter since I'll take SS; I should have asked this 5 years ago.

 

[G-Man]

When you say brokerage, I assume that you mean a taxable brokerage account? If so, is there a reason why you withdraw rather than do Roth conversions and then withdraw from the Roth?

IOW, rather than withdraw to the top of the 12% bracket and scrape what you don't use into brokerage I would consider doing Roth conversions to the top of the 12% tax bracket and then use Roth withdrawals for spending,

Similiar to what you do but any residual of what you withdraw over what you spend ends up in a tax-free Roth rather than in a taxable account. And for the transition to it you can spend the 15% in taxable and let the tax-free Roth grow. If you are withdrawing 6-7% then you can use the taxable account for 2-3 years and let the Roth money converted from tax-deferred accounts continue to grow tax-free.

Above assumes that you are over 59-1/2 so would have no restrictions on withdrawals from a tax-free Roth.

What account would you use to pay the taxes on the Roth conversions?

 

[Finance Dave]

We're fairly new into retirement, and we sold 5 rental properties spread out over the past 3 years, so we have a big chunk in a non-retirement account at FIDO along with our TIRA and Roth IRAs. Our plan going forward is to withdraw to the top of the 12% tax bracket and rebalance. Any needs above that we will take from our non-retirement account for now.

As for which funds we sell, we are very conservative with only about 15-30% equities (I buy more when the market goes down, and sell when it comes up...right now we're at 18%), and we only invest in a handful of broad ETFs like RSP, VTWO, QQQ, IVV, etc....so I will just look at which ones have increased the most and sell those to rebalance.

We have a lot of our portfolio in CDs right now, although some of the higher-paying ones are getting called. I started about a month ago locking in some 3 and 5 year non-callable CDs even though they pay less. Over the long term, I'm happy with an overall portfolio return of about 4-5%. Yes I know inflation eats most of that, but we "oversaved" in order to allow us to be more conservative...and I sleep really well at night these days.

I really like RSP, as IVV is basically a toned down version of QQQ with the top 5 or so holdings being all tech companies and comprising a VERY large portion of the S&P on a market-weighted basis...whereas RSP is equal weighted. This year it has hurt us to be in RSP vs IVV, as tech stocks have done well. However, our goal is not to make more money, but to avoid large losses...and the tech stocks are more volatile.

As my brother once said "You only have to get rich once"

 

[COcheesehead]

My one critique on Early Retirement is that a lot of post assume that you are really well prepared for retirement. And taking just dividends or less than 2%. This was not my experience, although the blog helped me immensely in preparing.

So if you are withdrawing 2% or less, you probably aren't helping me or many here. If you are withdrawing 5% or more, you are probably in the position where you may help.
I'm not criticizing the below 3% people, just suggesting that you may want to consider your advice. If you are withdrawing 2-3%, you aren't very helpful to me, in my experience, although some of you are.

Supposedly, this is an Early Retirement Forum, just to remind you. I'm 65 so now I am an old fart and as problematic as old farts are. This sounded way too snarky and it wasn't meant to be.
What is your advice for people withdrawing 5-7% before SS? I don't care if you are withdrawing 2%--what would YOU do? That was the question. Perhaps the response is not to retire, but that was not my experience.
Navigating the period before SS is, I think, much neglected here, even though most of you have done it. That was the point of my original post. In a year, it won't matter since I'll take SS; I should have asked this 5 years ago.

That’s not how you asked the original question. Good luck.

 

[TheWizard]

If I needed to withdraw 5-7% of my total stash each year prior to SS, I don't know.
I'd either keep working until I was in a better situation or I'd just plan on living a really hunkered down life in retirement, with not much more than SS to live on once it started...

 

[pb4uski]

What account would you use to pay the taxes on the Roth conversions?

From taxable accounts or cash flow if possible since the objective is to optimize the amount in the tax free Roth, but otherwise via withholding taxes on the conversion.

 

[pb4uski]

We're fairly new into retirement, and we sold 5 rental properties spread out over the past 3 years, so we have a big chunk in a non-retirement account at FIDO along with our TIRA and Roth IRAs. Our plan going forward is to withdraw to the top of the 12% tax bracket and rebalance. Any needs above that we will take from our non-retirement account for now. ...

Just curious. Instead of withdrawing to the top of the 12% tax bracket why not do Roth conversions to the top the 12% tax bracket and live off taxable account money?

 

[pb4uski]

If I needed to withdraw 5-7% of my total stash each year prior to SS, I don't know.
I'd either keep working until I was in a better situation or I'd just plan on living a really hunkered down life in retirement, with not much more than SS to live on once it started...

While 5-7% might be a bit high, it is very common for ER to have higher WR from ER to when pensions or SS starts and then for WR to drop once pensions or SS starts. What is most important is this "ultimate" WR after pensions and SS starts.

Or put another way if your WR once pensions and SS start is less than 4% after withdrawing gap funding from the analysis then you are fine.

I retired at 56 and didn't start my pension until I was 62 and DW started SS hen she was 66 and I'll start at 70. So assuming that spending was constant then we would have 4 different WR... once from 56 to 62, another from 62 to 66, another from 66 to 70 and one "ultimate" WR after 70. As long as the ultimate WR is less than 4% then we're fine.

 

[Rianne]

We will start WD in 2024. Appreciate this thread for ideas. SS=$60K. We're thinking 2% WD from the portfolio to meet our spending needs. Puts us in a low 12% tax bracket. When I plug in numbers, Fed. tax rate is 10%. Will take from taxable and tIRA.
https://www.irscalculators.com/tax-calculator

 

[Closet_Gamer]

What is your advice for people withdrawing 5-7% before SS?

My advice is to keep a large store of antacid and anxiety meds stashed in the cabinet!

In all seriousness, your point is well taken that lots of people don't have large nest eggs to retire into and having a <3% withdrawal rate isn't an option.

I think there are a lot of folks on the board who have skinnier portfoios/spending levels, but perhaps aren't quite as vocal.

Back on 5-7%, that is way outside my comfort zone so I would be looking at how to get that down or at the very least ensuring that a large portion of that is nice-to-have rather than essential expenditures.

I might also consider some type of immediate annuity or other structure that provides a very high protection level for your essential expenses and allows you to invest more aggressively to fund the nice-to-have stuff. That way if things really go sideways with your more aggressive investments at least can have confidence that your whole retirement doesn't implode.

Good luck.

 

[Chuckanut]

Part of my bond allocation is in a 2-3 year "step-ladder" of bonds which are coming due quarterly. These fund regular spending.

Of course, I need to sell something to fund the stepladder. Since I do not yet take SS or RMDs this is funded by strategically selling equities in my taxable account. As an active stock investor I sell from time to time as stocks reach their objectives or through trimming of holdings at market highs. This supplements interest and dividends.

Around Nov-Dec, I start looking for a good time to sell and withdraw cash for the next year’s expenses. If the market it bumping up near or above all time highs, I sell what I need to fund next year and leave the rest where it is. That seems to work for me, and this year it looks like it might work again. I may sell something next week.

 

[Ronstar]

I'm living off an annuity and ss and maybe $15k per year cash withdrawal. About 3 months ago, I put most of my cash in equities. So now I'm looking to sell some taxable to get $15k in cash for next year. I didn't do a Roth conversion this year, so I should be able to stay in a 12% tax bracket.

My annuity runs out in about 5 years - but that's when RMD's will kick in. So I'll need to develop a withdrawal strategy at that point. It will become AA based at that time.

 

[Out-to-Lunch]

Now that I understand the question a little better, I will report on what we are doing.

I am in the camp of big-papa and PB4, in that I have a larger withdrawal rate prior to SS. (I should say that I am fortunate to have a pension that covers our bare-bones expenses.) I decided to establish a TIPS ladder to cover some of the additional desired spending. The result is about a 5% WR for a while, with some of that coming from the TIPS portion, and some withdrawn from the remaining funds (which are then rebalanced).

 

[SecondCor521]

My one critique on Early Retirement is that a lot of post assume that you are really well prepared for retirement. And taking just dividends or less than 2%. This was not my experience, although the blog helped me immensely in preparing.

So if you are withdrawing 2% or less, you probably aren't helping me or many here. If you are withdrawing 5% or more, you are probably in the position where you may help.
I'm not criticizing the below 3% people, just suggesting that you may want to consider your advice. If you are withdrawing 2-3%, you aren't very helpful to me, in my experience, although some of you are.

Supposedly, this is an Early Retirement Forum, just to remind you. I'm 65 so now I am an old fart and as problematic as old farts are. This sounded way too snarky and it wasn't meant to be.
What is your advice for people withdrawing 5-7% before SS? I don't care if you are withdrawing 2%--what would YOU do? That was the question. Perhaps the response is not to retire, but that was not my experience.
Navigating the period before SS is, I think, much neglected here, even though most of you have done it. That was the point of my original post. In a year, it won't matter since I'll take SS; I should have asked this 5 years ago.

[Emphasis added.]

It's hard not to make assumptions. I'm 54 and single, so I on the one hand I still have to pay attention to early withdrawal penalties, but on the other hand I can ignore the complexities that come with MFJ (such as increased taxes after the first spouse, and complexities around SS claiming strategies).

I do try to answer the question that people ask. I think several others do too. There are challenges with doing so:

1. We don't usually know the person's entire financial picture, and critical details can be left out in the initial post. We generally assume that posters are like most of us - they're LBYM, knowledgeable on DIY, willing to learn about taxes, are somewhat older, etc. If the OP is different in some significant way (retiring with a 7% WR for example) and we don't know or notice, then we might be off base at the start.

2. The entirety of taxes and financial planning is very complex. For me, I am grateful that I can ignore whole areas of planning because I know, for example, that I'll never daytrade crypto, I won't have to deal with spousal SS issues, that I prefer passive index funds and "stay the course" AA. The extra effort to remember and comment on all those complexities makes it hard sometimes to respond to someone who is in a different area of the landscape financially speaking. I couldn't help you with spousal SS issues and WEP and GPO and so forth other than to say they exist and maybe consult open social security.

3. It's easy to think, for what I think are obvious reasons, that the plan we've worked out for ourselves is really good and therefore should be good for other people. Roth conversions are a prime example. I think they're good for me and save me a lot in taxes, but occasionally there are long discussions here where some folks think they're a nothing burger tax wise.

I think if you persist in explaining your situation and goals and have a good back and forth and ask questions about why people do things one way vs the other, you'll still get a lot of useful advice. At least you can understand it and even discard it if it doesn't apply.

As far as the bolded question goes, I would first recommend the person go back to work and not retire. In the rare cases where someone can't work, I'd advise them to take advantage of any social safety net that might exist, reduce expenses, sell assets, and try to raise other income. Perhaps a reverse mortgage or early SS. It would depend on the specifics of why someone was trying to retire on 7% before SS.

In general, there are several well known ways for retiring before SS, and not all require a 7% WR. I retired at 46 with basically a 2% WR. I spend from taxable and do a Roth ladder, and could have and considered doing an SEPP. There is also the 401(k) retire at 55 option, and the "just pay the penalty" option. These are all well discussed in various blogs if you search for them. We can talk about those in more detail too, but it sounds like you're past that point now.

 

[Vanbookie]

We use a combination of a bond ladder and a small variety of income generating ETFs, combined with SS. Covers a budget of $92,000. Another half mil in dividend and growth stocks. Hope we don't need it for health costs.

 

[mickeyd]

We are fortunate enough to have all of our monthly expenses paid by our DB plans. We usually have about $2K left over monthly. We make RMD w/d when required, but either reinvest it (less tax) or use it for essential "fun and games".

 

[rayvt]

What are some good CEFs to purchase now? How would you know when to sell?

Doug Albo
https://seekingalpha.com/mp/1237-ce...63992-equity-cefs-an-inglorious-year-for-cefs

 

[G-Man]

Doug Albo
https://seekingalpha.com/mp/1237-ce...63992-equity-cefs-an-inglorious-year-for-cefs

Only for subscribers only. What are the key takeaways from the article?

 

[Gotadimple]

I've seen some random posts on this, but I'm curious about what withdrawal strategies you are using and whether there are some rational strategies with longterm benefit.

You asked about withdrawal strategies and there are several to consider when you aren't yet eligible (or want to) collect Social Security. So far I have divided them into three stages. I won't know if it worked for several more years/decades hopefully!

I Early Retirement
Create an asset allocation that is moderate.
Determine your cash needs and set aside a bucket (see Bucket Strategy) to hold cash needs for the year
Consider Roth conversions and do them over several years. Read Ed Slott! See his website. Do this now - it's important!
Do withdrawals (what investments you get them from is up to you as long as you maintain your asset allocation).
Consider all of the above once a year and be aware of the tax consequences.

II Social Security Eligible
Note: You may not take Social Security but at age 65 you WILL be taking Medicare
Create/maintain an asset allocation that is moderate unless you have cash needs concerns, then reduce risk using cash investments.
Use the bucket strategy for cash needs, reducing your cash needed by the income generated by Social Security.
Consider continue Roth Conversions
Do withdrawals and maintain asset allocation
Consider where else your health insurance is coming from (Medigap, Medicare Advantage - don't depend on Medicare alone)
AVOID IRMAA!! No one wants to pay a Medicare premium that is 400% higher than the rest of the population


III RMD Required
Create/maintain an asset allocation that is moderate to conservative depending on your SAN factor (SAN = Sleep at Night)
Consider what you will do with RMDs - you have to take them, you don't have to spend them, there are tax implications to your withdrawals that can be reduced by gifting them. If you have read anything by Ed Slott you should have before you were eligible for Medicare.
Stop any conversions to Roth (hopefully your Traditional IRA is now very small)
Spending money should now come from several sources: Pensions/Social Security, RMDs, taxable accounts, and Roth accounts.
Know the tax consequences of your withdrawals and prepare for them
AVOID IRMAA!!

Plenty to think about without getting in the weeds of which investment instrument you liquidate to fund your spending.

- Rita