Withdrawing in January for the year?

[Independent]

As 2B stated, everyone has their own method. I don't withdraw anything until I have bills to pay.

+1

I withdraw when I spend the money. I don't try to time the market.

 

[audreyh1]

I have also noticed that most of those who say they take withdrawals annually, most say they do it in January. Are there particular benefits to doing it that time of year, or is it just a convenient time? It occurred to me that December might make tax planning easier if one is also juggling Roth conversions and distributions in taxable accounts in addition to taking withdrawals from tax-deferred accounts.

(I have yet to take withdrawals myself as DW is still working.)

Many of us have distributions paid out by our mutual funds, and most of these are paid in December. This pretty much drives all the other considerations as well as Dec 31 being the end of the tax year. Most of our investments are in taxable accounts.

Also, I use my portfolio value on Dec 31 as the base for what I withdraw the next Jan. I use the % of remaining portfolio method.

It works out well in terms of both withdrawals, rebalancing and taxes to withdraw in January. You have a new tax year, so you aren't adding to the prior year's income if you sell some mutual funds to rebalance.

I can usually meet my withdrawals from the distributions that have been paid out the prior year - most of which were paid out in Dec. In fact 3/4 of my mutual fund distributions are paid out in late Nov and Dec. Once I have taken my annual withdrawal, I then usually need to rebalance the portfolio.

In January I have a pretty good idea of what I am going to owe for the prior year in terms of taxes, so I can set that aside.

December would be a difficult time especially for rebalancing as I would not know until the very end of the month what all my distributions will be. I really have to wait until the start of the next month.

 

[2B]

Also, I use my portfolio value on Dec 31 as the base for what I withdraw the next Jan. I use the % of remaining portfolio method.

It works out well in terms of both withdrawals, rebalancing and taxes to withdraw in January. You have a new tax year, so you aren't adding to the prior year's income if you sell some mutual funds to rebalance.

+1

I also use the Dec 31 value for calculating spending and use the % of portfolio for spending. I don't reinvest dividends in my taxable accounts but these fall well short of meeting my spending needs. The amount I move to cash is something less than 5% of my portfolio since my spending is 5% of my net portfolio (after escrow fun) plus my small pensions and future SS (from escrow fund).

By Dec 31 I have a very good idea of how much I'll have to spend for that year's taxes and what my estimated payments should be for the coming year. I also will be determining how much of an IRA to Roth rollover I plan on doing. Since money is moving around, it's a good time to rebalance and be done with it.

I used to do it on my birthday but I found I was also having to do a certain amount of moving in January anyway. I thought about doing quarterly funding and rebalancing but decided to not commit myself to so much extra work.

 

[Chuckanut]

Besides, at the end of the day the $2k a year is just coming out of my heirs pocket.

Child abuser!!

Do you count things like a 5 year PenFed 3% CD as part of cash? Or is it more like a bond? It seems a bit of both to me, but what do I know.

 

[marko]

My distributions are from a market fund where dividends were deposited, so market movement isn't my concern.

I do sometimes straddle two years (December and January withdrawals) if I'm running low and if I made smaller/larger withdrawals in the previous year; to perhaps help me in the coming year. IOW, if I made smaller WDs in one year, I might make another WD in December if I know that I'd need a larger WD in the coming year.

 

[W2R]

I withdraw in January right before my annual rebalancing. Aside from the reasons others have cited like taxes, December dividends, and choosing to compute my WR based on my 12/31 portfolio balance each year, also I like starting the new year this way - - with a nicely rebalanced portfolio and with my entire year's spending money withdrawn and available. Often I buy myself a delayed Christmas present in January too.

Originally, after withdrawing to a high yield savings account, I would move money regularly into checking each month just like a paycheck. That was helpful to me when I first retired. Over the years, that has morphed into moving money into checking when checking gets low, instead. I don't need the paycheck simulation any more for some reason.

 

[Options]

...

Originally, after withdrawing to a high yield savings account, I would move money regularly into checking each month just like a paycheck. That was helpful to me when I first retired. Over the years, that has morphed into moving money into checking when checking gets low, instead. I don't need the paycheck simulation any more for some reason.

I can see moving away from paycheck simulation happening. OTOH, I've noticed any time I don't have some sort of structured means of spending (i.e., spreadsheet showing monthly income/outflow), I tend to spend more. A couple of years ago I tried going from using cash for weekly spending to only using a debit card for spending. My budget was always off, regardless of how hard I tried to mentally track spending while using debit. Needless to say, I returned to using cash and haven't looked back (forfeiting lots of cash rewards in the process, I know).

 

[pb4uski]

I'm relatively new to ER, and really struggling with the question of holding cash in the AA. I've gone through similar rationalization math. I compare total portfolio performance with and without cash, so it's a slightly larger impact than your method, which assumes you would own bonds if not cash. Either way, it's sub-$5K per year per $1M, which may be small, but still spendable cash. Regardless of how it's calculated, or how small it is or isn't, or whether you or your heirs would ultimately spend it... my real question is: Why? I won't spend $50 at Home Depot without a good reason. Several $K every year requires a REALLY good reason. You say you "sleep well at night." That implies you are protected from some risk. I wonder if you might elaborate on that?

The first year I was retired I tried to think of my liquidity fund as being separate from my retirement funds and just found it too confusing so I decided to change my AA from 60/40/0 to 60/34/6 and that is what I did. Silly perhaps, but it works for me. I guess the sleep at night part is that if the turd hits the fan like it did in 2008 that I can get along for at least a couple years without having to make any particular moves with the bonds and stocks in my portfolio and I won't be forced to sell at a loss just to meet our living expenses. Besides, if something like that happened and I had more courage than I did back then I could even use some of those funds to buy more equities at depressed prices (but I doubt that I would).

Child abuser!!

Do you count things like a 5 year PenFed 3% CD as part of cash? Or is it more like a bond? It seems a bit of both to me, but what do I know.

Please don't give the children any ideas for a civil action.

I view the 34% as an allocation to "fixed income" so it would include bonds and CDs and I include the Penfed CD in that 34% of fixed income. The struggle that I have is what to assign to it as a duration in calculating my fixed income duration and I finally just gave up and assign it a zero duration since its value does not decline when interest rates increase like bonds do.

 

[audreyh1]

I used to do it on my birthday but I found I was also having to do a certain amount of moving in January anyway. I thought about doing quarterly funding and rebalancing but decided to not commit myself to so much extra work.

Yeah, it's enough work once a year. I'm glad I don't try to do it quarterly!

 

[audreyh1]

I don't think anyone who has >50% of their portfolio in equities needs to worry about any "drag" from cash being part of their fixed income. Think of it as a bar bell strategy. Heck, some folks might even be comfortable living with a higher equity allocation if they have a bit more in cash.

You don't need to have each component of your AA beat inflation. You just need to total AA to beat inflation. And according to the above graph, 40% equities has been good enough for a portfolio to be drawn from and still hold up to inflation during some very challenging periods.

Pb4uski - if you don't have your cash buffer in a separate account it can get tricky to maintain and AA and a buffer. Your approach should be good enough, IMO.

 

[Options]

I don't think anyone who has >50% of their portfolio in equities needs to worry about any "drag" from cash being part of their fixed income.

...

Yes that's my thinking (although I'll be moving to 40% equities quite soon). It's the 2 years cash/3 years ST bonds mix I was questioning. To your point, it won't make much difference and will probably be what I end up doing anyway.

 

[mathjak107]

Many of us have distributions paid out by our mutual funds, and most of these are paid in December. This pretty much drives all the other considerations as well as Dec 31 being the end of the tax year. Most of our investments are in taxable accounts.

Also, I use my portfolio value on Dec 31 as the base for what I withdraw the next Jan. I use the % of remaining portfolio method.

It works out well in terms of both withdrawals, rebalancing and taxes to withdraw in January. You have a new tax year, so you aren't adding to the prior year's income if you sell some mutual funds to rebalance.

I can usually meet my withdrawals from the distributions that have been paid out the prior year - most of which were paid out in Dec. In fact 3/4 of my mutual fund distributions are paid out in late Nov and Dec. Once I have taken my annual withdrawal, I then usually need to rebalance the portfolio.

In January I have a pretty good idea of what I am going to owe for the prior year in terms of taxes, so I can set that aside.

December would be a difficult time especially for rebalancing as I would not know until the very end of the month what all my distributions will be. I really have to wait until the start of the next month.

if markets are down alot do you still run with the balance or do you do something like bob clyatts less 5% than the year before ? i am going to use a real end of year balance to base on but i was going to follow bob's idea.

 

[audreyh1]

if markets are down alot do you still run with the balance or do you do something like bob clyatts less 5% than the year before ? i am going to use a real end of year balance to base on but i was going to follow bob's idea.

Yes, I still run with the fixed percent of Dec 31 value even with the portfolio down. We don't spend currently everything we withdraw, so hopefully we'll have some left over from the prior good years to help us through a bad year or two.

 

[Greg V]

mj107, I also rebalance as planned, market up or down, at the beginning of the year. Theoretically, a down year gets me the chance to balance into Equities when they are at a lower price. I'm a fixed percentage type of guy for withdrawals, so the lower portfolio value from previous year's end would reduce the amount. However, as you suggest, I could set aside even less cash for withdrawal than my normal percentage if I decided that made the most sense.

 

[NW-Bound]

For people who use a fixed percentage of present portfolio value, if you withdraw then set aside the cash but not spend it all after a good year, it may not be different from the people who use the fixed percent of portfolio at start of retirement but who spend it.

That is, except for another detail. You are increasing your cash AA after a string of good years, expecting to use it as reserve to spend in future bad years. It's a form of tactical AA.

 

[audreyh1]

Not really.

One group is increasing their withdrawal by inflation regardless of what their portfolio does. The other is tracking the portfolio performance which means if the portfolio outpaces inflation for a while, so does their withdrawal.

Since the withdrawal amount is computed on what is in the portfolio, the amount set aside outside of it doesn't matter, neither does the AA of things outside the portfolio since that isn't rebalanced.

Withdrawal and spending are separate things. My spending varies from year to year anyway and doesn't necessarily track either inflation nor my portfolio. And I have money set aside for many things giving me plenty of spending flexibility. After several years I may splurge on something regardless of market conditions.

 

[Options]

...

Withdrawal and spending are separate things. My spending varies from year to year anyway and doesn't necessarily track either inflation nor my portfolio. And I have money set aside for many things giving me plenty of spending flexibility. After several years I may splurge on something regardless of market conditions.

Agreed. Seems to me barring drastic lifestyle changes (above and beyond eliminated work-related expenses) retirement spending patterns mimic pre-retirement spending for the most part. In my case anyway, I'm always trying to spend less than budgeted and I suspect that pattern will continue throughout retirement. I splurge as well but not sure if I'll be able to do it regardless of market conditions. Time will tell, as will future market conditions.

 

[NW-Bound]

...Since the withdrawal amount is computed on what is in the portfolio, the amount set aside outside of it doesn't matter, neither does the AA of things outside the portfolio since that isn't rebalanced...

I have a lot of "cash" in I-bonds, which I have not touched in years. I do include that in my AA calculation. Should I exclude that from the AA, then say that my AA is even higher in equities than it is?

It's a mental accounting game. Whether I move my cash from left to right pant pockets or leave it where it is, I still consider it in my AA.

 

[audreyh1]

I have a lot of "cash" in I-bonds, which I have not touched in years. I do include that in my AA calculation. Should I exclude that from the AA, then say that my AA is even higher in equities than it is?

It's a mental accounting game. Whether I move my cash from left to right pant pockets or leave it where it is, I still consider it in my AA.

It's not a mental accounting game. It's a very real one.

I have a retirement portfolio of $X. On Dec 31 of each year I use the value to compute my withdrawal $ for Jan. I ignore all other funds or investments that are not part of my retirement portfolio.

That retirement portfolio has a target asset allocation. After I withdraw, I rebalance the portfolio back to target. The portfolio is in fact made up of several different types of accounts, but they are all part of the retirement portfolio and together meet the target AA.

Anything that happens with funds outside that portfolio has no bearing whatsoever if it is not included in the withdrawal calculation or not rebalanced as part of the retirement AA.

 

[Options]

It's not a mental accounting game. It's a very real one.

I have a retirement portfolio of $X. On Dec 31 of each year I use the value to compute my withdrawal $ for Jan. I ignore all other funds or investments that are not part of my retirement portfolio.

That retirement portfolio has target asset allocation. After I withdraw, I rebalance the portfolio back to target. The portfolio is in fact made up of several different types of accounts, but they are all part of the retirement portfolio and together meet the target AA.

Anything that happens with funds outside that portfolio has no bearing whatsoever if it is not included in the withdrawal calculation or not rebalanced as part of the retirement AA.

This. I have about $35K cash "outside" PF and not included in AA or rebalancing calculations as it's earmarked for a new car in the next few weeks (at which time it will vanish from the account held in, so including it in the AA, rebalancing, or PF calculations would not make sense). Mental accounting is including it in my current net worth calculations just because...for the moment anyway...it makes me feel good.

 

[2B]

My approach is to determine my portfolio value on Dec 31. I subtract my "escrow fund" for deferred SS income and heath insurance cost from this amount. I take 5% of this amount and move it to my bank. This is "cash" and excluded from my rebalancing calculations that are done to free up this cash.

I have a CD ladder which I consider "fixed income." Some of it matures every year and I like to have some mature in December which increases my rebalancing flexibility.

 

[pb4uski]

I have a lot of "cash" in I-bonds, which I have not touched in years. I do include that in my AA calculation. Should I exclude that from the AA, then say that my AA is even higher in equities than it is?

It's a mental accounting game. Whether I move my cash from left to right pant pockets or leave it where it is, I still consider it in my AA.

It's not a mental accounting game. It's a very real one......

Anything that happens with funds outside that portfolio has no bearing whatsoever if it is not included in the withdrawal calculation or not rebalanced as part of the retirement AA.

I guess it is a matter of opinion and where one wants to draw the line. If I owned I-bonds I would include them as part of my fixed income portfolio (like I do with CDs that I own). I also have an online savings account that I rebalance to being 6% of my total retirement assets consistent with my 60/34/6 AA.

However, once money leaves that online savings account to our local bank accounts things change as I consider these local bank accounts to be transitional... simply in the process of being spent on living expenses. So while these local bank accounts are part of my net worth, in my mental fund accounting they are part of the operating fund and not part of the retirement fund. Now that said, the balance in these local bank accounts is typically pretty modest... typically less than 1% of the retirement assets so it really doesn't make a big difference.

 

[papadad111]

Reading this thread a funny-to-me thought came to mind -- an analogy in fact : how is your socks and underwear drawer arranged.

Everyone's is set up just s little bit differently. It's very "personal" in how it is managed and maintained. There may be mental math involved. Left and right socks if you will. There is no best way to arrange it. And regardless how it is counted or managed the drawer contains the same number of undergarments when you go sleep at night.

 

[pb4uski]

Yes, just like should toilet paper emerge from the top/front of the roll or the back/bottom of the roll?

 

[NW-Bound]

One can call it many things, but the net result is the same. That is after a string of good stock market returns, one has a stash of cash (CD, I-bonds, or money market) set aside as a buffer for the case the market turns south.

I never look into details at Ray Lucia's money bucket, but suspect that it is a different name for the same idea.