4% how it works

[thepalmersinking]

Semi-hypothetical, using a 4% withdrawal rate. If you have $3million divided by 70% in stocks made up of 20 holdings and 30% fixed made up of 3 holdings. Does a person simply take 4% out of each holding equally, or is there a plan only to reduce holdings in winners or losers?

 

[audreyh1]

You can rebalance your portfolio by taking the needed amount out of each holding - if maintaining a certain allocation is your goal. So, right, take more from the winners. Probably a bit easier with funds than stocks.

 

[SecondCor521]

You can do whatever you like.

But the 4% rule as it's done in the research usually rebalances back to the given asset allocation every year after the withdrawal.

So take the 4% * $3M = $120K withdrawal from your portfolio and then rebalance the remaining portfolio to 70/30. Lather, rinse, repeat next year.

 

[Gumby]

It is my understanding that the 4% rule assumes withdrawal once per year with concurrent rebalancing. So, for Year 1, the rule says you can withdraw $120,000. You withdraw from equities and fixed income in amounts such that you end up with $2,016,000 in equities and $864,000 in fixed income (a 70/30 split). Next year, add in an inflation boost and withdraw and reallocate. As between individual holdings, I don't believe Bengen made any assumptions about that.

 

[RunningBum]

A common way is to not reinvest dividends. Suppose that's 2% of your 4. Then you typically take 2% from where you are over your AA to help bring it in balance. If that's not enough, you could transfer from the overweight part to the under, or just leave it if it's within, say, 5%.

 

[kgtest]

You can rebalance your portfolio by taking the needed amount out of each holding - if maintaining a certain allocation is your goal. So, right, take more from the winners. Probably a bit easier with funds than stocks.

+1 plus the stop reinvesting divvies. Just turn the switch off once RMD or other withdrawal comes...from the funds that are "winners" from the prior year. Lots of folks just sell at beginning or end of year, but some do it as they need to raise cash as well.

 

[skipro33]

I keep a year's worth (4%) of cash in my Fidelity IRA where 100% of my retirement savings is invested. I pull from that on an annual basis, then rebalance back during the next quarter.

 

[OldShooter]

If your equity comprises only 20 stocks you are not even close to being diversified, so fussing about a SWR is really to miss the point.

William Bernstein's admonition applies: “Do you think that by choosing a portfolio of only a few stocks that you hope will score big, you are maximizing your chances of becoming wealthy? Indeed you are, but you are also maximizing the chances of a retirement of cat food cuisine”

 

[thepalmersinking]

If your equity comprises only 20 stocks you are not even close to being diversified, so fussing about a SWR is really to miss the point.

William Bernstein's admonition applies: “Do you think that by choosing a portfolio of only a few stocks that you hope will score big, you are maximizing your chances of becoming wealthy? Indeed you are, but you are also maximizing the chances of a retirement of cat food cuisine”

4 of the holdings are ETFs: SPY,VTV,VYM,VBK

 

[OldShooter]

4 of the holdings are ETFs: SPY,VTV,VYM,VBK

Good to know. All of the various calculators and analyses AFIK assume the statistical behavior of a diversified portfolio. When you said "20 stocks" that implied to me something different.

 

[Dtail]

I assume your 4% reference is more of your withdrawal rate, not the 4% guidance which was derived out of the Bengen/Trinity study and is not typically used as a retirement withdrawal methodology.

 

[thepalmersinking]

Good to know. All of the various calculators and analyses AFIK assume the statistical behavior of a diversified portfolio. When you said "20 stocks" that implied to me something different.

Those holdings also represent a hypothetical $700K of the stock portion. The other large holdings are AAPL $200K V $180K pypl $100k.

 

[OldShooter]

Those holdings also represent a hypothetical $700K of the stock portion. The other large holdings are AAPL $200K V $180K pypl $100k.

Better, I would say, but still not great.

Professional are bound by the "prudent man rule," a concept from 190 years ago. (https://en.wikipedia.org/wiki/Prudent_man_rule) Now, politically correct, it is the "prudent person rule." https://www.investopedia.com/terms/p/prudentmanrule.asp

Banks and other financial managers add detail to the rule. Often the threshold of an "imprudent concentration of assets" is set at 10% or 15%. At DW's megabank, she managed accounts that were necessarily over the megabank's thresholds for tax reasons, typically inherited stock in one company. Every year she had to explain, face to face, to a review committee and get their concurrence on her strategy for getting below 15%.

I'd suggest that you do the same and make a plan to get the Apple and Visa positions to maybe 10% if you still love the stocks. Otherwise just liquidate completely and put the proceeds in a total market fund. That would be the most prudent move of all.

 

[Koolau]

Haven't heard anyone address taxes. That subject may be of significance in your decisions of what to liquidate and what to keep. My suggestion is to develop a plan for investment, tax efficiency and safe levels of withdrawal. Good luck because YMMV.

 

[pb4uski]

Hard to address taxes when the OP has not provided any information on the tax attributes of the accounts this hypothetical portfolio is in.

 

[Koolau]

Hard to address taxes when the OP has not provided any information on the tax attributes of the accounts this hypothetical portfolio is in.

I agree. If you will notice, I was addressing OP but I was also surprised no one here suggested the tax issue to OP. Taxes CAN change everything about how one invests, how one withdraws and even how one spends. YMMV