I agree when you're comparing bond funds to cash. But if you hold actual bonds and hold them to maturity then bonds and cash start to look a lot alike....
A review of basic withdrawal stratagies in retirement.
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I agree when you're comparing bond funds to cash. But if you hold actual bonds and hold them to maturity then bonds and cash start to look a lot alike....
mathjak107
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not really as cash changes quickly in a rising rate scenario . bonds do not .
you will always be behind the curve with bonds when rates rise on both bonds and cash . they don't always move together .
you will always be behind the curve with bonds when rates rise on both bonds and cash . they don't always move together .
You are correct, but still a totally different beast than bond funds. Here's a good article, complete with a 6 month cd - 6 month treasury comparison chart.
https://www.bogleheads.org/wiki/CDs_vs_bonds
Perhaps I missed it, but I don't see an analysis of taking more retirement distributions before starting SS & RMD's to keep later income/tax rates down, keep Medicare payments down, & to add to Roth IRA's. I.e., it's not good to pay low taxes now if they will be higher later. JMO.
Trooper
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That will be my plan also when I say "Adios" in about 6 weeks, pb4uski.
pb4uski
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You missed it. There are numerous threads on the "tax torpedo" and on the strategy of doing annual Roth conversions to the top of a specific tax bracket that is lower than the tax bracket that one expects to be in once SS and RMDs start. Most typically, people do Roth conversions to the top of the 15% tax bracket. Google "tax torpedo" in the search bar above.
Just out of curiosity, why have you chosen to send the divs to your local bank rather than the online checking "accumulation" fund? Obviously, there's no right answer, but I'd probably have elected to send them to the online accumulation account, and have the "paycheck" and other inflows to my spending account be a very regular and fixed amount each month (1/12 th of the withdrawal amount I determined in Dec).
I meant in this thread, not others. Perhaps the op isn't aware if he/she didn't mention?
pb4uski
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No particular reason, that's just the way I did it. It does work out well however in that most of the dividends come in at year end and end up being used for Christmas shopping and estimated tax payments (which I only do in December).
OP's plan is good w/ its variable income of fixed % WD
@ the OP, your plan looks good. I like your willingness to accept the variable income of the flat percentage WD of your recent annual portfolio value. WDing that way is not a problem even for the slightly higher percentage draw during the SS wait. Your method tolerates the modest temporary boost.
It is the 4% of retirement day assets plus inflation (Bengen's 4% real income SWR) method that cannot be boosted permanently early in retirement due to its sequence of return risk. Your acceptance of variable retirement income dodges that risk.
You can somewhat smooth the larger income variations by spending an average of several years of the variable income. With your 2-3 years of income bucket, you could spend the average of those year's WDs, or just calculate the multi-year average if you choose to not have the separate cash bucket.
Wm Bengen did two studies, several years apart. One was the seminal study that made his reputation. The other may have looked at your fixed % of annual assets method for 20-30-40 retirement years but very few liked the idea of having variable real retirement income. You might have to log in at wherever it was published. My suggestion is to research it because you may be able to spend a few fractions of a % more than the 4% real SWR, since you are accommodating the market drops that the 4% real SWR ignores.
@ the OP, your plan looks good. I like your willingness to accept the variable income of the flat percentage WD of your recent annual portfolio value. WDing that way is not a problem even for the slightly higher percentage draw during the SS wait. Your method tolerates the modest temporary boost.
It is the 4% of retirement day assets plus inflation (Bengen's 4% real income SWR) method that cannot be boosted permanently early in retirement due to its sequence of return risk. Your acceptance of variable retirement income dodges that risk.
You can somewhat smooth the larger income variations by spending an average of several years of the variable income. With your 2-3 years of income bucket, you could spend the average of those year's WDs, or just calculate the multi-year average if you choose to not have the separate cash bucket.
Wm Bengen did two studies, several years apart. One was the seminal study that made his reputation. The other may have looked at your fixed % of annual assets method for 20-30-40 retirement years but very few liked the idea of having variable real retirement income. You might have to log in at wherever it was published. My suggestion is to research it because you may be able to spend a few fractions of a % more than the 4% real SWR, since you are accommodating the market drops that the 4% real SWR ignores.
Chuckanut
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Quite a good discussion and a good article by Kitces. Thanks to all.
And, it is probably worth mentioning the "VPW" (Variable Percentage Withdrawal) calculation method in any discussion of this subject. It has many fans. A good thread on it here.
More details are at the Bogleheads site.
More details are at the Bogleheads site.
For what it is worth, the VPW site shows the annual portfolio values for a 1966 retiree. As my retirement progresses, it is comforting to compare my history of portfolio values to the worst case of 1966, regardless of which WD method is used.
Turn_the_Page
Recycles dryer sheets
Your plan is very similar to mine, which I'll implement next year.
I want to again thank everyone for their comments.
Samclem:
I planned on rebalancing my allocation, but the Kitces article really emphasized the importance of doing this. Thanks for posting it.
Fritz:
You are giving me confidence that our similar withdrawal strategies have been working out well for you over the last 6 years. Thanks.
LOL:
I suspect using bonds instead of 2 years of cash is a logical approach. I psychologically like the idea of having a cash supply to withdraw from. Your idea makes putting everything into a 60/40 balance index fund at Vanguard and letting it ride very tempting.
I have two more comments/questions:
- I'm going to show my ignorance here. My retirement budget takes into account medical costs, and taxes to cover the money that will be withdrawn from IRA/401K accounts. While reading everyone's comments I started to realize that I'm not taking inflation into account. Am I supposed to consider increasing the withdrawal percentage as we go along? I certainly haven't planned for that, and it has me very concerned.
- I crunched our numbers a few more times, and came to the following conclusion: A 4% withdrawal rate gives us a very generous monthly amount to live on. In reality we can easily live on something closer to 3%, in fact we are living on something close to the 3% rate. If we plan on this lower 3% withdrawal rate, that leaves us with a nice big slush fund for extra expenditures (car replacement, home repairs, vacations). I realize that I'm just playing mind games with the numbers, but I like the lower withdrawal rate plan better. Any comments on this idea?
Thanks. JP
Samclem:
I planned on rebalancing my allocation, but the Kitces article really emphasized the importance of doing this. Thanks for posting it.
Fritz:
You are giving me confidence that our similar withdrawal strategies have been working out well for you over the last 6 years. Thanks.
LOL:
I suspect using bonds instead of 2 years of cash is a logical approach. I psychologically like the idea of having a cash supply to withdraw from. Your idea makes putting everything into a 60/40 balance index fund at Vanguard and letting it ride very tempting.
I have two more comments/questions:
- I'm going to show my ignorance here. My retirement budget takes into account medical costs, and taxes to cover the money that will be withdrawn from IRA/401K accounts. While reading everyone's comments I started to realize that I'm not taking inflation into account. Am I supposed to consider increasing the withdrawal percentage as we go along? I certainly haven't planned for that, and it has me very concerned.
- I crunched our numbers a few more times, and came to the following conclusion: A 4% withdrawal rate gives us a very generous monthly amount to live on. In reality we can easily live on something closer to 3%, in fact we are living on something close to the 3% rate. If we plan on this lower 3% withdrawal rate, that leaves us with a nice big slush fund for extra expenditures (car replacement, home repairs, vacations). I realize that I'm just playing mind games with the numbers, but I like the lower withdrawal rate plan better. Any comments on this idea?
Thanks. JP
pb4uski
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JP, the withdrawals increase with inflation because it is presumed that living expenses increase with inflation. As an example, let's say someone had $1 million and a 4% WR so in the first year they are withdrawing $40k. If we assume inflation is 2.5%, they would withdraw $41k the second year, $42k the third year, etc.
The percentage is only really measured at inception (retirement) and could be more or less depending on how the portfolio does.... in most cases the % will actually decline if the return on the portfolio is more than the initial WR. For example, if in year 1 the portfolio returns 5%, then the second year withdrawal will be less than 4% of the portfolio balance.
I think many of us just withdraw what we need to live on. I haven't needed to increase my withdrawals for inflation since I retired, but we have dipped into our nestegg for some big items like a new garage.
The percentage is only really measured at inception (retirement) and could be more or less depending on how the portfolio does.... in most cases the % will actually decline if the return on the portfolio is more than the initial WR. For example, if in year 1 the portfolio returns 5%, then the second year withdrawal will be less than 4% of the portfolio balance.
I think many of us just withdraw what we need to live on. I haven't needed to increase my withdrawals for inflation since I retired, but we have dipped into our nestegg for some big items like a new garage.
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Pb4uski. So the typical 4% rule everyone talks about assumes an annual increase in the withdrawal percentage based on the inflation rate. I didn't know this. Like you, we will try to live on the withdrawal rate we start with, and increase it if necessary. Take care. JP
pb4uski
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The increase is to the withdrawal percentage but the withdrawal percentage is applied to the initial $1 million balance (not the current balance).
So if the first withdrawal was 4% and inflation was 2.5%, then the second year's withdrawal is 4.1% (4% * (1+2.5%)^1) of $1 million and the third year withdrawal is 4.2% (4% * (1+2.5%)^2) of $1 million.
Mind you, very few people follow it this rigidly... it is more a rule of thumb. If experience was adverse most of us would tighten our belts and reduce our withdrawals and conversely, if experience is good, then we might splurge a little more which would increase withdrawals.
So if the first withdrawal was 4% and inflation was 2.5%, then the second year's withdrawal is 4.1% (4% * (1+2.5%)^1) of $1 million and the third year withdrawal is 4.2% (4% * (1+2.5%)^2) of $1 million.
Mind you, very few people follow it this rigidly... it is more a rule of thumb. If experience was adverse most of us would tighten our belts and reduce our withdrawals and conversely, if experience is good, then we might splurge a little more which would increase withdrawals.
Even if you do the inflation increase per year, it's probably better to use your own personal inflation rate based on your own spending. Another thing to remember is that most studies assume that you withdraw the entire year's spending all at once, adjusted for the previous year's inflation. But inflation happens all throughout the year - meaning you need to also have a buffer for that.
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As Pb4uski mentions, very few people stick with a hard 4% and just adjust it for inflation. There's a lot to be said for using a withdrawal calculation method that uses the year-end balance of your accounts, or some smoothed average of that. This helps your portfolio survive dips in value and it also can significantly increase the amount you can spend. For more on this, see this post.
old woman
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I do it all wrong. I retired 2 years ago and just take money when I want it. I am taking my dividend this month because I ran out of money so will fill up checking, then live on that until it runs out then sell an investment if I want more money.
I live pretty cheap mostly and get SS so might spend down a few hundred a month and a few thousand for property taxes but this year drew out enough for a new roof and some cash gifts so about 5% total, next year maybe 2-3% withdrawal and the next year maybe 1-2% since I will finish up the cash gifts in 3 years I can live on just SS so my investments are only for extras after that I think I will end up taking 2% plus inflation and might still double my money before I die, that is why I am doing the cash gifts to set up the younger generations.
I live pretty cheap mostly and get SS so might spend down a few hundred a month and a few thousand for property taxes but this year drew out enough for a new roof and some cash gifts so about 5% total, next year maybe 2-3% withdrawal and the next year maybe 1-2% since I will finish up the cash gifts in 3 years I can live on just SS so my investments are only for extras after that I think I will end up taking 2% plus inflation and might still double my money before I die, that is why I am doing the cash gifts to set up the younger generations.
There are so many systematic withdrawal methods out there, but they do fall into two major categories.
Fixed amount each year (adjusted for inflation)
Variable amount (% withdrawn may be fixed or increasing over time like VPW, but whether the withdrawals keep up with inflation is totally dependent on your portfolio's returns)
And of course you can create a hybrid between the two major categories.
In the variable category, there are many methods out there to smooth year-to-year withdrawals. For example: Scott Burns and others have mentioned taking some fixed percentage of your portfolio out each year OR 90% of the previous year's withdrawal, whichever is largest. The 90% (or whatever % you're comfortable with) limits how far your annual withdrawals can drop relative to the previous year's withdrawal during a down market.
Back to the 4% "rule", the studies show that over history most of the time you could have withdrawn more than 4% - meaning that most of the time in history, you'll croak leaving a large sum behind. Fine if you want to leave some behind. Not so fine if you wished you could have used that during retirement.
Enter several methods that help you take advantage if you didn't happen to retire at the worst time in history.
1. Kitces Ratcheting described here: https://www.kitces.com/blog/the-rat...l-rate-a-more-dominant-version-of-the-4-rule/
Shows you a method to increase your withdrawals over time (beyond inflation) if your portfolio is still continuing to grow after several years of withdrawals.
2. And oldy but goody and one of my favorites: Gummy's sensible withdrawals described here: sensible withdrawals
If you can live on less than the amount described in the 4% rule, this is a method that allows you to withdraw some percentage of the extra returns during years when your portfolio has grown even after taking your withdrawal and inflation into account. I tend to like it because it's sort of like a bonus at work. You (your portfolio) does well, you get a bonus, otherwise, no bonus. I also like it because, statistically, when a bonus happens, it tends to happen earlier in retirement instead of later - meaning that you might have bonuses earlier in retirement when you still want to travel, etc.
As mentioned, the systematic withdrawal methods are endless and one-size definitely does not fit all.
Fixed amount each year (adjusted for inflation)
Variable amount (% withdrawn may be fixed or increasing over time like VPW, but whether the withdrawals keep up with inflation is totally dependent on your portfolio's returns)
And of course you can create a hybrid between the two major categories.
In the variable category, there are many methods out there to smooth year-to-year withdrawals. For example: Scott Burns and others have mentioned taking some fixed percentage of your portfolio out each year OR 90% of the previous year's withdrawal, whichever is largest. The 90% (or whatever % you're comfortable with) limits how far your annual withdrawals can drop relative to the previous year's withdrawal during a down market.
Back to the 4% "rule", the studies show that over history most of the time you could have withdrawn more than 4% - meaning that most of the time in history, you'll croak leaving a large sum behind. Fine if you want to leave some behind. Not so fine if you wished you could have used that during retirement.
Enter several methods that help you take advantage if you didn't happen to retire at the worst time in history.
1. Kitces Ratcheting described here: https://www.kitces.com/blog/the-rat...l-rate-a-more-dominant-version-of-the-4-rule/
Shows you a method to increase your withdrawals over time (beyond inflation) if your portfolio is still continuing to grow after several years of withdrawals.
2. And oldy but goody and one of my favorites: Gummy's sensible withdrawals described here: sensible withdrawals
If you can live on less than the amount described in the 4% rule, this is a method that allows you to withdraw some percentage of the extra returns during years when your portfolio has grown even after taking your withdrawal and inflation into account. I tend to like it because it's sort of like a bonus at work. You (your portfolio) does well, you get a bonus, otherwise, no bonus. I also like it because, statistically, when a bonus happens, it tends to happen earlier in retirement instead of later - meaning that you might have bonuses earlier in retirement when you still want to travel, etc.
As mentioned, the systematic withdrawal methods are endless and one-size definitely does not fit all.
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
We are sort of that way... I have my monthly "paycheck" withdrawal from the cash part of our retirement nestegg and we take more if we need to. I focus more on our spending being within a WR range based on our spending needs and our portfolio as if I retired today, which effectively ratchets up allowable withdrawal amounts if there is a sustained period of favorable investment performance and increases allowable withdrawals only for inflation if there is a sustained period of unfavorable investment performance.
No matter which withdrawal. Method one chooses, I think after retirement it would be very useful to keep a historic track of one's real portfolio value (or its value in present-year dollars and another line for the value at retirement adjusted each year for inflation). That lets you know if you are gaining ground or losing ground.
audreyh1
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We sort of do a rough test by seeing tracking our inflation adjusted net worth. If it stays above the initial value adjusted for inflation, we're doing great. But things can easily be knocked down hard by a market sell off. After 2008 it took 5 years to get back to even when taking into account inflation.
Now we're running about 16% ahead of inflation which is a nice cushion. I take comfort from that when I am withdrawing from a portfolio that is smaller than it was a year ago. In 2015 (at least so far) the portfolio didn't grow enough to recover from my last withdrawal. It's flat to slightly negative this year, which means we're taking a small pay cut compared to last year, and a second withdrawal from a portfolio that didn't grow.
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