Another withdrawal thread

[thepalmersinking]

Hypothetically, if you have $3 million portfolio made up of 70% stocks and 30% bonds and wish to embark on a 5% withdrawal rate then what it the general thinking on he drawdown from each category? Would you take 50% of your needs out of each, or a weighted withdrawal based on the category and rebalance at the same time. Thinking of a once a year lump sum withdrawal.

 

[RunningBum]

First, I would turn off reinvestment of dividends and CG distributions and use that as part of my 5%. To get the rest I'd weight withdrawals to bring my portfolio back to my desired AA.

 

[PaunchyPirate]

Personally, I do as RunningBum says. But if you prefer to do once-a-year withdrawal, then I would withdraw from the investment(s) that will help you rebalance back to your desired allocation. That could be from one investment or multiple depending on what has happened to your allocation due to market conditions.

 

[The Cosmic Avenger]

First, I would turn off reinvestment of dividends and CG distributions and use that as part of my 5%. To get the rest I'd weight withdrawals to bring my portfolio back to my desired AA.

Does it matter if it was taxable or a tax-advantaged account? I know this makes sense for a taxable account, since you have to pay income tax on those distributions whether you reinvest or not; in fact, I've been doing that in our taxable account and just using it for spending money. (Our distributions are low and the taxable account is still growing.) But for a tax-advantaged account, all withdrawals are counted the same no matter where they come from, no STCG, so I lean towards reinvesting in the short term. But please tell me why I'm wrong, that's how I learn.

 

[PaunchyPirate]

Does it matter if it was taxable or a tax-advantaged account? I know this makes sense for a taxable account, since you have to pay income tax on those distributions whether you reinvest or not; in fact, I've been doing that in our taxable account and just using it for spending money. (Our distributions are low and the taxable account is still growing.) But for a tax-advantaged account, all withdrawals are counted the same no matter where they come from, no STCG, so I lean towards reinvesting in the short term. But please tell me why I'm wrong, that's how I learn.

I'm not RunningBum, but from my perspective, you are correct.

 

[sengsational]

Sell whichever one exceeds the AA target. If that isn't enough, sell 70% stock 30% bond. The net result is that you're back at 70/30.

 

[RunningBum]

Does it matter if it was taxable or a tax-advantaged account? I know this makes sense for a taxable account, since you have to pay income tax on those distributions whether you reinvest or not; in fact, I've been doing that in our taxable account and just using it for spending money. (Our distributions are low and the taxable account is still growing.) But for a tax-advantaged account, all withdrawals are counted the same no matter where they come from, no STCG, so I lean towards reinvesting in the short term. But please tell me why I'm wrong, that's how I learn.

It can matter. I'm under 59.5, so I'm not withdrawing at all from IRAs, so I reinvest dividends in my IRAs. If I was withdrawing from IRAs, I'd probably not reinvest.

Your point about not having to worry about STCGs is accurate, but if I was going to be withdrawing cash from an IRA in the near future, I'd probably rather have it in cash in my IRA. I haven't fully thought that through yet for myself. I don't see a problem with reinvesting dividends and staying fully invested right up until you need the cash.

 

[audreyh1]

Hypothetically, if you have $3 million portfolio made up of 70% stocks and 30% bonds and wish to embark on a 5% withdrawal rate then what it the general thinking on he drawdown from each category? Would you take 50% of your needs out of each, or a weighted withdrawal based on the category and rebalance at the same time. Thinking of a once a year lump sum withdrawal.

I let all mutual fund distributions go to cash, which I then leave in my retirement portfolio until the next Jan. This is usually enough to cover my Jan withdrawal which is more like 3.5% of taxable investments or 3% including our IRAs. So I’m not trying to meet 5%. After withdrawing my annual income from cash, I then rebalance my retirement portfolio to my target AA.

 

[SecondCor521]

Hypothetically, if you have $3 million portfolio made up of 70% stocks and 30% bonds and wish to embark on a 5% withdrawal rate then what it the general thinking on he drawdown from each category? Would you take 50% of your needs out of each, or a weighted withdrawal based on the category and rebalance at the same time. Thinking of a once a year lump sum withdrawal.

First, a 5% WR might or might not be sustainable. This is far more important to assess than the question you actually asked.

As for your question, withdraw however is convenient, and rebalance periodically (every year or so seems to be fine) back to 70/30. Avoid rebalancing in taxable accounts as much as possible.

I reinvest dividends in tax-deferred and do not reinvest dividends in taxable. Taxable dividends just go into the spending stream.

 

[Finance Dave]

More than one way to skin a withdrawal strategy...but I think like audrey does since we are heavy in cash....I take the withdrawal from cash, then rebalance the portfolio...which is pretty easy since we have relatively few different investments.

 

[Major Tom]

In addition to what has been said by the other contributors to this thread, you may want to consider that the survivability of a portfolio doesn't change as greatly as one may think, over a fairly wide range of AA's, though the potential volatility will.

In other words, IMO, it's not worth going to a great deal of trouble to adjust your AA to precise figures. After all, a subsequent change in the market could very well throw it out of whack for another year (and probably will). Personally, I'm comfortable with a variation in my stock allocation from about 50% up to 75%, which lessens the need for conscious rebalancing, other than that provided by my annual fund sales. The greater your need for a specific AA, the more attention you'll have to pay to your rebalancing strategy.

 

[SecondCor521]

In addition to what has been said by the other contributors to this thread, you may want to consider that the survivability of a portfolio doesn't change as greatly as one may think, over a fairly wide range of AA's, though the potential volatility will.

How much historical survivability depends on AA is in turn dependent on the historical survivability of the WR in the first place. The lower the WR, the lower the dependence.

Someone with a 1% WR can probably have anything from a 0/100 to a 100/0. Someone with a 4% to 5% WR may find their historical survivability is notably higher between, say 40/60 and 70/30.

You are right, though, that there is typically a broad plateau of maximal historical survivability that is usually in the middle of the AA range somewhere and tails off to lower success rates towards the 0/100 and 100/0 ends.

In other words, IMO, it's not worth going to a great deal of trouble to adjust your AA to precise figures. After all, a subsequent change in the market could very well throw it out of whack for another year (and probably will). Personally, I'm comfortable with a variation in my stock allocation from about 50% up to 75%, which lessens the need for conscious rebalancing, other than that provided by my annual fund sales. The greater your need for a specific AA, the more attention you'll have to pay to your rebalancing strategy.

It's nice to have a band like that, as long as you're comfortable with the historical survivability percentages across the entire range.

Oddly enough, with a very high stock allocation and a moderately wide band, one doesn't need to reallocate very often at all. I'm 97/3 now, and I did rebalance during the market correction last spring, but other than that I don't think I've rebalanced in quite a few years. (I did coincidentally allow my target AA to drift upward from IIRC 95/5 to 97/3, so that has helped me be lazy.)

 

[Major Tom]

Thank you for the clarification SecondCor521. My WR tends to lie within the range of 2 - 3%. I wasn't considering higher or lower WR's, though you are correct. A 1% WR is enviable!

 

[levindb]

If you are doing a once/year withdrawal from tax advantage accounts, and you rebalance once/year, it does not matter where you take your funds from, the rebalancing straightens everything out.

If you are taking dividends and CG from your tax advantage accounts, then you are not actually taking funds out once/year...but again, rebalancing puts everything back to normal, no matter how you handle the dividends and CG.

The taxable accounts, however, might provide some tax relief if there is a tax difference between LTCG/Dividends and your marginal tax rate...make sure you include state taxes when you do this comparison.

Money is money, no matter if you take your funds out in $5 bills, or $100 bills...the market and inflation will more likely determine what you accounts are worth in the future, rather than how you withdraw your funds...IMHO.

 

[Chuckanut]

First, I would turn off reinvestment of dividends and CG distributions and use that as part of my 5%. To get the rest I'd weight withdrawals to bring my portfolio back to my desired AA.

+1

RB's comment is precise and to the point. One can festoon it with a lot of crepe and ribbons, but all that does is add confusion.

 

[ERD50]

How much historical survivability depends on AA is in turn dependent on the historical survivability of the WR in the first place. The lower the WR, the lower the dependence.

Someone with a 1% WR can probably have anything from a 0/100 to a 100/0. Someone with a 4% to 5% WR may find their historical survivability is notably higher between, say 40/60 and 70/30.

You are right, though, that there is typically a broad plateau of maximal historical survivability that is usually in the middle of the AA range somewhere and tails off to lower success rates towards the 0/100 and 100/0 ends. ....

FIRECalc shows something a little different.

A 1% WR survives anything, so we can't really glean any info from that. Moving the WR up to 2.7% over 30 years triggers a few failures below 5/95 AA.

Going up to 5% WR, the success rate just keeps increasing with increasing AA, right up to 100/0.

At 4%, there is a slight drop at 75/25 and another at 95/5, the max success is flat between 55/45 and 70/30. But the success rate at 40/60 carries all the way to 100/0.

-ERD50

 

[SecondCor521]

^ That's why I used the terms "may" and "typically" in my response. Maybe "typically" was too strong, as that's based on my particular FIREcalc data inputs.

If you look at 40 year periods, use a spending level that is about 95% safe, and include a solid amount of SS (which are my particular inputs), then you will find that there is a middle plateau with some tailing off at the right side of the graph. I suspect the effect would be even more pronounced with shorter time durations (like 10 years or 20 years), as in those scenarios there are timeframes where higher stock AAs fail due to steep dropoffs early in the period (like 1987, 2000, 2008).

But you've illustrated the larger point, which is that people should (a) look at their own situations in FIREcalc or their preferred tools, and (b) not take other people's or other tool's word for stuff.

 

[ERD50]

^ That's why I used the terms "may" and "typically" in my response. Maybe "typically" was too strong, as that's based on my particular FIREcalc data inputs.

If you look at 40 year periods, use a spending level that is about 95% safe, and include a solid amount of SS (which are my particular inputs), then you will find that there is a middle plateau with some tailing off at the right side of the graph. I suspect the effect would be even more pronounced with shorter time durations (like 10 years or 20 years), as in those scenarios there are timeframes where higher stock AAs fail due to steep dropoffs early in the period (like 1987, 2000, 2008).

But you've illustrated the larger point, which is that people should (a) look at their own situations in FIREcalc or their preferred tools, and (b) not take other people's or other tool's word for stuff.

If you are saying that the AA success curve will vary with how many years you are looking at sure, and as you say, short time frames will be bad for high stock AA - not enough time to recover from a dip.

But "may" and "typically" strike me as rather odd to describe historical data - it returns values, the same values every time.

I also think you are confusing things by bringing SS into the discussion of AA vs portfolio success. Since SS is modeled as inflation adjusted, it is just a straight reduction n the withdraw rate of the portfolio. As an example, the AA/success curve should look exactly the same for someone who start with a $1M portfolio and $20,000 spend (2% WR), and someone who has a $40,000 spend and $20,000 SS. The AA curve doesn't change due to SS, it changes because SS brought the WR back down to 2%.

Sure, with SS your income never drops to zero (assuming SS doesn't fail), but if we define "failure" the same (your portfolio going to zero), the curves are all the same.

OK, most of the above can be seen as just quibbling over semantics. I only go there because I think it's important we are all talking the same language. The important take away that we both see, is that portfolio success is not very sensitive to AA above ~ 40/60. It's one of those things that has helped me to be more like Alfred E. Neuman ("What, me worry?"). I love the fact that most of this financial analysis says you can be loose and lazy - just stay with low cost broad indexes, maybe rebalance, maybe not, and you are probably as good or better than someone who tinkers with it.

I've only actively rebalanced a couple times in over 15 years. Even once I'm taking SS/pension, I can probably rebalance as part of selling for RMDs, and rarely ever actively rebalance (by "active", I mean do it outside of just selling to meet expenses).

-ERD50

 

[SecondCor521]

If you are saying that the AA success curve will vary with how many years you are looking at sure, and as you say, short time frames will be bad for high stock AA - not enough time to recover from a dip.

But "may" and "typically" strike me as rather odd to describe historical data - it returns values, the same values every time.

I agree that FIREcalc is deterministic and returns the same values every time...for a given set of inputs. What my "may"/"typically" was referring to is that varying inputs will give you varying success curves. The previous poster I was quoting seemed to be making broad statements about the shape of those success curves, and I thought they were overly broad to the point of potentially being misleading to someone with different inputs. I was also acknowledging that my statements about the shapes of those curves were also generalities, and hinting that people should consider their own particular inputs.

I also think you are confusing things by bringing SS into the discussion of AA vs portfolio success. Since SS is modeled as inflation adjusted, it is just a straight reduction n the withdraw rate of the portfolio. As an example, the AA/success curve should look exactly the same for someone who start with a $1M portfolio and $20,000 spend (2% WR), and someone who has a $40,000 spend and $20,000 SS. The AA curve doesn't change due to SS, it changes because SS brought the WR back down to 2%.

Sure, with SS your income never drops to zero (assuming SS doesn't fail), but if we define "failure" the same (your portfolio going to zero), the curves are all the same.

I only brought SS into it to explain why I saw FIREcalc success curves with a plateau in the middle and falling off to either side.

Your statements above are generally true if a person is already on SS. For someone like me who is age 52 and planning to take SS at age 70, I am not sure they are, because each of those 120+ FIREcalc cycles each have two segments - the first 18 years where I'm not on SS and the last N-18 where I am.

OK, most of the above can be seen as just quibbling over semantics. I only go there because I think it's important we are all talking the same language. The important take away that we both see, is that portfolio success is not very sensitive to AA above ~ 40/60. It's one of those things that has helped me to be more like Alfred E. Neuman ("What, me worry?"). I love the fact that most of this financial analysis says you can be loose and lazy - just stay with low cost broad indexes, maybe rebalance, maybe not, and you are probably as good or better than someone who tinkers with it.

I've only actively rebalanced a couple times in over 15 years. Even once I'm taking SS/pension, I can probably rebalance as part of selling for RMDs, and rarely ever actively rebalance (by "active", I mean do it outside of just selling to meet expenses).

-ERD50

I agree with pretty much all of the above, with the one minor caveat that the sensitivity to AA above ~ 40/60 is typically true for "longer" time periods, like 20 to 40 years, and not necessarily so for "shorter" time periods, like 10 years. Pretty much everyone here is probably running "longer" time period analyses, but I sometimes run "shorter" time periods to analyze things related to my Dad's situation (he's 85).