Best withdrawal formula at retirement

[Dave C.]

We have 75% of our portfolio in tax-advantaged accounts, both IRA's and a 401K, the other 25% is in a taxable accounts.

Where can I read up on the most cost effective way to start withdrawing living expenses? I'm sure we'll spend down our taxable accounts first, but I've heard of some new retires moving money into MM funds for monthly or yearly living expense, and other types of withdrawal Process.

We've been good at saving it.....but how is the best way to spend it. I'll retire in about 15 months. Thanks.

 

[Midpack]

http://www.early-retirement.org/forums/f28/best-method-of-withdrawing-money-63823.html

http://www.early-retirement.org/forums/f28/poll-complicated-retirement-withdrawal-options-63111.html

http://www.early-retirement.org/forums/f28/withdrawal-strategy-advice-63125.html

http://www.early-retirement.org/forums/f28/any-ray-lucia-fans-here-61734.html

http://www.early-retirement.org/forums/f28/withdrawal-rate-mechanics-43947-2.html

http://www.early-retirement.org/for...ution-decumulation-withdrawal-plan-47108.html

http://www.early-retirement.org/forums/f28/semi-fixed-minimum-withdrawal-starting-at-3-a-49968.html

http://www.early-retirement.org/forums/f47/faq-archive-ray-lucia-and-his-buckets-30725.html

 

[Dave C.]

http://www.early-retirement.org/forums/f28/best-method-of-withdrawing-money-63823.html

http://www.early-retirement.org/forums/f28/poll-complicated-retirement-withdrawal-options-63111.html

http://www.early-retirement.org/forums/f28/withdrawal-strategy-advice-63125.html

http://www.early-retirement.org/forums/f28/any-ray-lucia-fans-here-61734.html

http://www.early-retirement.org/forums/f28/withdrawal-rate-mechanics-43947-2.html

http://www.early-retirement.org/forums/f28/detailed-distribution-decumulation-withdrawal-plan-47108.html

http://www.early-retirement.org/forums/f28/semi-fixed-minimum-withdrawal-starting-at-3-a-49968.html

http://www.early-retirement.org/forums/f47/faq-archive-ray-lucia-and-his-buckets-30725.html

Thank you Midpack!! Your response, and the attachments, are full of exactly the type of information and examples we soon-to-be-retirees need when figuring out withdrawal strategies. One response is helpful....8 responses are "Over the Top" helpful!

 

[Midpack]

Thank you Midpack!! Your response, and the attachments, are full of exactly the type of information and examples we soon-to-be-retirees need when figuring out withdrawal strategies. One response is helpful....8 responses are "Over the Top" helpful!

No problem. This site is full of (mostly) knowledgeable, helpful people who 'pay it forward' all the time...

 

[rbmrtn]

Take a look at I-orp. It is a calculator/planner that optimizes withdrawals among investment accounts, taxable, tax deferred , IRA, 401K etc

Retirement Calculator - Parameter Form

 

[growing_older]

Also worth figuring as part of a withdrawal strategy if you will have years with low "income" that can be used to convert deductible IRA/401k money to Roth at low tax rates.

 

[obgyn65]

Hi Fave - You have come to the right place. Feel free to use the Google function on this site. Lots of interesting topics.

We've been good at saving it.....but how is the best way to spend it. I'll retire in about 15 months. Thanks.

 

[RonBoyd]

An Alternative Approach

There are a number of problems with the ‘4% rule’ that have been explored in literally hundreds of articles. First, the ‘4% rule’ is based on a very simple allocation to stocks and bonds and many studies demonstrate that you can do better with a more diversified portfolio that includes real estate, commodities, and other asset classes. Second, the 4% rule ignores the specific market conditions when you retire. If you happen to retire at the end of a bull market, the 4% rule is far too optimistic. If you happen to retire at the end of a bear market, the 4% rule is too pessimistic.

Some additional thoughts:

What Are the Core Asset Classes for Total Return Portfolios?

How Many Asset Classes or ETFs Are Required to Construct Diversified Portfolio?

Swensen's 6 ETF Portfolio

QPP Analysis Of Portfolioist Portfolio

 

[bondi688]

I am a little unclear about the 4% safe withdrawal rule. Does the rule assume a total draw down of the of the nest egg or is it saying by sticking to 4% a year, and with investment return to balance the outflow, the principle is never drawn down to zero?

For me, social security benefits will likely cover all the essentially living and health care related expenses. The proceeds from savings, investments and IRA will be where discretionary spending come from. My plan is a flexible look back approach and see how well the investments did last year, and use 55 to 75% of the interests, dividends and distributions (not unrealized and not yet captured paper profits) for discretionary spending, and leave the remainder as cushion for down markets.

 

[Midpack]

I am a little unclear about the 4% safe withdrawal rule. Does the rule assume a total draw down of the of the nest egg or is it saying by sticking to 4% a year, and with investment return to balance the outflow, the principle is never drawn down to zero?

You start by taking 4% out of your portfolio in the first year – this includes dividends, interest and withdrawals. The next year you take out the same amount you took out the first year plus inflation. So if you start by taking $40,000 out in the first year and inflation is 3% then in the second year you take out $40,000 + 3% ($1200) = $41,200. Every year after that you adjust the previous year’s withdrawal amount by the inflation rate, without any regard for how your portfolio performs during the 25-30 year drawdown period. IOW, the 4% is used to determine the first year withdrawal only.

If past history is any indication, the 4% rule will give you about a 95% chance of not fully depleting your nest egg for 25-30 year periods. That means there's also about a 5% chance your nest egg will reach "zero" if you blindly follow the methodology without adjusting to real returns over the course of the drawdown period. There's also a chance, if you're lucky enough to time your drawdowns to begin with a long secular bull market, that you'll have a substantial estate in 30 years. The range of outcomes varies considerably.

The 4% rule is really a guideline rather than a hard and fast rule – If your equities perform better than expected then you can spend a bit more than the 4% rule amount however the opposite is also true, if you encounter a bear market and the value of your portfolio drops then you should be prepared to cut back on the withdrawals.

 

[bondi688]

Midpack: Thanks. I am counting on being flexible and not sticking to a formula.