FIRE Withdrawl Strategies 101

[DawgMan]

I know this subject matter has been discussed before, but I do think many of us who are close to ER have to be thinking and rethinking our plans as to how we will navigate the treacherous waters of what the market givith and taketh away!

Soooo, plans are made, RE budget set (discretionary filled/ideal budget & SHTF budget), debt paid off, AA set, your RE too stuff identified. Here is my general questions...

- Are you now holding a separate cash bucket as part of your previous AA bond bucket which is ear marked for spending X years in case the SHTF or are you staying with your AA and filling 1 years expenses at some point(s) by rebalancing? Is your cash bucket outside of your AA effectively?
- If you hold the 3rd bucket of $ for expenses, are you tapping it in a market like 2017 to cover next years expenses or rebalancing first?
- Alternatively, in a market like 2018, are you paying expenses first out of your cash bucket and then rebalancing (assuming your cash is part of the AA equation)?

I am trying to challenge my self and how I want to/should manage the market swings. Psychologically, I can envision the how having a cash bucket for multiple yrs may help you sleep at night when the market tanks. OTOH, are you not just watering down your AA and weighting it on the bond/cash side? I would like to think I will set my AA (60/40) and perhaps have some of my 40 in cash from time to time, but let rebalancing every year fill my annual expense budget. Just wondering how the multiple year cash bucket folks reconcile their true AA strategies... and if they even care! Food for thought for us scaredies who are close.

 

[CRLLS]

I will be watching this. I am in this same boat as 2018 starts the withdrawal of retirement funds process for us.

 

[Ready]

This is all new to me since I just stopped working in August. So far, I've changed my AA from 60/40 to 55/45. Of the 45% fixed income, a good chunk is in cash in a savings account that I can use for expenses. Once that dries up, I plan to stop reinvesting the dividends and capital gains and just live on those for most of my routine expenses. I have a good chunk in municipal bond funds that pay a decent amount of dividends (tax free of course).

I should not need to sell my equities for quite some time, so if there is a major market correction I will not need to sell at the bottom. At least that's the plan, until it changes.

 

[LOL!]

I do something very very simple.

1. No cash bucket.

2. In my taxable accounts, I move the quarterly dividends to my checking account and spend them.

3. In my tax-advantaged accounts, I make no withdrawals and use them for rebalancing to my asset allocation which means no cash ever.

4. If I need more money than my taxable dividends give me (i.e. my checking account gets low), then I sell shares in my taxable account that have the highest cost basis so that I realize the least amount of gains which in turn are offset by previous tax-loss harvesting. I may even sell shares at a loss in order to increase my carryover losses and pay no tax. That means I might sell shares about 10 times a year as needed.

That's it.

You see I simply do not care nor worry about losses in the stock market. I don't even try to avoid them.

 

[GrayHare]

Current spending money in checking account comes annually from a maturing CD. Each year I start a new multi-year CD with funds from selling off whatever has appreciated significantly, which is a rebalance of sorts. Then lather rinse repeat annually. Dividends and cap gains are set to reinvest since per Christine Benz study that produces a slightly better return. Benz's "Ready Your Portfolio for Retirement" video is at http://www.morningstar.com/cover/videoCenter.aspx?id=641676&SR=EVZ128

 

[DawgMan]

Current spending money in checking account comes annually from a maturing CD. Each year I start a new multi-year CD with funds from selling off whatever has appreciated significantly, which is a rebalance of sorts. Then lather rinse repeat annually. Dividends and cap gains are set to reinvest since per Christine Benz study that produces a slightly better return. Benz's "Ready Your Portfolio for Retirement" video is at Ready Your Portfolio for Retirement

So if I read you correctly, you have for eg $100k expenses, you buy your CD that will produce $100K (equity and yield) cash it out say 12/31, drop it in checking acct, rebalance carving out another CD? This gives you peace of mind next year is in the bag? Same strategy regardless of good/bad market years?

 

[DawgMan]

I do something very very simple.

1. No cash bucket.

2. In my taxable accounts, I move the quarterly dividends to my checking account and spend them.

3. In my tax-advantaged accounts, I make no withdrawals and use them for rebalancing to my asset allocation which means no cash ever.

4. If I need more money than my taxable dividends give me (i.e. my checking account gets low), then I sell shares in my taxable account that have the highest cost basis so that I realize the least amount of gains which in turn are offset by previous tax-loss harvesting. I may even sell shares at a loss in order to increase my carryover losses and pay no tax. That means I might sell shares about 10 times a year as needed.

That's it.

You see I simply do not care nor worry about losses in the stock market. I don't even try to avoid them.

Tax differed accts don’t come into play? Just kick the can on those til X age? My tax differed is large enough I may not be able to ignore at least no later than 65.

 

[LOL!]

My tax-deferred accounts won't come into play until I am forced to take RMDs or the taxable account runs out of money. But all accounts are included in my portfolio asset allocation. So if I sell equities in my taxable account, I may need to exchange from bond funds to equity funds in my tax-advantaged accounts in order to maintain the portfolio asset allocation that I desire.

I am doing Roth conversions from tax-deferred to Roth every year, but that's not a withdrawal.

 

[retire2020]

I take Div/Cap and use for expenses which is half of my yearly expenses. Other half...If market has been good then I will sell some funds and take another half... If market has dropped then I will sell my short term bond fund to fund other half of expenses. My short term bond fund contains five years of expense. My over all AA is 60/40.

 

[pjigar]

- Are you now holding a separate cash bucket as part of your previous AA bond bucket which is ear marked for spending X years in case the SHTF or are you staying with your AA and filling 1 years expenses at some point(s) by rebalancing? Is your cash bucket outside of your AA effectively?

The guy at https://earlyretirementnow.com claimed that keeping cash buffer only helps with sequence of return risk during early years (3,5?) but beyond that chase reserves does not protect you from bumps. I forgot the details but my take away was: maintain 3 years of cash when you retire and forget about the cash buffer beyond that.

 

[W2R]

Basically my financial plan specifies 5.5% cash in my investment portfolio. I inclulde this cash in the "fixed" part of my 45:55 (equities:fixed) asset allocation. During the year, dividends and capital gains from my investments go straight to that cash allocation at Vanguard. Also I can use that cash allocation for rebalancing during the year, if/when needed.

I withdraw my spending money for the entire year during the first week in January. For me it is always less than the dividends accumulated during the previous year. I take it from my cash investment allocation and move it to my local bank account which I do not consider to be part of my investment portfolio.

Afterwards I rebalance immediately so my portfolio cash allocation remains 5.5%.

It is helpful to keep these procedures very simple and foolproof.

As for market swings, I don't mess with anything except to withdraw during the first week in January, or to rebalance when necessary. It's not like I'm giving myself choices... "Gosh, oh my golly, maybe I should sell XYZ and buy ABC?" or "End of the world! Maybe I should sell everything?" Nope, not part of my investment plan.

EDITED TO ADD: See, if there is a market crash, the percentage of my portfolio related to equity funds would drop. So, my fixed allocation (including cash) would go up in percentage. I would cut back on spending, and only use what cash I absolutely needed. If I still had too high a percentage in cash, then I'd rebalance (buy equities low until I had the right percentage again). With any luck I would not need to sell equities while they are low, at least for a few years. So, all of that sort of takes care of itself to a certain extent.

 

[DawgMan]

I take Div/Cap and use for expenses which is half of my yearly expenses. Other half...If market has been good then I will sell some funds and take another half... If market has dropped then I will sell my short term bond fund to fund other half of expenses. My short term bond fund contains five years of expense. My over all AA is 60/40.

So you strategically hold short term bond funds equal to 5 yrs expenses as part of your 40? It’s a set figure vs a % of your bond holdings?

 

[VanWinkle]

I currently have 2 years of expenses in cash and short term bond fund. I will need to spend this money down until Nov 2019 to keep my taxable income low for ACA subsidies. I have 10 years of bonds in my IRA in case the stock market is down when I start drawing SS in 2020. My withdrawal after SS will be about 2 % of portfolio with more than that amount from dividends and interest. It sounds easy, but then why am I still worried? It is the unknown that makes us uneasy, but it also keeps us on our toes. I do not really bucket funds, I just set an allocation. My cash reserve is not part of my Asset Allocation.

 

[GrayHare]

So if I read you correctly, you have for eg $100k expenses, you buy your CD that will produce $100K (equity and yield) cash it out say 12/31, drop it in checking acct, rebalance carving out another CD? This gives you peace of mind next year is in the bag? Same strategy regardless of good/bad market years?

Yes. It means keeping X years of expenses in CDs which, like any insurance, has a cost, but I feel I've "won the game" so why risk what Mister Market may do in the near future?

 

[Looking4Ward]

I have dividends and CG distributions in my taxable portfolio set to dump into my brokerage MM account, and that account is setup to send a paycheck to my regular checking account each month.

So far (almost 4 years now) that has been enough to meet and even exceed my WR. It's also been high enough that there wasn't any headroom for Roth conversions from my IRA which I don't plan on touching until I'm forced to via RMD's.

But I do keep three years worth of living expenses in Wellesley in case dividends dwindle and/or CG distributions don't exist during a downturn.

 

[RobbieB]

I don't have a budget and never will.

I don't have buckets and never will.

I spend freely out of one big pot and give it no thought at all.

If SHTF I'll deal with it then, otherwise I'm too busy having fun to worry about it -

 

[pb4uski]

I tried to think of my cash outside my AA but decided that it was much easier to just think of it as part of my AA. When I first retired, I carved 6% out of bonds as cash, and have since cut it back to 5%. At that level, we could live for about 2 years between the cash and taxable account dividends without selling any bonds or stocks.

I have a monthly transfer from our online savings account (in my AA) to out local bank checking account that we use to pay our bills, which is not in our AA but is usually only $10-20k.

The cash is about a 20 bps drag on overall yield.

I usually rebalance "opportunistically" when market events suggest... for example I rebalanced early in 2016, when Brexit hit the market, etc. I found myself rebalancing frequently in 2017 as I had little confidence in the market gains and wanted to lock them in. Absent market events, I rebalance annually, usually in December.

I also do a buckets style analysis and find that my 60/35/5 AA lines up well with buckets... 5% liquidity bucket, 22% stable value bucket and 73% inflation protection bucket.

 

[SecondCor521]

No, No, N/A, N/A, and Yes, respectively to the questions in the OP.

I spend from my checking, which gets refilled from savings, which gets refilled from taxable, which gets refilled from my Roth pipeline, which gets refilled from my IRA, which holds my 10% bond allocation, which I rebalance when I feel like it or when it gets 2 percentage points out of whack either way.

In my brain I tell myself I am 90/10, and that's true if I ignore cash. Considering cash, I am at 88/9/2 (doesn't total due to rounding), so really not a difference worth worrying about.

The simplest plan is what W2R does: withdraw annually then rebalance. Conceptually this is what I do, but more frequently and with more mental stress. But I'm a newbie, and most of the stress is self-inflicted.

 

[Scuba]

We RE’d in Nov 2016 and haven’t really locked into a “system” yet. So far have mainly lived off payments from previous employer’s deferred comp accounts so haven’t had to withdraw much from the rest of the portfolio.

Prior to ER, I obsessed frequently about money. I’ve been pleasantly surprised that since ER, since the market has done so well and I’ve been busy with activities I enjoy, I haven’t even looked closely at our spending vs budget. Our FA has kept the AA in our taxable portfolio within the desired range. Our overall NW has increased substantially in this great market even with living off the portfolio.

I think we’ll refine this as distributions from deferred comp decline and we have to start using other assets for cash flow. Our taxable income was too high in 2017 to do any Roth conversions but that’s something we’ll look at as a possibility for 2018, especially with new brackets.

I’m not sure if/when we will stabilize and withdraw a set % or amount each year. Seems like variables will change. We still have to decide when to take my pension, take the rest of my deferred comp, cash out an employer provided annuity, take Social Security, and someday RMD’s will kick in. And I’m sure whenever there is a major market decline, we will likely cut our discretionary spending. Plus healthcare is a big variable for us as we are 7-8 years away from Medicare.

So far just rolling with it is working for us ... we’ll see what the future brings. Sometimes I think we should have ER’d earlier but it is nice not to have to fret too much about having “enough.”

 

[Lawrence of Suburbia]

Apart from a bit of cash (emergencies and living expenses for 2-3 years), I'm a rebalancer (as opposed to bucketeer). Standard 4% withdrawals, or that's the plan for when I finally retire in about a year. At that point, all my non-cash investments will be in balanced funds (VWIAX, DODBX, etc.) so I need do nothing.

 

[atmsmshr]

Withdrawl Strategies

I know this subject matter has been discussed before, but I do think many of us who are close to ER have to be thinking and rethinking our plans as to how we will navigate the treacherous waters of what the market givith and taketh away!

Soooo, plans are made, RE budget set (discretionary filled/ideal budget & SHTF budget), debt paid off, AA set, your RE too stuff identified. Here is my general questions...

- Are you now holding a separate cash bucket as part of your previous AA bond bucket which is ear marked for spending X years in case the SHTF or are you staying with your AA and filling 1 years expenses at some point(s) by rebalancing? Is your cash bucket outside of your AA effectively?
- If you hold the 3rd bucket of $ for expenses, are you tapping it in a market like 2017 to cover next years expenses or rebalancing first?
- Alternatively, in a market like 2018, are you paying expenses first out of your cash bucket and then rebalancing (assuming your cash is part of the AA equation)?

I am trying to challenge my self and how I want to/should manage the market swings. Psychologically, I can envision the how having a cash bucket for multiple yrs may help you sleep at night when the market tanks. OTOH, are you not just watering down your AA and weighting it on the bond/cash side? I would like to think I will set my AA (60/40) and perhaps have some of my 40 in cash from time to time, but let rebalancing every year fill my annual expense budget. Just wondering how the multiple year cash bucket folks reconcile their true AA strategies... and if they even care! Food for thought for us scaredies who are close.

Links to references and calculators:

Bogleheads Variable Percentage withdrawal https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

Optimal Retirement Planner and plethora of articles from Journal of Personal Finance https://www.i-orp.com/GOPtax/articles.html

Portfolio Charts website section for income basics https://www.i-orp.com/GOPtax/articles.html

I am leaning to a Guyton Klinger method for filling the buckets, but a VPW age based income stream for a high equity based portfolio coupled with a high guaranteed income. RE starts in two years.

Atom

 

[retire2020]

So you strategically hold short term bond funds equal to 5 yrs expenses as part of your 40? It’s a set figure vs a % of your bond holdings?

I dont hold any cash except for expenses for the year in advance. Its a set figure(around 300K) which is part of overall 40% FI of 3M total asset.

 

[targatom2019]

I got two years worth for emergency, a bond ladder of around 85 insured muni bonds with maturity dates form two years to 20 years( I am currently 47), 401K is all aggressive growth, IRA and brokerage account are both 100% equities. Bond account has at least 1 bond call per month or sometimes 5 bonds. My plan is to live of the interest from the bond account first.

 

[Done]

When I first retired, I kept far too much cash until I felt comfortable spending it down. I still keep a fairly large fixed amount in an online savings account for unexpected or lumpy expenses of rental properties. Portfolio AA is 55/45 where fixed income includes the cash and some CD’s that can be raided with penalty if needed in an extended down market.

For income, I have the rentals and then turn dividend/CG reinvestment on or off as needed to maintain the cash level. I don’t budget but do track everything in Quicken and also keep an annual snapshot of portfolio value and WR in a spreadsheet to watch the trend.

 

[audreyh1]

At the start of each year I take 3.5% of the Dec 31 value out of my retirement portfolio for my annual income. Then I rebalance to my target AA.

During the year, I accumulate all dividends and distributions in cash (no automatic reinvesting) inside the portfolio and most are paid in December. So I generally have the cash to withdraw to cover the income in Jan, but still have some rebalancing to do after the withdrawal.

I also have several years of cash/short-term investments accumulated outside this retirement portfolio (so not part of the AA) that can smooth over periods when my income drops due to losses in the portfolio. It’s been growing over these many recent good market years as my spending has not kept up with my income. I’m comfortable with this large short-term buffer because frankly I feel like our retirement portfolio is large enough and I’m not interested in investing even more in long-term investments like equities and intermediate-term bonds. What’s the point? (no children)

We can draw down this buffer quite a bit before we would feel the need for belt-tightening or at least cut out the splurges, LOL! (Knock on wood)