My withdrawal plan. Is this right?

[Shabby]

OK, I am 1-4 months away from FIRE and making sure I have all this right.
My Plan:
1X Annual Need = Cash
2X Annual Needs = MM 2.5%
Nest Egg = 100% Wellesley making 4-5% in Dividends

I spend from the existing Cash pile to live. My dividends don't get reinvested so they become my new Cash. The dividends are slightly more than I budgeted for annual spend. Life goes on. No need to rebalance. Wait for SS to kick in for more $$. Relax. Safe.

P.S. Yes I know I am conservative and the AA on VWINX might not be what you would do. I am more wondering about the logistics of where to take the cash from and replenish it.

 

[pb4uski]

There is no one right way. I do something similar to what you plan to do... my retirement portfolio cash is the middleman between the checking account that I use to pay my bills and the rest of my retirement portfolio and dividends are taken in cash... those dividends and annual rebalancing replenish cash.

Other people are content with periodic redemptions of Wellesley and transfers to their local checking account. Either is fine.

How is your pile split between taxable/tax-deferred/tax-free? How old are you? When do you plan to start SS? Do you expect to have a tax torpedo?

 

[joylesshusband]

2X Annual Needs = MM 2.5%

As you plan to replenish the 1X annual needs in cash by your dividends, what is the purpose of the above 2X in MM?
Why 2X?
Why not less?
Why not more?

 

[Shabby]

How is your pile split between taxable/tax-deferred/tax-free? How old are you? When do you plan to start SS? Do you expect to have a tax torpedo?

I'm 51. I am planning on taking SS as early as possible to have more money when I am young and can enjoy it. No tax implications as almost all of the nest egg is in a taxable account.

 

[Shabby]

As you plan to replenish the 1X annual needs in cash by your dividends, what is the purpose of the above 2X in MM?
Why 2X?
Why not less?
Why not more?

I have just read about 2-3X in your Bucket 1. Plus I am such a conservative chicken I just sorta thought it sounded ok. But yes, if I went anywhere it would be 1X in Cash and 1X in MM. And now that I type this, that might be fine. But if we have an extended downturn I wouldn't want to have to sell any Wells. Hmmm....

 

[24601NoMore]

Sounds like you've got it setup for dividends to replenish your cash to the point where this could go on forever without having to sell shares of VWINX or your MM. If so, congrats. You're obviously foregoing some opportunity cost (with VWINX being "very" conservative vs. a more balanced portfolio) but sounds to me like it should work just fine..

I've done something similar (enough dividends and interest to cover "core" expenses and I'll dip into the portfolio "principal" for discretionary spend), although my dividends are coming from more sources (bond funds like PIMIX, FNMIX and PIGIX, VWINX/VWIAX, individual stocks like O, CVX, T, F, WELL, brokered CDs, MMs, etc).

That said, have you modeled out inflation year over year and what that could potentially do to your plan? If you haven't done so already, putting together a simple spreadsheet with projected income and expenses by year and increases caused by inflation might be worthwhile..

 

[Shabby]

That said, have you modeled out inflation year over year and what that could potentially do to your plan?

So I did do a little looking at inflation and felt good about things. I figure I could start dipping into the Wells if I need to later in life. Also wouldn't inflation be taken care of because dividends rise with inflation?

 

[24601NoMore]

PS - you might want to double-check your assumptions on Wellesley dividends..TTM div was 3.24%, and current 30 day yield is 3.64%..3-year total return is 6%, but then you're selling shares to get to the 4-5% rate you mentioned.

 

[24601NoMore]

So I did do a little looking at inflation and felt good about things. I figure I could start dipping into the Wells if I need to later in life. Also wouldn't inflation be taken care of because dividends rise with inflation?

Not always..in fact, bond funds (of which Wellesley is ~60%) tend to drop in NAV (and often divs as a result) when inflation/rates increase. Over time, the existing bonds get replenished with higher coupon (interest rate) bonds, but in the near term bond funds and funds that hold bonds tend to drop in increasing rate environments.

ETA - as an example, look at VWIAX/VWINX total return over the last one year period: -1.46%/-1.55%. Sure, TTM yield is decent at 3.24% and if memory serves me right has indeed increased "slightly", but not enough to cover the annual ~2 - 2.5% inflation..

 

[Shabby]

PS - you might want to double-check your assumptions on Wellesley dividends..TTM div was 3.24%, and current 30 day yield is 3.64%..3-year total return is 6%, but then you're selling shares to get to the 4-5% rate you mentioned.

Oh gosh I was just looking at that again. But these numbers seem good to me on a fund that is about $25. Seems about 5%. What am I doing wrong?
Year Div
1999 $1.02
2000 $2.14
2001 $2.54
2002 $0.91
2003 $0.87
2004 $0.88
2005 $1.25
2006 $1.35
2007 $1.20
2008 $1.31
2009 $0.89
2010 $0.80
2011 $0.82
2012 $1.10
2013 $1.44
2014 $1.26
2015 $1.37
2016 $1.02
2017 $1.08
2018 $1.85
AVG $1.25

 

[Texas Proud]

Just to be clear... cash and MM are the same thing... the question is where are you going to hold that cash.... a MM account makes sense since interest rates have risen and you can get some interest....


So I read your OP to say 1 year in a checking account and 2 more years in a MM account... reading my above, I would only keep enough in the checking to pay the bills and move money from MM to checking when needed...


As for the yield... this is just a guess as I have not looked... I bet you are calculating with return of capital included where other poster was giving the yield on dividends only....

 

[24601NoMore]

Oh gosh I was just looking at that again. But these numbers seem good to me on a fund that is about $25. Seems about 5%. What am I doing wrong?

Those appear to be total distributions (ST, LT Gains + Dividends). Look at the Morningstar Quote page for TTM and current yield..

https://www.morningstar.com/funds/xnas/vwinx/quote.html

 

[Shabby]

As for the yield... this is just a guess as I have not looked... I bet you are calculating with return of capital included where other poster was giving the yield on dividends only....

OK, so I think I need some education on this and have needed it for a long time. Mutual funds kick off dividends and LT and ST Cap gains. All these aren't included in "Yield" numbers Why? I want to be able to compare funds and it doesn't matter to me what the $$ is called that kicks off (I know it's taxed different, blah blah).

 

[Shabby]

Just to be clear... cash and MM are the same thing... the question is where are you going to hold that cash.... a MM account makes sense since interest rates have risen and you can get some interest....

Cash and MM aren't the same to me. Cash is my Bank account that earns no interest and I use it daily to pay bills, debit card, etc. MM is in my investment account and earns 2.55%. So my thought was put the years $$ in the bank account and watch it go down to 0. Easy to manage that budget wise. Then Dec 31st I pull another years worth from the 2.55% MM into the bank. Right? Or are you saying I am losing some interest not keeping it all in the MM?

 

[24601NoMore]

OK, so I think I need some education on this and have needed it for a long time. Mutual funds kick off dividends and LT and ST Cap gains. All these aren't included in "Yield" numbers Why? I want to be able to compare funds and it doesn't matter to me what the $$ is called that kicks off (I know it's taxed different, blah blah).

This might help..from M*..

TTM Yield
Yield is a measure of the fund's income distributions, as a percentage of the fund price. Trailing twelve months yield is calculated by summing the income distributions over the trailing 12 months and dividing that by the sum of the last month's ending NAV plus any capital gains distributed over the 12-month period.

Yield
This is the annual dividend per share divided by the current stock price and displayed as a percentage.

Note that neither # includes LT or ST Cap gains. And, to complicate things, when a fund (like VWINX/VWIAX) pays out a distribution (dividend, LT or ST Cap Gain), it's share price tends to drop by roughly that same amount. So, if you buy a fund at $25/sh, and it pays a $1/sh distribution, expect the NAV to be ~$24 until it either increases or decreases again due to market changes.

It's tempting (I know, because I did exactly this) to buy a fund like VWINX/VWIAX for the yield, as an income generating strategy. That's because many of us (me included) were brought up to think about interest in a bank account and "not touching the principal". But, in essence, this does not really apply to mutual funds in that way, because the "principal" (in $, not share quantities), will change with any distribution that you do not reinvest.

There's a raging and often tense debate on Bogleheads on dividends vs. "total return". I'm one who believes in having part of my portfolio geared toward income and hence, dividends, but on BH that's almost sacriligeous and you might just get run out of town if you focus on dividends and income vs. total return. To each their own and there are many strategies to get to a successful ER. I just happen to prefer one geared more toward income and having somewhat predictable income streams to replace my (former) bi-weekly paychecks/annual W2 income.

 

[24601NoMore]

Cash and MM aren't the same to me. Cash is my Bank account that earns no interest and I use it daily to pay bills, debit card, etc. MM is in my investment account and earns 2.55%. So my thought was put the years $$ in the bank account and watch it go down to 0. Easy to manage that budget wise. Then Dec 31st I pull another years worth from the 2.55% MM into the bank. Right? Or are you saying I am losing some interest not keeping it all in the MM?

I'd recommend you keep minimum $$ in the zero percent checking and do regular (ie: monthly) transfers from your MM. You're giving up 2.55% annually of every $ that's in checking vs. the MM.

Let's say your yearly expenses are $50K, so you're keeping that in checking. That's $1,275 in lost/opportunity cost income you're passing up.

 

[jIMOh]

OK, I am 1-4 months away from FIRE and making sure I have all this right.
My Plan:
1X Annual Need = Cash
2X Annual Needs = MM 2.5%
Nest Egg = 100% Wellesley making 4-5% in Dividends

I spend from the existing Cash pile to live. My dividends don't get reinvested so they become my new Cash. The dividends are slightly more than I budgeted for annual spend. Life goes on. No need to rebalance. Wait for SS to kick in for more $$. Relax. Safe.

P.S. Yes I know I am conservative and the AA on VWINX might not be what you would do. I am more wondering about the logistics of where to take the cash from and replenish it.

Many good replies and discussion on page 1.
You mentioned this is a taxable account, so any changes will have a tax implication... so if you sell, try selling in a down year.

Have you looked into other types of mutual funds- for example "equity income". Vanguard has other funds which are 60-40 or 80-20 which may kick out more dividends and less capital gains, for example. Of course this adds volatility, just adding a diverse opinion to the already good advice provided.

 

[HI Bill]

Cash and MM aren't the same to me. Cash is my Bank account that earns no interest and I use it daily to pay bills, debit card, etc. MM is in my investment account and earns 2.55%. So my thought was put the years $$ in the bank account and watch it go down to 0. Easy to manage that budget wise. Then Dec 31st I pull another years worth from the 2.55% MM into the bank. Right? Or are you saying I am losing some interest not keeping it all in the MM?

Why give up interest on half or more of your living expenses for a year? Why not set up regular (monthly) distributions from a money market account, so that you're not losing interest on December's 'paycheck' for an entire year? (etc., etc.).

 

[cranberryjoe]

Your plan should work but it is very conservative with the cash. I would not hold so much earning 0%.

The way I do it, I keep only about 2 months of expenses in a 0% checking account to pay the current month's bills. The rest of my "cash" is in an FDIC insured high yield savings account earning something over 2% interest. I have an automatic transfer every month to move one month of expenses from savings to checking. Dividends and CGs from my taxable account are deposited into the savings account throughout the year. Then at the end of each year I sell some investments to fill up my savings account back up to 1.5x for the next year.

I start the year with about 1.5 years of anticipated expenses in my savings account, which provides half a year of emergency funds that can be tapped quickly without having to make any decisions about what investments to sell. I started retirement using 2.5 years but decided I didn't need that much cash, so switched to 1.5 years.

When people talk about holding "cash" they usually mean holding it somewhere that won't lose value. FDIC insured savings accounts earn interest and are as safe as no-interest checking accounts. Many people (including me) consider money market funds to be just as safe although they are not FDIC insured. So MM funds are usually considered cash by most people. My opinion: if you're already planning on keeping a majority of your "cash" in a MM fund, you might as well keep even more there. One year of expenses in a 0% checking account is giving up a lot of interest in addition to losing out to inflation.

 

[HI Bill]

Wellesley may be too conservative over the long haul to keep you even or ahead of inflation. VG says the 1, 3, 5 and 10-year returns "After Taxes on Distributions and Sales of Fund Shares" are -0.67%, 3.53%, 3.36%, and 5.96%. The 10-year average looks ok, but the other three are at/below inflation.

 

[pb4uski]

OK, so I think I need some education on this and have needed it for a long time. Mutual funds kick off dividends and LT and ST Cap gains. All these aren't included in "Yield" numbers Why? I want to be able to compare funds and it doesn't matter to me what the $$ is called that kicks off (I know it's taxed different, blah blah).

No, only regular dividends are included in the yield numbers... ST and LT CG distributions are excluded.

The 3.57% yield on the VWINX overview page is roughly the 12/17/18 0.235 dividend distribution times 4 divided by the 9/20/2018 reinvest price of $26.58.

The reason that CG distributions are not included is because they can vary wildly........ 2018:$1.0408.... 2017:$0.309.... 2016:$0.2686

 

[SecondCor521]

I'm surprised nobody's brought this up (as far as I noticed, anyway), but OP didn't say how many years s/he has in Wellesley. At age 51 and on the conservative side with conservative investments, you'd probably want about 30 years' expenses or so.

If OP has 40 years of expenses in Wellesley, I'd say s/he is fine. If OP has 10 years of expenses there, I'd be worried.

 

[VungTau]

Get that interest

I'd recommend you keep minimum $$ in the zero percent checking and do regular (ie: monthly) transfers from your MM. You're giving up 2.55% annually of every $ that's in checking vs. the MM.

Let's say your yearly expenses are $50K, so you're keeping that in checking. That's $1,275 in lost/opportunity cost income you're passing up.

My bank gives me 2.1% interest in a savings account, full access to the funds albeit with a limit of 6 transactions per month - for me, more than enough to fully manage my money.

Don't waste your money in a 0% interest account!

 

[jollystomper]

I'd recommend you keep minimum $$ in the zero percent checking and do regular (ie: monthly) transfers from your MM. You're giving up 2.55% annually of every $ that's in checking vs. the MM.

Let's say your yearly expenses are $50K, so you're keeping that in checking. That's $1,275 in lost/opportunity cost income you're passing up.

+1

I keep barely a month of expenses my checking account, and only move it there from a high yield savings account (which currently pays 2.2%, you can do better) at the end of the preceding month.

 

[Dtail]

+1

I keep barely a month of expenses my checking account, and only move it there from a high yield savings account (which currently pays 2.2%, you can do better) at the end of the preceding month.

+2