Poll: Retirees, do you keep your Excess Withdrawal? Or Spend it?

[tmm99]

I didn't vote because this is just my second year, but I would most likely vote for "retiree who doesn't withdraw about the same amount, or about the same percentage each year." because I am withdrawing USD to be spent in Canada and the exchange rate is a huge wild card.

As for excess, I have decided to carry over from my grocery/restaurant/living expense category except for the first $1,000 not spent. In other words, last year, in this category, my spending was $1,934 below budget, which means I can carry over $934 to this year. It's like a little game I play with my own money. This will most likely become my pocket money to spend frivolously when I am traveling.


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[Alan]

I also don't draw a fixed sum or a fixed %, but I do keep track very closely. The first 3 years were under 2%, the next year was 3.5% and the last 3 years have been remarkably similar at 5.4%.

 

[NW-Bound]

"Retirees, do you keep your Excess Withdrawal? Or Spend it?"

First, I would have to define excess. I draw monthly as I need to pay the bills. So, there's really no excess.

I track to see my burn rate, and to be sure that it does not go beyond my target WR. If I spend more than that in the last 12 months, I would convince myself it is all OK because the average over 24 months, 36 months, etc... looks better.

Hey, perhaps I can mimic Shiller PE10 and define my WR10. I would make the period shorter, perhaps WR5, because 10 years is a long time relative to a person's retirement years.

 

[KB]

I only withdraw if I need more than I get from my SS, pensions and dividends, etc. And I gift to my kids each year too, so that eats up 28K. I've been more generous to my charities lately too, so I keep a certain amount of spare cash and give away the rest.

 

[GravitySucks]

I don't have excess money or spare change.

 

[audreyh1]

While I understand spending less than you've calculated you're "allowed" to spend, I don't look at that as "tuck some away outside my portfolio, for future use"; it just remains in the portfolio.

For instance, let's say I've run various simulations and found that the upshot is I can spend $X this year. If I spend 90% of $X, that other 10% of X just remains as an asset. To me, it wouldn't really matter what account it was in (except of course it's worth a bit more if it happened to be already through the tax gauntlet), money is money.

If the difference was large (20% or more), I might feel inclined to seek out ways to enjoy the difference between what I'm "allowed" to spend and what it looks like the actual spending might turn out to be. Not to the level of the money "burning a hole in my pocket", as my dad used to say, but if I found something interesting to spend it on, it would be more likely than if I hadn't had an excess.

That means you have a variable withdrawal rate, as you are reinvesting unspent funds for the long term. Nothing wrong with that, of course. Some of us choose not to reinvest unspent funds in the long-term investments of a retirement portfolio, so there is a difference.

That is really a third option: keep, spend, or reinvest are the actual choices.

From posts read over the years I get the impression that most retirees posting here have variable % withdrawals, and most of those only take out what they need for the year or month and keep the rest invested in their target AA.

 

[audreyh1]

Whenever I see "percent" I always mentally add the words, "of what?"

Are we talking about a WR calculated by using the portfolio value on the day of retirement as the denominator for all subsequent years?, or is it figured by dividing the current year's spending by the portfolio value on some arbitrary date, such as January 1st or the anniversary of FIRE?

I think quite a few here compare their withdrawal to something like the Dec 31 value of their portfolio each year. I practice the % of remaining portfolio withdrawal method and I do exactly that - take a fixed percent of the Dec 31 value out otpf the portfolio each Jan.

I don't think that many folks here use the Trinity method of some fixed % of the starting portfolio value adjusting for inflation each year.

 

[audreyh1]

I withdraw 3.5% of our portfolio each Jan based on the Dec 31 value the prior year.

Our portfolio has grown a lot, but our spending hasn't grown so much. As a consequence our withdrawal after taxes, far exceeds our spending at this point.

I am hoarding unspent funds in short-term investments because I don't want to reinvest them in my portfolio because it is too volatile and I'm not seeking to maximize long term return. Plus, once withdrawn, I consider those funds fair game for splurges and part may be needed to supplement income during some portfolio down years. I'm more interested in making good use of the money in the short term while I am younger and healthy.

I did increase our budget for this year. I also hope to buy a nice new car.

With luck, the problem will only get worse (knock on wood) as I do plan at some point to increase our withdrawal rate as we age. We better get to work figuring how to spend it better! Loudly knocking on wood!!

 

[Live And Learn]

I need an option for "I don't know yet !". 2016 was my first full ER year. My budget WR is 3% and I ended up spending that - because I bought an unbudgeted boat with my underspend in medical expenses. Will I do that every year ? I doubt it. My original plan was to spend 1/2 of my underspending and to bank the rest. Maybe that's what I'll do next year. Or maybe not

 

[Dd852]

Old habits died hard. At w@rk I managed a cost center - in FIRE I continue to manage costs and not "revenue". As long as our costs are well below my warning lines (e.g. 4% of assets) I'm happy. If they ever approached that, I'd go into cost cutting mode just like in the old days!

 

[Viking]

I pull my base budget out of the portfolio at the beginning of each year. If I want to fund discretionary extras, I pull that as I need to pay off the credit card. If there's any left over at the end of the year, I deduct that from the next year's withdrawal.

 

[nun]

Right now, with 2 pensions and rental income, DW and I have taken distributions or Roth conversions up to the 15% threshold. That amount is less than 1.5% of portfolio, $100,000<spending<$150,000 and a while before SS.

Still trying to figure out the optimal strategy.

Pensions and rental income here too that cover expenses. Some part time work took me over the 15% tax threshold so no ROTH conversions and I just reinvest dividends

 

[scrabbler1]

I have monthly and quarterly dividends from my mutual fuds coming in to cover my expenses. I build in a surplus or cushion into my budget to allow for unforeseen expenses. Anything left over gets reinvested. Any cap gain distributions also gets reinvested.


In 2015, my built-in surplus was nearly totally eaten up by the deductible and copays and other OOP expenses stemming from my 12-day hospital stay. In 2016, my unexpected medical expenses were much, much lower, so I had more of my built-in surplus reinvested. My SWR went back under 2% in 2016.


I don't use my surplus as a license to spend; very rarely have I gone on even a mild spending spree on non-essential items. The last time I did that was in 2014 when in the span of 6 months I bought some new clothes, bought a new (refurbished) PC for my LF, and went on a relatively cheap vacation trip with her for 2 weeks. My SWR in 2014 was still below 2%.

 

[marko]

Our spending is fairly constant. Some things go down and others go up depending on the year and other events. Some years there's a new car, other years a new roof but it unconsciously stays within a few $K each year.

Essentially our lifestyle dictates our WR but it is always a percent or two below our calculated SWR.

We start the year with our after tax dividends being WR'd to our checking and then backfill through the rest of the year as needed.

 

[traineeinvestor]

Our objective is to make our nest egg last "forever" so the concept of withdrawal rates isn't really applicable. We monitor a number of metrics, of which income from investments, expenses, cash flow and net worth are the most important.

Our spending has fluctuated quite a lot - holidays and home repairs etc are not constant. Income from investments has been rising (if unevenly). Cashflow has been slightly negative due to the principal component on our home mortgage but will become strongly positive when the last payment is made in 4.5 years time. Net worth has grown at faster than the rate of inflation since I retired. DW has gone back to work full time which is unnecessary from a financial perspective but it's what she wanted to do.

 

[bingybear]

I don't worry about it. Don't track expenses, don't have a budget.

My overhead is low and my discretion is high.

+1
retirement has been short so far, almost 2 years. But we came up with a really conservative budget based on 2013 spending while working. We have been dealing with DMIL and have not had time to do much else. Just looking at our monthly CC bill, we are way under the conservative estimated.

I don't really track WR. I have a spreadsheet that monitors healthcare and tax spending for doing taxes. The other thing I see if my credit card bills that I pay, but don't record these. This just gives me a feeling of my spending.

 

[Golden sunsets]

I estimate current year expenses in January following an analysis of previous year's spending including taxes. I check to see if that figure falls within my SWR guidelines (so far, it has). I then withdraw from several different sources, including tax sheltered accounts and a dividend from my holding company, trying to keep personal taxes within lower tax brackets to the extent possible. My January withdrawals are deposited to savings accounts linked to checking, and usually cover my annual expenses, but if necessary, they can be topped up later in the year. Sometimes there is a surplus, as there is this year. When that happens I will, in order of preference, (a) put it in my TFSA (tax free savings account), (b) keep it in savings to offset current year's expenses, or (c) prepay some investment mortgage debt. I do not go out and spend it just because it's there.

This year I would like to put the surplus in my TFSA as I have contribution room, but it's not clear what the best long term investment would be inside the TFSA as markets are currently overvalued. Perhaps a HISA might be the best choice, as this would enable me to invest in index funds within the TFSA in the event of a market crash, while also acting as an emergency fund. I will definitely not be paying down tax deductible mortgage debt, as all my mortgages are currently at historically low interest rates.

What is a TFSA? Could you enlighten me?

 

[2017ish]

What is a TFSA? Could you enlighten me?

Meadbh lives up North. TFSA is a creature of Canadian law:

The Tax-Free Savings Account (TFSA) program began in 2009. It is a way for individuals who are 18 and older and who have a valid social insurance number to set money aside tax-free throughout their lifetime. Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn. Administrative or other fees in relation to TFSA and any interest or money borrowed to contribute to a TFSA are not deductible.

The Tax-Free Savings Account

 

[Golden sunsets]

I did't vote either. 2017 is technically our first year of decumulation and also DH's first RMD. Our pensions and SS exceed our monthly spending minus taxes. And the first RMD to be pulled this December exceeds federal and state taxes. So we will pay the taxes in December and funnel the rest to taxable investments. WR rate estimated to be .6% this year unless we purchase a new vehicle late this year.

 

[Eagle43]

My pensions pay for day to day needs. I take RMD, pay taxes,. That's gonna stop this year. We're getting old. Time to spend it.

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[Eagle43]

Oh, and reinvest RMD after taxes.

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[donheff]

I selected keep the excess outside the portfolio but that isn't precisely what I do. I have an SWR but spend less that that. I leave the excess in the portfolio but track that amount as a pseudo account while reducing the SWR portion of the portfolio accordingly. The excess amount is reserved for special needs like a huge splurge or spending during a downturn.

 

[Badger]

I don't budget or track expenses but our SS and small pensions have been taking care of all our expenses since the house is paid for and Medicare and Tricare takes care of any medical. This year my wife will be taking RMD that will amount to about 30% more. Then a year later our combined RMD will be about 100% more. Since our tax bracket will be much higher than the present 15% bracket the actual amount realized will not be double but still more than we will spend. If still able we can travel and have a few luxuries but our frugal mentality makes it uncomfortable to be frivolous so it looks like I will be making annual donations to local no-kill animal shelters and a few other select charities. There will still be plenty to pass on to the grown children who will probably blow it on dining, booze and grown-up toys.

Cheers!

 

[6miths]

I don't worry about it. Don't track expenses, don't have a budget.

My overhead is low and my discretion is high.

Same. Have a large cushion and expenses are not high enough to threaten it at this point.

 

[Meadbh]

What is a TFSA? Could you enlighten me?

Thanks 2017ish for providing the information requested.

The TFSA was introduced in Canada in 2009 and is similar to a Roth in the US, but with fewer restrictions. You put after tax savings in, and from that day forward, their earnings are tax free, and withdrawals are tax free. There are contribution limits, but they are cumulative. For this year, the contribution limit is $5500. You can invest in a multitude of vechicles within your TFSA. You can withdraw funds at any time, tax free, but you cannot add the amount of the withdrawal to your contribution limit until the following calendar year.

The TFSA is a great vehicle for a young person 18 or older who is in a low tax bracket. It is also great for retirees who are back in a low tax bracket and want to save. It is a great place to save for those in high tax brackets who have already maxed out their RRSPs (registered retirement savings plans). So it's good for everyone, really. It can be used as an emergency fund, but some avid investors have achieved huge growth within their TFSA, to the extent that a few of them have been audited by Revenue Canada, as it is not meant to be a day trading account. Americans in Canada, or Canadians in the US, should beware, as the IRS does not recognize the TFSA as a tax free account.

https://en.m.wikipedia.org/wiki/Tax-Free_Savings_Account