Retirement withdrawal variability

[OldShooter]

I’m not motivated by passing large inheritance either. ...

I talked about funding trusts for our sons, but didn't mean to imply that we are highly motivated to leave a large estate. It is working out that way because we have been lucky and successful in our careers and in our post-retirement (passive) investing. We spend all the money that we care to, but it hasn't been enough to dent the portfolio. As we realized that a few years ago, we started to pay more attention to a solid estate plan.

So ... we invest to maximize the estate not so much because we are motivated to pass a large inheritance but rather because that has turned out to be the fact and there is no reason not to invest in recognition of that fact.

 

[youbet]

Thanks to you and Cut-throat for the info. I just renewed a couple of Cds. I will take RMD in January and take after tax cash out of Vanguard and buy more cds. Although I will look at VGs prime money market fund. DW and I are financially ok. Like the quarterback who takes a knee in the last minute to ensure victory I will play safe. The game is (should be) won.

Just try to keep in mind that it's your overall AA that determines how conservative or aggressive (safe or risky as many have been saying) you are being. Reinvesting or not reinvesting your unspent WR every year is just one way to control your AA.

For example, say someone is 100% equities and they withdraw 4% the first year. They spend 3% and buy CD's with the unspent 1%. They're still very aggressive despite not reinvesting the unspent withdrawal dollars. And you can easily imagine the opposite scenario.

Also, don't think of RMD's as a withdrawal. The tax caused by the RMD transfer from a tax deferred account to a non-tax deferred account is an expense. What you do with the balance is up to you and your spending needs.

I wonder, what do you consider "the quarterback taking a knee in the last minute to ensure victory?" 100% cash/CD's/treasuries? Something like a conservative 30/40/30 AA? Just curious.

 

[Lsbcal]

Sounds like a lot of sensible people here. I'm not going to quibble with the various flavors of solutions.

I currently just have a book entry of "unspent" money that is available for luxuries. Currently it is being cleaned out by a kitchen remodel. At the start of this year it amounted to about 3% of assets i.e. 3% of total portfolio invested 60/40 with a very significant portion of short term bonds in the FI part.

So that 3% book entry could decline in a bad market but I wouldn't be worried about that as the whole portfolio is my bogey. I do have a very well studied Plan B though.

 

[youbet]

So ... we invest to maximize the estate not so much because we are motivated to pass a large inheritance but rather because that has turned out to be the fact and there is no reason not to invest in recognition of that fact.

This is always a very personal thing and I'm surprised when people comment positively or negatively about it beyond simply stating their own situation as you have done.

In our case, we have a special needs grandson. We get great satisfaction and pleasure from the fact that we've been able to establish a significant trust for him while still living a nice FIRE lifestyle. (Is it correct to say "living a nice FIRE lifestyle when you're both 71? We FIRE'd at 55/58 which was a tad bit early, but that was years ago.........).

Beyond the trust for our grandson, we'll likely leave some significant bux to our son and DIL who have both done some sacrificing of their own careers due to the challenges they face. But that will be a factor of our ongoing spending vs market performance. FireCalc says the odds are tilted in their favor if the future resembles the past but only time will tell........

 

[DEC-1982]

... Some people just take out money on an as-needed basis and don't really have a strategy. I am curious what others are doing....

Yep. It seems to be working so far. If we get another 50+ % bear market in my lifetime I will have to rethink this.

 

[audreyh1]

Just try to keep in mind that it's your overall AA that determines how conservative or aggressive (safe or risky as many have been saying) you are being. Reinvesting or not reinvesting your unspent WR every year is just one way to control your AA.

For example, say someone is 100% equities and they withdraw 4% the first year. They spend 3% and buy CD's with the unspent 1%. They're still very aggressive despite not reinvesting the unspent withdrawal dollars. And you can easily imagine the opposite scenario.

Personally I prefer to maintain a retirement portfolio that is large enough to meet my needs, and then have short-term flexibility with my assets outside of that.

I don’t worry about the AA over all my investable assets as I only withdraw from and rebalance the retirement portfolio.

So the “how aggressive or conservative you are being” has no meaning to me for assets outside of my retirement portfolio.

I think some folks here get too hung up on the idea that all investable assets are one big pot and should be treated all the same way and only look at the AA of the total regardless of what is rebalanced or withdrawn from. For me, I only care about the subset that I am rebalancing and withdrawing from. That subset is providing my annual retirement income, and that is the set I have modeled and chosen the risk trade offs, survivability, AA, withdrawal rate, etc. What happens outside that has no bearing IMO.

 

[OldShooter]

Personally I prefer to maintain a retirement portfolio that is large enough to meet my needs, and then have short-term flexibility with my assets outside of that.

I don’t worry about the AA over all my investable assets as I only withdraw from and rebalance the retirement portfolio.

So the “how aggressive or conservative you are being” has no meaning to me for assets outside of my retirement portfolio.

I think some folks here get too hung up on the idea that all investable assets are one big pot and should be treated all the same way and only look at the AA of the total regardless of what is rebalanced or withdrawn from. For me, I only care about the subset that I am rebalancing and withdrawing from. That subset is providing my annual retirement income, and that is the set I have modeled and chosen the risk trade offs, survivability, AA, withdrawal rate, etc. What happens outside that has no bearing IMO.

It all boils down to Richard Thaler's "mental accounting." (https://en.wikipedia.org/wiki/Mental_accounting) We all do it to a some degree: splitting fungible money into categories and treating it differently depending on what category it is in. Household budgeting is maybe the simplest example.

Thaler will point out, though, that it is important to appreciate that there are traps where optimizing individual categories can be suboptimal for the whole. For example, household budgeting again, it is suboptimal to refuse to take money out of the entertainment category when the groceries category runs out of cash.

So looking at the whole or looking at it in pieces are simply mental accounting options. 1# of potatoes diced into pieces is still 1# of potatoes.

 

[youbet]

So looking at the whole or looking at it in pieces are simply mental accounting options. 1# of potatoes diced into pieces is still 1# of potatoes.

+1

Ain't dat da truth....... ?

 

[Eagle43]

Just try to keep in mind that it's your overall AA that determines how conservative or aggressive (safe or risky as many have been saying) you are being. Reinvesting or not reinvesting your unspent WR every year is just one way to control your AA.

For example, say someone is 100% equities and they withdraw 4% the first year. They spend 3% and buy CD's with the unspent 1%. They're still very aggressive despite not reinvesting the unspent withdrawal dollars. And you can easily imagine the opposite scenario.

Also, don't think of RMD's as a withdrawal. The tax caused by the RMD transfer from a tax deferred account to a non-tax deferred account is an expense. What you do with the balance is up to you and your spending needs.

I wonder, what do you consider "the quarterback taking a knee in the last minute to ensure victory?" 100% cash/CD's/treasuries? Something like a conservative 30/40/30 AA? Just curious.

I have been taking RMDs five years. To date, I have not spent a dime. I pay the taxes and reinvest in Vanguard. The qb analogy means that the reinvestment stops and the RMD gets put into cds or savings account. Those accounts won't go up very fast, but afaik don't decrease. As I said, at 75 the pile doesn't have to increase, but if any pile does, I want it to be available cash. Currently I am 70/30 But I am not counting the cd/cash accounts which are outside of our investments. I consider RMDs to be my VPW. Whatever the IRS says take out, I do. AFAIK the RMD tables indicate if I do this and live to be 95, I'll still have some loot. If not, well too bad.

 

[Cut-Throat]

Currently I am 70/30 But I am not counting the cd/cash accounts which are outside of our investments.

Me Too ! .... I've got 1 Investment Portfolio invested in 1 Mutual Fund ... Target Retirement 30% Stocks/70% Bonds... Very Simple. That is the Only Asset allocation I Maintain.



I make my VPW withdrawals once a year and keep it in a 'Spending Account'... It is never counted in my 'Investment Portfolio' and neither is the Change in my Pockets or in the Couch Seat Cushions.

 

[audreyh1]

It all boils down to Richard Thaler's "mental accounting." (https://en.wikipedia.org/wiki/Mental_accounting) We all do it to a some degree: splitting fungible money into categories and treating it differently depending on what category it is in. Household budgeting is maybe the simplest example.

Thaler will point out, though, that it is important to appreciate that there are traps where optimizing individual categories can be suboptimal for the whole. For example, household budgeting again, it is suboptimal to refuse to take money out of the entertainment category when the groceries category runs out of cash.

So looking at the whole or looking at it in pieces are simply mental accounting options. 1# of potatoes diced into pieces is still 1# of potatoes.

Money may be fungible, but investments aren’t. You can’t treat long-term and short-term investments or safe and risky investments as if they are identical.

It’s not just mental accounting. It’s good investment practice to partition assets by investment goal and timeline. Most folks here don’t blend their checking account or their funds set aside for current year spending with their long term investments. I suppose some do. Many segregate savings for their children’s college from their retirement savings.

 

[OldShooter]

Money may be fungible, but investments aren’t. You can’t treat long-term and short-term investments or safe and risky investments as if they are identical.

It’s not just mental accounting. It’s good investment practice to partition assets by investment goal and timeline. Most folks here don’t blend their checking account or their funds set aside for current year spending with their long term investments. I suppose some do. Many segregate savings for their children’s college from their retirement savings.

I didn't say there was anything wrong with it. I just said that it could lead to suboptimal results if the person doing it didn't realize what they were doing or maybe did it too rigidly. As I said, we all do it to some degree and in our old age here one of the reasons is to manage an AA, as you point out.

I didn't say, though I believe it to be true, that paying attention to an AA that does not comprise all assets could cause one to mislead oneself. For example, having $300K in equities, and $300K in fixed income, and $300K in a "stash" gives a 50/50 allocation if the stash is not considered and a 33/66 allocation if all assets are considered. Very different.


If the person then says "I think 50/50 is too aggressive" and makes changes on that basis, then he/she may end up being more conservative than he/she even understands. All because the 50/50 is really a false premise.

 

[Huston55]

I didn't say there was anything wrong with it. I just said that it could lead to suboptimal results if the person doing it didn't realize what they were doing or maybe did it too rigidly. As I said, we all do it to some degree and in our old age here one of the reasons is to manage an AA, as you point out.

I didn't say, though I believe it to be true, that paying attention to an AA that does not comprise all assets could cause one to mislead oneself. For example, having $300K in equities, and $300K in fixed income, and $300K in a "stash" gives a 50/50 allocation if the stash is not considered and a 33/66 allocation if all assets are considered. Very different.


If the person then says "I think 50/50 is too aggressive" and makes changes on that basis, then he/she may end up being more conservative than he/she even understands. All because the 50/50 is really a false premise.

+1

I too set aside a chunk if FI (4+/-yrs expenses in CD/Bond ladder) but, when I calculate my AA, I include those $$$ in my FI allocation. Some do it differently and, that’s certainly their choice. But, I keep thinking that Mister Market doesn’t care about our ‘mental accounting’ because math is math. Not a judgment, just my view.

 

[TwoByFour]

It’s not just mental accounting. It’s good investment practice to partition assets by investment goal and timeline.

I have never bought into that. When we were accumulating we never invested for a goal other than retirement, so that part was easy. Post-retirement our only timeline is from now until our last day of retirement, and our only goal is to not run out of money before the end of the timeline.

Yes, we know we will need a new car in 5 years or so, but to me that is an expense like any other expense. When we get to that point in 5 years I will liquidate whatever is appropriate to buy the car - if stocks are underwater, I will sell bonds. If interest rates have put bonds under water, I will wait until my 2-year bonds mature. Or just draw it out of the 2% of cash we keep around. In any event, there are no liability-matching accounts, just a range of liquidity options all within our retirement account.

 

[YVRRocketSurgery]

This is likely not optimal but this is how I'm planning my cash flow in retirement.
I estimate a spend of $50k/yr to replicate our current lifestyle and ~$90k/yr to achieve our extended goals in retirement.

Half my portfolio is built on a portfolio of dividend growth stocks with the other half index/couch potato.
At retirement, I'm expecting the dividend growth portfolio to produce the $50k/yr to cover our core retirement and hope that the dividends grow at a rate that will cover the pace of inflation.

I'm also hoping the index/couch potato side of the portfolio will be able to fund our extended retirement goals by withdrawing at about 4%+inflation rate as a base. Because this side supports our extended goals, we're ok being a bit flexible with this bucket. It can also support the other side if dividends get cut.
Call it timing or whatever and variable withdrawal rate or whatever but I'm also looking to adjust asset allocation and withdrawal rates on this side pending on conditions such as: are we achieving our extended goals, how volatile is the market, are we keeping up with inflation, how well is our portfolio doing?

Anyway, I'm kind of all over the place but still have a couple of more years to refine my plans.

 

[TwoByFour]

... are we achieving our extended goals, how volatile is the market, are we keeping up with inflation, how well is our portfolio doing?

Good that you are thinking about inflation. People who have portfolios that are really bond heavy seem to forget the 1980's and how devastating inflation can be. The thing about inflation is that it is a permanent loss, never to be recovered from. Contrast that with a drop in the stock market which is temporary. It might take a few years but so far it has always recovered.

 

[Cut-Throat]

Good that you are thinking about inflation. People who have portfolios that are really bond heavy seem to forget the 1980's and how devastating inflation can be. The thing about inflation is that it is a permanent loss, never to be recovered from. Contrast that with a drop in the stock market which is temporary. It might take a few years but so far it has always recovered.

Inflation doesn't care whether your dollar is invested in stocks or bonds! Stocks are not a sure fire Inflation protector at all. Cherry picking dates from the 1980s does not validate your point .... I guess you forgot about the 1970s and 'Stagflation' and the Business week Magazine cover proclaiming 'Equities are dead'. In the 1973-1974 time period we had double digit inflation and over a 40% drop in the stock market.


BusinessWeek: The Death of Equities - The Big Picture

 

[RunningBum]

My thinking is that it isn't how stocks do during an inflationary time, it's that you want to try to keep growing your portfolio in case of an upcoming extended high inflation period. You may think you've won the game so you go conservative, but if inflation hits you may wish you'd have been running up the score so that the inflated prices don't break your plan. I'm not talking 100% equities, but not being too conservative with 0 or low equities. Keep your acceptable AA, adjust for age if you like (I do, but http://www.early-retirement.org/forums/f28/age-based-aa-poll-88258.html shows many here do not), but don't change it just because Firecalc says you're at 100%.

 

[Cut-Throat]

My thinking is that it isn't how stocks do during an inflationary time, it's that you want to try to keep growing your portfolio in case of an upcoming extended high inflation period. You may think you've won the game so you go conservative, but if inflation hits you may wish you'd have been running up the score so that the inflated prices don't break your plan. I'm not talking 100% equities, but not being too conservative with 0 or low equities. Keep your acceptable AA, adjust for age if you like (I do, but http://www.early-retirement.org/forums/f28/age-based-aa-poll-88258.html shows many here do not), but don't change it just because Firecalc says you're at 100%.

However, once you are in your late 60s and pretty much eliminated the sequence of return risk, you don't have to worry about being too conservative. The 'Sweet Spot' for retirees is 30% equities. And that is exactly what the Vanguard Target Retirement income fund is. You do have to worry about running out of time for stocks to recover.... They can cut your equity position in half and not recover for 20 years. Continuing to withdraw money into the teeth of a bear market is what destroys portfolios, especially at age 70..... Not Bonds. Look at every Portfolio 'Failure' in past history and that is exactly what happens. That is the definition of Risk. You can mitigate this risk by delaying S.S. to age 70 and applying the 'Age in Bonds' Philosophy. This is a 'Withdrawal Thread', we are not talking about someone that is in their 30s and building wealth.

 

[OldShooter]

I have never bought into that. When we were accumulating we never invested for a goal other than retirement, so that part was easy. Post-retirement our only timeline is from now until our last day of retirement, and our only goal is to not run out of money before the end of the timeline.

Yes, we know we will need a new car in 5 years or so, but to me that is an expense like any other expense. When we get to that point in 5 years I will liquidate whatever is appropriate to buy the car - if stocks are underwater, I will sell bonds. If interest rates have put bonds under water, I will wait until my 2-year bonds mature. Or just draw it out of the 2% of cash we keep around. In any event, there are no liability-matching accounts, just a range of liquidity options all within our retirement account.

++++1 Excellent.

... The 'Sweet Spot' for retirees is 30% equities. ...

Silly, of course. Everyone's situation is different. Our "sweet spot" is 75% at age 71. Others will have different sweet spots depending on their assets and their particular risk/reward comfort.

... [Stocks] can cut your equity position in half and not recover for 20 years. ...

Silly again. On a total return basis, this has never happened. Looking at market indices only, this has only happened once, in 1929-1949. If you want to worry about high impact events, try this one:

The world finally gets its wish and knocks the US$ down as the world reserve currency. The dollar drops 20% in value, causing all imports and all commodities (food, oil, etc.) to rise 25% in price. The resulting inflation is uncontrollable; neither monetary nor fiscal policy have much effect. In the course of two or three years, dollar-denominated bond portfolios lose half of their buying power. Equites will suffer, too, but US producers of commodities will do well and re-shoring of manufacturing will bring a partial recovery. There is no recovery for bonds, however.

That scenario, dear @Cut-Throat, is IMO far more likely than your hypothetical 20-year equity disaster. But hey, if you want to plan for your particular disaster that's up to you. To argue here, though, that everyone should behave like you do is most charitably described as a bit arrogant.

 

[Lsbcal]

This thread is getting a bit discordant, don't you think?



Maybe time for everyone to take a deep breath and realize we are all reasonable people when not driving on the freeways.

 

[Scuba]

OP, before I RE’d, I ran spreadsheets regularly and was feeling that I needed a specific withdrawal strategy. However, post-ER, I’ve realized that we really don’t need any complex formulas. We just live the way we want to live, which is pretty close to how we lived pre-ER, and withdraw when needed. Once or twice a year, I look back at our spending and see if it is in line with expectations or if not, what has changed. So far after almost 2 years of ER, total spending has been as expected and with market performance so good, our NW is higher than when we RE’d.

I do calculate our NW quarterly. I realize it will decline when the market inevitably corrects and am confident we won’t panic when it does. Fortunately we have a few different income streams that cover our basic expenses plus a reasonable amount of discretionary spending.

 

[Dd852]

Withdrawal strategy discussions always seem to get very heated and a bit too edgy. I think it is because, honestly, none of us know or can know. There are no crystal balls. We are all trying the best we can to manage ourselves and the crazy world outside with the extremely limited knowledge we have and with the “certainty” our experience has given us. We get defensive because we all fear deep down that our strategy is actually wrong and we will be screwed when we’re 80. But if I could suggest something - a few deep breaths and an acknowledgement that we are all equally stepping into the unknown everyday...thus we all can actually learn something from everyone, no matter how much at odds his/her method might be from our own.

 

[Bryan Barnfellow]

Withdrawal strategy discussions always seem to get very heated and a bit too edgy. I think it is because, honestly, none of us know or can know. There are no crystal balls. We are all trying the best we can to manage ourselves and the crazy world outside with the extremely limited knowledge we have and with the “certainty” our experience has given us. We get defensive because we all fear deep down that our strategy is actually wrong and we will be screwed when we’re 80. But if I could suggest something - a few deep breaths and an acknowledgement that we are all equally stepping into the unknown everyday...thus we all can actually learn something from everyone, no matter how much at odds his/her method might be from our own.

+1 Besides politics and religion, the only thing worse I've found is in my audiophile discussion groups. Try floating "digital vs analog" and duck for cover!

-BB

 

[DEC-1982]

I have never bought into that. When we were accumulating we never invested for a goal other than retirement, so that part was easy. Post-retirement our only timeline is from now until our last day of retirement, and our only goal is to not run out of money before the end of the timeline.

Yes, we know we will need a new car in 5 years or so, but to me that is an expense like any other expense.

Agree.