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Old 11-21-2017, 12:39 PM   #21
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With an inheritance, you may feel the need to compartmentalise the money. Eventually, you will realize that it is really yours. Your dead relative won’t be asking for it back. They left it to you to enjoy, so just enjoy it. No need to overthink it with formulas.
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Old 11-21-2017, 12:43 PM   #22
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It was mostly good dividend paying stock so it just got added to the brokerage portfolio. I sold some to raise cash and add to some of my other positions (also dividend paying stocks). So basically going to buy a few things outright (new 3 row SUV, OLED TV and washer/dryer) with some cash and then leave things alone. I don't do the inflation thing with withdrawals as long as it's enough to live well. I figure I can always raise it at a later point to catch up.
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Old 11-21-2017, 12:48 PM   #23
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I received a nice inheritance from my uncle (and eventually I expect to receive a bigger one from my aunt, though as I told both of them, I would prefer to put that off as long as possible - I adore them both.) I simply deposited the check into our managed portfolio account and didn't adjust the WR. That will adjust over time anyway.

Our circumstance may be different from others - we were well positioned before the inheritance and are now "even more" well positioned. We don't spend a lot, but it's nice to know the money is there if we need it.
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Old 11-21-2017, 04:49 PM   #24
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If you have way more than you need to fund your annual expenses even when padded by lots of discretionary stuff, then you can set aside the chunk needed to fund those annual expenses and draw from that.

The excess can be used for whatever you like.

The problem with putting absolutely everything in one pot that you draw from annually, even when new funds show up unexpectedly, is that the money is spread out for the rest of your life. That is: you can only spend 4% of the new funds for the rest of your life. Maybe you'd like to spend a good chunk of it now, or in the near future, when you are younger, healthier, and alive. Maybe there are a couple of big splurges you have been putting off because they didn't fit within your prior annual income.

IMO as long as the retirement fund is large enough to cover your desired annual spending level, anything above that can be used however you like. It doesn't all have to be doled out 4% a year.
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Old 11-21-2017, 05:29 PM   #25
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First update your estate documents.

Were I in your position I would put as much in a Roth IRA as the tax code allows, fill up my regular IRA and let it run, postpone taking SS. If your children (or grandchildren) are years away from entering college fund their 529 accounts. Spend down your inheritance because your IRA investments will grow tax free. Eventually you will be forced to take minimum required distributions which will fill up your cash account.

You and your significant other should make a spending plan. What do you need for daily expenses and experiences on your bucket list. You can always tap your IRAs if s..t happens and you need cash for an unexpected expense. If you really have excess cash then invest a portion that you don't think you will need for about 5 years.

One personal opinion about paying for your children's education: make sure they have skin in the game. After they have completed the education that s/he is willing to pay for you can always pay off their school loans.
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Old 11-21-2017, 06:15 PM   #26
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First update your estate documents.

Were I in your position I would put as much in a Roth IRA as the tax code allows, fill up my regular IRA and let it run, postpone taking SS. If your children (or grandchildren) are years away from entering college fund their 529 accounts. Spend down your inheritance because your IRA investments will grow tax free. Eventually you will be forced to take minimum required distributions which will fill up your cash account.

You and your significant other should make a spending plan. What do you need for daily expenses and experiences on your bucket list. You can always tap your IRAs if s..t happens and you need cash for an unexpected expense. If you really have excess cash then invest a portion that you don't think you will need for about 5 years.

One personal opinion about paying for your children's education: make sure they have skin in the game. After they have completed the education that s/he is willing to pay for you can always pay off their school loans.
Many good points. Since we are both retired I don't think there is a way to put stuff in an IRA. I think the advice of putting a portion away for unexpected expenses is a good idea. Will also put a nice chunk away for travel.

I am practicing your advice about the kid's education right now. I pay the tuition and give them a few bucks now and then, but they pay for room and board. They both have jobs of about 15 hours a week and I think that is good for them. 2 years in neither has any debt. I had to work my way through college without any assistance but didn't want them to go that route. So far it has worked out nicely.

I will state that the inheritance has been a game changer for us. It jumped our NW by over 1/3 and now we are VERY comfortable. I just don't want to get TOO comfortable but will "blow some dough" now and then LOL.
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Old 11-21-2017, 06:57 PM   #27
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Are you willing to do consulting or develop a small business? If yes, as a small business you can set up a SEP IRA.
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Old 11-21-2017, 07:27 PM   #28
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I will state that the inheritance has been a game changer for us. It jumped our NW by over 1/3 and now we are VERY comfortable. I just don't want to get TOO comfortable but will "blow some dough" now and then LOL.
Yeah Baby! Have some fun and kick up your heels a bit -

It's nice to not have to worry about money eh? Good for you guys, enjoy!
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Old 11-22-2017, 07:51 AM   #29
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IMO as long as the retirement fund is large enough to cover your desired annual spending level, anything above that can be used however you like. It doesn't all have to be doled out 4% a year.
This seems like a reasonable idea to me. I have applied a similar concept as follows. Since my portfolio does not necessarily resemble any “market wide” proxy (ie only 10-12 names) using Firecalc is suspect. So I have simply spent dividends (around 3.5% current yield)which are growing at about 8% per year. My portfolio has done very well.

So I figure I will liquidate relatively small amounts (maybe 1-2% per year) add to my cash balance, and up my spending on “special items” over next few years. I figure as long as my div dollar amounts increase by more than inflation, I will be able to maintain my lifestyle even if I have to go back to just divs. I expect that the inevitable correction will encourage me to do this.

I guess my philosophy could be described as “spend while the spending is good, because it probably won’t last”.
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Old 11-22-2017, 08:11 AM   #30
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I guess my philosophy could be described as “spend while the spending is good
Because it probably won’t last”.
Yep. I think that is a good way to handle a probably way overvalued market.

That is why I go ahead and take my full withdrawal each year even though I don't spend it all. Because I figure it's better to withdraw it now, while things are way up. I'm younger and healthy now and can take more advantage of extra spending money compared to 10 or 20 years from now when I'm not as young and potentially not as healthy.

I'm still working on the spending part.
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Old 11-22-2017, 09:32 AM   #31
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That is why I go ahead and take my full withdrawal each year even though I don't spend it all. Because I figure it's better to withdraw it now, while things are way up.
So is this market timing? Get it while the getting is good? Where do you put it until you spend it?
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Old 11-22-2017, 09:54 AM   #32
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So is this market timing? Get it while the getting is good? Where do you put it until you spend it?
No - of course it's not. I'm withdrawing the same percent each year regardless of whether the portfolio goes up or down. I use the % of remaining portfolio method.

This is as opposed to taking out less because I don't need it immediately. Quite a few folks here let their withdrawal rate drop as their portfolio climbs because they don't spend it during the current year so they reinvest the remainder, or take out less the following year, or they just take out what they need when they need it which amounts to the same thing. Thus they are keeping more invested in long-term investments as their portfolio climbs. So they may have a bigger pile later (or not) when they are older or dead. I deliberately do not do that, because I chose a given portfolio size and withdrawal rate with good survival characteristics, and it was designed to have X% taken out each year and I choose not to reinvest unspent funds in the long-term risky investments which comprise the bulk of my retirement portfolio.

I have the accumulating unspent funds in short-term instruments - high yield savings, short- to medium-term CDs, short-term bond funds.
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Old 11-22-2017, 09:59 AM   #33
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Yep. I think that is a good way to handle a probably way overvalued market.

That is why I go ahead and take my full withdrawal each year even though I don't spend it all. Because I figure it's better to withdraw it now, while things are way up. I'm younger and healthy now and can take more advantage of extra spending money compared to 10 or 20 years from now when I'm not as young and potentially not as healthy.

I'm still working on the spending part.
Although we take similar approaches. I think there may be a philosophical difference. I take a higher WR because the market is up. I expect to spend this over next couple of years. I would not expect this WR to continue indefinitely.

While you, just take your regular WR even though you don’t know yet whether or where you will spend it.

Fair description?
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What really happens to the excess?
Old 11-22-2017, 11:15 AM   #34
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What really happens to the excess?

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No - of course it's not. I'm withdrawing the same percent each year regardless of whether the portfolio goes up or down. I use the % of remaining portfolio method.

This is as opposed to taking out less because I don't need it immediately. Quite a few folks here let their withdrawal rate drop as their portfolio climbs because they don't spend it during the current year so they reinvest the remainder, or take out less the following year, or they just take out what they need when they need it which amounts to the same thing. Thus they are keeping more invested in long-term investments as their portfolio climbs. So they may have a bigger pile later (or not) when they are older or dead. I deliberately do not do that, because I chose a given portfolio size and withdrawal rate with good survival characteristics, and it was designed to have X% taken out each year and I choose not to reinvest unspent funds in the long-term risky investments which comprise the bulk of my retirement portfolio.

I have the accumulating unspent funds in short-term instruments - high yield savings, short- to medium-term CDs, short-term bond funds.
Dear Audrey,

If you've been RE for a few years, is it your experience that your accumulated unspent funds will end up going toward some opportunistic, discretionary purchase you hadn't forecast, or do they tend to pile up for a few years in some dusty, cobwebbed corner of a vault, or will they ultimately just get rolled back into the portfolio?

Also, you mention using the "% of remaining portfolio" withdrawal model. Does this reflect consciously varying your spending budget, or is it in pursuit of continuously migrating your AA?

DW and I don't stick to a precise budget, but we do observe that just like our earned income (we're not retired yet), our expenses are awfully predictable year over year. Even the lumpy costs like replacing a roof or a heat pump are never surprises; we can see those coming a long way in advance and accrue for them (or not, which is why we have the HELOC).
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Old 11-22-2017, 11:31 AM   #35
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No - of course it's not. I'm withdrawing the same percent each year regardless of whether the portfolio goes up or down. I use the % of remaining portfolio method.
........
I have the accumulating unspent funds in short-term instruments - high yield savings, short- to medium-term CDs, short-term bond funds.
I am interested to know how you mentally account for those surplus funds. By which I mean, how does your brain see them? Do you perceive them to be a bonus, to be kept intact indefinitely, or to be spent on the next big ticket item, such as an emergency roof repair? Do you have a target amount in mind for this bucket? Do you empty it periodically, by spending it or reallocating it? Because I think a bucket is what you have here. It may be filled to varying degrees, but it is a bucket. From previous posts, I gather that you don’t count this as part of your investment portfolio, but if the amounts are not trivial, surely it is a meaningful part.
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Old 11-22-2017, 01:52 PM   #36
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I think Audrey has told us that she uses any unspent withdrawal to shift her asset allocation out of equity and into fixed until she needs it. But your question relates to what happens if she does not need to spend it? Is it a permanent shift in AA?
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Old 11-22-2017, 05:28 PM   #37
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Dear Audrey,

If you've been RE for a few years, is it your experience that your accumulated unspent funds will end up going toward some opportunistic, discretionary purchase you hadn't forecast, or do they tend to pile up for a few years in some dusty, cobwebbed corner of a vault, or will they ultimately just get rolled back into the portfolio?

Also, you mention using the "% of remaining portfolio" withdrawal model. Does this reflect consciously varying your spending budget, or is it in pursuit of continuously migrating your AA?

DW and I don't stick to a precise budget, but we do observe that just like our earned income (we're not retired yet), our expenses are awfully predictable year over year. Even the lumpy costs like replacing a roof or a heat pump are never surprises; we can see those coming a long way in advance and accrue for them (or not, which is why we have the HELOC).
Sorry was out running errands.....

% of remaining portfolio means that I take a the same X percent each year of whatever the value of my portfolio is on say Dec 31 of the prior year. That means if my portfolio takes a 20% whack, so does my income. I rebalance the retirement portfolio to the same fixed AA each year. A large chunk of our spending is discretionary, and I decided that I would rather live with variability in income than pursue some fixed inflation adjusted income path that might fail. And so far, the income has exceeded our generous budget and our spending which is usually under budget. The % remaining portfolio method in the worst case can mean income drops to 40-50% in real terms during the worst possible scenarios, so you had better be able to handle the income variability.

The accumulated short term funds give me a lot of flexibility and options. There is a chunk invested in longer term CDs (5 years at 3%) earmarked for years when my income shrinks because the portfolio has dropped in value. The rest is for discretionary one-off type expenses and emergencies (myself as well as immediate family). We will buy another car soon, we can spend more on travel if we want, I may start gifting more as it accumulates. We could buy another residence if we wanted. I guess in general the idea is to use more of it in the short term while we are healthy and active as it accumulates.

No - no plans to eventually roll the excess funds back into the retirement portfolio. I already consider it to be "more than large enough". I don't see the point of making it bigger.

Been RE for over 18 years now FWIW.
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Old 11-22-2017, 05:38 PM   #38
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I am interested to know how you mentally account for those surplus funds. By which I mean, how does your brain see them? Do you perceive them to be a bonus, to be kept intact indefinitely, or to be spent on the next big ticket item, such as an emergency roof repair? Do you have a target amount in mind for this bucket? Do you empty it periodically, by spending it or reallocating it? Because I think a bucket is what you have here. It may be filled to varying degrees, but it is a bucket. From previous posts, I gather that you don’t count this as part of your investment portfolio, but if the amounts are not trivial, surely it is a meaningful part.
Part of the surplus I allow to accumulate because I might have to draw on it to supplement income if the retirement portfolio takes a major hit, which would reduce our annual withdrawn income. This part could be considered a bucket. However what we have accumulated so far is well in excess of what I consider required for that.

So I see most of it as for one-off or big ticket items, gifting, emergencies, more travel, whatever. We could buy a much nicer new car if we want. Even another residence if we are so inclined. We have lots of options.

No target amount for these "surplus" funds. I haven't emptied it. It keeps building. We are ramping up our spending gradually.

I don't apply AA rules to the funds outside my retirement portfolio, so I don't worry about it even though they funds are now significant. The retirement portfolio is big enough.
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Old 11-22-2017, 05:40 PM   #39
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I think Audrey has told us that she uses any unspent withdrawal to shift her asset allocation out of equity and into fixed until she needs it. But your question relates to what happens if she does not need to spend it? Is it a permanent shift in AA?
I only worry about the AA of the retirement portfolio - that's the chunk I withdraw from and rebalance, and that's the chunk that I want to last for 40 years plus inflation. I don't worry about the AA across all my investable assets as I don't rebalance across all my assets and I only apply the annual withdrawal % to the retirement portfolio.
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Old 11-22-2017, 05:52 PM   #40
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Part of the surplus I allow to accumulate because I might have to draw on it to supplement income if the retirement portfolio takes a major hit, which would reduce our annual withdrawn income. This part could be considered a bucket. However what we have accumulated so far is well in excess of what I consider required for that.

So I see most of it as for one-off or big ticket items, gifting, emergencies, more travel, whatever. We could buy a much nicer new car if we want. Even another residence if we are so inclined. We have lots of options.

No target amount for these "surplus" funds. I haven't emptied it. It keeps building. We are ramping up our spending gradually.
Hmmm. That seems like a sound way to deal with those large irregular expenses. You don't get a new car every year, but you really need to somehow budget for it. Since you've budgeted for it, but not hit the actual expense, you have that year's allocation to it left over, (+/- any other budget vs. real expense differences) and you have put it in a safer place since you're probably buying one relatively soon.

I'm liking it, and will think about adopting that. I've been more lax. I pull funds as I need them, and fortunately don't usually need as much as my VPW formula would allow. In a new car year I would be over, but I just look at the average over a few years ago and it seems to work out.
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