What Withdrawal Strategy for the Newly Retired

[modhatter]

Reading all the comments about what withdrawal strategy is best, and what to do when market drops 20%, and comments about having to make up loss differences monthly with added contributions.

What about when your not making any more contributions. If you were forced to retire today in today's market. What strategy do you think appropriate now? Bonds, CD's yielding practically nothing and purchasing bonds now - not such a good idea. Stocks at very high levels for the most part. How would you get your 3+% draw down now?

You guys with pensions and dual social security checks need not apply. Your portfolio is primarily gravy money. What if you were single and only had social security, and needed 2/3rds of your money from your portfolio?

What would be your approach to that scenario?

 

[W2R]

Reading all the comments about what withdrawal strategy is best, and what to do when market drops 20%, and comments about having to make up loss differences monthly with added contributions.

What about when your not making any more contributions. If you were forced to retire today in today's market. What strategy do you think appropriate now? Bonds, CD's yielding practically nothing and purchasing bonds now - not such a good idea. Stocks at very high levels for the most part. How would you get your 3+% draw down now?

You guys with pensions and dual social security checks need not apply. Your portfolio is primarily gravy money. What if you were single and only had social security, and needed 2/3rds of your money from your portfolio?

What would be your approach to that scenario?

There are quite a few of us here who are retired and rely on our portfolio for more than 2/3rds of our money, me included, and like you I am single. For the most part we are doing fine.

Journalists will write scare articles about almost anything you can invest in. My approach to that is to diversify, mostly through Vanguard index mutual funds but also including Wellesley. Generally I assume that although my portfolio will go up and down, in the long term everything will be OK. I rebalance every year or whenever my allocations move post my rebalancing point.

Right now the market is doing pretty well, but it always seems to go up and down and will probably crash pretty seriously again one day as it has in the past. Like before retirement, LBYM will be your friend in tough times. My dividends alone last year came to 2.53% which is not unusually high. They are sinking too, but still that is 5/6th of your 3% withdrawal.

 

[walkinwood]

DW & I rely on our portfolio for 100% of our expenses. Since we're in our early 50s (DW is not quite there yet), we use a %age of our portfolio value instead of the traditional SWR ( % of initial portfolio adjusted annually for inflation). We started with 4%, but find that we're doing well with a little less than that.

Will we be successful? Mathematically, we'll definitely be, but will 4% of our portfolio be enough to live on? Who knows? Historical studies by Bob Clyatt shows that it worked in the past. We'll adapt if we need to (read my past posts - we've already adapted to a few things). But we'd rather do this than let someone else dictate our lives for us.

 

[Major Tom]

I started withdrawals from my portfolio about 2 years ago, so cannot offer much in the way of experience, but can at least describe what I plan to do. Until eligible for SS in a little over 12 years, I am 100% dependent on my portfolio. (EDIT - just remembered that I have a minor part-time gig that pays about 8% of my income - the portfolio supplies the rest.)

Decisions on whether this is a good time to buy any particular asset are moot for me, as I decided long ago that passive index fund investing was going to be my approach. I keep about 2 years of living expenses in a savings account, and the rest of the money in low cost equity and bond funds in a 60/40 equity/bond ratio. Terribly boring, and that's the way I like it.

I'm not concerned with whether bonds or bond funds are a good buy now because I don't keep them for the purpose of maximizing returns, but for the purpose of helping to reduce volatility.

Sorry if I sound a bit like a member of some strange cult, blindly parroting the words of my dear leader, but passive index investing allows me to not have to bother with what would, for me, be unwanted time and energy spent wondering when is the best time to buy what asset, and when is the best time to sell what, other than the transactions required to keep roughly the same AA.

Also, my ~2.5% WR, while not extremely low, is low enough that I'm pretty sure I'll be able to stay the course with the same AA and WR in times of severe market downturns.

Where the future is concerned, "pretty sure" is about as confident as I feel, and is definitely good enough for me.

 

[Meadbh]

My portfolio will generate all my income until CPP (smaller than SS and I won't be entitled to the full amount) kicks in. My strategy is first, to diversify. I have income generating real estate and some alternatives as well as the usual mix. Second, I do have a cash buffer for the first critical few years. Third, I am being as frugal as I reasonably can and am keeping WR <3%. When I have reduced (real estate) debt and eliminated (consumer) debt, WR will be closer to 2%. Fourth, I am mostly paying myself with corporate dividends right now (my corporation) as the tax treatment is favorable up to a point. I am of two minds about the timing of tax sheltered withdrawals as I will certainly end up in a high tax bracket when I get to RMD age in 16 years, and will have OAS clawed back. That might be the time to take some charitable donation tax credits.

CPP = Canada Pension Plan
OAS = Old Age Security

 

[mpeirce]

I keep about two years of spending money in a CD ladder.

The rest is in the stock market (mostly index funds) and throws off enough dividends that we could make it quite a while living off dividends plus the CD money along with cutting discretionary spending some in our budget (mostly travel).

In non-downturn years, I look at our entire portfolio and as I'm balancing I skim off what we need beyond the dividends.

My goal is to not have to liquidate stock/funds when they are down, only when they are up. We'll see how that works out.

(No pension, no SS for a long time...)

 

[RunningBum]

Dividends provide more than half of what I need. The rest I sell from stocks or bonds, trying to keep my AA balanced. I feel like doing this has me selling stocks when they are higher, and keeping them when they have dropped. In the future if I try for the ACA subsidy I might have to watch taking capital gains. I haven't done CD ladders.

 

[RockyMtn]

Jan 1 of each year I fund my expense amount for that year. Keep the equivalent of an additional two years expenses in mm fund. All dividends go into mm fund that is then topped off with sales from portfolio at end of year AA rebalancing to keep my two year fund full.

Pension and SS await a few years down the road but for now this is how I am doing it and seems to work for me.

 

[Rich_by_the_Bay]

Good remarks above. I'd only add the importance of a long-term horizon to your allocation. There will be years you are down -- alot. And there will be those where you have done well and are tempted to cash in your earnings. Learn to let these years breeze on by as if you were meditating or whatever works for you. Stay with the plan. A nice cash buffer helps ease the stress.

 

[modhatter]

Truth be told, I am trying to figure the best way to set my son up after I am gone. (no questions asked please about son) So I need to think long time Horizon. (sixty years) I want to play it as safe as possible so I can assure myself (as much as you can assure yourself) that the money will last this long time frame. There will be no other income other than that which my portfolio generates for him.

Say in today's dollars, he needs $40,000 a year with cost of living increases as time goes on, and I am able to leave him $2,000,000. I would keep probably $200,000 out in liquid CD's and money market, for downturns and emergencies (new AC, car, etc.)

So if I split the remaining up ($1,800,000) in $1,000,000 stocks and $800,000 in bonds. Assuming the bond and maybe some Reit's thrown in
provide at least a 3% income stream ($24,000) and the stocks throw off another 2% on the one mil in dividends. ($20,000) That only leaves $4,000 a year to grow the portfolio assuming the market stays stagnant. In good years, he will be able to replenish his cash reserves if needed and hopefully buy some additional stocks. In bad years, he lives off of his cash reserves.

In his lifetime, I think he will see stagnation, a good size drop, and some good years. Without talking about annuities, is the above scenario the best I could hope for him. Am I being too optimistic for this long time frame? The other consideration is that I will most likely have to pay out at least an additional .50% to an adviser as he will most likely not be capable of handling a portfolio and doing any re-balancing for himself.

If I am thinking correctly, we would have to see around a 6% portfolio gain over the long term, for him to be able to use this withdrawal and have enough left for inflation. Obviously I am not a pro at this, so poke holes where you can.

 

[NW-Bound]

The 2%WR is sufficiently low that it should be safe. You can just put it all in Wellesley, and the current yield is enough for that WR, and still have some left-over for growth. If putting it all in one place makes you uncomfortable, there are other similarly conservative MFs with good track records for you to spread that money around.

If one can barely keep up with inflation, a 2%WR will make a portfolio last 50 years. It seems to me what you need is not an investment adviser, but a trust and a trustee.

 

[modhatter]

I did set up a trust, but looking into a trustee turned out to be a very expensive proposition. He is not a spend thrift so I don't worry about that. He is just not likely to do what is necessary in terms of re balancing etc. and I need to spell out for him in the Trust the manner of draw down for him as well as objectives.

I was hoping a yearly trip to a fee based adviser might work to direct him with his re balancing and the appropriate place to take out the money for the coming year. Vanguard, by the way does not offer Trust services. (at least last time I checked) A Trustee Fee is on top of financial advisory fees. They become more a partner than a Trustee. I have met with two different companies. Quite expensive.

 

[clifp]

One thing you might look into is the Vanguard managed payout funds. They had the bad luck to start right before the financial melt down. But for you needs with a super long time frame, the Vanguard Managed Payout growth fund maybe perfect.

 

[obgyn65]

In the situation you describe, and if I was forced into retirement today, I would continue with CD laddering and explore with my spreadsheet if SPIAs -or even annuity ladders- make sense over the next few years. I would not invest in stocks, but again I am one of the most conservative investors here.

What would be your approach to that scenario?

 

[NW-Bound]

... He is not a spend thrift so I don't worry about that. He is just not likely to do what is necessary in terms of re balancing etc. and I need to spell out for him in the Trust the manner of draw down for him as well as objectives...

Then, a balanced MF like Wellesley will do all that balancing for him, and hopefully all he has to do is to live off the dividend. I cannot get my wife to be interested in investing either.

Someone else suggested a Managed Payout fund. That sounds interesting, and I am going to see what that is all about.

 

[truenorth418]

I retired almost 2 years ago. My approach is similar to some of the others in this thread. I move a set % of the portfolio over at the beginning of the year, about 2.5%, into a checking account. I keep about 3 years expenses in this account at a given time, which would help in any big ticket emergencies as well as a big market collapse. I invest the rest according to my risk tolerance and longevity assumptions. I use 95 years as my life expectancy, which would be 45 years from now. My AA is 70 stocks, 10 real estate (REITs), and 20 bonds. I will increase bonds as I go and as yields rise. I have some high yield blue chip stocks in my portfolio as well as index funds. This portfolio's yield throws off most but not all of the cash I need in a given year; rest I take from cap gains or cash reserves as needed. I will probably be eligible for the ACA subsidy, and I can manage my withdrawals accordingly, at least for the first few years, by using the cash reserves in lieu of cap gains.

Every calculator I have found, as well as my own calculations, give me 100% success rate with this plan even without SS and a small pension as reinforcements. So far so good.

 

[modhatter]

You know I didn't consider balanced funds. Where is my head? Also that payout fund from Vanguard sounds interesting, and I will look into that. See it helps to ask you knowledgeable people here.

 

[NW-Bound]

Though I have a bit of money with Vanguard, I did not know about its Managed Payout funds until clifp mentioned it.

Here's the gist. They have 3 funds, which vary in their growth objective. They are VGPFX, VPGDX, and VPDFX. The tradeoff is between taking a smaller distribution and having your principal grow vs. spending more and having it shrink.

The respective payouts in terms of % annual WR are 2.5%, 4.5%, and 6.7%. At the higher WR, Vanguard states that the NAV is expected to decline with time, and indeed it has (VPDFX).

One thing noteworthy is that all 3 funds have more than 70% equities, according to Morningstar! I guess they don't like bonds in the current state.

See: https://personal.vanguard.com/us/funds/vanguard/ManagedPayoutList.

 

[scrabbler1]

For me, it is the future pension, Social Security, and unfettered access to my IRA which will be the gravy on top of the main course consisting of my current taxable account's monthly dividends. The monthly dividends from one big bond fund more than cover my expenses and that is despite those dividends dropping from a few years ago. Excess dividends are reinvested, along with the quarterly dividends from a stock fund. I have not had to touch principal, either, so I can watch it grow along with the IRA whose value has nearly doubled since I did the rollover in late 2008 after it had dropped a lot in 2008 like everything else, of course.

Once I take RMDs from the IRA along with the pension and SS (even if delayed a few years), I am going to be awash in income. Just get me through the next ~9 years to age 59.5 intact when the first of those "reinforcements" kicks in.