Withdrawals and re-balancing

[cyclone6]

I'm curious as to how you all take withdrawals from your portfolios. Specific strategies.

1) Do you take your money out once a year or more often?

2) If you have a broad-based diversified portfolio (lets just assume for a 50/50 portfolio something like 12.5% small-cap, 12.5% large-cap, 12.5% intl small cap, 12.5% intl large-cap, 25% long-term treasuries, 25% short-term treasuries - basically the Merriman portfolio from "Living it up without outliving your money" - do any of you use this portfolio?) how do you determine what to sell to meet your funding needs?

3) Any hints on which asset class to take the money from to gain a tax advantage?

4) After you take the money out, where do you put it? (Emigrant type accounts? Since I am planning on spending a significant amount of time in Thailand I'm looking at everbank.com and their Thai Baht denominated CDs...)

5) Do you just keep one years worth of cash at any given time, spend it down, and then do the same the next year? Or keep several years in cash?

It sounds like one afternoon per year could be all thats needed to set youself up for the next year. Anyone do things much differently?

Thanks!

 

[audreyh1]

If your investments are in a taxable portfolio, then it's usually easiest to take the interest, dividends and distributions from your mutual funds and use them to fund your annual needs (in other words, don't reinvest distributions). You have to pay taxes on these distributions anyway. If there is any excess, you can use the remainder to rebalance your portfolio.

Obviously if you portfolio does not generate enough in distributions to cover your annual withdrawal, you will have to sell something and realize a capital gain. And with 15% tax rate on long term capital gains, that's the most tax efficient way to do it. Just take the withdrawal from whichever asset classes are most overvalued, so that this also helps rebalance the portfolio.

If your retirement portfolio is mostly in an IRA/401K none of the above matters since any withdrawals will be treated as income (tax wise) and distributions do not get taxed.

Audrey

 

[Papi]

reinvest distributions). You have to pay taxes on these distributions anyway. If there is any excess, you can use the remainder to rebalance your portfolio.

Audrey, do you have any special strategies in a taxable account when you re-balance? Don't you get wholloped with taxes when you rebalance in a taxable account??

 

[cute fuzzy bunny]

My funds dump their dividends into our money market acct, and my wifes part time job paycheck goes in there too. We buy stuff. When the account gets too large, we buy a car or I reinvest the money.

 

[audreyh1]

Audrey, do you have any special strategies in a taxable account when you re-balance?  Don't you get wholloped with taxes when you rebalance in a taxable account??

Well - I don't rebalance very often (certainly no more than once a year) and only if an asset class is pretty out of whack. 15% tax on part of the gain is not too big a penalty for taking profits off the table when an asset class has a big run. Remember - you only pay taxes when you make money, and gains after a big run-up can evaporate just as quickly.

If an asset class is overvalued (over allocation), I make sure any distributions get paid to cash. In many cases this has been enough to help me rebalance without extra taxes incurred. This is a common strategy for taxable accounts.

Audrey

 

[kat]

I do pretty much as others described: send all distributions to my PMM account.

I also arranged a monthly transfer from my PMM account to a "statement savings" account at my local bank. I made it so the monthly transfer covers all the monthly bills, which are all paid automatically out of that local bank for free. Bills that are not monthly (taxes and insurance), I write a check from PMM.

I use excess money from unspent distributions to rebalance.

When I have a check to deposit, I do it at my local bank (walking distance) and transfer it to PMM. Should PMM get too high, I put it where my AA plan says I should.

P.S. I keep one year of expenses in the PMM (plus current maintenance money for my house), but my experience is it is more like an emergency fund, since distributions cover my needs and so far my wants. I am well under 4% use, so I don't pay a lot of attention to that.

 

[AltaRed]

That all works fine when the income stream from cash distributions is sufficient to cover your living expenses, never mind providing a source of funds for re-balancing. Most people are going to have to tap into their capital per 4% SWR.

And if you got to do it from a taxable account, per Audrey , tap into where your asset allocation is out of whack regardless of tax consequences. After all, paying tax is not a bad thing if your investments have achieved capital gains and you are crystallizing gains for personal benefit (living expenses).

I, like a lot of people here, will keep a year or more of expenses in Money Market precisely because I would be reluctant to tap into equity or bond investments that have had a down year. The source of funds for the Money Market fund will come from re-balancing and if its a great equity year, that is a great time to take a whole bunch of profits off the table (and into Money Market, CD's, etc).

 

[donheff]

reinvest distributions). You have to pay taxes on these distributions anyway. If there is any excess, you can use the remainder to rebalance your portfolio.

Audrey, do you have any special strategies in a taxable account when you re-balance? Don't you get wholloped with taxes when you rebalance in a taxable account??

I was worrying about the same thing in another thread. Somone suggested that I do my rebalancing in the non-taxed portion of the portfolio. Sort of a "duh" moment for me. Of course, if you don't have any IRAs, 401Ks, etc., I guess you are out of luck with that approach.