Withdrawing in January for the year?

[MrLoco]

I have read numerous posts where one will withdraw from their portfolio in January to supplement pensions, SS, etc. for the entire year. My question is : If you see a significant drop in the market beginning in December do you:

-- take what you will need for the subsequent year in Dec realizing this may push you into a higher tax bracket

-- wait until later in the year to make your annual withdrawal from your portfolio hoping to see a bounce back in the market and draw from short term/fixed income investments in the meantime

-- still make the withdrawal in January and just take a LT capital loss on next year's taxes

The reason I am mulling this is that next year I will begin taking a 3% withdrawal from taxable equity index funds alone and was initially going to take withdrawals on a quarterly basis to "smooth out" a sudden drop in the market at the beginning of the year. ( My wife and I will delay future pensions and SS to take advantage of potential ACA subsidies. The 3% withdrawal will supplement monthly dividend income from muni funds in taxable). Thoughts?

 

[2B]

People do it differently. As you noted, some do it annually. Some also do it monthly or quarterly. Do whatever you feel comfortable with. Most people link their withdrawals with rebalancing but not everyone.

You've asked a question with many answers. All of them are "right."

I personally rebalance annually or when there is a big change in portfolio alignment. This month my SERP plan paid out a substantial amount of money that had been invested in an S&P500 index fund. When it came out, I rebalanced my large US cap funds. Later this month I'll move my 401k which is also in an S&P500 index fund. That will trigger another rebalancing. After this I plan on doing it annually in early January. Cash for that year's spending will go into my bank savings account and moved to checking as needed. Tax "optimization" will be done at the same time.

 

[Golden sunsets]

We anticipate starting the draw down phase next January by withdrawing a lump sum and placing it in a cash account and paying ourselves a monthly sum to supplement our pension/SS payments. We will do this regardless of market conditions. The source of this cash will be from maturing bonds timed to meet our annual withdrawal estimates. We will replenish the future year bond basket periodically when the market has increased equities. We have 8 years worth of bonds structured in this manner so that we can ride out any down periods of the market. The remaining fixed income portion of our portfolio are in bond funds, I bonds, savings accounts(waiting for rates to rise).

 

[audreyh1]

I have read numerous posts where one will withdraw from their portfolio in January to supplement pensions, SS, etc. for the entire year. My question is : If you see a significant drop in the market beginning in December do you:

-- take what you will need for the subsequent year in Dec realizing this may push you into a higher tax bracket

-- wait until later in the year to make your annual withdrawal from your portfolio hoping to see a bounce back in the market and draw from short term/fixed income investments in the meantime

-- still make the withdrawal in January and just take a LT capital loss on next year's taxes

The reason I am mulling this is that next year I will begin taking a 3% withdrawal from taxable equity index funds alone and was initially going to take withdrawals on a quarterly basis to "smooth out" a sudden drop in the market at the beginning of the year. ( My wife and I will delay future pensions and SS to take advantage of potential ACA subsidies. The 3% withdrawal will supplement monthly dividend income from muni funds in taxable). Thoughts?

Most of my Jan withdrawal is taken from fund distributions paid out during the prior year. Most of the distributions are paid out in December. I let distributions accumulate as cash during the year.

There will likely be no LT cap loss involved, or very little. Why? Because any selling will be from funds that outperformed. If stocks take a hit, then the selling will be from bond funds to rebalance and buy more of the dropped stock funds.

Since I own equity and bond funds in my taxable retirement fund and rebalance, only the asset class that doesn't take a hit is sold.

If you are all in equity in your taxable account and only withdrawing from that, the situation is quite different.

 

[Taxman59]

At w*rk, we had some charitable trusts that had a fixed payout in December each year. Every year, I recommended that the investment guy raise the cash in January and let the rest ride the market. NO NO NO!! you will lose the gains in the market between now and November!!! For 4 straight years, the portfolio was at its top in January and December and near the low in November. Even when the portfolio was up when we sold, the added growth was minimal but when the market was down, the losses from selling at a low were devastating to the long term outlook for the trust.

I would raise cash early in the year to replenish the cash bucket and use ups in the market to raise more and downs to buy more.

 

[jebmke]

As 2B stated, everyone has their own method. I don't withdraw anything until I have bills to pay.

 

[W2R]

Most of my Jan withdrawal is taken from fund distributions paid out during the prior year. Most of the distributions are paid out in December. I let distributions accumulate as cash during the year.

Same here. Like Audrey, I withdraw from my taxable accounts only once/year, during the first week in January. My dividends for the year are taken as cash, so they are just sitting there waiting to be withdrawn; and I don't spend more than my dividends from the previous year. i also have more cash available that I could use if necessary (it hasn't been necessary, though).

I never sell in order to withdraw, although I do habitually rebalance right after my annual withdrawal. If the market has dropped considerably, I will probably need to rebalance anyway.

 

[pb4uski]

....The reason I am mulling this is that next year I will begin taking a 3% withdrawal from taxable equity index funds alone and was initially going to take withdrawals on a quarterly basis to "smooth out" a sudden drop in the market at the beginning of the year. ( My wife and I will delay future pensions and SS to take advantage of potential ACA subsidies. The 3% withdrawal will supplement monthly dividend income from muni funds in taxable). Thoughts?

I don't have this issue in a sense in that like others I rebalance when my AA if out of whack or annually. My AA includes a 6% cash component and I have a monthly "paycheck" withdrawal from that cash component and when I rebalance the cash component gets refilled to 6%.

 

[athena53]

We've done only two withdrawals so far, and quarterly just feels right to me. Taking the whole amount out at the beginning of the year, IMO, leaves too much cash idle. We have our capital gains reinvested but not the dividends, and I periodically sell to rebalance or weed out poor performers, so typically we have enough idle cash in the account to make at least the next quarterly payment.

If I were feeling pessimistic about the market, I might change course- liquidate enough to meet a year of expenses, for example, and cut back on discretionary purchases such as travel in order to make it last.

 

[dallas27]

sacrilege! What does firecalc tell us to do.

 

[REWahoo]

I have automatic withdrawals set up to transfer to my checking account every other week, just like when I was getting a paycheck. It works for me just like ad hoc, monthly, quarterly or annual withdrawals works for others. To each his own.

 

[NW-Bound]

I always have a lot of cash in my AA. I also do not move that cash into my checking account until I need it. Cash is fungible, although I'd like to earn a bitty more interest if I could.

About the OP asking about getting cash based on market movements, as an active investor I try to make trade or rebalance independently of my immediate spending needs. Hence, the cash buffer in my AA.

 

[Bikerdude]

I transfer any cash sitting in a MM account in my IRA's to a online Bank MM paying considerably more interest. The main transfer is done in Jan. I do other transfers during the year as cash accumulates. I usually never sell other assets unless I'm re-balancing.

 

[Cobra9777]

I don't follow any specific timing. We hold 5% cash allocation at Ally. When our Fidelity CMA falls below a predetermined threshold, I replenish it from Ally. When Ally falls below a predetermined threshold, I sell equities in the taxable account (as tax efficiently as possible) and transfer the proceeds to Ally. We only hold equities in taxable. I then immediately rebalance, as necessary, in the tax-deferred account by moving between stocks and bonds. All distributions from the taxable account go directly to the CMA. Those distributions plus pension and rental income cover ~85% of our expenses. So, we don't sell very often... usually in conjunction with some large, discretionary expenditure, such as a new car, home improvement project, or international travel. Since I rebalance immediately after selling, it doesn't really matter where the market is at the time. I just re-size and rebalance the portfolio, as needed, to extract some cash.

 

[audreyh1]

Our annual cash withdrawn in Jan is held in a high yield savings account, currently yielding around 1%, and monthly amounts are sent to checking to cover bills.

 

[Options]

I have automatic withdrawals set up to transfer to my checking account every other week, just like when I was getting a paycheck. It works for me just like ad hoc, monthly, quarterly or annual withdrawals works for others. To each his own.

That's an interesting concept, a bi-weekly paycheck. How does that interact (if it does) with your AA and rebalancing? Do you have a cash account in your AA that you w/draw from?

 

[clifp]

I do monthly transfers from my brokerage to my checking account. Most of the time the withdrawals are interest and dividends (lately a lot lot more dividends than interest).

One of the issue I have with the total return investing is the concept of annual withdrawal, it would be a bit to nerve racking/tempting to try and time the market. Quarterly withdrawal right after EFT/fund distributions make most sense to me.

 

[REWahoo]

That's an interesting concept, a bi-weekly paycheck. How does that interact (if it does) with your AA and rebalancing? Do you have a cash account in your AA that you w/draw from?

It really hasn't had much impact on rebalancing. The bulk of my portfolio is in Wellington and Wellesley funds, and they take care of rebalancing for me.

The funds are withdrawn from a Vanguard money market account, where dividends from the W&W funds are deposited quarterly. At some point I'll need to sell some of the W funds to add to cash, but at the current burn rate and with some cash also in PenFed CDs, I have several years before I'll need to do so.

FYI, I think Vanguard discontinued offering a bi-weekly automatic withdrawal, thankfully grandfathering those of us who had it in place. But they won't allow me to change the amount or I have to switch to monthly, so I simply skip a withdrawal a few times a year to maintain the cash flow where I want it.

 

[Options]

It really hasn't had much impact on rebalancing since the bulk of my portfolio is in Wellington and Wellesly funds, and they take care of rebalancing for me.

The funds are withdrawn from a Vanguard money market account, where dividends from the W&W funds are deposited quarterly. At some point I'll need to sell some of the W funds to add to cash, but at the current burn rate and with some cash also in PenFed CDs, I have several years before I'll need to do so.

FYI, I think Vanguard discontinued offering a bi-weekly automatic withdrawal, thankfully grandfathering those of us who had it in place. But they won't allow me to change the amount or I have to switch to monthly, so I simply skip a withdrawal a few times a year to maintain the cash flow where I want it.

Thanks. I'll have to think on this some more. I was planning to do lump sum annually and dividends sweep to a VG MM account as part of rebalancing (no W funds, and also have funds in taxable/tax-deferred/Roth to contend with), then perhaps distribute monthly needs from VG MM to Ally checking. Was also going to go with Otar's suggestion of 2 years cash, 3 years ST bond fund buckets, but reading about cash bucket drags on a PF has me rethinking that strategy (possibly). OTOH, a big advantage to buckets is psychological, and 2008 demonstrated just how psychological investing can get. Decisions, decisions...

 

[pb4uski]

I include 6% cash in my AA and don't see the drag as very significant. If it wasn't in cash it would be in bonds earning say, 4% compared to 0.9% in my online cash account so the difference is 3.1% but on 6% of my portfolio I take a hit to my portfolio return of 0.186%.

So historically a 60.40 portfolio earns 8.9%, but lets say prospectively it is only 7%. My holding 6% cash rather than bonds drops that return to 6.8%. So on a $1 million portfolio my average return is $68k rather than $70k but I sleep well at night. Besides, at the end of the day the $2k a year is just coming out of my heirs pocket.

That said, carrying 15% cash/st bonds would be more like $5k a year on $1 million and too much of a drag for my taste.

 

[NW-Bound]

My true "cash" is less than 2%. The rest of it is in I-bonds paying 2.7% last year, and stable value funds paying 1.2%. Altogether, it's 25% of portfolio, as I am leery of bonds right now.

 

[mathjak107]

this will be our first year retired when i pull the plug in july . i am still wrestling with a lot of the structuring ideas and eventually i will likely post our finances in a thread shortly and use all your collective brains together to find the best way of working with the ira's and taxable accounts to blend them for best tax efficiency. the endless possibilities are making my hair hurt so i will be open to some more brain storming.

we are starting off with about 2 years withdrawals in place in cash and are channeling dividends , and distributions in to cash too but so far only doing in this with the funds in our mutual funds in our taxable account. assets are about 50/50 iras and taxable account with about 2.8 million total and another 300-400k in co-op apartment profits still due us if we can sell them , not likely at the moment since they have stabilized tenants who are not taking a lease buy out offer. rents are close to break even. so i don't count them ....


i am still trying to wrap my arms around the projected finances. we are looking to get about 130-140k a year income as we live in ny .

the plan is to take ss at 63 in january. that will give us about 36k in ss combined , a 20k pension and an average of 50-70k in distributions from the funds in our taxable account at fidelity.

we still have some money owed us on some lease rights we sold so we get another 4k in interest until a balloon payment is due in 3 years.


so that takes us pretty close to goal without even using ira distributions yet.


so year two we will relook at things and see what we need but i think we will refill what we are short every jan . with a goal of holding 2 years needs at a time.

 

[Cat-tirement]

I have read numerous posts where one will withdraw from their portfolio in January to supplement pensions, SS, etc. for the entire year.

I have also noticed that most of those who say they take withdrawals annually, most say they do it in January. Are there particular benefits to doing it that time of year, or is it just a convenient time? It occurred to me that December might make tax planning easier if one is also juggling Roth conversions and distributions in taxable accounts in addition to taking withdrawals from tax-deferred accounts.

(I have yet to take withdrawals myself as DW is still working.)

 

[Greg V]

About half of our retirement assets are in the Federal Thrift Savings Plan and half in IRAs.

The TSP has limited withdrawal options, among which are a fixed monthly amount which can be changed annually (an open season towards year's end). A monthly withdrawal is how we handle our TSP portion.

From the IRAs, we set a fixed percentage of the previous year end value as our target and generate that cash when we rebalance in Jan/Feb of the current year. We normally take that withdrawal out of the IRAs mid to late Summer when we can adjust the withholding to best fit our total tax burden.

It's worked for us thus far, but everyone's situation is unique.

 

[Cobra9777]

I include 6% cash in my AA and don't see the drag as very significant. If it wasn't in cash it would be in bonds earning say, 4% compared to 0.9% in my online cash account so the difference is 3.1% but on 6% of my portfolio I take a hit to my portfolio return of 0.186%.

So historically a 60.40 portfolio earns 8.9%, but lets say prospectively it is only 7%. My holding 6% cash rather than bonds drops that return to 6.8%. So on a $1 million portfolio my average return is $68k rather than $70k but I sleep well at night. Besides, at the end of the day the $2k a year is just coming out of my heirs pocket.

That said, carrying 15% cash/st bonds would be more like $5k a year on $1 million and too much of a drag for my taste.

I'm relatively new to ER, and really struggling with the question of holding cash in the AA. I've gone through similar rationalization math. I compare total portfolio performance with and without cash, so it's a slightly larger impact than your method, which assumes you would own bonds if not cash. Either way, it's sub-$5K per year per $1M, which may be small, but still spendable cash. Regardless of how it's calculated, or how small it is or isn't, or whether you or your heirs would ultimately spend it... my real question is: Why? I won't spend $50 at Home Depot without a good reason. Several $K every year requires a REALLY good reason. You say you "sleep well at night." That implies you are protected from some risk. I wonder if you might elaborate on that?