FIRE withdrawal strategies

[DawgMan]

One opposing strategy I seem to continue to read about is Dividend/Interest vs. Total Return (Rebalance/sell for next month's/yrs income). Putting aside SWR/pensions/part time working/working spouses/other income sources, I have hard time understanding why someone would focus on a dividend/interest yielding portfolio to support their SWR when/if a Total Return portfolio yields a greater balance (Inc dividends/interest) otherwise. I get psychologically that if your dividends can support your SWR than you may feel "safe" or like you are not touching your principle (regardless of its value, including a devalue), but isn't this smoke & mirrors?? At the end of the day, we all have assets that either generate income or not, increase/decrease in value, have tax implications that affect our net $, have certain risk profiles, but in the end, are there to support our RE years. I'm still 3 yrs from RE, but my thinking has always been "how do I maximize my assets to support my desire RE spending for RE yrs?". Tell me where I am wrong??

 

[Dash man]

You're not wrong. People have different approaches to the same end. Personally I set an estimated monthly expense and move the needed cash into my checking account for the month. It's a conservative number compared to what all the calculators and our CFP says. We typically stay below it. We reevaluate our net worth and investable assets quarterly to make sure we can sleep at night. If we need a new car, a kitchen makeover or a new roof, we just do it. If our quarterly evaluation ever shows we need to adjust other spending, we can easily do so. So far our Net Worth keeps going up, so we sleep well.

 

[DawgMan]

You're not wrong. People have different approaches to the same end. Personally I set an estimated monthly expense and move the needed cash into my checking account for the month. It's a conservative number compared to what all the calculators and our CFP says. We typically stay below it. We reevaluate our net worth and investable assets quarterly to make sure we can sleep at night. If we need a new car, a kitchen makeover or a new roof, we just do it. If our quarterly evaluation ever shows we need to adjust other spending, we can easily do so. So far our Net Worth keeps going up, so we sleep well.

So it sounds like you have a SWR based on a Total Return AA strategy? I'm not here to hate on dividend folks, just trying to understand the rationale outside of the mind game of not touching principle?

 

[gayl]

Not sure if this is good place to put this but what the heck I'm going to do it anyway. Here's my break down, and my target to retire in June 2017:

- net pension 2292 month inc health insurance
- brokerage #1 = 60k
- brokerage #2 = 200k
- IRA = 290k
- Roth = 60k
- USAA bonds = 25k
- savings = 15k
- no debt

Regular expenses 1300 month

Add annual:
+ 2982 prop tax
+ 700 earthquake insurance
+ 500 apx holidays
+ 2500 my 1 overseas trip per yr
+ 15k family trip (1 week, 8-10 of us)

Don't know what Restricted SSA will be but SSA @ 66 would be 1703 / 2319 @ 70

Do I have enough? Would like to avoid taking SSA until 70 to self insure for LTC

Best strategy ��

 

[Dash man]

So it sounds like you have a SWR based on a Total Return AA strategy? I'm not here to hate on dividend folks, just trying to understand the rationale outside of the mind game of not touching principle?

If we used an SWR approach we could spend about 30% more than we do. I do keep the majority of dividend paying stocks in my taxable account. Mutual Funds are in tax deferred accounts. I try to make taxes easy to do pay as little as possible. Unfortunately for taxes but fortunately for income, DW has some vested stock options that will keep our tax rate high for a few more years. If able, we hope to eventually roll some tax deferred money into a Roth to reduce the RMD hit in ten years. We don't have any bonds but keep a larger than normal cash allocation instead of the bonds. Mainly in taxable CDs. Most of our spending cash comes from dividends and interest in our taxable accounts or from savings principal. We're about 60% equities right now and also have a small pension and rental income. Fixed expenses are low relative to our spending so we have plenty of room to adjust if needed. But I don't calculate SWR like many in this site. Too much like work. But I admit if we didn't have the resources we do, I'd watch things much closer.

 

[rodi]

Not sure if this is good place to put this but what the heck I'm going to do it anyway. Here's my break down, and my target to retire in June 2017:

- net pension 2292 month inc health insurance
- brokerage #1 = 60k
- brokerage #2 = 200k
- IRA = 290k
- Roth = 60k
- USAA bonds = 25k
- savings = 15k
- no debt

Regular expenses 1300 month

Add annual:
+ 2982 prop tax
+ 700 earthquake insurance
+ 500 apx holidays
+ 2500 my 1 overseas trip per yr
+ 15k family trip (1 week, 8-10 of us)

Don't know what Restricted SSA will be but SSA @ 66 would be 1703 / 2319 @ 70

Do I have enough? Would like to avoid taking SSA until 70 to self insure for LTC

Best strategy ��

A quick glance shows that your pension covers your "regular" expenses with about (rough) $1k/month left over. And you have about (rough) $1800/month in lumpy expenses... so you need 800/month withdrawal from your savings. Lets call it 10k/year. Your investments are about 650k. That's a 1.5% WR... seems safe.

Unless.... Your pension isn't COLA'd.
Unless... you forgot a big expense...

As usual - I suggest you make sure you've covered everything in spending. I confirmed I'd covered all my expenses when I got my bottom up number to match my top down spending estimates.

Top up: What you have started here... add up all the different spending categories for an annual spending number.

Bottom down - take your *gross* pay and subtract out things that go away in retirement (401k contributions, FICA taxes, regular contributions to savings, etc.) Then adjust other categories as needed (for me it was adding in a big number for healthcare.)

When I got those numbers to match - I was confident in the number.

Then run firecalc.

 

[gayl]

My COLA caps @ 4%

FWIW: Think I'll also try living on that budget for six months to what it feels like. But I want to step down

 

[audreyh1]

Totally total return here and plan to spend down the portfolio if needed.

But I understand folks who prefer living off dividends and interest. They must settle for a much lower income from their portfolio especially if they are trying to keep up with inflation. It may be the low withdrawal rate makes them feel more financially secure. It may be they really want to pass the bulk of their investments on to heirs.

We use % of remaining portfolio withdrawal method and currently withdraw 3.5% of the Dec 31 value of our retirement portfolio at the start of January each year. And then rebalance if necessary.

 

[W2R]

One opposing strategy I seem to continue to read about is Dividend/Interest vs. Total Return (Rebalance/sell for next month's/yrs income). Putting aside SWR/pensions/part time working/working spouses/other income sources, I have hard time understanding why someone would focus on a dividend/interest yielding portfolio to support their SWR when/if a Total Return portfolio yields a greater balance (Inc dividends/interest) otherwise. I get psychologically that if your dividends can support your SWR than you may feel "safe" or like you are not touching your principle (regardless of its value, including a devalue), but isn't this smoke & mirrors?? At the end of the day, we all have assets that either generate income or not, increase/decrease in value, have tax implications that affect our net $, have certain risk profiles, but in the end, are there to support our RE years. I'm still 3 yrs from RE, but my thinking has always been "how do I maximize my assets to support my desire RE spending for RE yrs?". Tell me where I am wrong??

Well, we are all different, y'know?

After reading as much as I could about SWR, I decided that 3.5% would be right for me. I am single and was planning a 35 year retirement. But:

(1) I don't want to rely on relatives to rescue me and sink their own retirement money into saving me if I should run out of money. Also,
(2) I would like to leave some money for my heirs rather than dying flat broke. And finally, and possibly most important,
(3) The SWR of 3.5% is based on historical market performance, and we all know there is no guarantee of what the future might bring.

So, I *prefer* to spend an amount equal to either 3.5%, or my dividends, whichever is smaller, just to provide a little more of a safety net. I don't invest for dividends; I invest for total return and withdraw/rebalance, but I have simply added one more constraint on my withdrawal amount.

Fortunately, I am not depriving myself at all and it's all good.

 

[sengsational]

I get psychologically that if your dividends can support your SWR than you may feel "safe" or like you are not touching your principle (regardless of its value, including a devalue), but isn't this smoke & mirrors??

I think it is.

Say you have two companies that are exactly the same in everything important, except that one issues dividends and one re-invests the money in the business. Theoretically, the one that keeps the money will have it's share price go up by the amount of money it keeps. If all of that is true, and I think generally it is, then the person owning the non-dividend company would sell a few shares to fund their retirement, whereas the person owning the dividend paying company would fund their retirement through dividends. Withdrawal rates include dividend and interest, so it's not like you get your dividends and then you get to sell 3.5% of your nest egg.

 

[JackJester]

This is interesting. I'm 5 years to FIRE and I have been focused on building up a dividend-based portfolio. My rationale is that I predict when I retire I will fall into the 15% tax bracket, and thus, those dividends are tax-free. Of course, this might change if Trump/Congress consolidate the tax brackets. But, assuming things stay the same, isn't it better to build a portfolio based on dividends if they are tax free? And, if your portfolio is high enough, then you can live off of dividends vs having to depend on the price growth of your funds/ETFs/stocks?

 

[gayl]

.But I understand folks who prefer living off dividends and interest. ... It may be they really want to pass the bulk of their investments on to heirs.

That's me. My kids probably won't have a pension

 

[devans0]

We are executing a Roth ladder. Dividends are not what I want.

 

[DawgMan]

This is interesting. I'm 5 years to FIRE and I have been focused on building up a dividend-based portfolio. My rationale is that I predict when I retire I will fall into the 15% tax bracket, and thus, those dividends are tax-free. Of course, this might change if Trump/Congress consolidate the tax brackets. But, assuming things stay the same, isn't it better to build a portfolio based on dividends if they are tax free? And, if your portfolio is high enough, then you can live off of dividends vs having to depend on the price growth of your funds/ETFs/stocks?

Well, I am not sure your tax free plan is 100% correct. I'm no tax expert, but as I understand it, your qualified dividends & LTCGs will be taxed at the same rate? So if you have focused on a total return (TR) portfolio first (trying to maximize growth vs accumulating equities with high dividends) and you are prudent in selling 1 - 4 times/yr to fund your expenses by pruning LTCG, I think you get to the same place? In fact, I think you could make an argument that any incidental dividends that come from your TR should be plowed back in to your TR portfolio. I agree that taxes definitely play into the withdrawal strategy.

For those trying to leave some $$ behind, I'm not sure I see an argument for a dividend strategy vs TR as you can achieve that with either one.

Again, no critique here as different strokes for different folks, but I know there are some smart money people on this site and I keep coming back to the conclusion that those who have gone with a designed dividend portfolio to fund their RE are doing this primarily for the "feel good/safer" reasons as opposed to the pure strategy of TR... and I think that is great if that is what works best for you and helps you sleep. As someone said, if your dividend portfolio is yielding 3% then you are arguably just doing a 3% SWR (for the most part) which you could also do with TR.

 

[donheff]

I use a total return approach based on 3% of initial portfolio. I track various approaches (standard Trinity, Guyton, VG floor and ceiling, % actual) just to see where things stand. I would have applied Guyton rules in the downturn but DW's income was still high enough to get by in the down years. We return enough of the SWR amount to the portfolio each year that we could probably get by on dividends and interest but that seems like too much of a PITA to me. I don't yet pull from tax deferred (they hold all our bonds and some equities), Taxable is all equities and is where I pull current expenses. We are in a highish tax bracket so I am postponing the 401K tax hit. It is simply easier to just track total return.

 

[audreyh1]

A total return strategy is more work. I suspect that's a big part of it! Taking distributions only can be automated and the investor can ignore their portfolio balance if they want. It can be mindless.

With dividends/interest income strategy you take the dividends and interest in cash, automatically reinvest the capital gains. You live on (including paying taxes) whatever your portfolio throws off and hope that the income keeps up with your needs. If you've budgeted to live off a pretty low percent of your portfolio, it probably will.

Some folks may also take cap gains distributions as income even though technically this is depleting principal, but even with that, the portfolio and income will probably grow over time and your heirs will be left with a sizable remainder.

 

[donheff]

A total return strategy is more work. I suspect that's a big part of it! Taking distributions only can be automated and the investor can ignore their portfolio balance if they want. It can be mindless.

With substantial tax deferred it can be harder if you want draw down taxable first while letting the tax deferred ride until 70 yo. Easier to just reinvest the deferred dividends.

 

[UnrealizedPotential]

I have a few Closed end bond funds that have a long term track record. I also have a bond fund that yields between 5 and 6 percent . I am not sure anyone is taking into account Cef's and their much higher yield when taking this discussion into account. I looked at the yearly return before investing in any of these, including the ugly 2007-2009 recession to see how they performed. All that said, it is the cef's and the income they throw off that I like. This gives me the more than extra monthly income I need to increase my income monthly by reinvesting what I don't need. I could not do this by just taking the money out of my stock investments, they wouldn't yield enough . Also, I would hate to take out money in a bear market from a stock portfolio. It's just something I like and it works for me. It allows me to increase my monthly income very rapidly.

 

[street]

My way is more unorthodox then most would presume. My plan was to have enough money in CD, MM or saving accounts to live on for 7 years. My yearly expenses are very low (3300 a month) to many here but I live very modest and enjoy simple life.
So I have enough money to live for at least 7 year by then or anytime in those 7 year I could apply for SS which would change a lot of my numbers and bottom line of my portfolio.
My second part of my plan is not to sell any investments and all gains go back in to the investments.
So this is my plan of WR in FIRE and has worked very well so far in the 10 months I have been retired. I'm worth 4% more then the day I retired.

 

[Danmar]

I get that an income approach may not be optimal. Problem is, at least in Canada, most of the well established successful companies, pay dividends. So if you are receiving divs and these happen to be sufficient to cover your cash flow needs what would you do? Reinvest all divs then sell equities as you go? Could do this but just seems easier to spend the divs. My portfolio yields about 3.5% which approximates a reasonable SWR. Huge imbedded cap gains would mean a high cost to switch at this point. Worked very well for the first 10 years of retirement.

Agree that unless I start liquidating some stock I will leave a very large legacy and "underspend" in our retirement. Planning to do this starting in 2017.

 

[Danmar]

A total return strategy is more work. I suspect that's a big part of it! Taking distributions only can be automated and the investor can ignore their portfolio balance if they want. It can be mindless.

With dividends/interest income strategy you take the dividends and interest in cash, automatically reinvest the capital gains. You live on (including paying taxes) whatever your portfolio throws off and hope that the income keeps up with your needs. If you've budgeted to live off a pretty low percent of your portfolio, it probably will.

Yes, agree. Just seems easier to use an income approach. Not that hard to get a current yield that approximates a reasonable SWR but you will have to focus on div payers and likely won't be as diversified as you might like.

 

[scrabbler1]

A total return strategy is more work. I suspect that's a big part of it! Taking distributions only can be automated and the investor can ignore their portfolio balance if they want. It can be mindless.

With dividends/interest income strategy you take the dividends and interest in cash, automatically reinvest the capital gains. You live on (including paying taxes) whatever your portfolio throws off and hope that the income keeps up with your needs. If you've budgeted to live off a pretty low percent of your portfolio, it probably will.

Some folks may also take cap gains distributions as income even though technically this is depleting principal, but even with that, the portfolio and income will probably grow over time and your heirs will be left with a sizable remainder.

I do some of this. I don't think someone has to use an all-or-nothing strategy when to comes to generating the cash needed to cover one's living expenses.

I have in my taxable account a large amount of money in one bond fund which generates just about enough dividends I take in cash every month to cover my expenses. But I also have a stock fund which generates both quarterly dividends to supplement the monthly cash inflows and has a good growth element in it. In this fund I reinvest the cap gain distributions, just as I do with the bond fund. I also have a smaller bond fund which acts as a second-tier emergency fund. I reinvest its monthly dividends.

I also have an IRA which is more growth oriented because I reinvest all of its earnings and have an AA more stock-tilted than in my taxable account. I won't have unfettered access to it for another 6 years as it is one of y "reinforcements" awaiting me as I enter my 6.

 

[Sojourner]

I admit to using the "dividends only" approach up to this point, but I think this is primarily due to several unusual factors in my situation. First, I am still only in my 40s. Second, I am semi-FIREd due to getting some supplemental income from part-time consulting work. Third, the dividends and CG distributions thrown off by my taxable investments have been enough to sustain a comfortable lifestyle so far.

Having said all that, I anticipate that the part-time work will be dwindling down substantially over the next year or two, and I've also started to do some selling of various mutual funds to make my overall portfolio more tax-efficient. So probably within the next couple years, the dividends-only approach won't be enough to sustain my desired spending levels, and I'll shift into total-return mode. Which is totally fine, since I never really had any objections to it -- other than the psychological comfort of preserving principal as long as possible.

 

[big-papa]

When I FIRE, I will go with a total return approach, but not an SWR approach. At least when I've looked at it, I couldn't make a dividends/interest method alone work for me.

I like variable withdrawal methods myself and am currently assuming VPW will be my preferred method (described over at Bogleheads in depth). But there are as many ideas for withdrawal methods as there are people who come up with them - and if there was one that was perfect and met everybody's needs, we'd all be using it.

 

[audreyh1]

With substantial tax deferred it can be harder if you want draw down taxable first while letting the tax deferred ride until 70 yo. Easier to just reinvest the deferred dividends.

Sure - more complex and not so automated.