A new retiree question:
Assuming 1880 or 1750 or 1570, we are down from prior highs. I know you said this was a planning exercise only.
So at what point do you actually cut your spending and reduce withdraw amounts - are you adjusting budgets real time in current period when 1880 happens, 1750 happens , 1700 happens or 1575 happens? or just speculating adjustments needed for, say Jan 1 2017 at your next withdraw period ?
What are the time triggers for your adjustment - quarterly. Monthly. Semiannual. Annual?
With volatile markets how do you avoid some knee jerk budgetary cuts while effectively managing overall spending ?
Btw. Reminds me of December 2008 when everyone's winter vacations all became winter staycations to quickly reign in spending as the market fell that first 25 percent. The next 35 percent was ugly.
I do a fixed % of my portfolio for annual withdrawal each January (all in taxable). So if my portfolio drops, so does my withdrawal. This year I took about a 4.25% haircut. My retirement fund was already down 3.5% from the Jan 2015 withdrawal, and then it dropped another 0.8% due to the market selloff.
My after tax funds available for spending in 2016, however, are higher than in Jan 2015, because my taxes owed for 2015 versus 2014 are quite a bit lower. So from a practical spending money point of view there was no haircut, but rather a raise!
Currently, my withdrawal, after estimated taxes are set aside, is quite a bit higher than my actual spending. So for the last few good market years, I have accumulated quite a bit in short-term funds, as a rising market meant more withdrawn in $ each year - especially after the huge gain in 2013. I have these short-term funds to draw on when things go to hell. My "extras" travel budget is generously funded. As is the fund for some upgrades to the house. We have funds set aside to buy a new car. I have an extra year's expenses set aside in 1 year CDs something I have maintained since retiring. And still some left over. (Knock on wood!!!)
My paper exercise on 1/8/16 went something like this: assuming a drop of ~18% from 1/8, which brings up to 1570 on the S&P500, and about 30% from all time highs (close to an average bear market), the portfolio would probably take about a 9% hit from 1/8 levels. The smaller portfolio withdrawal from that lower level, after guesstimated taxes, would still exceed my current after tax spending budget. Knock on wood!!!! That is the test.
I hope I haven't seriously jinxed anything here!
When would I take less from the portfolio? I think I would be willing to take a smaller % withdrawal, closer to our spending budget, if I thought equities and bonds had corrected to "better valuations". That's very vague, of course, but a good bear market certainly means valuations have improved significantly. After the 2013 run up, even though withdrawals way exceeded our typical spending, I insisted on doing the full withdrawal each year because I felt like the punch bowl could be taken away any year now.
