Does this withdrawal "rule" make any sense?

[DawgMan]

Tinkering, just for an exercise right now. Let's say you define your expenses for the year as $100K and that represents a 3% WR. While you have already pulled your $100K for this years expenses in early Jan, you expect 2022 expenses to be similar. Come end of Jan, due to a fast market run up, you have hit a 3% return ($100K in unrealized gains). Does in make sense to take the chips off the table the day of the year you see your returns produce the next years (and perhaps the year after's expenses in big bull market), rebalance, rinse and repeat? I've been inclined to do my year's expenses withdrawal/rebalance 1 time a year and deal with the market returns/yield once, as opposed to cashing out. None the less, something to think about. Anyone employ this "rule"/strategy or something like it?

 

[Dtail]

I take the full year amount in Jan and then don't calculate for the rest of that year leading to any further withdrawal decisions for that current year.

 

[walkinwood]

You've got too much time on your hands


All we can know is if the method you suggest has worked in the past. But I think it will be difficult to do that analysis unless you have the data & the programming chops to do it yourself.


At a 3% withdrawal you can probably do a few crazy things and still be okay - probably.

 

[DawgMan]

You've got too much time on your hands

Probably. Thought I would try and split the atom!!

 

[Dtail]

Probably. Thought I would try and split the atom!!

There are many worriers on this site, but you might just take the cake.
Not a bad thing, but don't drive yourself crazy.
Talk to RobbieB.

 

[DawgMan]

There are many worriers on this site, but you might just take the cake.
Not a bad thing, but don't drive yourself crazy.
Talk to RobbieB.

Not worry, just chasing the best mouse trap!

 

[CRLLS]

I can't predict the future. And I don't know anyone who can. The market can still go up, and it can go down. As they say, "You pays your money and takes your chances". Nobody knows for certain. As I was in saving mode, the pundits promoted Dollar Cost Averaging. I think it works the same in the withdrawal stage. For the last couple of years, I have used a monthly withdrawal. This matches up with my monthly expenses. I take out just what I need and let the rest grow throughout the year. Generally, it will. Sometime it won't. I don't worry about it. Over the long term I will come out ahead ( I think).

When RMD-time hits I may rethink this plan.

 

[RunningBum]

I would think not. A 3% return is not all that great. You will take money off the table that could continue making more money the rest of the year in a good year. And in a bad year you may never hit 3%, so basically you are cutting short the good years while letting a bad year ride. Keep your money invested, and let good years run and cover any bad years.

Of course that's a simplified picture, as the market doesn't go straight up or straight down all year. You could have a year where it jumps 3% early in the year, so you take that money off the table, and then it loses the rest of the year, and you look like a genius.

 

[DawgMan]

I would think not. A 3% return is not all that great. You will take money off the table that could continue making more money the rest of the year in a good year. And in a bad year you may never hit 3%, so basically you are cutting short the good years while letting a bad year ride. Keep your money invested, and let good years run and cover any bad years.

Of course that's a simplified picture, as the market doesn't go straight up or straight down all year. You could have a year where it jumps 3% early in the year, so you take that money off the table, and then it loses the rest of the year, and you look like a genius.

For clarity, my mind game was thinking about just taking the next years expenses if/when the market ran up and produced strong returns. If the market produced less than say 3%, I would ride it out and do the once a year pull/rebalance, regardless if returns were negative.. The whole thought experiment came to me thinking my $$ are there to fund my expenses... so if they do it sooner vs later, should I consider taking the bank? I’m just tightening the screws...

 

[OldShooter]

We just take our money during the year when we need it. Needs are lumpy due to travel, RE taxes, etc. In December we withdraw safe harbor amounts from tIRAs and have them 10% withheld. When RMDs are an issue we will finish those up in December. We liquidate tactically from fixed and equity sides so there is a little market timing there I guess.

Given the long-term upward bias of the market I think we are statistically more likely to be ahead leaving money in equities/in the market/in the IRAs until we need it. Certainly we were better off in 2020 by pulling incrementally/needs-based than if we had pulled a pile of money in January and parked it in money markets or something.

IMO there is no mousetrap with forecasting ability, which would be the only "best mousetrap" that would be of any practical use. Otherwise all you can hope for is to have a lucky mousetrap. Any mousetrap can get lucky.

 

[audreyh1]

Tinkering, just for an exercise right now. Let's say you define your expenses for the year as $100K and that represents a 3% WR. While you have already pulled your $100K for this years expenses in early Jan, you expect 2022 expenses to be similar. Come end of Jan, due to a fast market run up, you have hit a 3% return ($100K in unrealized gains). Does in make sense to take the chips off the table the day of the year you see your returns produce the next years (and perhaps the year after's expenses in big bull market), rebalance, rinse and repeat? I've been inclined to do my year's expenses withdrawal/rebalance 1 time a year and deal with the market returns/yield once, as opposed to cashing out. None the less, something to think about. Anyone employ this "rule"/strategy or something like it?

That’s not how the models work, so I have no way to say that it “makes sense”.

I guess you’ll have to model it yourself.

Note: if you rebalance annually, you’re always topping up fixed income during a bull run.

 

[CardsFan]

When I get too into the weeds on things like this, I realize there are hundreds of choices, that will only differ a little, so, to quote that great philosopher Tripper (Bill Murray), It Just doesn't matter

 

[DawgMan]

That’s not how the models work, so I have no way to say that it “makes sense”.

I’m inclined to stay the course. It just appealed to my greed gland during these crazy market exuberance run ups..”hmm, should I take chips off the table?” Again, withdrawals are a different mindset. Dollars are there to support your current/future expenses. I suppose I thought some hear had an argument for this approach, but I hear ya, I’m not changing the machine unless someone can convince me other wise.

 

[audreyh1]

My withdrawals are % remaining portfolio, so a fixed % of each Dec 31 value. As such, I have a larger income after bull years. I like this psychologically, because I’m essentially taking more $$ out whenever the market is high.

Of course I have to be prepared for an income cut after a bear year.

I always take out the full amount calculated each year and don’t worry whether I am going to spend it all or not during that same year.

 

[pb4uski]

I think your thought is valid... I think of it as opportunistic rebalancing.

 

[SecondCor521]

Tinkering, just for an exercise right now. Let's say you define your expenses for the year as $100K and that represents a 3% WR. While you have already pulled your $100K for this years expenses in early Jan, you expect 2022 expenses to be similar. Come end of Jan, due to a fast market run up, you have hit a 3% return ($100K in unrealized gains). Does in make sense to take the chips off the table the day of the year you see your returns produce the next years (and perhaps the year after's expenses in big bull market), rebalance, rinse and repeat? I've been inclined to do my year's expenses withdrawal/rebalance 1 time a year and deal with the market returns/yield once, as opposed to cashing out. None the less, something to think about. Anyone employ this "rule"/strategy or something like it?

I don't.

If your portfolio grows rapidly and that puts you outside your rebalancing bands, then I would recommend rebalancing.

If you are not outside your rebalancing bands, then you are essentially making a market timing bet, which may or may not pay off as others have noted.

I am not sure but I do not think there is very much correlation between a quick market run-up and subsequent underperformance over the following 11 months. You may be suffering from the gambler's fallacy; I would suggest reading up on it.

You also may be demonstrating that your risk tolerance is now lower, since you're using phrases like taking your chips off the table. If so, I would recommend adjusting your target AA, then rebalancing to and keeping to that lower risk AA.

If you want to "tactically" raise and lower your AA as the situation appears to warrant, then IMHO you (and lots of others here who do so) are essentially market timers on the margins. Market timing on the margins is something that I intellectually don't think works. But having done it once myself by Roth converting in March 2020 at a relative market low and having success, I can't say it's completely without appeal.

 

[NW-Bound]

I think your thought is valid... I think of it as opportunistic rebalancing.

If I get it right, the OP already took out his 2021 withdrawal, and is thinking about taking out the 2022, and perhaps even the 2023 withdrawal. At 3% WR, that's converting 9% of his portfolio to cash.

If the market keeps going up, he will have less money than if he leaves it alone. Who knows? In the long run, it may not make a big difference, as others have said. Some years you are right, and others you are wrong. But if it gives him peace of mind, I say there's no big harm in doing it.

I guess this form of market timing, er rebalancing, is more significant for someone who has nearly 100% stock AA. As for myself, I always carry a large percentage of cash. My periodic withdrawals through the year as I spend are insignificant to my cash AA. Hence, my trading activities, er tactical reallocations, are totally decoupled from my withdrawal needs.

 

[big-papa]

Tinkering, just for an exercise right now. Let's say you define your expenses for the year as $100K and that represents a 3% WR. While you have already pulled your $100K for this years expenses in early Jan, you expect 2022 expenses to be similar. Come end of Jan, due to a fast market run up, you have hit a 3% return ($100K in unrealized gains). Does in make sense to take the chips off the table the day of the year you see your returns produce the next years (and perhaps the year after's expenses in big bull market), rebalance, rinse and repeat? I've been inclined to do my year's expenses withdrawal/rebalance 1 time a year and deal with the market returns/yield once, as opposed to cashing out. None the less, something to think about. Anyone employ this "rule"/strategy or something like it?

Would you do the opposite if, at the end of January there was a correction of 3%?

As somebody else said, this is something like opportunistic rebalancing or even a "light-touch" market timing. If it works, it would need to be set up with hard, fixed rules that you must never, ever deviate from.

Not retired yet, but I will be using a variable withdrawal method that takes into account the size of my portfolio, stock valuations, interest rates, expected inflation and the time value of money of future cash flows and will make one withdrawal per year. It's described here: https://www.bogleheads.org/wiki/Amortization_based_withdrawal

In between withdrawals I'll use rebalance bands.. Rebalancing bands aren't guaranteed to increase your returns, but last year it did just that for me.

Cheers.

 

[mrfeh]

Given the long-term upward bias of the market I think we are statistically more likely to be ahead leaving money in equities/in the market/in the IRAs until we need it. Certainly we were better off in 2020 by pulling incrementally/needs-based than if we had pulled a pile of money in January and parked it in money markets or something.

I have read that while it it best to invest a lump sum immediately, when in withdrawal phase, it is better to have more frequent, smaller withdrawals (for the reason above).

Don't have links to back that up; just relating it. Perhaps move to quarterly or monthly withdrawals?

 

[big-papa]

I have read that while it it best to invest a lump sum immediately, when in withdrawal phase, it is better to have more frequent, smaller withdrawals (for the reason above).

Don't have links to back that up; just relating it. Perhaps move to quarterly or monthly withdrawals?

Over on bogleheads there's a technique for withdrawing using a method called VPW (variable percentage withdrawal). Math is similar as in the ABW link I gave above. However, there is a specific thread there where the author of VPW uses a cash buffer account for smoothing with the assumption of monthly withdrawals.

What might work for one withdrawal method might not work for another.

Here's the link: https://www.bogleheads.org/forum/viewtopic.php?t=284519

Cheers.

 

[donheff]

I think your thought is valid... I think of it as opportunistic rebalancing.

+1. I generally keep enough cash around to cover a year or so in expenses. If we get a run up that feels particularly big I will take the opportunity to replenish the cash and even build up a little. I did that last year before the big drop. I don't have a specific number that triggers such an action, depends on how much cash I already have and subjective assessments of the market: I know it when I see it. I doubt that it makes a significant difference from a fixed annual, quarterly, or monthly approach

 

[Exchme]

Obviously this would give a bad result if you did it for all of your money, because you would have limited upside and unlimited downside each year. Same applies if it's just 3% your money, except it's just a 3% bad result.

Now to get off my soapbox, fear of loss is a not-so-funny thing. I have to admit that my inner alarm bells are going off as I believe interest rates will rise, causing problems for both bonds and stocks. If something like that actually happens, then Dawgman may well be right this year.

 

[RunningBum]

I have read that while it it best to invest a lump sum immediately, when in withdrawal phase, it is better to have more frequent, smaller withdrawals (for the reason above).

Don't have links to back that up; just relating it. Perhaps move to quarterly or monthly withdrawals?

Right, since the market over time has always gone up, the idea is to keep as much of your money invested as possible.

 

[Time2]

While you have already pulled your $100K for this years expenses in early Jan, you expect 2022 expenses to be similar.

I've only been on the withdrawal plan for two years, but I make sure to get my expenses for next year pulled out in or by December 31st. This way I can do a lot of tax planning. Worked great the first year, tentatively I think it's all in line for 2020, but won't until I do the 1040.
Dinkytown says it's all good!
https://www.dinkytown.net/java/1040-tax-calculator.html

 

[pb4uski]

... As somebody else said, this is something like opportunistic rebalancing or even a "light-touch" market timing. If it works, it would need to be set up with hard, fixed rules that you must never, ever deviate from. ...

Why is that? Most of us don't slavishly adhere to an x% withdrawal rate, so why would we slavishly adhere to a rebalancing policy?

Its as simple as "feeling" that the market has had a good run and gotton ahead of its skis and rebalancing then to lock in some profits... it might work out or it might not.