Systematic Withdrawals: how do you decide what to sell?

[BBQ-Nut]

For those who are in FIRE, but not fortunate enough to pay 100% of your expenses from interest or pension or SS and have to do systematic withdrawals from your accounts - how do you decide what assets/funds to sell?

I've read that you can have monthly automatic withdrawals from your IRA or 401k, but is that done by equal amounts from all funds held?

Or do you specify how much to sell and from what assets each time you 'liquidate' holdings?

If so, how do you decide what holdings to sell?

And does that cause you to 'rebalance' on your own?

And if you sell off after tax assets do you incur more taxes by rebalancing or do you sell off in equal portions to maintain your balanced portfolio?

 

[REWahoo]

If you stick the word "drawdown" in the E-R Google search box up near the top of this page you'll find a couple of dozen threads discussing this.

 

[W2R]

For those who are in FIRE, but not fortunate enough to pay 100% of your expenses from interest or pension or SS and have to do systematic withdrawals from your accounts - how do you decide what assets/funds to sell?

I've read that you can have monthly automatic withdrawals from your IRA or 401k, but is that done by equal amounts from all funds held?

Or do you specify how much to sell and from what assets each time you 'liquidate' holdings?

If so, how do you decide what holdings to sell?

And does that cause you to 'rebalance' on your own?

And if you sell off after tax assets do you incur more taxes by rebalancing or do you sell off in equal portions to maintain your balanced portfolio?

Instead of withdrawing once a month, I withdraw my entire year's spending money during the first week in January. In my case, this comes entirely from dividends (which are sent to a money market account until time to withdraw them). Immediately afterwards I rebalance so it is easy to know what to sell and buy.

What do I mean by rebalancing? My meaning is as follows. I have a written financial plan that specifies, for example, 30% Wellesley, 20% Total Stock Market Index, and so on. If the percentage of one is too high and another is too low, I sell the first and buy the second so that my planned portfolio asset allocation is once again what my plans dictate. It's easy but still, I try to do it very carefully to make sure I don't make any mistakes.

Now, what if your spending needs exceed your dividends, so that you have to sell in order to withdraw? Simple. If you are selling funds to get your withdrawal amount, then figure out how much of which funds to sell in order to more nearly approach your planned asset allocation, and then rebalance if it is called for by your written financial plan.

 

[Bestwifeever]

Bbq, your question is what drew me to this site--the practicalities of how to get the $$ out. REWahoo's suggestion to search is a good one. Many astute folks here consider tax consequences, etc., in making this decision, and those are discussed in some of the posts you will find.

Your financial institutions will probably have a procedure to automatically withdraw a certain amount from whatever accounts you choose. DH and I have virtually all our $$ in a Vanguard IRA made up of several accounts. We have all dividends and capital gains sent to our checking account whenever they occur, and we have taxes automatically withheld. For big expenses, we take $$ as needed from the money market fund we have in the IRA and also have taxes withheld. That fund earns basically no money so the distributions we receive are not affected as the fund diminishes, and should easily last beyond the time we take Social Security.

Good luck.

 

[W2R]

Bbq, your question is what drew me to this site--the practicalities of how to get the $$ out. REWahoo's suggestion to search is a good one. Many astute folks here consider tax consequences, etc., in making this decision, and those are discussed in some of the posts you will find.

Your financial institutions will probably have a procedure to automatically withdraw a certain amount from whatever accounts you choose. DH and I have virtually all our $$ in a Vanguard IRA made up of several accounts. We have all dividends and capital gains sent to our checking account whenever they occur, and we have taxes automatically withheld. For big expenses, we take $$ as needed from the money market fund we have in the IRA and also have taxes withheld. That fund earns basically no money so the distributions we receive are not affected as the fund diminishes, and should easily last beyond the time we take Social Security.

Good luck.

That's true - - taxes and potential effect on RMDs can affect withdrawal decisions, too. The TSP makes it even more complicated by restrictive withdrawal requirements. I do withdraw a fixed monthly amount from a bond fund I hold within the TSP, in addition to the withdrawal from my taxable accounts described above. I do this in order to minimize RMD's later on.

 

[Chuckanut]

Like the best wife, my plan is withdraw a year's worth of expense money in January.

But....

Towards the end of the year if the market is bumping up against new record highs I might take all or part of it early. Nobody ever went broke taking a profit. And there is no reason to be greedy.

Of course, I use any withdrawal to re-balance my portfolio.

 

[RunningBum]

3 years in and I still don't have a system. Dividends are my first source, so that's an easy one. The ones at VG are swept to a MM fund and from there I just do a bank transfer as needed. When I'm needing more funds, I'll look at my AA and sell from the overweight area, with consideration to tax management. I just watch my bank account and large upcoming expenses such as quarterly tax payments, property tax bills, vacation or large purchases and sell when needed. I almost always sell a few months extra expenses so I don't need to do this too often...probably 2 or 3 times a year.

 

[Rich_by_the_Bay]

For those who are in FIRE, but not fortunate enough to pay 100% of your expenses from interest or pension or SS and have to do systematic withdrawals from your accounts - how do you decide what assets/funds to sell?

And if you sell off after tax assets do you incur more taxes by rebalancing or do you sell off in equal portions to maintain your balanced portfolio?

You might check out the Vanguard Managed Payout Fund. It is designed to smooth distributions over time using a fancy set of tactics and a 3-year rolling horizon and a bunch of other tricks which I am not smart enough to understand. But in principle it looks interesting - unlike a SPIA, it provides full access to your fund, stays in your estate and is conservative enough to justify it as a reasonable fixed income option - set it and forget it. I don't own it, but might consider it down the line.

 

[Alan]

The withdrawal phase for us is more complicated than I anticipated but I am enjoying the game. I have pensions and dividends but it doesn't cover all our expenses particularly since I'm doing ROTH conversions as well as planning for a move back to the UK.

I have a target AA and sell at different points throughout the year, being mindful of keeping close to that AA, and also the tax implications. I've run TurboTax more often this year than I have ever done before as I weigh up the tax consequences of potential withdrawals.

 

[pb4uski]

Ours is easy. I rebalance annually around December and sell enough taxable assets to bring my cash position back to 6% of our total retirement assets (a little over three years of withdrawals after considering that we take dividends in cash). The cash position is in an online savings account. The monthly "paycheck" is a transfer from that online savings account to our credit union, from where we pay our bills.

Since we keep our taxable income within the 15% tax bracket, any capital gains on sales as well as qualified dividends are tax free for federal. I use the specific identification method for taxable account sales and am careful only to sell long term lots. Absent Roth conversion my federal tax bill would be nil.

P.S. If selling taxable securities to raise cash for our living expenses throws my AA off target, I just rebalance to target in my tax-deferred accounts buy selling fixed income and buying equities or vice versa.

 

[mathjak107]

a lot depends on income. many times it pays to hit tax deferred money first. a 65 year old couple can pull almost 22k tax free out of iras every year and pay zero taxes .

they can pull almost 42k out of ira's every year and pay as little as 1800 bucks tax . for someone delaying ss that is over 332k in taxable ira money at an effective tax rate of 4.5%.


that is a great deal and the sad part is many folks pass it right by listening to old beliefs that you should hit deferred money last.

depending on income that may be a big mistake giving up tax free money.

 

[GrayHare]

This Morningstar video is the best I've seen about comparing withdrawal approaches.

http://www.morningstar.com/cover/videoCenter.aspx?id=641676&SR=EVZ128

 

[audreyh1]

Let distributions accumulate in cash during the year. Withdraw from that for annual expenses the next Jan. Rebalance to cover the remainder. Withdrawn in one lump sum each Jan and moved into a separate spending account.

Only withdrawing from taxable accounts.

 

[jebmke]

Sell from whatever is over-weighted that month. No tax consequences. I harvested losses quite a bit in '08-09 and still have a ton left.

 

[explanade]

So folks are taking the dividends which have accumulated but also redeeming some funds and buying others to get the desired AA?

 

[REWahoo]

So folks are taking the dividends which have accumulated but also redeeming some funds and buying others to get the desired AA?

Yes.

 

[audreyh1]

So folks are taking the dividends which have accumulated but also redeeming some funds and buying others to get the desired AA?

+2

 

[BBQ-Nut]

So folks are taking the dividends which have accumulated but also redeeming some funds and buying others to get the desired AA?

I get the concept of taking dividends, esp from tax deferred portfolios, and distributing them to one's liquid account to dispense out for expenses, but my question had to do with specifically, about 'redeeming "some fund" and buying "others" to get the desire AA'.

What funds are people selling when they must sell off to meet expenses?

Are you selling your fixed income funds? Or your equities? What criteria do you use to decide which specific funds to sell off?

Using equal across the board distributions to keep your overall AA the same sounds reasonable, but I've read that in down markets if you sell of your equities you are hurting your chances for rebounding - so using a 'rule of thumb' of equal portions may not be the most sound.

Just trying to get a flavor for how folks make the specific choices.

 

[CaliforniaMan]

I get the concept of taking dividends, esp from tax deferred portfolios, and distributing them to one's liquid account to dispense out for expenses, but my question had to do with specifically, about 'redeeming "some fund" and buying "others" to get the desire AA'.

What funds are people selling when they must sell off to meet expenses?

Are you selling your fixed income funds? Or your equities? What criteria do you use to decide which specific funds to sell off?

Using equal across the board distributions to keep your overall AA the same sounds reasonable, but I've read that in down markets if you sell of your equities you are hurting your chances for rebounding - so using a 'rule of thumb' of equal portions may not be the most sound.

Just trying to get a flavor for how folks make the specific choices.

I am just starting this year, but I wrote myself a little Excel spreadsheet where I enter the mutual fund balances, the percent to withdraw (i.e. move to a MM fund), and it calculates how much I must move between the funds to keep the same AA, less what has been moved into the MMF. I have selected to reinvest dividends and cap gains during the year and plan to do my rebalance/draw dance once a year.

So depending on how the various assets have performed and how much I want to draw, I will either buy or sell various funds to keep the same AA and put the desired draw in the MMF. Basically I am just moving money between funds.

That is the plan, did it the first time this year.

 

[mathjak107]

putting taxes aside as i already voiced my opinion about hitting the ira accounts first to get that nice low tax rate what assets you sell is really only crucial the first 5 years.

the first five years are very dangerous to a retirement so the one thing you do not want to count on spending from in a down market is equities.

after a good run up whether you use a systematic whithdrawal or a bucket system it really didn't matter.

as long as you have a good up cycle before a down turn you can pull from any where you like and still get similiar results.

even spending from 100% equities directly in good and bad times did not make much difference.

 

[clifp]

I get the concept of taking dividends, esp from tax deferred portfolios, and distributing them to one's liquid account to dispense out for expenses, but my question had to do with specifically, about 'redeeming "some fund" and buying "others" to get the desire AA'.

What funds are people selling when they must sell off to meet expenses?

Are you selling your fixed income funds? Or your equities? What criteria do you use to decide which specific funds to sell off?

Using equal across the board distributions to keep your overall AA the same sounds reasonable, but I've read that in down markets if you sell of your equities you are hurting your chances for rebounding - so using a 'rule of thumb' of equal portions may not be the most sound.

Just trying to get a flavor for how folks make the specific choices.

Realistically you aren't going any two people with the same withdrawal process.

The various studies and calculators assume this process.
$1,000,000
50/50 stocks/bonds
Stocks up 12% = $550,000
Bonds up 2.2% = $511,000
Total = 1,060,000
Inflation 2.5%
Withdrawal $41,000
Sell $40,000 from your one stock fund
Sell $1,000 from your one bond fund
Start 2015 with $510K in stocks and bonds.

AFAIK no actual retiree has just one stock and one bond fund and increase their withdrawal rate by inflation.

I have a set amount amount that is moved from brokerage account to my checking account each month, plus rental income. But for major purchases and I've made a lot in the last year, I do a combination of selling over valued stocks and also tax harvesting.

There are also multiple ways to rebalanced. Annual is popular method. as is using bands International 20-25% US 40-45% Bonds 30-40% whenever an asset class exceeds its upper bounds you sell it and use the proceeds to fund your withdrawal needs and if there is some left over but the asset class near the lower end of their boundaries.

The problem of course is it is not always possible to know what is a down market or up market for a few years.

The good news is that any of these schemes will generally result in you selling stocks when they are expensive and buying them when they are cheap (on relative basis to bonds).

I wouldn't sweat it too much all of these scheme work. Although I'd certainly read the threads on tax efficiency and such.

 

[pb4uski]

I get the concept of taking dividends, esp from tax deferred portfolios, and distributing them to one's liquid account to dispense out for expenses, but my question had to do with specifically, about 'redeeming "some fund" and buying "others" to get the desire AA'.

What funds are people selling when they must sell off to meet expenses?

Are you selling your fixed income funds? Or your equities? What criteria do you use to decide which specific funds to sell off?

Using equal across the board distributions to keep your overall AA the same sounds reasonable, but I've read that in down markets if you sell of your equities you are hurting your chances for rebounding - so using a 'rule of thumb' of equal portions may not be the most sound.

Just trying to get a flavor for how folks make the specific choices.

I don't take any dividends from my tax-deferred accounts, only from taxable accounts. Since dividends from taxable accounts will be taxed anyway it seems silly to reinvest them and have to wait a year to sell the shares to get tax favored treatment. Those dividends are paid to my credit union account and are spent.

Since we are under 59 1/2, we sell taxable funds when we rebalance and top up our cash position which funds our living expenses, then we rebalance fixed income and equities entirely within our tax-deferred accounts, selling equities and buying bonds or vice versa, as is necessary to get the whole back to our target AA.

If our living expenses were coming from tax deferred accounts, I would continue to reinvest dividends and do one of two things. One, do an annual distribution from tax-deferred accounts of the amount needed for living expenses and let it sit in online savings and then be auto transferred to our credit union monthly. Or two, have monthly auto withdrawals proportionally from the two main stock and bond funds in my tax-deferred account and then rebalance annually as necessary. I would probably lean to the former as it seems more simple to me but I can tell you for sure in 12 years.

Since sales in tax deferred accounts have no tax implications, it isn't necessary to fret over what positions to sell other than possible AA implications, however in most cases between reinvested dividends and market movements and sales there are many moving parts so I wouldn't fret over that other than just monitoring AA to make sure if doesn't vary too much from target.

 

[explanade]

Can you post the spreadsheet without your specific numbers but the formulas intact?

 

[BBQ-Nut]

putting taxes aside as i already voiced my opinion about hitting the ira accounts first to get that nice low tax rate what assets you sell is really only crucial the first 5 years.

the first five years are very dangerous to a retirement so the one thing you do not want to count on spending from in a down market is equities.

after a good run up whether you use a systematic whithdrawal or a bucket system it really didn't matter.

as long as you have a good up cycle before a down turn you can pull from any where you like and still get similiar results.

even spending from 100% equities directly in good and bad times did not make much difference.

Ok, but what funds are you 'hitting' in your ira?

A select few, all, by sector, by asset class?

 

[BBQ-Nut]

I guess I'm not wording my question very well.

I am not asking about what methodology folks use for their drawdown, but what specific funds you decide to sell as part of your systematic withdrawals.

How do you decide to draw on your bond fund vs an overseas or emerging market, a small cap or your index ETF?

Or does everyone do equal portions across all their funds to preserve your desired AA?