Retirement withdrawal variability

[Cut-Throat]

So in continuing to play, we not only don't have "unnecessary" risk we really don't have much risk at all.

With little risk, you are also not playing the game I was referring to. -- The game of Risk/Reward...
This is just basic Investing... More equities more risk...The risk is losing Money.

 

[RunningBum]

Money that is not needed?

You were the one who came up with that concept. I'm not going to talk around in circles with you. I've made my point to justify why I continue to invest money I could withdraw in a year but will not spend.

 

[Cut-Throat]

You were the one who came up with that concept. I'm not going to talk around in circles with you. I've made my point to justify why I continue to invest money I could withdraw in a year but will not spend.

Please show me where I came up with a Concept of "Money that is not needed"... I think you are confusing me with someone else.

 

[RunningBum]

Please show me where I came up with a Concept of "Money that is not needed"... I think you are confusing me with someone else.

Post 21.

Risking Money that you need for money that you don't need is a very bad strategy.

It's all money, whether it's in your nest egg or newly earned.

 

[OldShooter]

With little risk, you are also not playing the game I was referring to. -- The game of Risk/Reward...
This is just basic Investing... More equities more risk...The risk is losing Money.

Not sure what your point is. Our AA is 75/25 and the money that will end up in the estate is 100% equities.

We don't have much risk of losing money at 100% equities because our time horizon pretty much eliminates volatility as a risk. Assuming equities continue on their historical trend from the last 90 years or so, we are in fine shape.

That said, one of the negative consequences of Markowitz' Modern Portfolio Theory is his paradigm that volatility = risk. This misleads many people. To a long term investor, volatility is not risk at all. The risk is in being "conservative," buying low payoff investments, and ending up with far less money than an equity strategy would have produced. That is lost money as surely as if someone picked your pocket.

Sears Holdings, Theranos, Enron, etc. are another kind of risk, but again a wise long term investor is diversified and individual stock risk is not a significant consideration. That is what Markowitz taught us.

 

[Cut-Throat]

Post 21.
Risking Money that you need for money that you don't need is a very bad strategy.

Exactly; I don't do this! ... So, it's not my Concept.... It was Bill Berstein that said this... But people that have enough and are in their late 60s, and can't afford to lose that much and still feel the need to tilt their AA into more than 60% equities are doing exactly that. That is where the 'Age in Bonds' rule comes from.

 

[Cut-Throat]

Not sure what your point is.......... but again a wise long term investor is diversified ...........................

My point was that when you are retired, and in your 60s and 70s, you are no Longer a 'long term investor' ...... You are running out of time....


Here is an article that explains it very well for your edification.


https://esimoney.com/youve-won-game-stop-playing/

 

[OldShooter]

My point was that when you are retired, and in your 60s and 70s, you are no Longer a 'long term investor' ...... You are running out of time. ...

I'll try once more and then stop: I am investing for my kid's trusts and for the charity endowments in our estate plan. That is a much longer horizon than my lifetime, so I am not running out of time at all. The portfolio has lots of time and can be very unconcerned about volatility. Given that, history tells us that a 100% equity strategy is the winning choice. By a lot.

Said another way, does the age of a professional portfolio manager matter when evaluating the investment strategy and risk level of the portfolio he manages? Of course not.

And, really, a 60YO has a life expectancy of 20-25 years. I consider that to be long term. YMMV.

 

[Cut-Throat]

I'll try once more and then stop: I am investing for my kid's trusts and for the charity endowments in our estate plan. That is a much longer horizon than my lifetime, so I am not running out of time at all. The portfolio has lots of time and can be very unconcerned about volatility. Given that, history tells us that a 100% equity strategy is the winning choice. By a lot.

Said another way, does the age of a professional portfolio manager matter when evaluating the investment strategy and risk level of the portfolio he manages? Of course not.

And, really, a 60YO has a life expectancy of 20-25 years. I consider that to be long term. YMMV.

Well, then this whole conversation doesn't apply to you then, does it? Did you even bother to read the article that I posted?

 

[Fedup]

I'll try once more and then stop: I am investing for my kid's trusts and for the charity endowments in our estate plan. That is a much longer horizon than my lifetime, so I am not running out of time at all. The portfolio has lots of time and can be very unconcerned about volatility. Given that, history tells us that a 100% equity strategy is the winning choice. By a lot.

Said another way, does the age of a professional portfolio manager matter when evaluating the investment strategy and risk level of the portfolio he manages? Of course not.

And, really, a 60YO has a life expectancy of 20-25 years. I consider that to be long term. YMMV.

Oldshooter, I’ve heard it’s not good to leave IRA for kid’s trust. I only find my trust with my real estate portfolio. Everything else goes direct to my heirs.

 

[OldShooter]

... Did you even bother to read the article that I posted?

I skimmed it. It is very old news, nothing new at all. Maybe new to you, I guess.

 

[audreyh1]

But retirement is different - cash flow is dependent upon investments (and SS, but for us income from investments dominate our cash flow) so it is crucial to keep investments well funded. This is why I keep money that is budgeted for withdrawal but unspent, invested. The key to make that work, I believe, is to maintain a range of liquidities in those investments. Cash of course is the most liquid but the least return. But our next most liquid is 1-year bond (or CD) ladder, and so on.

You perhaps don’t understand the Total Return concept where withdrawals come from both dividends/interest and selling portfolio assets as needed. In that case, cash flow of the retirement fund doesn’t matter at all.

It doesn’t matter to us. We just take x% out of the retirement fund every year regardless of the cash flow and rebalance after withdrawal.

 

[Huston55]

OP-

We’re 4yrs into FIRE & follow the Guyton-Klinger Decision Rules VWR method. We also keep 4+/-yrs of cash (CD/bond ladder) for use during a bear market; used/replenished annually. Our overall AA is 60/30-35/5-10. Additionally, we capture LTCG in our taxable account (versus Roth conversions) and, because we’re funding expenses primarily from our taxable account, our taxable income is very low, enabling significant untaxed LTCG capture; rinse/repeat. Like many others here, our NW has increased since FIRE, despite annual spending.

Regarding spending, we’ve underspent our allowable annual WD for most of those 4yrs of FIRE, which has enabled us to extend our CD/bond ladder to a length that bridges us to 70yo, when SS kicks in. At that time, all essential expenses will be matched by ‘guaranteed’ income streams; in essence, we’ve already covered essential expenses from now on with the CD/bond ladder.

So, the answer to your question about ‘what we do with extra/unspent $$$’ is that we add it to the CD/bond ladder (cash) portion of our AA. All this said, I think we’ve slowly evolved toward a ‘safety first’ approach, and I’m fine with that.

 

[Cut-Throat]

I skimmed it. It is very old news, nothing new at all. Maybe new to you, I guess.

Well, not news to me, but you seemed like you didn't get it..... So, I was just trying to help out a very "Old Shooter".

 

[OldShooter]

Oldshooter, I’ve heard it’s not good to leave IRA for kid’s trust. ...

It's not a simple question. There are tax considerations and tradeoffs that I have not kept up on. That's why we have a good specialist attorney.

In our case, the bigger picture is that neither son is capable of managing the money. It will be at least high six figures. One is just naive and could easily be taken advantage of. The other and (worse) his wife are spendthrifts. So the instructions to the trustee are that the funds are primarily intended to supplement each son's retirement at a normal age and should be managed and disbursed accordingly. So tax considerations did not dominate our planning. YMMV and probably will.

 

[Fedup]

It's not a simple question. There are tax considerations and tradeoffs that I have not kept up on. That's why we have a good specialist attorney.

In our case, the bigger picture is that neither son is capable of managing the money. It will be at least high six figures. One is just naive and could easily be taken advantage of. The other and (worse) his wife are spendthrifts. So the instructions to the trustee are that the funds are primarily intended to supplement each son's retirement at a normal age and should be managed and disbursed accordingly. So tax considerations did not dominate our planning. YMMV and probably will.

Got it. I’m thinking of writing a letter to my two young adults on what to do and what not to do with our estate. We do have a will and trust. Because we travel a lot, I worry if we go early and they are still young adults, they wouldn’t make the optimum decision. For example, one of them is to use the money to purchase insurance like annuities. They are not savvy yet when it comes to investing. But I don’t want to hand cuff them either.

 

[TwoByFour]

Risk.... Why put up with unnecessary risk, when you've already won the game? I keep reading these 'Equities always go up posts'.

I haven't won the game until I have a dirt nap. Black swans are my biggest fear. That is, something unexpected and expensive, like long term care. So we have reduced our risk from 100/0 during accumulation to 60/40 during retirement but I doubt I will go much below that.

Besides, risk with equities does not mean one is in danger of losing money, it only means that one may not have a predictable amount of assets on any given day. If an investor has patience and the means to skate through market down-turns, the risk is mitigated.

 

[audreyh1]

There are lots of folks here who take what they need each year from their retirement investments. Check their withdrawal rate, and as long as it’s under what they consider safe for their age, deem it good. I can’t argue with that approach.

With that approach they’ve chosen to maximize the long-term retirement assets, so will probably pass on a large bundle when they go. Many folks here are motivated to pass along a generous inheritance. Again, I can’t argue with that goal.

We don’t have the goal of passing a large inheritance and we are choosing to deliberately draw down our retirement assets while living, at least by half. So we have a different approach, and one of them is not to reinvest unspent withdrawn funds in long-term investments. Unspent funds go into shorter term safer investments and are available for immediate and short-term needs/wants.

 

[Huston55]

2x4-

I will not presume to give you financial advice but, I think it’s important to point out some of the inconsistencies/inaccuracies in this post; some food for thought for you regarding your OP.

I haven't won the game until I have a dirt nap.

Wrong game. The game is not to “achieve death”, it is to “achieve financial independence.”

Black swans are my biggest fear. That is, something unexpected and expensive, like long term care. So we have reduced our risk from 100/0 during accumulation to 60/40 during retirement but I doubt I will go much below that.

I think many share your fear of Black Swans but, long term care (LTC) is not a Black Swan. LTC can be forecasted & planned for; precisely the opposite of a Black Swan. And, changing AA from 100/0 to 60/40 wouldn’t protect from a Black Swan anyway...by definition.

Besides, risk with equities does not mean one is in danger of losing money, it only means that one may not have a predictable amount of assets on any given day. If an investor has patience and the means to skate through market down-turns, the risk is mitigated.

“The market can remain irrational longer than you can remain solvent.“ (Keynes)

 

[Cut-Throat]

“The market can remain irrational longer than you can remain solvent.“ (Keynes)

Yes, you have hit on what is missing from most of the rationale here.....



I have been seeing a lot of "Equities always go up" Posts lately.... A very bearish indicator, when the majority thinks that stocks have very little risk and you just have to wait a year or so, before they 'bounce back'....



Just plan on losing Half of your equity position over night and not recovering it for 20 years and you'll be fine......

 

[Eagle43]

I do the same as Cut-throat for the same reasons you mention, and I use a combination of high yield savings accounts, short-term CDs, treasury-bills and even short-term bond funds. Spread over several durations.

Thanks to you and Cut-throat for the info. I just renewed a couple of Cds. I will take RMD in January and take after tax cash out of Vanguard and buy more cds. Although I will look at VGs prime money market fund. DW and I are financially ok. Like the quarterback who takes a knee in the last minute to ensure victory I will play safe. The game is (should be) won.

 

[W2R]

I believe that dealing with the variability in spending is an issue no matter what withdrawal strategy is being used. This whole experience makes me wonder if a withdrawal strategy is even needed. Some people just take out money on an as-needed basis and don't really have a strategy. I am curious what others are doing.

OK, here is what I am doing.

I withdraw according to very conservative rules that I wrote down in my financial plan. These rules are: no more than 3.5% and no more than my dividends for the prior year.

Then, during the year, I either:

1. Don't spend anywhere near that much because I have all I want; or
2. Spend more because some unusual big expense comes up. So far in 9 years of retirement, this only happened in 2015 when I bought my dream house. Other unusual expenses like my dental implants or new HVAC unit were covered by what I had withdrawn for that year already.

In 2015, I "borrowed" money from myself to buy my house, using some of the excess money that I could have spent, but hadn't spent, during previous years of retirement.

It's like when you are working. Just because your salary when working is thus-and-such, doesn't mean you will be spending every last cent every year. You build up an emergency fund and some savings. You put some aside for a rainy day, for those years when big expenses come up. And then if you unexpectedly need to use a little bit of it, you cut back and replace it after the fact so that you still have a nice cushion of savings in case you need it later on.

That's how I handle it, anyway. Unlike some others, I do re-invest what I don't spend each year and keep track of it in a spreadsheet. I don't know if reinvesting is a superior strategy but that is what I do.

 

[NW-Bound]

There are lots of folks here who take what they need each year from their retirement investments. Check their withdrawal rate, and as long as it’s under what they consider safe for their age, deem it good. I can’t argue with that approach.

The above is what I do.

With that approach they’ve chosen to maximize the long-term retirement assets, so will probably pass on a large bundle when they go. Many folks here are motivated to pass along a generous inheritance. Again, I can’t argue with that goal...

While I like to leave my children and maybe grandchildren something, I do not intentionally plan to leave them a lot of money. If we spend it all, and leave the two homes to them, that's a lot more than most people inherit from their parents.

We do not find much to desire, already having what we need and want. If the market stays generous, we may just die rich. Or the market can just turn south and much of that money simply evaporates.

Successful investing is an endeavor of mine. It is fun to make money, even if I do not spend all of it myself.

 

[Fedup]

I’m not motivated by passing large inheritance either. I think it would be sad if I don’t think they will surpass me and my husband’s in terms of earnings. We started out as two low life engineers without anything to our back. My hope is they will out earn us in many ways.

 

[Huston55]

I’m not motivated by passing large inheritance either. I think it would be sad if I don’t think they will surpass me and my husband’s in terms of earnings. We started out as two [-]low life[/-]super groovy & charismatic engineers without anything to our back. My hope is they will out earn us in many ways.

Hey, hey now! No such thing as a ‘low life’ engineer.