Need Advice On Withdrawal Strategy

[novaman]

I sold my practice in May 2018 at the age of 54 and I continue to work about 12 hours a week for the new owner. After a lifetime of saving, 2019 looks to possibly be the first year where I will need to draw a bit from my portfolio to live off of.

I'm thinking that I could either liquidate my estimated needs for the year and have it in cash to draw from, or I could sell as needed in small amounts going forward.

I'm new to all this so I'm just curious- what do you all do?

 

[RunningBum]

It really doesn't matter much. It's probably good to have a certain amount in cash so you aren't forced to sell at a low, but there are ways around that, such as selling equities in taxable for spending money, and buying them back in an IRA if you have non-equities available.

Are you pulling from a taxable account? What I do is stop automatic reinvestments, and use that, and sell other investments as needed.

 

[sengsational]

I'm not typical because "everything" is in "tax advantaged" accounts. That being said, I "do my taxes" in December and pull whatever amount from tIRA/401k that keeps my PTC ACA whole. Then, if during the year I need more, I pull from Roth/HSA.

 

[GravitySucks]

I usually pull quarterly or as needed.

 

[pb4uski]

..... I'm new to all this so I'm just curious- what do you all do?

5% (target) of my portfolio is in an online savings account that earns 2%... I have an automatic monthly transfer from that online savings account to my local credit union account that I use to pay my bills... I call this my monthly "paycheck".

 

[Onward]

I pull monthly as needed.

 

[38Chevy454]

It's essentially the opposite of dollar cost averaging when buying in. If you think you can time the market, then either get more in cash now, or wait until later depending on your thoughts about what the market will do. Many on here do a big withdrawal at beginning of the year and then supplement as needed for a big expense. Many others do periodic regular withdrawals. In the end both can work, it just is a matter of your risk tolerance and thoughts on market performance. Get all cash now and help avoid selling at a lower value later, or risk selling now when it might be higher later. I don't think there is one right answer, as both methods can provide money.



Without getting into a lot more discussion, your question also leads to short term vs long term, and asset allocation ratios. But that would be a lot more involved than your original question.

 

[VanWinkle]

Monthly paycheck from Money Market to local Bank account. Vanguard sends it like clockwork around the first of each month. Taxable account as I am not touching IRA until RMDs other than conversions.

 

[Cut-Throat]

I'm new to all this so I'm just curious- what do you all do?

I use VPW and withdraw the entire yearly amount in very early January each year. I sell the Shares in my Mutual Fund and Transfer the Cash into a 'Spending Account' that is earning about 2% currently.... In fact, I just did this yesterday.

 

[Dtail]

I transfer the monies monthly from my online savings into my brick and mortar. Not taking yet from TIRA/401K.

 

[audreyh1]

I sold my practice in May 2018 at the age of 54 and I continue to work about 12 hours a week for the new owner. After a lifetime of saving, 2019 looks to possibly be the first year where I will need to draw a bit from my portfolio to live off of.

I'm thinking that I could either liquidate my estimated needs for the year and have it in cash to draw from, or I could sell as needed in small amounts going forward.

I'm new to all this so I'm just curious- what do you all do?

I like to withdraw my annual income at the start of the year. I park most of it in a high yield savings account — some of them are yielding 2.2% or better — and then have what I need monthly sent to my checking account, kind of like a paycheck.

 

[SecondCor521]

I withdraw about a quarter's worth of expected expenses and then see how long it lasts. I have some non-portfolio income which can make it last longer. But like audreyh1, I park it in a HYSA and then have a monthly transfer to checking.

 

[googily]

If you aren't worried about ACA or Medicare cliffs, how much do you worry about withdrawals and your tax brackets? I'm plowing the max into my 401k/mega backdoor this year (still working), and so need money to replace that pay. I'm somewhat close to the top of the 22% bracket at my default (before charity, TLH, etc), so I find myself strangely hesitant to draw from my inherited IRA, because that will raise my income and send me into the 24% bracket. But I worry about getting too deep into my taxable account. On the other hand, I am looking at large RMDs in later years, which will also have me probably at 24% or whatever that current bracket would be. Is this reticence just the tax tail wagging the dog?

(Sorry to tag along into this thread, but it is related to withdrawal strategies .)

 

[DEC-1982]

I'm thinking that I could either liquidate my estimated needs for the year and have it in cash to draw from, or I could sell as needed in small amounts going forward.

I took a retirement income planning class in Jan 2012. The individual who taught the class said something that sticks in my mind. He said that just like dollar cost averaging helps on the way up by allowing you to buy more shares when prices are down, dollar cost selling is worse for you when making withdrawals by selling more shares frequently when prices are down. I haven't done the math to confirm that my instructor was correct; I took him at his word. You are welcome to check this out on your own.

Anyway, I tend to just make the one withdrawal at the beginning of the year.

 

[RunningBum]

I took a retirement income planning class in Jan 2012. The individual who taught the class said something that sticks in my mind. He said that just like dollar cost averaging helps on the way up by allowing you to buy more shares when prices are down, dollar cost selling is worse for you when making withdrawals by selling more shares frequently when prices are down. I haven't done the math to confirm that my instructor was correct; I took him at his word. You are welcome to check this out on your own.

Anyway, I tend to just make the one withdrawal at the beginning of the year.

That doesn't make sense because you don't know whether stock prices will be down or up in the future. And the general trend over time is up, not down, over time. The instructor is off in both the buying and selling scenario. In 25 of the last 30 years the stock market finished higher at the end of the year than when it started. That favors buying early while it's low, and spreading out selling over the year.

 

[Winemaker]

I keep 3 years worth of expenses in my stable value fund in my 401k. Yesterday, I pulled my annual allotment which will be put in a bank MM account. I will transfer monthly stipend last day of month.

My first year of retirement, I took monthly withdrawals. That proved to be a royal pain in a$$, as I had to wait for the three day settling period, which had to be business days, and they would send a check via snail mail. I may or my not be in town. If I chose a wire transfer, it was $25 a pop.

 

[Joe0401]

Curious, where do you make this annual withdrawal from? Is it an Ira? Is it savings? Will savings be depleted after so many years.

 

[Joe0401]

I will be 62in a few months. I retired at 60. I took a lump sum retirement rather than monthly and split that between stocks and bonds. Now I’m watching that take a hit on a daily basis. Maybe I should have taken the monthly from my work. Oh well. I have been living on savings. Soc security check will help out soon. Also have a variable annuity which earns 6% a year, as long as I don’t touch it till I’m 65, then I’m guarenteed 5% a year withdrawal.

 

[sengsational]

If you aren't worried about ACA or Medicare cliffs, how much do you worry about withdrawals and your tax brackets?

As indicated here, that's the primary driver for me.

I'm not typical because "everything" is in "tax advantaged" accounts. That being said, I "do my taxes" in December and pull whatever amount from tIRA/401k that keeps my PTC ACA whole. Then, if during the year I need more, I pull from Roth/HSA.

But the main reason why I'm posting is to address the "market timing" aspect comments, because I don't think they apply if you're following your AA rebalancing plan. Either that, or it becomes a "how tight are your bands", and that gets a bit personal


What I mean is that, along with the shift of value from "wherever" into the spending account, in my case, there's also a rebalance. So even if I "sell low" to get the cash, I concurrently "buy low" in another account, making it a wash.



For example, let's say the best account to get the cash for next year happened to be in US equities (not really the way it is for me, but just for the example). Even if I sold at the pit of despair on 12/24, concurrently I'd be buying the same amount (or more) in another account. Kind of selling stuff to myself.


So although I "have to" do an tIRA/401k pull in December in order to align my tax situation, it has no effect on my AA, so no "market timing" is involved.

 

[Lewis Clark]

.... I'm thinking that I could either liquidate my estimated needs for the year and have it in cash to draw from, or I could sell as needed in small amounts going forward. ...

This article on Early Retirement Now address lump sum vs dollar cost averaging for investments. The basic logic is that since stocks generally go up over time, investing a lump sum is usually better than dollar cost averaging.

https://earlyretirementnow.com/2017/05/10/lump-sum-vs-dollar-cost-averaging/

For withdrawals, the opposite logic would seem to apply. It would usually be better to take the withdrawals a little bit at a time. The later withdrawals would come from stocks with higher valuations.

Of course, if you think the value of the investments is falling instead of rising, the opposite actions would be better.

 

[sengsational]

What to do with a windfall is not what most people think of when they think of dollar cost averaging; it's more like applying your fixed dollar monthly savings every month, whether the market is up, down or sideways. This way, you're guaranteed to "buy low", at least sometimes, building up the share balance more when the market is low.


As to how to reverse the process when you're in decumulation mode, it would seem to me you'd need to sell a fixed number of shares every month. So you'd always sell 10 shares. If the price was $10/share, you'd be able to spend $100. But if the price fell to $6, you'd only be able to spend $60 that month.

 

[RunningBum]

What to do with a windfall is not what most people think of when they think of dollar cost averaging; it's more like applying your fixed dollar monthly savings every month, whether the market is up, down or sideways. This way, you're guaranteed to "buy low", at least sometimes, building up the share balance more when the market is low.

And if you DCA, you're also guaranteed to "buy high", at least sometimes. Right?

As to how to reverse the process when you're in decumulation mode, it would seem to me you'd need to sell a fixed number of shares every month. So you'd always sell 10 shares. If the price was $10/share, you'd be able to spend $100. But if the price fell to $6, you'd only be able to spend $60 that month.

I don't see any reason why you'd have to do this. Sure, if you're decumulating a steadily falling asset, you might have to make some adjustments, but hopefully you're diversified and not all of your investments are dropping like a rock. How can you know whether it will keep dropping? And if somehow you do, you should dump it all at once before it drops any more.

 

[novaman]

I withdraw about a quarter's worth of expected expenses and then see how long it lasts. I have some non-portfolio income which can make it last longer. But like audreyh1, I park it in a HYSA and then have a monthly transfer to checking.

Thanks to everyone for all the responses. I really like this approach mentioned here because a quarterly approach will not be as tedious as a monthly approach but you are still taking a smaller periodic withdrawal. Also the idea of withdrawing a quarter's worth of expenses and seeing how long it lasts lights up the frugality part of the brain and will help to keep expenses more in line with the budget.

 

[Cut-Throat]

For withdrawals, the opposite logic would seem to apply. It would usually be better to take the withdrawals a little bit at a time. The later withdrawals would come from stocks with higher valuations.

Of course, if you think the value of the investments is falling instead of rising, the opposite actions would be better.

This is only if You believe that you can time the market............
Also, I like a 'Cash Cushion' of at least 2 years of fairly non-discretionary expenses. (which happens to be about 1 year of my VPW withdrawal)....


And finally making my withdrawal many times during the year, would add a level of complication to my taxes that I don't currently have... So, that is why I withdraw a Full year on Jan. 1

 

[Sunset]

For my dividends that get paid to my accounts, I simply withdraw those whenever I want more cash, or they build up too much and move them to a High yield bank account (maybe a cashable CD).