alternate withdrawal method comparison computation help

[Ready-4-ER-at-14]

Hi, I've been slowly converting a bunch of individual stock holdings to an index based method as many here seem to do. My understanding that people then take out some value from that periodically and let the rest hopefully grow.

I have also observed that a total withdrawal rate somewhere between 3-4% is often used.

We have a couple years coming where the passive money should just about pay for for everything with a bit of a buffer in cash for the unexpected. Some of the holdings have appreciated in the last quarter and I want to take some out of the fund and just have the extra cash there too. What i am looking specifically at is in a Roth that can be tapped without any penalties or taxes.

Any idea roughly how to determine what withdrawing say 25% of the increase of a major index fund like SPY or DIA quarterly would relate to in a percentage withdrawal scenario historically? I would not tap it if it were flat or down.

There might be an old thread on this but if so I'm not sure of key words to search here. It certainly seems sustainable and obviously if the fund were up 2% a quarter it would be taking out around 2% annually. My gut reaction is that is about what it would be historically.

Thanks for a response and I'm hoping i won't have to type a bunch of stuff into excel to get an estimate.

 

[audreyh1]

The withdrawal schemes modeled are not based on portfolio growth. What do you do when it drops - put money back?

I think you’re going to have to model this yourself.

 

[CRLLS]

It sounds like you want to adjust your W/D because you are feeling you can based on the recent market results. This is not an uncommon feeling. This is not the 3-4% (plus inflation) W/D strategy often cited. Instead of that method, I would suggest you look at the "retire and retire again" method of W/D and see if that fits your comfort level. The question about using a Roth as a tax free cash bucket account is more of a tax arbitrage question vs a 25% of gain W/D method IMO.

 

[Exchme]

Can't really figure out what you are trying to do so just a couple general points.

You can only fill your Roth with money from your tax deferred and you have to pay taxes on the amounts withdrawn from your tax deferred to do the conversions to Roth. If you are over 59.5, then you can withdraw your contributions to a Roth at any time without penalties or taxes. You have to leave the gains you made (while in the Roth) in the Roth for 5 years to avoid taxes on them. The rules are more restrictive if you are under 59.5.

However, depending on your tax bracket once RMDs get going, the Roth may be the very best thing to own, so I would not lightly take money out of it. Do some studies in I-orp (i-orp.com, scroll down to see the word Extended version) to see if you should be doing some Roth conversions. It is easy to fill out the forms and the on line explanations are good.

 

[Ready-4-ER-at-14]

Thanks for the comments.

to Audrey who asked, " What do you do when it drops - put money back? "
I would only take money out when the quarterly value had increased. So if the indexes dropped i would still have a loss of account value and no spending from that account. The idea was in a rising index part of gain is removed. My understanding is historically markets can drop and take 7 years to return to the pre drop prices. I assume maybe 1/4 of that time quarterly values would increase.

To CRLLS who suggested I look at the retire and retire again strategy. TY that was a good alternative to what I was suggesting. I read quit a bit about it and sort of got overwhelmed in the details of possible complications. I'll need to let the subconscious chew on that for a bit and revisit it. I can see how what I am contemplating and doing a little now is sort of a retire and retire again as some quarters I would delay distribution (ie put off retirement distribution).

To Exchme we are heavy in portfolio value in roth and tax deferred. Fixed income ladders are in tax deferred set to mature for distribution or Roth conversion. Type of holding was mentioned just so people would not take tax considerations into account in answers. Sort of my attempt to keep the answers simple.

 

[Exchme]

Sounds like some kind of soft rebalancing/prime harvesting. Most people would just set their asset allocation percentages and then rebalance occasionally to maintain it.

To specifically evaluate your idea, I think you are going to have to make your own spreadsheet. You can find the historical returns you need in various places. For instance earlyretirmentnow.com has a large spreadsheet in his SWR series that includes month by month returns of the S&P and other indices you need (inflation, 10 yr treasury, etc.). A lot of work has been done on optimizing withdrawal schemes already and that site in particular has a lot of interesting articles on the topic of withdrawal rates.

The Bogleheads.org wiki is also always worth checking out, the reading is dry, but lots of knowledge.

in general, optimizing your withdrawal scheme is not as important as maintaining your asset allocation and not overspending.

 

[Ready-4-ER-at-14]

Sounds like some kind of soft rebalancing/prime harvesting. Most people would just set their asset allocation percentages and then rebalance occasionally to maintain it.

To specifically evaluate your idea, I think you are going to have to make your own spreadsheet. You can find the historical returns you need in various places. For instance earlyretirmentnow.com has a large spreadsheet in his SWR series that includes month by month returns of the S&P and other indices you need (inflation, 10 yr treasury, etc.). A lot of work has been done on optimizing withdrawal schemes already and that site in particular has a lot of interesting articles on the topic of withdrawal rates.

The Bogleheads.org wiki is also always worth checking out, the reading is dry, but lots of knowledge.

in general, optimizing your withdrawal scheme is not as important as maintaining your asset allocation and not overspending.

Thanks the data link you supplied. It should allow me to create what I need. However being lazy I was hopping someone would mention something like a tradestation guru site where you could set parameters and let them run the back test for like $20. lol. Sort of like the site where part time artists create something from an old photo and do it on the cheap as it only takes them maybe 30 minutes to whip something out. I suspect they paint over a low resolution printed picture they create.

 

[Exchme]

Thanks the data link you supplied. It should allow me to create what I need. However being lazy I was hopping someone would mention something like a tradestation guru site where you could set parameters and let them run the back test for like $20. lol. Sort of like the site where part time artists create something from an old photo and do it on the cheap as it only takes them maybe 30 minutes to whip something out. I suspect they paint over a low resolution printed picture they create.

Not heard of a low cost service to analyze finances, usually it's a high priced advisor that knows less than you'd hope and just wants a piece of your pie. In general the exact strategy matters less than keeping spending reasonable. And of course being lucky enough to retire when the markets are doing well. Withdrawal strategies are also complicated by lumpy spending or income. In my case, I see that once SS kicks in, my withdrawal rate plummets. So if I wanted to, I could spend more now, but my stodgy cheapness prevents that and that is all the budgeting I need.

 

[Ready-4-ER-at-14]

For jollies I went to yahoo and got the monthy data for SPY going back to july 2010 and plugged that into a spreadsheet seeing what 100k would have given taking out 4% annually with end of day data. (7 column just means 7th month).
7/1/10 7 110.27 (share price was 110.27)
7/1/11 7 129.33
7/1/12 7 137.71
7/1/13 7 168.71
7/1/14 7 193.09
7/1/15 7 210.5
7/1/16 7 217.12
7/1/17 7 246.77
7/1/18 7 281.33
7/1/19 7 297.43
7/1/20 7 326.52
I to that she sum taken out was 64,892.52 and the value of stock left was 196,863.29.
I tried what I had been contemplating I got 65,355.38 taken out and value of shares at end at 266,364.53.

maybe this idea worked better because the maket went up so much or maybe my excel formulas were wrong somehow. Anyhow I had suspected that it might be a similar result.

If someone wants to play with this, verify my numbers, disprove them, correct them, be my guest. It was a mental game for me.