Backtesting or Studies on Withdrawal Strategies versus DCA-out

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jmb1855

Dryer sheet aficionado
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If DCA-in is the best way to invest, is DCA-out the best way to withdrawal?

Any other withdrawal strategy seems to either be a form of market timing or risk mitigation at the cost of possible future gains.

Are there any studies which compare DCA-out to other withdrawal strategies like buckets, bond/CD ladders, etc?

My withdrawal rate is low enough that I believe that I can weather downturns of the normally expected types

Additional personal info if it’s relevant:

I’m over 5 years into retirement and have the common story: it’s all great, more money than when I retired, etc.

I’m currently 55YO, married and at a 2% annual withdrawal rate. All our retirement is self funded other than future SS. Healthcare is via ACA

I currently pay our monthly expenses by pulling money from a large non-retirement standard brokerage account. I pull money every month or so. We also have retirement accounts that we’ll use later. All accounts are invested in mostly equities and a three fund (primarily) type of portfolio

I don’t post often here but am reading posts often. The advice from folks on this website helped get me where we are financially 😎
 
I'm 11 years in to the 3 bucket strategy and so far it's working. Assets have doubled and we spend what we want. When we were w*rking, we netted about 80k after taxes and saving; we spend at least twice that now. In 2.5 years, I'll be 70 and turn the SS faucet on.
 
I understand the clarification. My DCA-in was because it was paycheck based which then appeared as DCA-in. Whenever I had money to invest, it was lump sum invested as I had it (monthly)

My question was about the withdrawal side. Are buckets or a different withdrawal strategy financially preferable to monthly withdrawals (assuming that a person has the risk tolerance and assets to weather market downturns)?

I don’t have the sophistication to run the back test and thought that someone might have already run across this comparison.

Nothing I’ve read ever advised monthly withdrawals so it made me question my approach
 
It's well-known that periodic contributions in the face of volatile prices is advantageous to the saver, but periodic withdrawals from a volatile asset hurt the spender.

Yes, buckets are an attempt to deal with this. But, they come with a cost (cash drag), and there are as many "bucket strategies" as there are adherents. To make them NOT be subject to the disadvantage of periodic withdrawals inherently involves a degree of market timing. (When do you refill the buckets?)

Have you read the Early Retirement Now series on SWR?
 
Thanks for pointing me back to the ERN series. It’s been years since I read it. Here’s the applicable link in case anyone else wants to review it:

Retirement Bucket Strategies: Cheap Gimmick or the Solution to Sequence Risk? – SWR Series Part 48 - Early Retirement Now

It leaves me back with my original premise that I’m not missing anything with buckets now because of:

My lower withdrawal % which gives me flexibility and risk mitigation during potential downturns.

The tax/ACA subsidy cost that rebalancing would cost me now while I’m managing MAGI for ACA

Where this might come into play for me in the future is:

When I’m not managing to a lower MAGI,

when I’m primarily using tax-deferred accounts, and/or

when we increase spending to a higher %

I’m all ears if anyone sees anything that I’m missing. Thanks!
 
Out-to-Lunch said:
It's well-known that periodic contributions in the face of volatile prices is advantageous to the saver, but periodic withdrawals from a volatile asset hurt the spender...
Click to expand...
I'm not sure that's well-known but I'm willing to read your references on this topic...
 
jmb1855 said:
I understand the clarification. My DCA-in was because it was paycheck based which then appeared as DCA-in. Whenever I had money to invest, it was lump sum invested as I had it (monthly)

My question was about the withdrawal side. Are buckets or a different withdrawal strategy financially preferable to monthly withdrawals (assuming that a person has the risk tolerance and assets to weather market downturns)?

I don’t have the sophistication to run the back test and thought that someone might have already run across this comparison.

Nothing I’ve read ever advised monthly withdrawals so it made me question my approach
Click to expand...
I don’t worry about DCAing out as I take it out once a year and rebalance if warranted. The models I’ve run and studied all do once at start of the year. That’s also most convenient for me to do it all at once.
 
I’m currently 55YO, married and at a 2% annual withdrawal rate. All our retirement is self funded other than future SS. Healthcare is via ACA
Click to expand...

At a 2% annual withdrawal rate, any reasonable portfolio will make it to the end of life.

The question for me was always, do I want the extra volatility?
The answer has been NO.
I never believed in DCA or buckets (why?).
 
Re: the classic withdrawal study, the creator of the 4% study, Bill Bengen, originally said a 50/50 domestic portfolio has always sustained 4% withdrawals for 30 years, with an inflation adjustment.

He’s now advising 65% stocks and a 4.7% safe withdrawal rate, with an inflation adjustment.

Here’s a recent interview with him. He Invented the 4% Rule | Bill Bengen on Why He Now Thinks 5% Works
 
At 2% withdrawal rate and you haven't claimed SS yet, you can withdraw any way you want.

EarlyRetirementNow did a study on buckets and the only thing that had usefulness historically was a small cash bucket at the start of retirement that you depleted at the first downturn and did not refill. And that case was only deemed useful because it made the worst case a little better and the withdrawal rate was much higher than yours so the extra cash bucket gave a small increase in the chance of success.
 
Thank you all for the double check. I’ll keep doing what I’m doing.

I’m keeping the annual withdrawal rate % low because of our ages (DW is 50) and because of:

Future lumpy expenses (car replacements)

A potential move to a different state

Increased travel

Along with those I plan to spend time researching one of the VPW methods. We have no plan or need for a large estate when we die

FD1000 said:
The question for me was always, do I want the extra volatility?
The answer has been NO.
I never believed in DCA or buckets (why?).
Click to expand...

Just to make sure I’m understanding your post, does this mean you just withdrawal as needed?

If so, what do you mean about extra volatility in this context? Thanks!
 
I am 56, single, retired about 10 years, on ACA, just under 2% net WR.

I believe it is best to invest extra money as soon as possible, and take money out for spending needs as late as possible.

So when I was working and had extra money, I invested it as soon as possible. Basically on payday and on January 1st or as soon as the check cleared.

Now that I'm retired, I spend on my 2% cash back Fidelity Visa CC. I sell from taxable every month and send the proceeds to my checking account a few days before Fidelity pulls my credit card balance. So one card, one manual transaction per month.

I don't think there's any need to back test the idea; I also think with a 2% WR you have margin to ignore any differences between the annual withdrawals that FIREcalc models and the monthly withdrawals you're actually doing.
 
jmb1855 said:
Thank you all for the double check. I’ll keep doing what I’m doing.

I’m keeping the annual withdrawal rate % low because of our ages (DW is 50) and because of:

Future lumpy expenses (car replacements)

A potential move to a different state

Increased travel

Along with those I plan to spend time researching one of the VPW methods. We have no plan or need for a large estate when we die



Just to make sure I’m understanding your post, does this mean you just withdrawal as needed?

If so, what do you mean about extra volatility in this context? Thanks!
Click to expand...
When you take a 2% withdrawal, your asset allocation can be more conservative.
 
The advice on DCA or not should be qualified by “on average”. I had a big amount to invest late 1999, and I’m glad I didn’t put it all in then. I didn’t because of the crazy valuations, and suddenly we have along drawn out 2.5 year bear market with a total drop of ~50%. Got lucky, but glad I went that route.
 
The advice on DCA or not should be qualified by “on average”.
Click to expand...
This is a really good point. "On average" doesn't apply to each of our individual actions. And you can be the outlier who gets screwed. When my wife sold her condo we invested half right away. Splitting the difference between lump sum and DCA - so we could avoid being the outlier. It's almost like sequence of returns risk! 🤔
 
jmb1855 said:
If DCA-in is the best way to invest, is DCA-out the best way to withdrawal?

Any other withdrawal strategy seems to either be a form of market timing or risk mitigation at the cost of possible future gains.
Click to expand...
A lot of this depends on your goals.

Not everybody in retirement has "future gains" as one of their goals. Our goals, in rank order:
#1 Make sure that we can pay all of our baseline bills
#2 Make sure we have enough for a reasonable guess at the magnitude of the inevitable surprises that come along in life as well as enough for discretionary spending
#3 Whatever remains after we're 6ft under goes to our sole heir, or any progeny of hers or, failing that, our favorite charity.

At a high level, what we're doing is described in this post: A nearly riskless and stable spending rule for retirement? Lets discuss the ARVA strategy.

It is not market timing and we're not trying to maximize future gains, though by circumstances, since we're not regularly spending from stock, that might ultimately end up being what happens. Or not. The future is unknown.

Cheers.
 
audreyh1 said:
The advice on DCA or not should be qualified by “on average”. I had a big amount to invest late 1999, and I’m glad I didn’t put it all in then. I didn’t because of the crazy valuations, and suddenly we have along drawn out 2.5 year bear market with a total drop of ~50%. Got lucky, but glad I went that route.
Click to expand...
I agree with this - the studies on DCA vs Lump Sum only show that, statistically, Lump Sum has come out ahead (the use of past tense is intentional). There is always going to be a distribution around that where it didn't and DCA would have come out ahead.

Cheers
 
If your WR is 2% I would't worry about anything. DCA out would work just fine. We are aiming for less than 3% WR and we plan to do DCA-out regardless of market fluctuations. IMHO a lot of discussions around withdrawal strategies are trying to find a goldilocks portfolio AA and/and size which becomes a moot point with a low WR like 2%. Try FireCalc and you will see what I mean. Your portfolio would be always higher than the starting value even in the worst case scenario.
 
Exchme said:
At 2% withdrawal rate and you haven't claimed SS yet, you can withdraw any way you want.

EarlyRetirementNow did a study on buckets and the only thing that had usefulness historically was a small cash bucket at the start of retirement that you depleted at the first downturn and did not refill. And that case was only deemed useful because it made the worst case a little better and the withdrawal rate was much higher than yours so the extra cash bucket gave a small increase in the chance of success.
Click to expand...

Here's the link that includes the "never refilled" cash bucket

“So, for the record, let me state that this cash bucket strategy seems to work pretty well, despite my previous doubts!

It’s relatively inexpensive insurance against Sequence Risk!

Think of it as a mini-glidepath during the first few years of retirement!

And it ‘only’ takes the flexibility of getting to 27.5x instead of 25x annual spending!”
 
This is all great info. Thanks!

I plan to ramp up our annual spend at some point after we make the lumpy expense decisions. It helps to know that I’m on a good track now.

Around that time I’ll look into potentially also moving to either a higher flat % annual spend or one of the variable spend models. If we make a move to a different state it’ll increase our monthly base expenses. That’s a primary reason why I’m keeping us at 2% now.

And also our ages, SR risk, initial financial concerns when retiring, etc.
 
First off, a bucket strategy is simply mental accounting for an overall asset allocation. Nothing wrong with that, if it helps you organize things. If you have 60% equity bucket, 30% intermediate bond bucket, 10% cash/ST bond , then you’ve got a 60/40 AA. And when the cash bucket is spent, it’s refilled by rebalancing. In most years, it will be equities sold to refill the cash.

I think it’s a matter of personal preference on a monthly, quarterly, annual, or random cash refill.

I hold a lot of individual stocks in a taxable brokerage. I just turned 60, so my 7yrs of retirement has been entirely from this account. I tend to sell in bunches and put the cash in a T bill ETF. If I only had a couple broad market ETFs, I would probably sell monthly.

If you think about it, DCA vs lump sum for spending is simply how you view rebalancing. Perhaps DCA is selling monthly for a “paycheck”. Lump sum could be an annual withdrawal/rebalance. Do what works for you.
 
The bucket strategy was developed by Harold Evensky, a financial planner. His book for financial planners makes it clear that the bucket strategy is not a return optimization strategy, but a client management strategy. When the market crashes and he gets panicked phone calls, he's able to tell them "You've got 5 years to recover. Go play golf."

If you assume the stock market has random noise, but an upward bias, lump sum investment will catch that upward bias. DCA in is a way to manage the possible regret of investing when the noise hits a high. DCA out will maximize the upward bias. In other words, on average, the longer you are invested, the better off you are.
 
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