Do withdrawal sources matter much?

[donheff]

There was a thread on withdrawal studies a while ago. You may find it interesting. Although studies were not perfect and may be a bit biased, withdrawing proportionately across all funds in the article didn't look bad at all.

http://www.early-retirement.org/for...ow-kirkpatrick-of-can-i-retire-yet-81129.html

This guy's papers are right on point. His updated paper would put a CAPE based decision (with no re-balancing) a bit ahead of proportional but probably not enough to make me lean that way in my 80s -- proportional would be good enough then.

You should approach this from an asset location standpoint.

Here's what I would do.

It would be more efficient to maintain all equity (or as much as possible)in after-tax accounts and the fixed income in the tax-deferred accounts. This will protect as much of the qualified dividends and cap gains distribution from being taxed as income as possible.

If RMDs are more than enough for expenses, you shouldn't be selling anything from your after tax accounts. Use the excess to buy equities in the after tax account.

For selling within the IRA, it doesn't really matter. Sell (and possibly buy) to maintain the total AA (after tax + IRA)

On the first two suggestions, I am already there, fully understand what you are recommending, and am on-board. On the last point, I am getting toward that conclusion, especially for my doddering years. That was the only thing I was really interested in when I posted.

Obviously we're going to answer the question we want to answer, not the one you asked. You should know this by now...

Yeh, that is what makes it fun. ...

 

[robertf57]

This thread has touched on several issues, all of which impact the financial well-being of the retiree:

1) To answer the OP's original question, it makes no difference what you sell in the TD. Money is fungible. As long as you are maintaining a particular asset allocation by rebalancing at some interval, the only consideration is transaction cost(which should be trivial if you are on this forum.

2) you have decided that Roth conversions are not for you because you are in a high tax bracket. Ok.... Have you actually done the math on that? I-orp can be an eye-opener! And if it is a wash, my personal opinion is that tax rates will be rising. Choose accordingly.

3) RMDs are a separate reason to look at spending or converting the TD accounts above and beyond the tax rate issue. Make sure you have modeled RMD impacts as you age.

I think many people ( including me!) just look at the fact that they are currently in a high tax bracket and assume that Roth conversions are not for them. I was quite surprised when I actually reviewed the positive impact of moving money from TD accounts now into Roth.......




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[pb4uski]

I guess I am not expressing my question clearly. I have no question about what proportion to keep in equities or what accounts (TD vs taxable) to keep FI and equities. I just want to evaluate whether from a total return perspective when I make RMDs I need to consider whether to selectively pick sources or just proportionally liquidate.

Lets try another thought experiment. You have a $1,000,000 IRA with a 50/50 AA in VG total bonds and VG total stock indexes. You will need to do ~ $30,000 RMDs this coming year. Is it roughly a wash to let the financial institution make monthly 50/50 distributions from stocks and bonds with you doing periodic re-balances if needed or should you spend time evaluating market performance and picking which assets to tap at the end of the year?

In my case, I carry 1-2 years of cash so my monthly "paycheck" comes from that account and it gets replenished annually when I rebalance so it isn't an issue for me.

It seems to me that you have a few options.

1. Set up a proportional 50/50 autosell... easiest because you set it and forget it and just rebalance occasionally if things get out of whack.

2. Rebalance monthly when you do your withdrawal.. a bit labor intensive but you have the time since you are retired... once you get a process set up perhaps 10 minutes a month.

3. Take each month's withdrawal from the asset class that is overweight. Sort of in between 1 and 2.

If I were in your shoes, I would do 1, but that is because I'm lazy.

 

[donheff]

trivial if you are on this forum.

2) you have decided that Roth conversions are not for you because you are in a high tax bracket. Ok.... Have you actually done the math on that? I-orp can be an eye-opener! And if it is a wash, my personal opinion is that tax rates will be rising. Choose accordingly.

I am in the 28% bracket. I-orp recommends that I make some massive Roth conversions to gain a little theoretical spending long term (about 2% more per year). This would entail some big tax expenditures in the near term. I am not comfortable with that.

 

[Hermit]

I am in the 28% bracket. I-orp recommends that I make some massive Roth conversions to gain a little theoretical spending long term (about 2% more per year). This would entail some big tax expenditures in the near term. I am not comfortable with that.

+1 I was in the same situation. I did not have after tax money to pay the taxes. I would have been pulling money out to pay the taxes and then paying taxes on the money pulled out to pay the taxes. It did not make sense to me. I'll just leave my money in the tax deferred accounts and be happy with the gains on the money I would pay in taxes.