Martha said:
Let me see if I can ask these questions in a way that makes sense. For retirees that are living off of their investments, how do you turn your investments into cash to pay your expenses? Do you just live off of dividends and interest ala the Norwegian Widow method? Do you keep a pile of cash around and live off of that? If so, how do you make the pile? Do you generate cash as part of rebalancing? From selling assets like mutual fund shares?
If you're not happy with the answers will you be keeping your job? That's a lot of pressure! (Just kidding.)
All our retirement portfolio's dividends & interest are distributed to our brokerage account's MM fund. We do the same with Tweedy, Browne's distributions (our only mutual fund) via EFT. Most of our bills are paid from the brokerage account (Fidelity's free electronic bill paying) and the rest are paid from my checking acount (EFT). It's pretty well balanced. My military pension is direct-deposited into my checking account and the mortgage payment is deducted a few days later. I also pay the property taxes & estimated federal taxes from checking. We transfer some cash from checking to the brokerage account once or twice a year for the higher interest rate.
At the beginning of each year we want to have a year's expenses in the brokerage's MM and another year's expenses in a CD. On the first business day of January (an arbitrary choice) I'll liquidate enough of whatever's had the best year to bring us up to those levels. We skipped 2003 liquidations but for the last two years we've sold Tweedy from our taxable account. Tweedy took off like a rocket last month and unbalanced the asset allocation so we liquidated another years' worth of expenses last week. We'll probably skip next January's sale.
If our portfolio tanks next year (no 2006 gains from any of our investments) then we'll use up the MM and start in on the CD. After the CD is gone we'd sell whatever investments had lost the least. If our portfolio kept losing money then in "bear year" #4, #5, #6... we'd probably think about cutting back on expenses.
I'm glad Tweedy is doing so well because that makes it easy to liquidate our only actively-managed fund (with the highest expenses). We're selling off the taxable account first to let the IRAs continue compounding. The vast majority of the shares were purchased in the '90s so all taxes are long-term cap gains.
Our household's in-depth financial analysis discussions go something like this:
Me: "Wow, look at how much this fund has risen!"
Spouse: "Sell!"
Martha said:
A related question is moving from the acquisition phase to a distribution phase. At a high tax bracket due to earnings, a person might chose to minimize assets that pay an income since so much of that income goes to taxes. Do you gradually drift into a new type of portfolio?
Ah, the baby-boomer liquidation question, where the retiring boomers kill the stock market by fleeing it en masse. When you ER are you guys going to sell all your stocks and buy bonds? Can you let us know a couple days beforehand?
But seriously, we haven't moved anything for retirement reasons although I can understand the desire to do so. We bought the DOW Dividend ETF (DVY) because it looked like an underpriced large-cap value fund but I've been surprised at my happy emotional reaction when the dividends pop up in our account.
You saw TH completely overhaul his portfolio last month for their life circumstances and I think he tries to preserve his principal while living entirely off the dividends.
Hopefully one of you qualifies for the IRS term
"real estate professional" if you need more deductions from rental real estate losses. I started putting that on our tax returns the year after I retired.