Retirement withdrawal question

[Flyfish1]

I've been retired for 6 months now and have yet to sell a share of stock, due to dividends, real estate income and a final work bonus. But, now I have to start the process of the long slow drawdown and perhaps this is a naive question so please excuse me. Do people typically draw down on all assets at the same time or do you take from the winners and leave the losers for another day? So, if I'm 60/40 for sake of argument and the bond side had a rough year, do I draw only from the equity side and then rebalance at some later date? Or just draw down on both the equity and the bond side ?

 

[pb4uski]

There is no right answer and it depends on whether the winners and losers are in taxable or tax-deferred accounts.

It sounds like some is in taxable accounts, in which case you should consider sellng selling at a loss and then buying something similiar enough to avoid the wash sale rules. once you have crustalized the loss you can, but don't have to, sell some others at a gain and immediately rebuy the same stock, which increases your basis for when you sell later (referred to as gains trading)

When drawing, many people will draw from equities or fixed depending on what is overweight compared to their target asset allocation... so if they are overweight in equities they will sell equities to bring themselves closer to target, and vice versa if overweight in fixed.

 

[PaunchyPirate]

I also think there is no one mandatory answer. I am currently in a phase of spending from my taxable brokerage and keeping my IRAs untouched while trying not to earn too much income so that I maximize ACA subsidies. My sequence/approach on deciding where to withdrawal is:

1. Always keep an eye on the asset allocation to make sure it stays within reasonable balance of where I want it. I target 60/40, but I don't panic if it becomes 63/37.

2. Try to sell an asset that is at a loss so I can realize a capital loss.

3. If I have a capital loss, try to sell something at a capital gain to match the loss.

4. Sell from a money market fund (with no capital gain) if funds exist and if this won't put my asset allocation out of balance.

5. If I have to sell any other investment, I would sell from one that realizes the smallest amount of capital gain.

6. If I had an investment that I really wanted out of, I would likely sell that higher in the priority list.

7. Sell to assist in maintaining the asset allocation balance.

 

[SecondCor521]

I agree with the previous posts.

So, if I'm 60/40 for sake of argument and the bond side had a rough year, do I draw only from the equity side and then rebalance at some later date?

If you do this, then understand that you're temporarily changing your asset allocation. If you're drawing 4% per year and take it all from equities, then you'll end up at something closer to 56/44 until you "rebalance at some later date".

Maybe you want to change your AA to be more conservative during that interim, maybe you don't. But if you draw from one side or the other you will shift your AA at least somewhat.

If you draw from one area then immediately rebalance, it doesn't much matter where you draw from. Ignoring taxes, of course, which should not be ignored. ;-)

Personally I draw from investments as needed and usually monthly, and I rebalance regularly and mechanically to my target AA as needed. Since my draws are relatively small and my rebalance bands relatively wide, this works for me. If I were drawing a higher percentage or had narrower AA bands, I'd probably be more attentive to it.

 

[SnowballCamper]

I think the big consideration is if the draw is from a taxable brokerage or an IRA that is taxed as regular income. It's probably prudent to consider capital gains taxes, but that doesn't matter on the IRA. It seems that there might be fewer transactions if you rebalance at the same time.

 

[HI Bill]

5. If I have to sell any other investment, I would sell from one that realizes the smallest amount of capital gain.

I practice the opposite, with an eye on total taxes over my lifetime.

While maintaining most of the 0% tax bracket on LTCGs, I sold a bunch of equities that had 50%+ gains, and sold tax-deferred equities (100% taxable), even though I have no RMDs this year. If I deferred selling all of my tax-deferred assets until later, I'd just have SS and 100% taxable tax-deferred withdrawals, and my tax rates would be much higher than they are now, especially if I can 'reset' the basis on my tax-deferred investments at lower tax rates. My spreadsheet showing annual withdrawals (aka, 'income) over my remaining lifetime also includes tax calculations, and while I'm currently paying ~$15K in annual taxes, they'll rise to over $30K annually when I have RMDs and SS, and have expended most of my taxable investments.

 

[mrfeh]

If you do this, then understand that you're temporarily changing your asset allocation. If you're drawing 4% per year and take it all from equities, then you'll end up at something closer to 56/44 until you "rebalance at some later date".

Just wanted to correct this misunderstanding...if nothing else changes, the AA would be 58.3/41.7 after the withdrawal.

 

[TheWizard]

I also think there is no one mandatory answer. I am currently in a phase of spending from my taxable brokerage and keeping my IRAs untouched while trying not to earn too much income so that I maximize ACA subsidies. My sequence/approach on deciding where to withdrawal is:

1. Always keep an eye on the asset allocation to make sure it stays within reasonable balance of where I want it. I target 60/40, but I don't panic if it becomes 63/37.

2. Try to sell an asset that is at a loss so I can realize a capital loss.

3. If I have a capital loss, try to sell something at a capital gain to match the loss...

I don't generally agree with #3.
I prefer to use $3000 per year of capital loss to offset that much of Ordinary Income taxed at 24% marginal rate.

My shares with with the highest unrealized LTCG will probably never be sold and will receive stepped up basis at some point...

 

[target2019]

I've been retired for 6 months now and have yet to sell a share of stock, due to dividends, real estate income and a final work bonus. But, now I have to start the process of the long slow drawdown and perhaps this is a naive question so please excuse me. Do people typically draw down on all assets at the same time or do you take from the winners and leave the losers for another day? So, if I'm 60/40 for sake of argument and the bond side had a rough year, do I draw only from the equity side and then rebalance at some later date? Or just draw down on both the equity and the bond side ?

There is no single answer. You can arrange all of the methods mentioned in the thread, and pick one that fits the moment.

If equity is up, that sounds like a good candidate. Depends on how tightly you want to control the 60/40 target, I suppose.

 

[big-papa]

A lot of people withdraw in whatever proportion keeps their AA close to their target once the withdrawals are complete. Beyond that, folks often look to make their withdrawals in the most tax efficient way possible.

By the way, it's not about winners or losers. Both could be losers but by differing amounts, such as we've seen with bonds and stocks in very recent memory.

Cheers.

 

[Flyfish1]

Thanks everyone.

 

[mrfeh]

A lot of people withdraw in whatever proportion keeps their AA close to their target once the withdrawals are complete. Beyond that, folks often look to make their withdrawals in the most tax efficient way possible.

+1

 

[SumDay]

I was also perplexed by this when we retired 5 years ago. I'd been following this guy's blog and found this post to be very helpful in establishing a procedure for us. I don't follow it to the letter, but it was written in plain English so I was able to grasp the concept and implement for our situation. So far, so good.

https://www.theretirementmanifesto.com/how-to-build-a-retirement-paycheck/

 

[Al18]

I’ve been retired for 5 years and so far have found it best to sell some fixed assets and some stock funds each year. On the stock side, I like to sell some with the most growth, and sell some of the losers. Those with the most growth tend to burn out after a number of years - it’s best to sell some when at their peak years. If you’re in the 12% tax bracket and married, you can sell a LOT of stock (over 100K) and pay no Federal taxes due to the 0% capital gains bracket. On the other hand, you’re going to be paying 10% tax on withdrawals from an IRA. I wouldn’t worry about maintaining your 60/40 ratio - it doesn’t change that much if you are pulling from both sides.

 

[jazz4cash]

, if I'm 60/40 for sake of argument and the bond side had a rough year, do I draw only from the equity side and then rebalance at some later date? Or just draw down on both the equity and the bond side ?

If you rebalance what difference would it make where you take income from an AA standpoint? I maintain a few years in cash equivalents so timing the rebalance is not important.

 

[oldtimer]

I’ve been retired for 5 years and so far have found it best to sell some fixed assets and some stock funds each year. On the stock side, I like to sell some with the most growth, and sell some of the losers. Those with the most growth tend to burn out after a number of years - it’s best to sell some when at their peak years. If you’re in the 12% tax bracket and married, you can sell a LOT of stock (over 100K) and pay no Federal taxes due to the 0% capital gains bracket. On the other hand, you’re going to be paying 10% tax on withdrawals from an IRA. I wouldn’t worry about maintaining your 60/40 ratio - it doesn’t change that much if you are pulling from both sides.

This statement may be true if you have no other income beside long term capital gains income. But incorrect if you have other types of income including short term capital gains.

 

[pb4uski]

^^^ It depends on how much ordinary income one has... if you have ordinary income that is less than the standard deduction and your total ordinary income and qualified income is less than the top of the 0% preferenced income tax bracket plus itemized deductions then you can have almost $120k of income for a married couple both over 65 and have $0 tax.

For example, MFJ both over 65 for 2023 if you have $30,700 of ordinary income and $89,250 of preferenced income (qualified dividends and LTCG); total income of $119,950 then your federal tax bill would be $0.

https://www.irscalculators.com/tax-calculator

 

[Gumby]

When we retired, I put my mutual fund distributions on cash pay instead of reinvest, so I have some actual cash to withdraw if I need to do so. To date, that hasn't been necessary, so I just invest in Treasuries. But it is nice having the option.

 

[Badger]

It has been 12 years since I retired early but only by 1 year. We are not big spenders. Before that time I put together a plan for withdrawals. It is only good for me and DW considering our situation and other than buying a CD using dividends from stocks there will be no other new investments. I have carefully chosen our investments. We have already won the race.
So far we have used very little of #1 and relied on SS, small pensions, and a little from dividends but there are no mortgage or loans and medical is taken care of with Medicare and Tricare.
1. Use checking, savings, and CDs first then
2. Use cash accounts from money swept from stock dividends then
3. Use cash from MM accounts from RMDs then
4. Roth IRA accounts then
5. tIRA accounts (Wellsley and Wellington) then
6. Stocks
If I go first my wife will never have to be concerned about money and her grown children will eventually have nice retirements too. I doubt we will ever get past #1. We still live a frugal but enjoyable life doing what we love.

Cheers!