Rules on Where to Draw From?

[HI Bill]

I've seen lots of threads discussing when to take distributions in ER, but can't find any that discuss the method of setting up ground rules as to where to draw from (cash when markets are down, equities when markets are up, etc.). I try to make my annual distributions from my brokerage accounts in one or two large transactions as early in the year as possible, trying to 'lock in' gains, and selling relatively 'high'.

But how does one determine which fund to draw from when the market is down, 10, 20, 30%, etc.? I have 3 years of expenses in bond funds and money market accounts and am employing a quasi-bucket approach.

This year, the market was in relatively good shape on January 3 and yesterday, March 24, so I made my distributions on those two dates, drawing from equity funds that were comprised of 50-64% LTCGs, while also trying to do a little AA rebalancing. [I'm trying to sell enough to meet the LTCGs MFJ limit of $83,350 for 2022].

Thanks for the input!

 

[audreyh1]

My rebalancing calculation tells me exactly where the money ultimately comes from. I don't have to worry about what the markets have done.

I usually take from cash initially (as I don't reinvest distributions, so cash grows a bit near the end of the year), and then I rebalance which takes from whatever is needed - bonds or equities.

When the market is down - you end up pulling from whichever is down less. If equities are down 10%, 20%, or 30% you are going to be pulling from cash and fixed income as needed until your portfolio is back in balance.

So, my above explanation is for having a target asset allocation and rebalancing say once a year when you withdraw. It's not the same as buckets.

 

[Montecfo]

I am an active stock investor. My taxable brokerage account consists of equities only. I also have cash in taxable savings and CDs which is a potion of my fixed income allocation. The balance of my fixed income (the lions share) is in tax deferred.

I pull first from cash in my taxable savings accounts or CDs.

I replenish the cash opportunitistically when I sell equities in my taxable account and before reinvesting.

I am usually holding winners and uaing those for charitable contributions, so my sales are usually positions with small gains or losses. That is unless I am gain harvesting as I did in the fall to lock in gains at low tax rates.

Not sure any of this rises to the level of a "rule" but is it what I do.

 

[frayne]

In my way of thinking it's the same pair of pants, different pockets. I pull from whichever pocket will keep my tax liability at the lowest amount, now and in the future. YMMV.

 

[COcheesehead]

For me it’s easy. I have a muni bond ladder. The ladder produces all of our retirement budget. The equities ride and will ride for 10+ years. It’s almost on auto pilot.

 

[easysurfer]

I think there are no hard and fast rules.

Kinda like no rules as to how to gather your tax info for tax time. Folders? Shoebox? Main thing is as long as you have some system that works for you.

 

[Which Roger]

My rebalancing calculation tells me exactly where the money ultimately comes from. I don't have to worry about what the markets have done.

This, and also tax considerations. DW and I have a target for how much income we want each year, so we balance rebalancing considerations (pun sort of intended) with selling assets that will give us the needed amount of spending money and, at the same time, the desired amount of income.

 

[RunningBum]

When I first ER'd, I followed audrey's method in post 2: spending distributions and withdrawing from the underweight part of my AA to cover the rest.

When the ACA came about I came up with a plan to have cash available to age 65 without having to sell appreciated stock funds in taxable. I guess that's a bucket, right? I set up a CD ladder and as a CD matures each year I keep money to add to the year's spending money. I have some other "ready money" in VG ST TIPS. If I need to rebalance, I do it in an IRA.

I'm leaning away from an X%/Y% AA to a 4 bucket approach (short, medium, long term and estate) which will influence where I take from after I'm on Medicare. That's 5 years away so right now I'm tracking to both an AA and buckets, which have about the same result right now so I don't need to commit yet.

 

[ER2B]

I do every other year LTCG up to zero taxes and every other year Roth conversion up to 22%. I spend what's left from paying taxes on the conversion.

 

[SnowballCamper]

If you have a set asset allocation, just do the withdraw at the same time as the rebalance.

 

[Navigator]

This is an excellent question. I take first from after tax accounts (cash and stock), taxable IRAs next, and try to never touch my Roth accounts. Within the IRA, I try to rebalance my accounts with my withdrawals so as to maintain a 60/40 portfolio. I sometimes see that people withdraw from cash and bonds only when the market is down. This leads to a variable asset allocation and makes it difficult to predict what the portfolio will do in the long term. Many times I thought the market was high or low, only to be proven wrong, so I try to avoid market timing now.

 

[sengsational]

ground rules as to where to draw from (cash when markets are down, equities when markets are up, etc.).

I think this is a non-question if you ascribe to keep to a target asset allocation. Maybe because so many of the members here DO have an AA target to which they align periodically, there's no reason to worry about that question.

My answer is to take the money from wherever it makes the most sense from a taxation perspective, and rebalance after.

Let's say the best place, tax-wise, had you selling a prized position because it was in an IRA. Well, just "sell to yourself" in the 401k, Roth, or after tax account. There are limitations, such as only one place (401k) for a guaranteed income fund, but for most situations, there's really no need to fret about where to pull depending on market conditions beyond the tax consequences that might tilt the decision.

 

[NW-Bound]

I withdraw throughout the year and my WR is small and less than the dividends and interests that I receive. I could be 100% invested, and always have the cash I need to withdraw.

However, I also practice tactical AA with a large cash position. This means my selling/buying moves a lot more cash than what I withdraw for spending. Because of a large cash portion, when I make a transaction, the buy/sell decision is completely decoupled from the need to have cash for withdrawal.

 

[BuysToys]

I withdraw once a year as part of my rebalancing activity. The money comes only out of an IRA. It's always a percentage of equity and bond holdings. For the past six years, it's been mostly equities with just a small smidgeon of bond. I'm taking about 3% of our total portfolio as the annual withdrawal. I rebalance the Roth accounts, but we have no plans to touch them until/if we need LTC.



We also have about 5% of our holdings in cash. While not likely the optimal method, we can hold off on any withdrawals for a couple of years if necessary. That allows us to sleep at night.