VPW and market timing

[Golden Mean]

Someone here does something sort of similar in terms of sequestering unspent money. Either @audreyh1 or @athena53 maybe?

Thanks. I hope they are and reply here.

How about INVESTING unspent money?
As you mentioned, we all have big ticket items from time to time, so then you'll be all set ..

That would be the same as under spending/taking out only what you need. Which is fine, but not how I'm approaching this.

P.S. Does anyone know how to quote all quoting/responses contained in a single post? I could not figure out how to quote TheWizards response and his quoting of SecondCor521 all in one go. Nesting them would be nice too.

 

[SecondCor521]

Basically at the end of the year I always figure out how much I get to spend the following year each month based on my VPW withdraw for the year. Then I just have that much moved out of my portfolio each month to our Fido checking account (the excess always goes to the "big ticket account"). Since I gave myself " a loan" of $41,400, I just moved $1800 less per month for the next 23 months to compensate for the loan amount. Honestly, it was not that hard to live on the new, lesser amount, as we rarely spend our monthly allotment anyway. The point was mostly to make me aware to slow down our burn rate.

OK, I get how you repaid the loan with a lower withdrawal. But where did you pull the $41,400 from in order to buy the thing? (I haven't paid attention to your particular accounts and setup which you may have already explained; I have a weakness that way, sorry. I also didn't even pay attention to what you spent the $41.4K on in the first place.)

If you have just a big taxable slush fund of cash, that would be one way to fund the thing, for example. In my setup I don't; I have a taxable account but it's fully invested.

 

[audreyh1]

How about INVESTING unspent money?
As you mentioned, we all have big ticket items from time to time, so then you'll be all set ..

If not needed at the moment I invest unspent money in short-term funds such as CDs, T-bills, etc. Keeping an eye on cash flow of course. I do keep it sequestered.

 

[Mark1]

OK, I get how you repaid the loan with a lower withdrawal. But where did you pull the $41,400 from in order to buy the thing? (I haven't paid attention to your particular accounts and setup which you may have already explained; I have a weakness that way, sorry. I also didn't even pay attention to what you spent the $41.4K on in the first place.)

If you have just a big taxable slush fund of cash, that would be one way to fund the thing, for example. In my setup I don't; I have a taxable account but it's fully invested.

I would have just pulled it out of my Marcus on-line saving account, which I use as intermediary account (although I do treat the account balance as part of our portfolio for my calculations). All of our withdraws from IRA, 401K, etc. go through this account as it provides us our monthly transfer (i.e. pay check) to live on each month.

Yes, it would have lowered the amount in our safe money category and elevated our equity % slightly, but I just ignored that fact. Besides it would slowly get built back up by $1,800 every month.

 

[Lsbcal]

There are only 3 or 4 states that have the percentage test you are referring to.

Everywhere else, you can deduct the percentage of the interest that is from government obligations.

I do not know which states are in that "test" category. But here is the link to the percentages of Treasuries in each fund last year: Treasury percentages

That link shows that VUSXX had 80.05% and VMFXX had 49.37% of "U.S obligations" for 2023.

For more info see Gumby's post here: info on state taxability

 

[Montecfo]

I think sequestering the funds makes sense if they are being held for short-term spending. If not, to me they should just be invested in accord with your AA.

But the penalty for keeping the money uninvested is rather low now with ST interest rates as they are.

Not sure if there is "science" to back the sequestering approach. I guess in some ways it depends on how tight your spending it relative to the withdrawal amount.

I respect that folks using this method have researched and become comfortable with the risk/reward.

I just have to plead ignorance or confusion. Maybe both .

 

[Golden Mean]

I think sequestering the funds makes sense if they are being held for short-term spending. If not, to me they should just be invested in accord with your AA.

I think you are right. If I continue this way and the market continues its run, it'll eventually skew my AA.

But the penalty for keeping the money uninvested is rather low now with ST interest rates as they are.

Yeah, it's easy right now with the yield curve inverted. Cash and fixed income, for me, are the same thing. Eventually I might be moving my true fixed income stash to a bond ladder, which will make the sequestered cash start to look sub-optimal.

Not sure if there is "science" to back the sequestering approach. I guess in some ways it depends on how tight your spending it relative to the withdrawal amount.

I respect that folks using this method have researched and become comfortable with the risk/reward.

I just have to plead ignorance or confusion. Maybe both .

Makes two of us, which is why I started this thread. It made me look closer at the situation. Although I was hoping someone would chime in and say, "You know, essentially what you are doing is THIS". Whatever THIS might be.

 

[Lsbcal]

If you are somewhat proficient at spreadsheets you can easily revise VPW to model your method. I have done this and then played with AA's and worst start dates like 1929, 1966, 2000, 2008, etc.

 

[TheWizard]

If not needed at the moment I invest unspent money in short-term funds such as CDs, T-bills, etc. Keeping an eye on cash flow of course. I do keep it sequestered.

Ok, so here's my situation in more detail.
When I retired in 2013, I had a large tax-deferred account, a modest Roth IRA account, and zero taxable account.

Because I annuitized a hefty amount of my tax-deferred with TIAA, I started having excess retirement income in 2018 or thereabouts, and especially after starting age 70 SS in 2020.

So I "sequestered" my excess income in my fledgling taxable account, 95% in stock index funds.
I started RMDs in 2022 so I have even more excess income now.

And my taxable account has grown from zero to over $300k. So that money is available to spend as needed but I have no expectation of spending most of it..

 

[big-papa]

I retired 3 years ago at 51 and started using VPW last year. In that year I used VPW as a kind of roof/sanity check on spending and only "cashed in" what I needed to spend. This year I am selling (equities) monthly at the amount VPW states, which is currently (50%-80%) higher than my monthly spend. The excess funds are going into VUSXX (to keep them mentally separate from VMFXX). I don't include the VUSXX amount in my VPW, "Portfolio Balance". i.e. I'm counting the VUSXX money as spent.

Now, I may spend that VUSXX money on travel this year, in which case I guess I'm doing things "the VPW way". BUT if I don't travel/spend the VUSXX funds and carry them over to next year, I wonder if I'm doing some weird version of market timing.

Anyone doing something similar, where they have a set withdrawal rate/amount and if it's greater than expenses they "sequester" the excess money in some manner?


A couple of other things:
Because the market is rising, my AA is not changing with this behavior, so far. So it almost seems to me like I'm re-balancing (monthly) in some half-assed way.
I once read (here, bogleheads?) that it's better to spend (more) in the up years than to spend less in the up years in preparation for down years.

Any thoughts are appreciated.

I don't use VPW but I do use amortization to make my withdrawal calculations - in practice, the only differences are that I prefer to use my own spreadsheet and I prefer to use expected returns in the amortization calculation instead of a fixed rate like the VPW author chose.

I'm doing something similar to what you did originally. I make my withdrawals calculations quarterly and treat that number as a "max". I then make the actual quarterly withdrawal and hold that in an ultra-short term bond fund from which I distribute to my checking account monthly. So far, I haven't even had to come close to actually withdrawing the prescribed amount. Over time, that should just add more margin to my withdrawals for whatever (big spend, emergency, legacy, etc.)

I don't see any reason to be "out of the market" by holding cash-like investments for long periods of time without a specific, planned purpose. I do have 2 chunks like that set aside. The first one is for some home improvements (again in an ultrashort bond fund) and the second is our I-bond stash which we're thinking of using for the possibility of purchasing a SPIA later in life if longevity appears to be in the cards.

Cheers.

 

[audreyh1]

Ok, so here's my situation in more detail.
When I retired in 2013, I had a large tax-deferred account, a modest Roth IRA account, and zero taxable account.

Because I annuitized a hefty amount of my tax-deferred with TIAA, I started having excess retirement income in 2018 or thereabouts, and especially after starting age 70 SS in 2020.

So I "sequestered" my excess income in my fledgling taxable account, 95% in stock index funds.
I started RMDs in 2022 so I have even more excess income now.

And my taxable account has grown from zero to over $300k. So that money is available to spend as needed but I have no expectation of spending most of it..

At some point you’ve gotta decide what to do with excess as it builds up. As you age, make sure you are not putting off important priorities. We’ve increased our gifting at times. Quite a bit is for near future increased spending - for example we really underspent during the pandemic years because we didn’t take our usual elaborate trips. Playing catch-up now as we can. We did finally buy our Model X after delaying car buying several years for non-monetary reasons.

 

[TheWizard]

At some point you’ve gotta decide what to do with excess as it builds up. As you age, make sure you are not putting off important priorities. We’ve increased our gifting at times. Quite a bit is for near future increased spending - for example we really underspent during the pandemic years because we didn’t take our usual elaborate trips. Playing catch-up now as we can. We did finally buy our Model X after delaying car buying several years for non-monetary reasons.

I'm not sure it's crucial to have a plan for spending all your money.
I just bought a new Mustang convertible last fall and after we did our first European river cruise in May, I booked another one for 2025 and am looking at yet another one.

I have no LTCI, so maybe I'm self insuring for that possibility down the road.
It's all good...