Withdrawal confusion

[SB1961]

I have been lurking for a few years regularly reading the forum posts and have just joined today, so please bear with me if my first post is a naive one.

I am 59 and looking to take ER and to do so sooner rather than later as I have a year’s notice period (yes you did read that right).

Posters regularly mention a 4% withdrawal rate from their capital to ensure that they hopefully have sufficient funds to “see them out” but I am thinking why do I need to withdraw any % if I am receiving regular income that replaces my salary or am I missing something ?

I have in round terms 35 investments that total £3m which in anticipation of ER I have mainly changed in the last year from £2m growth investments & £1m income investments to £2m in income investments & £1m in growth investments. The income investments are currently producing c£120,000 per annum.

My salary is £120,000 and after 40+ years working in the industry I am in, I am now fed up of the corporate politics, targets, regulations, etc and thinking that the income from my investments with the changes I have made is the same as my salary, so why don’t I resign and simply replace my salary with my investment income.

It would appear that my investment income is sufficient to not have to withdraw from capital, especially as pensions will add to the income in due course, albeit I can withdraw in due course if I needed to.

Assuming I am not missing something, perhaps it is just a change of mindset I need from receiving a regular salary from my employer to effectively receiving the same income but from my investments.

So the regular question, am I good to go ?

 

[DayDreaming]

By not reinvesting the income that your investments produce, you are in effect withdrawing that money.

4% withdrawal rate is used as a guideline for when you have no other streams of income, i.e. no pension, no social security. When you have other streams of income, you may not need to withdraw from your investments, it really depends on the individual's situation. It sounds like you may not need to touch your principle, but, if you do spend that £120,000 per annum that your investments throw off, that is a withdrawal.

 

[ERD50]

By not reinvesting the income that your investments produce, you are in effect withdrawing that money.

4% withdrawal rate is used as a guideline for when you have no other streams of income, i.e. no pension, no social security. When you have other streams of income, you may not need to withdraw from your investments, it really depends on the individual's situation. It sounds like you may not need to touch your principle, but, if you do spend that £120,000 per annum that your investments throw off, that is a withdrawal.

+1.

Also, the 4% guideline (maybe reference point is a better description?) includes an inflation adjustment each year. Again, of course this doesn't mean you need to take that out, just that historically an inflation adjusted 4% Withdraw survived 95% of 30 year periods (US history). Your "income" from the portfolio may or may not keep up with inflation.

And at age 60, you probably want to plan for more than 30 years, which will take the historically safe withdraw rate down a bit (~ 3.2% gets you to a historically 100% safe 'forever' portfolio).

So your $120,000 withdraw of the income being produced is a 4% withdraw (120,000/3,000,000 = 4%). So pulling all of that out, and adjusting for inflation, puts you on the edge, historic-wise. But could be fine if pensions make up a buffer. Is your pension inflation adjusted?

-ERD50

 

[Surewhitey]

I have been lurking for a few years regularly reading the forum posts and have just joined today, so please bear with me if my first post is a naive one.

I am 59 and looking to take ER and to do so sooner rather than later as I have a year’s notice period (yes you did read that right).

Posters regularly mention a 4% withdrawal rate from their capital to ensure that they hopefully have sufficient funds to “see them out” but I am thinking why do I need to withdraw any % if I am receiving regular income that replaces my salary or am I missing something ?

I have in round terms 35 investments that total £3m which in anticipation of ER I have mainly changed in the last year from £2m growth investments & £1m income investments to £2m in income investments & £1m in growth investments. The income investments are currently producing c£120,000 per annum.

My salary is £120,000 and after 40+ years working in the industry I am in, I am now fed up of the corporate politics, targets, regulations, etc and thinking that the income from my investments with the changes I have made is the same as my salary, so why don’t I resign and simply replace my salary with my investment income.

It would appear that my investment income is sufficient to not have to withdraw from capital, especially as pensions will add to the income in due course, albeit I can withdraw in due course if I needed to.

Assuming I am not missing something, perhaps it is just a change of mindset I need from receiving a regular salary from my employer to effectively receiving the same income but from my investments.

So the regular question, am I good to go ?

I agree with your reasoning & just getting you to your pension is a safe bet. I assume health care is not a problem too? One of the bigger "?" in this crowd...

My goal is to get enough passive /growth to spend 1.25% of my true expenses. 25% buffer is my comfort zone. We're just a year or two away imo. I could (but don't plan) fill the gap with p/t w*rk...

 

[ivinsfan]

Since you don't say how much you spend each year, we can't tell you if you are "good to go"


Also when you say you have 35 investments, what exactly do you mean? 35 stocks, 35 mutual funds, 35 what?

 

[SecondCor521]

There are several things that will likely lower the OP's taxes in retirement:

1. The amount they spend is probably less than that 120K salary. Possibly much less. So if they withdraw their spending rather than their income, the amount on which their taxes are based might be lower. (Unless they've got 120K or so in unavoidable dividends, which they might based on how they've structured their portfolio.)

2. The tax profile on investment and retirement income is better than it is on salary income - at least in the US. Social Security isn't taxed in my state. Investment income doesn't have FICA taxes. Dividends can often be qualified and taxed at a capital gains rate. Selling appreciated securities is taxed at a capital gains rate and part of the proceeds are return of basis which is untaxed. I think the UK is similar but not sure.

3. There are lots of tax goodies in the US tax code for relatively moderate income people. ACA subsidies, college tax credits, lower brackets, 0% capital gains bracket, etc. etc.

I was saving about 60% of my income in the years before retiring. My last full year of working, taxes were my single largest budget category. Now I pay very minimal taxes.

OP, have you looked at how your taxes might change?

The other thing I'd just emphasize is that the 4% rule is based on US history, as noted by ERD50. I think the UK market suffered more in post-WWII, so the safe withdrawal rate there might be a bit higher. Plus, you're probably not investing in US investments anyways.

 

[ivinsfan]

SecondCor this poster has used the pound sign, so probably UK based?


They didn't say where they would retire.

 

[SecondCor521]

SecondCor this poster has used the pound sign, so probably UK based?


They didn't say where they would retire.

Right, which is why my post had multiple caveats that I was talking about the US but the UK might be different. See for example the last sentence in item 2, and the entire last paragraph.

 

[ivinsfan]

Right, which is why my post had multiple caveats that I was talking about the US but the UK might be different. See for example the last sentence in item 2, and the entire last paragraph.

I guess Alan would be up to date on the differences...my bad for not reading your entire post..


The OP didn't really give a lot of details

 

[OldShooter]

... It would appear that my investment income is sufficient to not have to withdraw from capital, especially as pensions will add to the income in due course, albeit I can withdraw in due course if I needed to. ...

There is a critical misunderstanding here IMO. There is no "investment income" and there is no "capital." It is all just "assets."

For example, suppose you have a $110 (don't know how to get a pounds sign ) stock that didn't change in value during the year, inflation is 5% and the year-end dividend from the stock is $10. Well, if you consider that $10 to be "investment income" and spend it, note that the buying power of your stock has declined by 5%. Did you just spend from "capital" then?

Here are a couple of worthwhile links:
https://en.wikipedia.org/wiki/Mental_accounting
https://famafrench.dimensional.com/videos/homemade-dividends.aspx

("Mental Accounting" can be a very useful thing, for example in budgeting and in saving for requirement. But it can also cause us to mislead ourselves, which I believe to be the case with trying to separate "income" and "capital.")

 

[SB1961]

Some further comments:

I am UK based and will be retiring in the UK.

My 35 investments are a mix of trusts, funds, bonds and shares.

I also have a house @ c£1.5m and other assets, e.g. classic cars @ c£500,000.

Debts are a mortgage @ c£340,000.

My current annual expenses are c£100,000 including my mortgage. Once my mortgage is paid off in 5 years this will reduce to c£50,000.

I expect my current £3m to continue to grow as £1m is in growth investments and it doesn’t look like I need to touch the principle as DayDreaming mentions, which is what I suppose I was getting at.

It just seems alien to go from a regular pay check to rely on investments but they will be providing the same income, so not really sure why I am worrying really and of course many of you have been there and done this.

 

[REWahoo]

It just seems alien to go from a regular pay check to rely on investments but they will be providing the same income, so not really sure why I am worrying really...

It appears you have no worries from a financial standpoint. Of course you can always worry about asteroid strikes, global warming, viral pandemics, alien invasions and the moral corruption of modern society.

 

[Tetto]

It appears you have no worries from a financial standpoint. Of course you can always worry about asteroid strikes, global warming, viral pandemics, alien invasions and the moral corruption of modern society.

 

[Alan]

Some further comments:

I am UK based and will be retiring in the UK.

My 35 investments are a mix of trusts, funds, bonds and shares.

I also have a house @ c£1.5m and other assets, e.g. classic cars @ c£500,000.

Debts are a mortgage @ c£340,000.

My current annual expenses are c£100,000 including my mortgage. Once my mortgage is paid off in 5 years this will reduce to c£50,000.

I expect my current £3m to continue to grow as £1m is in growth investments and it doesn’t look like I need to touch the principle as DayDreaming mentions, which is what I suppose I was getting at.

It just seems alien to go from a regular pay check to rely on investments but they will be providing the same income, so not really sure why I am worrying really and of course many of you have been there and done this.

I think you are in really good shape financially. As mentioned above your taxes will drop significantly since you won’t be paying NI contributions and there is very favorable tax treatment of dividends and capital gains. If you are married then you potentially can reduce taxes even further. For example I have private pensions and my wife doesn’t so all our taxable investments are in her name to maximize all the tax free and lower tax band options.

 

[corn18]

I think you have it right. Congrats and enjoy retirement. It looks like you have some fun stuff to play with.

 

[walkinwood]

Be aware that the Safe Withdrawal Studies that result in ~4% withdrawal rate adjusted for inflation are done using US market data.
They also assume that you're invested in the market index, not individual stocks; do not take investment fees into account; and assume 40-70% in equity investments.

 

[USGrant1962]

Be aware that the Safe Withdrawal Studies that result in ~4% withdrawal rate adjusted for inflation are done using US market data.
They also assume that you're invested in the market index, not individual stocks; do not take investment fees into account; and assume 40-70% in equity investments.

All the way back to Trinity and Bengen they've studied the behavior of 0-25-50-75-100% equities. It turns out, as FIRECalc shows on "Investigate changing my allocation," that the success rate is virtually flat from 40% to 90% equities, and doesn't drop off severely until you go below 30%. But most SWR studies did not assume a limited range.

 

[Bamaman]

The 4% "Rule" is a guideline where funds can be withdrawn from 401K's. The idea is to keep from spending all of one's money in a normal retirement and normal expected lifespan. In the U.S., most retirees have Social Security income and very often a defined pension too.

What fits one person doesn't necessarily fit another.

In your case, you're set to retire just fine. Turn in your notice now to retire, and I'd also try to weasel out of that 1 year expected time period. Such a long term notice is simply too long in most situations.

35 investments would almost be a full time job to watch over. My investments are just in 5-6 funds, and I feel better just keeping my life simple in retirement.

 

[dadu007]

... In the U.S., most retirees have Social Security income and very often a defined pension too.

I beg to differ with "very often". This is simply not true anymore. Most people in the US do NOT have a defined pension. I think there is a slant towards this misperception from members on this forum since so many posters here DO have a pension. AND they retired early or reached FI because of that.

Actually, I am continually surprised at how many forum members do have pensions....I've worked for a company for 20 years that froze/stopped pensions in my second year of employment with them.

I get the vibe there a quite a few people on this forum who were in the military, worked for the government (state or federal), or were employed by major defense contractors...that's why I see the words "my pension" tossed out so often.
Am I bitter? Yes, LOL.

 

[Nords]

The 4% "Rule" is a guideline where funds can be withdrawn from 401K's. The idea is to keep from spending all of one's money in a normal retirement and normal expected lifespan.

Technically it's from all assets, not just a 401(k), and it's for a portfolio survival of 30 years. (Not whatever a normal retirement or normal expected lifespan may be.) It's a coincidence that the IRS Required Minimum Distribution tables start at 4%. Or maybe they copied Bengen's SAFEMAX homework?
https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf
(At RMD age 72, 1 / 25.6 = 3.9%.)

In the U.S., most retirees have Social Security income and very often a defined pension too.

Wow. Social Security, sure. Defined pension? If you're describing a defined contribution pension then that could be "most", but it's definitely not a defined benefit pension.

Here's two charts to help sort out the distinctions:
https://www.federalreserve.gov/publ...being-of-us-households-in-2018-retirement.htm
https://www.bls.gov/opub/ted/2021/6...rs-had-access-to-retirement-plans-in-2020.htm

I get the vibe there a quite a few people on this forum who were in the military, worked for the government (state or federal), or were employed by major defense contractors...that's why I see the words "my pension" tossed out so often.
Am I bitter? Yes, LOL.

I see that comment a lot on social media, and one of the responses is:
"You want a pension, go buy an annuity."

 

[RetireBy90]

I get the vibe there a quite a few people on this forum who were in the military, worked for the government (state or federal), or were employed by major defense contractors...that's why I see the words "my pension" tossed out so often.
Am I bitter? Yes, LOL.

While the fact is that most in US don’t have a defined benefit pension, no need to be bitter, it is a choice wevall made. After 8 years in the Army I made a choice to reup and stay for 20. Many factors, but pension was certainly one of them. Mom went back to work after kids were grown for local county because they had a pension. My point is there are jobs where pay may not be up to private sector but include a pension. If you want a pension apply for one of them. It is a choice we all make.

 

[pb4uski]

Technically it's from all assets, not just a 401(k), and it's for a portfolio survival of 30 years. (Not whatever a normal retirement or normal expected lifespan may be.) It's a coincidence that the IRS Required Minimum Distribution tables start at 4%. Or maybe they copied Bengen's SAFEMAX homework?
https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf
(At RMD age 72, 1 / 25.6 = 3.9%.) ...

I agree with what you wrote Nords... I think it is just a coincidence that the age 72 RMD is ~4% and it has no connection to the 4% rule.

Though 72 + 25.6 is 97.6 and the full retirement age at the time of the Trinity Study as 65 and 30 years is age 95 so it all lines up neatly... but is just a conicidence.

 

[EastWest Gal]

Posters regularly mention a 4% withdrawal rate from their capital to ensure that they hopefully have sufficient funds to “see them out” but I am thinking why do I need to withdraw any % if I am receiving regular income that replaces my salary or am I missing something ?

I have always interpreted the 4% withdrawal rate as 4% of the value of the assets, not selling 4% of the assets. I started out at a 3.3% w/d rate, but that has decreased to about 2.5% due to the crazy market.

OP, you are very good to go. You may want to check the "Blow That Dough" thread! Have a great retirement. Give your notice.

 

[pb4uski]

I have always interpreted the 4% withdrawal rate as 4% of the value of the assets...

It's actually 4% of the value of the assets at the time you begin withdrawals, with withdrawals increased for inflation each year... so if your portfolio declines in year one then the withdrawal in year two could be more than 4% and conversely if the portfolio appreciates then the withdrawal in year two could be much less.

So say we start with a $1m portfolio and withdraw $40k in year 1 and inflation is 3% so the scheduled withdrawal for year 2 is $41.2k. If at end of year 1 the portfolio is $900k then the second year withdrawal is 4.6% of the portfolio balance... if at the end of year 1 the portfolio is $1.1m then the second year withdrawal is 3.7% of the portfolio balance.

 

[BobTomas]

I prefer to be more fluid with the withdrawal amount, say x% of the asset value each year rather than based on x% of year 1, for this simple reason:

Say I retire in 2021 with $1M, using 4% "rule" gives me $40K that year, which would increased with inflation the next year using the "standard" year 1 concept (so now $41.2K in 2022). But lets say by 2022 my assets have grown to $2M. If I had retired in 2022 instead then I would use $80K/year plus inflation each year as my 4%. Why should I live on 50% income every year for the rest of my life just because I retired one year earlier? In 2022 why not pretend to myself that I just retired that year instead and take the $80K + inflation each year? So, I prefer to adjust what I can withdraw based on how my assets change over time (maybe not every year but you get the idea...).