Withdrawal Strategies

[RobLJ]

I've seen some random posts on this, but I'm curious about what withdrawal strategies you are using and whether there are some rational strategies with longterm benefit.
I built up a cash warchest in our IRA,403b to get us through the 7 years until I take SS (in 2025, I think). Most of that is gone.

I think what I have been doing, to describe it too kindly, is seat of the pants. I withdraw from core stock funds when they shoot up (Usually about 1/2 of the yearly gain), stick the proceeds in cash or bond funds. When the market drops over-much (in my view) like in 2022 or most particularly 2019, I plunk some of that money back in stock funds. The rest funds withdrawals, although I'm cash-poor now. Once I start taking SS in 2025, the problem largely goes away, and when DW takes it in 2029, the problem is more going to be what to do with everything, so I'll probably hang out on the BTD forum for tips.

The easiest answer is when rebalancing, to use the excess % money (largely) to fund withdrawals, but I'm pretty much square on target, although the run-up since October has resulted in stock funds being a little rich. So any withdrawal strategies out there beyond the obvious rebalancing one, to use as a secondary strategy? I probably should phrase this better, but I think most of you will know what I'm asking.

My interim plan is to look at fund increases and draw from the gains this year. Fidelity Contrafund, for example, is up 30% YTD, which is a bit ludicrous. The S&P indexes have also shot up, although not to that extent.

As an example of the problem, my Fidelity Floating Rate fund is up 11% YTD, so I could fund 5-7% of our yearly withdrawal just by withdrawing this year's gains from it. But since I don't think the Fed will reduce rates quickly, that 9% yield is pretty tasty, so I'm tempted to withdraw beyond yearly gains from some other bond funds and wait on it until 2025 or so. Trying to finegrain withdrawals like this, though, is probably a mistake and a time-suck.

This is the disease of overthinking, and a classic First World "problem."

 

[audreyh1]

We aren’t drawing from IRAs yet, just taxable accounts. We have a mix of IRAs and after tax accounts for our retirement portfolio. It’s mostly index funds.

I have a set asset allocation that applies to the retirement portfolio as a whole.

I use a percentage of the Dec 31 retirement portfolio value each year and withdraw that amount early in Jan. There is usually enough in cash to cover this.

Then I rebalance back to the target AA.

Pretty much leave it alone the rest of the year unless tax harvesting.

Very routine.

 

[kgtest]

We aren’t drawing from IRAs yet, just taxable accounts. We have a mix of IRAs and after tax accounts for our retirement portfolio. It’s mostly index funds.

I have a set asset allocation that applies to the retirement portfolio as a whole.

I use a percentage of the Dec 31 retirement portfolio value each year and withdraw that amount early in Jan. There is usually enough in cash to cover this.

Then I rebalance back to the target AA.

Pretty much leave it alone the rest of the year unless tax harvesting.

Very routine.

and why I LOVE your contribution to this forum/community. Super simple. I too will use this SAME exact strategy.

 

[InsertCleverHandle]

This is a good tool for reading about different strategies. Although, most of the analysis I've read is that the actual impact of different strategies is minimal.

https://guide.ficalc.app/withdrawal-strategies/

 

[Out-to-Lunch]

So any withdrawal strategies out there beyond the obvious rebalancing one, to use as a secondary strategy?

It might be helpful to us to know what you perceive to be the (potential) shortcoming of the obvious rebalancing strategy?

 

[Chuckanut]

We aren’t drawing from IRAs yet, just taxable accounts. We have a mix of IRAs and after tax accounts for our retirement portfolio. It’s mostly index funds.

I have a set asset allocation that applies to the retirement portfolio as a whole.

I use a percentage of the Dec 31 retirement portfolio value each year and withdraw that amount early in Jan. There is usually enough in cash to cover this.

Then I rebalance back to the target AA.

Pretty much leave it alone the rest of the year unless tax harvesting.

Very routine.

Mine is about the same except that I use a variable withdrawal rate that goes up a bit in years when earnings outpace inflation, and down a bit in years when earnings fall behind inflation. Is it better than yours, I honestly don't know. It may have made more sense when I retired 10+ years ago and had a longer time span to consider. I think people tend to adjust spending if they have a bad year or a great year, all other things being equal. Which they often aren't.

 

[audreyh1]

We count on our asset allocation to keep up with inflation over the long term, but when it doesn’t over the short term we take the reduced annual $$.

I’ve been using 3% as our withdrawal rate for many years now. We’re quite a bit older and I know we could safely draw more, but we’re not keeping up with spending it all anyway, so I haven’t bothered to increase it yet.

Frankly I don’t care what’s better, I just care that it’s working for me.

 

[GrayHare]

Sounds like I handle it much as you. I replenish a cash bucket by selling whatever has had a big run up. I vary from that approach only upon unusual circumstances. For example, the market consequences of impending covid looked obvious to me, so just prior to the downturn I sold more stocks than I ever had, then rebought near the pandemic bottom. I don't do that often since broad market opportunities happen infrequently.

 

[Montecfo]

Part of my bond allocation is in a 2-3 year "step-ladder" of bonds which are coming due quarterly. These fund regular spending.

Of course, I need to sell something to fund the stepladder. Since I do not yet take SS or RMDs this is funded by strategically selling equities in my taxable account. As an active stock investor I sell from time to time as stocks reach their objectives or through trimming of holdings at market highs. This supplements interest and dividends.

If stocks were to stay down for an extended period, the 2-3 year ladder provides time for market recovery, and another year of expenses in i-bonds adds to the runway if needed.

It has seemed to work.

 

[big-papa]

I prefer amortization based withdrawal methods. These are all described over at bogleheads with VPW being the oldest one, but two others, ABW and TPAW, being the most recent.

For us, we have the equivalent of a TIPS based SS bridge and a TIPS ladder, all in our tax deferred space. US stock in Taxable and International in tax deferred. We no longer rebalance. The income floor we have from TIPS/SS means our stock doesn't have to work all that hard to give us a good level of potential spending.

Today we're using an amortization based method (my own spreadsheet) for the stock portion of our investments, but plan B for my wife will be a fixed % of portfolio withdrawal and a good chance our baseline withdrawal will eventually be a fixed % of portfolio as well in our later years to further simplify things.

We make our withdrawals quarterly.

Cheers.

 

[pb4uski]

From what you describe in the OP, it seems you are focused on whether to redeem stocks or bonds for spending, but all is taxable account money since most IRA and 403b money is gone.

What I and many here do is include an online savings account with at least a year of withdrawals and use that for spending. So for example, if my WR is 4% and my AA is 50/50 then at the beginning of each year I would target a 50/46/4 AA. with the 4 being 4% in cash that is used for spending and then replenished at the next rebalancing.

Another approach is to have a AA target and just withdraw from the category that is overweight and leave the categories that are underweight to grow.

 

[RobLJ]

From what you describe in the OP, it seems you are focused on whether to redeem stocks or bonds for spending, but all is taxable account money since most IRA and 403b money is gone.

Actually most of our money is still in 403b (mine) and IRAs (DW's); I withdraw up to the 12% tax limit and scrape what we don't spend into a brokerage, which has grown a lot but is only 15% of the total.

But I agree to use the rebalancing to fund most, where to draw the rest I guess is the question. We are almost exactly on target on our allocations this year, unless something dramatic happens, so I suspect I will figure out what the dividends were in my 403b, as audrey suggests (I have to reinvest them in my 403b, curiously, although it will only take 3 hours or so to figure out what dividends were granted and sell them), then look at gains for the rest.

I think many of the most astute here, like audrey and others, are taking less than 3% so dividends may fund all or most withdrawals. We're taking 5.5 to 7% (at the top), so we're skiing a bit more of an edge, although it has worked out very very well. I was taking almost 10% from my account before DW qualified to make withdrawals, but my account is only about 7% less than when I started withdrawals. I had modeled a 25-50% reduction in my 403b, although the numbers still worked. First World Problems.

 

[SecondCor521]

I'm still under 59.5, so the current plan is basically spend from taxable and do Roth conversions every year to have a Roth conversion ladder available if necessary. It does not look like it will be necessary.

I invest in VTSAX and VBTLX. My AA is based on my spending rate, life expectancy, and results from the Investigate Tab in FIREcalc. It's basically 98/2 or so. I'm a passive Bogle-style buy and forget investor.

My asset placement is based on the Bogleheads rules.

I have reallocation bands that are wide enough to where I rarely am required to reallocate. I reallocate on occasion when I feel like it. Reallocations happen in my traditional IRA where my VBTLX share live.

I monitor my WR%, but it's so low I don't really monitor it closely any more.

I sort of monitor my Roth conversion ladder, but since it looks overfunded I don't worry about that much either.

I monitor my cash flow, because I do JIT refills of my checking account from taxable in order to ensure my credit card payment doesn't bounce.

 

[COcheesehead]

I don’t use a percentage and then spend that. I created a cushy budget and then invested to make that happen with as low a risk as reasonable.
We spend freely and our portfolio balance from retirement in 2020 has only increased even with all the withdrawals.
We take everything from our taxable account and do not have any pensions nor are we taking social security for 10 more years.
As a percentage we are at 2.34%.

 

[PokeNTexas]

Using Variable Percentage Withdrawal method (VPW, see Bogleheads wiki). We use the VPW Retirement Worksheet. Five years into retirement.

 

[RobLJ]

For future RMDs, we are withdrawing to the top of the 12% bracket, but we don't spend it all, Cheesehead, like you.
We're spending withdrawals 75% to a 110% (in 2019, when we put on solar panels and bought a Bolt, so now our electricity and gasoline bills are negligible; otherwise we haven't had to spend all of the withdrawals). The unspent goes into our taxable brokerage, which is now able to fund almost any emergency.
The nice thing about the 12% tax withdrawal is that it is keyed to inflation, so I don't have to think much about it, other than to figure out what the 12% limit is.


I thought this strategy would draw down my 403b progressively. But it didn't. First world problems--I may have to pay more taxes when RMDs start for me in 7 years.

 

[RobLJ]

My question wasn't phrased at all well, but it has more to do with how you select funds for your withdrawals. I'm learning a lot, however, from your responses on general withdrawal strategies. The community is very giving, so I am grateful to all of you for your thoughtful responses--all of them. I appreciate all of you and the Mods (I overstride the lines now and then but I don't mind at all being slapped down. I went back to Texas to help my sister with her colon surgery and I was reminded by her how regularly I overstepped lines as a kid. She did well on her surgery, so I'm back from Texass after 5 weeks, thank God, so I can hike in Reno now. How I missed not being able to hike out my front door.)

 

[COcheesehead]

We use a bond ladder so we sell nothing. Just live off interest.

 

[RobLJ]

We use a bond ladder so we sell nothing. Just live off interest.

That is an ideal scenario--really cool.
Obviously, we can't withdraw just interest or a bond ladder but when I reserved a lot cash it was similar to a bond ladder (only different!).

 

[G-Man]

We use a bond ladder so we sell nothing. Just live off interest.

Just curious. How much interest is generated from the bond ladder and how much was the initial bond ladder investment?

 

[COcheesehead]

Just curious. How much interest is generated from the bond ladder and how much was the initial bond ladder investment?

I have two ladders, one in taxable, one over multiple deferred accounts.

The taxable account ladder in 2024 will generate $178,400. $131,000 of that is in tax free muni bonds. Many double tax free, my state specific.

The rest is in taxable bonds and includes one high yield CEF, WDI. About 3% of this ladder is in agency bonds with call risk.

The amount in the taxable account is valued at $2,925,000 with some in cash.

The deferred ladder adds about another $60,000 with little call risk. I have all my equity allocations in deferred accounts and the bond ladder is the minority allocation in those accounts.

Edit: $107,000 is tax free.

 

[G-Man]

I have two ladders, one in taxable, one over multiple deferred accounts.

The taxable account ladder in 2024 will generate $178,400. $131,000 of that is in tax free muni bonds. Many double tax free, my state specific.

The rest is in taxable bonds and includes one high yield CEF, WDI. About 3% of this ladder is in agency bonds with call risk.

The amount in the taxable account is valued at $2,925,000 with about $80,000 in cash.

The deferred ladder adds about another $60,000 with little call risk. I have all my equity allocations in deferred accounts and the bond ladder is the minority allocation in those accounts.

I need to learn more about CEFs.

 

[COcheesehead]

I need to learn more about CEFs.

They are rocket fuel, both up and down. They can be really, really good and really, really bad. Treat accordingly.

 

[G-Man]

They are rocket fuel, both up and down. They can be really, really good and really, really bad. Treat accordingly.

Any advice on how to learn more about CEFs?

High Yield? I assume you mean dividend?

 

[COcheesehead]

Any advice on how to learn more about CEFs?

High Yield? I assume you mean dividend?

Yes, high dividend, about 12%. I only have 5% in WDI, but it provides 15% of my income.
cefdata.com is loaded with info. You want to make sure a fund is earning its distribution, earnings are increasing, hopefully sold at a discount to NAV and in the case of WDI built as a buy and hold and not intended to be a trading vehicle.