How should retirees make withdrawals?

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How should retirees make withdrawals?

Postby EternalOptimist » Thu Jan 31, 2013 11:42 am

Hi, let's assume someone retired today with a 50% stocks/50% bonds split and started withdrawing from their portfolio. Given the need to maintain a sufficient ownership of stocks over the long haul, should withdrawals come disproportionately from bonds...at least early on? Any other thoughts?
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Re: How should retirees make withdrawals?

Postby Browser » Thu Jan 31, 2013 11:47 am

No. If you do that you are incrementally increasing your equity allocation and making your portfolio riskier. If you've decided on the appropriate allocation based on your ability, need, and willingness to take risk, why would you do that? It runs contrary to the "Age in Bonds" guideline also, in which you systematically reduce equity exposure in retirement.
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Re: How should retirees make withdrawals?

Postby cheese_breath » Thu Jan 31, 2013 11:48 am

Do you want to keep the same AA or migrate to another AA? I would think your withdrawals should be consistant with maintaining your desired AA. At least that's how I do it.
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Re: How should retirees make withdrawals?

Postby BigFoot48 » Thu Jan 31, 2013 12:17 pm

Possibly a lot of withdrawals will come from dividend and capital gain income from both stock and bond funds, assuming it is not automatically re-invested. This has been my personal experience over the past 10 years, and of course depending upon the withdrawal amount needed, and the size of the portfolio, and interest rates, and probably other things.
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Re: How should retirees make withdrawals?

Postby Sheepdog » Thu Jan 31, 2013 1:03 pm

Similar to Bigfoot48, a high percentage of my withdrawals in over 14 years of retirement has been from dividends. I reinvest capital gains. As I aged, I lowered my stock allocation gradually (100 minus my age in stocks) and invested in less volatile investments as well. Most dividends go to short term bond funds or money market funds from which I then take my monthly distributions. Also, much of my RMDs goes to those same bond/MM funds. The choice of funds which I have taken the RMDs has helped me maintain my stock percentage glide path.
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Last edited by Sheepdog on Thu Jan 31, 2013 1:06 pm, edited 1 time in total.
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Re: How should retirees make withdrawals?

Postby Cut-Throat » Thu Jan 31, 2013 1:06 pm

Sheepdog wrote:Similar to Bigfoot48, a high percentage of my withdrawals in over 14 years of retirement has been from dividends. I reinvest capital gains. As I aged, I lowered my stock allocation gradually (100 minus my age in stocks) and invested in less volatile funds as well. Most dividends go to short term bond funds or money market funds from which I then take my monthly distributions. Also, much of my RMDs goes to those same bond/MM funds. The choice of funds which I have take the RMDs has helped me maintain my stock percentage glide path.
Jim


Curious as to why you re-invested Capital Gains?
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Re: How should retirees make withdrawals?

Postby Sheepdog » Thu Jan 31, 2013 1:12 pm

Cut-Throat wrote:
Sheepdog wrote:Similar to Bigfoot48, a high percentage of my withdrawals in over 14 years of retirement has been from dividends. I reinvest capital gains. As I aged, I lowered my stock allocation gradually (100 minus my age in stocks) and invested in less volatile funds as well. Most dividends go to short term bond funds or money market funds from which I then take my monthly distributions. Also, much of my RMDs goes to those same bond/MM funds. The choice of funds which I have take the RMDs has helped me maintain my stock percentage glide path.
Jim


Curious as to why you re-invested Capital Gains?

I wanted to harvest the dividends and keep the number of shares invested to grow future dividends as long as possible. I will sell the funds, though, to maintain the bond/MM funds from which I take my distributions at an approximate 3 year future withdrawal needs (my market volatility safety net.).
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Re: How should retirees make withdrawals?

Postby Cut-Throat » Thu Jan 31, 2013 6:31 pm

Sheepdog wrote:I wanted to harvest the dividends and keep the number of shares invested to grow future dividends as long as possible. I will sell the funds, though, to maintain the bond/MM funds from which I take my distributions at an approximate 3 year future withdrawal needs (my market volatility safety net.).


Would not dividends re-invested also 'grow future dividends'....I guess what I am asking is why just re-invest the capital gains and not the dividends?

Myself, I plan on taking both captial gains and dividends to spend without having to sell shares to live off.
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Re: How should retirees make withdrawals?

Postby ResNullius » Thu Jan 31, 2013 6:42 pm

Cut-Throat wrote:
Sheepdog wrote:I wanted to harvest the dividends and keep the number of shares invested to grow future dividends as long as possible. I will sell the funds, though, to maintain the bond/MM funds from which I take my distributions at an approximate 3 year future withdrawal needs (my market volatility safety net.).


Would not dividends re-invested also 'grow future dividends'....I guess what I am asking is why just re-invest the capital gains and not the dividends?

Myself, I plan on taking both captial gains and dividends to spend without having to sell shares to live off.

This raises a question that I have thought about often. In retirement, is it better to have a large amount in cash/MM to draw down over a period of say 3 years, while leaving distributions during that same period to be reinvested? Or, is it better to take the distrubtions as they come and use them for your yearly living expenses? Or, does it make no difference which way you do it? When the cash/MM amount drops too low, then replinish by actually selling shares of your mutual funds.
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Re: How should retirees make withdrawals?

Postby Woodshark » Thu Jan 31, 2013 7:02 pm

Not retired yet but would think I would keep 12 to 18 months of expenses in a MMA. Transferring cash to my checking account for monthly bills and resupplying the MMA every 6 months as needed. That way I always have 6 to 12 months expenses in cash. This allows some flex on when you want to sell off your investments.
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Re: How should retirees make withdrawals?

Postby Browser » Thu Jan 31, 2013 7:07 pm

ResNullius wrote:
Cut-Throat wrote:
Sheepdog wrote:I wanted to harvest the dividends and keep the number of shares invested to grow future dividends as long as possible. I will sell the funds, though, to maintain the bond/MM funds from which I take my distributions at an approximate 3 year future withdrawal needs (my market volatility safety net.).


Would not dividends re-invested also 'grow future dividends'....I guess what I am asking is why just re-invest the capital gains and not the dividends?

Myself, I plan on taking both captial gains and dividends to spend without having to sell shares to live off.

This raises a question that I have thought about often. In retirement, is it better to have a large amount in cash/MM to draw down over a period of say 3 years, while leaving distributions during that same period to be reinvested? Or, is it better to take the distrubtions as they come and use them for your yearly living expenses? Or, does it make no difference which way you do it? When the cash/MM amount drops too low, then replinish by actually selling shares of your mutual funds.

Don't have a complete answer but one thing to consider is the tradeoffs with reinvestment, especially with ETFs. On the one hand, you get autoinvestments of very small share amounts, which you probably wouldn't trade otherwise. On the other hand, you get autoinvestments at whatever the price and spreads are when that happens and you have no control.
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Re: How should retirees make withdrawals?

Postby obgraham » Thu Jan 31, 2013 7:22 pm

Most everything I have is in IRAs.
So I reinvest all my dividends and cap gains in the fund they are from.
Right now my AA is S:40, B:40, Cash:20. I withdraw from the cash sector. Every 6-12 months I reallocate, and that replenishes the cash sector.
Works for me. I know many don't keep anything in cash, given the poor return, but I like it that way.
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Re: How should retirees make withdrawals?

Postby Sheepdog » Thu Jan 31, 2013 8:19 pm

Cut-Throat wrote:
Sheepdog wrote:I wanted to harvest the dividends and keep the number of shares invested to grow future dividends as long as possible. I will sell the funds, though, to maintain the bond/MM funds from which I take my distributions at an approximate 3 year future withdrawal needs (my market volatility safety net.).


Would not dividends re-invested also 'grow future dividends'....I guess what I am asking is why just re-invest the capital gains and not the dividends?

Myself, I plan on taking both captial gains and dividends to spend without having to sell shares to live off.

I need the dividends to live on.... They are my living income. I can't reinvest everything. I want to hold off selling as long as I can. It is simply my conscious decision not to reinvest capital gains. It's worked fine for over a decade.
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Re: How should retirees make withdrawals?

Postby crowd79 » Thu Jan 31, 2013 8:43 pm

In retirement, you will want to withdraw from your tax deferred accounts (401k, tIRA) up to the top of the lowest tax bracket threshold you can manage first (to pay minimal taxes)....withdraw your minimum tIRA RMD at age 70.... and then withdraw from a Roth lastly on top of that
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Re: How should retirees make withdrawals?

Postby ourbrooks » Thu Jan 31, 2013 10:42 pm

Believe it or not, there's research which supports a "bonds first" strategy: http://www.thornburginvestments.com/meetings/retirement-withdrawal-sequence_rweigand.pdf

The reasoning behind the strategy is this: One of the biggest causes of running out of money is poor stock performance early in retirement. By using up bonds first, effectively, stocks are given an extra five or ten years to accumulate earnings. Obviously, this strategy won't work all the time;but it works often enough to give better odds than balanced withdrawals.

True, this strategy leaves the investor with all stocks after the bonds run out, but, by then, they've accmulated enough to withstand further market crashes.
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Re: How should retirees make withdrawals?

Postby dharrythomas » Thu Jan 31, 2013 11:16 pm

I'm in favor of drawing down in a balanced approach.

I'm not retired, but my plan is to simplify. (Frankly if Vanguard offered Admiral shares of Target Retirement or LifeStrategy Funds, I'd be better off doing it NOW):

1. Bring everything into Vanguard and we can get it into 5 or fewer accounts.
His and Her Traditional (Her traditional is very small so I may roll it into her Roth in a couple of years when some income sources dry up)
His and Her Roth
Taxable (Right now the only thing here is the World Stock Index, may add Tax Managed Balanced and Tax Managed International later)

2. Keep a years expenses in a Credit Union

3. Put one balanced fund in each account and take withdrawals from that.
Traditional: Target Retirement 20XX
His Roth: LifeStrategy Moderate Growth
Her Roth: Wellington

It becomes easier for my wife or daughters to manage WHEN I die or become incapacitated and I won't have to worry about which account to draw out of.

The intent is to take what we need from the traditional and leave the Roth and taxable for last (though spending the dividends from the taxable), then spend the taxable so that IF there is anything to pass on more of it will be in Roth accounts.

Good Luck

Harry
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Re: How should retirees make withdrawals?

Postby Browser » Fri Feb 01, 2013 1:27 am

ourbrooks wrote:Believe it or not, there's research which supports a "bonds first" strategy: http://www.thornburginvestments.com/meetings/retirement-withdrawal-sequence_rweigand.pdf

The reasoning behind the strategy is this: One of the biggest causes of running out of money is poor stock performance early in retirement. By using up bonds first, effectively, stocks are given an extra five or ten years to accumulate earnings. Obviously, this strategy won't work all the time;but it works often enough to give better odds than balanced withdrawals.

True, this strategy leaves the investor with all stocks after the bonds run out, but, by then, they've accmulated enough to withstand further market crashes.

It's a goofy strategy. Read Milevsky's critique of the "buckets" approach, which is what this is. The idea that stocks get less risky the longer you hold them is the basis for this misbegotten strategy, which they don't.
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Re: How should retirees make withdrawals?

Postby EternalOptimist » Fri Feb 01, 2013 1:06 pm

ourbrooks wrote:Believe it or not, there's research which supports a "bonds first" strategy: http://www.thornburginvestments.com/meetings/retirement-withdrawal-sequence_rweigand.pdf

The reasoning behind the strategy is this: One of the biggest causes of running out of money is poor stock performance early in retirement. By using up bonds first, effectively, stocks are given an extra five or ten years to accumulate earnings. Obviously, this strategy won't work all the time;but it works often enough to give better odds than balanced withdrawals.

True, this strategy leaves the investor with all stocks after the bonds run out, but, by then, they've accmulated enough to withstand further market crashes.



That;s what I thought I've read and I kind of believe it
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Re: How should retirees make withdrawals?

Postby Browser » Fri Feb 01, 2013 1:33 pm

Yet, some commentators have expressed the view that placing a few years worth of retirement spending needs into safe investments — and then planning on not touching the remaining funds in the event of a bear market — can somehow avoid the ruinous impact of a poor sequence of investments returns.

A fringe element of this sect believes that if markets decline retirees should simply be counseled to take only income from their bond allocation
and then “wait for the stock allocation to recover” and thus avoid selling at a loss. I believe these strategies are an optical illusion at best and create a potential for grave disappointment at worst.
If you are unlucky enough to earn a poor sequence of initial returns, so-called bucketing of your retirement income is not a guaranteed bailout.

Don’t confuse your cash-flow-generation strategy with your asset-allocation policy. If you decide to adopt the so-called buckets approach to retirement income planning, then beware that your total asset allocation and implicit exposure to equity will fluctuate unpredictably over time. Moreover, if indeed you experience a poor initial sequence of investment returns — so that you have been forced to liquidate all your cash investments — you might find yourself with a 100 percent equity exposure well into retirement and possibly deep into a bear market. (This is in contrast to the non-bucketer who is maintaining the same exact asset mix and hence the same financial risk profile over time.) Sure, the market may recover by the time you have to tap into the equity portion — or it may not. Either way, you have neither reduced nor mitigated financial risk but simply taken a bet on economic scenarios you believe will not happen. Safety is just a mirage

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