Retirement Withdrawals

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eastwayroad
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Joined: Mon Feb 16, 2015 2:58 pm

Retirement Withdrawals

Post by eastwayroad »

In preparing for retirement I haven't found much discussion of the mechanics of spending from principal.
Close reading of William Bernstein, comments from many folks on this board and sources elsewhere lead me to less emphasis on income yield as a main goal, in favor of stability and safety of overall portfolio.
So, when the time comes to replace a paycheck, "withdrawal" means in part selling off holdings.
How does one decide on a plan? Between cap gain tax considerations, maintaining AA - not to mention irrational sentimental attachment to long held funds- it all seems daunting. And truth be told, I have no heirs so no need to leave a legacy at the end of the line.
BahamaMan
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Re: Retirement Withdrawals

Post by BahamaMan »

Look at VPW for a plan that you can actually follow and execute. Personally I am using this and I have 100% of my 'Withdrawal Portfolio' in Target Retirement Income Fund, so that removes a lot of the decisions for me. VPW is much safer than an inflation adjusted SWR whether 2,3 or 4% (which no one actually follows anyway) and will probably let you spend more money as well. On January 1st of each year, I use the VPW percent of my Portfolio and Sell that amount from my Mutual Fund and transfer the Cash to my "Spending Account". Taxable Accounts First and then Tax Advantage Accounts.

I also plan on delaying my SS to age 70 as well as my Wife's... This will also add to the stability of income, as it is inflation adjusted. I have set aside a chunk of cash to supplement SS until it 'kicks in'. With the delay of SS and the AA of the Target Income Fund of 70% Bonds and 30% Stocks, it will provide a smooth income flow regardless of Market Conditions. We also do not plan on leaving an estate.

http://www.bogleheads.org/wiki/Variable ... withdrawal
kolea
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Re: Retirement Withdrawals

Post by kolea »

Your question is a good one. I think pre-retirement accumulation is a piece of cake compared with turning that into an efficient cash generation machine upon retiring. Here is a sort-of laundry list of things to consider:
  • Withdrawal rate. Some people refer to this as SWR, but that term is also used to figure out how much you need to retire, which is quite a different thing. You really need to get a good handle on your budget needs in your retirement and that should determine your withdrawal rate (as opposed to basing it on a fraction of your assets). I recommend figuring out a bare-bones budget amount also. This is probably the most important item you control that will affect your retirement.
  • Withdrawal model. The wiki has a few such as VPW, constant dollar, constant percentage. There are lots of variations on all these. This goes hand-in-hand with your withdrawal rate. I use a constant percentage with a floor and ceiling. I put it all into a spreadsheet tied to my investment accounts so it is very turn-key. Some people prefer the comfort of a constant income stream, and this is the decision point that sets that for you.
  • Asset goals. This is really tied to AA, withdrawal rate, and withdrawal model. What I am getting at here is whether you are interested in maximizing your income during retirement and basically spending down your principal, or whether you would like to preserve principal as much as possible and live off returns only. You may not have a choice, but you should at least give this some thought. It is a difficult thing to answer and is worthy of a lot of discussion. I personally see greater safety in maintaining a large cushion of principal and therefore am not trying to spend it all down.
  • Asset Allocation. You presumably already have one, so enough said.
  • Withdraw quarterly or annually. We do it quarterly to minimize cash sitting around. But a lot folks do it annually.
  • Whether to reinvest and always draw capital gains, or whether to draw distributions and make up the difference with cap gains. I guess there are pros/cons to each. I don't like to track Specific ID which you need to do if you reinvest and then draw only cap gains, so I just don't reinvest. But I believe a lot of people do.
  • Making IRS quarterly pre-payments. You need to remember the IRS in all of this.
  • Cash management. Some people I believe put their withdrawal cash into short term CD's. We don't because we withdraw quarterly. But we do keep a buffer of cash since our spending is so variable and the buffer helps smooth it out.
  • Investing for total return or cash flow. In reality there is no difference between the two, but it is common to get seduced into thinking that dividend stocks will be better for you in retirement. They might be easier in some ways, but there is no difference in terms of ROI.
  • (Edited in....) Managing retirement accounts (e.g., IRA) vs. taxable accounts. I am still wresting with how to optimize this and all I can say is that right or wrong, we are spending out of taxable first. That might change. There are lots of variables to consider. You should read the wiki and all the threads here.
I am sure there are other issues, but those are the ones I have wrestled with in getting our investments set up. I hope this helps. Good luck!
Kolea (pron. ko-lay-uh). Golden plover.
LeeMKE
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Re: Retirement Withdrawals

Post by LeeMKE »

I'm planning on delaying Social Security and will have bigger withdrawals in the early years, very small withdrawals during both Social Security and Pension payment periods, and then larger withdrawals when the last person is standing and pension and Social Security payments decrease. So far, the only tool that allows me to calculate the withdrawals with this underlying variable cash flow is the Fidelity Retirement Income Planner.

I don't see how to use VPW in that kind of circumstance. Am I missing something?

I've also been noodling over where to take assets each year during retirement. The Fidelity advisor pointed out that 1) Tax laws and brackets change, so whether to take from tax deferred or tax paid accounts (IRA vs. Roth) will be made on a near term basis, probably every five years or more frequently based on what the laws are at the time. Just as right now I am converted IRA to Roth based on the gap left over in our current tax bracket each year, we'll be withdrawing a chunk that has tax due and filling in with tax free (already tax paid). 2) Market returns can be modeled more easily than the vagaries of tax taw, and market returns ain't that easy to predict. 3) Stay the course, use a conservative model of market performance, and then prepare to make adjustments to where the cash flow comes from based on actual experience and tax law, as we go.
The mightiest Oak is just a nut who stayed the course.
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Kalo
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Re: Retirement Withdrawals

Post by Kalo »

Since you mentioned not needing to leave a legacy, you may also want to look into funding a portion of your retirement with Single Premium Income Annuities.

Kalo
"When people say they have a high risk tolerance, what they really mean is that they are willing to make a lot of money." -- Ben Stein/Phil DeMuth - The Little Book of Bullet Proof Investing.
Dandy
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Re: Retirement Withdrawals

Post by Dandy »

Waiting until age 70 to take SS so funding retirement from taxable fixed income products e.g. CDs and also having taxable equity funds pay divs and cap gains to money market rather than reinvested.

At age 70 will obviously take RMDs from my TIRA I hope to take these proportionately from all products except a CD ladder. I feel that there will be excess. If there is I'll probably have to "invest" them in muni funds to try to keep a reasonable allocation.

I think there is a psych barrier to withdrawing from taxable investments that have substantial gains. But, logically each redemption will likely include gains that are taxed lower than many tax brackets. Being in a high tax bracket is what we aspire to but then have some regrets when we arrive :happy
billfromct
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Re: Retirement Withdrawals

Post by billfromct »

After I retire, I will keep 7 years of IRA withdrawals from my rollover IRA account in a short term bond fund (4 years) and an intermediate term bond fund (3 years), or a CD or Guggenheim "bullet shares" ladder. My retirement IRA asset allocation will be 60%-70% stocks & 30%-40% bonds.

I will calculate my annual IRA withdrawal amount by dividing my IRA value by my life expectancy. I guess it would be easier to have Vanguard calculate my IRA annual required distribution and transfer it from my IRA short term bond fund into my taxable MM fund each January.

I will refund my 7 year IRA bond withdrawal funds from my IRA stock funds each January depending on how the stock market is doing (yes I know this is market timing) but with most stock market cycles lasting 5-7 years, I will have time to hold back refunding my IRA bond funds from my IRA stock funds during bear markets like 2008 & 2009.

Each January I will transfer my annual IRA distribution from my Vanguard IRA short term bond fund to my Vanguard taxable money market fund. Or I will have Vanguard do this automatically. Of course I will have Vanguard with hold the appropriate Federal & state taxes.

Each January, I will then transfer the after tax IRA distribution from my Vanguard taxable money market fund into my credit union high interest (.85%) savings account.

At the beginning of each month I will transfer my monthly after tax IRA distribution allocation from my credit union high interest saving account to my credit union checking account to cover monthly expenses, travel, etc.

I will elect to take SS at age 70.

My main goal is to keep things simple (I guess it doesn't sound so simple) and be able to spent my entire after tax IRA distribution each year without worrying about running out of money as I get older.

bill
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Peter Foley
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Re: Retirement Withdrawals

Post by Peter Foley »

Retirement withdrawals a very tricky. There are a lot of moving parts. What works for one individual or couple may not be the right choice for another.

Some of the early steps are a health assessment and a decision about when to draw SS if health issues are part of the equation.

Additional steps include an assessment of lifestyle including fixed costs and potentially variable costs, how much one has saved for retirement, and a cash flow analysis.

One's mix of taxable, tax deferred and tax free investments is another consideration. It is usually advisable to turn off dividend and capital gain reinvestments in taxable accounts.

With all this in mind one can then consider AA, withdrawal rates, the potential need for annuities, marginal income rates, unrealized long term capital gains, etc.

IMHO, of least importance is how and when to withdraw the money (lump some at beginning of year/end of year/monthly payments/quarterly payments.
ralph124cf
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Re: Retirement Withdrawals

Post by ralph124cf »

I am currently withdrawing at an unsustainably high rate until my wife and I start SS and pension at 70. This is more than we care to spend, so I am converting about 25% of this to Roth. I am withdrawing at this rate to smooth the income before and after age 70 when we will begin RMDs. We are debating starting the TREA annuity when my wife turns 66 in a few months, at the same time she starts taking SS based on my record. This would cut our withdrawal rate, but not much.

Ralph
longinvest
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Re: Retirement Withdrawals

Post by longinvest »

LeeMKE wrote:I'm planning on delaying Social Security and will have bigger withdrawals in the early years, very small withdrawals during both Social Security and Pension payment periods, and then larger withdrawals when the last person is standing and pension and Social Security payments decrease. So far, the only tool that allows me to calculate the withdrawals with this underlying variable cash flow is the Fidelity Retirement Income Planner.

I don't see how to use VPW in that kind of circumstance. Am I missing something?
If I planned to retire at 62 and wanted to delay Social Security to 70, I would put the equivalent of 8 years of "delayed Social Security payments" aside into 1 year in cash, and 7 years in a CD (or TIPS) ladder. When combined with future Social Security payments, this would give me a riskless basic floor of income. I would only apply VPW on the remaining risky portfolio.

As for the reduction in income when one spouse dies, it could be managed by planning to sell the house which has become probably too big and reduce expenses as there's one less mouth to feed. If that's not appropriate, then setting another small pool of money aside (at retirement) to take care of this eventuality could do the trick.

The backtesting spreadsheet is meant to be easily modifiable, so that one can easily model one's specific plan. The last version of the backtesting spreadsheet takes Social Security and pensions into account, as long as one has set aside a CD ladder (as explained above) for bridging retirement to Social Security payments. If that is not sufficient for you, and you know spreadsheets a little, you could go ahead and modify the spreadsheet to meet your personal needs.

It would be very difficult for me to model an arbitrary number of retirement plan options in a single spreadsheet. Yet, I hope that a free spreadsheet, easily adaptable to one's needs, can still be convenient tool.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
ourbrooks
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Re: Retirement Withdrawals

Post by ourbrooks »

I've looked at VPW and decided it doesn't fit my needs at all, but, perhaps, I'm not interpreting it correctly. Suppose that I started retirement in 2007 with a 60/40 portfolio. That year, I'd withdraw 4.8%. The next year, the stock market dropped 39% so my overall portfolio dropped by 23%. In 2008, per the spreadsheet, I should withdraw 4.9%, or 0.1% more, but, in dollar terms, since withdrawals are a percentage of portfolio, I'd see a 23% drop in my spending. Is that correct? More generally, is it the case that the dollar amount of VPW withdrawals goes up or down by a percentage that is just slightly less than how much your portfolio went up or down? Am I missing some kind of smoothing calculation?
BahamaMan
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Re: Retirement Withdrawals

Post by BahamaMan »

ourbrooks wrote: Am I missing some kind of smoothing calculation?
Why yes, you are missing something! ....... In my case I have my Wife and my S.S. to draw from as well as a Portfolio that is 70% Bonds/30% Stocks...... My worstcase Historical Withdrawal drop from my Initial Withdrawal is 15%..... Piece of Cake for me..... So, the smoothing comes from S.S., Pensions, Annuities, Separate Cash Accounts and a more conservative Asset Allocation......

But, more importantly, Let me ask you a Question..... In your scenario where your portfolio dropped by 23%, what would you like to Spend?..... I know I would probably cut back more than 23%...But, that's just me.
longinvest
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Re: Retirement Withdrawals

Post by longinvest »

ourbrooks wrote:I've looked at VPW and decided it doesn't fit my needs at all, but, perhaps, I'm not interpreting it correctly. Suppose that I started retirement in 2007 with a 60/40 portfolio. That year, I'd withdraw 4.8%. The next year, the stock market dropped 39% so my overall portfolio dropped by 23%. In 2008, per the spreadsheet, I should withdraw 4.9%, or 0.1% more, but, in dollar terms, since withdrawals are a percentage of portfolio, I'd see a 23% drop in my spending. Is that correct? More generally, is it the case that the dollar amount of VPW withdrawals goes up or down by a percentage that is just slightly less than how much your portfolio went up or down? Am I missing some kind of smoothing calculation?
If I didn't have the tolerance for a 23% portfolio drop, I shouldn't be 60% in stocks.

But, assume I have this tolerance. Let's look at the numbers:

Before retirement, I would have made sure I accumulated 25x my residual expenses (over Social Security). Assuming I needed $60k total (including taxes), and that I got $20k in Social Security payments, that would be 25x$40k = $1M.

In December 2007, I would have withdrawn $48k and had $8k more than planned. In December 2008, after a dreadful stock market year, I would have withdrawn $36k, barely $4k less than planned, for a total income of $56k. That's 7% less than the planned $60k. Not so bad, is it? I could live with that!

The key to using a percent of portfolio withdrawal strategy is to have flexibility in one's budget, and to stick to conservative planning estimates, before retirement.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
ourbrooks
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Re: Retirement Withdrawals

Post by ourbrooks »

What I'd like to spend has nothing to do with it. I can't tell my Medicare Advantage plan that I'm cutting my spending by 23% without losing important benefits. I can't tell the city I'm cutting my taxes by 23% either.

So the real prerequisites for VPW are:
1. Non-investment income sources that cover things like taxes, health care, insurance, home repairs, etc. , a.k.a a liability matching portfolio.
2. A conservative asset allocation, more conservative than 60/40, to provide optional expenditures.

No, VPW is not for me. I'd much rather spend more on SPIAs and have the freedom to do whatever I please with what's left, including investing it in riskier portfolios or spending it all half way through my retirement.
longinvest
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Re: Retirement Withdrawals

Post by longinvest »

ourbrooks, I am glad that you found a plan that works for you.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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Kevin M
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Re: Retirement Withdrawals

Post by Kevin M »

eastwayroad wrote: Close reading of William Bernstein, comments from many folks on this board and sources elsewhere lead me to less emphasis on income yield as a main goal, in favor of stability and safety of overall portfolio.
Good that you understand that. It's total return that matters, not "income". You don't want to take excessive risk to get higher yields.
eastwayroad wrote:So, when the time comes to replace a paycheck, "withdrawal" means in part selling off holdings.
Correct, to the extent that dividends, interest, social security, etc. don't cover expenses.
eastwayroad wrote:How does one decide on a plan? Between cap gain tax considerations, maintaining AA - not to mention irrational sentimental attachment to long held funds- it all seems daunting.
I don't find it that daunting. First, I use dividends and interest in taxable accounts to fund expenses. Next, I sell whatever assets in taxable accounts are over target allocation; sentiment has no place in these decisions. I currently also sell assets that I'd rather not have as I move toward a simpler portfolio (e.g., individual stocks).

Paying capital gains taxes is part of the deal, but don't ignore tax-loss harvesting opportunities.

I don't tap into tax-advantaged accounts yet, since I don't need to, but if I did, this would be my last source of funding expenses. I do convert some traditional IRA to Roth if I think it makes sense (i.e., that I'll pay less taxes now than later, when I'm forced to take RMDs).

You asked a very focused question about retirement withdrawals, so I won't go into other details, but of course optimizing your social security benefits strategy is important, unless you are so wealthy that it doesn't matter.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
BahamaMan
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Re: Retirement Withdrawals

Post by BahamaMan »

ourbrooks wrote:What I'd like to spend has nothing to do with it. I can't tell my Medicare Advantage plan that I'm cutting my spending by 23% without losing important benefits. I can't tell the city I'm cutting my taxes by 23% either.
These type of arguments amuse me. All throughout our working careers we are told to 'Live below our incomes'. But suddenly we retire and now we need every penny to cover taxes and Insurance plans!

I can tell your not retired, because this is not the way the real world works. I am retired and my VPW withdrawal can easily be cut by 50% and I would only have to cut some vacations out of my budget. My prerequisite for 'having enough to retire' is having enough discretionary income to do this easily. If you cannot manage this, you should not retire.
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