How to w/d from taxable until SS/RMD time gets here?

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BolderBoy
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How to w/d from taxable until SS/RMD time gets here?

Post by BolderBoy »

I'm sure there are others pursuing the same trail as I or planning to, so please share your experience, expertise and wisdom.

Let's say for argument's sake I have $400k sitting in a taxable account, split x:y between Limited-Term Tax-Exempt and the Total Stock Market Index.

What if I wanted to live on the $400k for the next 7 years and then take SS & RMDs (from my tax-deferred accounts) for the balance of my life? For purposes of this subject, lets ignore my retirement accounts as well as strategic moves I'll be making with them over the next 7 years (primarily doing Roth conversions to the top of the 15% bracket.) Also presume I pay all my debts monthly and that my $$$ are well enough to carry me to SS/RMD age.

Is it as simple as telling Vanguard to set up bi-monthly selling and withdrawals-to-my-checking-account, letting the market highs/lows when the selling happens simply happen as they will? Should the bi-monthly selling reflect the AA split in the accounts? (ie, need $3k/month, have 40:60 AA, so sell $1200 of TSMI and $1800 TBMI each month?) If there is excess accumulation because I live simply, do I merely send the excess back to VG for re-investment or let it accumulate in a MM fund at VG going forward - not invested further?

Or should all of this be in real cash right now (a MM fund) rather than a bond and stock fund? Or all in bonds? Or only in laddered CDs? I guess I'm asking if the risk is too great with stock/bond exposure of any stripe at this point?


I'd like to see this batted about a bit and I have a thick skin, so hammer away.

Thanks!

PS - I'm retired so presume no other source of income for now but the $400k.
DSInvestor
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by DSInvestor »

If spending down a taxable account you should not reinvest dividends. Collect the dividends for spending.

IMO, you should not ignore the tax advantaged accounts when spending down the taxable account, because the overall AA needs to be considered. For example, if you seek 40/60 stock/bond AA but your overall portfolio is 50/50, you should sell stocks. If the tax cost to sell stocks in the taxable account is high, you may want to place two trades:

1) In taxable, sell bonds (presumably at lower tax cost)
2) In tax advantaged, exchange stocks for bonds.

These two trades combined have you selling stocks from your portfolio.

I see that you're looking to do Roth conversions up to the top of the 15% bracket. Be aware that while LTCG may be taxed at 0% Fed but it is included in AGI and if you're subject to state income taxes, it will likely be taxed as ordinary income by your state.

Also the more tax efficient you are about withdrawing from the taxable account, the more headroom you may have for large Roth conversions up to top of the 15% tax bracket.
Last edited by DSInvestor on Tue Jul 08, 2014 6:25 pm, edited 1 time in total.
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by Spirit Rider »

You don't mention what your emergency fund status is. Most retirement income planners would move some to cash or laddered CDs. Certainly not all of it, but maybe so you have in the range of 2-4 years of expenses.

Generally, you should draw down in proportion to maintain your desired asset allocation.
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by BolderBoy »

DSInvestor wrote:If spending down a taxable account you should not reinvest dividends. Collect the dividends for spending.
Okay, doing this already - thanks for the confirmation.
IMO, you should not ignore the tax advantaged accounts when spending down the taxable account, because the overall AA needs to be considered. For example, if you seek 40/60 stock/bond AA but your overall portfolio is 50/50, you should sell stocks. If the tax cost to sell stocks in the taxable account is high, you may want to place two trades:

1) In taxable, sell bonds (presumably at lower tax cost)
2) In tax advantaged, exchange stocks for bonds.

These two trades combined have you selling stocks from your portfolio.
Okay, how about if I plow ahead as I described with the taxable side and merely do all the rebalancing on the retirement side as needed? Presume I have enough in retirement to easily handle keeping the AA correct, even when taxable is included in the picture.

Are you comfy with my leaving my taxable as a mix of stock and bond funds and not 100% cash?
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by BolderBoy »

Spirit Rider wrote:You don't mention what your emergency fund status is. Most retirement income planners would move some to cash or laddered CDs. Certainly not all of it, but maybe so you have in the range of 2-4 years of expenses.

Generally, you should draw down in proportion to maintain your desired asset allocation.
Several years ago I asked here about an emergency fund when one is retired and most of the responses indicated that an emergency fund wasn't truly needed - at least not to be itemized out - because what you have is what you have, once the accumulation phase is over. Essentially one's whole portfolio is one's emergency fund, even if not in cash, since it could be liquidated even if at a loss, if need be.

What do you think about that?
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by Artsdoctor »

If you're going to rely on your taxable account to support your lifestyle, the taxable account should provide a predictable stream of income.

You mention that the account is about $400,000 now and you'd like to spend it over 7 years. If the Total Stock Market fund drops 20%, how will that affect your lifestyle? 30%? 50%

You won't be able to "freeze" today's value in time and your equity portion is almost certain not to rise in a linear fashion over the next 7 years so what's your mechanism to provide that income as the equity side declines?
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by BolderBoy »

Artsdoctor wrote:If you're going to rely on your taxable account to support your lifestyle, the taxable account should provide a predictable stream of income.

You mention that the account is about $400,000 now and you'd like to spend it over 7 years. If the Total Stock Market fund drops 20%, how will that affect your lifestyle? 30%? 50%

You won't be able to "freeze" today's value in time and your equity portion is almost certain not to rise in a linear fashion over the next 7 years so what's your mechanism to provide that income as the equity side declines?
It's a risk. Is the risk of putting it all in bonds (to generate more than paltry returns) low enough that you'd consider going that route, were it you?

I'm getting the feeling I should probably make taxable have zero equity position to mollify a big change.
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by scrabbler1 »

Bolderboy, I have been an early retiree (age 51) for 5 1/2 years and use the monthly dividends from a bond fund to pay for my expenses. Most of the rebalancing I do is in my IRA although I have made a rare rebalancing move in my taxable accounts which are more bond-weighted than the IRA (which is now 50/50 although may be due for another rebalancing move).

As for an emergency fund, I do what I have been doing all along from my working days. I keep about $750 extra in my local bank's checking account beyond minimum account balances to avoid fees to cover me for any small, unforeseen expenses. My next layer or funds is about $40k in an intermediate-term muni bond fund. I rarely have to tap into that, only if I have a large, unforeseen expense the local bank's account can't handle. This bond fund has checkwriting privileges, another useful feature to add some liquidity and speed to accessing the funds. I am quite willing to risk selling from that fund at a small loss in order to get 2-2.5% (about $100 per month) in dividends. I hate the idea of having a lot of money earning nothing.

This will be my plan until I near 60 when the first of my "reinforcements" kick in. They are (a) unfettered access to my IRA, (b) my frozen company pension, and (c) Social Security.
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by BolderBoy »

DSInvestor wrote:I see that you're looking to do Roth conversions up to the top of the 15% bracket. Be aware that while LTCG may be taxed at 0% Fed but it is included in AGI and if you're subject to state income taxes, it will likely be taxed as ordinary income by your state.
Yes, the first $24k will be exempt from state taxation (when I hit 65 y/o).
Also the more tax efficient you are about withdrawing from the taxable account, the more headroom you may have for large Roth conversions up to top of the 15% tax bracket.
Yes, that will need to be considered and does indeed complicate the figuring a bit.
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by BolderBoy »

scrabbler1 wrote:Bolderboy, I have been an early retiree (age 51) for 5 1/2 years and use the monthly dividends from a bond fund to pay for my expenses. Most of the rebalancing I do is in my IRA although I have made a rare rebalancing move in my taxable accounts which are more bond-weighted than the IRA (which is now 50/50 although may be due for another rebalancing move).

As for an emergency fund, I do what I have been doing all along from my working days. I keep about $750 extra in my local bank's checking account beyond minimum account balances to avoid fees to cover me for any small, unforeseen expenses. My next layer or funds is about $40k in an intermediate-term muni bond fund. I rarely have to tap into that, only if I have a large, unforeseen expense the local bank's account can't handle. This bond fund has checkwriting privileges, another useful feature to add some liquidity and speed to accessing the funds. I am quite willing to risk selling from that fund at a small loss in order to get 2-2.5% (about $100 per month) in dividends. I hate the idea of having a lot of money earning nothing.

This will be my plan until I near 60 when the first of my "reinforcements" kick in. They are (a) unfettered access to my IRA, (b) my frozen company pension, and (c) Social Security.
Okay - you are describing a scenario close to what I have in mind. Can you explain the actual mechanics a bit - it doesn't sound like you need to actually sell any of your bond principal in order to meet expenses; just use the dividends - that is easy to set up with VG. What I'm wondering about is "programmed selling" from a bond and/or stock fund? And it sounds like you'd lean away from having too much equity in taxable in order to avoid a potential big market dip as has been suggested by another?

Any problem with simply having 100% of your taxable in bonds and let the AA be adjusted over on the retirement side?

And if you've pondered it, at what point does one start considering SS to be like a bond or annuity holding? Before it is taken or only when it is finally being taken, going forward?
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by scrabbler1 »

BolderBoy wrote:
scrabbler1 wrote:Bolderboy, I have been an early retiree (age 51) for 5 1/2 years and use the monthly dividends from a bond fund to pay for my expenses. Most of the rebalancing I do is in my IRA although I have made a rare rebalancing move in my taxable accounts which are more bond-weighted than the IRA (which is now 50/50 although may be due for another rebalancing move).

As for an emergency fund, I do what I have been doing all along from my working days. I keep about $750 extra in my local bank's checking account beyond minimum account balances to avoid fees to cover me for any small, unforeseen expenses. My next layer or funds is about $40k in an intermediate-term muni bond fund. I rarely have to tap into that, only if I have a large, unforeseen expense the local bank's account can't handle. This bond fund has checkwriting privileges, another useful feature to add some liquidity and speed to accessing the funds. I am quite willing to risk selling from that fund at a small loss in order to get 2-2.5% (about $100 per month) in dividends. I hate the idea of having a lot of money earning nothing.

This will be my plan until I near 60 when the first of my "reinforcements" kick in. They are (a) unfettered access to my IRA, (b) my frozen company pension, and (c) Social Security.
Okay - you are describing a scenario close to what I have in mind. Can you explain the actual mechanics a bit - it doesn't sound like you need to actually sell any of your bond principal in order to meet expenses; just use the dividends - that is easy to set up with VG. What I'm wondering about is "programmed selling" from a bond and/or stock fund? And it sounds like you'd lean away from having too much equity in taxable in order to avoid a potential big market dip as has been suggested by another?

Any problem with simply having 100% of your taxable in bonds and let the AA be adjusted over on the retirement side?

And if you've pondered it, at what point does one start considering SS to be like a bond or annuity holding? Before it is taken or only when it is finally being taken, going forward?
I simply have the bond fund's monthly dividends sent to my local bank's checking account each month. That monthly influx of money pays the bills. A few of my bills are not monthly, such as car insurance and estimated income tax payments, so I have to make sure I carry forward enough of a surplus from earlier months to cover them. This bond fund's dividends slightly exceed my expenses on an annual basis so any surplus is plowed back into the bond fund. Furthermore, any cap gain distributions, which are erratic, are automatically reinvested so I add to my total share count and my monthly diivdends that way.

I recently changed what I do with my stock fund's quarterly dividends. I used to reinvest them but in a mild rebalancing move I am taking them as cash with the intent on buying more shares of the bond fund. I began doing this a few months ago when I had gone on a small spending spree at the beginning of the year and needed a cash infusion to pay some of the bills my normal cushion could not handle (and i did not want to use the second tier intermediate-term BF to pay it). My AA in the taxable accounts is about 37/63 in favor of bonds, the stock part acting as a mild inflation guard.

I haven't given any thought about SS as a bond or an annuity. It is too distant for now.
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by BolderBoy »

scrabbler1 wrote:This bond fund's dividends slightly exceed my expenses on an annual basis so any surplus is plowed back into the bond fund. Furthermore, any cap gain distributions, which are erratic, are automatically reinvested so I add to my total share count and my monthly diivdends that way... My AA in the taxable accounts is about 37/63 in favor of bonds, the stock part acting as a mild inflation guard.
Okay, you answered one of my questions - about what to do with the excesses; you buy more bond shares. But you maintain an equity position in taxable as well. Hmmmm, would the same inflation hedge accrue if all of that was in your retirement side instead? This is just asking since you likely can't make any move like that in your present circumstance, anyway.

I'm getting more the feeling I should burn down the equity side of my taxable holdings by withdrawals and gradually selling to buy the bond side.

The taxation issues I can twiddle very closely with a spreadsheet that I put together.

And you answered my "SS as bond or annuity and when" question handily - you don't consider it as a holding of any sort presently.
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by ralph124cf »

I think that one is better off having equity in taxable, because of the favorable tax treatment of capital gains. OP mentioned topping up to the top of the 15% bracket with Roth conversions, so this would mean 0% tax on capital gains taken.

OP, you mentioned periodic equal withdrawals from both funds. This is reverse dollar cost averaging.

Dollar cost averaging is great during the accumulation stage, because you are buying more shares when prices are down, less when prices are up.

If you do this when withdrawing, you sell more shares when prices are down, and fewer when prices are high. I would recommend withdrawing a predetermined fraction of the total of the two accounts each month or year, while keeping your desired AA. This way you are withdrawing more from the more profitable account (or account with fewer losses). You mentioned 7 years. Withdraw 1/7 of the total from the accounts maintaining your desired AA for the first year. Then 1/6 the second year, and ending withdrawing everything in the last year.

This does mean that you need to accept a somewhat variable spending plan.

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Re: How to w/d from taxable until SS/RMD time gets here?

Post by freebeer »

DSInvestor wrote:If spending down a taxable account you should not reinvest dividends. Collect the dividends for spending....
Why? It would seem better to reinvest and consider which securities to sell for spending based on total tax situation ... It nay be those (since basis = current value) but you might prefer to tax loss harvest or even take cap gains depending on the overall situation. This assuming low cost mutual funds with no bid/ask spread...
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by BolderBoy »

ralph124cf wrote:OP, you mentioned periodic equal withdrawals from both funds. This is reverse dollar cost averaging.

Dollar cost averaging is great during the accumulation stage, because you are buying more shares when prices are down, less when prices are up.

If you do this when withdrawing, you sell more shares when prices are down, and fewer when prices are high. I would recommend withdrawing a predetermined fraction of the total of the two accounts each month or year, while keeping your desired AA. This way you are withdrawing more from the more profitable account (or account with fewer losses). You mentioned 7 years. Withdraw 1/7 of the total from the accounts maintaining your desired AA for the first year. Then 1/6 the second year, and ending withdrawing everything in the last year.

This does mean that you need to accept a somewhat variable spending plan.

Ralph
Thank you. I hadn't considered it as a form of "reverse DCA." This is why I posted my question here - for the range of considerations which come to bear. I was trying to automate the process, but I can see it is a losing game to do so too much.
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by BolderBoy »

freebeer wrote:
DSInvestor wrote:If spending down a taxable account you should not reinvest dividends. Collect the dividends for spending....
Why? It would seem better to reinvest and consider which securities to sell for spending based on total tax situation ... It nay be those (since basis = current value) but you might prefer to tax loss harvest or even take cap gains depending on the overall situation. This assuming low cost mutual funds with no bid/ask spread...
I find it interesting that no one has yet suggested that it should all be in cash, now, going forward. For safety...
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by furwut »

BolderBoy wrote: I find it interesting that no one has yet suggested that it should all be in cash, now, going forward. For safety...
I'm an early retiree (age 52) and I'm considering laddering a combination of CD's/TIPS bonds to meet my essential needs until age 65 when I'll have a pension. Have to do more research on that approach first. But as I see it early retirement, for me, is risky given the uncertainty of reemployment should the market turn south.

For now I'm started with the Systematic Withdrawal approach. I'm keeping a cash bucket of 9 months expenses divided as follows:
1 month checking
2 months savings
6 months high yield checking account (as good a return as a bond fund).

My plan is to spend down the cash until i have just 2 months left then replenish by selling of some of my taxable account. I believe Vanguard's recommendation is for a 1 yr cash bucket. Anyway - no automatic exchanges are setup. I just will sell when I need additional cash.

Eventually I can see needing to rebalance my portfolio as my taxable account is nearly all stocks. So I'll sell some bonds in my tax deferred and buy stocks to offset the stocks I've sold on the taxable side.
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by DSInvestor »

freebeer wrote:
DSInvestor wrote:If spending down a taxable account you should not reinvest dividends. Collect the dividends for spending....
Why? It would seem better to reinvest and consider which securities to sell for spending based on total tax situation ... It nay be those (since basis = current value) but you might prefer to tax loss harvest or even take cap gains depending on the overall situation. This assuming low cost mutual funds with no bid/ask spread...
The dividends are taxed whether they are reinvested or not. OP has 400K taxable account and looking to withdraw 36K/yr. Let's say that dividends are 8K.

If dividends are not invested, he has 8K cash. He sells 28K.
AGI = 8K Dividend + (28K gross proceeds - cost basis)

If dividends are reinvested, he has no cash so he needs to sell 36K which may realize a larger capital gain.
AGI = 8K + (36K gross proceeds- cost basis)

TLH is easier without reinvestment as no shares are being acquired in wash sale window.
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by Flobes »

BolderBoy wrote:I find it interesting that no one has yet suggested that it should all be in cash, now, going forward. For safety...
OK, I'll bite.

When I started early retirement, I created a CD ladder, three years worth, in six-month steps, comprised of 120% of my guesstimated budget. Larger amounts pop in January than July, because all of my tax and insurance expenses are in the first half of the year. I was Roth converting each year to the top of 15% fed bracket, enjoying the free $20k excluded from state taxes.

Fast forward: I'm now in year six of early retirement. My CD ladder is now five years, still in six-month steps.

Thanks to the ACA, my health insurance and health care costs are very minimal, and I no longer fund my HSA (bcz I've garnered the maximum cost sharing benefits so I can't have an HSA plan). So my spending is quite lowered from my earlier guesstimate; the two largest line items are gone. My Roth conversions are on hiatus until I turn 66, to keep my MAGI down for ACA qualification, until I am 66. But now I'm considering a QLAC in my IRA! So I may not do any more conversions, even then.

I have way more in taxable than in tax-advantaged. So the CD ladder is part of my fixed-income allocation. My initial set-up was from cash inheritance, so I didn't have any selling or capital gains considerations.

I'm coasting to 70 with cash, without concern that a market plunge will impact my next years, and with pretty simple mechanics. But even more of my taxable is in Total Stock and Total International... and a cushion of IBonds!
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by Spirit Rider »

BolderBoy wrote:
Spirit Rider wrote:You don't mention what your emergency fund status is. Most retirement income planners would move some to cash or laddered CDs. Certainly not all of it, but maybe so you have in the range of 2-4 years of expenses.

Generally, you should draw down in proportion to maintain your desired asset allocation.
Several years ago I asked here about an emergency fund when one is retired and most of the responses indicated that an emergency fund wasn't truly needed - at least not to be itemized out - because what you have is what you have, once the accumulation phase is over. Essentially one's whole portfolio is one's emergency fund, even if not in cash, since it could be liquidated even if at a loss, if need be.

What do you think about that?
Yes, your need for a true emergency fund declines, but adding cash as an asset category to your allocations is a good idea. I was asking to see if you already had some cash to change function.

There are disagreements about whether a cash bucket is necessary or not. However, what is the answer to the following question that gets asked here a lot. "I need money in three years where should I place it?" The universal answer would be, you need to keep it in cash.
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by grabiner »

freebeer wrote:
DSInvestor wrote:If spending down a taxable account you should not reinvest dividends. Collect the dividends for spending....
Why? It would seem better to reinvest and consider which securities to sell for spending based on total tax situation ... It nay be those (since basis = current value) but you might prefer to tax loss harvest or even take cap gains depending on the overall situation. This assuming low cost mutual funds with no bid/ask spread...
There is no tax cost for spending the dividends, so you might as well take them in cash and spend them. If you want to harvest a loss or a gain, you can do this independent of what you do with the dividends. (And if you want to harvest a loss, taking the dividends in cash protects against wash sales.)
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by scrabbler1 »

BolderBoy wrote:
scrabbler1 wrote:This bond fund's dividends slightly exceed my expenses on an annual basis so any surplus is plowed back into the bond fund. Furthermore, any cap gain distributions, which are erratic, are automatically reinvested so I add to my total share count and my monthly dividends that way... My AA in the taxable accounts is about 37/63 in favor of bonds, the stock part acting as a mild inflation guard.
Okay, you answered one of my questions - about what to do with the excesses; you buy more bond shares. But you maintain an equity position in taxable as well. Hmmmm, would the same inflation hedge accrue if all of that was in your retirement side instead? This is just asking since you likely can't make any move like that in your present circumstance, anyway.
Yes, there is an inflation hedge with the stock funds in the IRA or taxable. But remember, I can't tap my IRA for another 8 years so I want an inflation hedge in the taxable account to help get me to age ~60 when I can tap into said IRA.
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by BigJohn »

BolderBoy,

I'm in a very similar situation with retirement 6 - 12 months out. Here's my current plan on how to structure my taxable assets for living expenses until SS/RMD time which for me is ~ 12 years away. Haven't noticed it mentioned here but don't forget that taxes on tIRA conversions will need to be paid out of taxable account as well to get maximum benefit.

Will have ~ 6 months living expenses in linked checking/savings account from which bills are paid. I'll take everything in taxable off reinvestment and direct here as first tranche of spending.

Will have ~ 1.5 years of living expenses in something safe and short term. Considered CD ladder but looking for simplicity and would rather not have to open new accounts and deal with the hassle. Also considered keeping all in checking/savings account which is simple but that seemed overly conservative. Planning to keep in VG account but have not made the final decision on specific fund. Considering VG ST Tax-Exempt or one of the VG ST Treasury funds. I do not plan to use this as a flow through bucket but rather as a fly-wheel. Will only use this money if/when needed to avoid selling at market bottom.

Balance of taxable funds at VG with ~ 60/40 AA. Stock component largely in VG index funds but some portion in very low cost basis employer stock rolled over from 401(k) using NUA. Bond component in national LT and IT Tax-Exempt funds. No guarantees but expect about 2/3 of normal living expense to come from dividends and interest. The rest will be generated by selling assets periodically. Not planning to put on auto pilot as I want ability to control what gets sold. Given price run-up, I'd be selling stocks right now but when we get a market correction I'll choose to sell the bonds. Tax deferred account will be near the same AA so I'll buy/sell there without tax considerations to maintain my overall AA.

All comments/criticism welcome.
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by SGM »

If I needed $3000 a month for 7 years from a $400,000 portfolio I would keep about $150,000 in investments that threw off dividends or muni interest. I would reach a little bit for a better yield than limited term with all the funds but maybe a bit more with the funds that I would not have to touch in the 7 years. I would probably be overall 50:50 in cash equivalents or limited and intermediate bond funds and the balance in higher yield bonds or stock funds. This may be too risky for most.

Now if that $150K was going to be used to pay taxes on Roth conversions during the 7 years I would be more conservative with that too.
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by letsgobobby »

In your scenario it seems to be a matter of allocating limited/precious 15% space, as I queried here:

http://www.bogleheads.org/forum/viewtop ... st=2081225

Therefore I don't think you can make smart decisions about your taxable accounts without also considering your pretax accounts like 401ks/TIRAs.
Last edited by letsgobobby on Wed Jul 09, 2014 11:30 am, edited 1 time in total.
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by Artsdoctor »

BolderBoy wrote:
Artsdoctor wrote:If you're going to rely on your taxable account to support your lifestyle, the taxable account should provide a predictable stream of income.

You mention that the account is about $400,000 now and you'd like to spend it over 7 years. If the Total Stock Market fund drops 20%, how will that affect your lifestyle? 30%? 50%

You won't be able to "freeze" today's value in time and your equity portion is almost certain not to rise in a linear fashion over the next 7 years so what's your mechanism to provide that income as the equity side declines?
It's a risk. Is the risk of putting it all in bonds (to generate more than paltry returns) low enough that you'd consider going that route, were it you?

I'm getting the feeling I should probably make taxable have zero equity position to mollify a big change.
Paltry returns of bonds are a fact of life for every retiree. However, a 0% real return is a lot better than a 20% loss. The relationship between risk and return is the most basic of all investment dictums. If you really are needing the money that you have invested in equities within the next few years, I would really caution you against holding them in equities. If you don't need the money and can live off of the dividends, no problem.
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BolderBoy
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by BolderBoy »

Artsdoctor wrote:Paltry returns of bonds are a fact of life for every retiree. However, a 0% real return is a lot better than a 20% loss. The relationship between risk and return is the most basic of all investment dictums. If you really are needing the money that you have invested in equities within the next few years, I would really caution you against holding them in equities. If you don't need the money and can live off of the dividends, no problem.
The ace-up-my-sleeve is of course that I can take SS at any time and suck up the reduced payout. This makes my scenario a bit different than that of some responders who retired well ahead of age 62 even and need to tread more carefully than I in the meantime.

Lots of good things to think about and I thank everyone for their responses. I think that Excel can help me model some ideas.
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Re: How to w/d from taxable until SS/RMD time gets here?

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Taking Social Security early will reduce your payout by quite a bit and you will be left with that reduced payout for the rest of your life. If it applies to your family, spousal benefits will be reduced forever as well.

There's no point in putting everything in cash because that's not necessary. If you want to ladder CDs and bonds, then your paltry returns will be slightly less paltry than cash. But don't forget to take into account inflation. Dividing $400,000 by 7 won't give you $57K in spending power all the way through. Even if you conservatively estimate inflation to be 1.5% each year on average, it will take over $63K seven years from now to purchase $57K worth of goods in today's dollars.

Good luck. Please try to learn a bit more about Social Security. The decision you make at age 62 will affect not just you but your family for the rest of your lives. Unlike the old days, you can't undo your decision once you've started collecting.
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Re: How to w/d from taxable until SS/RMD time gets here?

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Artsdoctor wrote:Taking Social Security early will reduce your payout by quite a bit and you will be left with that reduced payout for the rest of your life. If it applies to your family, spousal benefits will be reduced forever as well.

There's no point in putting everything in cash because that's not necessary. If you want to ladder CDs and bonds, then your paltry returns will be slightly less paltry than cash. But don't forget to take into account inflation. Dividing $400,000 by 7 won't give you $57K in spending power all the way through. Even if you conservatively estimate inflation to be 1.5% each year on average, it will take over $63K seven years from now to purchase $57K worth of goods in today's dollars.

Good luck. Please try to learn a bit more about Social Security. The decision you make at age 62 will affect not just you but your family for the rest of your lives. Unlike the old days, you can't undo your decision once you've started collecting.
Roger all that. 64 y/o now and have been handily living on $40k/yr for many years now (maybe I'll spurge and spend $45k/yr between now and SS time, respecting inflation's toll), so should be fine making it to 70 before taking SS. The juggling going forward then will be to minimize taxes as I take cap gains and do my Roth conversions. In a nutshell, what I've been planning to do all along, sounds like "the plan". Just won't be able to automate the $$$ w/d process the way I was hoping - oh well, I do have the time to tweak this by hand and Excel is my friend.
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Re: How to w/d from taxable until SS/RMD time gets here?

Post by Artsdoctor »

^ I am guilty of being presumptuous. For some reason, most likely because of your moniker, I thought you were less than 64 years old and were contemplating taking social security "early," at 62. Then you do indeed have options ahead for you.

Dividends will clearly be helpful, as Grabiner points out above. Try to limit any bond funds to durations that are less than when you might need the principal (or buy individual bonds and/or CDs), and don't anticipate selling equity principal for money you need in the near future.
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