how to draw down taxable retirement acct...?

[travelinman]

Hi everyone!

The day is fast approaching. In 15 years or so.

So, just to satisfy my curiosity, I'll be asking what may seem like novice questions to you old pros.

Today's gem;
Without getting too specific, if I (theoretically) have a core/satellite (is that what you call it?) portfolio, with the big 3 (Total Stock, Total International, Total Bond) as 70% (or so) of the total value, and a few added extras like Small Cap Value, Emerging Markets, REIT, and Health Care rounding it out...

Is there a -best- way to draw this (taxable)account down?

Would you A) trim a little off from each every year
or B) trim off the extras and keep the core?

Didn't want to get too specific, so
A) People wouldn't yell at me for my silly portfolio, and
B) My allocations may very well change in the next 15 years, and
C) Getting too specific requires too much effort just to satisfy my curiosity at this point.

Thanks in advance! Like I said, just curious to hear some opinions.
TM

[Darth Xanadu]

I can't claim to be an expert, but I'll share my opinion. I would think that you would have a target allocation of holdings, and draw down to meet that target, similar to adding new money to underweight component during accumulation stage. So for example if REITs are heavier than your plan calls for at that time, I would draw primarily from there to get to the "right" spot. There may also be tax considerations depending on holdings.

[mhalley]

Your portfolio isn’t egregious aside from having reit in taxable. It is much too tax inefficient and should be moved to tax advantaged accounts. There are multiple ways to draw the portfolio down. You could turn off dividend and capital gain reinvestment and have the money sent to your bank account. You could sell whichever investment has exceeded your ips asset allocation. Sell anything that has a loss to minimize taxes. Sell to simplify the portfolio. Sell a little of everything to maintain aa.

[Tyler Aspect]

In the early retirement period typically people sell stocks to fund their yearly expense. At the same time they would still maintain their target asset allocation. I don't know if you will still have these extra funds in 15 years, but if you did then you should maintain the dollar level of each fund according to your target allocations.

[bligh]

In addition to no longer re-investing dividends, depending on your income level in retirement (social security, pensions, RMDs, etc.) you could start your plan by selling your highest capital gains (in any of those investments) lots up to where you pay no capital gains tax. Then tune the lots you are planning to sell to refine your asset allocation to your target.

[travelinman]

See? That's what I'm talkin' about!
I didn't even think about it from a 're-balancing' angle. (New guy here)
That actually makes sense to me, thanks!

I know that my current allocations may be re-visited/revised between now and then, but along the way I'll be collecting tidbits of info to help me make the right choices. (Hopefully!)

I think I'll stick around here... I might learn somethin'!
TM

[travelinman]

@mhalley

Yeah that REIT thing... I made some purchases before educating myself sufficiently haha and some consolidation may be in my best interest. Thanks for the tip!

Being that I have a taxable account ONLY (travelin' man here) I expect to have some tax to pay along the way. But unnecessary tax? Probably not a good idea...

Thanks to everyone for taking the time to answer!

[Taz]

In your taxable account you might:
- Donate appreciated shares to charity and/or setup a donor advised fund
- Stop reinvesting dividends & capital gains distributions and direct them to a Roth IRA

[livesoft]

I am drawing down my taxable account now in retirement. When I need money, I look to see how much I need and which shares would be best to sell that will cause the least tax consequences now and in the future. There is no need to plan ahead because the situation changes.

So far in 2018, I have sold varying numbers of shares on
Jan 08
Jan 18
Feb 23
Feb 27

I'll also spend the dividends when they show up in March, June, September, and December.

If I need to rebalance after selling shares in my taxable account, I do the rebalancing in my tax-advantaged accounts.

[remomnyc]

I am drawing down my taxable account now in retirement. When I need money, I look to see how much I need and which shares would be best to sell that will cause the least tax consequences now and in the future. There is no need to plan ahead because the situation changes.

So far in 2018, I have sold varying numbers of shares on
Jan 08
Jan 18
Feb 23
Feb 27

I'll also spend the dividends when they show up in March, June, September, and December.

If I need to rebalance after selling shares in my taxable account, I do the rebalancing in my tax-advantaged accounts.

This is my plan.

[MikeG62]

You could turn off dividend and capital gain reinvestment and have the money sent to your bank account.

^ This is what I have done (in 3rd year of early retirement). Second, I have interest payments on my muni bonds transferred to my checking account when they post to my brokerage account. This covers roughly 2/3rds of our annual spend needs.

Additional cash needs so far have been funded from online savings account (I guess you could call that really short-term fixed income).

When the time comes that online savings is drawn down to a low level, cash would come either from maturing (or called) bonds or selling equities (probably more of the latter than the former). That is likely to be years from now though.

[Lafder]

Take a chance and post everything. It really gives a more full picture!

Where you withdraw from will depend on what is there when you need money. Are you 100% comfortable with what the holdings are? Since to me, the holdings for the next 15 years is a more major concern than where to draw from in the future.

As you approach retirement, I would be thinking about what size cash emergency fund you want to have, and be sure that is fully funded. You can do that with new cash or by selling proceed, or not reinvesting dividends.

Are you maxing retirement accounts? What are those holdings?

Are you paying down debt so you will have less expenses in retirement?

When I needed to pull money from taxable for a down payment on a home, I looked at the capital gains tax effects depending on where I took it from as well as the effect on my overall portfolio AA (asset allocation). But in the end, another factor helped me decide. One of the accounts had close to the amount I needed. So I liquidated that one and took a little from another account.

lafder

[dbr]

Once you start to get into "best" the devil is in the details and can't be answered without having the details.

[Meg77]

First you can move dividends and gains in stock funds and interest on bond funds to be distributed rather than be reinvested. So you live first off those distributions which could easily be 2-3% of your portfolio. That may be ALL you need if you have any current income from part time work, social security, rental income etc. To the extent you need to sell shares to meet your spending needs, you just do the reverse of what you do now: sell whatever is appropriate (bonds or stocks) based on market fluctuations to keep your asset allocation in line.

To avoid excessive trading fees I wouldn't do this monthly but rather quarterly. Annually isn't quite often enough since you'd be more exposed to market swings (I wouldn't want to sell a year's worth of spending on one bad day for example).

[pkcrafter]

travelinman:

Being that I have a taxable account ONLY (travelin' man here) I expect to have some tax to pay along the way. But unnecessary tax? Probably not a good idea...

Well, this reply brings more questions. Are you a U.S. resident? Own your own business? Is there a reason why you can't fund an IRA or Roth or maybe a small business tax deferred plan if you own your own business?

Note too that replies that say tax considerations drive selected withdrawals are probably from investors who also have tax deferred accounts where they can do portfolio rebalancing. If you only have taxable accounts you should only use tax-efficient funds and do the rebalancing by withdrawing from assets that are higher than target.

Paul

[rixer]

I have withdrawn from taxable two years now in retirement. My situation is different than some. I have a LS balanced fund in all accounts. I know that balanced funds aren't as tax efficient but in this case, it was purchased after retirement, isn't a terribly huge amount, I spend the dividends and taxes haven't been an issue.

So, what I do is simply sell what I need from my LS fund in taxable and everything remains in balance. Simplicity.

[travelinman]

Wow! I never expected so many replies!

Thanks for the input, very much appreciated.

As for the whys and wherefores, I'm a musician from NYC who always had a day job as a mechanic (off the books). A few years ago, I started working with jet engines, and now work for a company overseas, though I maintain an address in NY. So, I've never been eligible for an IRA or any form of retirement account.
After I hit 40, I realized that I had zero (literally) saved for retirement, so I started sockin' it away, and when I had accumulated a considerable amount, I started buying mutual funds in a taxable account. I originally bought the 500 index fund, but then started to make random purchases as soon as a new bundle of money was available. Along the way, I read and researched about personal investing, and am figuring things out as I go along.


I'll probably consolidate a little to simplify things, but I think I'm pretty happy so far. In another 15 years, I should have approximately 1.5 gazillion dollars to fund my retirement! Theoretically.

[travelinman]

@Lafder:

I plan to have approx. 150,000 in my 'emergency cash fund', that will be used only if the market tanks. If that ever gets used, I'll top it off when the market comes back. That should be enough to get through most corrections/minor recessions.

@pkcrafter:

Regarding tax-efficient funds, don't all funds throw off taxable dividends and/or capital gains?

@meg77:

I could definitely live off of 3% dividends! (1.5 gazillion X .03?) (Theoretically)
I'm not sure I understand where that figure comes from (my fault, not yours!)...
We can't say 3% from my total investment, if not every stock in the fund(s) pays dividends...?

Thanks to anyone still hangin' on to this thread!!!

[Meg77]

@meg77:

I could definitely live off of 3% dividends! (1.5 gazillion X .03?) (Theoretically)
I'm not sure I understand where that figure comes from (my fault, not yours!)...
We can't say 3% from my total investment, if not every stock in the fund(s) pays dividends...?

Well, the total stock market index yields 1.62% currently, the total international index yields 2.6%, and the total bond index yields 2.57%. The REIT index yields 3.7%, and many individual stocks or dividend funds have yields much higher of course. As interest rates rise bond yields should tick back up closer to historical levels as well. So based on the market and your mix of funds at retirement, your dividend/interest yield will vary. But 3% is a pretty good ballpark estimate, especially if you have a sizeable bond holding.

[Lafder]

Did you really mean that 100% of your savings are not in retirement accounts that are tax advantaged?

If you are working another 15 years, why not add some retirement accounts.

They will help you have more money by the time retirement comes.

lafder

[travelinman]

Hahaha YES! I did mean that 100% of my funds are in taxable. You sound shocked!
I work in a foreign land for a foreign company, and they don't let Americans open investment or savings accounts. The U.S. brought the hammer down with the 'banking secrecy' thing, and Americans aren't really welcome in certain financial institutions....