Drawdown for dummies 101

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mdbravelion
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Drawdown for dummies 101

Post by mdbravelion »

Hi,

What does a drawdown actually look like in practice. Let's assume a simple 2 fund portfolio, and a retirement age of say 65. Let's not discuss tax efficiency or SSI/pension or healthcare. Let's assume no stock splits. Let's assume a 30 year retirement.

Portfolio - 50% - VTI - 4545 shares for a total of 1M
50% - BND - 11764 shares for a total of 1M

Would you just take 3 percent (136 shares of VTI and 353 shares of BND) out in perpetuity? What is the portfolio was consisting of shares which had less absolute number of shares but a higher price per share? For example, say the portfolio was constructed of 50 shares which were worth 20k each? Does anyone have a spreadsheet or an actual draw-down strategy that they can share?
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retired@50
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Re: Drawdown for dummies 101

Post by retired@50 »

I think the general rule of thumb is to withdraw money in such a way that the remaining balance is still divided up per your desired asset allocation.

In your example, 50/50, so you'd withdraw money so that each fund has an equal amount of dollars remaining, without worrying about how many shares are held in each fund.

Regards,
Last edited by retired@50 on Wed Jun 09, 2021 12:21 pm, edited 1 time in total.
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vas
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Re: Drawdown for dummies 101

Post by vas »

One might consider Roth conversions prior to Social Security. The annual withdrawal could be used to maintain your asset allocation. That is, draw more from stock or bond fund as needed. Additional rebalancing may also be required.

Some suggest a separate cash account with a couple years of expenses. This allows some flexibility so you don't need to withdrawal if the markets are down.
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RubyTuesday
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Re: Drawdown for dummies 101

Post by RubyTuesday »

First I turned off any reinvestment of distributions in taxable.

Then any additional cash I need from portfolio I sell either based on AA or based on taxes or both.
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WyomingFIRE
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Re: Drawdown for dummies 101

Post by WyomingFIRE »

mdbravelion wrote: Wed Jun 09, 2021 12:17 pm Hi,

What does a drawdown actually look like in practice. Let's assume a simple 2 fund portfolio, and a retirement age of say 65. Let's not discuss tax efficiency or SSI/pension or healthcare. Let's assume no stock splits. Let's assume a 30 year retirement.

Portfolio - 50% - VTI - 4545 shares for a total of 1M
50% - BND - 11764 shares for a total of 1M

Would you just take 3 percent (136 shares of VTI and 353 shares of BND) out in perpetuity? What is the portfolio was consisting of shares which had less absolute number of shares but a higher price per share? For example, say the portfolio was constructed of 50 shares which were worth 20k each? Does anyone have a spreadsheet or an actual draw-down strategy that they can share?
You might find this to be helpful: https://www.bogleheads.org/wiki/Withdrawal_methods.

Extended i-ORP is also interesting for these types of questions: https://www.i-orp.com/Plans/extended.html.

The i-ORP articles posted on the following link are also informative: https://www.i-orp.com/Plans/articles.html

This paper (https://www.i-orp.com/modeldescription/ ... dtaxes.pdf; available on that link) makes the following statement: "The common practice for the scheduling of withdrawals from retirement savings accounts is to first deplete the after-tax account, then the tax-deferred and finally the Roth IRA." It then goes on to explain why that conventional wisdom isn't necessarily correct or wise for various reasons, including tax minimization.
Last edited by WyomingFIRE on Wed Jun 09, 2021 1:25 pm, edited 1 time in total.
BH_RedRan
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Re: Drawdown for dummies 101

Post by BH_RedRan »

So I (admittedly) only spent about 10 minutes reading the .pdf paper in the link. Am I correct that the paper basically concludes that there isn't much difference in available spending regardless of Roth conversions? It seems to say that for most scenarios covered that Roth conversions trade tax-deferred growth for tax reductions and that the result is not a huge benefit in available spending for the effort.

So, that seems to leave the main benefits of Roth conversions as being tax-free inheritance and as a guard against significantly higher tax rates in the future (including the good chance a single filer moves up brackets). Is that all about right?
WyomingFIRE
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Re: Drawdown for dummies 101

Post by WyomingFIRE »

BH_RedRan wrote: Wed Jun 09, 2021 1:16 pm So I (admittedly) only spent about 10 minutes reading the .pdf paper in the link. Am I correct that the paper basically concludes that there isn't much difference in available spending regardless of Roth conversions? It seems to say that for most scenarios covered that Roth conversions trade tax-deferred growth for tax reductions and that the result is not a huge benefit in available spending for the effort.

So, that seems to leave the main benefits of Roth conversions as being tax-free inheritance and as a guard against significantly higher tax rates in the future (including the good chance a single filer moves up brackets). Is that all about right?
I'm not certain that general conclusion may be drawn. Each specific scenario would have to be run in i-ORP, while inputting a host of assumptions, of course. I think the statement quoted above in that pdf was merely meant to suggest that i-ORP's outputs might be counter-intuitive for some. The i-ORP materials also state that some people use i-ORP merely to assess withdrawals.

i-ORP maximizes disposal income, which some people do not like but which also doesn't mean you have to spend those dollars. Additionally, you can set certain input parameters, specifically amount to be retained for heirs at the end of each scenario run, to try to lower disposal income by year during the plan.

Anyway, one output of i-ORP is specific suggested withdrawals from each account, by year, through all years of the plan. It's pretty fascinating.
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Raybo
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Re: Drawdown for dummies 101

Post by Raybo »

You ask not to discuss tax efficiency. Do RMDs fit into that?

If not, then at 72 you will have to begin taking RMDs. Depending on how much you have in an IRA and how well the stock market does in the intervening years, it is possible that your RMDs might be higher than the $60K you are planning to take each year. In such a case, conversions to Roths might make some sense from an RMD/Taxes point of view.

At 72, you have to take a bit less than 4% of your IRA as an RMD.
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dbr
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Re: Drawdown for dummies 101

Post by dbr »

What a drawdown looks like in practice is that if you want some money to spend at any point in time you sell some assets in one or another of your accounts and have the proceeds deposited in a place from which you can spend it. The actual mechanics can be quite varied depending on what your accounts are.

A variation on this is that some withdrawals for spending may be automated to some degree. I have taxable account distributions directly deposited in my checking account and a lot of spending is automated withdrawals for bill pay from the checking account. Most brokers will also arrange to sell and deposit fixed dollar amounts from your assets every month. I don't know if that is done for IRAs. I know you can't do that in the 401k. In my 401k I have to sell assets in the directed brokerage, initiate at transfer of cash from the brokerage to an asset in the plan, sell some of that asset, and then direct that the proceeds go to an account from which one can spend.

RMDs in my mind are not drawdowns. I think it is more logical to consider an RMD to be a transfer of assets from a tax deferred plan to a taxable account. While RMDs can be done in kind, I usually sell something in the 401k and take a cash transfer to a checking account from which the money might be spent or sent to a broker to buy something.

In short, drawdown looks just like all other money management people have been doing all their lives except the direction of money flow might be reversed and you don't have a corporate payroll system automating a lot of it.

What there is not is some rigid process of transactions you have to engage in. When people talk about a drawdown strategy that means a strategy of best tax advantage in how things are manipulated.
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tennisplyr
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Re: Drawdown for dummies 101

Post by tennisplyr »

retired@50 wrote: Wed Jun 09, 2021 12:21 pm I think the general rule of thumb is to withdraw money in such a way that the remaining balance is still divided up per your desired asset allocation.

In your example, 50/50, so you'd withdraw money so that each fund has an equal amount of dollars remaining, without worrying about how many shares are held in each fund.

Regards,
+1
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marcopolo
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Re: Drawdown for dummies 101

Post by marcopolo »

I really don't understand why there is such a knee jerk reaction in this forum to push Roth Conversions, often in cases where they are detrimental, as if they were some kind of magic bullet.

The OP said to leave out discussions of tax-efficiency. There is NO mention of the existence of a tax-deferred account, yet somehow half the responses are suggesting Roth Conversions. How can any of those responders know if a Roth Conversions would be appropriate for the OP's situation?!?

Roth Conversions are terrific tool when used properly under the right circumstances, but they are not universally beneficial.

OP, there is nothing special about the number of shares, or their price. That should not affect how you withdraw your funds.
A common approach, that I also use, is to select an asset allocation that you are comfortable with (your example is 50/50), and then withdraw your desired amount in such a way so that the resulting portfolio maintains the selected 50/50 allocation. So, if stock have increased a lot in value, you would withdraw from stocks. If stock dropped a lot in value, you would withdraw from bonds. For smaller changes in value, you might withdraw some from each in proportion to their gains to get the portfolio back to the desired 50/50 allocation.
Once in a while you get shown the light, in the strangest of places if you look at it right.
sailaway
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Re: Drawdown for dummies 101

Post by sailaway »

mdbravelion wrote: Wed Jun 09, 2021 12:17 pm Hi,

What does a drawdown actually look like in practice. Let's assume a simple 2 fund portfolio, and a retirement age of say 65. Let's not discuss tax efficiency or SSI/pension or healthcare.
So, not at all what it would actually look like in practice then.
Marseille07
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Re: Drawdown for dummies 101

Post by Marseille07 »

mdbravelion wrote: Wed Jun 09, 2021 12:17 pm Hi,

What does a drawdown actually look like in practice. Let's assume a simple 2 fund portfolio, and a retirement age of say 65. Let's not discuss tax efficiency or SSI/pension or healthcare. Let's assume no stock splits. Let's assume a 30 year retirement.

Portfolio - 50% - VTI - 4545 shares for a total of 1M
50% - BND - 11764 shares for a total of 1M

Would you just take 3 percent (136 shares of VTI and 353 shares of BND) out in perpetuity? What is the portfolio was consisting of shares which had less absolute number of shares but a higher price per share? For example, say the portfolio was constructed of 50 shares which were worth 20k each? Does anyone have a spreadsheet or an actual draw-down strategy that they can share?
Forget the number of shares for now. You simply withdraw 3% notionally and rebalance.

If the total is 2M and you want to withdraw 3%, then the resulting portfolio will be 1.94M. If you want to maintain 50/50, then each side has to be 970K. You can calculate how many shares of VTI & BND respectively and sell off the difference to withdraw 3%.
Nightowl99
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Re: Drawdown for dummies 101

Post by Nightowl99 »

WyomingFIRE wrote: Wed Jun 09, 2021 12:34 pm This paper (https://www.i-orp.com/modeldescription/ ... dtaxes.pdf; available on that link) makes the following statement: "The common practice for the scheduling of withdrawals from retirement savings accounts is to first deplete the after-tax account, then the tax-deferred and finally the Roth IRA." It then goes on to explain why that conventional wisdom isn't necessarily correct or wise for various reasons, including tax minimization.
That paper seems to come to an interesting conclusion about the best drawdown strategy for those of us expecting a big tax increase when RMDs begin. That is, I think it suggests, perhaps for those who have more in tax deferred than in after-tax or Roth, spending from tax deferred throughout retirement, along with spending from after-tax at first, until the after-tax account is depleted. Then spend from tax deferred along with funds from Roth as needed. I haven't read about this strategy before but it sounds like a good plan to me since I'm already making as many Roth conversions as I can to avoid the looming tax bomb.

I think even a drawdown plan for dummies needs to consider taxes.
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22twain
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Re: Drawdown for dummies 101

Post by 22twain »

retired@50 wrote: Wed Jun 09, 2021 12:21 pm I think the general rule of thumb is to withdraw money in such a way that the remaining balance is still divided up per your desired asset allocation.
I'd simply take all of the 3% (or whatever withdrawal rate you're using) out of whichever side is "high" at the moment. If the allocation is still off by more than 5% (i.e. more than 55% stock or less than 45% stock), then I would rebalance back to 50% as a separate step.

Note that if you're already at 50% stock, then withdrawing 3% from the stock side reduces your stock allocation to about 48.5%, not 47%. If this doesn't seem right, do the math! So a single withdrawal doesn't change your allocation by a significant amount. Your allocation will probably change more over the course of a year because of the (usually) rising or (sometimes) falling stock market. To me at least, it's not worth fussing over getting the allocation "just right" by splitting a withdrawal between stocks and bonds.
In your example, 50/50, so you'd withdraw money so that each fund has an equal amount of dollars remaining, without worrying about how many shares are held in each fund.
I agree that the number of dollars is what's relevant here, not the number of shares.
It's "Roth", not "ROTH". Senator William Roth was a person, not an acronym.
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corn18
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Re: Drawdown for dummies 101

Post by corn18 »

BH_RedRan wrote: Wed Jun 09, 2021 1:16 pm So I (admittedly) only spent about 10 minutes reading the .pdf paper in the link. Am I correct that the paper basically concludes that there isn't much difference in available spending regardless of Roth conversions? It seems to say that for most scenarios covered that Roth conversions trade tax-deferred growth for tax reductions and that the result is not a huge benefit in available spending for the effort.

So, that seems to leave the main benefits of Roth conversions as being tax-free inheritance and as a guard against significantly higher tax rates in the future (including the good chance a single filer moves up brackets). Is that all about right?
This is true for my scenario. Really isn't a big impact if I do Roth conversions or not, at least not for me. Now, my heirs would greatly appreciate it if I went through the trouble of converting everything to Roth. Sure makes their inheritance a lot less taxing (see what I did there :happy )
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GAAP
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Re: Drawdown for dummies 101

Post by GAAP »

BH_RedRan wrote: Wed Jun 09, 2021 1:16 pm So I (admittedly) only spent about 10 minutes reading the .pdf paper in the link. Am I correct that the paper basically concludes that there isn't much difference in available spending regardless of Roth conversions? It seems to say that for most scenarios covered that Roth conversions trade tax-deferred growth for tax reductions and that the result is not a huge benefit in available spending for the effort.

So, that seems to leave the main benefits of Roth conversions as being tax-free inheritance and as a guard against significantly higher tax rates in the future (including the good chance a single filer moves up brackets). Is that all about right?
Another reason in my situation is the existence of a state estate tax that considers the full value of a TIRA. Roth conversion takes the embedded federal taxes out of the estate, reducing or eliminating the state estate tax.

I would be careful with the word "spending". Most of these papers treat withdrawal and spending as synonymous -- which is not necessarily true. The net amount available in each case is identical, but the timing is different -- assuming nothing changes with tax rates, investment choices, etc.
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