Suggestion on withdrawals (TIPS vs dividends vs VPW)

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
NKOTB
Posts: 60
Joined: Mon Aug 25, 2014 6:43 pm

Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by NKOTB »

Hello fellow bogleheads,
My close buddy recently told me over dinner that he and his partner have decided to move back to their native country for family reasons. We are open about our finances so he told me his withdrawal plans. I wasn’t so convinced about some of their withdrawal plans so wanted to run it by you all and see what your thoughts were.

1. 50% NW is in a low cost mutual fund in a post tax brokerage account. (90/10 stock & bond fund).
2. 30% NW is tied to various retirement account which they don’t plan to tap until their RMD in their 70s. (80/20 stock & bond fund).
3. 20% is cash and MMF.

1. They are in their mid to late 40s, 2 kids. They plan to work locally once they move but will be paid very little. They may return back to the US in 10-15 years when the kids are launched. They are expecting some SS.
2. They plan to transfer 10% of their net worth to the other country and put them in a high yield savings account in that country which currently yields 8-9% and will cover for their all essential expenses.
3. They would like to move the remaining 10% to buy a TIPS ladder that should give them income for next 15 years to cover about 75% of their travel and leisure expense. The other option was to leave it all in a MMF for now which is yielding above 5% ( which will cover about 50% of these expenses).

4. They want to keep the remaining 80% NW here in the mix of brokerage and retirement accounts as it is and leave them untouched if possible for their retirement and legacy.

My suggestion to him was since they’re still young enough,

1. They take the 10% NW with them which they think should cover their essential expenses.
2.For the travel and leisure income, instead of TIPS or bond fund they should either:
A. Transfer the 10% of the NW to the Brokerage account and start withdrawing dividends which per their current scenario covers those expenses.(Travel + leisure).
B. Or do a variable withdrawal from the brockrage account which is about 2-2.5% WR to cover those expenses which is still quite a low withdrawal amount to ride the SORR.

What are your thought?
BirdFood
Posts: 268
Joined: Sat Mar 23, 2024 12:15 pm

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by BirdFood »

I'm feeling the need for an explanation of the advantages that you see for your scheme versus their scheme. Is your goal to avoid their buying bonds?

Edited to add: You say they're young, and they are, but as I see it, they're young in terms of time for their investment growth, not in terms of time for them to earn paychecks, because they're about to give up 10-15 years of paychecks, and possibly most of the rest of their lifetime earning years? (I don't know if the work they'll be doing for that 10-15 years would relate to a continued career when they return.)

So to me, this looks like they're retiring in their forties. And therefore a risky allocation seems risky.
Topic Author
NKOTB
Posts: 60
Joined: Mon Aug 25, 2014 6:43 pm

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by NKOTB »

They are more than family to me. I have no hidden interests in their money. I’ve always wished best for them and their money but since I am in the same age as my friend and heavily invested in stock funds, I don’t understand bond fund or TIPS ladder being superior to a VPW of 2-2.5% when my friend is in an enviable position of a good NW and now with a much lower annual expenses which their move.
avalpert1
Posts: 595
Joined: Sat Mar 02, 2024 6:15 pm

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by avalpert1 »

They are currently at a 70/30 equities/FI+cash position which is perfectly reasonable for their age and plans (given the risk they are taking on the human capital front I'm not sure suggesting they take on more investment risk as you seem to want is wise anyway and could see suggesting less).

That said, without knowing what the country is and tax implications I'd hesitate to give specific suggestions.
BirdFood
Posts: 268
Joined: Sat Mar 23, 2024 12:15 pm

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by BirdFood »

NKOTB wrote: Tue May 14, 2024 4:37 pm They are more than family to me. I have no hidden interests in their money.
Arr? If you're responding to me, I'm not suggesting that you do. I just couldn't tell what your objection was, and since you mentioned their age, and one thing that would go away in your scheme was bonds, I wondered if getting rid of bonds was your goal.
NKOTB wrote: Tue May 14, 2024 4:37 pm I’ve always wished best for them and their money but since I am in the same age as my friend and heavily invested in stock funds
But are you effectively retiring now, like they are? That, IMO, is the huge difference. They're essentially retiring, and after 10-15 years of low expenses they will return to a US-expenses life. Given that, for them to have almost everything in stocks strikes me as dangerous.

Yes, if the stocks go well, they will be able to live a much more luxurious life. But if they go badly, they might have to go back to work at a time when they didn't plan to do so.
esteen
Posts: 514
Joined: Thu May 23, 2019 12:31 am

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by esteen »

I agree with other posters that while the topic couple is young in absolute standards, it sounds like they are entering a phase of their life that is mostly retirement-like, which means this is the point they have the highest sequence of returns risk.

Their high NW might mean they could take on more risk and maybe get away with it, but it also means they don't have to take on more risk. What did Bill Bernstein say, something like "When you've won the game, stop playing." To some, a high NW may mean they want to be more risky but to most, it means taking risk off the table to preserve the wealth you've created.
This post is for entertainment or information only, and should not be construed as professional financial advice. | | "Invest your money passively and your time actively" -Michael LeBoeuf
steadyosmosis
Posts: 1188
Joined: Mon Dec 26, 2022 11:45 am

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by steadyosmosis »

NKOTB wrote: Tue May 14, 2024 4:07 pm What are your thought?
I did the TIPS thing myself.
I sleep well at night.
Age<59.5 | Early-retired | AA ~55/45 | Taxable=100% VTI | Roth IRA=97% equities | HSA=94% equities | Traditional IRA=100% fixed income | I spend from the taxable account |
rossington
Posts: 1904
Joined: Fri Jun 07, 2019 2:00 am
Location: Florida

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by rossington »

NKOTB wrote: Tue May 14, 2024 4:07 pm Hello fellow bogleheads,
My close buddy recently told me over dinner that he and his partner have decided to move back to their native country for family reasons. We are open about our finances so he told me his withdrawal plans. I wasn’t so convinced about some of their withdrawal plans so wanted to run it by you all and see what your thoughts were.

1. 50% NW is in a low cost mutual fund in a post tax brokerage account. (90/10 stock & bond fund).
2. 30% NW is tied to various retirement account which they don’t plan to tap until their RMD in their 70s. (80/20 stock & bond fund).
3. 20% is cash and MMF.

1. They are in their mid to late 40s, 2 kids. They plan to work locally once they move but will be paid very little. They may return back to the US in 10-15 years when the kids are launched. They are expecting some SS.
2. They plan to transfer 10% of their net worth to the other country and put them in a high yield savings account in that country which currently yields 8-9% and will cover for their all essential expenses.
3. They would like to move the remaining 10% to buy a TIPS ladder that should give them income for next 15 years to cover about 75% of their travel and leisure expense. The other option was to leave it all in a MMF for now which is yielding above 5% ( which will cover about 50% of these expenses).

4. They want to keep the remaining 80% NW here in the mix of brokerage and retirement accounts as it is and leave them untouched if possible for their retirement and legacy.

My suggestion to him was since they’re still young enough,

1. They take the 10% NW with them which they think should cover their essential expenses.
2.For the travel and leisure income, instead of TIPS or bond fund they should either:
A. Transfer the 10% of the NW to the Brokerage account and start withdrawing dividends which per their current scenario covers those expenses.(Travel + leisure).
B. Or do a variable withdrawal from the brockrage account which is about 2-2.5% WR to cover those expenses which is still quite a low withdrawal amount to ride the SORR.

What are your thought?
Hello OP,
What is their net worth?
Can they afford to do this if they are not earning much income and the markets tank?
It’s confusing: If the 20% in question is coming from the brokerage account isn’t the 10% in your “A” already there? Or do they want to move some of the cash?
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
Topic Author
NKOTB
Posts: 60
Joined: Mon Aug 25, 2014 6:43 pm

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by NKOTB »

Thank you for your replies.
1. My argument for leaving a high % of their NW in risky asset ( stock fund) was since 20 % of the NW it will most likely cover their expenses and further supplemented by dividends from their brockrege account with a low 2-2.5% WR for next 15 years, won’t that save them from SORR while the remaining fund grows? I’m also talking about 30% of their retirement account which has at least another 25 years to grow without touching them.
2. If they decide to return back after 15 years or so, I don’t think they plan to work ( since they’re both in tech and with the long gap in their resume and their age it’s not possible). Even if they retire here in their 60s. They hopefully will have a good nest egg to sustain a comfortable retirement here. From what I recall their NW is about 20x annual expense at present.
3. I am in favor for what a wiser and safer way to approach this. If TIPS or MMF/Bond fund/CD) is better, how much or what % should they allocate to avoid SORR and sleep peacefully?
BirdFood
Posts: 268
Joined: Sat Mar 23, 2024 12:15 pm

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by BirdFood »

NKOTB wrote: Tue May 14, 2024 6:02 pm Thank you for your replies.
1. My argument for leaving a high % of their NW in risky asset ( stock fund) was since 20 % of the NW it will most likely cover their expenses and further supplemented by dividends from their brockrege account with a low 2-2.5% WR for next 15 years, won’t that save them from SORR while the remaining fund grows?
But you're recommending that they not take that 20%, right? I thought your recommendation was that they only take 10 and put the other 10% under discussion in stock? (Or the mostly-stock funds that the other 80% is in.)
NKOTB wrote: Tue May 14, 2024 6:02 pmI’m also talking about 30% of their retirement account which has at least another 25 years to grow without touching them.
More confusion. Can you clarify what you're recommending? It sounds to me like they were going with 70/30 and you want them to take more risk. Yes?
Topic Author
NKOTB
Posts: 60
Joined: Mon Aug 25, 2014 6:43 pm

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by NKOTB »

@ BirdFood
1. Yes. I was suggesting to take 10% and put the rest 10% on stock fund ( post tax brockrage) and do a variable withdrawal. Let me know if this is not wise and what a better strategy would be.

2. Leave the remaining ( current pre and post tax arrangements as it is now).
BirdFood
Posts: 268
Joined: Sat Mar 23, 2024 12:15 pm

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by BirdFood »

NKOTB wrote: Tue May 14, 2024 8:18 pm @ BirdFood
1. Yes. I was suggesting to take 10% and put the rest 10% on stock fund ( post tax brockrage) and do a variable withdrawal. Let me know if this is not wise and what a better strategy would be.

2. Leave the remaining ( current pre and post tax arrangements as it is now).
What they want to do sounds much wiser. Why do you want to push them to take so much risk?
rossington
Posts: 1904
Joined: Fri Jun 07, 2019 2:00 am
Location: Florida

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by rossington »

NKOTB wrote: Tue May 14, 2024 8:18 pm @ BirdFood
1. Yes. I was suggesting to take 10% and put the rest 10% on stock fund ( post tax brockrage) and do a variable withdrawal. Let me know if this is not wise and what a better strategy would be.

2. Leave the remaining ( current pre and post tax arrangements as it is now).
OP,
At their age I think the bigger risk they are taking is giving up most of their income.

They could possibly spend more than they are estimating in which case they could come up short before retirement. They may not sleep well thinking about that type of SORR.
TIPS and MMF will not produce much income.
So yes your idea seems to be more prudent in this situation because they need to take more stock risk to offset the risk they plan to take.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
BirdFood
Posts: 268
Joined: Sat Mar 23, 2024 12:15 pm

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by BirdFood »

rossington wrote: Wed May 15, 2024 12:11 am TIPS and MMF will not produce much income.
So yes your idea seems to be more prudent in this situation because they need to take more stock risk to offset the risk they plan to take.
Are you assuming that they’re living off the interest from the TIPS and MMF?

My impression was that they were spending the principal. That they had allotted twenty percent of their holdings to spend during the fifteen years of very early retirement, while the remaining eighty percent grows undisturbed in preparation for the rest of their retirement. (That’s definitely the impression that I get from “TIPS ladder”—if they didn’t plan to spend principal, I don’t think they’d need to ladder.)

Converting half of that twenty percent to stocks seems to produce a dangerously high risk that they will have to dig deep into the eighty percent that was to be growing, if the market has a bad drop.
Topic Author
NKOTB
Posts: 60
Joined: Mon Aug 25, 2014 6:43 pm

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by NKOTB »

1. The 10% they plan to put in the foreign account has currently an interest rate of 8-9% as I mentioned earlier and cover fixed expenses (the interest only). The principle will be there in 15 years when they need it.
2. Withdrawal of 2% of the remaining 90% NW (in current scenario which should be covered by the dividend from their brokerage account).
3. I understand the interest rates at foreign institute and dividend payouts could go down and they may have to use another strategy but as things are now, 2% WR on the 90% NW is still very low and safe to ride the SORR over the next 15 years. If they start depleting the 10% principle after 15 years, it will take them another 3-4 years to start using more of the remaining 90% of their money. So we are talking about close to 20 years before they need a higher withdrawal from their total asset.
4. What we are also missing is the 30% tied to their retirement account which will remain untouched for next 25 years and should grow handsomely by the time the withdraw. I haven’t included some SS for cushion.
5. In a nutshell, I feel confident that although my friends are retiring early (in terms of missing higher paychecks), but their SWR is still very low (2-2.5%) for the next 20 years (assuming years 15-20 is covered by the 10% principle) that not only they can ride the SORR but also their NW will be growing to a much larger amount.
dcabler
Posts: 4856
Joined: Wed Feb 19, 2014 10:30 am
Location: TX

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by dcabler »

NKOTB wrote: Tue May 14, 2024 4:37 pm They are more than family to me. I have no hidden interests in their money. I’ve always wished best for them and their money but since I am in the same age as my friend and heavily invested in stock funds, I don’t understand bond fund or TIPS ladder being superior to a VPW of 2-2.5% when my friend is in an enviable position of a good NW and now with a much lower annual expenses which their move.
I think you might be referring to something different than what most people on this forum think when you mention a VPW of 2-2.5%
VPW is a particular withdrawal method described on this forum starting on this wiki:
https://www.bogleheads.org/wiki/Variabl ... withdrawal

If you scroll down to the withdrawal lookup table, somebody in their late 40's with a 70/30 portfolio is going to start by withdrawing more like 4.5%.
It'll actually be higher since your friend is somewhere between 80% and 90% stock at the moment and the table only goes up to 70%

Cheers. 
KlangFool
Posts: 32146
Joined: Sat Oct 11, 2008 12:35 pm

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by KlangFool »

OP,

1) If you tell me that the interest rate at that country is at 9% to 10%, it means that it has very high inflation.

2) So, please explain to me how TIPS which is based on the US inflation rate work for this person?

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Topic Author
NKOTB
Posts: 60
Joined: Mon Aug 25, 2014 6:43 pm

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by NKOTB »

@ klangfool
1. Yes, I also thought the inflation is quite high with the amount of return on their deposit. They however are certain the interest should cover their fixed expenses.
2. They want to use TIPS on 10% of their current cash for next 10-15 years to cover any extra expenses. I don’t understand it well either, hence my original question on why not put them into your post tax account and do a low (2-2.5) withdrawal for the duration.
KlangFool
Posts: 32146
Joined: Sat Oct 11, 2008 12:35 pm

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by KlangFool »

NKOTB wrote: Wed May 15, 2024 9:03 am @ klangfool
1. Yes, I also thought the inflation is quite high with the amount of return on their deposit. They however are certain the interest should cover their fixed expenses.
2. They want to use TIPS on 10% of their current cash for next 10-15 years to cover any extra expenses. I don’t understand it well either, hence my original question on why not put them into your post tax account and do a low (2-2.5) withdrawal for the duration.
OP,

1) Common sense tells you that the saving account interest rate does not beat inflation.

2) So, how would the TIPS based on the US inflation can beat the inflation rate in (1). It will not.

3) Ask this person to compare the inflation rate of (1) versus (2) and ask how this will work out.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
BirdFood
Posts: 268
Joined: Sat Mar 23, 2024 12:15 pm

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by BirdFood »

Confusion. They’re not planning to spend any principal at all? Not from the bank 10%, not from the TIPS 10%? They will live solely on interest?
Topic Author
NKOTB
Posts: 60
Joined: Mon Aug 25, 2014 6:43 pm

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by NKOTB »

Yes, not touch the principle for at least another 15 years. With the assumption/ calculations that the 20% (bank interest + TIPS income) covers all the expense.
BirdFood
Posts: 268
Joined: Sat Mar 23, 2024 12:15 pm

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by BirdFood »

NKOTB wrote: Wed May 15, 2024 12:01 pm Yes, not touch the principle for at least another 15 years. With the assumption/ calculations that the 20% (bank interest + TIPS income) covers all the expense.
Income from a TIPS ladder very often means spending the principal of the maturing TIPS. Hence my confusion. I’m confused as to why they’re making it a ladder.

Edited to add: But in any case, if they can live for 15 years in the interest from only twenty percent of their holdings, never touching principal, that is to me all the more reason to declare “You’ve won, so stop playing the game” rather than seeking extra risk.

Do they really want extra risk? Are they ultra, ultra embracing of maximum risk? Absolutely would chose a gamble on maximum wealth over accepting already-assured security? If they had to go back to work at age seventy, would they say that the gamble was worth it?

Yes, those are all the same question. Another way to put it: If you see them going back to work at age seventy, will you feel totally comfortable that you urged maximum risk?
Topic Author
NKOTB
Posts: 60
Joined: Mon Aug 25, 2014 6:43 pm

Re: Suggestion on withdrawals (TIPS vs dividends vs VPW)

Post by NKOTB »

Thank you.
I agree it’s not wise to be so aggressive at this stage of their life and especially when they are financially at such a stable position.
Post Reply