What counts in calculating portfolio withdrawals?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
racy
Posts: 164
Joined: Sun Mar 30, 2008 7:38 am
Location: Nebraska

What counts in calculating portfolio withdrawals?

Post by racy » Wed Oct 04, 2017 3:09 pm

When one takes a dividend or capital gain from a stock fund for spending, I know that it counts as a withdrawal from the portfolio.
But, I'm a bit confused on bonds. Does taking income from a bond fund count as a withdrawal (i.e. for living w/i the 4% "rule")?
And, how about individual bonds or income from deeds of trust, where one eventually gets back the principal? Are these withdrawal?

123
Posts: 2592
Joined: Fri Oct 12, 2012 3:55 pm

Re: What counts in calculating portfolio withdrawals?

Post by 123 » Wed Oct 04, 2017 3:12 pm

I think that anything removed from your portfolio would count as a withdrawal. The theory is that a portfolio can withstand a certain withdrawal rate to be viable over some period of time. Sorry, no "freebies". Just like a bank doesn't allow free withdrawals (they all reduce your balance) we don't either.
Last edited by 123 on Wed Oct 04, 2017 3:13 pm, edited 1 time in total.
The closest helping hand is at the end of your own arm.

david
Posts: 71
Joined: Thu Jan 03, 2013 12:39 am

Re: What counts in calculating portfolio withdrawals?

Post by david » Wed Oct 04, 2017 3:13 pm

racy wrote:
Wed Oct 04, 2017 3:09 pm
When one takes a dividend or capital gain from a stock fund for spending, I know that it counts as a withdrawal from the portfolio.
But, I'm a bit confused on bonds. Does taking income from a bond fund count as a withdrawal (i.e. for living w/i the 4% "rule")?
And, how about individual bonds or income from deeds of trust, where one eventually gets back the principal? Are these withdrawal?
If you are taking income from the bond fund (and not e.g., reinvesting it) then yes, it is a withdrawal for the purposes of a Safe Withdrawal Rate (e.g. 4% rule) strategy. It is similar for stock dividends and anything else.

Bottom line: If you reinvest the proceeds, then it is not a withdrawal. If you don't, then it is.

dbr
Posts: 24133
Joined: Sun Mar 04, 2007 9:50 am

Re: What counts in calculating portfolio withdrawals?

Post by dbr » Wed Oct 04, 2017 3:22 pm

Yes, it is a withdrawal, but there is also a context. The context is the equation

newportfoliovalue = oldportfoliovalue + return + contributions - withdrawals

and the definition

return = capital gains + interest + dividends (and maybe - net investment expenses)

So if return includes interest and dividends from stocks and bonds and you withdraw the bond interest or dividend then you had better count that in withdrawals. The issue really comes down to doing simple arithmetic but with attention to consistency with definitions. A person can always change the definitions and work out consistent formulas for those definitions, but it is usually better for people to be conventional in how this is done.

goingup
Posts: 2829
Joined: Tue Jan 26, 2010 1:02 pm

Re: What counts in calculating portfolio withdrawals?

Post by goingup » Wed Oct 04, 2017 4:07 pm

This is a very interesting question. I may learn something new here. I had thought that taking bond fund interest in cash would notbe considered a portfolio withdrawal. Taking stock fund dividends in cash is absolutely considered a withdrawal, however.

MotoTrojan
Posts: 860
Joined: Wed Feb 01, 2017 8:39 pm

Re: What counts in calculating portfolio withdrawals?

Post by MotoTrojan » Wed Oct 04, 2017 4:10 pm

goingup wrote:
Wed Oct 04, 2017 4:07 pm
This is a very interesting question. I may learn something new here. I had thought that taking bond fund interest in cash would notbe considered a portfolio withdrawal. Taking stock fund dividends in cash is absolutely considered a withdrawal, however.
Nope, both are withdrawals.

User avatar
midareff
Posts: 5094
Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: What counts in calculating portfolio withdrawals?

Post by midareff » Wed Oct 04, 2017 4:29 pm

racy wrote:
Wed Oct 04, 2017 3:09 pm
When one takes a dividend or capital gain from a stock fund for spending, I know that it counts as a withdrawal from the portfolio.
But, I'm a bit confused on bonds. Does taking income from a bond fund count as a withdrawal (i.e. for living w/i the 4% "rule")?
And, how about individual bonds or income from deeds of trust, where one eventually gets back the principal? Are these withdrawal?
Every dollar you remove from a portfolio counts as a dollar towards your withdrawal rate. Dividends taken to the bank, capital gains and original dollars invested when taken to the bank all count.

Sidney
Posts: 6644
Joined: Thu Mar 08, 2007 6:06 pm

Re: What counts in calculating portfolio withdrawals?

Post by Sidney » Wed Oct 04, 2017 5:21 pm

I count everything I spend, no matter where it comes from then I net out what I would call exogenous income (pension, social security ...). But I don't really pay much attention to "withdrawal." My main focus is on what I have and making sure it is in the right place and sufficient to get me to the end. I can't change what happened in the past.
I always wanted to be a procrastinator.

User avatar
Peter Foley
Posts: 4100
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: What counts in calculating portfolio withdrawals?

Post by Peter Foley » Wed Oct 04, 2017 7:32 pm

So is taking interest from a CD not a withdrawal but taking interest from a bond is?

Any distinction between taking interest from a bond and taking interest from a bond fund?

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: What counts in calculating portfolio withdrawals?

Post by avalpert » Wed Oct 04, 2017 7:35 pm

Peter Foley wrote:
Wed Oct 04, 2017 7:32 pm
So is taking interest from a CD not a withdrawal but taking interest from a bond is?

Any distinction between taking interest from a bond and taking interest from a bond fund?
If the CD is part of your portfolio than taking the interest is a withdrawal, and no there is no distinction between a bond and a bond fund.

It's best to not think about the individual investments at all. Your portfolio is the total value of all the individual holdings and there returns whether those returns are deposited back into the investment or into another account. Any money taken out of that portfolio, regardless of source, is by definition a withdrawal from the portfolio.

User avatar
iceport
Posts: 3333
Joined: Sat Apr 07, 2007 4:29 pm

Re: What counts in calculating portfolio withdrawals?

Post by iceport » Wed Oct 04, 2017 8:21 pm

Yes, as others have said, anything that comes out of your retirement portfolio counts as a withdrawal for measuring against your assumed sustainable withdrawal rate.

BUT WAIT, there's more!

All taxes that must be paid while the funds are still invested (in taxable accounts) get counted when measuring against your assumed sustainable withdrawal rate, and withdrawals are counted before any taxes have been subtracted.

All investing expenses (fund expense ratios, fund fees, advisor fees, etc.) get counted when measuring against your assumed sustainable withdrawal rate.

Studies of sustainable withdrawal rates have typically assumed idealized investing conditions in which there are no investing expenses or taxes. To the extent there are expenses and taxes involved in managing your portfolio, they must be accounted for. They have the effect of reducing the portion of your withdrawals that are available to meet your living expenses.

So, for example, if you pay an advisor 1%/year to manage your portfolio, and you assume a sustainable withdrawal rate of 4%/year, then you must count that 1% fee as part — 25% to be exact! — of the 4% annual withdrawal. That means you have only left 3% to live on, before taxes (on any taxable part of the portfolio) and other investing expenses.
"Discipline matters more than allocation.” ─William Bernstein

Post Reply