Which AA do people draw from in retirement?

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a_teacher
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Which AA do people draw from in retirement?

Post by a_teacher » Fri May 18, 2018 3:12 pm

Bonds, Stocks, or Target Date?

Does it matter if in a bull or bear market?

What are the tax implications of each?

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Pajamas
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Re: Which AA do people draw from in retirement?

Post by Pajamas » Fri May 18, 2018 5:04 pm

It's hard to answer your question without more context.

Tax implications depend more on the type of the account than the type of investment in the account.

Many people withdraw from taxable accounts until they have to withdraw from retirement accounts.

Many people use withdrawals as an opportunity to rebalance towards their desired asset allocation. Target date funds basically balance themselves but if you have all three then you would have to take the context into account. If stocks have done well you might sell more stocks and fewer bonds to get back to your desired AA.

It can be very simple or somewhat complicated.

https://www.bogleheads.org/wiki/Withdrawal_methods

Sidney
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Re: Which AA do people draw from in retirement?

Post by Sidney » Fri May 18, 2018 5:34 pm

I withdraw monthly from my muni bond funds because that is when they pay dividends. I withdraw quarterly from my equity account because they pay dividends quarterly. If I need to sell something to supplement the dividends, I generally try to move my allocation closer to the desired equity/fixed target.
I always wanted to be a procrastinator.

a_teacher
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Re: Which AA do people draw from in retirement?

Post by a_teacher » Fri May 18, 2018 6:19 pm

Pajamas wrote:
Fri May 18, 2018 5:04 pm
It's hard to answer your question without more context.

Tax implications depend more on the type of the account than the type of investment in the account.

Many people withdraw from taxable accounts until they have to withdraw from retirement accounts.

Many people use withdrawals as an opportunity to rebalance towards their desired asset allocation. Target date funds basically balance themselves but if you have all three then you would have to take the context into account. If stocks have done well you might sell more stocks and fewer bonds to get back to your desired AA.

It can be very simple or somewhat complicated.

https://www.bogleheads.org/wiki/Withdrawal_methods
Thanks Pajamas. I ask partly due to deciding whether to fully fund 457 or 401k. 457 can be withdrawn sooner but only has good stock options. I figured you wouldn't want to withdraw from stocks during a bear market. I'll check out the wiki. Thank you.

a_teacher
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Re: Which AA do people draw from in retirement?

Post by a_teacher » Fri May 18, 2018 6:20 pm

Sidney wrote:
Fri May 18, 2018 5:34 pm
I withdraw monthly from my muni bond funds because that is when they pay dividends. I withdraw quarterly from my equity account because they pay dividends quarterly. If I need to sell something to supplement the dividends, I generally try to move my allocation closer to the desired equity/fixed target.
Thanks Sidney!

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dratkinson
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Re: Which AA do people draw from in retirement?

Post by dratkinson » Fri May 18, 2018 6:34 pm

Add to above Wiki discussion.

Recall some retirees report keeping 5yr of living expenses in cash equivalents (1yr) and safer bond/stable value funds (4yrs) to avoid the Sequence of Return Risk (retirees forced to sell equities during a down market). Assume markets recover within 4yrs of crash.

Recall forum topics on Sequence of Return Risk.
See: http://www.google.com/search?q=%22seque ... rg%2Fforum
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

KlangFool
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Re: Which AA do people draw from in retirement?

Post by KlangFool » Fri May 18, 2018 6:41 pm

a_teacher wrote:
Fri May 18, 2018 3:12 pm
Bonds, Stocks, or Target Date?

Does it matter if in a bull or bear market?

What are the tax implications of each?
a_teacher,

I believe that you are asking the wrong question.

1) The Retiree will keep a few years of cash or cash equivalent. This is where they use for current expenditure

2) Meanwhile, depending on the tax circumstances, bull market, or bear market and so on. They will convert a certain amount of their portfolio into cash. It does not have to be 1 year worth of cash. It could be more or less depending on whatever that is the most tax efficient.

KlangFool

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willthrill81
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Re: Which AA do people draw from in retirement?

Post by willthrill81 » Fri May 18, 2018 6:43 pm

It depends in part on whether they are attempting to maintain a fixed AA or a glidepath of some sort (e.g. increasing or decreasing stock exposure).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Toons
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Re: Which AA do people draw from in retirement?

Post by Toons » Fri May 18, 2018 6:44 pm

So far ,,
Pension
SS
Dividends ,Cap-gains from Taxable account.,,
Have sufficed
:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

a_teacher
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Joined: Mon Jan 29, 2018 2:07 pm

Re: Which AA do people draw from in retirement?

Post by a_teacher » Fri May 18, 2018 6:46 pm

KlangFool wrote:
Fri May 18, 2018 6:41 pm
a_teacher wrote:
Fri May 18, 2018 3:12 pm
Bonds, Stocks, or Target Date?

Does it matter if in a bull or bear market?

What are the tax implications of each?
a_teacher,

I believe that you are asking the wrong question.

1) The Retiree will keep a few years of cash or cash equivalent. This is where they use for current expenditure

2) Meanwhile, depending on the tax circumstances, bull market, or bear market and so on. They will convert a certain amount of their portfolio into cash. It does not have to be 1 year worth of cash. It could be more or less depending on whatever that is the most tax efficient.

KlangFool
Thanks KlangFool. So, in a bear market, you would pull that cash from Bonds? And in a bull market from stocks?

dbr
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Re: Which AA do people draw from in retirement?

Post by dbr » Fri May 18, 2018 6:54 pm

You should always be attending to your asset allocation. It can be helpful to raise cash for withdrawals from whatever asset is overweight. Tax issues are about what asset location to with draw from not about what asset allocation to withdraw from.

As to cash, people here are all over the map about that. I see no reason to keep a cash reserve "for withdrawals" because my asset allocation does not include a significant amount in cash.

KlangFool
Posts: 10382
Joined: Sat Oct 11, 2008 12:35 pm

Re: Which AA do people draw from in retirement?

Post by KlangFool » Fri May 18, 2018 6:56 pm

a_teacher wrote:
Fri May 18, 2018 6:46 pm
KlangFool wrote:
Fri May 18, 2018 6:41 pm
a_teacher wrote:
Fri May 18, 2018 3:12 pm
Bonds, Stocks, or Target Date?

Does it matter if in a bull or bear market?

What are the tax implications of each?
a_teacher,

I believe that you are asking the wrong question.

1) The Retiree will keep a few years of cash or cash equivalent. This is where they use for current expenditure

2) Meanwhile, depending on the tax circumstances, bull market, or bear market and so on. They will convert a certain amount of their portfolio into cash. It does not have to be 1 year worth of cash. It could be more or less depending on whatever that is the most tax efficient.

KlangFool
Thanks KlangFool. So, in a bear market, you would pull that cash from Bonds? And in a bull market from stocks?
a_teacher,

The answer is not that straightforward. For example, you could do Tax Loss Harvesting for stock in the Bear Market.

https://www.bogleheads.org/wiki/Tax_loss_harvesting

You should read the following thread.

viewtopic.php?t=87471
"How to pay ZERO taxes in retirement with 6-figure expenses"

The bottom line is if you have the buffer of a few years of expenses, you have maximum flexibility on withdrawal. Then, you can withdraw at the most tax efficient approach.

KlangFool

KlangFool
Posts: 10382
Joined: Sat Oct 11, 2008 12:35 pm

Re: Which AA do people draw from in retirement?

Post by KlangFool » Fri May 18, 2018 7:26 pm

a_teacher wrote:
Fri May 18, 2018 6:19 pm
Pajamas wrote:
Fri May 18, 2018 5:04 pm
It's hard to answer your question without more context.

Tax implications depend more on the type of the account than the type of investment in the account.

Many people withdraw from taxable accounts until they have to withdraw from retirement accounts.

Many people use withdrawals as an opportunity to rebalance towards their desired asset allocation. Target date funds basically balance themselves but if you have all three then you would have to take the context into account. If stocks have done well you might sell more stocks and fewer bonds to get back to your desired AA.

It can be very simple or somewhat complicated.

https://www.bogleheads.org/wiki/Withdrawal_methods
Thanks Pajamas. I ask partly due to deciding whether to fully fund 457 or 401k. 457 can be withdrawn sooner but only has good stock options. I figured you wouldn't want to withdraw from stocks during a bear market. I'll check out the wiki. Thank you.
a_teacher,

You can withdraw 401K before 59.5 years old too. Please check out the following article.

https://www.madfientist.com/how-to-acce ... nds-early/

KlangFool

a_teacher
Posts: 29
Joined: Mon Jan 29, 2018 2:07 pm

Re: Which AA do people draw from in retirement?

Post by a_teacher » Fri May 18, 2018 8:07 pm

KlangFool wrote:
Fri May 18, 2018 7:26 pm
a_teacher wrote:
Fri May 18, 2018 6:19 pm
Pajamas wrote:
Fri May 18, 2018 5:04 pm
It's hard to answer your question without more context.

Tax implications depend more on the type of the account than the type of investment in the account.

Many people withdraw from taxable accounts until they have to withdraw from retirement accounts.

Many people use withdrawals as an opportunity to rebalance towards their desired asset allocation. Target date funds basically balance themselves but if you have all three then you would have to take the context into account. If stocks have done well you might sell more stocks and fewer bonds to get back to your desired AA.

It can be very simple or somewhat complicated.

https://www.bogleheads.org/wiki/Withdrawal_methods
Thanks Pajamas. I ask partly due to deciding whether to fully fund 457 or 401k. 457 can be withdrawn sooner but only has good stock options. I figured you wouldn't want to withdraw from stocks during a bear market. I'll check out the wiki. Thank you.
a_teacher,

You can withdraw 401K before 59.5 years old too. Please check out the following article.

https://www.madfientist.com/how-to-acce ... nds-early/

KlangFool
Thanks Klangfool. I guess this assumes Roth will be around in 10+ years.

KlangFool
Posts: 10382
Joined: Sat Oct 11, 2008 12:35 pm

Re: Which AA do people draw from in retirement?

Post by KlangFool » Fri May 18, 2018 8:11 pm

a_teacher wrote:
Fri May 18, 2018 8:07 pm
KlangFool wrote:
Fri May 18, 2018 7:26 pm
a_teacher wrote:
Fri May 18, 2018 6:19 pm
Pajamas wrote:
Fri May 18, 2018 5:04 pm
It's hard to answer your question without more context.

Tax implications depend more on the type of the account than the type of investment in the account.

Many people withdraw from taxable accounts until they have to withdraw from retirement accounts.

Many people use withdrawals as an opportunity to rebalance towards their desired asset allocation. Target date funds basically balance themselves but if you have all three then you would have to take the context into account. If stocks have done well you might sell more stocks and fewer bonds to get back to your desired AA.

It can be very simple or somewhat complicated.

https://www.bogleheads.org/wiki/Withdrawal_methods
Thanks Pajamas. I ask partly due to deciding whether to fully fund 457 or 401k. 457 can be withdrawn sooner but only has good stock options. I figured you wouldn't want to withdraw from stocks during a bear market. I'll check out the wiki. Thank you.
a_teacher,

You can withdraw 401K before 59.5 years old too. Please check out the following article.

https://www.madfientist.com/how-to-acce ... nds-early/

KlangFool
Thanks Klangfool. I guess this assumes Roth will be around in 10+ years.
a_teacher,

Why won't it be? It lets the government to collect more taxes before retirement age.

KlangFool

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randomizer
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Re: Which AA do people draw from in retirement?

Post by randomizer » Fri May 18, 2018 8:52 pm

By the time I retire I should have managed to read all of The Ultimate Guide to Safe Withdrawal Rates. But that will likely take me the next 20 years.

If I had to make it up as I go along, I'd think that I'd want to do a rising-equity glide path, withdrawing from fixed-income. If I get edgy about risk as I get older, I might turn off dividend reinvestment at some point and let the fixed-income sit for while.
87.5:12.5, EM tilt — HODL the course!

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dratkinson
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Location: Centennial CO

Re: Which AA do people draw from in retirement?

Post by dratkinson » Sat May 19, 2018 7:50 pm

a_teacher wrote:
Fri May 18, 2018 6:46 pm
...
Thanks KlangFool. So, in a bear market, you would pull that cash from Bonds? And in a bull market from stocks?
Cash reserve. If you use the cash reserve idea (5yrs typically reported), then during a bull market you'll be refilling your cash reserve while you continued to withdraw from cash to pay living expenses.

If you have traditional retirement accounts, their annual RMDs would go into your cash reserve. The bull/bear market determines whether your RMDs come from stocks/bonds.


Roth. As a Roth has no RMDs, it so should be the last account withdrawn from---after all traditional accounts are exhausted. Why? To allow equities* the maximum opportunity for growth.

If you don't need RMDs in retirement---your living expenses covered by pension, SS, dividends---then a Roth conversion is a good way to turn off unneeded RMDs and the associated tax.

You'll need to decide if the LT equity-growth benefit* (for yourself or heirs) is worth the tax cost of a Roth conversion.

A simple answer, which does not seem to be your case, is... if you will need the RMDs to live on in retirement, then don't convert to a Roth as you'll just pay the tax early.

A simple answer, which also does not seem to your case, is... if your tIRA contributions are not deductible, then immediate Roth conversion is preferable to make all future growth tax-free.


Roth conversion. Many report using the time between retirement and age 70.5, while in a lower tax bracket before RMDs and SS start, for their Roth conversion. This can be beneficial if your working/retirement tax brackets are widely separated; you're in a much lower tax bracket in retirement.

However, if your working/retirement tax brackets are expected to be close, then converting to a Roth early may be more beneficial because many more years of equity growth* then becomes tax free. In this case, the greater equity-growth benefit* from early conversion is expected to out-weight the smaller tax-bracket benefit from delaying conversion until retirement.


* Equities in Roth accounts. Since equities are expected to grow more than bonds and Roth withdrawals are tax-free, many choose to populate a Roth account with equities to give it the greatest opportunity to benefit from long-term tax-free growth.


Bonds in traditional retirement accounts. Since bonds are expected to grow less then equities, many report populating traditional retirement accounts with bonds to minimize the tax paid on RMDs.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

a_teacher
Posts: 29
Joined: Mon Jan 29, 2018 2:07 pm

Re: Which AA do people draw from in retirement?

Post by a_teacher » Sat May 19, 2018 8:24 pm

dratkinson wrote:
Sat May 19, 2018 7:50 pm
a_teacher wrote:
Fri May 18, 2018 6:46 pm
...
Thanks KlangFool. So, in a bear market, you would pull that cash from Bonds? And in a bull market from stocks?
Cash reserve. If you use the cash reserve idea (5yrs typically reported), then during a bull market you'll be refilling your cash reserve while you continued to withdraw from cash to pay living expenses.

If you have traditional retirement accounts, their annual RMDs would go into your cash reserve. The bull/bear market determines whether your RMDs come from stocks/bonds.


Roth. As a Roth has no RMDs, it so should be the last account withdrawn from---after all traditional accounts are exhausted. Why? To allow equities* the maximum opportunity for growth.

If you don't need RMDs in retirement---your living expenses covered by pension, SS, dividends---then a Roth conversion is a good way to turn off unneeded RMDs and the associated tax.

You'll need to decide if the LT equity-growth benefit* (for yourself or heirs) is worth the tax cost of a Roth conversion.

A simple answer, which does not seem to be your case, is... if you will need the RMDs to live on in retirement, then don't convert to a Roth as you'll just pay the tax early.

A simple answer, which also does not seem to your case, is... if your tIRA contributions are not deductible, then immediate Roth conversion is preferable to make all future growth tax-free.


Roth conversion. Many report using the time between retirement and age 70.5, while in a lower tax bracket before RMDs and SS start, for their Roth conversion. This can be beneficial if your working/retirement tax brackets are widely separated; you're in a much lower tax bracket in retirement.

However, if your working/retirement tax brackets are expected to be close, then converting to a Roth early may be more beneficial because many more years of equity growth* then becomes tax free. In this case, the greater equity-growth benefit* from early conversion is expected to out-weight the smaller tax-bracket benefit from delaying conversion until retirement.


* Equities in Roth accounts. Since equities are expected to grow more than bonds and Roth withdrawals are tax-free, many choose to populate a Roth account with equities to give it the greatest opportunity to benefit from long-term tax-free growth.


Bonds in traditional retirement accounts. Since bonds are expected to grow less then equities, many report populating traditional retirement accounts with bonds to minimize the tax paid on RMDs.
Wow! Thanks Drat! Much appreciated.

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