Monthly vs. Annual Withdrawals

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chuckb84
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Monthly vs. Annual Withdrawals

Post by chuckb84 » Tue Oct 16, 2018 10:40 am

This is an interesting couple of simulations using portfoliovisualizer.com.

Put $769,000 in as a balance. Withdraw $48,000/year for 20 years, with a portfolio of

60% US Stock Market
20% Global Stocks Ex-US
40% Total US bond Market

Don't inflation adjust withdrawals.

If you withdraw $48,000 once a year, the
10th Percentile 25th Percentile 50th Percentile 75th Percentile 90th Percentile results:
$394,047 $863,908 $1,507,141 $2,324,697 $3,245,869

But if you withdraw the same $48,000/year as monthly $4000 amounts, you get
$347,287 $777,431 $1,407,465 $2,190,000 $3,118,359

And that's the effect of leaving the money in for the year and then taking it out, versus steady withdrawals.

The results make sense, but I was surprised at the size of the effect. I'm currently doing monthly withdrawals, because it's "like a paycheck", but this might make me switch.

sport
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Re: Monthly vs. Annual Withdrawals

Post by sport » Tue Oct 16, 2018 10:46 am

The comparison seems to be monthly vs. lump sum at the END of the year. If you need the money during the year, that will not work.

delamer
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Re: Monthly vs. Annual Withdrawals

Post by delamer » Tue Oct 16, 2018 10:46 am

But if you do an annual withdrawal, don’t you have to take all the money out at the beginning of the year to pay your monthly bills?

EDIT: sport and I are thinking alike on this

retiringwhen
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Re: Monthly vs. Annual Withdrawals

Post by retiringwhen » Tue Oct 16, 2018 10:50 am

So what do you live on for the first year before you can take money out? You would need to reduce the opening balance the first year by that amount vs. the monthly starting balance to have a fair comparison.

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cheese_breath
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Re: Monthly vs. Annual Withdrawals

Post by cheese_breath » Tue Oct 16, 2018 10:53 am

I was going to make a comment regarding beginning vs. end of year but you three beat me to it.
The surest way to know the future is when it becomes the past.

Dottie57
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Re: Monthly vs. Annual Withdrawals

Post by Dottie57 » Tue Oct 16, 2018 10:58 am

What happens in a negative returns scenario for some years? Or is that included already

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JoMoney
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Re: Monthly vs. Annual Withdrawals

Post by JoMoney » Tue Oct 16, 2018 11:31 am

I remember finding something similar when trying to figure out if there was a day of the week that performed better for making my 401k contributions. It felt like the market always went down after my payroll contributions went in on Friday, so I did my own 'what if' study to see if there was another day that would have been better.
Initially I thought I was onto something, Monday contributions were clearly outperforming Fridays. Then I discovered that it seemed to move up in a linear way, Mondays were better than Tuesdays, Tue. was better than Wed., Wed. better than Thurs....
Then I realized that it was simply about getting the money in earlier. When I compared Friday contributions compared to the following Monday (rather than the prior Monday), suddenly Friday's were better.

Time IN the market beats timing the market.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

retiringwhen
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Re: Monthly vs. Annual Withdrawals

Post by retiringwhen » Tue Oct 16, 2018 11:52 am

OP, don't be embarrassed, this is why we discuss stuff here.

Instead adjust the inputs to the simulation and publish the results. That in and of itself would make this thread interesting. we can see the results in a more realistic model and secondly, we can discuss two interesting data point wrt time in the market. Reminds me of all the folks who try to put their total annual IRA contribution in during January every year. The simulations do show the returns are better, but i don't have a year's IRA contributions setting around in cash. It would already be invested. I guess some folks get bonuses or early tax refunds that could fund it though.

So in other words, your analysis is a variation on the DCA vs. Lump sum investing conundrum.

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vineviz
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Re: Monthly vs. Annual Withdrawals

Post by vineviz » Tue Oct 16, 2018 11:58 am

JoMoney wrote:
Tue Oct 16, 2018 11:31 am
Time IN the market beats timing the market.
Yes to this.

Your best bet is almost always to invest as soon as you have the money available and to withdraw only when you need to SPEND the money.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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One Ping
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Re: Monthly vs. Annual Withdrawals

Post by One Ping » Tue Oct 16, 2018 12:17 pm

chuckb84 wrote:
Tue Oct 16, 2018 10:40 am
60% US Stock Market
20% Global Stocks Ex-US
40% Total US bond Market
Anyone else notice this is 120% of the portfolio?

OP, is this what you meant?
40% US Stock Market
20% Global Stocks Ex-US
40% Total US bond Market
"Re-verify our range to target ... one ping only."

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JoMoney
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Re: Monthly vs. Annual Withdrawals

Post by JoMoney » Tue Oct 16, 2018 12:24 pm

One Ping wrote:
Tue Oct 16, 2018 12:17 pm
chuckb84 wrote:
Tue Oct 16, 2018 10:40 am
60% US Stock Market
20% Global Stocks Ex-US
40% Total US bond Market
Anyone else notice this is 120% of the portfolio?

OP, is this what you meant?
40% US Stock Market
20% Global Stocks Ex-US
40% Total US bond Market
OP's portfolio had better returns :D :greedy
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

garlandwhizzer
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Re: Monthly vs. Annual Withdrawals

Post by garlandwhizzer » Tue Oct 16, 2018 12:50 pm

I do annual rebalancing/withdrawals, usually at year end or the early new year, liquidating sufficient equity at that time from IRA (RMD) plus TSM from personal account to provide sufficient cash into my personal MMF to cover all anticipated living expenses for the upcoming year. In addition I keep an extra 1 - 2 years of living expenses in the personal MMF to tide me over in case a bear market. Selling MMF generates no capital gains for tax purposes which is nice when unanticipated money is needed. Selling equity in the depths of a bear market can be disastrous and knowing up front that you have sufficient financial assets to cover living expenses for at least 2 - 3 years is nice. Most bear markets last less than 2 years of downside action before at least a cyclical rally occurs if not a new secular bull market. Few realize that even during the Great Depression from 1932 to 1937, the Dow Jones went from 800 to 3350, a gain of about 320%. By 1937 if you had invested stock dividends since the collapse of 1929 you would have been made whole in nominal terms and had positive 8 year returns in real terms due to the deflation that occurred. If you're retired and have no pension (that's me), having sufficient cash on hand to last a few years is a good idea IMO. If the downturn lasts longer than that and you run out of cash, you can start selling bonds which typically rally in price during recessions. The point is to survive with minimal damage and simply play a waiting game for what has always happened in the US following a deep bear market, a strong bull market. Historically, looking at optimal times to sell equity, sometime around year end has been good due to frequent Santa Claus rallies at year end plus new equity investment purchases in the early new year as a result of year end bonuses.

So far this has worked well. It kept me from selling a single share of equity in 2007-9. It's important IMO to prepare for a deep bear market before it happens when times are good and the equity market is awash in optimism.

Garland Whizzer

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Garco
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Re: Monthly vs. Annual Withdrawals

Post by Garco » Tue Oct 16, 2018 1:12 pm

I'm taking required minimum distributions (RMD's) from my tax deferred account. I take the money out on a quarterly basis. That works reasonably well, and is a compromise between the alternatives proposed by the OP. I've been thinking of moving to monthly, just because of the "paycheck" feeling as the OP mentioned in initial post. But I'll rethink that. In any case I would not do a once-per-year distribution since that carries timing risk that you're taking money at a temporary market low point rather than spreading the risk across the year.

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One Ping
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Re: Monthly vs. Annual Withdrawals

Post by One Ping » Tue Oct 16, 2018 2:25 pm

JoMoney wrote:
Tue Oct 16, 2018 12:24 pm
One Ping wrote:
Tue Oct 16, 2018 12:17 pm
chuckb84 wrote:
Tue Oct 16, 2018 10:40 am
60% US Stock Market
20% Global Stocks Ex-US
40% Total US bond Market
Anyone else notice this is 120% of the portfolio?

OP, is this what you meant?
40% US Stock Market
20% Global Stocks Ex-US
40% Total US bond Market
OP's portfolio had better returns :D :greedy
So how do you run a monte carlo with -20% cash? (Which it seems OP did to generate the end of simulation percentile distributions.)

Having a hard time reproducing the results in the OP.

ETA: 40/20/20 appears to be the asset allocation OP used.
"Re-verify our range to target ... one ping only."

sport
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Re: Monthly vs. Annual Withdrawals

Post by sport » Tue Oct 16, 2018 3:10 pm

Garco wrote:
Tue Oct 16, 2018 1:12 pm
I'm taking required minimum distributions (RMD's) from my tax deferred account. I take the money out on a quarterly basis. That works reasonably well, and is a compromise between the alternatives proposed by the OP. I've been thinking of moving to monthly, just because of the "paycheck" feeling as the OP mentioned in initial post. But I'll rethink that. In any case I would not do a once-per-year distribution since that carries timing risk that you're taking money at a temporary market low point rather than spreading the risk across the year.
You can transfer money within your IRA from stocks to bonds on any schedule you wish. You can then make monthly withdrawals from the bond fund without any concern about what the market is doing at the moment.

retiringwhen
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Re: Monthly vs. Annual Withdrawals

Post by retiringwhen » Tue Oct 16, 2018 3:58 pm

sport wrote:
Tue Oct 16, 2018 3:10 pm
Garco wrote:
Tue Oct 16, 2018 1:12 pm
I'm taking required minimum distributions (RMD's) from my tax deferred account. I take the money out on a quarterly basis. That works reasonably well, and is a compromise between the alternatives proposed by the OP. I've been thinking of moving to monthly, just because of the "paycheck" feeling as the OP mentioned in initial post. But I'll rethink that. In any case I would not do a once-per-year distribution since that carries timing risk that you're taking money at a temporary market low point rather than spreading the risk across the year.
You can transfer money within your IRA from stocks to bonds on any schedule you wish. You can then make monthly withdrawals from the bond fund without any concern about what the market is doing at the moment.
I actually keep some of my emergency funds in a money market with in an Inherited IRA as I know we'll be taking RMDs each year from it, so it acts as the parking place and smoother for converting any stocks or bonds needed to sell to keep the RMDs going. I can time them as appropriate and still take the RMDs.

chuckb84
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Re: Monthly vs. Annual Withdrawals

Post by chuckb84 » Sat Oct 27, 2018 9:00 pm

One Ping wrote:
Tue Oct 16, 2018 12:17 pm
chuckb84 wrote:
Tue Oct 16, 2018 10:40 am
60% US Stock Market
20% Global Stocks Ex-US
40% Total US bond Market
Anyone else notice this is 120% of the portfolio?

OP, is this what you meant?
40% US Stock Market
20% Global Stocks Ex-US
40% Total US bond Market
Yah. Just a typo. Portfolio Visualizer, thankfully, won't run unless your allocations add up to 100%.

ralph124cf
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Re: Monthly vs. Annual Withdrawals

Post by ralph124cf » Sun Oct 28, 2018 11:57 am

garlandwhizzer wrote:
Tue Oct 16, 2018 12:50 pm
I do annual rebalancing/withdrawals, usually at year end or the early new year, liquidating sufficient equity at that time from IRA (RMD) plus TSM from personal account to provide sufficient cash into my personal MMF to cover all anticipated living expenses for the upcoming year. In addition I keep an extra 1 - 2 years of living expenses in the personal MMF to tide me over in case a bear market. Selling MMF generates no capital gains for tax purposes which is nice when unanticipated money is needed. Selling equity in the depths of a bear market can be disastrous and knowing up front that you have sufficient financial assets to cover living expenses for at least 2 - 3 years is nice. Most bear markets last less than 2 years of downside action before at least a cyclical rally occurs if not a new secular bull market. Few realize that even during the Great Depression from 1932 to 1937, the Dow Jones went from 800 to 3350, a gain of about 320%. By 1937 if you had invested stock dividends since the collapse of 1929 you would have been made whole in nominal terms and had positive 8 year returns in real terms due to the deflation that occurred. If you're retired and have no pension (that's me), having sufficient cash on hand to last a few years is a good idea IMO. If the downturn lasts longer than that and you run out of cash, you can start selling bonds which typically rally in price during recessions. The point is to survive with minimal damage and simply play a waiting game for what has always happened in the US following a deep bear market, a strong bull market. Historically, looking at optimal times to sell equity, sometime around year end has been good due to frequent Santa Claus rallies at year end plus new equity investment purchases in the early new year as a result of year end bonuses.

So far this has worked well. It kept me from selling a single share of equity in 2007-9. It's important IMO to prepare for a deep bear market before it happens when times are good and the equity market is awash in optimism.

Garland Whizzer
I'm not sure where you are getting your DOW numbers from. The DOW was in double digits for all of 1932, falling to a low of 41.22 on July 8, 1932. It finally got back up to triple digits, 100.36, on January 2, 1934. The DOW climbed to 179.90 by the end of 1936, and then fell to 120.85 by the end of 1937.

The DOW first hit 1,000 in November of 1972, before settling back to 632.04 on January 2, 1975.

Ralph

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willthrill81
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Re: Monthly vs. Annual Withdrawals

Post by willthrill81 » Sun Oct 28, 2018 12:09 pm

Logically, we would expect monthly withdrawals to be superior to annual withdrawals because the remaining months' withdrawals should result in additional gains over the long-term.

That being said, doing annual withdrawals is akin to having a tiny portion of your portfolio in cash (e.g. around 4-5%). There will be some measurable cash drag on such a portfolio, but it won't be much. Considering that I'm planning on using some type of percentage-of-portfolio approach for withdrawals anyway, I don't want even more variability in our withdrawals by doing them monthly instead of annually. If we make annual withdrawals, we can more effectively plan our spending for the upcoming year. That's worth a tiny bit of cash drag to me.
“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

ralph124cf
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Re: Monthly vs. Annual Withdrawals

Post by ralph124cf » Sun Oct 28, 2018 12:20 pm

An additional advantage to doing a single withdrawal at the end if the year is that you do not have to pay any federal income tax until the end of the year, and can keep that cash invested. You could legally just file your estimated tax for the fourth quarter claiming all the income in the fourth quarter, or, to keep it simple, have your custodian withhold all the tax due for the year from your withdrawal.

Ralph

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willthrill81
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Re: Monthly vs. Annual Withdrawals

Post by willthrill81 » Sun Oct 28, 2018 10:04 pm

ralph124cf wrote:
Sun Oct 28, 2018 12:20 pm
An additional advantage to doing a single withdrawal at the end if the year is that you do not have to pay any federal income tax until the end of the year, and can keep that cash invested. You could legally just file your estimated tax for the fourth quarter claiming all the income in the fourth quarter, or, to keep it simple, have your custodian withhold all the tax due for the year from your withdrawal.

Ralph
That's a good point.
“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

garlandwhizzer
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Re: Monthly vs. Annual Withdrawals

Post by garlandwhizzer » Mon Oct 29, 2018 11:48 am

ralph124cf wrote:
I'm not sure where you are getting your DOW numbers from. The DOW was in double digits for all of 1932, falling to a low of 41.22 on July 8, 1932. It finally got back up to triple digits, 100.36, on January 2, 1934. The DOW climbed to 179.90 by the end of 1936, and then fell to 120.85 by the end of 1937.
My numbers may be wrong but my point is still valid in percentage terms. From the Dow low of 41.22 in 1932, it rose to 179.90 by the end of 1936. That gain (179.90 - 41.22) is 138.68 Dow points which is a 336% gain from the low of 41.22 in 1932 to the cyclical high 3.5 years later. Actually the gain was more that for investors because of 3.5 years of dividend re-investment which do not show up in the Dow numbers. The point I was trying to make is that, given sufficient patience, even in the depths of the Great Depression, the market presented stock investors with cyclical rallies into which equity could have been sold to generate cash if needed. The point is not that the Great Depression wasn't a disaster for investors but rather that there were cyclical rallies and also that dividend reinvestment made a big difference for buy and hold investors.

The following is a direct quote from an article on investor returns during the Great Depression.

http://www.thecompoundinvestor.com/stoc ... epression/
How Quickly Would You Have Made Your Money Back From The Wall Street Crash?

If you read up on what happened to stocks and the market during the depression years it is highly likely that the figure you will see quoted in answer to the above question is something like twenty-five years. That is, if you put money in at the peak of the market, pre-crash, it would have taken twenty-five years for you to break even again. Now, twenty-five years is a good chunk of an investing “lifetime”, probably even more so back then when life expectancies would have been lower, so it sounds like a terrible figure. You basically spend all that time with no returns to show for it.

The thing is that the effect of reinvesting dividends totally blows that figure away. It would have taken twenty-five years in one particular scenario – the one where you didn’t include dividends. If you did include them, it would have taken you only seven years. Despite the awful economic climate and period of falling earnings and dividends, the return accelerator that you experience with reinvesting those dividends at low valuations slashes the time it takes to get you back to breakeven. Thirty years of doing that from the market top in 1929 would have delivered returns of about 7.5% compounded annually up to 1960. No matter how bad things get, taking the long approach has nearly always made it salvageable.
Garland Whizzer

fennewaldaj
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Re: Monthly vs. Annual Withdrawals

Post by fennewaldaj » Mon Oct 29, 2018 1:23 pm

I will likely use annual withdrawals when I retire because I plan to use one of the variable withdrawal plans. It seems easier to know what we have to spend for the year at the beginning so we can plan accordingly.

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