Cashing out for 2017 expenses while market is high?

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CFIT
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Cashing out for 2017 expenses while market is high?

Post by CFIT » Thu Jan 26, 2017 10:59 am

I am retired, receive a pension, and have both Roth and standard IRAs. Each year I take out a small percentage of my retirement funds to cover fixed expenses like insurance and taxes, making the withdrawals throughout the year as bills come due. Given how well the market is doing at the moment and my expectations that it will not last I am tempted to cash out my expenses for the year right now. I would park the money in my checking account, essentially making no interest. Although this is a form of market timing the only downsides I see are losing out on gains if the market goes higher still plus making nothing on the money that I've withdrawn. I'm willing to accept this but wonder if I am missing anything?

Thanks.

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cheese_breath
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Re: Cashing out for 2017 expenses while market is high?

Post by cheese_breath » Thu Jan 26, 2017 11:03 am

One thing you're missing is if you put the money in an online bank such as Ally you could earn about 1% on it.
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Re: Cashing out for 2017 expenses while market is high?

Post by Grt2bOutdoors » Thu Jan 26, 2017 11:06 am

Bird in hand is better than 2 in a bush. Take the money now.
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LiterallyIronic
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Re: Cashing out for 2017 expenses while market is high?

Post by LiterallyIronic » Thu Jan 26, 2017 11:09 am

You gotta take the money out sometime. Might as well be now.

Though I would've thought the wise thing to do would be to always have at least a year's worth of expenses in cash in order to weather a market downturn without having to pull cash when it's low.

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Peter Foley
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Re: Cashing out for 2017 expenses while market is high?

Post by Peter Foley » Thu Jan 26, 2017 11:20 am

Sorry to do this but it is easier . . . quoting myself from another thread;
I suggest you read this article on withdrawal strategies. It may apply to RMD's as well. . . .

http://www.caniretireyet.com/new-resear ... trategies/
This is the first of two articles Kirkpatrick wrote on the subject. His basic premise is that you will come out much better if you make withdrawals from stocks when the CAPE Median is high. The CAPE Median is relative high at this point in the market cycle.

Reading the article may provide you with reassurance that you are not "market timing" rather following a plan. :wink:

CFIT
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Re: Cashing out for 2017 expenses while market is high?

Post by CFIT » Thu Jan 26, 2017 1:18 pm

Thanks for the quick and helpful advice! I found the article especially useful.

It also crossed my mind that I could cash out for my fixed expenses by selling investments in my standard IRA account and putting them into a money market fund in the same account. As long as we don't see events that break the buck the money should be safe. Keeping it out of my checking account avoids the temptation to spend it on other things.

Thanks again.

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Re: Cashing out for 2017 expenses while market is high?

Post by oldcomputerguy » Thu Jan 26, 2017 1:26 pm

CFIT wrote:Thanks for the quick and helpful advice! I found the article especially useful.

It also crossed my mind that I could cash out for my fixed expenses by selling investments in my standard IRA account and putting them into a money market fund in the same account. As long as we don't see events that break the buck the money should be safe. Keeping it out of my checking account avoids the temptation to spend it on other things.

Thanks again.
What's the return rate on the money market account you're contemplating? Money in an Ally online savings account might earn significantly more than money in the money market, and will be FDIC-insured. It'll still be outside your checking account, but can be transferred if/as needed with a mouse click. And if you need it in a hurry, you won't have to wait for the sale of shares of a money market account to settle. Seems like a win-win to me.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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HomerJ
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Re: Cashing out for 2017 expenses while market is high?

Post by HomerJ » Thu Jan 26, 2017 1:29 pm

LiterallyIronic wrote:You gotta take the money out sometime. Might as well be now.

Though I would've thought the wise thing to do would be to always have at least a year's worth of expenses in cash in order to weather a market downturn without having to pull cash when it's low.
This.

I would think it would be a good idea to keep at least 1 year's expenses out of the market ahead of time.

Me, I'll probably have 5 years of expenses in a CD ladder when I retire.

livesoft
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Re: Cashing out for 2017 expenses while market is high?

Post by livesoft » Thu Jan 26, 2017 1:30 pm

smartinwate wrote:What's the return rate on the money market account you're contemplating? Money in an Ally online savings account might earn significantly more than money in the money market, and will be FDIC-insured.
Ha! I like how "significantly more" means 0.21%. VMMXX has an SEC yield of 0.79%. Ally has a money market with 0.85% yield.

So on $50,000, that is $105 significantly more.

One can spend their time better by opening a new 2%-cash-back card than opening an Ally Savings account.
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Quark
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Re: Cashing out for 2017 expenses while market is high?

Post by Quark » Thu Jan 26, 2017 1:34 pm

Which would make you feel worse, missing out on a gain by cashing out early or waiting and seeing values decline?

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Kenkat
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Re: Cashing out for 2017 expenses while market is high?

Post by Kenkat » Thu Jan 26, 2017 1:39 pm

Is the market high? Maybe. Or maybe it will continue to rise. You don't really know. It "feels" like the market is high, but there is no demonstrated ability for anyone to predict this. Since the market tends to rise over time, the logical decision would be to leave the money in as long as possible. However, there are behavioral forces at work here as well and so if there is some security feeling like you are locking in 2017 at a level that is satisfactory to you, there's probably not an overwhelming reason not to do that.

lgs88
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Re: Cashing out for 2017 expenses while market is high?

Post by lgs88 » Thu Jan 26, 2017 1:47 pm

The principle of loss aversion suggests that you will feel much MORE foolish if you leave it in and it loses value, than if you take it out now and it increases in value.

So if you've got expenses to fund, it'll do your mental state some good to take it out now.
merely an interested amateur

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Re: Cashing out for 2017 expenses while market is high?

Post by Sheepdog » Thu Jan 26, 2017 1:55 pm

My goal in retirement, since 2008, has been to keep a minimum of 3 years of normal withdrawals in safe and easy to get to holdings. It is not unlike the saying, a person should not invest aggressively money that they will need in the next 3 to 5 years.
So cashing out for 2017 expenses is appropriate for you, in my opinion. ( or more).
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barnaclebob
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Re: Cashing out for 2017 expenses while market is high?

Post by barnaclebob » Thu Jan 26, 2017 2:00 pm

What % is 1 year of expenses to your portfolio?

bigred77
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Re: Cashing out for 2017 expenses while market is high?

Post by bigred77 » Thu Jan 26, 2017 2:22 pm

barnaclebob wrote:What % is 1 year of expenses to your portfolio?
This is the question. If it's around 4% or something similar than cashing out early and missing a run up/decline of 10% is only going to affect your portfolio by 40 basis points. Nothing earth shattering.

If it makes you feel good to convert your planned 2017 withdrawal amount to cash equivalents, then by all means do so.

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Re: Cashing out for 2017 expenses while market is high?

Post by inbox788 » Thu Jan 26, 2017 2:40 pm

CFIT wrote:I am retired, receive a pension, and have both Roth and standard IRAs. Each year I take out a small percentage of my retirement funds to cover fixed expenses like insurance and taxes, making the withdrawals throughout the year as bills come due. Given how well the market is doing at the moment and my expectations that it will not last I am tempted to cash out my expenses for the year right now. I would park the money in my checking account, essentially making no interest. Although this is a form of market timing the only downsides I see are losing out on gains if the market goes higher still plus making nothing on the money that I've withdrawn. I'm willing to accept this but wonder if I am missing anything?
If you're not doing this systematically, you're market timing, and more often than not, you'll be pulling it out too early on rising years and failing to do it on down years. Others have planned years of expenses and already pulled them out, and that's what I'm planning to do. The more comfortable my situation, the more years I'll take off the table, rather than let my feelings over the market decide things. More often than not, those feelings are wrong.

On a purely financial decision, you should keep funds in the market for longer time whenever you can, and should expect to do better with this strategy in the long run, but have to live with risk and volatility.

And if you can't decide or this bothers you, just take out a little at a time on a regular basis or take out half now and half in 6 months. You'll split all the differences good and bad.

Good Listener
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Re: Cashing out for 2017 expenses while market is high?

Post by Good Listener » Thu Jan 26, 2017 4:46 pm

For myself, I am willing to forego the extra interest or dividends I could get from a bank or money market mutual fund. I put 3 years of expenses in my checking account (no interest) a year ago and now am in the 2nd year. It looks like it might last longer. For OP, I would do it right now and avoid a bunch of transactions. If it might be called market timing, who cares?

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F150HD
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Re: Cashing out for 2017 expenses while market is high?

Post by F150HD » Thu Jan 26, 2017 5:08 pm

CFIT wrote: Given how well the market is doing at the moment and my expectations that it will not last I am tempted to cash out my expenses for the year right now.
I wonder how many people do this with RMDs.

I have an inherited account, pondered taking my RMD now in similar fashion to your thought versus waiting till December. Dunno.

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Re: Cashing out for 2017 expenses while market is high?

Post by inbox788 » Thu Jan 26, 2017 5:14 pm

F150HD wrote:
CFIT wrote: Given how well the market is doing at the moment and my expectations that it will not last I am tempted to cash out my expenses for the year right now.
I wonder how many people do this with RMDs.

I have an inherited account, pondered taking my RMD now in similar fashion to your thought versus waiting till December. Dunno.
That's what I would do. The penalty of forgetting to take RMD is too great to wait till December IMO. I'd double check that RMDs were taken half way through the year and again in December to make triply sure I don't get hit with that hefty fee.

oleviking
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Re: Cashing out for 2017 expenses while market is high?

Post by oleviking » Thu Jan 26, 2017 5:20 pm

RMD's are only on a traditional IRA, correct? The Roth does not have that same requirement, does it?

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Re: Cashing out for 2017 expenses while market is high?

Post by Grogs » Thu Jan 26, 2017 5:40 pm

oleviking wrote:RMD's are only on a traditional IRA, correct? The Roth does not have that same requirement, does it?
Correct. You can keep the money in there until you're 100 if you want. That's why many people try to do some Roth conversions before RMDs kick in if they're in a low tax bracket.

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Re: Cashing out for 2017 expenses while market is high?

Post by dumbbunny » Thu Jan 26, 2017 5:53 pm

I recently took some money off the table to pay 2016 federal, state taxes, and penalties. No regrets.
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Re: Cashing out for 2017 expenses while market is high?

Post by Nate79 » Thu Jan 26, 2017 5:53 pm

You can't know ahead of time what the market is going to do thru the year or next year, etc. Set a policy and stick with it. Trying to predict what the market will do is a fool's game whether you are using CAPE data this or that.

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Re: Cashing out for 2017 expenses while market is high?

Post by F150HD » Fri Jan 27, 2017 7:42 am

inbox788 wrote:That's what I would do. The penalty of forgetting to take RMD is too great to wait till December IMO. I'd double check that RMDs were taken half way through the year and again in December to make triply sure I don't get hit with that hefty fee.
well I'm not worried about 'forgetting' so that really isn't an issue to me. Thanks.

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Re: Cashing out for 2017 expenses while market is high?

Post by Dottie57 » Fri Jan 27, 2017 8:59 am

HomerJ wrote:
LiterallyIronic wrote:You gotta take the money out sometime. Might as well be now.

Though I would've thought the wise thing to do would be to always have at least a year's worth of expenses in cash in order to weather a market downturn without having to pull cash when it's low.
This.

I would think it would be a good idea to keep at least 1 year's expenses out of the market ahead of time.

Me, I'll probably have 5 years of expenses in a CD ladder when I retire.
Me too.

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Re: Cashing out for 2017 expenses while market is high?

Post by livesoft » Fri Jan 27, 2017 9:02 am

I took my RMD from an inherited IRA yesterday. It will pay for half of a hotel room for one night I've booked in April.

Non-spousal Inherited Roth IRAs also have RMDs if one wants to stretch it.
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Re: Cashing out for 2017 expenses while market is high?

Post by oldcomputerguy » Fri Jan 27, 2017 9:29 am

livesoft wrote:
smartinwate wrote:What's the return rate on the money market account you're contemplating? Money in an Ally online savings account might earn significantly more than money in the money market, and will be FDIC-insured.
Ha! I like how "significantly more" means 0.21%. VMMXX has an SEC yield of 0.79%. Ally has a money market with 0.85% yield.

So on $50,000, that is $105 significantly more.

One can spend their time better by opening a new 2%-cash-back card than opening an Ally Savings account.
Sorry, I was looking at VMFXX, the fund that Vanguard has me set up in as a settlement fund. It's SEC yield is 0.48% with an ER of 0.11%, and has returned 0.3% over the last year. And I wasn't really referring to an Ally money market, rather the Ally online savings, which has a 1% interest rate and is FDIC-insured. Plus, it's more liquid than a money-market account (one doesn't have to wait for the funds to settle), so would be a better choice for money that one might need quickly.

You're quite right that a difference of 21 bp is not that severe. But if I can get more than twice the return (1% versus 0.3%) and get FDIC insurance, why should I not at least consider it?
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Re: Cashing out for 2017 expenses while market is high?

Post by JW-Retired » Fri Jan 27, 2017 10:11 am

Sheepdog wrote:My goal in retirement, since 2008, has been to keep a minimum of 3 years of normal withdrawals in safe and easy to get to holdings. It is not unlike the saying, a person should not invest aggressively money that they will need in the next 3 to 5 years.
So cashing out for 2017 expenses is appropriate for you, in my opinion.
Yes to the 3-5 years of non-aggressive money, but isn't that what bonds are for? IMO my 40% bonds allocation in tax deferred easily qualifies as "safe and easy to get to holdings". This covers way more than 5 years of RMDs.

I can't see any need to have another bucket of cash in there on top of that. (Unless the OP has a really high equity allocation.....he/she never said?)
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livesoft
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Re: Cashing out for 2017 expenses while market is high?

Post by livesoft » Fri Jan 27, 2017 10:14 am

smartinwate wrote:You're quite right that a difference of 21 bp is not that severe. But if I can get more than twice the return (1% versus 0.3%) and get FDIC insurance, why should I not at least consider it?
Just a note for others reading this: The SEC yield is calculated net of the expense ratio, so the current 0.79% yield of VMMXX is what one would get. Yes, the Vanguard Fed MM has a lower yield.
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Re: Cashing out for 2017 expenses while market is high?

Post by dbr » Fri Jan 27, 2017 10:20 am

Generally speaking in retirement withdrawal the reduced volatility of holding a little more money in cash for withdrawals is offset by the reduced return of holding same. The effect over a long term of withdrawing money is pretty much a wash. It may make people feel more comfortable to have cash ahead for small annual withdrawals, but it doesn't make any difference one way or the other. The situation is different if someone is planning to take out a large fraction of the assets all at once at a particular time in the near future.

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Re: Cashing out for 2017 expenses while market is high?

Post by Peter Foley » Fri Jan 27, 2017 10:58 am

dbr wrote:
It may make people feel more comfortable to have cash ahead for small annual withdrawals, but it doesn't make any difference one way or the other.
I admit that I am one of those people who feel more comfortable with this approach. I try to keep this in perspective; little or no earnings on a year's worth of annual expenses is simply not going to make a difference in my life, nor affect my (already frugal) lifestyle. That is not to say that this is the right approach for everyone either economically or psychologically. So, returning to the original question, it would be my preferred approach to take some money off the table for this year's spending while the market is high. I cannot say if this is the right approach for the OP.

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Re: Cashing out for 2017 expenses while market is high?

Post by willthrill81 » Fri Jan 27, 2017 11:13 am

LiterallyIronic wrote:Though I would've thought the wise thing to do would be to always have at least a year's worth of expenses in cash in order to weather a market downturn without having to pull cash when it's low.
The problem with that strategy is that you're foregoing the expected return on that money every moment that it's not invested. Mathematically, keeping cash on the sidelines is a bad deal. Remember that historically, the market experiences a 20% or larger decline every 3.4 years. Based on history, that cash isn't going to last long if you use it when the market is down.

However, if keeping that cash helps you stay the course and not sell when stocks drop by 50%, then it's perfectly acceptable.

As time goes on, this is why I'm leaning toward investing a large portion of my portfolio, probably 50%, in VWINX in retirement. It's made money in 41 out of its 47 years, never had a 10% loss in any one year (9.85% was the worst in 2008), and only trailed the S&P 500 by .43% over the same period. If you can't stomach a potential 10% drop in your portfolio, then you probably shouldn't be in stocks at all.
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Re: Cashing out for 2017 expenses while market is high?

Post by hand » Fri Jan 27, 2017 11:44 am

willthrill81 wrote:
LiterallyIronic wrote:Though I would've thought the wise thing to do would be to always have at least a year's worth of expenses in cash in order to weather a market downturn without having to pull cash when it's low.
The problem with that strategy is that you're foregoing the expected return on that money every moment that it's not invested. Mathematically, keeping cash on the sidelines is a bad deal. Remember that historically, the market experiences a 20% or larger decline every 3.4 years. Based on history, that cash isn't going to last long if you use it when the market is down.
Foregoing expected return isn't necessarily the greatest sin for someone in the withdrawal phase.

Failing to meet required *minimum* return is the real issue for many. As such withdrawing money from the market at a point where market is above the required minimum is at the very least reasonable, and in some cases may be optimal.

If early withdrawal is an attempt at maximizing returns, I would call it market timing and likely to fail its intended goal of maximal returns, however early withdrawal as a recognition that at least part of the game is won and no need to play further or risk negative outcomes doesn't bother me.

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Re: Cashing out for 2017 expenses while market is high?

Post by willthrill81 » Fri Jan 27, 2017 12:18 pm

hand wrote:
willthrill81 wrote:
LiterallyIronic wrote:Though I would've thought the wise thing to do would be to always have at least a year's worth of expenses in cash in order to weather a market downturn without having to pull cash when it's low.
The problem with that strategy is that you're foregoing the expected return on that money every moment that it's not invested. Mathematically, keeping cash on the sidelines is a bad deal. Remember that historically, the market experiences a 20% or larger decline every 3.4 years. Based on history, that cash isn't going to last long if you use it when the market is down.
Foregoing expected return isn't necessarily the greatest sin for someone in the withdrawal phase.

Failing to meet required *minimum* return is the real issue for many. As such withdrawing money from the market at a point where market is above the required minimum is at the very least reasonable, and in some cases may be optimal.

If early withdrawal is an attempt at maximizing returns, I would call it market timing and likely to fail its intended goal of maximal returns, however early withdrawal as a recognition that at least part of the game is won and no need to play further or risk negative outcomes doesn't bother me.
Much of this is dependent on how much retirement funds one has. If it's greater than around 25x needed income, then I agree that keeping a year of expenses in cash can make good sense. If the funds are less than that, then you probably need every dollar working as hard for you as you possibly can.

I certainly agree that getting 'greedy' by trying to maximize returns may not be appropriate for everyone. But the numbers indicate that most retirees are stretched thinly with their retirement funds, and for those, significant money on the sidelines may not be appropriate.
“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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