What’s the proper way to pay yourself in retirement?

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ricks1433
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What’s the proper way to pay yourself in retirement?

Post by ricks1433 »

Hi,

Once a person retires, what is the best way to pay yourself or ensure a constant stream of money? I read lots of articles on saving and building the nest egg but not many on what happens once you are retired.

Let’s say someone (a retiree) had a million dollars worth of ETF’s in a three portfolio approach. Would they just sell a little bit of stocks monthly or quarterly, or do something else? If so, I’m assuming you just somehow automate the sell orders? Is this what a service like Vanguard Personal Advisor provides for retirees?

I’ve been using Betterment for some deposits and I do see they have automated recurring withdrawals.

Anyhow, just wanted to understand it from the gurus here.
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RickBoglehead
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Re: What’s the proper way to pay yourself in retirement?

Post by RickBoglehead »

There is no best or proper way. It would be a matter of opinion.

I plan on not reinvesting dividends or interest or capital gains, which this year will be 7/12 of my planned retirement income. Prior to Social Security, I will sell monthly holdings to provide the other 5/12s, for a period of 6 months. Then I will see how that matches with the reality of our needs.

Of course this may change if my cash on hand exceeds what I consider a short term emergency fund.

If you plan on applying for a mortgage in retirement, a regular monthly selling of assets to provide an income stream is supposed to be desirable to a bank.
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B. Wellington
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Re: What’s the proper way to pay yourself in retirement?

Post by B. Wellington »

RickBoglehead wrote: Fri Oct 11, 2019 5:28 am There is no best or proper way. It would be a matter of opinion.

I plan on not reinvesting dividends or interest or capital gains, which this year will be 7/12 of my planned retirement income. Prior to Social Security, I will sell monthly holdings to provide the other 5/12s, for a period of 6 months. Then I will see how that matches with the reality of our needs.

Of course this may change if my cash on hand exceeds what I consider a short term emergency fund.

If you plan on applying for a mortgage in retirement, a regular monthly selling of assets to provide an income stream is supposed to be desirable to a bank.
+1

Our plan is to "sweep" all interest, quarterly dividends, and any capital gains (taxable first) to a money market account and then onto the checking account. Followed by the sale of shares to makeup for any "shortfall" in funds. Following roughly a ~4% WR.

I want to try to keep this as simple and straight forward as possible in the coming years... Hope that helps... :beer
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Wiggums
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Re: What’s the proper way to pay yourself in retirement?

Post by Wiggums »

We are planning to do the same thing.
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Re: What’s the proper way to pay yourself in retirement?

Post by lostdog »

B. Wellington wrote: Fri Oct 11, 2019 5:52 am
RickBoglehead wrote: Fri Oct 11, 2019 5:28 am There is no best or proper way. It would be a matter of opinion.

I plan on not reinvesting dividends or interest or capital gains, which this year will be 7/12 of my planned retirement income. Prior to Social Security, I will sell monthly holdings to provide the other 5/12s, for a period of 6 months. Then I will see how that matches with the reality of our needs.

Of course this may change if my cash on hand exceeds what I consider a short term emergency fund.

If you plan on applying for a mortgage in retirement, a regular monthly selling of assets to provide an income stream is supposed to be desirable to a bank.
+1

Our plan is to "sweep" all interest, quarterly dividends, and any capital gains (taxable first) to a money market account and then onto the checking account. Followed by the sale of shares to makeup for any "shortfall" in funds. Following roughly a ~4% WR.

I want to try to keep this as simple and straight forward as possible in the coming years... Hope that helps... :beer
Does this mean you sell the shares quarterly?
PaunchyPirate
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Re: What’s the proper way to pay yourself in retirement?

Post by PaunchyPirate »

I'm finishing up my first year of retirement. I'm also trying to keep my taxable income low enough to get some ACA healthcare tax credit subsidy to reduce my medical costs. At retirement, I stopped re-investing dividends and interest and capital gains distributions in my taxable account. I have them sent to my sweep account. From there, I move that to my local checking account when I need some money to pay my bills. I don't have it set up to do this automatically. I just move it when I need it. The sweep account money has provided about 60% of my needed income. I also have been spending cash that I had purposefully built up in my local savings account. This method has meant I haven't needed to sell any investment, which would mean capital gains, which would increase my taxable income, which would mean I would lose my ACA tax credit. I have enough investments that I can sell with no capital gains that I can do the same thing next year. Probably by year 3, I will have to sell an investment to free up cash for living, so I will likely lose my ACA tax credit in that year. If the ACA is still around in the same manner in year 4, I will sell enough funds in year 3 to cover year 4 expenses so that I can return to an ACA tax subsidy. Prior to starting my retirement year, I created a detailed monthly budget which I have adhered to quite accurately and without any discomfort.

If I were not managing income in this manner to get the ACA subsidy, I would still be doing the same thing.
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Tamarind
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Re: What’s the proper way to pay yourself in retirement?

Post by Tamarind »

If your money is in an IRA at Vanguard (possibly other custodians too), you could also continue to reinvest dividends and withdraw even amounts per plan. There is a withdrawal automation option (no PAS needed) where you can set amounts and proportions. This may be helpful if you'd feel most comfortable with a regular income stream that flows to your back account without requiring effort from you each time to calculate how much to sell.

Some people use a SPIA (single premium immediate annuity) for part of their money, which gives the same "income stream" behavior, guaranteed, likely at a slightly higher rate of return than a conservative portfolio, but in return you actually have to give up the premium money at the start of the contract. This is a more common choice for folks who do not have much surplus saved, cannot bear to invest enough in stocks to get a better return, or want to secure a floor under their income in case they live much longer than expected.

PaunchyPirate above has made a great argument for why those who need to control taxable income carefully will want to have less automation.
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Re: What’s the proper way to pay yourself in retirement?

Post by tennisplyr »

Interesting.....we're retired 8 years, late sixties. We've been taking money when we need it by selling shares of whatever makes sense at that point in time. We're ok with that. Do you think it would be better to sweep all interest, dividend, gains into savings as we move along? Why?
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Re: What’s the proper way to pay yourself in retirement?

Post by Leroy Jones »

I have my IRA at Vanguard in Life Strategy Moderate Growth. I take monthly distributions so it's like a paycheck. I have also calculated my Federal and State Tax liability and have Vanguard withhold the appropriate percentage so I either get a very small return or owe a very small amount. Worked out well last year and am hoping it will again this year.
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22twain
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Re: What’s the proper way to pay yourself in retirement?

Post by 22twain »

So far I've needed to take money for expenses only from my taxable brokerage account. I turned off automatic reinvesting of dividends and let them accumulate in my settlement fund (money market fund). Once a year, I estimate how much more I'll need to cover expenses for the coming year, sell that amount of shares, and leave the proceeds in the settlement fund. If I need more for a large one-off expense during the year, I sell some more shares at that time.

Once a month, I take a couple of minutes to log on and transfer money from the settlement fund to my checking account. This is my "paycheck". I aim to transfer the same amount each month. Sometimes I transfer more if I've had a large expense. Sometimes I skip a "paycheck" if I've had some slow months. I keep a thousand or two extra in the checking account, as a cushion.

When I start collecting Social Security at 70 in a few years, it will cover my current expenses, so I'll stop doing these transfers. If I need any extra money, it will come from my RMDs which will start at the same time.
Last edited by 22twain on Sun Oct 13, 2019 1:03 am, edited 3 times in total.
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wolf359
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Re: What’s the proper way to pay yourself in retirement?

Post by wolf359 »

As stated, there is no "proper way."

Your specific method has to fit within your risk tolerance and your goals. Some methods may produce more money over your lifetime, but are subject to sequence of returns risk (there's the chance of running out of money). Other methods use guaranteed income sources like annuities and pensions, but don't adjust with inflation. Some will result in a maximum income during your lifetime, but leave nothing for your heirs. Some techniques may leave a lot to your heirs, but that means you spend less over your lifetime.

This is an overview of methods documented by Bogleheads:
https://www.bogleheads.org/wiki/Withdrawal_methods

As you've noted, there is much more information and research on the accumulation of wealth than there is on the withdrawal phase.

Book recommendations (these are just the ones I've read recently):
"How Much Can I Spend in Retirement?" by Wade Pfau
The Boglehead's Guide to Retirement Planning, by Taylor Larimore, Mel Lindauer, et al.

My suggestion -- rewrite your Investor's Policy Statement specifically to address your withdrawal phase. By the time you reach this level, your accumulation IPS has been incorporated into your financial DNA and you are used to your balance constantly climbing. Seeing your balance shrink will be stressful, and seeing it shrink during a market event when you have no other sources of income is even more stressful. That is the sort of thing that the IPS is created to address. After you figure out your plan, stress test it, and write it down.
B. Wellington
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Re: What’s the proper way to pay yourself in retirement?

Post by B. Wellington »

lostdog wrote: Fri Oct 11, 2019 7:18 am
B. Wellington wrote: Fri Oct 11, 2019 5:52 am
RickBoglehead wrote: Fri Oct 11, 2019 5:28 am There is no best or proper way. It would be a matter of opinion.

I plan on not reinvesting dividends or interest or capital gains, which this year will be 7/12 of my planned retirement income. Prior to Social Security, I will sell monthly holdings to provide the other 5/12s, for a period of 6 months. Then I will see how that matches with the reality of our needs.

Of course this may change if my cash on hand exceeds what I consider a short term emergency fund.

If you plan on applying for a mortgage in retirement, a regular monthly selling of assets to provide an income stream is supposed to be desirable to a bank.
+1

Our plan is to "sweep" all interest, quarterly dividends, and any capital gains (taxable first) to a money market account and then onto the checking account. Followed by the sale of shares to makeup for any "shortfall" in funds. Following roughly a ~4% WR.

I want to try to keep this as simple and straight forward as possible in the coming years... Hope that helps... :beer
Does this mean you sell the shares quarterly?
Depending on the amount of interest and dividends I would prefer to delay the selling of any shares as long as possible.

(Some) suggest selling in January for expenses following a % WR for the coming year above any pension and/or SS.
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Re: What’s the proper way to pay yourself in retirement?

Post by earlyout »

I try to keep it very simple. My cash needs vary throughout the year so when I need cash I rebalance by selling whatever asset is ahead at that time and move the proceeds to the checking account. This has worked well for about 20 years so I see no need to make it complicated. It also allows me to be fully invested.
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Re: What’s the proper way to pay yourself in retirement?

Post by NotWhoYouThink »

tennisplyr wrote: Fri Oct 11, 2019 7:37 am Interesting.....we're retired 8 years, late sixties. We've been taking money when we need it by selling shares of whatever makes sense at that point in time. We're ok with that. Do you think it would be better to sweep all interest, dividend, gains into savings as we move along? Why?
Taking it from where?
If from an IRA, your method makes sense.
If from a taxable account, sweeping interest and dividends along the way slightly simplifies tax reporting.
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Re: What’s the proper way to pay yourself in retirement?

Post by dbr »

There is no proper way. Or, more correctly, there are many proper ways. Most of the differences have to do with practical matters of avoiding large tax costs and finding the most convenient mechanism for each particular investor to manage those transactions.

I personally obtain cash from Social Security and pension payments and then take dividends, interest, and capital gains distributions on taxable investments. I also sell assets in my retirement account in order to take the necessary RMDs. Since the total income from all of these can be more than we spend in a given year, when there is a reasonable excess we reinvest that back into taxable investment holdings. Obviously how that works depends on exactly what the amounts of money are in all those sources of income and on how much we spend. Spending changes year on year and so do some of the income streams. Another individual would have a completely different situation. When RMDs are taken or when excess money is available investments to sell or buy might be selected in the direction of rebalancing asset allocation, though the need to do that does not arise with much frequency. I take my RMD at the end of the year so that I can use withholding to even up to my estimated tax payment. That means I don't have to bother with estimated tax payments. It is also not impossible that I would need to withdraw more than the RMD if expenses are large in a year, but that hasn't happened yet.
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Re: What’s the proper way to pay yourself in retirement?

Post by KlangFool »

tennisplyr wrote: Fri Oct 11, 2019 7:37 am Interesting.....we're retired 8 years, late sixties. We've been taking money when we need it by selling shares of whatever makes sense at that point in time. We're ok with that. Do you think it would be better to sweep all interest, dividend, gains into savings as we move along? Why?
tennisplyr,

Yes. Those are the capital gain, dividend, and interest that you cannot avoid. After that, you can decide whether you need to sell more or fewer shares in order to maximize your tax efficiency.

For example, if the interest, dividend, and gain are enough to cover your expenses. You may only sell enough shares to cover your long-term capital gain tax of 0%.

KlangFool
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Re: What’s the proper way to pay yourself in retirement?

Post by sixtyforty »

Most of our money is in Vanguard in Vanguard funds. Unlike most here, I re-invest the dividends and have an auto sell of a preset amount each month with a transfer into the checking account. It's nice because the "paycheck" shows up each month. Have very little cash, with about 50/50 allocation in balanced funds.. so I don't have to manually re-balance. I keep it very simple.
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Re: What’s the proper way to pay yourself in retirement?

Post by dbr »

KlangFool wrote: Fri Oct 11, 2019 8:03 am
tennisplyr wrote: Fri Oct 11, 2019 7:37 am Interesting.....we're retired 8 years, late sixties. We've been taking money when we need it by selling shares of whatever makes sense at that point in time. We're ok with that. Do you think it would be better to sweep all interest, dividend, gains into savings as we move along? Why?
tennisplyr,

Yes. Those are the capital gain, dividend, and interest that you cannot avoid. After that, you can decide whether you need to sell more or fewer shares in order to maximize your tax efficiency.

For example, if the interest, dividend, and gain are enough to cover your expenses. You may only sell enough shares to cover your long-term capital gain tax of 0%.

KlangFool
Just to expand a little, in a taxable account, if you plan to spend some money, it does not make sense to reinvest distributions and then turn around and sell shares. That is just unnecessary transactions and could result in extra taxes depending on how it is done. In a tax deferred account where one is going to have to sell shares anyway one might for convenience just take the distributions but it is probably more convenient to auto reinvest everything and sell what you need when you need it. The difference is all about taxes.
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Re: What’s the proper way to pay yourself in retirement?

Post by livesoft »

In retirement we don't spend money in a constant stream. Our expenses are very lumpy. So we don't need to pay ourselves in a constant stream.

We just charge most all expenses to [rewards] credit cards and pay the credit card bills when due. The monthly amounts vary drastically from zero to a few hundred dollars to thousands of dollars. So if we haven't received enough fund dividends to pay the bills, then we manually sell shares in the most tax-efficient way and send the money to our checking account just in time to pay the bills.

I want to note that it doesn't matter whether equities are up or down or sideways because if we sell low (which seems to be an irrational fear of many), then we just (in a tax-deferred account) buy low by exchanging from bond funds to stock funds that are similar to the stock funds that we sold.

The above may be off-putting to folks who relied on a strict budget and monthly paychecks to pay bills. It may also be off-putting to folks who believe they need a pile of cash floating around somewhere. But it works for us.
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Re: What’s the proper way to pay yourself in retirement?

Post by KlangFool »

OP,

Do you care how much taxes you pay in retirement?

If the answer is no, you can do whatever you want.

If the answer is yes, you need to do some tax planning.

A) Keep 1 year of expense in cash. Then, you have the flexibility of when you need the cash.

B) Do not re-invest your dividend, distribution, and interest from your taxable account. You have to pay taxes on those things. You have no choice.

C) Collect your social security and pension. You have no choice on this either.

After (A) to (C), for each year, you can decide what, when, how much to sell in order to minimize your tax payment.

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Re: What’s the proper way to pay yourself in retirement?

Post by MikeG62 »

I too have turned off dividend and capital gains reinvestment in our taxable accounts. Dividends and interest on investments in our taxable accounts covers around 2/3rds of our annual spend. The rest is funded from a mix of maturing (or called) muni bonds and cash withdrawn from MMF's, no-penalty CD's and maturing Treasuries - I consider these as the short end of our fixed income exposure (others might call it excess cash).
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Re: What’s the proper way to pay yourself in retirement?

Post by rixer »

Here's what we do. We're retired, drawing SS, have IRS's and a small taxable account. We take the dividends and cap gains from taxable and transfer them to our online savings account at Ally. We are invested in a balanced fund in all accounts. We simply sell enough of our balanced fund in my IRA to account for my RMD, take the balance of our yearly withdraw from the balanced fund in Taxable and send it all to Ally. This leaves everything in balance all the time. Very easy for us. From Ally we, have a set amount transferred to our brick and mortor bank each month on about the same day our SS payment arrives. This gives us a years income coming in each month with a slush fund left in Ally for unexpected or extra expenses.
Anyway, that's what works for us.
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Re: What’s the proper way to pay yourself in retirement?

Post by Call_Me_Op »

I recommend over-saving to leave yourself some wiggle-room.
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Re: What’s the proper way to pay yourself in retirement?

Post by GerryL »

Here is what has worked for me, with adjustments as different milestones were hit:
When I first retired 5 years ago, I stopped reinvesting dividends in taxable accounts. Those dividends plus severance pay and two mini pensions were enough to cover expenses for four years.

A year ago, SS kicked in to replenish the depleted severance $$.

This year it was time to start taking RMDs. Early in the year I saw that my IRA balance had grown since the dip the previous December -- about twice as much as the RMD I would have to take. I sold shares to balance my holdings but kept the proceeds in the settlement fund in the IRA. This way I could request QCDs as needed and in the next few months will take the remainder of the RMD without having to calculate ups and downs in the different holdings. Don't know yet at what point I will move the RMD to cash next year, but I like the simplicity of moving it all at once and then withdrawing as needed.

Now that my cash flow has increased (w/ SS and RMDs) and my checking account is flush, I am holding taxable dividends in the settlement fund with the option of reinvesting in my taxable balanced fund. Just executed my first dividend reinvestment since retirement started.
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Re: What’s the proper way to pay yourself in retirement?

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (retirement spending).
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Re: What’s the proper way to pay yourself in retirement?

Post by scrabbler1 »

I am not old enough to take money out of my IRA, 72t notwithstanding. To fund my checking account to pay my bills, I take most monthly dividends as cash as well as quarterly dividends. The smaller monthly dividends and all cap gain distributions get reinvested somewhere. My goal is to not have to sell anything which would make my tax returns more complicated (Sched D, form 8949). Some years I meet that goal, some years I do not.
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Re: What’s the proper way to pay yourself in retirement?

Post by StealthRabbit »

Good replies - as mentioned 'Correct' method varies per individual goals and accumulation (wealth, income, taxes, health, gifting / spending objectives)

I consider the 'Seasons-of-Retirement' in my distributions... yours will vary.
1) Pre age 65 = pre-medicare - spend your excess (May need ACA subsidy as mentioned) LEARN your new budget / spending habits; burn already taxed savings / tailor draw-downs and accts for future Asset allocations (get rid of losses & residual brokerage accts and stock options (fund DAF if needed), barter, (be creative on income stream to keep MAGI > $65,840) if needed, i.e. Clean-up and simplify finances and home.
2) FRA to 70.5 = draw down Taxable Deferred (tIRA / 401k-BEFORE RMD) - opportunity for ROTH conversions /
3) 70.5 - 80 = Active yrs Burn taxable / Roth while balancing taxes + time to plan EOL strategy (in case you get senile... ) more travel / recreation / splurging / ROTH conversions (if needed), Planned distributions, may include QCDs.Set up your future budget, May include SPIA (care needs, spousal financial needs, inheritance, gifting...)
4) 80 - 90 = More stable systematic withdrawals (taxable as able) Likely time to know your financial needs to transition to CCRC, / retirement living, LT care options (aging in place) Gifting, planning for future care.
5) 90+ Enjoy what's left! Systematic withdrawals Gifting / enjoying enhancing the life of others (heirs, friends, community, needy) / joint access to all accts, EOL (demise) plan... such as funerals.coop (<$1000 for burial or cremation)

BTW: I consider my DAF as a very handy tax / retirement planning tool, and will cover my future gifting, tho QCD's may also add to gifting.
My DAF is also what the kids inherit. (they can distribute as they wish).
Last edited by StealthRabbit on Fri Oct 11, 2019 1:21 pm, edited 1 time in total.
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Re: What’s the proper way to pay yourself in retirement?

Post by KlangFool »

scrabbler1 wrote: Fri Oct 11, 2019 1:03 pm I am not old enough to take money out of my IRA, 72t notwithstanding. To fund my checking account to pay my bills, I take most monthly dividends as cash as well as quarterly dividends. The smaller monthly dividends and all cap gain distributions get reinvested somewhere. My goal is to not have to sell anything which would make my tax returns more complicated (Sched D, form 8949). Some years I meet that goal, some years I do not.
scrabbler1,

That is not true. You could use the Roth conversion ladder.

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

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zengolf2011
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Re: What’s the proper way to pay yourself in retirement?

Post by zengolf2011 »

wolf359 wrote: Fri Oct 11, 2019 7:40 am
This is an overview of methods documented by Bogleheads:
https://www.bogleheads.org/wiki/Withdrawal_methods

As you've noted, there is much more information and research on the accumulation of wealth than there is on the withdrawal phase.

Book recommendations (these are just the ones I've read recently):
"How Much Can I Spend in Retirement?" by Wade Pfau
The Boglehead's Guide to Retirement Planning, by Taylor Larimore, Mel Lindauer, et al.

My suggestion -- rewrite your Investor's Policy Statement specifically to address your withdrawal phase. By the time you reach this level, your accumulation IPS has been incorporated into your financial DNA and you are used to your balance constantly climbing. Seeing your balance shrink will be stressful, and seeing it shrink during a market event when you have no other sources of income is even more stressful. That is the sort of thing that the IPS is created to address. After you figure out your plan, stress test it, and write it down.
Good advice, wolf. In addition to the sources you cited, Jane Bryant Quinn's How to Make Your Money Last could be useful. She suggests keeping cash equivalents to cover two years of expenses, plus a short-term bond fund to cover another two years. I use her method. It relieves a lot of stress and worry over market fluctuations.
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Re: What’s the proper way to pay yourself in retirement?

Post by Broken Man 1999 »

Near the end of each month I transfer enough from my TIRA to pay my portion of our bills thru the middle of the next month. The rest of my bills are paid from my SS deposit. Repeat each month. My bills are lumpy, so each month a different amount withdrawn is necessary.

Our AA is 50% equities and 50% bonds, so ideally we sell from the asset that is greater than the other. Lately the choice for me has been individual stocks that I am slowly selling off.

DW's bills vary very little each month, so she takes the same withdrawal every month. Her withdrawal has been automated, so no hands-on necessary. Each of our withdrawals also sees some percentage of the withdrawal sent by Vanguard to Uncle Sam for taxes.

We have virtually nothing in our taxable account, and I don't see this changing until we start RMDs. Not sure what portion of RMDs will be spent
for expenses, the excess, if any, will probably be reinvested in the taxable account. Still a few years out.

The first year we started withdrawing from out retirement portfolio, I withdrew enough in December to cover our expenses in the following year. But I didn't like having so much sitting around in my checking account. So, I changed after the first year to just withdraw whatever was needed to pay the following month's bills. Since I charge everything I can on my various rewards cards, I know what the bills will be the following month, so it is easy to dial in the correct amount to withdraw.

So far as this being the "proper way", well, for me it is. When you reach retirement age, I should think you would be very good at estimating your expenses, at least after the first year or so of retirement. Once your retirement expenses have gelled, then you just need to decide from where you will take your $$$ to pay your bills. Our current method is like each of us getting a paycheck once a month.

Broken Man 1999

ETA: We hold as little cash as is possible, only enough to pay current bills. This decision is very personal. Others like holding more cash, sometimes multiple years of expected expenses. For this particular decision, you should hold whatever amount of cash that allows you to SWAN (sleep well at night). There are no right or wrong answers, only personal preferences.
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Re: What’s the proper way to pay yourself in retirement?

Post by CoAndy »

B. Wellington wrote: Fri Oct 11, 2019 5:52 am
RickBoglehead wrote: Fri Oct 11, 2019 5:28 am There is no best or proper way. It would be a matter of opinion.

I plan on not reinvesting dividends or interest or capital gains, which this year will be 7/12 of my planned retirement income. Prior to Social Security, I will sell monthly holdings to provide the other 5/12s, for a period of 6 months. Then I will see how that matches with the reality of our needs.

Of course this may change if my cash on hand exceeds what I consider a short term emergency fund.

If you plan on applying for a mortgage in retirement, a regular monthly selling of assets to provide an income stream is supposed to be desirable to a bank.
+1

Our plan is to "sweep" all interest, quarterly dividends, and any capital gains (taxable first) to a money market account and then onto the checking account. Followed by the sale of shares to makeup for any "shortfall" in funds. Following roughly a ~4% WR.

I want to try to keep this as simple and straight forward as possible in the coming years... Hope that helps... :beer
Anyone know if it is possible to receive dividends directly instead of automatic investment into 401(k) and 457 plans? Obviously taxes would have to be paid on those but is that even allowed?
drawpoker
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Re: What’s the proper way to pay yourself in retirement?

Post by drawpoker »

tennisplyr wrote: Fri Oct 11, 2019 7:37 am .....We've been taking money when we need it by selling shares of whatever makes sense at that point in time. We're ok with that.......
Works for me, too. Of course, try and time it when the market is high and share price up. That way, if it goes down in the next few days, I feel smug, pat myself on the back. If it goes higher in the next few days, that's okay, too. I just made back part of the money.

So, mostly it's All Good :D
RAchip
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Re: What’s the proper way to pay yourself in retirement?

Post by RAchip »

I like to keep at least 2 years expenses in cash (right now I have a lot more cash than that) in a money market linked to a checking account. I have RMD’s, dividends and bond interest all auto transferred into my cash account. I have not had to sell investments yet but I will do so if cash ever drops below 2 years expenses.
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Leif
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Re: What’s the proper way to pay yourself in retirement?

Post by Leif »

So many variables involved. How much in taxable, how much in retirement, are you collecting a pension, social security, rental income, other income.

In many cases the recommendation is drawing from taxable first, then tIRA, then Roth IRA. But that can change if you have a large capital gains in taxable, maybe you want to draw from tIRA and leave a step up of taxable assets for inheritance.

That is barely even starting to understand the variables.

Living off dividends is OK, but what if the stock market is way down? Do you really want to draw on the dividends? (which may also be cut). I have mine on reinvest (except tIRA which I'm trying to de-risk) and will draw as necessary by selling the top performer and/or bonds and cash. I'm doing my best to get equities out of my tIRA (without changing my AA), since they have higher expected return. I hope this will reduce my RMDs (and taxes) over time. Mostly bonds in my tIRA. Equities in taxable (tax efficient funds) and Roth IRA (tax inefficient funds).

In my case I built a bridge of CDs from retirement to SS @ 70. After that RMDs will pay taxes and provide additional income.
bberris
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Re: What’s the proper way to pay yourself in retirement?

Post by bberris »

PaunchyPirate wrote: Fri Oct 11, 2019 7:24 am .... This method has meant I haven't needed to sell any investment, which would mean capital gains, which would increase my taxable income, which would mean I would lose my ACA tax credit. I have enough investments that I can sell with no capital gains that I can do the same thing next year. Probably by year 3, I will have to sell an investment to free up cash for living, so I will likely lose my ACA tax credit in that year. If the ACA is still around in the same manner in year 4, I will sell enough funds in year 3 to cover year 4 expenses so that I can return to an ACA tax subsidy. ...

If I were not managing income in this manner to get the ACA subsidy, I would still be doing the same thing.
To avoid generating capital gains that would push us over the limit for the subsidy, we are simply borrowing the cash needed until we age out of ACA. The loss of ACA subsidy is significant even if you can stay below the cliff. The expected contribution percent applies to all your income rather than just the marginal increase.
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ricks1433
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Re: What’s the proper way to pay yourself in retirement?

Post by ricks1433 »

Thank you to everyone for all the insightful answers! Will also take a look at the book recommendations! Appreciate it all! :sharebeer
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telemark
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Re: What’s the proper way to pay yourself in retirement?

Post by telemark »

I don't try to simulate an income, because I don't have an income. What I have is expenses, which vary from month to month, and investments. As others have already said, when I need money I sell whatever makes sense at the time. I retired with four or five years of expenses in taxable, so I'm spending that down first. When that's gone I'll start drawing from the tax advantaged accounts.

Among other things, this means I no longer need to save up for anything. Either I can afford a thing or I can't. Either way, the money is already there.
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Re: What’s the proper way to pay yourself in retirement?

Post by SGM »

We have Vanguard and another brokerage. In taxable all dividends and capital gains are distributed to a municipal money market account. The interest is close to the Vanguard intermediate muni bond fund. We withdraw from the money market account as needed. In the other brokerage account we withdraw when the sweep account reaches around $1000.00. If we need more money we will sell from a stock or stock fund. Occasionally we will sell a muni bond fund if the capital gains are negative or very low. I have a limit as to how much capital gains I will take each year.

We do have income from streams outside our portfolio including SS. We know how much income we will receive from these other income streams as well as close approximation of taxable and muni bond dividends. We have some dividend income every month but it varies. I am considering buying a ladder of SPIAs over several years in our 70s.
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Re: What’s the proper way to pay yourself in retirement?

Post by MathIsMyWayr »

KlangFool wrote: Fri Oct 11, 2019 8:34 am A) Keep 1 year of expense in cash. Then, you have the flexibility of when you need the cash.

B) Do not re-invest your dividend, distribution, and interest from your taxable account. You have to pay taxes on those things. You have no choice.

C) Collect your social security and pension. You have no choice on this either.

After (A) to (C), for each year, you can decide what, when, how much to sell in order to minimize your tax payment.
I used to think this is THE way to go. However, nothing is the best all the time in finance. Everything has pluses and minuses. Do not jump into a hasty conclusion that the taxable income forced up on you (B & C) has to be kept in cash. What you are advocating is to keep the forced income out of the market. If your portfolio is large enough, there is no reason why any cash inflow should not be invested immediately. The forced income during retirement is not any different from a pay check while working. I think this is similar to what livesoft is doing. Market goes up or down, but do you trust that time in the market counts at the end of the day?
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Re: What’s the proper way to pay yourself in retirement?

Post by Ron »

telemark wrote: Sun Oct 13, 2019 2:38 am I don't try to simulate an income, because I don't have an income.
So, you never have to file a tax return? :wink:

- Ron
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telemark
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Re: What’s the proper way to pay yourself in retirement?

Post by telemark »

Ron wrote: Sun Oct 13, 2019 8:00 am
telemark wrote: Sun Oct 13, 2019 2:38 am I don't try to simulate an income, because I don't have an income.
So, you never have to file a tax return? :wink:

- Ron
There are always taxes, unless perhaps you are Livesoft. I have capital gains from selling stock, and a few thousand a year in dividends, and I'm doing Roth conversions up to the limit for the ACA subsidy, and I pay taxes on all of these. When I start drawing from my traditional IRA I will pay taxes on that. What I don't do is try to create the illusion of an income stream, so many dollars appearing by magic once a month. I don't have that, and I don't see a point in pretending otherwise.

It still feels very strange, after decades of getting a regular paycheck, but I'm getting used to it. In five to ten years I'll start to draw Social Security, and then I'll have a regular income again. By then I anticipate that will feel strange.
wolf359
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Re: What’s the proper way to pay yourself in retirement?

Post by wolf359 »

CoAndy wrote: Fri Oct 11, 2019 3:47 pm
Anyone know if it is possible to receive dividends directly instead of automatic investment into 401(k) and 457 plans? Obviously taxes would have to be paid on those but is that even allowed?
Each 401k plan is governed by the documents that created it. Therefore, your question can't be accurately answered without going to your plan administrator and asking them.

In general terms, you cannot withdraw from a 401k while you are still actively working at the company. If you are no longer working at the company, but not retired, they will generally either let you 1) keep the money invested (if you have a balance of $5,000 or more); 2) roll the entire balance to an IRA; or 3) cash out the entire balance (subject to withholding, taxes, and penalties).

If you are no longer working at the company and of retirement age, then the plan has some mechanism to withdraw your money as well. Plans vary how they do this as well. However, you probably just get a check -- on a traditional 401k you pay tax on the entire income amount regardless of whether it came from dividends or capital gains. You may be able to set a withdrawal amount equivalent to the dividend payouts.

Ask your HR department.

401-k and 403b are similar. 457 is a completely different beast, and has different rules. You have to research that separately.
MathWizard
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Re: What’s the proper way to pay yourself in retirement?

Post by MathWizard »

Tamarind wrote: Fri Oct 11, 2019 7:26 am If your money is in an IRA at Vanguard (possibly other custodians too), you could also continue to reinvest dividends and withdraw even amounts per plan. There is a withdrawal automation option (no PAS needed) where you can set amounts and proportions. This may be helpful if you'd feel most comfortable with a regular income stream that flows to your back account without requiring effort from you each time to calculate how much to sell.

Some people use a SPIA (single premium immediate annuity) for part of their money, which gives the same "income stream" behavior, guaranteed, likely at a slightly higher rate of return than a conservative portfolio, but in return you actually have to give up the premium money at the start of the contract. This is a more common choice for folks who do not have much surplus saved, cannot bear to invest enough in stocks to get a better return, or want to secure a floor under their income in case they live much longer than expected.

PaunchyPirate above has made a great argument for why those who need to control taxable income carefully will want to have less automation.
I have been looking for this type of withdrawal option without extra fees from Vanguard, but have not been able to find it.

If you could post a link to the form or instructions on how to do this, I would be grateful.

Automated transfers in are easy to find, just it the reverse.
wolf359
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Re: What’s the proper way to pay yourself in retirement?

Post by wolf359 »

MathWizard wrote: Sun Oct 13, 2019 3:08 pm
Tamarind wrote: Fri Oct 11, 2019 7:26 am If your money is in an IRA at Vanguard (possibly other custodians too), you could also continue to reinvest dividends and withdraw even amounts per plan. There is a withdrawal automation option (no PAS needed) where you can set amounts and proportions. This may be helpful if you'd feel most comfortable with a regular income stream that flows to your back account without requiring effort from you each time to calculate how much to sell.

Some people use a SPIA (single premium immediate annuity) for part of their money, which gives the same "income stream" behavior, guaranteed, likely at a slightly higher rate of return than a conservative portfolio, but in return you actually have to give up the premium money at the start of the contract. This is a more common choice for folks who do not have much surplus saved, cannot bear to invest enough in stocks to get a better return, or want to secure a floor under their income in case they live much longer than expected.

PaunchyPirate above has made a great argument for why those who need to control taxable income carefully will want to have less automation.
I have been looking for this type of withdrawal option without extra fees from Vanguard, but have not been able to find it.

If you could post a link to the form or instructions on how to do this, I would be grateful.

Automated transfers in are easy to find, just it the reverse.
Go to the section where you would set up the automated transactions. It's in the same place. Automated investments are under the investments tab; automated withdrawals are in the withdrawals tab. You simply schedule a transaction action and a time interval, and it happens automatically.

Here's some guidance about the withdrawal process at Vanguard. https://investor.vanguard.com/retiremen ... ithdrawals
Spoiler: they recommend you send everything to a money market account and withdraw from there. They also recommend you call them and talk to an advisor (PAS) if you have detailed questions.
HeelaMonster
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Re: What’s the proper way to pay yourself in retirement?

Post by HeelaMonster »

KlangFool wrote: Fri Oct 11, 2019 8:34 am ...
B) Do not re-invest your dividend, distribution, and interest from your taxable account. You have to pay taxes on those things. You have no choice.
...
Lots of references throughout this thread to turning off automatic reinvestment of distributions in your taxable account. I get the logic of that (I think...) if one is going to be spending those funds anyway.

But can someone please speak to the situation where retirement expenses are adequately covered by a combination of SS + pension + RMD from tax-deferred plans? In that scenario, does it still make sense (i.e., is there a reason) to turn off reinvestment, even if you are not likely to need funds from the taxable account? I feel like I must be overlooking something, since this seems to be a nearly universal approach... so am left wondering if that advice applies equally in ALL situations.
Last edited by HeelaMonster on Sun Oct 13, 2019 4:41 pm, edited 1 time in total.
KlangFool
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Re: What’s the proper way to pay yourself in retirement?

Post by KlangFool »

HeelaMonster wrote: Sun Oct 13, 2019 4:32 pm
KlangFool wrote: Fri Oct 11, 2019 8:34 am ...
B) Do not re-invest your dividend, distribution, and interest from your taxable account. You have to pay taxes on those things. You have no choice.
...
Lots of references throughout this thread to turning off automatic reinvestment of distributions in your taxable account. I get the logic of that (I think...) if one is going to be spending that.

But can someone please speak to the situation where retirement expenses are covered by a combination of SS + pension + RMD from tax-deferred plans? Specifically, does it still make sense (i.e., is there a reason) to turn off reinvestment, even if you are not likely to need funds from the taxable account? I feel like I must be overlooking something, since this seems to be a nearly universal approach... so am left wondering if that advice applies equally in ALL situations.
HeelaMonster,

1) You have to pay taxes whether you want to spent it or not.

<<RMD from tax-deferred plans? >>

2) Who says that you must spend the RMD from the tax-deferred plans? You could do a Roth conversion and move the money into a Roth IRA.

KlangFool
MikeG62
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Re: What’s the proper way to pay yourself in retirement?

Post by MikeG62 »

HeelaMonster wrote: Sun Oct 13, 2019 4:32 pm
KlangFool wrote: Fri Oct 11, 2019 8:34 am ...
B) Do not re-invest your dividend, distribution, and interest from your taxable account. You have to pay taxes on those things. You have no choice.
...
Lots of references throughout this thread to turning off automatic reinvestment of distributions in your taxable account. I get the logic of that (I think...) if one is going to be spending that.

But can someone please speak to the situation where retirement expenses are covered by a combination of SS + pension + RMD from tax-deferred plans? Specifically, does it still make sense (i.e., is there a reason) to turn off reinvestment, even if you are not likely to need funds from the taxable account? I feel like I must be overlooking something, since this seems to be a nearly universal approach... so am left wondering if that advice applies equally in ALL situations.
If I did not need the cash flow from dividends to help fund our expenses in retirement, I would not turn off dividend reinvestment. By point of fact, I have it turned off only in our taxable brokerage account - not in my tIRA or Roth. I am retired with no pension and no plans to take SS or RMD’s till I turn 70.

So if I were in the situation you describe I would continue to reinvest dividends. Otherwise you are going to build cash you don’t need and eventually find a place to invest it.
Real Knowledge Comes Only From Experience
HeelaMonster
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Re: What’s the proper way to pay yourself in retirement?

Post by HeelaMonster »

Klang, thanks for quick reply....
KlangFool wrote: Sun Oct 13, 2019 4:40 pm 1) You have to pay taxes whether you want to spent it or not.

<<RMD from tax-deferred plans? >>

2) Who says that you must spend the RMD from the tax-deferred plans? You could do a Roth conversion and move the money into a Roth IRA.
1) The tax part I do get, but if you take receipt (i.e., put those distributions in your pocket... or in savings acct), don't you then miss the opportunity to continue growing the taxable account, through reinvestment? That's the piece that's tripping me up, if those funds are not needed for current spending.

2) I will be doing Roth conversions, but there will still be RMDs. At that point, isn't this another case where you are paying taxes whether you spend it or not... just like the taxed distributions under #1?
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Re: What’s the proper way to pay yourself in retirement?

Post by togb »

I'm still a few years away and I have no idea if this is the proper way, but here's what I think I'll do:
1. have SS come monthly, to checking-- after withholding federal taxes.
2. Then I'll be pulling from MM, which will hold about a year's expenses. I'll probably pull monthly, and again have federal taxes withheld.
3. Some dividends will no longer be invested, so dividends from bond investments will be building cash, which can sit there til it's enough that it should go to MM or get invested.
4. Cash will be sufficient year's worth of expenses. Bonds and fixed income will be another 3-5 years. This is where I'll pull the additional money if the MM is not sufficient for what I want to spend. If I get over the 5 year mark, then I can invest it. If I get down to less than 3, I may have to flow equity dividends to replenish the bond/FI bucket.

Once I've tried this for a bit, I'll likely set up something that's more automatic and won't require my mind to stay sharp to administer.

I'll tend to operate out of a regular bank checking that does not keep huge balances for routine expenses. Bigger expenses will come from the checking attached to brokerage. Fixed IRA distributions will come to the bank checking every month, like SS does-- after federal withholding.
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Re: What’s the proper way to pay yourself in retirement?

Post by KlangFool »

HeelaMonster wrote: Sun Oct 13, 2019 4:51 pm Klang, thanks for quick reply....
KlangFool wrote: Sun Oct 13, 2019 4:40 pm 1) You have to pay taxes whether you want to spent it or not.

<<RMD from tax-deferred plans? >>

2) Who says that you must spend the RMD from the tax-deferred plans? You could do a Roth conversion and move the money into a Roth IRA.
1) The tax part I do get, but if you take receipt (i.e., put those distributions in your pocket... or in savings acct), don't you then miss the opportunity to continue growing the taxable account, through reinvestment? That's the piece that's tripping me up, if those funds are not needed for current spending.

2) I will be doing Roth conversions, but there will still be RMDs. At that point, isn't this another case where you are paying taxes whether you spend it or not... just like the taxed distributions under #1?
HeelaMonster,

1) Who says that you must put the money into your pocket and/or saving account?

2) The specific phrase is "Turn off automatic reinvestment". We may reinvest or not reinvest the money depending on our tax situation. Automatic reinvestment does not work for everyone.

KlangFool
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