What counts in calculating portfolio withdrawals?
What counts in calculating portfolio withdrawals?
When one takes a dividend or capital gain from a stock fund for spending, I know that it counts as a withdrawal from the portfolio.
But, I'm a bit confused on bonds. Does taking income from a bond fund count as a withdrawal (i.e. for living w/i the 4% "rule")?
And, how about individual bonds or income from deeds of trust, where one eventually gets back the principal? Are these withdrawal?
But, I'm a bit confused on bonds. Does taking income from a bond fund count as a withdrawal (i.e. for living w/i the 4% "rule")?
And, how about individual bonds or income from deeds of trust, where one eventually gets back the principal? Are these withdrawal?
Re: What counts in calculating portfolio withdrawals?
I think that anything removed from your portfolio would count as a withdrawal. The theory is that a portfolio can withstand a certain withdrawal rate to be viable over some period of time. Sorry, no "freebies". Just like a bank doesn't allow free withdrawals (they all reduce your balance) we don't either.
Last edited by 123 on Wed Oct 04, 2017 3:13 pm, edited 1 time in total.
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Re: What counts in calculating portfolio withdrawals?
If you are taking income from the bond fund (and not e.g., reinvesting it) then yes, it is a withdrawal for the purposes of a Safe Withdrawal Rate (e.g. 4% rule) strategy. It is similar for stock dividends and anything else.racy wrote: ↑Wed Oct 04, 2017 3:09 pmWhen one takes a dividend or capital gain from a stock fund for spending, I know that it counts as a withdrawal from the portfolio.
But, I'm a bit confused on bonds. Does taking income from a bond fund count as a withdrawal (i.e. for living w/i the 4% "rule")?
And, how about individual bonds or income from deeds of trust, where one eventually gets back the principal? Are these withdrawal?
Bottom line: If you reinvest the proceeds, then it is not a withdrawal. If you don't, then it is.
Re: What counts in calculating portfolio withdrawals?
Yes, it is a withdrawal, but there is also a context. The context is the equation
newportfoliovalue = oldportfoliovalue + return + contributions  withdrawals
and the definition
return = capital gains + interest + dividends (and maybe  net investment expenses)
So if return includes interest and dividends from stocks and bonds and you withdraw the bond interest or dividend then you had better count that in withdrawals. The issue really comes down to doing simple arithmetic but with attention to consistency with definitions. A person can always change the definitions and work out consistent formulas for those definitions, but it is usually better for people to be conventional in how this is done.
newportfoliovalue = oldportfoliovalue + return + contributions  withdrawals
and the definition
return = capital gains + interest + dividends (and maybe  net investment expenses)
So if return includes interest and dividends from stocks and bonds and you withdraw the bond interest or dividend then you had better count that in withdrawals. The issue really comes down to doing simple arithmetic but with attention to consistency with definitions. A person can always change the definitions and work out consistent formulas for those definitions, but it is usually better for people to be conventional in how this is done.
Re: What counts in calculating portfolio withdrawals?
This is a very interesting question. I may learn something new here. I had thought that taking bond fund interest in cash would notbe considered a portfolio withdrawal. Taking stock fund dividends in cash is absolutely considered a withdrawal, however.

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Re: What counts in calculating portfolio withdrawals?
Nope, both are withdrawals.
Re: What counts in calculating portfolio withdrawals?
Every dollar you remove from a portfolio counts as a dollar towards your withdrawal rate. Dividends taken to the bank, capital gains and original dollars invested when taken to the bank all count.racy wrote: ↑Wed Oct 04, 2017 3:09 pmWhen one takes a dividend or capital gain from a stock fund for spending, I know that it counts as a withdrawal from the portfolio.
But, I'm a bit confused on bonds. Does taking income from a bond fund count as a withdrawal (i.e. for living w/i the 4% "rule")?
And, how about individual bonds or income from deeds of trust, where one eventually gets back the principal? Are these withdrawal?
Re: What counts in calculating portfolio withdrawals?
I count everything I spend, no matter where it comes from then I net out what I would call exogenous income (pension, social security ...). But I don't really pay much attention to "withdrawal." My main focus is on what I have and making sure it is in the right place and sufficient to get me to the end. I can't change what happened in the past.
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Re: What counts in calculating portfolio withdrawals?
So is taking interest from a CD not a withdrawal but taking interest from a bond is?
Any distinction between taking interest from a bond and taking interest from a bond fund?
Any distinction between taking interest from a bond and taking interest from a bond fund?
Re: What counts in calculating portfolio withdrawals?
If the CD is part of your portfolio than taking the interest is a withdrawal, and no there is no distinction between a bond and a bond fund.Peter Foley wrote: ↑Wed Oct 04, 2017 7:32 pmSo is taking interest from a CD not a withdrawal but taking interest from a bond is?
Any distinction between taking interest from a bond and taking interest from a bond fund?
It's best to not think about the individual investments at all. Your portfolio is the total value of all the individual holdings and there returns whether those returns are deposited back into the investment or into another account. Any money taken out of that portfolio, regardless of source, is by definition a withdrawal from the portfolio.
Re: What counts in calculating portfolio withdrawals?
Yes, as others have said, anything that comes out of your retirement portfolio counts as a withdrawal for measuring against your assumed sustainable withdrawal rate.
BUT WAIT, there's more!
All taxes that must be paid while the funds are still invested (in taxable accounts) get counted when measuring against your assumed sustainable withdrawal rate, and withdrawals are counted before any taxes have been subtracted.
All investing expenses (fund expense ratios, fund fees, advisor fees, etc.) get counted when measuring against your assumed sustainable withdrawal rate.
Studies of sustainable withdrawal rates have typically assumed idealized investing conditions in which there are no investing expenses or taxes. To the extent there are expenses and taxes involved in managing your portfolio, they must be accounted for. They have the effect of reducing the portion of your withdrawals that are available to meet your living expenses.
So, for example, if you pay an advisor 1%/year to manage your portfolio, and you assume a sustainable withdrawal rate of 4%/year, then you must count that 1% fee as part — 25% to be exact! — of the 4% annual withdrawal. That means you have only left 3% to live on, before taxes (on any taxable part of the portfolio) and other investing expenses.
BUT WAIT, there's more!
All taxes that must be paid while the funds are still invested (in taxable accounts) get counted when measuring against your assumed sustainable withdrawal rate, and withdrawals are counted before any taxes have been subtracted.
All investing expenses (fund expense ratios, fund fees, advisor fees, etc.) get counted when measuring against your assumed sustainable withdrawal rate.
Studies of sustainable withdrawal rates have typically assumed idealized investing conditions in which there are no investing expenses or taxes. To the extent there are expenses and taxes involved in managing your portfolio, they must be accounted for. They have the effect of reducing the portion of your withdrawals that are available to meet your living expenses.
So, for example, if you pay an advisor 1%/year to manage your portfolio, and you assume a sustainable withdrawal rate of 4%/year, then you must count that 1% fee as part — 25% to be exact! — of the 4% annual withdrawal. That means you have only left 3% to live on, before taxes (on any taxable part of the portfolio) and other investing expenses.
"Discipline matters more than allocation.” ─William Bernstein