Withdrawing from what account in a recession.

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Saintor
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Withdrawing from what account in a recession.

Post by Saintor »

Soon to be a retiree.

Let's say that I have an 401K all equity account and a taxable CD account. I can go 5 years of expenses on the CD account, but the bulk of my assets are in the equity account. I want to keep a fixed ratio of both accounts

In normal mode when there is a return, no matter from where I withdraw the money, I rebalance yearly.

If you have a year with no return or in a recession, I would take the money "exclusively" from the CDs. A recession can be 3 years; If the 4th one is building net worth again, then only (after 4 years), I would rebalance.

(I quoted "exclusively" because it isn't really; I would probably withdraw a little money from the 401K equity account to benefit from a lower tax bracket).

Does this strategy make sense and is it used by some people here?
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arcticpineapplecorp.
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Re: Withdrawing from what account in a recession.

Post by arcticpineapplecorp. »

1. there will be times when you'll have to withdraw 401k whether you want to or not (i.e., when you're RMD age). Plan accordingly.

2. Sounds like you only have a cash bucket to cover 5 years at most before having to draw on 401k. If the 401k hasn't recovered in that time you'll be selling stocks in 401k at a loss. If you're trying to prevent this, you should have more than 5 years in fixed income, even if that means you have to hold some fixed income in 401k.

Some people talk of 50/50 portfolio in retirement, so they're not taking too much, nor too little risk. And if you think about it if a 4% withdrawal should last 30 years, then a 50/50 portfolio means you have 15 years in fixed income. That's a better cushion considering there have been two times (Great Depression and 1966-1982) where it took 16 years to recover fully from those situations (I know the market in '29 recovered by '36 but then the market fell again in '37 and didn't recover til '45).

Bill Bernstein has talked about holding 20 years in safe assets so you can sleep at night.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
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grabiner
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Re: Withdrawing from what account in a recession.

Post by grabiner »

arcticpineapplecorp. wrote: Sat Mar 02, 2024 9:27 pm 1. there will be times when you'll have to withdraw 401k whether you want to or not (i.e., when you're RMD age). Plan accordingly.
However, you don't have to withdraw from the investments that are in the 401(k). If the 401(k) holds stock and you want to sell bonds, you can withdraw stock from the 401(k), and move an equal amount from bonds to stock in the taxable account, keeping your stock exposure. Similarly, if you are not RMD age but you do want to sell stock, you can sell bonds from your taxable account and move money in the 401(k) from stock to bonds.
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Saintor
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Re: Withdrawing from what account in a recession.

Post by Saintor »

One big concern; if I rebalance after many years, the personal tax would be higher than it should be...
EricBackus
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Re: Withdrawing from what account in a recession.

Post by EricBackus »

arcticpineapplecorp. wrote: Sat Mar 02, 2024 9:27 pm ... if you think about it if a 4% withdrawal should last 30 years, then a 50/50 portfolio means you have 15 years in fixed income.
I don't think this is correct. On average, fixed income has had a lower rate of return than equities, so the fixed income part of the 50/50 portfolio has provided less than half of the return of the portfolio. So if the whole portfolio lasted just 30 years, then the fixed income part of the portfolio provided less than 15 of those years.
loukycpa
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Re: Withdrawing from what account in a recession.

Post by loukycpa »

Short answer yes people do this. If you look you will find threads on the bucket strategy, bond tents, and rising equity glide path, and prime harvesting. These are all withdrawal strategies that depart from just holding a static asset allocation.
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RyeBourbon
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Re: Withdrawing from what account in a recession.

Post by RyeBourbon »

EricBackus wrote: Tue Apr 02, 2024 1:20 am
arcticpineapplecorp. wrote: Sat Mar 02, 2024 9:27 pm ... if you think about it if a 4% withdrawal should last 30 years, then a 50/50 portfolio means you have 15 years in fixed income.
I don't think this is correct. On average, fixed income has had a lower rate of return than equities, so the fixed income part of the 50/50 portfolio has provided less than half of the return of the portfolio. So if the whole portfolio lasted just 30 years, then the fixed income part of the portfolio provided less than 15 of those years.
I agree, Eric. Mathematically speaking, 4% is 25X, so a 50/50 portfolio has 12.5X in fixed income.
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arcticpineapplecorp.
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Re: Withdrawing from what account in a recession.

Post by arcticpineapplecorp. »

EricBackus wrote: Tue Apr 02, 2024 1:20 am
arcticpineapplecorp. wrote: Sat Mar 02, 2024 9:27 pm ... if you think about it if a 4% withdrawal should last 30 years, then a 50/50 portfolio means you have 15 years in fixed income.
I don't think this is correct. On average, fixed income has had a lower rate of return than equities, so the fixed income part of the 50/50 portfolio has provided less than half of the return of the portfolio. So if the whole portfolio lasted just 30 years, then the fixed income part of the portfolio provided less than 15 of those years.
i was using it as a rough approximation, that's all. historically bonds have provided around 3.6% real (chart below), maybe less depending upon the length and particular time period. You can also say the 4% isn't fixed, it's starting with 4% then adjusting for inflation so the factors get more complicated but if you're drawing around 4% or so and fixed income is paying 4% now, then you're drawing the income from the portfolio and don't need the higher return of stocks to produce more growth. There have been posts since fixed income has increased that show the fixed income is providing the income you need, so you don't need to take as much risk with equities as when fixed income was paying much less in prior years. I'm just trying to show that if the OP is concerned with drawing money from equities in a downturn, then just hold more in fixed income. Now that fixed income is paying around the withdrawal rate, the OP doesn't need to take as much return and still can have patience while stocks recover from any downturn, should that take many years.

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