Author Topic: Withdraw scenario  (Read 1029 times)

JSMustachian

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Withdraw scenario
« on: June 03, 2019, 01:58:36 PM »
Lets say you retire early at 40. Unfortunately the market tanks 20-30% in your first year. You don't want to sell your stocks since the value has dropped. How do you access your bonds?

If the bond funds are in your traditional IRA like I've read its recommended to keep them you have to wait 5 years for the conversion before you can get the money penalty free. I could keep bonds in my brokerage but the dividends are taxable income and generally not recommended to be kept in a taxable brokerage account.

How can you plan when to sell stocks or bonds in your traditional IRA when you are planing ahead for 5 years since you have to do conversions each year to access your money since you are not 59.5 yet.


« Last Edit: June 03, 2019, 02:15:01 PM by JSMustachian »

Aggie1999

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Re: Withdraw scenario
« Reply #1 on: June 03, 2019, 03:11:36 PM »
For early retirees, bonds don't make a lot of sense in tax advantaged accounts. I don't want low bond growth taking up space in my Roth accounts for 20 - 30 years. Also, would seem like a hassle when needing to withdraw your basis out of the Roth. No real advantage in a tIRA that I see as you are paying ordinary income tax rate on tIRA withdraws just like you would on the bond dividends on a normal account. I say keep bonds in a brokerage account and use the dividends paid out each month to go towards your 4% or whatever safe withdraw rate when retired.

A more confusing topic to me is to know when to use the bonds. Do you live off bonds when the market has been going sideways for a while or do you wait until big drops. I guess it all comes down to asset allocation, but even that is confusing since you ideally want less bonds the longer your are retired.

ysette9

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Re: Withdraw scenario
« Reply #2 on: June 03, 2019, 03:35:45 PM »
Most people recommend having five years’ cash available somehow in a taxable account or similar to tide you over while you wait for your Roth conversions to season.

Even in a down market your equities will be throwing off some dividends, so that is a start to covering your living expenses.

FIREstache

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Re: Withdraw scenario
« Reply #3 on: June 03, 2019, 03:53:54 PM »

I have non-equities in a regular brokerage account as well as some CDs that mature every year.

Also, I'll be able to withdraw as needed from my fixed interest fund in my 457 since I'll be 55 the year I FIRE.

Basically, if stocks drop, I'll draw from non-equities until the AA comes back into balance.

Threshkin

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Re: Withdraw scenario
« Reply #4 on: June 03, 2019, 07:30:31 PM »
Most people recommend having five years’ cash available somehow in a taxable account or similar to tide you over while you wait for your Roth conversions to season.

Even in a down market your equities will be throwing off some dividends, so that is a start to covering your living expenses.

YES!  You should FIRE with a solid cash reserve to ride out any early market downturns.  What you describe is called sequence of return risk.  It is a very real risk that you need to plan for.  If you plan for a Thin FIRE retirement that has no buffer for early market drops you are taking a big risk.

JSMustachian

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Re: Withdraw scenario
« Reply #5 on: June 04, 2019, 08:38:23 AM »
We will definitely plan to keep several years worth of cash in our money market account. We are being very conservative with our FIRE plans so there is no risk of running out of money.

We are aiming for 1.5 million stache with a 4% withdraw but we could easily half that by cutting out discretionary spending. Just trying to nail down the withdraw strategies when the time comes. Thank you!

Mr. Green

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Re: Withdraw scenario
« Reply #6 on: June 04, 2019, 12:21:16 PM »
Most people recommend having five years’ cash available somehow in a taxable account or similar to tide you over while you wait for your Roth conversions to season.

Even in a down market your equities will be throwing off some dividends, so that is a start to covering your living expenses.
Worth noting is keeping 5 years of expenses in cash is 20% of your portfolio if you FIREd with 25 times annual expenses. If you're not including that in your bond/fixed income asset allocation it will have a huge drag on the portfolio's overall performance.

Mathematically, the smarter move is to simply make one's normal, periodic withdrawal. In a recession, the market isn't at the bottom long. If one makes quarterly withdrawals you sell a little bit on the way down and back up. Maybe you don't even sell at the bottom at all because it happens in between quarters. Also, you're only selling enough for the quarter so it doesn't feel like a huge hit psychologically.

If one needs the cash to feel secure maybe it's a worthwhile sacrifice, but there is definitely a performance hit to doing so.

spartana

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Re: Withdraw scenario
« Reply #7 on: June 04, 2019, 12:46:07 PM »
I FIREd shortly before the Great Recession and lost 50% of my net worth (house equity and investments) seemingly overnight. I had 3 years of expenses in cash (laddered CDs and bonds). I had very low expenses of under $1000/month for barebones and did some belt tightening on luxuries and just used CDs as needed. They lasted longer than I thought they would so didn't really need to use bonds or investments during the downturn.

Even now I like to keep 3 years barebones expenses (approx $30k total) in a liquid money market account for peace of mind.

ETA I also could have gone back to work (assuming I could find a job in that high unemployment environment) even making minimum wage would have coveted all my expenses. That is something many mustashians plan for in a downturn or recession. Or I could have gotten a couple of roommates to cover all my expenses (I was single and childless). Didn't need to do either fortunately and despite not having a higher passive income I was very happy and fulfilled with my Great Recession FIRE life ;-).
« Last Edit: June 04, 2019, 12:53:47 PM by spartana »

Caroline PF

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Re: Withdraw scenario
« Reply #8 on: June 04, 2019, 06:13:57 PM »
Lets say you retire early at 40. Unfortunately the market tanks 20-30% in your first year. You don't want to sell your stocks since the value has dropped. How do you access your bonds?

If the bond funds are in your traditional IRA like I've read its recommended to keep them you have to wait 5 years for the conversion before you can get the money penalty free. I could keep bonds in my brokerage but the dividends are taxable income and generally not recommended to be kept in a taxable brokerage account.

How can you plan when to sell stocks or bonds in your traditional IRA when you are planing ahead for 5 years since you have to do conversions each year to access your money since you are not 59.5 yet.

Money is fungible across accounts. Lets assume you want to sell $5000 worth of bonds, but the bonds are inaccessible in your traditional IRA. You would sell $5000 worth of stocks from your accessible account (taxable account or mature Roth ladder). Then sell $5000 worth of bonds in your IRA, and use that money to buy $5000 of stock in that same IRA. You bought and sold stocks at the same price, so you didn't lose any money (still have the same number of shares). And over all accounts, you now have $5000 less of bonds.

cap396

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Re: Withdraw scenario
« Reply #9 on: June 05, 2019, 05:49:00 AM »

Money is fungible across accounts. Lets assume you want to sell $5000 worth of bonds, but the bonds are inaccessible in your traditional IRA. You would sell $5000 worth of stocks from your accessible account (taxable account or mature Roth ladder). Then sell $5000 worth of bonds in your IRA, and use that money to buy $5000 of stock in that same IRA. You bought and sold stocks at the same price, so you didn't lose any money (still have the same number of shares). And over all accounts, you now have $5000 less of bonds.

+1

This is what I plan to do if it ever becomes necessary.

Threshkin

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Re: Withdraw scenario
« Reply #10 on: June 13, 2019, 11:27:49 AM »
I FIREd shortly before the Great Recession and lost 50% of my net worth (house equity and investments) seemingly overnight. I had 3 years of expenses in cash (laddered CDs and bonds). I had very low expenses of under $1000/month for barebones and did some belt tightening on luxuries and just used CDs as needed. They lasted longer than I thought they would so didn't really need to use bonds or investments during the downturn.

Even now I like to keep 3 years barebones expenses (approx $30k total) in a liquid money market account for peace of mind.

ETA I also could have gone back to work (assuming I could find a job in that high unemployment environment) even making minimum wage would have coveted all my expenses. That is something many mustashians plan for in a downturn or recession. Or I could have gotten a couple of roommates to cover all my expenses (I was single and childless). Didn't need to do either fortunately and despite not having a higher passive income I was very happy and fulfilled with my Great Recession FIRE life ;-).

This is a real FIRE risk, particularly for people planning a long, thin FIRE.  In a large recession, unemployment tends to go up (even way up).  So the "I will just go back to work" approach to dealing with the downturn may be harder than anticipated.

I am pretty deep in the Fat FIRE assets/Thin FIRE expenses camp.  I don't want to ever have to worry about going back to work again.  (FIREd for over 2.5 years now.)