Author Topic: How do you actually "withdraw" money from your Retirement Accounts  (Read 2264 times)

khangaroo

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I'm several decades from withdrawing money from my retirement accounts but I'm not sure how the process/mechanics actually works. I always hear that you should only withdraw your "gains" and not the actual "principal" of your accounts.

So lets take a Roth IRA for instance. Lets say you put in $60k and it grew it $100k. However, this is all invested in an index fund so you have $100,000 worth of an index fund. You have all your dividends reinvested into the fund rather than taking it as cash in your account.

To withdraw, do you sell a portion (shares) of your $100k (up to $40k because you don't want to encroach on the $60k "principal") each month/year and use that as your income? Or do you stop reinvesting your dividends and build that up as a bucket that you withdraw money from?

Or is there a button somewhere and your broker does this for you?

Thanks in advance!

MDM

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Re: How do you actually "withdraw" money from your Retirement Accounts
« Reply #1 on: January 03, 2017, 06:38:42 PM »
I always hear that you should only withdraw your "gains" and not the actual "principal" of your accounts.
That's not quite accurate.

You might take a look at Withdrawal methods - Bogleheads and Variable percentage withdrawal - Bogleheads.

Livingthedream55

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Re: How do you actually "withdraw" money from your Retirement Accounts
« Reply #2 on: January 04, 2017, 07:36:34 AM »

Do you manage the account yourself? If you have online access (to say Vanguard for example) yes there is a button/screen. You login to your account, click "sell" and fill out a few pieces of information asked for in a few screens.

For me (this will be in a couple of years) - I am going to withdraw 4% of whatever is in the IRA account on January 2nd each year and move it to a checking account (they are already linked) and let all the dividend reinvestment settings continue unchanged.

If you have a broker you simply instruct him or her to sell a certain percent or dollar amount (once a year, once a month- whatever you want).

There are tax consequences when you sell (lots of time for you to educate yourself about Traditional IRAs vs. Roth IRAs) - I see you are currently in a Roth so it is likely your withdrawals will be federal tax free after age 59 1/2 (if earlier learn how - see rule 72t) so no need to worry about cost basis, dividends, etc.

Info from Vanguard on Roth IRAs
A Roth IRA is an individual retirement account that offers tax-free growth and tax-free withdrawals in retirement. Roth IRA rules dictate that as long as you've owned your account for 5 years* and you're age 59 or older, you can withdraw your money when you want to and you won't owe any federal taxes.

https://investor.vanguard.com/ira/roth-ira

trammatic

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Re: How do you actually "withdraw" money from your Retirement Accounts
« Reply #3 on: January 04, 2017, 12:06:39 PM »
I am going to withdraw 4% of whatever is in the IRA account on January 2nd each year and move it to a checking account
FYI, this is not following the 4% rule--it is actually more conservative.  I notice this hiccup often.  The Trinity study looked at annual distributions of 4% of the initial principal year in and year out.  (If you start with $1mm, then you'd withdraw $40k per year regardless of the balance of the investment.)  Your method would result in you never running out of money because taking 4% of any amount will leave 96% behind.  Say in year 2, the total value of your investments halved to $500k...the 4% rule would have you take out 40k, where your 4% of the balance rule would have you take out 20k.

Livingthedream55

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Re: How do you actually "withdraw" money from your Retirement Accounts
« Reply #4 on: January 04, 2017, 01:20:07 PM »
I am going to withdraw 4% of whatever is in the IRA account on January 2nd each year and move it to a checking account
FYI, this is not following the 4% rule--it is actually more conservative.  I notice this hiccup often.  The Trinity study looked at annual distributions of 4% of the initial principal year in and year out.  (If you start with $1mm, then you'd withdraw $40k per year regardless of the balance of the investment.)  Your method would result in you never running out of money because taking 4% of any amount will leave 96% behind.  Say in year 2, the total value of your investments halved to $500k...the 4% rule would have you take out 40k, where your 4% of the balance rule would have you take out 20k.

You are right - I am intentionally being more conservative as I have other income streams including a pension so in years the market was down I would withdraw less.

So, to the original poster, what I will be doing is technically not an example of the 4% withdrawal rule. Sorry for any confusion!


BigRed

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Re: How do you actually "withdraw" money from your Retirement Accounts
« Reply #5 on: January 04, 2017, 01:34:16 PM »
I am going to withdraw 4% of whatever is in the IRA account on January 2nd each year and move it to a checking account
FYI, this is not following the 4% rule--it is actually more conservative.  I notice this hiccup often.  The Trinity study looked at annual distributions of 4% of the initial principal year in and year out.  (If you start with $1mm, then you'd withdraw $40k per year regardless of the balance of the investment.)  Your method would result in you never running out of money because taking 4% of any amount will leave 96% behind.  Say in year 2, the total value of your investments halved to $500k...the 4% rule would have you take out 40k, where your 4% of the balance rule would have you take out 20k.

This is wrong, the original study withdrew 4% of the original pricipal, after adjusting for inflation.  So, the withdrawals actually increase each year in nominal dollars, regardless of the changes in portfolio value from year to year.  This plan is equivalent to the "Retire again-and-again" plan, which has a much higher than 4% SWR.

Al1961

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Re: How do you actually "withdraw" money from your Retirement Accounts
« Reply #6 on: January 04, 2017, 05:00:11 PM »
I don't hear much about RMDs from the generally younger people on this board, but I'll have to start dealing with these in just another decade. The effect on remaining portfolio value really depends on how much will be taxed at a higher marginal tax rate, but generally, the portfolio is adversely impacted by taxes and loss of tax deferred compounding.

From age 66* on (Canada), if you have most of your assets in retirement accounts (RRSP and/or LIRA converted to a RRIF) the 4% "rule" is basically irrelevant**. The government makes you take out an ever increasing percentage from your retirement account. Mostly so it can finally be taxed.

I understand that US RMDs are not as high as the Canadian RMDs and don't kick in until age 70.5, and don't exceed 4% until age 73.

https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

https://www.woodgundy.cibc.com/wg/reference-library/topics/retirement-planning/rrsp-maturity-options/rrif-minimal-withdrawal.html

*Must convert to RRIF by age 71, but can be earlier at your option. RMDs are >4% starting at age 66 in Canada.
 
**OK, so you don't have to spend anything more than the taxes due on the withdrawal, and what you would have spent if left to your own judgement on what to withdraw. Excess mandatory withdrawals can be redeposited into taxable accounts, but you have a smaller amount to invest and, as mentioned above, you lose some tax deferred compounding.

Frankies Girl

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Re: How do you actually "withdraw" money from your Retirement Accounts
« Reply #7 on: January 04, 2017, 05:11:38 PM »
I don't give a single thought to how much was principle and how much is growth. Moot point anyway for me to even consider since at this point I doubt I could come up with things I want to spend money on that would even eat into the principle enough to matter. (I am not a big spender). I am not interested in leaving any legacy and if there is money left over, it's going to charity anyway.

I have an inherited IRA, lots of IRAs (one each of a Roth and traditional/rollover) between myself and the spouse and a taxable account with my brokerage (all accounts are with the same company - Fidelity).

I linked up my checking account (brick and mortar) with my taxable investment account.

When I have to take a distribution (required minimum distributions are necessary each year from an inherited IRA if the person you inherited from would have been taking them if they were still alive), I have them sell off equal parts of the 3 funds I hold in that IRA, then take out federal taxes at 10% (and send that part off to the IRS) and the remaining cash is transferred to my taxable account. From there, I can decide to reinvest that money in my taxable, or set up a transfer from my taxable to my checking account for spending.

I have an automatic plan in place for the first part (sell funds, pay tax, transfer to taxable account on X date). I can go in and modify that plan at any time and have - change the date, increase/decrease federal tax, change it to take the amount from only one fund, etc... Or I could just do it myself without an auto plan, or I could call up my rep and ask them to do it (but don't see the point to that at all).

Takes about 3 days total for the money to move over to my checking account as of now, but my understanding is that the ACH debit/credit transfers may be getting faster in the coming year for some institutions. In any case, the ACH transfers are free so I don't mind waiting a few days for the moves to happen. And bonus - they count as "direct deposit" so my checking account with the fussy bank I use doesn't get to charge me a service fee since that is one of their requirements for a free checking accounts. ;)


« Last Edit: January 04, 2017, 05:32:04 PM by Frankies Girl »