Author Topic: Question: When you finally get there...  (Read 4642 times)

Kaspian

  • Handlebar Stache
  • *****
  • Posts: 1536
  • Location: Canada
    • My Necronomicon of Badassity
Question: When you finally get there...
« on: February 28, 2014, 01:03:08 PM »
Don't get me wrong, I'm a long, long way off FI, but I've been wondering something and oddly I never really seem to trip across any articles written about it.  When somebody gets to their magic number, let's say $800K, and they know they're fine, decide to kick off the job, and retire (or just permanently leave the rat race for other things), how does the money drawdown work?  Like, we all know that 4% is a pretty safe bet (and it's repeated often in thousands of blog pages), but how do you do it?  Do you sell of 4% of your investments a year?  Bi-annually?  Quarterly?  Or do you convert big chunks into some sort of money market fund and use that almost as top tier bank account to filter down to others?  Sell off equity funds *and* the icing off the bonds?  I know most money control-freaks here (myself included) would never go the route of something as barbaric as annuities.  ...Or do you?  So, my stupid question of the day really is:  How does the withdrawal from investments to liquid cash work? 

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: Question: When you finally get there...
« Reply #1 on: February 28, 2014, 01:07:47 PM »
Common question lately!  We just had a thread on this a couple of days ago.  Check it out, lots of good info and links there.

http://www.mrmoneymustache.com/forum/ask-a-mustachian/early-retirees-how-did-you-financially-transition-to-retiring/

Kaspian

  • Handlebar Stache
  • *****
  • Posts: 1536
  • Location: Canada
    • My Necronomicon of Badassity
Re: Question: When you finally get there...
« Reply #2 on: February 28, 2014, 01:31:11 PM »
Excellent!  Thanks, Eric!!

payitoff

  • Guest
Re: Question: When you finally get there...
« Reply #3 on: February 28, 2014, 04:02:32 PM »
i do have another dummy question:

how are your funds being funded in Vanguard? is it Roth IRA, 529 or straight savings?

Since i understand you can have as many Roth's as you want but only can contribute to a maximum per year?

matchewed

  • Magnum Stache
  • ******
  • Posts: 4322
  • Location: CT
Re: Question: When you finally get there...
« Reply #4 on: February 28, 2014, 04:10:25 PM »
i do have another dummy question:

how are your funds being funded in Vanguard? is it Roth IRA, 529 or straight savings?

Since i understand you can have as many Roth's as you want but only can contribute to a maximum per year?

Seems you need to read a finance book.

The quick of it is you can contribute a maximum of $5.5k to Roth IRA accounts per year (that is not per account, $5.5k total a different amount for people over the catch up age).

As for what type of accounts are people using? Whatever they plan for with their investment policy statement, AA, and particular plan towards FIRE.

payitoff

  • Guest
Re: Question: When you finally get there...
« Reply #5 on: February 28, 2014, 04:21:43 PM »
exactly why i called it a dummy question :)

im still not clear with the answer. as i have previously understood, if  have 3 different Roth IRA accounts, i can only contribute a maximum of $5500 total per year right? please correct me if im wrong, thanks

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: Question: When you finally get there...
« Reply #6 on: February 28, 2014, 06:21:14 PM »
Assuming you're younger than age 50, the maximum Roth contribution is $5500 per year, independent of the number of accounts.  There's no benefit to having multiple accounts.
« Last Edit: February 28, 2014, 06:23:02 PM by Eric »

dragoncar

  • Walrus Stache
  • *******
  • Posts: 8661
  • Registered member
Re: Question: When you finally get there...
« Reply #7 on: February 28, 2014, 06:37:06 PM »
i do have another dummy question:

how are your funds being funded in Vanguard? is it Roth IRA, 529 or straight savings?

Since i understand you can have as many Roth's as you want but only can contribute to a maximum per year?

You can open any of a few different types of accounts at Vanguard (or elsewhere): https://investor.vanguard.com/mutual-funds/account-types

I think most people have a mix of different account types - you typically want to max out your tax-free and tax-deferred options first.  There are a few discussions of this around here and bogleheads.org

payitoff

  • Guest
Re: Question: When you finally get there...
« Reply #8 on: February 28, 2014, 07:02:22 PM »
thank you so much! this answered my question!

SwordGuy

  • Walrus Stache
  • *******
  • Posts: 5513
  • Location: Fayetteville, NC
Re: Question: When you finally get there...
« Reply #9 on: February 28, 2014, 09:53:37 PM »
The 4% safe withdrawal rate isn't safe rule despite everyone knowing it is.

Marshal Petain once said, "The Ardennes is impassable, if properly defended."

What people remembered was "The Ardennes is impassable."  and it didn't get defended.  Germany stomped the daylights out of the Belgians, British and French in 1940 because of that "little detail."

The 4% safe withdrawal rate was considered safe for a 30 year retirement period.  If a person still had $0.01 left on the last day of the 30th year of retirement, victory was declared.  If they had lived for 40 years instead of dying by 30, they would be old and broke.

If you are planning on retiring early, then a 30 year retirement could be stretched to 60 or more years.   
So, if you want a pretty safe bet, it would be wise to either plan on a lower withdrawal rate or be able to cut back on expenses for several years in a row or be prepared (and able) to make money in a side gig.  MMM gives plenty of examples about how they have multiple buffers built into their retirement.

Nords

  • Magnum Stache
  • ******
  • Posts: 3188
  • Age: 58
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: Question: When you finally get there...
« Reply #10 on: February 28, 2014, 10:15:25 PM »
Don't get me wrong, I'm a long, long way off FI, but I've been wondering something and oddly I never really seem to trip across any articles written about it.  When somebody gets to their magic number, let's say $800K, and they know they're fine, decide to kick off the job, and retire (or just permanently leave the rat race for other things), how does the money drawdown work?  Like, we all know that 4% is a pretty safe bet (and it's repeated often in thousands of blog pages), but how do you do it?  Do you sell of 4% of your investments a year?  Bi-annually?  Quarterly?  Or do you convert big chunks into some sort of money market fund and use that almost as top tier bank account to filter down to others?  Sell off equity funds *and* the icing off the bonds?  I know most money control-freaks here (myself included) would never go the route of something as barbaric as annuities.  ...Or do you?  So, my stupid question of the day really is:  How does the withdrawal from investments to liquid cash work?
http://the-military-guide.com/2014/02/20/how-should-i-invest-during-retirement/

Some of your 4% annual withdrawal is going to come from monthly interest, rental property income, investment fund dividends, and annuity income (pension, purchased annuiity, Social Security).  Some equity dividend funds pay out quarterly.  At the end or beginning of the year you may sell off assets to generate the rest of your 4% annual withdrawal, but you may also choose to just replenish your cash accounts to a certain level and use the 4% SWR as a "max withdrawal" tripwire.

wtjbatman

  • Handlebar Stache
  • *****
  • Posts: 1313
  • Age: 35
  • Location: Missouri
Re: Question: When you finally get there...
« Reply #11 on: February 28, 2014, 10:26:33 PM »
Mine will be 100% dividends, one of the benefits of a dividend growth strategy. I'll never touch the principal, and in fact, it's very likely (there are no guarantees of course) the principal and dividends will actually keep growing faster than inflation so I'll have more and more money to "spend" (if I want, I'm sure I will reinvest it in that case) than I actually need.

But for index investors, the thread Eric posted has a lot of good info. And now this thread has some good info too!

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: Question: When you finally get there...
« Reply #12 on: February 28, 2014, 11:34:46 PM »
The 4% safe withdrawal rate was considered safe for a 30 year retirement period.  If a person still had $0.01 left on the last day of the 30th year of retirement, victory was declared.  If they had lived for 40 years instead of dying by 30, they would be old and broke.

While it's true that if you had $.01 on the last day after 30 years it would still be considered successful, the vast majority of the time periods amassed ridiculous sums of money after 30 years.  In fact, if you stretch it out to 50 years, you're still looking at 84% success rate before factoring in any safety margins at all.

Check it:  http://www.firecalc.com/