Question on retirement in practice

[themagicman]

I am planning on retiring in a few months and am curious how people are tackling the following issues.

1. What are people doing with their "leftover" money?
- When I retire, my first year withdraw the SWR calculates is ~$40,000. I should only spend around $32,000 next year though. So my question is what do people typically do with this leftover $8k that was unspent?
- A couple of ideas I have thought of but I would like to hear from others ; reinvest in using my standard asset allocation, invest it in very long duration treasuries to help on down stock market years, keep in cash savings, use options to help in a down stock market year

2. What do people do with money for sinking funds that they are planning to contribute to?
- Part of my retirement budget, contains $8,800 of sinking funds that will not be used most years (part for house repair, car replacement, and for healthcare costs). I am curious what people physically do with that money? Put in a savings account, a lower volatility investment? Or keep in your current AA to just think that it will shake out ahead in the end when I use those sinking funds?

[NotJen]

#1 - withdraw less the next year. 

#2 - I've never done sinking funds.  When working, I could cash flow pretty much everything, or use my EF.  Now, if I need a large chunk of money I'll just sell investments when they are needed.

[secondcor521]

54, single, FIREd about 7 years.

1.  I withdraw approximately monthly from my FIRE stash only as needed.  What I don't need stays in the FIRE stash at my target AA.  So in your example, the $8K would be left in the FIRE stash until needed and wouldn't be removed in the first place.

2.  I don't do sinking funds either.  I just leave it in the FIRE stash until needed.  I figure leaving my money invested and not selling until needed will average out OK.  I do "account" for infrequent large expenses by keeping my day-to-day WR% lower than what I could; the margin there is my sinking fund equivalent.

[reeshau]

Just finished year 3 of retirement.

It's a silly thing to take out extra money because the model told you to.  Take what you need, leave the rest alone, and know that you are ahead of your chosen model.

"Plans are worthless, but planning is essential."  -- Dwight Eisenhower

"No plan survives first contact with the enemy." -- Helmuth von Moltke (translated)

"All models are wrong, but some are useful." --George E. P. Box

Anything you need in less than 5 years shouldn't be in stocks.  That becomes quite a large sum in retirement.  I don't quite adhere to that, but I do have a barbell:  100% in stocks, but with significant (1 year or more) in liquid cash to deal with shocks--market, life, or otherwise.  I don't do sinking funds per se, but they are useful because taking extra-large withdrawals in response to large expenses can screw up your tax / ACA planning.  I am also holding my HSA in reserve for medical shocks like this, until Medicare comes around.

[NotJen]

Anything you need in less than 5 years shouldn't be in stocks.  That becomes quite a large sum in retirement.

So, I did follow this guideline for the beginning of FIRE (I'm 3+ years in).  My first year of FIRE, I funded with the cash I saved up during my last year at work.  I sold my home at the start of my 2nd year - I decided to keep 5 years worth of expenses in cash, and invest the reset.  Two years later, my cash store has only reduced by $13,000...  There was A LOT of uncertainty in my expense calculations, so I aimed high.

Plan for the future: When I do have to start selling investments, I will keep my cash level between 1-2 years of expenses, topping up annually or semi-annually as needed.

[GuitarStv]

Anything you need in less than 5 years shouldn't be in stocks.

This seems largely unnecessary if you have a sensible asset allocation.

[reeshau]

Anything you need in less than 5 years shouldn't be in stocks.

This seems largely unnecessary if you have a sensible asset allocation.

That's why I say: in stocks.  A sensible asset allocation for someone in retirement would have a fixed income / bond component.  If you have 25x your spending, then 5 years would make an 80% stocks / 20% bonds allocation.  Still fairly aggressive.

Of course, the point of 5 years is so that you aren't faced with principle withdrawals in a down year, like last year.  But the economic cycles of the 21st century have, so far, lasted far more than 5 years.

[yachi]

I've been FIREd a bit over a year.  There are a few things to keep in mind:

1) You might want to keep income consistent through retirement to qualify for health insurance or just to minimize your taxes.  For me, if I draw from too many low-income sources, I don't show enough income to quality for health insurance from the ACA, and would have to switch to medicaid, so that's something I want to avoid.

2) One-time expenses like purchasing an RV or buying a car with cash need to be thought through.  When your only option is to pull money from traditional retirement accounts, paying cash could come with a large tax hit.  Plan ahead for these expenses or consider a loan so you can spread out the tax hit over more than one year.

3) If your plan works for withdrawing $40K, then it works for withdrawing more than you need.  At that point investing the extra $8K very aggressively or very conservatively both make sense because you don't need it.  So investing it in options makes sense because you don't need the $8K to live on (so you can stand to lose it).  And leaving it in a savings account makes sense because you don't need it to work for you (the rest of your portfolio does that).