You're retired. Awesome! How do you draw money from your investments?

[niknak]

Although my wife and I aren't ready to retire yet, I'd like to be more confident that when we decide to do it, we know how to do it properly. My main question is how people actually withdraw money from their investment accounts. MMM talks about living off of a max of about 4% of his investments per year but not how he does it.

Do people sell a certain amount of stock each month? Do they just not automatically reinvest dividends and live off that?

Please share your strategies for doing this wisely.

Thanks!

[Catbert]

I set my portfolio up years ago with the bond portion in zero coupon muni bonds.  A different bond is set to mature each year in the approximate amount I thought I'd need in retirement.  With bond rates so low now, that might not be the best option.

Another tactic is to sell/not reinvest whatever asset is doing best that year.  If stock are up 16% year-to-date then take from there.  If stocks are down then take from bonds or whatever.

I think may early retirees try for multiple streams of income.  Rent, bond interest, dividends, etc. and selling only were absolutely necessary.  I certainly would not sell stocks/bond/funds on a regular monthly basis because you get hit too hard with price fluctuations. 

[Tyler]

That depends a lot in your investment strategy.

If you focus on a dividend/interest (income) portfolio, you can just let that roll into cash and spend it as needed. If you are a value investor looking for capital appreciation, then selling stocks (after holding them at least a year to minimize CG taxes) will be part of the plan.

Personally, I invest in the Permanent Portfolio which is somewhat unique because is holds 25% cash. So I'll just live off the cash portion and rebalance as needed when I reach a rebalancing band every few years.  I find this to be pretty tax efficient and also reassuring during market dips.

[Michread]

Vanguard tells you how: https://retirementplans.vanguard.com/VGApp/pe/pubeducation/jumppages/RetIncGetStarted.jsf?SelectedSegment=ThinkingaboutRetirement

[chasesfish]

If you can access all your accounts (not tied up in retirement accounts and under 59), then let Vanguard do it for you with a managed payout fund

https://personal.vanguard.com/us/insights/article/fund-announcement-w-10162013

[Woodshark]

Another popular option is track your expenses for two years before retirement. It's easy, just use your checkbook ledger. Once you figure out your average annual expenses you know about what you should need per year.  Pick a date, some people use Jan 1, some their birthday etc.  From your investments, convert to cash what you estimated you will need for the coming year. Put this in a money market fund or other accessible account. As you need it, transfer from this to your checking account.  In six months, see where you are and make any changes needed.

[the fixer]

Personally, I invest in the Permanent Portfolio which is somewhat unique because is holds 25% cash. So I'll just live off the cash portion and rebalance as needed when I reach a rebalancing band every few years.  I find this to be pretty tax efficient and also reassuring during market dips.

My current plan is to do something similar to this, except the cash portion of my portfolio might be lower (5-10%?) Withdraw from your cash as needed, then it's simply a rebalancing exercise.

[GreenGuava]

Do people sell a certain amount of stock each month? Do they just not automatically reinvest dividends and live off that?

That's certainly part of it, at least for the taxable stash.  I mean, you're going to pay tax on the distributions anyway, and you're in the phase of life where you're drawing from your stash, so take it into your bank account as you would a paycheck.

If it's not enough, yes, you sell some.  Use the 4% rule to both limit how much you draw out (so you don't think of it as something you can spend all at once) and to plan to ensure you will likely have enough.  Don't make the mistake of thinking that selling shares equates to dipping into principal - drawing dividends has the exact same effect.

And, of course, draw from taxable accounts before tax-advantaged ones, although be aware of what you'll need 5+ years from now - in case you need to start a Roth pipeline.

[dadof4]

Personally, I invest in the Permanent Portfolio which is somewhat unique because is holds 25% cash. So I'll just live off the cash portion and rebalance as needed when I reach a rebalancing band every few years.  I find this to be pretty tax efficient and also reassuring during market dips.

My current plan is to do something similar to this, except the cash portion of my portfolio might be lower (5-10%?) Withdraw from your cash as needed, then it's simply a rebalancing exercise.

That was my plan, until I read this:
http://www.fpanet.org/journal/Home/SustainableWithdrawalRates/

TL;DR -
Having a cash buffer will decrease your chances of success, with the effects getting worse the larger the cash buffer is (study checked 1-4 years worth of cash, or 4-16% of `stache at 4% WR). 

[oldtoyota]

Vanguard suggests this:

Withdraw from taxable accounts first;
Then, tax-deferred, such as a 401K;
Then, tax-sheltered accounts like a Roth.

https://personal.vanguard.com/us/insights/retirement/living/retirement-income-withdrawal-strategy

[Tyler]

Having a cash buffer will decrease your chances of success, with the effects getting worse the larger the cash buffer is (study checked 1-4 years worth of cash, or 4-16% of `stache at 4% WR).

The Permanent Portfolio behaves a bit differently than traditional stock/bond blends, and the cash is part of how it fundamentally works rather than a concession for retirement.  So the cited study doesn't apply directly, although as I mentioned before the PP is kindof a special situation.  It's not for everyone.  Your link is interesting, though, as it relates quite well to typical "Firecalc-friendly" portfolios.  Thanks for sharing.

It's a good point that each person should look at the big picture of their particular investment choices and have a plan in place ahead of time.  IMHO, if adding a cash buffer helps you sleep better at night during market crashes, one can still make an argument that this would be preferable to a more stressful portfolio that should theoretically return more.  Mechanical back testing studies all assume that investors have the fortitude to stay the course even in the darkest market times.  That's where many flesh and blood investors fall short.

[the fixer]

I too found that study interesting, but I don't think it applies to what I was suggesting. The study uses a cash buffer which is sized based on X years of expenses, which means it grows with inflation and becomes a larger percentage of the portfolio over time. If you just make 5% of your portfolio cash, that asset allocation would remain fixed and the balance would change as the overall size of the portfolio either grows or shrinks.

That study made me realize, though, that this suggestion has not been empirically tested, so I guess I can't really recommend it. I've got a while before I need to use it.

[dadof4]

IMHO, if adding a cash buffer helps you sleep better at night during market crashes, one can still make an argument that this would be preferable to a more stressful portfolio that should theoretically return more.  Mechanical back testing studies all assume that investors have the fortitude to stay the course even in the darkest market times.  That's where many flesh and blood investors fall short.

Great point. In fact, the researchers from the study said something very similar in their conclusion [emphasis mine]:

"Although the results from this study show that a static asset allocation strategy is superior to a buffer zone strategy at minimizing longevity risk, the use of a buffer zone may be merited if it will impact one’s investment portfolio choice. To elaborate, it may provide a psychological mechanism to induce clients to accept stock exposure. With the one exception of comparing a pure bond asset allocation to a bond and buffer zone strategy, it is clear that buffer zone strategies are much superior to a long-term bond portfolio strategy."

I guess it's easy for me to sit here in the accumulation phase with a job to cover my expenses and claim I would stick out a crash without flinching. But after ER, when my survival relied on that 'stache, fear that it might go down 50% in a year might make me make moves that are not completely rationally justified.

[Iron Mike Sharpe]

Vanguard suggests this:

Withdraw from taxable accounts first;
Then, tax-deferred, such as a 401K;
Then, tax-sheltered accounts like a Roth.

https://personal.vanguard.com/us/insights/retirement/living/retirement-income-withdrawal-strategy

If you are in the 15% or lower tax bracket, wouldn't you want to take from 401K first?  Becasue your qualified dividends from your taxable account would not be taxed.  So, if they are not going to be taxed, you don't want to draw down your taxable accounts and decrease dividends in future years.

Am I correct in this line of thinking?

[Miss Growing Green]

I use cash flow from a rental property (which is a great tax shelter), cash flow from my Peer-2-peer lending investments (Prosper and Lending Club), income from my blog, and income from my Ebay Store (not really passive income), so I don't have to worrry about withdrawing from savings/IRAs/selling stocks each month.

[Peter]

Don't make the mistake of thinking that selling shares equates to dipping into principal - drawing dividends has the exact same effect.

This is something I had to think long and hard about to wrap my head around, but it's correct. To those of you who think it's safer to draw on the dividend and riskier to sell your shares, you need to do some reading and thinking to get over that mental hump.