Ok, here’s something else I’m wondering. Say my 4% is $40k. My investments distribute $20k and I have $120k cash. Does it make more sense to use the $20k distribution plus $20k cash for 6 years, or use the cash for 3 years, and let the distributions reinvest to grow the invested stache, or will the end result be the same however you do it?
Firstly you should have decided on an asset allocation (AA) of stocks to fixed income.
Each year, you would have a plan, such as:
1. Have distributions not reinvested and instead put into a separate account to use
2. Anything that not enough for the withdrawal rate, take out of the allocation that has performed the best to bring the proportions closer to your target AA
3. If you are out of our pre-decided percentage bands, then rebalance to bring it back
Here is a simple example
Assumptions
1 mil
4% withdrawal rate
70/30 AA
Rebalance bands of 5%
After one year say you have gotten 30k in distributions
And say stocks grew to 805k and fixed income grew to 305k
Your AA is now 72.5/27.5, so your equities portion has grown more, so you take out the other 10k from your equities.
That leaves you with 795k equities, 305k fixed income and your AA is now 72.25/27.25
Since it is not outside of your balancing bands of 5% (65/35 and 75/25) you do nothing more
After another year or two, you might end up with an AA of 76/24, in which case you would sell down 6% of the 76 to bring it back in line with your original allocation.
You need to determine these and put it into an investment policy statement (IPS) so you are not guessing and instead have a set of steps laid out in advance that you follow each year.
- An appropriate AA for yourself
- A withdrawal rate you are comfortable with
- Rebalancing bands