Author Topic: Investing and withdrawing money later on  (Read 3182 times)

BM1986

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Investing and withdrawing money later on
« on: April 28, 2016, 02:07:53 PM »
Hi Guys,

I am new to the forum but have been reading the blog for quite some time. Also I have been working on the goal of financial independence for a few years now. I currently divide my savings into putting it in indexfunds (most), individual shares, savings, paying of the mortgage.

While thinking about when reaching my goal I was starting to wonder how this would work exactly and would be grateful to get your opinions. As currently most of my savings go and will keep going into indexfunds this obviously grows. I make monthly deposits and am confident this way you will average out buying on different levels and will give me 5-7 % interest yearly. However I was wondering about the mechanics and strategy once you would have reached the wanted goal and start withdrawing.

For example would it be best to take yearly withdrawals or monthly - also what would happen when a stock crash occurs at this stage?  In the current situation while growing the stash you will keep buying even when share prices drop which helps make larger gains on the shares you buy at lower levels. I can imagine when only withdrawing every year, and a crash occurs which could set you to 50% you will not have the same absolute amounts interest which you usually would have and it will take a long time going back to the original amount of interest? In this case withdrawing the same absolute amount continuously could make your stash to continue to decline. How do you guys see this?

Hope it is clear since I have trouble explaining it :P

Thanks

soccerluvof4

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Re: Investing and withdrawing money later on
« Reply #1 on: April 28, 2016, 02:27:17 PM »
Most , including myself would need more specifics like age , how much money you are investing, cash reserve etc... one of the reasons is whether or not you should have ?% in bonds which usually protects your downside and then you would sell bonds on such crash and buy stocks BUT there are alot of variables to this so I again the more information you can give the more insight people can give you. Not to mention your time horizon and risk assessment.

BM1986

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Re: Investing and withdrawing money later on
« Reply #2 on: April 28, 2016, 02:43:08 PM »
Okay some numbers:

- Age 30
- Monthly saving approx. 50% of nett income - 2200 EUR (so 2500 USD)
- Approx. 70-80% of these savings go into indexfunds (mix of shares - bonds in ratio 70/30)
- Remainder in individual shares, savings, paying off mortgage
- Current assets approx 155K EUR (so 175K USD)
- For me the target would be reached at >500K EUR at which I may need some small additional income but as I do not hate working I feel I will always want to do some paid labor for a small % of the time. So at this stage I would feel 'independent' I expect this will be feasible to accomplish within 10 years. Maybe I will raise my goal during this period I do not know yet.

Feel free to ask more if needed :)
« Last Edit: April 28, 2016, 02:45:15 PM by BM1986 »

WildJager

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Re: Investing and withdrawing money later on
« Reply #3 on: April 28, 2016, 03:18:04 PM »
While still in the accumulation phase I am in 100% equities for the simple fact that long term gains are all I care about right now.  The ebb and flow of the market doesn't really factor in since I'm dumping money in on a consistent basis.

During the withdrawal phase, as already mentioned by another poster, a more balanced portfolio minimizes the up and down swings of the market via their contradictory behaviors to market triggers.  Thus, while your portfolio trend line won't be as vertical overtime, the difference between the trend line and your actual portfolio value at any given time will be closer.  So, when you have to sell, the dip you may be selling in won't be as egregious.

There has been some talk of holding some X amount of cash in reserves to act as a buffer during down markets.  While you can sense how the market is doing based off of the larger economic picture, this strategy practically amounts to market timing.  You may save yourself some heartache from having to sell in a dip, but you also may simply be losing out on earning potential if the market does well.  I see it as one of those times where you have to decide based on what makes you sleep better at night.

As far as selling monthly or yearly, that's mostly academic (and is basically the same as keeping some portion of your portfolio in cash if you think about it).  The good news is the 4% theory accounts for the inevitability that you'll be selling some of your stash in a downturn, so there's that.

In the end, just keep yourself educated on how the general market is doing and you'll probably be a tad safer than blindly selling at a regimented timeline.  The 4% rule assumes that you'll be selling consistently.  If it's obviously a bad time to sell, and you cinch your belt instead and wait it out, you'll be providing yourself with even more of a safety buffer.

Eric

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Re: Investing and withdrawing money later on
« Reply #4 on: April 28, 2016, 04:31:13 PM »
For example would it be best to take yearly withdrawals or monthly

Whatever's easier.  It isn't going to make much of a difference either way.  Over the long run, you'll pay a slight premium if you do it once a year, but that's offset by the simplicity. 


- also what would happen when a stock crash occurs at this stage?  In the current situation while growing the stash you will keep buying even when share prices drop which helps make larger gains on the shares you buy at lower levels. I can imagine when only withdrawing every year, and a crash occurs which could set you to 50% you will not have the same absolute amounts interest which you usually would have and it will take a long time going back to the original amount of interest? In this case withdrawing the same absolute amount continuously could make your stash to continue to decline. How do you guys see this?

Yep, your original amount could continue to decline.  Especially right away.  However, as long as there's not a prolonged recession, you should be fine.  Even if there's a prolonged recession, you'll still probably be fine.  You can mitigate some of this drop by holding bonds.  So even if the stock market drops 30 or 40%, a historically large drop, your portfolio will not decrease by this amount. 

Also keep in mind that there have been plenty of crashes and recessions in the past, which is why we recommend a very conservative withdrawal rate of 4% or lower.  Read the thread linked at the top of this forum "Stop worrying about the 4% rule."

Add in some flexibility of being able to lower expenses or pick up a bit of extra income and you can be pretty confident that you'll be able to weather any financial storm.


rubybeth

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Re: Investing and withdrawing money later on
« Reply #5 on: April 28, 2016, 04:56:29 PM »
Some stocks pay dividends quarterly or monthly, so you could also get steady income by switching to funds that do that. If you're with Vanguard, you could talk to them about specifics. Basically, the dividends can just be transferred into your checking account monthly/quarterly, kind of like a regular paycheck.

GreatLaker

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Re: Investing and withdrawing money later on
« Reply #6 on: April 28, 2016, 09:18:45 PM »
Here is a discussion of withdrawal strategies:
https://www.bogleheads.org/wiki/Withdrawal_methods

Market crash at the start of the withdrawal phase is known as Sequence of Return Risk. A web search should return lots of references.
One way of mitigating the risk is keeping enough fixed income so you would not have to spend down equities during a crash.

Another is variable percentage withdrawal, where you cut back on discretionary spending during periods of low market returns:
https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

BM1986

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Re: Investing and withdrawing money later on
« Reply #7 on: April 29, 2016, 03:23:59 AM »
Thanks for the answers and insights this does help to thing about the withdrawal strategies and assuring the value of your assets as much as possible.

Regarding fixed incomes I am also a bit in doubt - from the investments there are of course dividends although with the index funds I own this is approx. 1-2% yearly. I am thinking of whether it would be interesting to keep my appartment for rent income when I move to another house in 1-2 years. Difficulty is that in NL where I live it would give me only 3-4% (rent) on the invested money (the appartment) which is less then I expect from my other investments. However the upside is of course a more steady passive income which will be more or less always the same. How do you guys see this or what other investments ideas do you have and use?