When to Withdraw (based on 4% rule) - stupid question

[LiseE]

First year into our early retirement, I'm wondering how do you all withdraw funds from your investments?  One lump sum at the beginning of the year?  Monthly?  One lump sum at the end of the year?

.. and here is my stupid question ...

Using 1M as an easy number ...

In January, the 1M portfolio earned 4% interest.  I withdraw my 40,000 and go about my merry way.  In February, my portfolio also returns 4%.  Is that another 40K I could withdraw?  As I'm typing I think I'm getting it .. the 4% rule takes into account that your portfolio will continue to earn and grow BIGGER than the 4% you withdrew.  If I took out the 40K my portfolio earned in February, my account would have to earn greater than 8% to stay ahead?

Am I getting that right?

[bacchi]

I withdraw quarterly.

Correct, you only pull out 4% (or whatever -- I use the VPW method) once per year, total. If that's in January, you'd pull out 4% + inflation and then repeat in 2022.

[Simpli-Fi]

here is a stupid answer.  Build in some flexibility so you aren't required to sell investments on an arbitrary timeline...sell when you notice the market is high.

only your spending and lifestyle can sort this out

congrats

[MDM]

Statistically, the longer you can delay withdrawals the more you can withdraw.

Practically, whether you withdraw annually, quarterly, monthly, etc., is unlikely to be the determining factor in retirement success.

See Withdrawal methods - Bogleheads for more discussion.

[MustacheAndaHalf]

I like Vanguard's calculator for being simple but capturing the essentials.
https://www.vanguard.com/nesteggcalculator

If you want more safety, you can take a withdrawal rate that works, and then reduce it a small amount.  For example, if 4% works, you could drop to 3.5% for added safety - and get a higher chance of your nest egg being there throughout retirement.

[dividendman]

First year into our early retirement, I'm wondering how do you all withdraw funds from your investments?  One lump sum at the beginning of the year?  Monthly?  One lump sum at the end of the year?

.. and here is my stupid question ...

Using 1M as an easy number ...

In January, the 1M portfolio earned 4% interest.  I withdraw my 40,000 and go about my merry way.  In February, my portfolio also returns 4%.  Is that another 40K I could withdraw?  As I'm typing I think I'm getting it .. the 4% rule takes into account that your portfolio will continue to earn and grow BIGGER than the 4% you withdrew.  If I took out the 40K my portfolio earned in February, my account would have to earn greater than 8% to stay ahead?

Am I getting that right?

Not sure what you mean in the bolded section. This would mean you're withdrawing 8% a year (well over the 4% a year "safe" rate). Just because your portfolio may rise doesn't mean you should take out more.

[Metalcat]

Yeah, the 4% is for the year, not per withdrawal.

It is possible that your accounts could rise 4% in January, and then another 4% in February, but that doesn't mean that you can take out 8% for the year and call that a 4% withdrawal rate.

If you take out the money monthly, you take out 1/12 of 40K. If you take it our quarterly, you take out 1/4 of 40K. If you take it out annually, you take out 40K. How much your accounts rise that year in value has absolutely no impact on how much you take out, if you are trying to use a 4% WR.

If you don't want to use a 4% withdrawal rate and instead want to try something different, then I recommend that you read extensively on the matter to better understand the impacts of various withdrawal rates and how to execute them.

[ChpBstrd]

Assuming your investments have positive returns in the long run, the phenomenon of compound interest suggests you should withdraw very frequently in small amounts, withdrawing only what you need at any given time. That way, you minimize the cash sitting uselessly in a checking account earning near 0%.

The ultimate manifestation of this idea would be to get a debit card from your brokerage (TD Ameritrade for example, offers one). You could sell a share of stock, commission-free, from your cell phone app, and then use your debit card to buy groceries minutes later. None of this selling $15k of investments every 3 months to move it into checking nonsense! The 4% rule is based on invested assets, not unproductive cash sitting on the sidelines. When one decides to hold thousands of dollars in checking, those dollars don't count as investments.

The people who use credit cards as their emergency funds and leaving everything else productively invested are also minimizing idle cash. I predict the concept of not leaving cash idle will come back into vogue if interest rates ever rise.

[kenmoremmm]

Not that I'm in the withdrawal phase yet, but shouldn't one's withdrawal approach effectively be the opposite of their contribution (i.e. reverse dollar cost averaging)? Say withdraw 1x/month to smooth out highs and lows?

[Metalcat]

Not that I'm in the withdrawal phase yet, but shouldn't one's withdrawal approach effectively be the opposite of their contribution (i.e. reverse dollar cost averaging)? Say withdraw 1x/month to smooth out highs and lows?

It could be, but it could not be. Also, not everyone does dollar cost averaging.

[Wintergreen78]

I just check my finances every three months. I like to keep about six months’ worth of expenses in checking/savings. So every three months I pull another 3 months worth out of my investments, check what I actually spent for the last three months, and check on how my investments have done.

[vand]

Personally my plan will keep as much money invested for as long as possible - that means withdrawing little and often.

If we say that the portfolio goes up on average 7%pa, by drawing it all out at the start of the year you leaving approximately 3.5% return on the table of that total value.  That is actually quite a lot - more than all the hundredths of basis points you save with Vanguard that people like to obsess over.

There will always be times when you will need to make withdrawals when the portfolio has taken a dip. If you aren't very comfortable making that withdrawal while your portfolio is down then you probably need to go back and reexamine your asset allocation - this is not something that RE'ers have had to do much of in the last decade, but that may change going forward.

[MustacheAndaHalf]

You could sell a share of stock, commission-free, from your cell phone app, and then use your debit card to buy groceries minutes later.

That turns into a weight loss plan when the stock market is closed.  "Ah, markets are closed, I can't buy groceries."

I think at retirement, it's time to switch from trying to grow every dollar, to protecting one's retirement nest egg.  Twice the assets won't make you twice retired, but losing those assets can end retirement.

Probably the simplest, most conventional approach is 60% stocks and 40% bonds.  Withdrawals of 4%/year can be combined with rebalancing.  You withdraw and rebalance until you've got 4% in cash, and the portfolio is back to 60% stocks/40% bonds.

[Ricochet]

I just check my finances every three months. I like to keep about six months’ worth of expenses in checking/savings. So every three months I pull another 3 months worth out of my investments, check what I actually spent for the last three months, and check on how my investments have done.

Great approach, one I’m going to copy.

[FIREin2018]

First year into our early retirement, I'm wondering how do you all withdraw funds from your investments?  One lump sum at the beginning of the year?  Monthly?  One lump sum at the end of the year?

.. and here is my stupid question ...

Using 1M as an easy number ...

In January, the 1M portfolio earned 4% interest.  I withdraw my 40,000 and go about my merry way.  In February, my portfolio also returns 4%.  Is that another 40K I could withdraw?  As I'm typing I think I'm getting it .. the 4% rule takes into account that your portfolio will continue to earn and grow BIGGER than the 4% you withdrew.  If I took out the 40K my portfolio earned in February, my account would have to earn greater than 8% to stay ahead?

Am I getting that right?

Why do you want your acct to stay ahead?
Die with little $ left.

lets say you have $1M and it's only making 1%/yr. (humor me)
your expenses are $40k/yr.
withdraw $10k/quarter.

You will still withdraw $40k every year (+ inflation).
That will last you ~25yrs.

but Social security at age 70 will lessen the cash burn.

[ixtap]

Assuming your investments have positive returns in the long run, the phenomenon of compound interest suggests you should withdraw very frequently in small amounts, withdrawing only what you need at any given time. That way, you minimize the cash sitting uselessly in a checking account earning near 0%.

The ultimate manifestation of this idea would be to get a debit card from your brokerage (TD Ameritrade for example, offers one). You could sell a share of stock, commission-free, from your cell phone app, and then use your debit card to buy groceries minutes later. None of this selling $15k of investments every 3 months to move it into checking nonsense! The 4% rule is based on invested assets, not unproductive cash sitting on the sidelines. When one decides to hold thousands of dollars in checking, those dollars don't count as investments.

The people who use credit cards as their emergency funds and leaving everything else productively invested are also minimizing idle cash. I predict the concept of not leaving cash idle will come back into vogue if interest rates ever rise.

That is just silly. Put the groceries on a cash back cc and leave the investments sit until that bill is due.

[ChpBstrd]

Assuming your investments have positive returns in the long run, the phenomenon of compound interest suggests you should withdraw very frequently in small amounts, withdrawing only what you need at any given time. That way, you minimize the cash sitting uselessly in a checking account earning near 0%.

The ultimate manifestation of this idea would be to get a debit card from your brokerage (TD Ameritrade for example, offers one). You could sell a share of stock, commission-free, from your cell phone app, and then use your debit card to buy groceries minutes later. None of this selling $15k of investments every 3 months to move it into checking nonsense! The 4% rule is based on invested assets, not unproductive cash sitting on the sidelines. When one decides to hold thousands of dollars in checking, those dollars don't count as investments.

The people who use credit cards as their emergency funds and leaving everything else productively invested are also minimizing idle cash. I predict the concept of not leaving cash idle will come back into vogue if interest rates ever rise.

That is just silly. Put the groceries on a cash back cc and leave the investments sit until that bill is due.

^ OK, so THIS is the ultimate manifestation of the idea. You should go net negative in cash if you can borrow at 0% and float a debt worth one month of spending. Earning 2% cash back or so (e.g. via the Citi Double Cash card) is icing on the cake because you're earning the 2% plus the market return for one month of spending. 

The only downside I can think of is that it would be hard to automate this process. If your brokerage allowed automatic withdraws from your CC company, or if your brokerage allowed you to schedule transfers to your checking account each month of exactly your estimated spending needs, you would still need to manually trade to generate the cash right before the transfers, unless you are living off of highly predictable dividends/interest. Even then, you'd have to watch it closely so that your payments don't bounce in the event of a recession or bond default. But then again you'd have to do that on the broker's card too, unless you're keeping significant cash with your broker.

[soccerluvof4]

I withdraw once a month any given day with in that month only on an up day at or what seems to be near the top and less than 3% per month. If we have a rough couple of months I live off my cash as I have a larger cash position because it helps me sleep nights knowing if the market has a sever crash, unlike last Marches flash crash I can sustain for 4-5 years. Everyone is different and has different risk tolerance etc.. But I agree once you have everything else in order and are just making withdrawals more frequently is better and no less than quarterly. And as everyone else said its 4% a year not a month.

[talltexan]

I use my birthday as the anchor date for withdrawal/rebalancing, so I'm not goofing around on quarter-end days trying to time the market movements.

I'm intrigued by the debt idea, though. Here's how I'd do it:

Step 0: set an annual budget equal to 4% of my big ball o' money
Step 1: apply for a line of credit using one of those "no interest on purchases during the first year" offers.
Step 2: work my budget for the entire year (since you're going into debt, you definitely want to keep to the budget)
Step 3: make my first annual withdrawal at the end of the year to pay off the line of credit, and repeat.

[Telecaster]

Assuming your investments have positive returns in the long run, the phenomenon of compound interest suggests you should withdraw very frequently in small amounts, withdrawing only what you need at any given time. That way, you minimize the cash sitting uselessly in a checking account earning near 0%.

The ultimate manifestation of this idea would be to get a debit card from your brokerage (TD Ameritrade for example, offers one). You could sell a share of stock, commission-free, from your cell phone app, and then use your debit card to buy groceries minutes later. None of this selling $15k of investments every 3 months to move it into checking nonsense! The 4% rule is based on invested assets, not unproductive cash sitting on the sidelines. When one decides to hold thousands of dollars in checking, those dollars don't count as investments.

The people who use credit cards as their emergency funds and leaving everything else productively invested are also minimizing idle cash. I predict the concept of not leaving cash idle will come back into vogue if interest rates ever rise.

That is just silly. Put the groceries on a cash back cc and leave the investments sit until that bill is due.

^ OK, so THIS is the ultimate manifestation of the idea. You should go net negative in cash if you can borrow at 0% and float a debt worth one month of spending. Earning 2% cash back or so (e.g. via the Citi Double Cash card) is icing on the cake because you're earning the 2% plus the market return for one month of spending. 

The only downside I can think of is that it would be hard to automate this process. If your brokerage allowed automatic withdraws from your CC company, or if your brokerage allowed you to schedule transfers to your checking account each month of exactly your estimated spending needs, you would still need to manually trade to generate the cash right before the transfers, unless you are living off of highly predictable dividends/interest. Even then, you'd have to watch it closely so that your payments don't bounce in the event of a recession or bond default. But then again you'd have to do that on the broker's card too, unless you're keeping significant cash with your broker.

The solution is to have two months' expenses in cash.  Yes, you have a slightly larger cash drag, but over any reasonable period having an extra month in cash won't matter.  And that way your expenses are covered in the time it takes the transactions to settle.