Author Topic: Withdrawal newbie question  (Read 742 times)

JohnnyZ

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Withdrawal newbie question
« on: February 25, 2019, 02:05:41 PM »
So I'm not quite there yet, but I found myself wondering about post-retirement withdrawals. There are many discussions about the 4% rule etc. but I haven't found anything about how to implement it in practice. For example: do you withdraw at a fixed date? Monthly? Yearly? Only when rebalancing? Do you sell more when the market has risen?

 My idea would be:
- keep about 1-2 years' worth of expenses in cash/savings account
- sell stocks once a year (1 year's worth of expenses)
- do not sell at a fixed date, but make an order to sell if the price reaches [last year's sell price]+[X%] (I'm thinking let X=5)

the idea of course being to keep enough cash not to have to sell at the worst time, and to have an simple rule to tell you when to sell. X could also be decreased in the case of a prolonged bear market.
Does that seem sensible, or daft? Should you keep less cash and keep bonds to be sold during bear market? Is it better to sell only when rebalancing (for tax purposes), without looking at the price tag?
 What's your strategy?

cap396

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Re: Withdrawal newbie question
« Reply #1 on: February 27, 2019, 05:36:50 AM »
I was hoping some others would reply because I'm also curious to know how people handle withdrawals.

I think your plan is good.  1-2 years of cash and selling once a year sounds good.  Your rule for when to sell sounds good because it has you selling at a time that is determined mathematically and not based on emotions or guessing how you think the market will perform next.  I would suggest picking a number for "X" in your formula and sticking with (not changing it based on how the market is doing).  But you would need a formula that will work in both a bear and bull market.

We just FIRE'd about 6 months ago and aren't taking withdrawals yet because we are living off the cash we got from selling our house.  Once we start taking withdrawals, we decided to sell stocks monthly instead of once a year just to sort of dollar cost average our withdrawals a little more often.  But I know many people have said that they do their withdrawals annually.
« Last Edit: February 27, 2019, 05:40:24 AM by cap396 »

secondcor521

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Re: Withdrawal newbie question
« Reply #2 on: February 27, 2019, 10:39:18 AM »
I've been retired for 3 years.

I withdraw 3 months' worth of expenses at a time and put the proceeds in my savings account.  I move about 1 month's worth of expenses from savings to checking each month and spend from my checking account.  When the savings account runs low, I withdraw another 3 months' worth of expenses.

Three months is what feels like a comfortable balance to me between keeping my money invested and not having to watch my cash account balances very closely all the time.

I rebalance occasionally whenever I notice I am out of whack relative to my target AA.  I consider my portfolio AA as a whole and rebalance within my traditional IRA, so rebalancing and withdrawals are not connected or related at all.

Other than the money that I'm planning on spending in the next few months, I do not keep any sort of cash cushion in my portfolio at all.

So my simple rule on when to sell is when I need the money.  I realize there will be times when I will sell at relatively low market valuations when I need cash and the market is down.  I think that during those times I will naturally become a little more frugal.  I also think that the drawback of having a cash cushion all the time outweighs the benefits that only occur some of the time.  Also, a cash cushion needs to be refilled, and the complications associated with that add, well, complexity.

My target AA is 93/7 and does not depend on whether or not we are in a bull market, a bear market, or otherwise.  I do not believe in trying to change one's AA in response to current or recent market conditions.

Boofinator

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Re: Withdrawal newbie question
« Reply #3 on: February 27, 2019, 11:00:50 AM »
I'm not retired, but I'd like to think I'd pull withdrawals similarly to how I invest: on an as-needed basis. Currently, I usually look at my balance after every paycheck and determine how much I'd like to contribute. In retirement, about once a month I'll look at upcoming expenses and determine how much I should withdrawal. The objective being to keep the little green soldiers working as long as possible.

Regarding
Quote
do not sell at a fixed date, but make an order to sell if the price reaches [last year's sell price]+[X%] (I'm thinking let X=5)
, I would not recommend this. Markets approximate a "random walk", so in any given year the market may not reach 5%, or they might go up 15% (so you'd be leaving a lot of money on the table).

nereo

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Re: Withdrawal newbie question
« Reply #4 on: February 27, 2019, 11:15:38 AM »
Our plan is to hav a sell order executed monthly, with money going directly into our checking account - much like a paycheck would. 

Each calendar year we'd determine from which bucket we'd be drawing money from for optimal tax efficiency, as well as make adjustments for inflation.  My guess is we'll frequently have money leftover (both from underspending and from occasional side-gigs) and so we might 'skip' sell orders once the checking account grows large enough.

Vanguard makes it pretty easy, and I'm sure it's similar with other brokerages.  Just as you can set up auto-invest you can set up auto-withdraw. No need to think about it.

Monthly, quarterly, yearly... up to you, though Boofinator has a good point: you want to keep your green soldiers working as often as possible.

JohnnyZ

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Re: Withdrawal newbie question
« Reply #5 on: February 28, 2019, 02:39:39 AM »
Thanks for your replies. It seems as a novice investor I am perhaps too scared of having to sell during a bear market, and also underestimating the cost of not investing ASAP.
 This has given me some food for thought.

MustacheAndaHalf

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Re: Withdrawal newbie question
« Reply #6 on: February 28, 2019, 10:03:15 PM »
When you're still accumulating, it may be fun to try and figure things out.  What you can't imagine is that decades from now, you'd rather have things just work.  Plus, you might have a spouse that wants to know how it works - is your spouse going to follow that same formula?  So it helps to think of something much simpler, that doesn't depend on the market.  Don't expect to profit off your withdrawals: you need to pay for food & rent regardless of the market conditions.

So maybe think of making quarterly withdrawals throughout retirement.  Once a year is a bit dramatic, and can be a test of your resolve.  Also, you can't afford to skip a year.  If you instead withdraw quarterly, the amounts are smaller and the behavior is better ingrained.