General Discussion > Welcome and General Discussion

The mechanics of 3%

(1/11) > >>

keyvaluepair:
Hello all,
I've a fairly elementary question on how people generate income post-FIRE. On a separate thread in the investment group, I'd asked if I was FIRE'able and it turns out that I am - approx total investments including cash, joint 401K and investments total $3.3M. Out of this, about 800K is generating a cash dividend of 2.2%.

In terms of getting 3% out of it, how do folks do it? Do you sell from index funds, sell stock positions? Something else? Sorry if the question is a bit vague, but given the large set of post-FIRE people here, I'd love to get overall guidance.
thanks
kv

DarkandStormy:
3% is super conservative, but if that's what you want to do and you're comfortable with, it affords you a lot more flexibility.

3% is not simply about getting a dividend.  It's also tied to the growth of your assets.  You are in some stocks or bonds, yes?  Those will (in all likelihood) increase in value during your retirement in addition to paying out divideds.

As for the mechanics, pick an asset allocation you are comfortable with (75/25? 60/40? 90/10? Up to you) and then in all likelihood either stocks will go up and you'll be out of balance or stocks will go down and you'll be out of balance.  Re-balance yearly (or semi-yearly) by simply selling what has now increased in your asset allocation and buy the other (assuming you do a simple stocks/bonds allocation).  You can (and should) probably re-assess your asset allocation yearly to fit your comfort level.

You could take the cash dividends or simply choose to reinvest them.  As for withdrawing, people withdraw as they see fit.  You could do it monthly, quarterly, etc.  Since you're 52, I'd start with your taxable brokerage account (assuming you have that) to avoid early withdraw penalties.  This will allow you to go through the Roth Ladder if you so choose (http://www.madfientist.com/how-to-access-retirement-funds-early/).  Otherwise, when you're withdrawing you could withdraw at your asset allocation (say you're 75% stocks, 25% bonds.  Sell $750 of stocks and $250 of bonds for every $1K you need).

I'm not near FIRE yet so I haven't researched it a ton, but those have been my takeaways from reading a few articles.  Maybe some post-FIRE people can chime in.

secondcor521:
Post FIRE person here.

Most people turn off any dividend reinvestment in taxable accounts and sweep those dividend payments into checking and then spend them.

You'll also probably have some miscellaneous income.  Funnel that into checking and spend that.

You will also likely find out that your taxes and expenses will drop more than you think.  You may be at the point where the above is enough.

If you need or want more, you'll need to sell a little bit of assets every year.  What I am doing is selling from my taxable account now while I am waiting for the pump to be primed on my Roth pipeline.

In five years or so, I'll reach something resembling stasis where I move a year's worth of expenses from my traditional IRA to my Roth IRA and pay income taxes on that money, and withdraw a year's worth of expenses from my Roth IRA and pay no taxes on that money.

Most people also have an asset allocation in mind and rebalance to it once a year or so.  You can tie that together with an annual withdrawal if you like, but there's no reason to.  Personally I have 100% stocks in my taxable and Roth, and then I rebalance to/from bonds within my traditional IRA so there are no tax implications.

If you do want to think in terms of rebalancing and selling at the same time, the general rule is to sell from whichever asset is out of whack to the high side, and then further rebalance if necessary.  So for example, if my AA calls for me to be at 70/30 and I'm at 75/25, I'll sell stocks for my withdrawal and then exchange more stocks for bonds to rebalance to 70/30 again.  If I'm at 65/35, I'd sell bonds for my withdrawal and then exchange more bonds for stocks.

Laura33:
What DarkandStormy laid out is the classic approach:  use your withdrawals as an opportunity to rebalance to your target asset allocation.

I plan to use a slightly different mechanism (to self-insure against sequence-of-return risk):  I am going to take probably three years of expenses and put it in a ladder of individual bonds (e.g., if my target FIRE date is 2020, I would have one year's $ in bonds maturing in 2020, another year's $ in bonds maturing in 2021, and a third year's income in bonds maturing in 2022).  The rest will likely remain in VTSAX (or other broad stock funds in 401(k)s).  Every year, I get the money from the bonds that mature and use that to live on.  If the stock market is flat or up, I will then buy another set of bonds maturing in 2023 to replace the ones that just matured.  If the stock market craters, though, I still have two more years' of expenses available, so I can ride it out and replenish the ladder in a year or two when the market turns around.

Then, once some of our other income sources kick in (pension, SS), I will probably stop with the bonds entirely, because I no longer have to worry about a big crash in the first few years of retirement. 

YMMV.  Personally, I am retiring "late" by this forum's standards, so I am planning never to have to work for pay again.  That means I am more concerned about protecting my downside risk than many others here (heck, if I were retiring today, I'd probably want a 5-year bond ladder given the recent market run-up!  But again, that is me and my high need for security).

talltexan:
Figure out the desired allocation. (for example, I have $1 million, and I want it to be 70% stocks).

On January first, I check my account, and I have $740,000 in stocks, $28,000 cash (that were paid as dividends over the previous year) and $300,000 in bonds. Since I need $30,000 to live, I'd take the cash that were paid as dividends, plus sell $2,000 worth of stocks for the year.

That leaves $38,000 in gains on the stocks, so I'd move $11,400 of that into new bonds.

Navigation

[0] Message Index

[#] Next page