Author Topic: withdrawal strategies for reducing Sequence of Return Risk  (Read 2037 times)

Lnspilot

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withdrawal strategies for reducing Sequence of Return Risk
« on: January 13, 2016, 06:49:39 PM »
Hey folks,

As my own FIRE date approaches (January 2017), I'm putting the finishing touches on my SuperPlan.

With relatively poor returns on the horizon* the biggest risk to my early retirement plan is the Sequence of Return Risk**.

Yes, the Mad Fientist has shown us how we can simply adjust our withdrawal rate*** to account for the Shiller CAPE, but I've got cash coming in soon, so I could just spend that instead of selling depreciated shares. I'll be doing a Roth Conversion at the end of year 1 of RE, so those basis dollars will be available to withdraw at the start of year 6, so the question remains what's the best way for me to fund years 1-5?


Here's what I'm thinking:


Years 1-5

The current dividend yield of my taxable account is about 1/2 ($15k) of my projected early retirement budget. Having a cash reserve to fund the other half would allow me to get through years 1-5 without selling any principal, which significantly reduces the Sequence of Return Risk.

Ideally I’d hold $75k to cover five years of $15k supplements. Adjusted for inflation, this is $80k-ish. During Q4 of 2016, I’ll instruct Vanguard to send all dividends to my checking account. Q4’s dividends will pay for 2017 Q1’s spending, and be supplemented with cash. Q1’s dividends + cash for Q2’s spending, etc.

I anticipate being able to have at least $60k in cash by 2017. This will put me mostly through years 1-4. I may need to sell shares doing years 4-5 to supplement dividends, but I’m willing to do that as necessary for a little while while I wait for my Roth IRA Conversion to become available.


Years 6-10

Paid for via dividends and Roth conversion basis dollars.




Pros: Reducing sequence of return risk.

Cons: losing a bit of cash due to inflation, and opportunity cost of the cash sitting idle and not invested.



Feel free to poke and prod this idea, but I also want to know for you recently retired or about-to-retire folks, what are your own plans for reducing Sequence of Return Risk?

Will you just sell from the taxable account or do something different? What other pros/cons do you see with this?




*https://www.kitces.com/blog/should-equity-return-assumptions-in-retirement-projections-be-reduced-for-todays-high-shiller-cape-valuation/
**https://www.kitces.com/blog/understanding-sequence-of-return-risk-safe-withdrawal-rates-bear-market-crashes-and-bad-decades/.
***http://www.madfientist.com/safe-withdrawal-rate/