Withdrawal Frequency in Retirement

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LMK5
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Withdrawal Frequency in Retirement

Post by LMK5 »

Keeping the 4% SWR in mind, how do retirees make their withdrawals? Do some withdraw the amounts needed on December 31st, across different account types, then put that money aside and use it the following year? Do you make withdrawals month-to-month and keep track of which account type it came from so you can maximize tax efficiency?

Looking for some examples of retirement withdrawal implementations.
mkc
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Re: Withdrawal Frequency in Retirement

Post by mkc »

There's a very recent topic asking this exact question. I will try to find and link it.

ETA - here ya go viewtopic.php?f=10&t=344895
dbr
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Re: Withdrawal Frequency in Retirement

Post by dbr »

Just about any pattern or lack of pattern in withdrawing can be completely possible and practical. There isn't much that would not just be common sense.

The actual practice depends a lot on how and where your assets are arrayed. The actual practice also recognizes that spending is not likely to be at such a consistent rate that one would literally hold withdrawals right near 4% each and every year. Trying to live in a straight jacket like that would not be much fun or such a person has a very steady lifestyle.

If you are asking this as a financial rather than a cash flow question, then an answer is that time invested always has positive effect on average, so leave money invested as long as possible. I guess that means postpone spending as long as possible. The ultimate logic to that is don't spend in January if you can wait till December . . . and don't spend this year if you can wait till next year . . . and . . . don't spend at all if you can do without.

So here is a list of where our income comes from:

1. Monthly deposit of pension and Social Security checks. There is also a monthly stipend from a Health Care Reimbursement Account. Last year and this year we got stimulus checks deposited in our checking account as well. This is not withdrawal from assets, of course, but you need to see it to understand the situation.

If a person (not us) does not have a pension one can convert assets to a pension by purchasing an SPIA. Whether or not it is an advantage to do that is a discussion for each individual. There are people (again not us) who obtain their income from a ladder of bonds, presumably long TIPS, and one could say the withdrawal is made when a bond matures and whenever interest is paid. Whether or not one should have such a ladder is a discussion for each individual. I mention it for theoretical discussion.

2. Direct deposit of dividends from taxable investments. These appear in the checking account whenever dividends appear. That depends on the dividend schedule for the investments. Stock funds usually pay quarterly dividends and bond funds often pay monthly.

3. Required Minimum Distribution from 401k. Technically I don't consider that a withdrawal because the next step can be variable. First off we use withholding on the RMD to pay taxes for the year. So, being spending that is a withdrawal in December. Afterwards excess cash might be reinvested in taxable holdings, so that is not a withdrawal. The rest is a withdrawal, so the timing is also every December.

4. Sale of taxable assets if more income is needed. We are doing that this year because there is some maintenance and improvement on the house that will be a large expense compared to normal. In the past there have been other lumpy expenses like this. We are making that sale a month or so before our contractors will be looking for payment. So that is the timing of the withdrawal.

Does this help?
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LMK5
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Re: Withdrawal Frequency in Retirement

Post by LMK5 »

Thanks for the great responses.
Exchme
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Re: Withdrawal Frequency in Retirement

Post by Exchme »

It wasn't clear to me whether OP understood the general order of withdrawal from different types of accounts. To minimize tax drag, if Roth conversions are being made, the Roth conversions should take up as much of the tax bracket as possible, and living expenses and taxes on the conversion should come from taxable. If there is not enough in taxable to do that, then tax deferred would be used as needed for all.

As far as timing, anything can work. Personally, I would not do it annually and then have a big pile of cash out of the market. Since a lot of the variability in my cash flow will be quarterly - due to estimated tax payments and receiving dividends - I will aim for quarterly withdrawals. Others might want to manage cash more tightly and do monthly.
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LMK5
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Re: Withdrawal Frequency in Retirement

Post by LMK5 »

Exchme wrote: Sat Apr 10, 2021 9:02 am It wasn't clear to me whether OP understood the general order of withdrawal from different types of accounts. To minimize tax drag, if Roth conversions are being made, the Roth conversions should take up as much of the tax bracket as possible, and living expenses and taxes on the conversion should come from taxable. If there is not enough in taxable to do that, then tax deferred would be used as needed for all.

As far as timing, anything can work. Personally, I would not do it annually and then have a big pile of cash out of the market. Since a lot of the variability in my cash flow will be quarterly - due to estimated tax payments and receiving dividends - I will aim for quarterly withdrawals. Others might want to manage cash more tightly and do monthly.
Do you consider the taxes you'll have to pay on conversions part of your withdrawals used for calculating your withdrawal rate?
Exchme
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Re: Withdrawal Frequency in Retirement

Post by Exchme »

Yes, the research that came up with the 4% withdrawal rate as a pretty safe number included draws for any reason as part of the 4%.

Another way to look at it is that part of the tax deferred account belongs to the government, you are just taking care of it for them and have to give it back when you withdraw it. So you have to be careful when looking at savings, some of the money in tax deferred isn't yours. Obviously the amount that belongs to the government will be larger in larger accounts as getting it out will require hefty taxes. To some degree this applies to taxable as well if there are a lot of capital gains.
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Re: Withdrawal Frequency in Retirement

Post by Golf maniac »

Been retired 5 years. We have a very detailed monthly budget. Annually we look at all income sources and expenses and establish our monthly budget for the next year. Then we determine how much is needed monthly from our retirement assets to meet the budget. We then add in the tax impact to increase the monthly withdrawal. We will adjust our budget during the year if one budget category is over or under budget. We have an “extra” category that is about $100 a month so we don’t have to change the monthly withdrawal. We have savings for any “lumpy” expenses that may come up during the year. This has worked very well for us with no problems.

All of my retirement accounts are taxable so taxes are always paid, we do try to stay within a given marginal rate when looking at our budget. I am very conservative with my retirement assets that will be used in the next 10 years. For assets that will may be used in 15 or 20 years, if at all, I take more risk.
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Re: Withdrawal Frequency in Retirement

Post by Broken Man 1999 »

For living expenses, SS provides about 50% of our needs. We distribute from our TIRAs the next month's needed funds near the end of the current month. We pull from the asset that is above the desired AA we want it to be.

Sometimes the amount is large, sometime the amount is small. Just like when employed, retiree expenses can be lumpy.

Works for us.

Broken Man 1999
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dbr
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Re: Withdrawal Frequency in Retirement

Post by dbr »

LMK5 wrote: Sat Apr 10, 2021 9:27 am
Exchme wrote: Sat Apr 10, 2021 9:02 am It wasn't clear to me whether OP understood the general order of withdrawal from different types of accounts. To minimize tax drag, if Roth conversions are being made, the Roth conversions should take up as much of the tax bracket as possible, and living expenses and taxes on the conversion should come from taxable. If there is not enough in taxable to do that, then tax deferred would be used as needed for all.

As far as timing, anything can work. Personally, I would not do it annually and then have a big pile of cash out of the market. Since a lot of the variability in my cash flow will be quarterly - due to estimated tax payments and receiving dividends - I will aim for quarterly withdrawals. Others might want to manage cash more tightly and do monthly.
Do you consider the taxes you'll have to pay on conversions part of your withdrawals used for calculating your withdrawal rate?
It might help to recognize that withdrawals and withdrawal rate are not about your cash flow. Withdrawals are about the fate of your investments. Simply put your investment portfolio grows and shrinks each year according the sum total of return earned, contributions made, and withdrawals taken. So a withdrawal is any removal of money from the portfolio just as a contribution was any addition of money to the portfolio other than return on investments.

Spending, on the other hand, is only indirectly related to the portfolio. If you get SS and spend that income, it is spending but not a withdrawal. If you have some cash in your checking account or in your wallet and you don't include the checking account and your wallet in your portfolio, then writing a check or spending cash from your wallet is spending, but it is not a withdrawal. If you have a mutual fund that is part of your portfolio and you write a check on that mutual fund, that is both spending and a withdrawal. If you have an advisor that deducts a 1% pa fee from your account that is both a withdrawal and spending though you never see that in your checking account or your wallet. If a mutual fund company spends money to run the fund, that is neither a withdrawal nor spending because it is accounted for when the return on the account is reported. Care must be taken here when running models such as the 4% withdrawal model because those models assume no costs and you must somehow account for net returns rather than asset class returns. You could either adjust the returns or put in a pseudo withdrawal in the model.

So, when you make a Roth conversion and you place less in the Roth than you distributed from the IRA you have made a withdrawal from assets and you have spent money on taxes. If you place the same amount of money in the Roth that you distributed from the IRA, then you have not made a withdrawal from your portfolio. Now you must find a source to pay the taxes, which is spending. If that source is your pension and Social Security income or just drawing down your checking account, then it is spending and not a withdrawal. If you actually sell some shares in your taxable account to pay the taxes, then it is a withdrawal and also spending.

It is certainly possible to scheme out a different way of keeping the accounts. There is nothing wrong with that as long as it is consistent. If you are modelling portfolio behavior, as in 4% rules, you also have to be consistent with the assumptions used in the model, as mentioned.
Marseille07
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Re: Withdrawal Frequency in Retirement

Post by Marseille07 »

I recommend monthly withdrawals.

Annually carries multiple issues:
1) You leave a lot of cash on the table uninvested
2) Budgeting is more difficult because you withdraw so much money upfront
3) The withdrawal amount can change drastically year over year, assuming you're doing some percentage-based withdrawal (and you should be)
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billthecat
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Re: Withdrawal Frequency in Retirement

Post by billthecat »

My situation is atypical because 84% of my NW is in taxable, so this may not apply. I'm not yet retired but my plan is to withdraw quarterly, to align with the slowest frequency of dividends of my holdings. Total bond is monthly, total US market is quarterly, and total international is annually - but I don't have international. (Timing based on my investments.)

I will have two taxable brokerage accounts, one "monthly budget" from which I spend, and one "main portfolio" which houses my taxable investments. Dividends and interest will accumulate in my "main portfolio" account. Then, at the beginning of each quarter, I will transfer one month's of expenses to the "monthly budget" account. And I will transfer two months to a HYS account, which also has the normal cash portion of my portfolio. Any shortfall to fund the cash would come from the sale of stock or bonds depending on whatever is needed to rebalance. At the beginning of month 2 of the quarter, I'd transfer one month's expenses from HYS to my "monthly budget" account. Same at the beginning of month 3.

The reason why I want a separate monthly budget account is partly behavior and partly security. Behavioral in that it will encourage me to stay within my budget, and security because my day to day ATM would be for this account, not the bulk of my assets.

I will be withdrawing from taxable accounts to spend, and doing traditional 401K to Roth 401K conversions. Ultimately, I'll be left with a dwindling taxable account and a sizable Roth account.
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David Jay
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Re: Withdrawal Frequency in Retirement

Post by David Jay »

Virtually all of our portfolio is in tax-advantaged accounts. In order to meet specific qualifications (ACA, MI Homestead, etc.) we carefully move money from tax advantaged to a taxable account that I call our "distribution" account (at the brokerage) a couple of times a year.

We then have an automatic transfer of a monthly "paycheck" from the distribution account to our Credit Union checking account. This eased my spouse's concern about the loss of salary at retirement.
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Dandy
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Re: Withdrawal Frequency in Retirement

Post by Dandy »

I have pension and SS sent to an online savings account that also has other savings. Twice a month I have money automatically sent to my checking account that approximates our normal monthly expenses.

It acts like a bimonthly paycheck that I used to get. Also, most of my bills come due mid month or later so I get a bit of earnings on the pension and SS income. Another benefit is that if I need more transfers from savings it alerts me that my expenses might need some attention.
KlangFool
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Re: Withdrawal Frequency in Retirement

Post by KlangFool »

OP,

I have 3 years of expense in CASH. The actual withdrawal has nothing to do with my actual expense need. My withdrawal method and timing is totally flexible in order to maximize tax efficiency.

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Buddtholomew
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Re: Withdrawal Frequency in Retirement

Post by Buddtholomew »

KlangFool wrote: Sat Apr 10, 2021 12:38 pm OP,

I have 3 years of expense in CASH. The actual withdrawal has nothing to do with my actual expense need. My withdrawal method and timing is totally flexible in order to maximize tax efficiency.

KlangFool
I too have 3 years in cash on a 60/40 AA.
Klangfool, do you plan to drawdown the cash position or is 3 years in cash part of the 60/40 AA that you will rebalance? In other words, will you always have 3 years in cash and if so, can you share how that will optimize withdrawals?
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Re: Withdrawal Frequency in Retirement

Post by KlangFool »

Buddtholomew wrote: Sat Apr 10, 2021 1:26 pm
KlangFool wrote: Sat Apr 10, 2021 12:38 pm OP,

I have 3 years of expense in CASH. The actual withdrawal has nothing to do with my actual expense need. My withdrawal method and timing is totally flexible in order to maximize tax efficiency.

KlangFool
I too have 3 years in cash on a 60/40 AA.
Klangfool, do you plan to drawdown the cash position or is 3 years in cash part of the 60/40 AA that you will rebalance? In other words, will you always have 3 years in cash and if so, can you share how that will optimize withdrawals?
Buddtholomew,

1) The 3 years of CASH is separate from my 60/40 AA. My 3 years buffer can fluctuate down to 1 year if I choose to.

2) My rebalancing of 60/40 is separate from my withdrawal.

3) My withdrawal is dependent on how much tax that I want to pay each year.

I have

A) CASH -> Generate ZERO taxable income

B) Dividend and distribution from my taxable account -> unavoidable taxable income

C) Roth IRA contribution -> ZERO taxable income.

I can generate more taxable income at ZERO taxes

A) Roth conversion up to standard deduction.

B) Tax gain harvest up to 0% long-term capital gain tax rate

C) Tax loss harvest to create more Roth conversion space

In summary, in my system,

1) Spending

2) Withdrawal/refilling the CASH buffer

3) Rebalancing -> I can rebalance in my Rollover IRA/Roth IRA with no taxable event.

are all independent of each other and can be done separately.

KlangFool
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Re: Withdrawal Frequency in Retirement

Post by Buddtholomew »

It sounds as though you intend to maintain and replenish the 3-year cash buffer in a way that optimizes taxes and via rebalancing opportunities.

Are you concerned with 40% in bonds + 3 years in cash as too fixed income heavy?
I too break it down to 15 years stocks and 10 years bonds/cash.
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dbr
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Re: Withdrawal Frequency in Retirement

Post by dbr »

Do people who are retired keep that same 10-15 years spending in fixed income the whole way. For example would you do that if you started that way at age 60 but now you are 80, of if you are 90? How does that work?

I'm curious because I don't think that way and instead just stick to an allocation target. For me that is 50/50, but it was there before retirement and hasn't changed since.
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Re: Withdrawal Frequency in Retirement

Post by jebmke »

I kept a fairly steady allocation for the first 10 years; Once I started my pension I have shifted my plan to only withdraw dividends (this is a micro sale of equity) and sell bonds, if necessary to raise cash. In other words, I have no plans to ever sell equity again. I will re-balance on the downside and I'm trying to decide this year whether to raise the lower trigger point to essentially ratchet the equity percentage up over time.
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Re: Withdrawal Frequency in Retirement

Post by KlangFool »

Buddtholomew wrote: Sat Apr 10, 2021 1:54 pm It sounds as though you intend to maintain and replenish the 3-year cash buffer in a way that optimizes taxes and via rebalancing opportunities.

Are you concerned with 40% in bonds + 3 years in cash as too fixed income heavy?
I too break it down to 15 years stocks and 10 years bonds/cash.
Buddtholomew,

<<Are you concerned with 40% in bonds + 3 years in cash as too fixed income heavy?>>

Why should I? I know that I know nothing.

Conversely, why do you think that it is safe to be 60% in stock?

<<I too break it down to 15 years stocks and 10 years bonds/cash.>>

Do you need to manage your income in order to retire early and qualify for the ACA subsidy? It is harder to do it with stock and bond.

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Sheepdog
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Re: Withdrawal Frequency in Retirement

Post by Sheepdog »

Withdrawal frequency in retirement? For me, it has been as needed, but with a watchful eye on my saving's balance. I have been retired for 22 years, now 87.
Needs are not constant in retirement. You must plan for such things as required large home maintenance items (major remodeling, new roof, driveway replacement, etc.)...automobile replacements in certain years......major unplanned medical expenses including large hearing or dental expenses which will popup unexpectedly. Will whatever percentage withdrawal method you use take care of those? When they occur, will they derail your withdrawal plan resulting in financial difficulties in your late retirement? No plan is perfect, but you should realize that you will have to take them in your considerations. If you have excess income, then you can relax somewhat. If you must maintain a tight retirement income and spending plan to maintain your lifestyle for a long life span (100?) like I do, then you should have a plan for the unplanned.
In short, I planned for an average annual withdrawal percentage, not a specific set annual withdrawal percentage. The withdrawals will be variable year to year and month to month. and taken out as needed.... low in some years in order to pay for the large expenses in others, yet keep within the average of multiple years. It requires me to limit luxury spending in down market years, but I have never wanted.
My goal was a withdrawal average of 4.5% a year, not adjusted for inflation.. That has worked great for us....good living, new autos for my wife and me on regular basis, nice vacations when income is good, enjoy sports and entertainment, etc. every year. Actual annual withdrawals have been variable to meet spending needs and wants. They have ranged from 3.14% to as high as 6.57%, but the average is very close to the plan (4.57%.. My savings balance today is higher than it was 22 years ago and still having a great life.)
I wouldn't want to be a prisoner of a set withdrawal plan. Watch your needs. Watch your investment balance. Be flexible so you can enjoy your "golden" years.
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Dandy
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Re: Withdrawal Frequency in Retirement

Post by Dandy »

Do people who are retired keep that same 10-15 years spending in fixed income the whole way. For example would you do that if you started that way at age 60 but now you are 80, of if you are 90? How does that work?
I roughly follow Dr Wm Bernstein's idea of keeping 20 or more years of draw down dollars in "safe" fixed income. At 73 and have SS and pension almost equal our normal expenses so I use the potential draw down my widow would need should I die first and she loses 1/2 my pension, her SS and files single instead of joint for taxes. I make sure there is enough "safe" fixed income to fund her draw down needs until age 90. At some point we won't need this safety first approach as we age much further and our portfolio stays reasonably in tact.

Our overall allocation is about 45/55 and withdraw from both equities and fixed income unless equities have a really bad year. Actually with interest rates likely to rise?? - FDIC products and short term bond funds should do ok for awhile compared to intermediate bond funds which are about 1/2 of my fixed income.
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