Cadence of Withdrawals when retired

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Frugalchicos
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Cadence of Withdrawals when retired

Post by Frugalchicos »

Hey there,

For all of those who are successfully retired, how is the cadence of your withdrawal? where do you pull your money from first? I understand the cadence goes like below (please, correct me if I am wrong):

1 - Dividends
2 - Taxable account
3- Cash cushion (planning in having cash for 4 years expense)
4 - SS
5 - 401K/IRA

Other passive incomes can play a role here (real estate, etc..)

2Birds1Stone
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Re: Cadence of Withdrawals when retired

Post by 2Birds1Stone »

I would strongly urge you to read the entire SWR series on ERN. It's not going to make or break your retirement, but getting this part *right* can significantly impact your failsafe withdrawal rate and anxiety in retirement.

https://earlyretirementnow.com/safe-wit ... te-series/

Scott 2
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Re: Cadence of Withdrawals when retired

Post by Scott 2 »

Our goal was to keep things simple and hassle free, so if something happens to me, it is easy for my wife to take over. Her interest in this stuff is low. We're running a basic 4 fund portfolio.

On the annual re-balance date, we bump cash reserves to 18 months. Spend from there. Sources in planned priority order - SS (when available), cash reserves, brokerage, roth, ira.


Currently - dividends and capital gains distributions in all accounts automatically reinvest. This might leave a small amount on the table, compared to holding less cash and sweeping the dividends into cash. But, we have low turnover index funds and are low income. The cost isn't much. I see it as the price of simplicity.

More careful tax planning would have been highly valuable during accumulation. We held funds of funds in taxable accounts, which threw off a steady stream of dividends and capital gains. We could have saved tens of thousands, simply holding those individual funds in the appropriate IRA or brokerage. Very high return for the small effort of re-balancing manually, containing the events to tax protected accounts.

At retirement, I find the primary task is balancing income thrown off by the brokerage account, with Roth conversions, with eligibility for ACA subsidies and cost sharing. The goal is to minimize lifetime taxes. It is complicated by consideration of RMD's, the 5 year delay on accessing roth conversions, and (if we're very lucky!) the medicare penalty on high income.

Crudely, our goal is to get as much in the Roth as possible. I made a spreadsheet that estimates value of our major account types (brokerage, roth, ira) up to age 90. Optimizing healthcare costs is the biggest unknown. The rules are changing annually, and it's hard to predict consumption.


I like Swedroe's discussion of all this in Your Complete Guide to a Successful & Secure Retirement.

I read the ERN series. It's good, but complicated. After understanding it, as well as McClung's living off your money, we landed pretty close to a naive bogleheads strategy. We were comfortable accepting the lower SWR, in exchange for simplicity.

The one concession I made to complexity, was taking on a rising equity glide path, due to the high market valuations. McClung's prime harvesting strategy makes implementation simple, a few steps to follow when re-balancing. I couldn't find a good reason to say no.

Frugalchicos
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Re: Cadence of Withdrawals when retired

Post by Frugalchicos »

Thanks @2Birds1Stone @Scott 2

I will go through the info you suggested and apply it to my excel sheet. Trying to see if there is any gap or missing part. So far, taxes and retiring in Spain when having the investments in the US are the most complex part for me.

WFJ
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Re: Cadence of Withdrawals when retired

Post by WFJ »

Frugalchicos wrote:
Mon Sep 20, 2021 3:51 pm
Hey there,

For all of those who are successfully retired, how is the cadence of your withdrawal? where do you pull your money from first? I understand the cadence goes like below (please, correct me if I am wrong):

1 - Dividends
2 - Taxable account
3- Cash cushion (planning in having cash for 4 years expense)
4 - SS
5 - 401K/IRA

Other passive incomes can play a role here (real estate, etc..)
ERN has some good resources, but as mentioned, it's quite complex and his estimates are INCREDIBLY dependent on statistical assumptions which may not be true, making the precise estimates useless and possibly dangerous. The most obvious assumption is long term returns will be normally distributed throughout your withdrawal.

To generate a robust withdrawal strategy, one would have to identify the primary variable of interest. Are you attempting to minimize taxes, minimize probability of busting, or maximizing long term value and how much is passed to your dependents (wife/kids/other)? There are all kinds of tax torpedo's for middle class responsible savers in the US that are ridiculous, but must be understood for long term retirees.

Personally,
1. 401k up to next marginal tax rate (ROTH conversion) but this can be complex and maybe not if simplicity is the long term goal.
2. Dividends
3. Cash in bull markets, Equity in bear markets (sell after one negative return year, this minimizes busting probability)
4. SS
5. ROTH

2Birds1Stone
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Location: Earth

Re: Cadence of Withdrawals when retired

Post by 2Birds1Stone »

ERN spends a lot of time exploring different strategies, especially ones made popular over the past decade or two. At the end of the day, his advice is not all that complicated! Turns out that much of his posts concentrated on dispelling myths and showing readers potential blind spots.

Start off with 60/40 portfolio and maintain a rising equity glidepath. Some strategies like McClung's Prime Harvesting do backtest well (though he recommends smoothing the sale of equities to avoid huge chunks being sold by a trigger which could cross the 120% of originally inflation adjusted equity value by a couple of bucks.....)

As Scott pointed out, rising equity glidepath + a simple rebalancing strategy covers most of it.

To WFJ's point, tax torpedoes are real......this is one of the big benefits of ERE level spending vs. the traditional multi million dollar investment portfolio (which I know you're striving for).

IlliniDave
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Joined: Wed Apr 02, 2014 7:46 pm

Re: Cadence of Withdrawals when retired

Post by IlliniDave »

I'm new at the being retired thing but successful so far.

If by cadence you mean the order of drawing from things my intended one is:

1. Annuity (and will include SS somewhere in the future).

(hopefully that covers everything except large "emergencies" and maybe an occasional splurge for at least a good number of years).

2. Taxable account money market/settlement account. I have all my fund distributions going there instead of reinvesting.
3. 401k and/or sell taxable account shares
4. Roth IRA and/or liquidate real estate

2-4 is a pretty loose ranking because I see those as highly situational. For example, at age 72 or whatever 401k withdrawals will become mandatory,moving them up to tier 1; and at times I may want to do tax loss harvesting so selling taxable account shares could occur at any time, which may or may not be immediately reinvested.

Laura Ingalls
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Re: Cadence of Withdrawals when retired

Post by Laura Ingalls »

I feel like it has been a complicated dance between tax optimization, financial aid optimization, and health care optimization.

2020 was not a FAFSA year (although we really didn’t know that til it was nearly over). We also took out about 8 months spending as a Covid related penalty free dispersement and then later put about half of it back into our Roth’s so it kinda was more of a conversation.

2019 we managed to pull off meeting the EITC requirements. I think we will this year too (fingers crossed). Accomplishing it in 2022 would require either a bigger checking balance than we have or less spending than we are willing to commit to.

Our general plan was spend taxable, sell house and spend proceeds, then use tax deferred after 59 and 1/2.

Currently have more in taxable than when we moved to semi retirement despite buying a little house, a big truck, and subsidizing about half to a third of “regular” living.

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Sclass
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Re: Cadence of Withdrawals when retired

Post by Sclass »

I drew down my savings account in the first four months. I had an OMG moment when I realized I had to dip into my investments. No more automatic deposit magically appearing in my checking account. I spent the next ten years drawing out of my stock account. Selling stock. Spending dividends. The market has gone up a lot in the last ten years so I actually have more than when I started. The stock market has been good for the last ten years.

ETA - I have a negligible amount of money in my IRA. Never really believed in them. I stopped contributing when my employer stopped matching.

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