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  • How to withdraw money in retirement

    So spent many years ‘adding to the retirement’ accounts in many ways, stocks, ETF, 401k, IRA, HSA etc.. It has all been adding to them and not taking things out. Pretty easy. Buying stocks, ETFs etc is pretty easy. Click click click away. You can buy a few here, more if you want, and there wait for it to drop if you want. Etc... I’m not depending on my day to day living on the price of these stocks necessarily.

    Now I am thinking about how you go about withdrawing. I know most of you are probably not withdrawing yet, but maybe you can shed light.

    In a given year if you want to say have $100,000 in income, do you sell some stocks/bonds/ETF here and there? Do you wait till the market is up? Do you do it once a month at a given time? All of the above? How do you do a “4% percent” withdrawal? How does one calculate 4% to sell? Do you not sell on certain months and live off what you have the month before? Do you then sell a little more if you need more money this month as long as it averages out over the year? Do does this all work?







  • #2
    1) It depends on all of the accounts you have, how much is in each, what %age of your money is tax-deferred/taxable/tax-free.
    2) So that I don't have to worry about whether the market is up or not yet, I plan to have at least 5 years' expenses in bonds and another 2-3 years in cash. then I won't be forced to sell low, most likely.
    3) 4% rule is based on what the balance is on 12/31 of the prior year
    4) Here's a drawdown in retirement plan from PoF, and at the bottom are links to 20-30 other posts that address this same topics and what others will do: https://www.physicianonfire.com/drawdown/

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    • #3
      Lots to unpack here. So, generally you want to spend primarily from taxable accounts first. I see no reason to sell things on a fixed schedule. You'll receive passive income from taxable dividends and possibly other passive income (rental property, RMD's, social security, etc). If you need more, sell securities (maintaining asset allocation) when you need the money. Rebalance in your retirement accounts without tax consequences. Calculate your SWR and make sure at the end of the year your spending is in the right ballpark. Adjust your SWR when circumstances change for better or worse. Adjust your SWR every year with inflation. Some years you take out more money (for medical bills, home repair, kids' college or wedding, etc), some years you take out less.

      I have thought about this topic here and there over the years, and gotten a lot of education from listening and reading to people like WCI, Kitces, etc. but I am not sure if someone has written the definitive book on decumulation strategies in retirement. ERN's SWR series comes close, but I just can't make myself read 35+ blog posts on a computer screen (I've only gotten through about 5 of them). If it were in a paperback book it would make for great reading.

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      • #4
        I believe the general rule of thumb is to not have money in stocks in the first place that you will need in the short term, up to 5 years in retirement, as JBME points out. A lot of that is in case the market tanks when you retire, you limit sequence of return risk.

        Traditionally the money need on a shorter term basis is held in bonds. Given a potential end to a 40 year bull run in bonds, some are keeping these short term reserves in other cash equivalents, such as HYSA.

        Withdrawals from different accounts are done in a way to minimize associated taxes and allow stock investments to continue growing uninterrupted in tax advantaged accounts when possible. Generally you tap into your cash reserves first as this is already after tax money with no tax implication. If you're at a certain age in retirement, you may be required to take RMD's but can choose which retirement accounts to take them from, if you start with Roth accounts you likewise can avoid a tax hit. Funds from HSA accounts used for healthcare purposes also will avoid taxes.

        The 4% rule is a guide to prepare one to have enough to cover your $100K in expenses when retired. You don't withdraw exactly 4%. If you need $100K plus your SS/pension, then you sell and withdraw the equivalent to $100K (hopefully you have the $2.5M to satisfy it as a 4% withdrawal) year 1, then withdraw inflation adjusted each year. Most people accumulate the years funds as a single swoop at once, rather than worrying about how much to withdraw on a month to month basis. Remember to factor in taxes that need to be paid for the year in your withdrawal calculations.

        The 4% rule is intended to give you a 90+% chance of not running out of money with a 60/40 portfolio over a 30 year retirement assuming average long term market returns. For some with the resources or early retirees, lowering that to a 3%-3.5% withdrawal rate lowers the longevity risk further. For others, say those who retire later or in poor health, you may be able to withdraw more depending on individual circumstances.

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        • #5
          I think of it like creating a retirement “paycheck” each month and break things down into two buckets: 1) fixed income sources (Social Security, etc.) 2) investment portfolio (IRAs, taxable, 401ks, HSA, etc.)

          1) Know what you’re going to spend each month (at least roughly).
          2) look at your fixed income sources (Social Security, etc.) - sounds like you’re early on in the withdrawal process, so likely this won’t be applicable yet, but eventually you’ll start collecting your regular social security checks.
          3) figure out what additional amount you need from your investment portfolio after your fixed income sources. Let’s assume you need $120k to keep things easy, then you’ll need to figure out how to generate a $10k/mo “paycheck” from your investment portfolio.

          From there, you want to determine what’s the most tax-efficient way to withdraw that $10k/mo based on your mix of investment accounts (taxable, Roth, pre-tax IRAs). You don’t want to focus on just having the lowest tax burden in any given year, but focus on lowering your lifetime tax bill. I look at this by working backwards and creating a broad 20-30 year plan and then each year calculate the more specific taxable income number I am targeting based on current tax brackets. Here’s how I look at creating that broad initial tax plan:

          1) what is your required minimum distribution going to be at 72. You can find the exact divisor online, but the first year is ~4% of the account balance.
          2) what will your Social Security be at age 70?
          3) if RMDs + Social Security (and any other fixed income sources) is greater than your living expenses, then you’ll likely be in a higher tax bracket in the future than you are today, so in general, I’d look at trying to get your pre-tax account balance lower to “smooth” out your tax liability. You could accomplish this by spending down your taxable accounts first and subsequently doing Roth IRA conversions to lower future RMDs + create another tax-free asset to draw from in the future.

          After you have a rough idea of your broad 20-30 year tax plan, each year look at getting to that target taxable income level to “smooth out” your tax liability. In general, here is how I do that:

          1) set up a recurring monthly withdrawal from your taxable investment account.
          2) have all dividends / capital gains paid to cash in that account.
          3) keep 3-6 months in cash in the account you have a regular withdrawal from (just to avoid having to worry about ever not having enough in there for the monthly withdrawal.
          4) when cash dips below your 3-6 month target, look at what’s the best way to replenish the cash. In up years, look at selling from stocks, in down years, sell from bonds. I like to have between 5-7 years worth of living expenses in high-qualify bonds to give a long enough runway to let stocks recover during down years.
          5) you want to stay on target to your set investment policy statement so it’s a balancing act between raising cash, managing taxes, and keeping to your allocation. Everyone has their own preference here.

          After you have your plan of how you’ll raise cash, and if you have room leftover to get to that target taxable income level, look at doing small Roth IRA conversions with the remaining amount of space you have.

          Then, you repeat this exercise each year. But once you are 72, between social security and RMDs, most of the work of where to take money from will be decided for you.
          Andrew Musbach, CFP® | Co-Founder & Financial Advisor at MD Wealth Management, LLC | Podcast Host - The Physician's Guide to Financial Wellness

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          • #6
            If you have a 457 these are usually drawn down first. If I continue to max mine for the next 20 years that will buy me some time before I need much else.

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            • #7
              Originally posted by Lordosis View Post
              If you have a 457 these are usually drawn down first. If I continue to max mine for the next 20 years that will buy me some time before I need much else.
              The tough thing about 457b's is that when you separate from your employer, you typically have to make an irrevocable decision about how you want to withdraw the money. So you can either overestimate and pay a crapload of taxes or underestimate and need to withdraw from elsewhere. But you're typically stuck with whatever choice you make.

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              • #8
                Originally posted by Lithium View Post

                The tough thing about 457b's is that when you separate from your employer, you typically have to make an irrevocable decision about how you want to withdraw the money. So you can either overestimate and pay a crapload of taxes or underestimate and need to withdraw from elsewhere. But you're typically stuck with whatever choice you make.
                True. If you under shoot supplement with taxable. If you over shoot invest in taxable.

                Probably better to undershoot if your institution is solid.

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                • #9
                  Good advice above, though I observe there is a bit of confusion going on between withdrawals from various locations (taxable, 401k, 457), and cashing of particular assets (stocks, bonds, dividends, etc). WCI actually addressed this here: https://www.whitecoatinvestor.com/wh...o-spend-first/. As an aside, I really liked Lange’s book and I recommend anyone getting close to pulling the trigger read it.
                  Last edited by Larry Ragman; 08-19-2020, 05:13 PM.

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                  • #10
                    Originally posted by Lordosis View Post
                    If you have a 457 these are usually drawn down first. If I continue to max mine for the next 20 years that will buy me some time before I need much else.
                    As you say, the 457b accounts are nominally at risk for the employers debts and are typically spent first. Certainly I intend to spend my 457b before my other accounts. I plan to use it as a bridge from retirement to 70 when I will claim SS. As a consequence this money is invested very conservatively. That is, while I am 70:30 overall, the 457b is 15:85 stocks to fixed income. I should clarify I am 3-5 years from retirement. I was formerly much more aggressive in this account.

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                    • #11
                      Originally posted by JBME View Post
                      1) It depends on all of the accounts you have, how much is in each, what %age of your money is tax-deferred/taxable/tax-free.
                      Absolutely. I have entered the preparatory epoch between 59.5 (tax-advantaged distributions are qualified) and 72 (RMD). While much emphasis on this site is placed on the tax-advantaged accounts, during this time frame I am focused on two items. First, the importance of having a significant taxable account has become crystal clear. Besides needing something to live on once I stop practicing, I am creating quite the tax bill with Roth conversions (I've been doing so up to the top of the 24% bracket for the past two years and will do so again by the end of this year). With no pensions or 457 plan, I don't expect any annuitized income until SS kicks in at 70 so having enough in taxable to get to 72 while not essential is certainly beneficial.

                      My second thought is "Where are my bonds?" I've gone from 0 to 30% bonds since 2008. At first I started with muni-bonds, my thought being bonds act as safety and ballast for my portfolio and tax-advantaged accounts allowed for maximal tax-efficient equity growth. Also, there was no Roth available until 2010. Why would I want to waste my pre-tax space with non-growth assets? Fast forward to 2020 I am now actively trying to slow the pre-tax growth, giving preference to Roth and taxable. This basically means filling the pre-tax bucket with bonds. For me, this is mostly an RMD issue. If I do nothing my initial RMD will likely far exceed anticipated spending levels. With judicious Roth conversions RMDs plus SS will hopefully be closer to spending levels. At this point my bonds are 1/3 muni, 2/3 pre-tax. As I spend my taxable, I can use the munis with minimal cap gains, preserve taxable equities to the extent possible (there are significant embedded unrealized cap gains) and and convert pre-tax equities to bonds as needed to preserve my 30% bond allocation.

                      Originally posted by STATscans View Post
                      In a given year if you want to say have $100,000 in income, do you sell some stocks/bonds/ETF here and there? Do you wait till the market is up? Do you do it once a month at a given time? All of the above? How do you do a “4% percent” withdrawal? How does one calculate 4% to sell? Do you not sell on certain months and live off what you have the month before? Do you then sell a little more if you need more money this month as long as it averages out over the year? Do does this all work?
                      For many on this site it may be better to plan how to create the RMD rather than some assumed spending level. For high earning super-savers who have the bulk of their portfolio stored as pre-tax, they may have no choice but to take an RMD significantly larger than what they actually spend. If they don't have much saved in taxable, they may also have to take pre-tax distributions between retirement and 72 to cover expenses and taxes. The analysis of how and what to sell is still the same but the amount needs to cover the largest expenditure which could be the RMD.

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                      • #12
                        Originally posted by GasFIRE View Post

                        Besides needing something to live on once I stop practicing, I am creating quite the tax bill with Roth conversions (I've been doing so up to the top of the 24% bracket for the past two years and will do so again by the end of this year).
                        This is a big dilemma I will face at the end of the year and probably most years going forward. I am only in my 30s and will likely face a 29% marginal fed + state bracket. Conventional wisdom would dictate I should not convert that high, but the reasons I sometimes convince myself to do it this year is that it seems more likely than not that tax rates are going to rise (especially after the TCJA is scheduled to expire in 2026), and there's a good chance I'll inherit substantial assets in the next 10-25 years, which the SECURE act requires to be withdrawn over abbreviated time periods.
                        On the other hand, I wonder if someday I will move to an income tax free state and be able to knock off the state portion of the tax (5%).
                        If the market is still at all time highs in December, that would also be a point arguing against converting. In hindsight I should have done it in March, but I had no idea what my taxable income was going to be for the year (still don't really have a good idea).
                        Maybe I'll poll the hive in ~4 months.
                        Last edited by Lithium; 08-20-2020, 05:15 AM.

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                        • #13
                          I think many of us feel like Lithium. Also in my 30s but we face a 34% bracket. I also will inherit assets in 10-25 years when I won't need them. I can envision moving to a state with lower income taxes by the time I'm 60 but that's 20+ years away...might be a tax free state too. I converted $5k from pre-tax to Roth in March and had planned to do more in April but got "spooked" by the very quick recovery. I wish I had converted another $10k or so, even at 34%. Still trying to assess whether I'll convert another $5-10k by the end of the year which will get us closer to the top of the 24% bracket but will also face 10% state tax hit.

                          I do not worry about the TCJA expiring though....the Bush tax cuts "expired" and a Democratic president extended the same cuts with the exception of the top bracket, which does impact some people on this board but it doesn't impact our household as we're regularly in the 24% bracket and used to be in 28%. I don't think we'll ever get our incomes into higher brackets in the future. I think the current rates with the exception of the top one or two brackets are likely to stay the same

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                          • #14
                            Well I can answer this question as I am in the spend down now. I find that the dividends and interest from my taxable account is more than enough to support me. RMDs are not mentioned enough on this forum. Similar to Gasfire I have significant bonds in my tax-deferred. I am working on Roth Conversions as well. My roth conversion will be my only ordinary income tax expense this year. My money is primarily invested at Vanguard. I have all the dividends and interest set to pay to the "settlement" account. This is linked to my local checking account. I simply transfer money to cover my expenses as needed. I am not really selling anything. I have several years worth of expenses sitting in the settlement account now to protect me from a bad SOR. "This bucket" is refilling faster than I am spending it. I have no other source of income until age 70.

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                            • #15
                              •Accumulation phase: pretty well discussed
                              •Transition phase: that is what is being discussed here. How to position assets for retirement. After tax, pretax, and tax advantaged Roth’s. The tax advantages basically flip once you change from the accumulation to withdrawal.
                              •Withdrawal phase - the goal is cash in your checking account to pay the bills AND minimize the taxes.
                              I see several points. First, long term care or living assistance for you or spouse. Someone will pay this likely. Sweat equity of family or cash. With today’s medicine many folks don’t die quickly. Years of expenses that probably close to your planned annual expenses. 3-5 years?
                              Second, SOR risk. It NEVER goes away. What is the difference once personal capital ceases? The next 5 years is the same for a 55, 65, 75 from a market return standpoint. Not much literature on that because it depends on the balances and the type of account. It’s only significant when your AA brings the balances too low, you had won the game and shouldn’t have been playing.
                              Third, the SWR is an academic exercise. 4% is well known. Pfau , Kitces.
                              https://www.morningstar.com/articles...no-longer-safe
                              https://www.kitces.com/blog/url-upsi...-final-wealth/

                              A tax issue, liquidity, or inheritance? Take where you are and plan your retirement journey.

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