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Post by steelpony10 on Apr 5, 2023 12:41:56 GMT
My intention with this post was to point out and learn about how spend down investors handle these market situations and the mechanics of the two methods in general. I mentioned two I thought were widely used techniques. This expert seemed really bad holding on to what gave her notoriety in the past.
Being an income investor I never knew the finer details of spending down and thought someone might benefit from that discussion. So if it’s just adapting on the run making snap decisions I’m not that guy. I’ll try to get ahead of issues before my brain completely goes.
I do believe currently our reserve can all be converted to a set it and forget it just send in vouchers totaling last years taxes portfolio. Anyway that’s the plan and it’s easy to pass on. It will be implemented by age 85 at the latest. If I pass first my wife can do whatever she wants with all her money. I have a feeling a financial advisor will scare her into being a spend down investor. 😂
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Post by win1177 on Apr 5, 2023 13:47:09 GMT
My intention with this post was to point out and learn about how spend down investors handle these market situations and the mechanics of the two methods in general. I mentioned two I thought were widely used techniques. This expert seemed really bad holding on to what gave her notoriety in the past. Being an income investor I never knew the finer details of spending down and thought someone might benefit from that discussion. So if it’s just adapting on the run making snap decisions I’m not that guy. I’ll try to get ahead of issues before my brain completely goes. I do believe currently our reserve can all be converted to a set it and forget it just send in vouchers totaling last years taxes portfolio. Anyway that’s the plan and it’s easy to pass on. It will be implemented by age 85 at the latest. If I pass first my wife can do whatever she wants with all her money. I have a feeling a financial advisor will scare her into being a spend down investor. 😂 My understanding of “spend down” is that one tries to live on a 4% withdrawal (or less) per year (inflation adjusted), and that it will typically last at least thirty years, according to studies in the past. It generally will result in the retiree dying with “some money” left in his/ her accounts, ie they did NOT outlive their assets. One can adjust their withdrawals along the way by skipping inflation adjustments, lowering withdrawals, etc if need be after a particularly bad “slump” in the market. We have a modified “bucket approach”, ie cash, shorter term (less risky) for seven years or less time frame, and “Long term”. Bucket 3 is all equity, bucket 2 is mostly cash but slowly being moved to bonds now that rates are much higher. Bucket 1 is cash (money markets). Since we have a large portfolio, it looks “aggressive” but we have plenty in buckets 1 and 2 for us to live on, so I anticipate we will die with a larger portfolio. Win
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Post by retiredat48 on Apr 5, 2023 14:52:36 GMT
I guess other then Mustang , there aren’t any other bucket investors or 4%ers posting here. Personally I don’t think investing methods based on past facts are reliable to address personal needs unless constantly tweaked when personal facts change as one ages. Of hand boiler plate stick to the past recommendations seems like really bad advice. Evidently this is a two part series of bad advice in my opinion. There are a lot of old sayings about the effectiveness of a plan. My favorite is "A plan is only good until first contact with the enemy. After that you have to innovate and adapt."
The only withdrawal method that is a start and forget method that I know of is RMDs. The government is very specific about them. Even then if needed you can take more but not less.
Bengen did his original analysis because advisors were using averages to determine client withdrawals and some clients were going broke. But the 4% Rule isn't a start and forget method. Based on his findings, Bengen recommended that a portfolio be between 50% and 75% stock for the best chance of success. This asset allocation has been confirmed by other studies. The FIRE articles recommend a higher proportion of stock. But that is because early retirement requires a longer payout period such as 40 years, not 30.
In spite of his study, I have read reports that Bengen sometimes took his clients to 100% cash. He adapted to market conditions.
Micheal Kitces once wrote that a 50% probability of success can be acceptable but he re-defined what the probability of failure meant. It didn't mean the retiree ran out of money. It meant that there is a 50% chance that changes will be necessary. A 90% probability of success still leave a 10% chance that changes will be needed.
There is a very easy way to check to see if withdrawals are going according to plan. In general the initial withdrawal can be 3% if planning a 40 year payout, 4% for 30 years, 5% for 20 years and 6% for 15 years. These withdrawal rates have been shown to have a 99/100% success rate. Since the worst case scenario doesn't happen all the time most investors will find they are building portfolio value not spending it down.
But when is it safe to increase withdrawals? Kitces discovered that any time the account balance grows 50% above of its starting value (after withdrawals), the portfolio is already far enough ahead that it won’t be depleted during the 30-year payout period. This provides room to ratchet the withdrawals higher, but it’s important to not go too fast or the higher spending could overwhelm available assets. To avoid going too fast the increase should occur only once every three years and only 10% (or less) over and above the regular inflation increase.
I don't believe either the bucket approach or the 4% Rule were ever start and forget withdrawal methods.
Everyone has their own opinions. I personally dislike annuities. I think they are poor investments. But I can see where annuities could be exactly what the retiree needs. They guarantee income for life. The drawback is the retiree's heirs get nothing when he or she dies. Even though I dislike them I am purchasing an annuity for my wife. Monthly payments are taken from my military retirement and when I die she will continue to receive 55% of my retirement pay. If she dies first it was wasted money. But I don't care. We don't need the small monthly premium but she will definitely need the annuity payments if she doesn't.
A retiree doesn't have to have just one withdrawal method. Mix and match them it that is what better fits your goals.
Mustang ,.. .IMO GREAT POST.Over the years you have also shown to be very well read/well versed on retirement studies by the guru's. I read your things closely. and YES, THE INVESTOR CONTROLS HIS/HER OWN PLAN. One is not locked in. Things change. One example is the last decade of 0%-1.5% interest rates on bond funds. The guru studies did not have such low rates for the bond allocation side. OTOH stocks zoomed, the way they should under ZIRP. So it balanced out. I also dislike annuities. Took a lump sum instead of GE monthly pension (a type of annuity), and now will have monies for heirs, and got the same income level return as pension over the years. A final point not discussed much is: If one is behind in their plan...drawdowns hurting, it is amazing how one month of working a year will help get back on track.. Like, work last three weeks in December at XMAS when employee demand great, put the earning in an IRA (so nontaxable), and you will greatly supplement SWRs. Like: Be a guard substitute at a Florida gated community.. Cover others vacations. You can read books; post on forums etc. while on the job. What's not to like! R48
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Post by FD1000 on Apr 5, 2023 16:54:20 GMT
A retiree (as well as an accumulator) can do it the KISS way or complicate things to no end. A typical retiree can use just 2-3 funds and make adjustments based on performance and needs.
Let's select a simple 2 funds portfolio for 50/50 Wellesley/Wellington. Of course you use other funds. The following are examples how to make things more complicated and/or to trick you instead of the above.
1) Buckets: you have to transfer money between buckets + most have years in the cash/very safe bucket because you feel better. If you just own W+W, no need to transfer money, all you to do is sell from the fund who did better to finance your expenses to keep it around 50/50. You don't need years of cash, just several months. It is likely that W+W will make more money in the next 20-30 years than your cash, and selling some shares should be part of the process if you need it
2) You must have income to sub your paycheck. No, you don't. First, most retirees don't have enough savings, they would have to use much higher vehicles to generate 10-15% income to cover their expenses. Second, just because a portfolio generates very high income, it should not comfort anyone it's enough. The size of the portfolio and the risk/SD are a lot more important. Can you select higher income vehicles? of course you can, but they should be based on risk-adjusted performance first.
It reminds me of one of my friends, he tells me he likes to do both(growth+income) regardless and why he invested over a decade ago the same % in MSFT,IBM,ATT. He was sure when he started that MSFT would be a better choice. MSFT made so much more than the others, it doesn't make any sense.
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Post by johntaylor on Apr 5, 2023 17:30:41 GMT
Because of pensions and income from LLC and a corp, we have no decumulation phase and have portfolio withdrawals of $0.00 in retirement.
We continue to invest new money.
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Post by FD1000 on Apr 5, 2023 18:25:15 GMT
Because of pensions and income from LLC and a corp, we have no decumulation phase and have portfolio withdrawals of $0.00 in retirement. We continue to invest new money. Your options are great, most who never worked in Gov/State/Education don't have pensions. You are also younger than 72 when you have to take RMD. The more you have, the more you pay taxes, and if you have millions, you will pay much higher for part-B, but that's a good option to have. When both file jointly and make up to $194K per year, each pays $164.9. Above $194K it jumps to $230.8 each. Attachments:
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Post by Mustang on Apr 5, 2023 19:40:44 GMT
A retiree (as well as an accumulator) can do it the KISS way or complicate things to no end. A typical retiree can use just 2-3 funds and make adjustments based on performance and needs. Let's select a simple 2 funds portfolio for 50/50 Wellesley/Wellington. Of course you use other funds. The following are examples how to make things more complicated and/or to trick you instead of the above. Two of my favorite funds. For full disclosure I have partition my portfolio into retirement funds and emergency/health care funds. We are down to 3 retirement funds. All are balanced funds. One in traditional IRAs and two (W+W) in taxable funds. Our retirement income comes from military retirement, social security, and RMDs. We have not started withdrawing from our taxable retirement funds. When we do I estimate that sleeve of our portfolio will be 50% American Funds Balanced Fund (IRAs), 25% Wellington and 25% Wellesley. Withdrawals from W+W will be using a modified 4% Rule.
Why? Like our pension and social security and unlike RMDs it will provide a stable inflation adjusted income. The procedure for withdrawals is extremely simple.
I have tested Wellington and Wellesley for 30 year retirements in both the stagflation years of the 70s (retirement starting in 1971) and the recent long bull market (retirement starting in 1990). Wellesley outperformed Wellington during the stagflation retirement and Wellington outperformed Wellesley during the bull market. (Performance in 2022 was a surprise. I had under estimated the effect of near zero interest rates. But after inflation raised its ugly head things have become more normal.) Since I cannot see the future the asset allocation will be 50/50.
Only one time since Wellesley Income Fund was created (1971) have Wellington and Wellesley lost money two years in a row. That was 1973 and 1974. To prevent selling a loss we will put two years of withdrawals in our brokerage money market fund. That amount is currently unknown because we haven't started withdrawals yet. The first withdrawal will be 4% of their combined value. Subsequent withdrawals increase by one percentage point less than CPI. The CPI increases are know in the fall.
There will be one withdrawal per year in January. The withdrawal will come from the fund with the highest End of Year balance. My tests show that this sleeve re-balances automatically every two to three years during both the stagflation retirement and the bull market retirement. No manual re-balancing is required.
The withdrawal will be moved to the Money Market Fund. In January it should contain around three years of withdrawals. By December it should be down to two. Spending and withdrawals are two different things. If both funds lose money then no withdrawal is taken from W+W but bills can continued to be paid out of the Money Market Fund. It is replenished over a two year period when W+W recover.
It is highly likely that W+W will continue to increase in value over the retirement period. If more income is needed then withdrawals can be increased using Kitces' method. Portfolio performance can be checked every five years using the initial withdrawal rates for shorter payout periods. Some have to be extrapolated from the data. For example, it 4% for a 30 year payout and 5% for a 20 year payout. The rate to use with 25 years remaining is 4.5%. If the plan isn't working make adjustments.
It doesn't have to be more complicated than that. I created a single page checklist for my with to use.
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Post by Deleted on Apr 5, 2023 20:29:04 GMT
Have there been a plethora of complaints from retirees on this forum about their portfolios being too complicated? Why the hell would I volunteer to pay more in taxes than neccessary by holding W&W in taxable, and please, no crap that "good" investors don't have taxable accounts. I use buckets. I hate taxes. I suck at market timing which makes buy and holding a very diversified global portfolio my most logical choice. I'm fairly confident in my abilities and weaknesses and have never asked for actual investment advice on an internet forum. If you have a problem with it, piss off. I'm tired of the indirect insults that everything I've done for the last 50 years is wrong.
django, proud holder of 9 funds and ETFs across 3 accounts, plus Savings Bonds and Cash.
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Post by habsui on Apr 5, 2023 20:38:56 GMT
I have no idea what this thread is really about. What you invest in is irrelevant to whether it is "spend-down". To avoid spend-down, you must inflation adjust you principal. If inflation is for example 3% and your PV (incl dividends) increased 7%, you can withdraw 4%. The rest is just style.
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Post by Chahta on Apr 5, 2023 21:16:49 GMT
Way to go....you showed your old man! This is the first time I have heard this part of your story. I thought you just another wealthy doctor. Ultimately I will inherit a small amount of money from my moms trust, which I helped her set up in her later years. To date, no inheritance, I paid my own way through college, med school, etc. Had to borrow for med school, but paid it off w/in 8 years. I invested and managed my moms trust and (fortunately or lucky?) managed to hit a few “home runs” in her account. It grew to over 2 million, which will be split five ways. But I don’t need the money, it’s “extra” for us. So it will go to heirs. Main issue I have to do is work on my daughter, who spends WAY too much. Try to get her to rein it in before she inherits this large chunk of money. Win It is too bad the younger folks have not known hard times and the true value of struggling to make a buck. Many of them were raised too well, lacking for nothing.
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Post by Mustang on Apr 5, 2023 22:09:25 GMT
Have there been a plethora of complaints from retirees on this forum about their portfolios being too complicated? Why the hell would I volunteer to pay more in taxes than neccessary by holding W&W in taxable, and please, no crap that "good" investors don't have taxable accounts. I use buckets. I hate taxes. I suck at market timing which makes buy and holding a very diversified global portfolio my most logical choice. I'm fairly confident in my abilities and weaknesses and have never asked for actual investment advice on an internet forum. If you have a problem with it, piss off. I'm tired of the indirect insults that everything I've done for the last 50 years is wrong.django, proud holder of 9 funds and ETFs across 3 accounts, plus Savings Bonds and Cash. This is a discussion forum. People are discussing the topic but as all discussions go the thread digresses a little. There have been discussion before on simplifying a portfolio. Those mostly interested are investors wondering how their spouse will do after they are gone. That is the reason I have simplified mine.
There is nothing wrong with the bucket approach. Many people use it. Since you use the bucket approach I'm curious why you didn't see the W+W sleeve of my portfolio uses some of its better aspects. The cash bucket (bucket 1) is the Money Market Fund. The more conservative bucket (bucket 2) is Wellesley. The growth bucket (bucket 3) is Wellington. Balanced funds just simplify the number of funds in each bucket eliminating the need to re-balance the assets. That is the fund manager's job. Spending is from bucket 1 and it is replenished with profits from bucket 2 or bucket 3 depending upon which is doing better. Christine Benz calls it pruning back the investment. This is the very definition of the bucket approach. The 4% Rule is only used to determine the initial dollar withdrawal.
I have no idea where this outburst comes from. No one is telling you how to run your portfolio. We are discussing various options and you are free to join in.
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Post by FD1000 on Apr 6, 2023 1:30:33 GMT
I have no idea what this thread is really about. What you invest in is irrelevant to whether it is "spend-down". To avoid spend-down, you must inflation adjust you principal. If inflation is for example 3% and your PV (incl dividends) increased 7%, you can withdraw 4%. The rest is just style.
Good post. PV = TR.
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Post by Broozer on Apr 6, 2023 3:49:27 GMT
I retired two years ago, and have not had to sell anything from my portfolio. I will be 73 in August (I can't believe I just typed that ). I was a self-employed toolmaker and never made a lot of money, as that was never my goal. My goal was to walk out my back door and go to work, and that's what I did for 36 years -- and no regrets.
I started investing in 1990, knowing absolutely nothing about it. But I learned as I went, read a lot, maxed out my SEP-IRA every year, bought, held, and added (through all the bear markets) opened a taxable account around 1998, and never paid anyone to "help" me.
And now, with only SS as additional income, I only need 1/4 or so of my RMDs from my SEP-IRA to live on. The rest gets reinvested in my taxable account. More than half of that income comes from 3 CE bond funds, which make up about 24% of my total PF. Without them, I wouldn't be able to reinvest much. I first started learning about CEFs at the MStar forum years ago, and the rest is history. "Spending down" my portfolio was a big concern for me for a long time. But so far so good, it's all bond income and stock divvies -- but of course that could change any day.
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bd1
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Post by bd1 on Apr 6, 2023 5:10:40 GMT
The big incentive for truck buyers who use them for work is the massive tax deductions. I doubt that there are many people at all who buy big trucks and who cannot take the tex deductions. . The decline in sales of big trucks primarily represents the decline in the fortunes of small business organization.
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Post by win1177 on Apr 6, 2023 13:28:06 GMT
Ultimately I will inherit a small amount of money from my moms trust, which I helped her set up in her later years. To date, no inheritance, I paid my own way through college, med school, etc. Had to borrow for med school, but paid it off w/in 8 years. I invested and managed my moms trust and (fortunately or lucky?) managed to hit a few “home runs” in her account. It grew to over 2 million, which will be split five ways. But I don’t need the money, it’s “extra” for us. So it will go to heirs. Main issue I have to do is work on my daughter, who spends WAY too much. Try to get her to rein it in before she inherits this large chunk of money. Win It is too bad the younger folks have not known hard times and the true value of struggling to make a buck. Many of them were raised too well, lacking for nothing. That’s my concern with our three children. My oldest has moderate ID/ severe cerebral palsy, so he is unable to manage money. He’s in a UCP group home, with us (wife and I) as guardians. Middle is very responsible young lady, but she has grown up always having “things”, and has a lot of trouble living on whatever income she makes. Youngest son (adopted) is also an ongoing “project”, he I immediately spends whatever he makes and is constantly struggling financially. Neither of them ever really “struggled” financially, so they are having to learn the hard way that they have to budget, watch their “outflow”, save/ etc. All my “preaching” to both of them obviously fell on deaf ears. Win
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Post by Chahta on Apr 6, 2023 13:39:39 GMT
win1177, if younger people and all people in general could add appreciation for being more frugal it would help get this country back on track. But I am not sure if it needs to happen from the top down or bottom up. However cutting free spending could ruin our economy further by hurting more businesses that have been built using credit cards.
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Post by Chahta on Apr 7, 2023 0:29:18 GMT
The sad take away from this is “if you don’t get extra high dividends in the 8% range, you are spending down”. But wait, when CEFs decline in value and you still get dividends you are spending down anyway. Your portfolio has declined in value.
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Post by Broozer on Apr 7, 2023 2:37:38 GMT
The sad take away from this is “if you don’t get extra high dividends in the 8% range, you are spending down”. But wait, when CEFs decline in value and you still get dividends you are spending down anyway. Your portfolio has declined in value. So what?
Let's say you had an apartment unit that was grossing $xxx per month, and the unit was appraised at a $1M value.
So there's a big real estate crash and you have your unit appraised again, and the number is, say, $700k -- but the rental income remains the same.
Would you panic and put it up for sale because the asset value dropped? If so, why?
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Post by FD1000 on Apr 7, 2023 4:11:47 GMT
The sad take away from this is “if you don’t get extra high dividends in the 8% range, you are spending down”. But wait, when CEFs decline in value and you still get dividends you are spending down anyway. Your portfolio has declined in value. So what?
Let's say you had an apartment unit that was grossing $xxx per month, and the unit was appraised at a $1M value.
So there's a big real estate crash and you have your unit appraised again, and the number is, say, $700k -- but the rental income remains the same.
Would you panic and put it up for sale because the asset value dropped? If so, why?
Only problem, you look at one option without looking at another option. If your apartment equals PDI, the other guy held SPY. So, in the last 5 years, PDI paid you over 50% income, while SPY paid you less than 10%. Which one was a better choice? the one option with a better TOTAL performance. And the most important fact is that...if you needed more income than what SPY supplied, and you sold stocks, you still came ahead. Test1: what happen in the last 5 years if we invested $1 million in each PDI, SPY? PV( results) shows that SPY grew by almost 70% and PDI grew by just 2%. This means SPY made about 68% more. Tests: what if we needed $50K annually, which SPY distributions can't support, hence we need to sell SPY shares. PV( results) shows that after all the distributions, SPY grew by 36.5% while the PDI portfolio shrank by 22.7%. This means SPY made 59+% more than PDI. So, even if PDI paid 5 times more, SPY was still a much better choice. It also proves that even if PDI supplied much more than your needs ($50K) and you didn't have to sell any shares, just collect the distributions, you still finished with 59% less money, the PDI portfolio shrank. But wait, PDI volatility was higher than SPY. Total return rules. Investing is a math exercise.
BTW, I'm not against high income investing, just because something pays more income, it doesn't mean it's superior. What does it mean in real life investing? If you are a typical investor with different choices and have to invest in riskier assets (stocks, MLP, CEFs, commodities). You must ask yourself, which one will make you more money, and if you care, which one has lower volatility/risk? After you know these answers, then pay attention to the income/yield. Example: what stock will make you more money in the next 5 years MSFT or T? if you think MSFT is the answer, you should not care that ATT yield is 5 times higher than MSFT.
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Post by Norbert on Apr 7, 2023 8:21:07 GMT
The sad take away from this is “if you don’t get extra high dividends in the 8% range, you are spending down”. But wait, when CEFs decline in value and you still get dividends you are spending down anyway. Your portfolio has declined in value. So what?
Let's say you had an apartment unit that was grossing $xxx per month, and the unit was appraised at a $1M value.
So there's a big real estate crash and you have your unit appraised again, and the number is, say, $700k -- but the rental income remains the same.
Would you panic and put it up for sale because the asset value dropped? If so, why?
No problem regarding the apartment, unless you can't find tenants. But, imagine you held Credit Suisse bonds yielding 9%. Now they're worth nothing and they pay nothing. Yield is no guarantee of future returns; and neither are FD's S&P 500 historical total returns.
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Post by Chahta on Apr 7, 2023 12:28:24 GMT
The sad take away from this is “if you don’t get extra high dividends in the 8% range, you are spending down”. But wait, when CEFs decline in value and you still get dividends you are spending down anyway. Your portfolio has declined in value. So what?
Let's say you had an apartment unit that was grossing $xxx per month, and the unit was appraised at a $1M value.
So there's a big real estate crash and you have your unit appraised again, and the number is, say, $700k -- but the rental income remains the same.
Would you panic and put it up for sale because the asset value dropped? If so, why?
No and I don’t.
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Post by steelpony10 on Apr 7, 2023 15:25:13 GMT
Chahta , How did my thread devolve into this crap? Lol. I just wanted to know how those other investing techniques are handled in these type of markets. Some acquaintances ask me and I was tired of saying I don’t know because markets only affect me in a positive way except the equity part, bad ones even more so. Using those other techniques, if your dependent on cap gains, what do you do now? I don’t see any discussion of a plan for poor markets of unknown lengths using those techniques. Maybe myself or others may benefit.
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Post by catdog on Apr 7, 2023 16:31:24 GMT
TWO THINGS
1. If we think it is a good idea to have an emergency fund during our working years, then we should have one during retirement. It should be established before the three buckets. It can be used for emergency's and also occasional "mad money". I think this would also smooth out inflation bumps. 4% money markets are great for emergency funds as long as they last.
2. I don't like annuities either. My mom enjoyed working part time into her 70's. When she fully retired we got her a reverse mortgage. She only wanted $400 per month (she really only spent about $300 per month). After 8 years the total cost was about $44,000. She passed about a year ago after spending 8 months in a nursing home. After selling her house there was over $200,000 left over.
Catdog
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Post by archer on Apr 7, 2023 16:47:37 GMT
In a great majority of investment comparisons, where backtesting favors one over the other, a different date range can be chosen to favor the loser. Given the market's tendency to change and trend for periods of time unknown until revealed in hindsight, success favors the investor who adapts or has good luck.
Referring back to the OP, all that can be said for the 4% is that it worked. 10 years from now if we have a 10yr flat market I suspect that monte carlo tests will change the % likelihood of success of the 4%WDR. I don't on using a fixed WDR or any plan for withdrawal other than what RMDs will require of me. I've never been into spending money just because I can, which a fixed WDR would encourage. I can be happy barely making ends meet, or if my PF does well, I will enjoy more of what it can provide on a case by case basis.
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Post by bb2 on Apr 7, 2023 18:33:45 GMT
WSJ had a bit today on drawing down but it was just an appeal for software to automate the plan making, which seems reasonable to me, at least as a good starting point. Surprised this type of tool doesn't already exist; maybe it does. AI will be used for this, for sure.
"For example, investors wanting to maximize their retirement cash flow need to figure out the best age to start taking Social Security. But this requires coordination with proceeds from income-producing properties, and how much they should withdraw from defined-contribution accounts, such as 401(k)s, among other things. They need to do it all in the most tax-efficient way possible. And if these sources of income are insufficient to meet cash-flow needs, then they will need to shop the marketplaces for products that can help make up the shortfall."
The last paragraph:
"Of course, some people may have individualized circum-stances that a software program can’t take into account. And there can be sudden changes in health, lifestyle and other factors that could alter the feasibility of a tool’s projections. Still, develop-ing easily accessible software that focuses on the big picture, offers guidance on spending, and provides sensible solutions, can be immensely impactful to the millions of Americans who retire every year."
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Post by Mustang on Apr 7, 2023 19:50:53 GMT
Every investor has different circumstances so the scenario below would not apply to everyone.
If an investor has $100k in taxable income the tax rate would be 22% married and 24% single. Let's assume the investor has $1M invested in a tax deferred account and uses the 4% Rule for withdrawals. All of the withdrawal is taxed as ordinary income. Since its in the same tax bracket, if married the taxes on a $40,000 withdrawal would be $8,800.
Let's say the $1M is in taxable accounts. Capital gains are taxed at a lower rate, 15% for both married and single. Taxable accounts have a cost basis. If cost basis is 50% then only $20,000 of the withdrawal is taxable. For retirees the distribution is most likely long term capital gains. Taxes on the withdrawal would be $3,000 instead of $8,800.
For a widow who files single (after 2 years) the difference is even more. Its $3,000 instead of $9,600.
Tax deferred accounts are extremely useful in building a retirement portfolio. For most, the expectation is that the investor will be in a lower tax bracket after retirement. The incentive for a tax deferred account is the ease of investing, the benefit of possible company matching, and avoidance of higher taxes now for lower taxes later.
What about taxes on distributions re-invested? It depends on expected future tax rates? Since my re-invested distributions are expected to benefit my wife after I am gone I already know that the tax rate on ordinary income (dividends) is going up to 24% and long term capital gains will stay the same. Our overall tax burden is less by paying taxes now instead of later.
As I have said everyone's situation is different, but I really don't see why advisors always think that avoiding taxes now is always better.
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Post by FD1000 on Apr 7, 2023 21:09:24 GMT
TWO THINGS 1. If we think it is a good idea to have an emergency fund during our working years, then we should have one during retirement. It should be established before the three buckets. It can be used for emergency's and also occasional "mad money". I think this would also smooth out inflation bumps. 4% money markets are great for emergency funds as long as they last. 2. I don't like annuities either. My mom enjoyed working part time into her 70's. When she fully retired we got her a reverse mortgage. She only wanted $400 per month (she really only spent about $300 per month). After 8 years the total cost was about $44,000. She passed about a year ago after spending 8 months in a nursing home. After selling her house there was over $200,000 left over. Catdog I never had an emergency fund during working and in retirement. After our savings which were invested in stocks passed a certain amount (for us $50K+) we no longer have cash or emergency for over 3 decades and are now in retirement. Do I really need an emergency fund? not really, first I use credit cards, if I can't, I have several thousand in the bank. Beyond that, I can sell my mutual funds and get the money within 2 days. Why would you have an emergency fund unless you buy illegal drugs or need it for a ransom?
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Post by fishingrod on Apr 7, 2023 22:23:04 GMT
FD1000, Some people may need an emergency fund because they may not have access to low interest credit cards for emergencies. Another reason is in case of job loss it can save the day and prevent one from racking up credit card debt, until one is employed again. Not everyone is the same.
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Post by gman57 on Apr 7, 2023 22:53:55 GMT
As I have said everyone's situation is different, but I really don't see why advisors always think that avoiding taxes now is always better. I agree.... example: ira vs roth IRA Put 6k in IRA and you get how much tax savings now? It grows to approx 40K after say 30 years. When you take it out you pay tax on 40k. ROTH Put 6k in now (pay tax on 6k) and it grows to 40K -- when you take it out you pay ZERO tax. Maybe I'm wrong but I'd rather pay tax on 6k than tax on 40k. Am I looking at this wrong? I didn't run the math and maybe if you have big tax bracket changes the numbers are different.
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Post by steadyeddy on Apr 7, 2023 23:00:07 GMT
The definition of "emergency fund" is subject to interpretation. Most common view is ready cash in a bank or MM account. As FD1000 said it could also be "ability" to turn some securities like mutual funds or ETFs into cash in a matter of couple of days. It really boils down to personal preference. I do have ready cash in Morgan Stanley bank paying 3.75% as my emergency fund. I could put it in a government MM fund and get a little more, but I am ok with a bank account. The larger the nest egg, I think the less the need for an emergency fund in true cash such as bank account or MM account. Because you have options. It may or may not include credit card borrowing.
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