When To Stop Saving and Start Spending

[steelpony10]

      www.investopedia.com/articles/personal-finance/021816/when-its-time-stop-saving-retirement.asp

      The switch over from saving to spending in retirement is difficult. Many can’t pull the trigger just like they can’t commit to any plan stuck in an endless quagmire of uncertainty like the rest of us.

       In my case I had a general outline of a plan hatched with help from an investing mentor which I started in about 1978 and modified as facts unfolded for 45 years. Luckily I got to semi retire early and start spending then fully retiring 7 years later. 2020 and 2022 gave me free reign in my candy store to nail my final concerns down and stop actively investing.

        Any interest in discussing this topic?



         

[catdog]

To stop saving completely will be difficult for most on this forum. I am not spending my portfolio yet but have often thought of what taking 4% withdrawals would look like. I am already thinking of what % of the 4% I should save, just in case.

Catdog

[archer]

It has been easy for me to stop saving because in 2008 the recession hit my construction business so hard that I was unable to save between 2008 until 2017 when I retired. When I retired I set up auto withdrawals from my taxable account holding mostly cash which I knew would last until I started collecting SS in 2024. SS will more than cover my living expenses, so withdrawals from my retirement accounts will be only discretionary or dictated by emergencies. I still think making withdrawals will be with some concerned reservation unless my PF has been growing like gangbusters. For years I have concentrated on growing my PF. Spending it is going the opposite direction!

[Mustang]

When to switch? Hard to say. The answer is when we need to.  

I don't have a problem spending.  I spent plenty this year restoring my customized Mustang.  Body work is done.  Interior is done.  It needed a little engine work. The timing chain guides needed replaced.  Compression test is good. Doesn't use oil.  And the supercharger still produces 95% of the boost it did when new.  A friend wanted to know why I would spend twice its book value refurbishing it.  The only answer needed is its unique and its fast.  Not Dodge Hellcat fast but fast enough.

The article is wrong about the 4% Rule.  While under bad economic conditions it can spend down portfolio value that is not what usually happens.  It is designed for the worst retirement period period in history.  The average safe initial withdrawal rate is around 6.5% adjusted for inflation so in an overwhelming number of scenarios the portfolio builds wealth.

[steadyeddy]

Dec 31, 2023 14:25:58 GMT steelpony10 said:

      www.investopedia.com/articles/personal-finance/021816/when-its-time-stop-saving-retirement.asp

      The switch over from saving to spending in retirement is difficult. Many can’t pull the trigger just like they can’t commit to any plan stuck in an endless quagmire of uncertainty like the rest of us.

       In my case I had a general outline of a plan hatched with help from an investing mentor which I started in about 1978 and modified as facts unfolded for 45 years. Luckily I got to semi retire early and start spending then fully retiring 7 years later. 2020 and 2022 gave me free reign in my candy store to nail my final concerns down and stop actively investing.

        Any interest in discussing this topic?



         

YES. I am interested in this topic as I am approaching retirement. My biggest concern/fear is giving up the paycheck. That sudden loss of twice monthly cashflow is mentally hard to deal with - regardless of the portfolio size. I also recognize that one day I need to pull the ripcord.

So experienced viewpoints are welcome!

[steelpony10]

    I set up a portfolio section to throw off monthly reliable cash flow with some slop because I was guessing to supplement our SS also sort of a guess.

     The reasoning for that was to match my last paycheck with cash flow and SS. The excess is compounded at high rates for any personal inflation rate raises that come along and less restricted spending. So far ther has been no spend down after about 15 years. We semi retired early using the money to delay taking SS as long as possible. Knowing I have excess income to needs lets us spend more freely over 4% as Mustang , points out.

      The rest of our portfolio, mostly equities. has been left to compound as a Plan B for later life issues if they arise.

[archer]

While spending is critical to portfolio survival, with 6.5% being OK most of the time, and 4% in worst cases, the wild card is whether or not one will spend a significant time in skilled nursing. In the case of skilled nursing, most peoples spending will exceed their plan. Hopefully this happens later in life. I know someone who was in a car accident in his early 70's who went into to skilled nursing over the course of his rehabilitation. Fortunately it wasn't long enough to do much financial harm, but it could have had he stayed a bit longer. Later in life if we go into skilled nursing for the last couple years or so, currently medicaid will take care of us once all our assets have been spent down, leaving no money for heirs. This was the case with my parents. Fortunately they still received quality care. This might have been due in part to they had some years prior moved into a continuing care assisted living facility.

Not to turn this into an income vs TR debate, but the above is one case where steelpony's income investing pays off. High quality high div CEFs even with significant NAV and price erosion will not fail unless they go bust. As has often been pointed out funds like PDI will not, or should I say has not kept up with the broad market, they do survive higher spending as long as the funds remain active.

[steelpony10]

archer ,

      My initial thinking was for example high quality dividend stocks and say REITS plus utilities or no growth more risk to principle higher distributions at half the cost.

       For an investment of 500k I could get 3-4% with 3-5% raises in yield so maybe 20k a year to start and supplement SS plus growth of principle that I could only get at by sacrificing income. The other choice I was comfortable with was getting 20k a year by taking positions in CEF’s for 250k which distributed 8%+ and investing the other 250k for growth which basically was the path I took.

        To make up for future inflation raises I would have a variety of sources to add more to CEF like cash, cap gains or reinvesting at 8% and rotating through CEF’S not relying on Mr. Market as much. So far there is no spend down. I chose not to die broke over dying rich. 90% VOO and spend down might work but scared me.

        Having handled both parents going into LTC the order of spend down would be equities first followed by lowest to highest income producers. Remember the second one going in gets the benefit of a residential house or condo value added in. Also make sure you choose a facility that takes Medicaid.The same care continues but is usually palliative at that point.

         All plans are flawed. What I outlined is based on the facts I managed through. Of course I could run out of funds. The more assets I have the better this all works. I’m guessing based on the past experience. Same way some posters invest. No surprises there.

          Back to the OP, I stopped with the income stuff. It’s time to beef up the catastrophic area as much as I can auto investing into equities mostly each month. 

[Mustang]

Jan 1, 2024 0:52:25 GMT steadyeddy said:

Dec 31, 2023 14:25:58 GMT steelpony10 said:

      www.investopedia.com/articles/personal-finance/021816/when-its-time-stop-saving-retirement.asp

      The switch over from saving to spending in retirement is difficult. Many can’t pull the trigger just like they can’t commit to any plan stuck in an endless quagmire of uncertainty like the rest of us.

       In my case I had a general outline of a plan hatched with help from an investing mentor which I started in about 1978 and modified as facts unfolded for 45 years. Luckily I got to semi retire early and start spending then fully retiring 7 years later. 2020 and 2022 gave me free reign in my candy store to nail my final concerns down and stop actively investing.

        Any interest in discussing this topic?



         

YES. I am interested in this topic as I am approaching retirement. My biggest concern/fear is giving up the paycheck. That sudden loss of twice monthly cashflow is mentally hard to deal with - regardless of the portfolio size. I also recognize that one day I need to pull the ripcord.

So experienced viewpoints are welcome!

I joined financial forums trying to learn how best to withdraw money from a portfolio.  I discovered that there was pretty much no discussion on that subject.  There is plenty of literature on the internet about it though.  Lots of advice. Some good, some not so good. Some so bad I wondered if the author had ever even read the paper he was discussing.  But among all the chaff there are grains of wheat.

1. You probably already do it but prepare a budget.  The general rule is that you will need 80% of your income in retirement.  Don't go by that.  Evey household is different.  Make a detailed budget and separate needs from wants.  If possible needs should be covered by a stable, consistent income.  Wants can be covered by a variable income.  If the variable income falls to half what was planned then wants can be cut, needs usually can't.  If other income sources cannot cover your budget then shortfalls need to come from investments.  Knowing how much gives you something to work toward.

2. Withdrawals and spending are two different things.  A lot of retirement authors merge the two together.  They write as if we immediately spend every penny we get.  RMDs are withdrawals that have to be taken.  The article in the link is correct.  If they are in excess of needs then the excess should be saved or re-invested.  Some expenses are monthly, some are quarterly, and some are annual.  Some authors write as if this variation means its impossible to have fixed dollar withdrawals.  It isn't.  It just means that a savings or money market account is needed to hold the excess until its needed.  Withdrawals are gross income.  Taxes, fees, etc. are paid from the withdrawal not the portfolio.  I hear people say retirees are on fixed income. A paycheck is fixed income.This isn't any different than it was when you were working. (Note: I had a good friend who worked on commissions. They were seasonal. He had to save summer commissions to make it through the winter.)  Budgets help retirees save for irregular expenses.

3. The withdrawal method you choose should determine how you structure your portfolio.  Misalignment can cause serious problems.  The most obvious misalignment would be wanting to withdrawal only income but structuring the portfolio for growth.  Withdrawal methods boil down to: income only, fixed dollar (either adjusted for inflation or not) and fixed percent (with guard rails or without).  Fixed dollar methods (like the 4% Rule) are designed to provide a stable, consistent income but they are subject to a sequence-of-return failure.  Fixed percent (like RMDs) are designed to protect the portfolio from longevity risk, the risk of running out of money.  Vanguard calculated that withdrawals will be less than planned 48% of the time. Even using upper and lower thresholds it was 45% or the time.  The FIRE (Financial Independence Retire Early) series showed that a 1966 retiree would have had to live off of less that 50% of planned income for an entire decade using the Guyton-Klinger guardrail method.  Volatility is the enemy of both withdrawal methods.  Taking fixed withdrawals during a downturn shortens your portfolio's life.  Taking variable withdrawals during a downturn cuts the amount of money you get.

4.  Research using historical data and Monte Carlo computer simulations show when using a fixed dollar withdrawal method a balanced portfolio with somewhere around 50-75% stock has the best chance for success.  It provides both income and growth and it has less volatility so withdrawals during downturns don't kill it.   A lot of writers use a 60/40 portfolio because it falls mid-range.  Depending on the retiree's goals the actual structure can be simple or complicated.  Take the bucket method of withdrawals.  Withdrawals come from cash, theirs five to seven year of fixed income, and the rest in stocks.  Returns are used annually to replenish cash.  Some authors have multiple funds in each of the three buckets.  Harold Evensky (creator of the bucket approach) said that for a do-it yourself investor the number of buckets should be two.  He is said to have simply attached a cash bucket to a total return portfolio.

5.  Almost every financial advisor recommends annual re-balancing. A good idea in the accumulation phase of investing but not so good when withdrawing money.  Darrow Kirkpatrick (“These are the Best Withdrawal Strategies”, Money, no date) tested the 4% Rule with a 60/40 portfolio and found that annual re-balancing was the worst way to withdrawal cash from a portfolio. It had the lowest success rate and lowest average ending balance.

6. This is just scratching the surface of the information available.  But it all narrows down to needs, wants and goals.

[steelpony10]

Mustang ,

    There is basically zippo for income investors. I always sorta felt the industry slanted the commentary to get amateurs to constantly churn their accounts back in the days of fees using scare tactics, studies, doomsday predictions etc.

     As a buy and holder nothing really applied much to me. I knew what I was aiming for from 1978, half cash and income investments and half equities in case I screwed that up.
 
      I do like that everything we spend each month is replaced with fresh cash. Excess distributions cover big expenditures, raises and surprises plus now we’re turning our attention to the back up plan, equities, with no spend down yet.

[steadyeddy]

Jan 2, 2024 1:44:51 GMT Mustang said:

Jan 1, 2024 0:52:25 GMT steadyeddy said:

YES. I am interested in this topic as I am approaching retirement. My biggest concern/fear is giving up the paycheck. That sudden loss of twice monthly cashflow is mentally hard to deal with - regardless of the portfolio size. I also recognize that one day I need to pull the ripcord.

So experienced viewpoints are welcome!

I joined financial forums trying to learn how best to withdraw money from a portfolio.  I discovered that there was pretty much no discussion on that subject.  There is plenty of literature on the internet about it though.  Lots of advice. Some good, some not so good. Some so bad I wondered if the author had ever even read the paper he was discussing.  But among all the chaff there are grains of wheat.

1. You probably already do it but prepare a budget.  The general rule is that you will need 80% of your income in retirement.  Don't go by that.  Evey household is different.  Make a detailed budget and separate needs from wants.  If possible needs should be covered by a stable, consistent income.  Wants can be covered by a variable income.  If the variable income falls to half what was planned then wants can be cut, needs usually can't.  If other income sources cannot cover your budget then shortfalls need to come from investments.  Knowing how much gives you something to work toward.

2. Withdrawals and spending are two different things.  A lot of retirement authors merge the two together.  They write as if we immediately spend every penny we get.  RMDs are withdrawals that have to be taken.  The article in the link is correct.  If they are in excess of needs then the excess should be saved or re-invested.  Some expenses are monthly, some are quarterly, and some are annual.  Some authors write as if this variation means its impossible to have fixed dollar withdrawals.  It isn't.  It just means that a savings or money market account is needed to hold the excess until its needed.  Withdrawals are gross income.  Taxes, fees, etc. are paid from the withdrawal not the portfolio.  I hear people say retirees are on fixed income. A paycheck is fixed income.This isn't any different than it was when you were working. (Note: I had a good friend who worked on commissions. They were seasonal. He had to save summer commissions to make it through the winter.)  Budgets help retirees save for irregular expenses.

3. The withdrawal method you choose should determine how you structure your portfolio.  Misalignment can cause serious problems.  The most obvious misalignment would be wanting to withdrawal only income but structuring the portfolio for growth.  Withdrawal methods boil down to: income only, fixed dollar (either adjusted for inflation or not) and fixed percent (with guard rails or without).  Fixed dollar methods (like the 4% Rule) are designed to provide a stable, consistent income but they are subject to a sequence-of-return failure.  Fixed percent (like RMDs) are designed to protect the portfolio from longevity risk, the risk of running out of money.  Vanguard calculated that withdrawals will be less than planned 48% of the time. Even using upper and lower thresholds it was 45% or the time.  The FIRE (Financial Independence Retire Early) series showed that a 1966 retiree would have had to live off of less that 50% of planned income for an entire decade using the Guyton-Klinger guardrail method.  Volatility is the enemy of both withdrawal methods.  Taking fixed withdrawals during a downturn shortens your portfolio's life.  Taking variable withdrawals during a downturn cuts the amount of money you get.

4.  Research using historical data and Monte Carlo computer simulations show when using a fixed dollar withdrawal method a balanced portfolio with somewhere around 50-75% stock has the best chance for success.  It provides both income and growth and it has less volatility so withdrawals during downturns don't kill it.   A lot of writers use a 60/40 portfolio because it falls mid-range.  Depending on the retiree's goals the actual structure can be simple or complicated.  Take the bucket method of withdrawals.  Withdrawals come from cash, theirs five to seven year of fixed income, and the rest in stocks.  Returns are used annually to replenish cash.  Some authors have multiple funds in each of the three buckets.  Harold Evensky (creator of the bucket approach) said that for a do-it yourself investor the number of buckets should be two.  He is said to have simply attached a cash bucket to a total return portfolio.

5.  Almost every financial advisor recommends annual re-balancing. A good idea in the accumulation phase of investing but not so good when withdrawing money.  Darrow Kirkpatrick (“These are the Best Withdrawal Strategies”, Money, no date) tested the 4% Rule with a 60/40 portfolio and found that annual re-balancing was the worst way to withdrawal cash from a portfolio. It had the lowest success rate and lowest average ending balance.

6. This is just scratching the surface of the information available.  But it all narrows down to needs, wants and goals.

Mustang, thank YOU for a very thoughtful response. I truly appreciate it!!

[archer]

Mustang, Can you say more about not using rebalancing for withdrawals? I'm thinking if one rebalances independently of withdrawals, or rebalances via withdrawals, the effect should be pretty much the same, with the end result being a rebalanced PF.

Rebalancing by using withdrawals would be harvesting the assets that have gained the most. The other options are harvesting the losers or harvesting evenly across all assets. Which of the 3 is recommended?

[Mustang]

I agree. In his second article he makes a distinction between rebalancing as a withdrawal strategy and annual rebalancing. In my succession plan the withdrawal is from the fund with the highest previous EOY balance. I tested this method using 50/50 Wellington and Wellesley and the portfolio re-balances automatically after three or four years. But using balanced funds puts what I'm doing outside of the scope of the published studies. It actually is a combination of withdrawing from Last Year's Performance and Proportional Withdrawals. Proportion withdrawals (discussed in his second article) have success rates almost as high as the CAPE Median stragegy..

Here is Kirkpatrick's original article. I read it a long time ago. But its basic premise made a point I couldn’t ignore. How you withdraw money makes a difference in the portfolio’s success: money.com/best-retirement-withdrawal-strategies/

“Many retirees will use systematic withdrawals from an investment portfolio for retirement income. I’ve done new research into the best retirement withdrawal strategies. History shows that your success can vary widely using the same portfolio and the same overall withdrawal rate, without changing your investments or taking on more risk. It all depends on how you withdraw from different asset classes like stocks and bonds. The secret is keeping it simple and using a consistent, value-driven approach. The payoff could mean extracting millions more income from your nest egg over the course of a long retirement.”

He tested six withdrawal strategies: “Note these are pure withdrawal strategies. They never buy or sell, or change the asset allocation, by any amount other than to generate the required withdrawal in a given year:”

The withdrawal strategies from a 50/50 portfolio were:
1. Equal Withdrawal Strategy. “withdraw the same amount each from the current balances of stocks and bonds.”
2. Rebalancing Strategy. “It uses the withdrawal as the means for bringing the asset classes back to the original, target allocation — 50/50 in my model.”
3. Last Year’s Performance. “If stocks returned more last year, this strategy withdraws entirely from stocks in the current year. If bonds returned more, it withdraws from bonds.”

Because one of my goals is a system simple to operate and maintain I wasn’t interested in the remaining three strategies. In fact, in the next link he gets rid of the next two and talks about the drawbacks of the third.

4. 3-Year Moving Average.
5. 7-Year Moving Average.
6. CAPE median Strategy. The most stand out comment I’ve read about CAPE went something like this: “About the time it was proven to work, it stopped working.” CAPE median had the best results. I just didn’t think it would be the best method for my wife.

But I was interested in this: “An old Wall Street adage advises it’s best to buy assets when they are out of favor. And it’s best to sell them when they’re in favor.”   Selling a balanced fund with the highest previous end of year balance is selling an assent when it is in favor, it is a proportional withdrawal and the portfolio automatically rebalances.every three or four years.

When looking up the first link I discovered a follow up article I’d not seen before: www.caniretireyet.com/the-best-retirement-withdrawal-strategies-digging-deeper/

He admits in this article that the results of the last three methods were overstated. “…the success ratio for the CAPE Median strategy was overstated by 1.7% (probably not statistically significant), and the success ratios for some of the momentum-based strategies were overstated anywhere from 2-7% (those strategies were already lagging).”

He says, “Contrary to conventional wisdom, rebalancing is not about juicing performance. (Helping you to buy low and sell high.) Rather, rebalancing reduces risk. In my simulations, adding rebalancing always reduces volatility (stock allocation), at the price of reducing your ending value, while having relatively little impact on success rates.

He still preferred CAPE median but added annual rebalancing (this is different from withdrawal rebalancing). But he points out that for it to work the retiree needs separate stock and bond funds. Not balanced funds. Again, I don’t need additional complications for my wife to use. So this withdrawal strategy doesn’t fit my goals.

He also said there were strong arguments against CAPE median. I didn’t follow that link because I wasn’t interested in the strategy. If you're thinking about using CAPE median you might want to follow that link.

“Annual rebalancing is like the Last Year strategy I studied before. It assumes that last year’s outperformance should be liquidated, but in fact we know that most stock market trends last far longer than one year. So it’s inefficient. It becomes obvious from my simulations, as well as a recent article from Michael Kitces, that rebalancing is actually suboptimal for long-term returns. But you might prefer the smoother ride….”

Here is a link to Kitces article. www.kitces.com/blog/how-rebalancing-usually-reduces-long-term-returns-but-is-good-risk-management-anyway/

He shows that rebalancing sells higher return assets to buy lower return assets.  It lowers volatility at the expense of total return.  

But there is a reason that 100% stock portfolio have a lower success rate in all of the studies than balanced portfolios for retirees withdrawing from investments.  During every retirement there will be periods of market declines and recessions. Sequence of returns makes a difference.  Since I cannot see the future I prefer less volatility.  This is a 23 year retirement starting in 2000.  The blue line is Wellesley Income Fund which is 60% bonds (a low return asset).  The red line is an SP500 Index fund. www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=5Xm0ldPisQMjJwbvS6jUZF

[archer]

Great post Mustang,

Your last paragraph hits the nail on the head. All the withdrawal studies were based on how the market performed in the past. The one rule that holds constant in all markets is volatility erosion. I noticed when using the fidelity fund screeners, on average funds with the lowest SD have the highest Sharpe. Over short time periods this doesn't hold up, but over longer periods it does.

[habsui]

I retired 12 years ago on a Friday.
I started spending (3% WD) on Saturday.
Worked out great..

[mnfish]

I have had one W2 since 2014 and it was for $14k in 2020. As of January 2014, I have been retired. I lived off of a taxable acct and two beneficial IRAs until 2020 when I took SS at 62. Since 2014 the 3 accts I withdraw from have grown 23% after withdrawals of at least 5% a year. Portfolios are/were mostly stocks and dividends/interest supplied about half of the withdrawals and the rest was cap gains. If and when the "dreaded" spend down happens I'll deal with it then.

[Birdman96]

Mustang - truly appreciate the research you’ve done and your ability to clearly summarize what you’ve found. It was instructive for me to use your PV analysis comparing Wellesley and the S&P index. I know I’m data picking now by changing the start date to 2013. This is a very different result, yes?

[Mustang]

Yes, very different results. Comparing the two shows how much a difference sequence-of-returns make.   Starting retirement in 2013 lets the retiree miss those 2000-2003 losses.   Look at how big a difference it made from March 2020 on the two charts.  On the 2013 chart there is huge growth in the SP500 from March 2020 to 2023.  www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=68peHLzpNNJhvtS24u6rHj

Using the 2000 start date there is no growth at all.  In fact, the SP500 fund starts dropping faster starting in October 2021. That period of huge growth couldn't even pull the fund back above the $500,000 mark. www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=5Xm0ldPisQMjJwbvS6jUZF

This is a result of inflation. With retirement starting in 2013 the withdrawal is $40,000.  If retirement had started in 2000 the inflation adjust withdrawal had grown to $54,000 by 2013.  The downward trend after only 24 years of withdrawals makes me wonder if the SP500 fund will even make it to 30 years as inflation adjusted withdrawals out run performance.  www.usinflationcalculator.com/

A person retiring needs a portfolio that can withstand SOR.  Think about the ramifications on your lifestyle if you plan on the returns of the last 10 years but get the ones from the 2000 start date.  According to Morningstar the SP500 Index fund averaged 11.8% return over the last 10 years.  Average return is 6.5%.  If your initial withdrawal was 11.8% you would be broke in a matter of years.  Even faster if you had a SOR like the 2000 retirement.  That is why the maximum safe withdrawal amount is fairly low (4%) because there is ample opportunity to increase withdrawals later.  Decreasing withdrawals later would require huge cuts because the portfolio had already been depleted.

P.S.  A start date of 2000 isn't even close to the worst retirement start date in history.  That was 1966.  The year Bengen based the 4% Rule on.  I once tested a 1968 retirement.  Within 25 years the inflation adjusted withdrawal had quadrupled.

[FD1000]

Mustang ,
As usual, great posts and analysis. Since retirement in 2018 we maintained the same life style as we have while working.
After our portfolio grew by a lot, we allowed ourselves to spend even more, still frugally, because you can't take it with you.

In the last 1.5 year, we replaced our 2 vehicles + the roof and the deck.

I never had any problem changing from saving to spending, after all, it's just numbers, always was, always will.