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Post by Mustang on Nov 27, 2021 13:22:37 GMT
Some may know that I have created a withdrawal plan and I am now looking for holes in it. The author of Early Retirement Now's Safe Withdrawal Rates hates the 4% Rule so he probably would point out its drawbacks. I have read exactly half of Early Retirement Now’s 48 part Safe Withdrawal Series. Here is my review of the first 6 parts. Guide for first time readers: earlyretirementnow.com/safe-withdrawal-rate-series/The author hates Bengen’s 4% Rule but he probably doesn’t understand it because he constantly misapplies it and in spite of his dislike his calculations show that it works.
The 4% Rule is specifically for a 30 year payout with a portfolio that is between 50-75% stock. Bengen, Trinity, and Pfau’s 2018 update of Trinity show that a3% initial rate is for 40-50 year payouts, 4% for 30 years, 5% for a 20 years and 6% for a 15 years with a 99-100% historic success rate. Success is simply not running out of money.
He wants to use 4% for a 60 year payout. In doing so he has run thousands of spreadsheet simulation (not Monte Carlo) sometimes using historic data and sometimes not.
Part I Introduction: It’s a bad idea to extrapolate the 4% Rule to a 50+ year payout period. That is true. Using data from 1871 to 2016 he looked at payout periods from 30 to 60 years. According to his methodology a 50/50 portfolio had a 95% chance of making it 30 years. A 75/25 portfolio 99%. No bad. I’m glad to have the confirmation that the 4% Rule works.
Part 2 Capital Preservation: He said the 4% Rule isn’t about the medium retiree. That is true. It is about the worst case scenario (1966). For most of the rolling payout periods (51 in Bengen’s 1994 study and 55 in Trinity’s 1998 study) there was substantial funds left over after 30 years. But he adds that there might not be enough to go another 5-10 years. That is also true. 4% is specifically for a 30 year payout. He then adds a goal of an ending balance of 50% of the starting balance. It’s now an apples to oranges comparison. The 4% Rule has no such goal.
Part 3 Equity Valuations: For a Shiller’s CAPE Ratio between 20 and 30 (current market) and a 30-year payout his simulations show an 85% probability of success for portfolios with 50% stock and a 95% probability of success for 75% stock if success is defined as not running out of money. It drops to 65% and 70% if success is defined as leaving half to the kids. This again confirms the 4% Rule will work.
Part 4 Social Security and Pensions: Goals are early retirement and leaving half to the kids. Retirement starts 25 years before social security eligibility. I didn’t see any benefit in reading the rest of it. It has nothing that applies to my situation.
Part 5 Cost-Of-Living Adjustments: I agree that looking at fixed withdrawals without COLA is a failure from a standard of living viewpoint. He does a lot of analysis showing why the 4% Rule with full inflation increases (and 4% + CPI minus 1) doesn’t work for a 60 year payout. They were never suppose to. None of the studies using historical data showed that it would. He prefers a 3% initial withdrawal which is what Bengen and the other studies show. I was interested in his CPI minus 1 calculations. If used continuously over 30 years purchasing power would be reduced to 74% (worst case scenario) at the age of 95. Hopefully the worst case scenario will not materialize but since retirees reduce spending as they age by 1-2% this is probably OK. Part 6 2000-2016 Case Study: He changes the goal again from not running out of money to not touching principal. That is a big change. He shows that the 4% Rule works but the real value of principle after 30 years drops to around 40% of its initial value. He talks about the portfolio value dropping from $1,000,000 to $600,000 in real dollars. But for normal retirees the payout period has also dropped from 30 years to 15 years where a 6-7% initial withdrawal rate is acceptable. (6% was 100% successful, 7% was 85% successful.) Meaning in real dollars the retiree started with a $40,000 initial withdrawal and if starting over 15 years later would still have a $36,000-42,000 withdrawal. In spite of his dislike of the 4% Rule this is more confirmation that it works.
I will post my thought on parts 7 to 24 later.
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Post by Mustang on Nov 27, 2021 14:39:14 GMT
Back to the Early Retirement Now’s 48 part Safe Withdrawal Series. Part 7 Toolbox and Part 8 Formulas: Spreadsheet calculations and the math behind the calculations. Part 9 Guyton-Klinger Guardrails: Assumes an 80/20 portfolio and a 60-year payout period. He shows that the 4% rule runs out of money after 28 years. He also uses monthly withdraws instead of annual. His other chart shows that G-K Guardrails beat the 4% rule for ending balance even with a 5% initial withdrawal. That is not unusual. Dynamic withdrawal methods are designed to protect the portfolio’s value. But it comes with a price. For a 1966 retiree there will be an entire decade of withdrawals that are half of what is needed. I hope the retiree is cutting vacations and not food and heat. Fixed withdrawal methods are designed to provide a stable income. Part 10 Debunking Guardrails some more: More details on G-K Guardrails. Needless to say if a stable retirement income is a goal this is not the withdrawal system you should use. Part 13 Prime Harvesting: Interesting concept related to upward glide slopes. I had not seen it before. It is a method that changes asset allocation instead of rebalancing back to 50/50 every year like the Bengen and the Trinity studies. He created upper and lower limits for equities. Basically if stock are doing good withdraw from stocks. If not withdraw from bonds. Same 80/20 portfolio, 60 year payout period and capital preservation rule that leaves half to the kids. Starting year was 1966. The various methods showed the initial withdrawal between 2.8-3.1%. Bengen said 3% for 50 years. A very complicated method for achieving the same results and his method usually ends with a 100% stock portfolio late in retirement. Part 14 Sequence of Returns Risk (SRR): He creates an interesting chart showing that withdrawing and saving is a zero sum game. SRR can benefit savers and harm retirees or vice versa. Since market timing usually doesn’t work that is why we save using dollar cost averaging and why we start retirement using what worked for the worst case scenario and work our way up. And, I agree completely that we should worry about volatility and find ways to mitigate the risk. Part 15 More SRR: It’s a bigger problem than low returns. 80/20, 30 year payout, monthly withdrawals, no capital preservation. December 1968 starting date: average return is 6.16% for the entire 30-year period but only a -3.29% first 10 years: Safe Withdrawal Rate was 3.8%. March 1979 starting date: average return is 6.03% for the entire 30-year period but only a -3.98% last 10 years. Safe withdrawal rate was 9.12%. “Safe return and average return are only slightly correlated.” Yes. That was why Bengen was looking for a better method. He was skeptical of averages. His 4% initial withdrawal was a worst case scenario Part 16 Low Future Returns: (Written in 2017) Bogle predicts 4% return over next decade (nominal not real). Assuming 2% inflation that only a 2% real return. Average historic real return is around 6.7%. He doesn’t like Ramsey’s 12% (nominal) prediction. Using Shiller’s CAPE ratio he predicts 3.3% real returns with substantial uncertainty so he agrees with 2%. Over the last five years since this has been written our portfolio averaged an 11.5% annual return . He also predicted inflation at 1.06% not 5.8%. So much for predicting the future. He said that 3.5% initial withdrawal should be good for 60 years. That pretty much matches other predictions.
Part 17 More on Social Security: He hammers the 4% Rule saying 3.5% is better then talks about how many years (of withdrawals) until becoming eligible for social security. He said people retiring at 50 (not 30) who wait to age 70 to take social security and reduce withdrawals accordingly can have a safe withdrawal rate of 4.5% or even 4.75%. While neither the age 30 retirement nor age 50 retirement are applicable to our situation, that’s nice to know. It makes 4% for an age 65 retirement sound pretty safe.
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Post by Mustang on Nov 27, 2021 14:56:41 GMT
Continuing on with a review of Early Retirement Now’s 48 part Safe Withdrawal Series.
Part 18 Dynamic Withdrawals and Shiller’s CAPE ratio: Flexibility is good but a 50% reduction in spending might be OK for those deferring vacations but it’s not good for those who would be deferring food. My wife and I will be using a dynamic withdrawal strategy on about half our portfolio (RMDs). And we will be implementing a touch of flexibility (CPI minus 1) on the rest. We also allow for increases in withdrawals should the market be very good.
Part 19 Equity Glidepaths: Wade Pfau and others have written that at age 55 equity should be around 60% dropping down to 40% at age 65 and back up to 60% at age 80 to insure against Sequence of Return Risk. Since he is focused on early retirement he said withdrawal rates had to be lower and equity higher to make 60 years. It is the opposite of what target date fund do. His recommendation seems very complicate for very little benefit. He said, “Likewise, if I’m OK with a 5% failure probability conditional on a CAPE>20, then the static stock allocation of 80% would give me an SWR of 3.47%. The glidepaths would have allowed between 3.57% and 3.63%." I'm sure that small of a difference falls well within the error of the estimate.
Part 20 More on Glidepaths: He compares a 70% to 90% equity glidepath to a flat 80% equity portfolio. Not applicable to our situation. And, based on the information in Part 19 and how little it changes the safe withdrawal rate its probably not worth the trouble unless we were looking at a 60 year payout.
Part 21 Mortgages: Since we have no debt I didn't read it.
Part 22 Simple Math (25x Rule): Specifying a retirement savings goal such as 25 times expenses will mean a retirement after a long bull run just before a bear market is likely because the portfolio is at its highest valuation. This is just common sense. The 25 times rule is the inverse of the 4% Rule (1 divided by 4% is 25). It is for a 30 year payout. He again uses a 60 year payout and an 80/20 portfolio. Apples to oranges again. And compares the 4% rule to a 3.25% rule over the 60 year payout. He prefers 3.25%. (For a 50 year payout so did Bengen.) He does show that retiring at the peak increases the probability of failure a little. Why? It guarantees a sequence of return problem. But, none of us can forecast a peak.
Part 23 Flexibility Limitations: As shown before dynamic withdrawal strategies can force a significant reduction in spending. An alternative for those wanting to retire at the age of 30 is to get a job. That made me laugh. He even has portfolio guardrails for when to go back to work and when to quit.
Part 24 Flexibility Myths: This time he changes the payout period to 50 years. He said worst failures were 1929 and 1966. Bengen showed both as a success. 1929w as a success thanks to deflation so he is obviously using different inputs than historical data. He says he knows the 1929 start would have run out after 23 years using the 4% Rule. (But it doesn’t) When talking about the flexibility rule he said don’t do inflation increases when the portfolio is under water. Then, he said the inflation rule would have walked down withdrawals (real dollars) by 2% per year. It seems he’s using a 2% inflation rate for a historical period that actually had deflation!
From what I have read there is nothing in the first 24 parts that would lead me to believe the 4% Rule would not work. In fact in many places his calculations show that it would.
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Post by Mustang on Nov 28, 2021 9:56:27 GMT
I have finished two more parts of his safe withdrawal series and, after I got past his misleading comments, I have gotten some good information. Mostly he has confirmed that my withdrawal plan using a cash bucket, modified 4% Rule(CPI -1) and Kitces ratchet up method will have a high probability of success. Here are my comments on parts 25 and 26:
Part 25 More Flexibility Myths: He starts with the same information as in Part 24 then looks at adding a cash bucket on top of the $1M 80/20 portfolio and ratcheting up withdrawals. (Both are in my withdrawal plan.) He is again looking at a 50 year not 30 year payout so the initial withdrawal rate is 3.25%. He said the cash bucket worked. That is good to know. Using the GK guardrail method to ratchet up withdrawals he said some payout periods would get increases and some wouldn’t. Not a surprise. Using Kitce’s method it’s the same. He then talks about GK guardrails and a 7% initial withdrawal. A $70,000 initial withdrawal drops below 40% ($28,000) for an entire decade. Some dynamic withdrawal methods are kind of tough to live on. For a livable income historically a 7% initial withdrawal increased for inflation is good (85% success rate) for a 15 year payout period.
Part 26 “10 Things the Makers of the 4% Rule don’t want you to know.” Most are simply a misunderstanding of what the 4% Rule is. If it is misapplied it doesn’t work. The last couple are just him complaining.
1. It a rule of thumb. Different situations require a different rate. Yes, especially if you extend the payout period to 50-60 years. 4% was calculated for the worst case 30 year payout.
2. The 4% Rule is likely too conservative. Yes, it a “worst case” rate. A lot of the time there will be a substantial ending balance. That is why I added Kitces’ method to ratchet up withdrawals.
3. Ignores expenses, taxes, etc. Yes. The withdrawals are gross income not net income. Adding those increase the initial withdrawal rate from 4% to 5-6% which would either limit the payout period to 15-20 years or decrease the probability of success for a 30 year payout. Pfau's 2018 update of the Trinity study showed a 48% success rate for a 75/25 portfolio and a 25% success rate for a 50/50 portfolio if fees and taxes are added on top of the 4% withdrawal.
4. Flexibility is overrated. Maybe. If talking about GK guardrails then yes. But there are reasonable ways to mitigate risk that his calculations show are successful. Reducing inflation increases to CPI minus one percentage point and a cash bucket work.
5. Some of the retirements would be scary. Scary? I thought he was into quantitative decision making. Because the future is unknown he again says some of the early retirees would have to go back to work unnecessarily. I really feel bad for them. No one can see the future. Uncertainty is always scary. The only thing we can do is mitigate the risks. If that is too scary then buy an annuity.
6. The 4% Rule works all the time if you time the bond market correctly. He is talking to early retirees. For normal retirees, studies have shown it worked during the worst case historic periods with different researchers using treasury bonds, 10-year bonds, etc. In spite of what he says the researchers did not change their methodology back and forth to make it work for all start dates. Each researcher picked one and stuck with it. Since I use balanced funds this is the fund manager’s job.
7. We confuse nominal and real numbers. Yes, it is easy to do. When using the 4% Rule withdrawals are in real dollars and the ending balance is in nominal dollars. That doesn’t matter. The goal was to not run out of money. If there is an ending balance it didn’t.
8. For the next 12 year we can ignore a potential failure. Now he is making stuff up. No one says that. And his example left out the fact that in his scenario the portfolio may have only recovered from an early bear market in nominal dollars but the payout period for the 2000 retiree is now only 10 years long (not 30).
9. We won’t have to rely on the 4% Rule ourselves. This is not worth a comment. He is complaining that the Trinity study authors (college professors) have pensions. A lot of research, including his, verifies that the 4% Rule works.
10. Small cap bias may not work in the future. True. None of the studies (Bengen 1994, Trinity 1998 or Pfau 2018 update that I’ve read used small cap equity. None. He is complaining about Bengen’s more recent studies where he added small cap and increased the safe withdrawal rate. But he is wrong about the 5.25% rate. Bengen did say that but it was when low inflation was factored in. The 4% Rule was set for a 1966 retiree whose retirement went through the stagflation years of double-digit inflation. Do to current inflationary pressures I think I will stick with the original 4% Rule.
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Post by steadyeddy on Nov 28, 2021 12:36:59 GMT
Mustang , thanks for the patience and dedication in summarizing the series up to part 25. Did the author discuss what the starting $ number should be? 20X, 25X, or what of annual expenses.
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Post by Chahta on Nov 28, 2021 13:35:45 GMT
Mustang, I see the portfolio percentages (80/20) mentioned. Is there an 8%, included in the 20%, cash position to mitigate SRR?
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Post by Mustang on Nov 28, 2021 17:17:57 GMT
steadyeddy , He discussed starting dollars in several parts and the 25 time desired withdrawal was mentioned. I'm going off memory but he didn't like it any better than the 4% Rule. He made a pretty good case against it in Part 22. He was talking about how the business cycle affect the timing of retirement. He posted analysis showing that if 25x was used to start of retirement then most people would retire at the end of a long bull market. The portfolio builds value until it hit the target amount and that few would retire during the bottom of a trough when the portfolios value was its smallest. I thought it made complete sense.
It also makes sense that retiring at the peak of a bull market using the 4% Rule would make the dollar withdrawal the biggest and would probably usher in a sequence of return risk because the next thing in the business cycle is a bear market.
He also talked about it in Part 25. I was interested in this because I have a cash bucket in my withdrawal plan. He said a cash bucket works if it is in addition to the portfolio. He used 1929 and 1966 starting retirements as example. Even though his inputs for the1929 simulation were wrong (he used inflation where it actually was a deflationary period) it showed that adding a cash bucket extended the payout period from 23 years to 30 years. He used an initial withdrawal of 3.25% (initial withdrawal would have been $32,500) and a cash bucket of approximately $100,000. The cash bucket was not replenished after being used. He said that to do this the portfolio would have to be 27.5 times the initial withdrawal instead of 25 times. But, since most people do not pick a retirement date base solely on their portfolio's balance this usually isn't a problem.
I did a quick calculation One divided by .0325 is approximately 30. The reason he comes up with 27.5 is because the $100,000 cash bucket is not used to calculate the withdrawal dollar amount.
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Post by Mustang on Nov 28, 2021 17:22:35 GMT
Chahta, No. The cash bucket is separate from the portfolio. He was using a $1 million 80/20 portfolio, a 3.25% (50-60 years) initial withdrawal and a cash bucket that was a little over $100,000. Which is roughly three times the initial withdrawal.
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Post by steadyeddy on Nov 28, 2021 22:48:04 GMT
Chahta , No. The cash bucket is separate from the portfolio. He was using a $1 million 80/20 portfolio, a 3.25% (50-60 years) initial withdrawal and a cash bucket that was a little over $100,000. Which is roughly three times the initial withdrawal. I am a couple of years from retirement... and I would not dare to have an 80/20 portfolio.. too much equity risk and the last thing I need is a market drop distressing me. In fact, I am more in favor of Kitces' approach of high% fixed income/cash as I approach retirement.
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Post by Deleted on Nov 28, 2021 23:07:55 GMT
Mustang - sorry if I lost track of your settled on withdrawal strategy - is it 4%, with CPI increases, and an increase of 10% if portfolio is 150% of starting portfolio value?
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Post by Mustang on Nov 28, 2021 23:09:17 GMT
I skipped up to part 48. None of the other parts interested me and I wanted to see what he had to say about the bucket strategy. I was disappointed. Part 48 Bucket Strategy: Portfolio is 60% stocks (18 years), 25% bonds (7.5 years), and 15% cash (4.5 years). Personally I think that is too much cash. For a $1 million portfolio that would be $600,000, $250,000, and $150,000. Withdrawals are taken out on January 1st. His estimated returns are $6,000 (6%), $4,000 (1.6%) and $300 (0.27% because of withdrawal). At beginning of year 1 he takes $40,000 from cash and re-balances. To replenish cash he takes $36,000 from stocks and $4,000 from bonds. He has a graphic showing money flowing from the sale of stock to bonds to cash. He is correct when he says it just the same as selling stocks every year. If I understand the bucket strategy correctly he messed this up. I think you are only suppose to prune back profits. If we are just pruning back profits it would be $6,000 from stocks and $4,000 from bonds leaving cash balance at $120,000. Stock and bond balances are unchanged. If only pruning back profits the entire scenario changes. Year 2, we withdraw $40,800 (2% inflation) from cash leaving the balance at $79,200. Cash earns $213. Let’s say stocks lost 5% ($30,000) leaving $570,000. Nothing is taken from stocks, $4,000 is taken from bonds. Cash balance is up to $83,400 (rounded). Balances are now stocks $570,000, bonds $250,000 and cash $83,400. Year 3, we withdraw $41,600 (rounded) from cash leaving a balance of $41,800. Cash earns $113, stocks earn 15% ($85,500). Bonds earn $4,000. Balances are $655,500, $254,000 and $41,800. We prune back profits: $85,500 from stock, $4,000 from bonds so ending balances are $570,000, $250,000, and $113,300.
If cash runs out then it has to be replenished prematurely. I assume that is when everything is re-balanced.
I may not have it exactly right (feel free to correct me). I haven't really studied the bucket strategy. I’m not a fan because of its complexity. He talks about an not taking from stock when the market is down but then he says that cash would be exhausted in 3.75 years. Bonds in 6.25 years. That would mean that stocks made absolutely zero return over the entire 10 year period. That doesn't sound realistic to me. He wants to see the numbers from other people maybe he should use realistic numbers. Sorry but I cannot read anymore of this stuff.
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Post by Mustang on Nov 29, 2021 0:00:40 GMT
Mustang - sorry if I lost track of your settled on withdrawal strategy - is it 4%, with CPI increases, and an increase of 10% if portfolio is 150% of starting portfolio value? I haven't really talked about my withdrawal strategy. Half of our portfolio is in traditional IRAs in a single Balanced Fund which has a 65/35 asset allocation. We are using RMDs as our withdrawal strategy so we are using a dynamic withdrawal strategy that protects the portfolio's value on half our portfolio. American Funds takes out the taxes and deposits the rest in our checking account monthly. The process is completely automatic. Like all dynamic withdrawal strategies our monthly deposit changes up and down every year depending upon portfolio performance.
I like the saying that says you should have a stable income to cover needs, variable income should cover wants.
So we need a stable income to live on. The other half is in our taxable brokerage account divided equally between a moderate-allocation fund (Wellington) and a conservative-allocation fund (Wellesley). Together they are roughly a 50/50 allocation. We are planning for a 30 year payout. That may be a bit long. It would take me to 101 and my wife to 95. Average life expectancy is 77 for men and 81 for women so 20 years is probably more realistic but who knows, we might beat the odds. Research has shown that retirees reduce spending as they grow older so I modified the 4% Rule a little. The annual increase will be CPI - 1 (e.g., if CPI is 5% the the multiplier is 1.04 not 1.05).
That also fixed a sequence-of-return failure in one of my tests. Using a 1968 start date and Wellington by itself the fund ran out of money after 25 years using the 4% rule. Using the modified 4% Rule it lasted 30 years.
Other research shows that how you withdraw money makes a big difference. Re-balancing back to 50/50 every year was the worst method. One of the better methods was pruning back profits. To simplify that for my wife, the rule is to take from the fund (Wellington or Wellesley) with the highest EOY balance. My tests show that the funds automatically re-balance after two or three years. The January withdrawal is to go into our savings account.
Looking back at history there was only one time that both Wellington and Wellesley lost money two years in a row at the same time (1973 and 1974). So I have established a rule to not withdraw money if both funds lose money. Instead, take that year's withdrawal from savings. Saving is supposed to be around two to three years of withdrawals. Probably three years at the beginning of the year and two at the end. So at the beginning of the year my wife will calculate how much to withdraw and determine which fund to withdraw it from (if any). I have written a checklist for her to follow in case something happens to me. Wives typically outlive their husbands.
Withdrawals and spending are two different things. Savings is the buffer. If withdrawals exceed spending then the excess stays in savings. If spending exceeds withdrawals then the shortfall comes from savings. We operate off a budget and typically spend less than our income. If savings exceeds three years of withdrawals at the beginning of the year then no withdraw will be taken that year.
This is a worst case scenario plan. Research has shown that typically the 4% Rule leaves a fairly big ending balance (nominal dollars). I've settled on something Kitces wrote. Every 3 years there will be a special review before the January withdrawal. If the combined balance of Wellington and Wellesley exceed their initial balance by 50% then a 10% increase in the withdrawal is permitted if needed. If not needed take less. This does not affect the RMDs from our traditional IRAs. Again using Wellington by itself a 1968 retirement did not ratchet up at all. A 1990 retirement ratcheted up almost every three years.
Is this a perfect plan? No. There is no such thing. I'm retired Air Force. A plan is only good until first contact with the enemy. After that you have to adapt and innovate.
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Post by retiredat48 on Nov 29, 2021 16:10:30 GMT
At Mustang...thanks for these posts.
Suggest you consider: Re-retire each year!
That is, for the next five years after your retire, re-run your numbers (with new portfolio values) as though you are retiring that day, a year later. Perhaps reduce years to survival by one each year. But even with a 30 year goal, rerunning the numbers will give you confidence, or non-confidence, in your plan. First five years are key to most failure incidences, which are low percentage to begin with.
Reruns should be easy, as you love this stuff!
Best wishes...
R48
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Post by Chahta on Nov 29, 2021 16:58:50 GMT
I have a crazy question. I am retired (not working) now for 2 1/2 years. I mostly live from SS and mildly (with gifted money) from my taxable account. I do not forsee using my IRAs until RMDs kick in 2024. Am I not considered in the "retired" phase until I start stressing the taxable/IRAs for income? I feel as though I am still accumulating.
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Post by retiredat48 on Nov 29, 2021 17:27:15 GMT
I have a crazy question. I am retired (not working) now for 2 1/2 years. I mostly live from SS and mildly (with gifted money) from my taxable account. I do not forsee using my IRAs until RMDs kick in 2024. Am I not considered in the "retired" phase until I start stressing the taxable/IRAs for income? I feel as though I am still accumulating. Retired is retired...the fact you can live off SS and taxable accounts shows you "have enough." RMDs do not have to be spent...you simply have to move money from IRA into taxable accounts. If you want to mitigate taxes on this transferred money, use ETFs (min cap gain distributions, by rule) and invest in lower paying divy stock funds such as small caps. Hold income assets in IRAs. And if you don't need dividends to spend, why worry about becoming a high divy-investor. R48
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Post by racqueteer on Nov 29, 2021 20:23:03 GMT
Something to think about... If you have RMDs you won't be using, it seems to me that investing in a property, putting it in a trust, then putting RMD money into improvements (maybe a fixer-upper), would be a good way to 'build' wealth without (further) tax consequences. I'm considering this approach myself. Am I failing to consider something?
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Post by Chahta on Nov 29, 2021 22:54:01 GMT
Money in but no income? Only relying on growth of property value? If it’s commercial then the value is figured with income in mind too. If it’s rental then tax consequences need to be figured in, including depreciation. Seems like it could work as long as real estate keeps going up.
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Post by richardsok on Nov 29, 2021 23:01:17 GMT
Something to think about... If you have RMDs you won't be using, it seems to me that investing in a property, putting it in a trust, then putting RMD money into improvements (maybe a fixer-upper), would be a good way to 'build' wealth without (further) tax consequences. I'm considering this approach myself. Am I failing to consider something? I'm 73 now and am very reluctantly taking steps to sell my Bucks County, Pennsylvania property. (I've cleared out the attic and the basement. Next up: the garage.) I always liked this semi-country home; the serenity, the growth in value, the beauty, the charming towns nearby. Many memories here. BUT...... there'll come a time where the physical upkeep will become just too much. (And never mind Christmas 2012 when I broke my leg tumbling off the roof.) I had a few good years right after my early retirement when I could spend time maintaining and fixing things unhurried without the career drudgery to interfere. But now I'm getting on and I know that hanging on will become more difficult. I don't know anything about you, rac. But I think there comes a time to begin letting big physical possessions go. If not, it slowly becomes easier to just postpone maintenance, to put off caulking, scraping, painting. Do I really need that garage door opener that just died? I can just park the car outside, and so on. Well, you get my drift. Good luck.
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Post by Chahta on Nov 29, 2021 23:11:47 GMT
Great answer richardsok. I don’t go on the roof or high ladders any more, at age 69. Retirement should be fun and easy. It is hard enough keeping my body working to hit the golf course as much as I can.
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Post by racqueteer on Nov 30, 2021 0:43:48 GMT
I think I need to clarify... This is my personal dwelling I'm talking about. I'm here and stuff needs to be done anyway. I don't NEED the RMDs, and investing involves potential capital gains. I plan to use RMDs to redo an enclosed porch, repaint, maybe add a full top floor. House is in a trust. Essentially, I'd be adding to the assets of the trust. That's the context.
Conceivably, I could also sell the existing house and buy something else with the proceeds, make improvements, trade up in the value of the estate.
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Post by Chahta on Nov 30, 2021 1:10:00 GMT
IMHO, if you don’t need the RMDs to live on then use them to make you happy. If that is fixing your house to your liking have fun! If it raises the value of your house all the better.
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Post by retiredat48 on Nov 30, 2021 2:36:24 GMT
Something to think about... If you have RMDs you won't be using, it seems to me that investing in a property, putting it in a trust, then putting RMD money into improvements (maybe a fixer-upper), would be a good way to 'build' wealth without (further) tax consequences. I'm considering this approach myself. Am I failing to consider something? Hi raq...yes, you may be missing (or forgetting) something. That is: Mutual Funds are required annually to pay out like 95% of their capital gains to shareholders. This limits growth of the asset, as taxes may be paid on same distributions. However, Exchange Traded Funds have this special IRS ruling that most of their sales of underlying stocks do not result in capital gains...thus very small cg payouts. So the investment wrapper of choice in taxable for excess IRA distributions is an ETF. Now combine this with investing in a low yield ETF, such as small cap growth stock fund. Yield is close to zero. Here you now have a virtually non-annually-taxable asset...like a mini IRA in taxable account. You are only taxed when you sell any. Hold till death and you get a step-up tax basis. Keep high divy payers in IRAs. What a country! R48
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Post by chang on Nov 30, 2021 2:51:30 GMT
Something to think about... If you have RMDs you won't be using, it seems to me that investing in a property, putting it in a trust, then putting RMD money into improvements (maybe a fixer-upper), would be a good way to 'build' wealth without (further) tax consequences. I'm considering this approach myself. Am I failing to consider something? Hi raq...yes, you may be missing (or forgetting) something. That is: Mutual Funds are required annually to pay out like 95% of their capital gains to shareholders. This limits growth of the asset, as taxes may be paid on same distributions. However, Exchange Traded Funds have this special IRS ruling that most of their sales of underlying stocks do not result in capital gains...thus very small cg payouts. So the investment wrapper of choice in taxable for excess IRA distributions is an ETF. Now combine this with investing in a low yield ETF, such as small cap growth stock fund. Yield is close to zero. Here you now have a virtually non-annually-taxable asset...like a mini IRA in taxable account. You are only taxed when you sell any. Hold till death and you get a step-up tax basis. Keep high divy payers in IRAs. What a country! R48 There are countries with no capital gains taxes whatsoever. Which is how it should be. You invest money that presumably you already paid tax on (e.g., earnings). What happens to it - win or lose - should not be the IRS's business. CGs are virtually a double taxation. So I wouldn't really celebrate until CGs are abolished altogether.
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Post by alvinthechipmunk on Nov 30, 2021 5:26:44 GMT
I have a crazy question. I am retired (not working) now for 2 1/2 years. I mostly live from SS and mildly (with gifted money) from my taxable account. I do not forsee using my IRAs until RMDs kick in 2024. Am I not considered in the "retired" phase until I start stressing the taxable/IRAs for income? I feel as though I am still accumulating. Retired is retired...the fact you can live off SS and taxable accounts shows you "have enough." RMDs do not have to be spent...you simply have to move money from IRA into taxable accounts. If you want to mitigate taxes on this transferred money, use ETFs (min cap gain distributions, by rule) and invest in lower paying divy stock funds such as small caps. Hold income assets in IRAs. And if you don't need dividends to spend, why worry about becoming a high divy-investor. R48 ******************************************* Specific and very helpful, thank you. I'm not drawing-down yet, either, though retired. Spousal income is key, though. I've made withdrawals, but mostly for the purpose of subsidizing the in-laws who live in a corrupt, screwed-up Asian country where 95% of the population goes hand-to-mouth. It might do them some good to discover birth control... Naw, too much to hope for. So: ETFs, I did not know must minimize cap gains??? I'm all in OEFs.
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Post by roi2020 on Nov 30, 2021 6:15:11 GMT
alvinthechipmunk, ETFs have an in-kind creation/redemption mechanism which helps to limit or avoid capital gains distributions. Link
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Post by Chahta on Nov 30, 2021 13:06:39 GMT
Basically, ETFs do not have to sell individual stocks to redeem shares for cash, forcing a CG/CL transaction to the fund.
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hondo
Commander
Posts: 148
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Post by hondo on Nov 30, 2021 19:54:09 GMT
I have really warmed up to using ETF funds, but feel somewhat trapped in my OEFs since there is no comparable EFT to transfer to. I understand that a person, with a taxable account, can transfer from say a OEF SP-500 fund to a EFT SP-500 fund without having a taxable event, however those of us using balanced funds such as vbiax have no matching EFT to transfer to, so the move to some other ETF would trigger a huge CG bill.
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Post by yogibearbull on Nov 30, 2021 20:27:38 GMT
hondo, that tax-free transfer works only for VG OEF to VG ETF class, but not for others. This is because VG has patented ETF classes for most of its indexed OEFs. That VG patent is expiring soon (and greedy VG hasn't licensed it to ANYONE), and then probably others can also use this device too.
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hondo
Commander
Posts: 148
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Post by hondo on Nov 30, 2021 23:17:56 GMT
Thanks YBB. Since you mentioned it, I remember having read that before, most likely from one of your post. Thanks again.
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Post by FD1000 on Nov 30, 2021 23:37:32 GMT
Mustang, wow, thanks for so much info. When I retired several years ago, I made many calculatiosn and stress tests. I retired with 25+ times our yearly expenses needs, not including SS. We don't have any other pension or RE income. The portfolio grew to 40+ times. I will start taking SS in several months at age 65, my wife will take it in 3.5 years. We only require about 1% annually withdrawal from our portfolio after both SS withdrawal.
Basically, I threw out now all the calculations, I don't pay attention to it. We are going to spend as usual, regardless of performance or reasonable LT inflation of 2-5%. Of course, I can adjust anytime. Nothing is ever final.
And zero % in cash, unless risk is very high.
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