I will be retiring shortly and looking to develop a plan for de-accumulation (HARD).
All of my investments are in tax deferred accounts.
I plan to claim Social security @ the age of 72 (will help me burn tax deferred money, reduce RMD).
Tax bracket will not change = 22% as of now, will convert some to Roth and stay below IRMAA limit.
- I sell 1/10 of monthly expenses from 10 funds even or
- I sell 1/5 of monthly expenses from top performing 5 funds (3 yr returns) or
- I sell 1/5 of monthly expenses from bottom performing 5 funds (3 yr returns)?
- I sell 1/5 of monthly expenses from top performing 5 funds (1 yr return) or
- I sell 1/5 of monthly expenses from bottom performing 5 funds (1 yr return)?
Selling will be every quarter.
Funds are mixture of growth, value, multi-asset/balance and bonds.
I want to make it as mechanical as possible.
What do you think about my options?
Do you have any similar strategy?
Any comment/feedback will be highly appreciated.
Do you need less than, say 4%, of your portfolio annually?
Isn't 70 the upper claiming age for SS?
Have you run scenarios with Portfolio Visualizer? Great website and a great way to back test your portfolio with Withdrawal scenarios.
Initial withdrawal - 4% annually
Will claim SS at the age of 70 (corrected)
PV - overlooked - based on the historical analysis - value of portfolio increased with 4% withdrawal in the last 5 years. So 1st option is simplest and manageable. Thanks for the backstop provided by Central Banks.
Your question is a good one since I will run into the same dilemma when replenishing the withdrawal bucket. I guess that makes it all the more imperative to keep the number of investments in the main IRA account, funds or ETFs, at minimum. That certainly would help in re-balancing. Looks like you have 10 funds to keep balanced which is a reasonable portfolio #.
One consideration for me, my IRA money is split 50/50 between the Schwab Intelligent Portfolio and what I call my self-managed account. Withdrawals from the IP get re-balanced automatically. That would be the easy option for me.
Hope more people respond with what they do so I can learn along with you.
Assuming for simplicity that rebalancing is done at the same frequency as selling shares, it makes absolutely no difference what one sells. That's because you're adjusting the portfolio to target weightings regardless of what was sold.
Simplified example: Two funds, $150K in A, $150K in B. Target allocation 50/50. Need$1K/month in cash.
Say A goes up $2K in a month, and B goes down $1K. If you sell off the winner, you've got $151K in A and $149K in B. Rebalance and you've got $150K in each. If you sell off the loser, you've got $152K in A and $148K in B. Rebalance and you've got $150K in each.
It has to work out that way, because you've got a fixed number of dollars at the end of each month. You take out a fixed number from whereever, and rebalance the rest.
If you rebalance less frequently than you cash out, it can make a difference which fund you sell (you want to sell the fund that is going to go up less the next month), but the effect is minor.
So the real question is not which fund(s) you want to sell for cash, but what your target allocation is. The simplest thing to do is to put everything into a target date fund whose glide path you like (or a fixed allocation fund if you don't want allocations to change over time) and let everything work automatically. Using a robo advisor, as MikeM is suggesting, is similar to using a target date fund.
The decision of what and when to withdraw the rmd funds is the tricky part. We’ve chosen to receive monthly funds from a TIAA 403-b account and a lump sum from an IRA account. In the 403-b, most funds are in fixed income, so we sell equal percentage amounts. In the IRA we rebalance the best performer (so far it’s been equities) into cash mid-year, or whenever there’s enough earned to cover the next year’s rmd. We stash these funds as a hedge against a significant market drop. If the market does drop, we would reinvest. If not we’ve already earned our rmd distribution, which is no longer at risk. The intent is to balance returns while minimizing risk.
Frugally Yours, Derf
I seem to remember more details about Benz's re-balancing advice but this is all I can find now
Optimal Retirement Asset Decumulation Strategies: The Impact of Housing Wealth Link to Full Text:
Now that I have been in retirement for the past 8 years, my objective is to develop a system of harvesting RMDs, that is tax friendly, but not necessarily tax avoidance. My system is devoted to shifting my principal from tax deferred, retirement accounts, to taxable accounts that I can more easily use for all kinds of age related expenses, and expenses I can address from a taxable account. My system is devoted to having a preservation of principal investing strategy, in which I use more aggressive bond oefs to produce sufficient total return to "recoup" RMD amounts that were harvested, so that my principal in tax deferred accounts can stay neutral, while my taxable account grows in principal each year. I don't want/need the extreme volatility of equities, where my principal can drop 25% to 35% over night, forcing me to have "patience" in an advanced age, to recoup major principal losses over time, which leads to age related stress in my golden retirement years. More aggressive bond oefs (nontraditional, multisector, HY Munis, FR/BL, etc. bond oefs) have great "total return" value for me, to preserve principal, with modest total return, in my tax deferred accounts, while I can use some more conservative bond oefs in my taxable account, to minimize taxes and prevent any major drops in principal.
I have become more and more a trader of bond oefs (both aggressive and conservative) to prevent major losses in recessions and black swan events, and to prevent major erosion of principal I have accumulated in over 40 years of working and investing for retirement.