{"id":73,"date":"2022-03-02T00:42:03","date_gmt":"2022-03-02T00:42:03","guid":{"rendered":"http:\/\/www.1engineeronfire.com\/?p=73"},"modified":"2022-03-07T20:52:09","modified_gmt":"2022-03-07T20:52:09","slug":"managing-withdrawals-in-retirement","status":"publish","type":"post","link":"https:\/\/www.1engineeronfire.com\/?p=73","title":{"rendered":"Managing Withdrawals In Retirement"},"content":{"rendered":"\n

Managing Withdrawals In Retirement<\/strong><\/p>\n\n\n\n

I didn\u2019t realize it but I had reached my minimum Financial Independence<\/strong> number in 2016.\u00a0 I was planning a 2020 retirement date and still had some financial house keeping to complete.\u00a0 We were making double payments on a 15-year mortgage.\u00a0 Our budget still needed refinement before I could confidently calculate my final FI number.<\/p>\n\n\n\n

It was about this time I realized my investing focus had always been on accumulation<\/strong> and I had little knowledge of withdrawal strategies.  It seems everyone writes about saving, investing and how to acquire wealth.  But few write about what to do when you reach your goal.  My guess is there are more people needing coaching in the accumulation phase\ud83d\ude0a<\/p>\n\n\n\n

Top 5 Withdrawal Strategies<\/strong><\/p>\n\n\n\n

A quick internet search of retirement withdrawal strategies<\/strong> results in five common strategies.  The 4% rule, Fixed dollar, Fixed percentage, Systematic and The 3-bucket strategy.  As an engineer I sometimes like to get lost in the numbers and simulate untold options.  In the end a much simpler approach seems to always win out. <\/p>\n\n\n\n

If you want to dive into some advanced strategies, I suggest looking into Darrow Kirkpatrick\u2019s January 4th<\/sup>, 2016 post in Money.com.  I\u2019ll be discussing the top 5 simple strategies here.<\/p>\n\n\n\n

The 4% Rule<\/strong><\/p>\n\n\n\n

The 4% rule<\/strong> has been discussed in my earlier blog and has been the gold standard of investment professionals for years.  Trying not to oversimplify you start your first year of retirement by withdrawing 4% of your 50\/50 stock\/bond portfolio.  You rebalance annually and in your second-year withdrawal no more than 1.02 x your last year\u2019s withdrawal.  The added 2% gives you a raise for inflation.  The research indicates a high success rate of a 30-year retirement never depleting the portfolio.<\/p>\n\n\n\n

Fixed Dollar<\/strong><\/p>\n\n\n\n

In a Fixed Dollar<\/strong> strategy, you simply withdrawal a fixed dollar amount like $40,000 annually for a set number of years.  At some time during the set term, you reassess your plan and adjust accordingly.  Very convenient for budgeting but doesn\u2019t account for inflation or principal growth or erosion.  You may run out of money or live below your portfolio\u2019s potential.<\/p>\n\n\n\n

Fixed Percentage<\/strong><\/p>\n\n\n\n

Using a Fixed Percentage<\/strong> strategy, you withdraw a fixed percent of your portfolio total.  If you select 4% of a $1m portfolio you would receive $40,000 your first year.  Without any growth your next year\u2019s withdrawal would be $38,400 (($1m – $40,000) x 4%).  If you received 7% growth after year one\u2019s withdrawal you would have a second year withdraw of $41,088 ((($1m – $40,000) x 1.07) x 0.04).  The advantage is an easy annual calculation (Total portfolio x 0.04 = Withdrawal).  Disadvantages are irregular withdrawal rates and no long-term protection against running out of money.<\/p>\n\n\n\n

Systematic Withdrawals<\/strong><\/p>\n\n\n\n

A Systematic<\/strong> withdrawal strategy is favored by some dividend investors.  You plan to withdrawal only dividend and interest income from your portfolio.  You never touch the principle and your portfolio is left to your heirs or the charity of your planning.  Your income will vary by market performance.  A very conservative approach that could be used with retirees who\u2019s pension and social security cover most or all of their basic needs.<\/p>\n\n\n\n

3-Bucket Approach<\/strong><\/p>\n\n\n\n

The 3-Bucket Approach<\/strong> gives a bit of security and still allows for the potential of growth.  Bucket one, for near term needs, will hold typically 3-5 years of cash.  Bucket two is invested in 5-8 years of fixed income securities and bucket 3 holds the remainder of your portfolio in equities.  As you pull cash from bucket one you refill if from growth from buckets 2 and or 3.  This takes a bit of management but gives you security from a downturn in the market.  In a lean portfolio it may leave the equity allocation too low for adequate long term growth.<\/p>\n\n\n\n

What’s Best For You<\/strong><\/p>\n\n\n\n

No one strategy is right for all<\/strong>.  Taxes, market valuation, required minimum distributions and other considerations muddy the waters.  You may find a mixture of strategies works best for you or a more complex method altogether.  I find the simple solution if often the most elegant.  That way I can spend more time spending time with  the things we enjoy.<\/p>\n\n\n\n

1 Engineer’s Strategy<\/strong><\/p>\n\n\n\n

Here is what I have done so far<\/strong>.  Being somewhat conservative I left work with a portfolio value of 35 x my gross annual budget.  I guess that\u2019s Chubby FIRE <\/strong>in today\u2019s FI world, only requiring a 2.8% withdrawal rate.  At two years prior to retirement, I moved 5 years of income to bonds within my 401-k.  The balance of my 401-k, my IRA\u2019s and other investments remain invested in 100% stocks. <\/p>\n\n\n\n

The year I turned 55, I \u201cseparated\u201d from my company and then qualified to use the rule of 55.  <\/strong>This allowed me to withdraw penalty free from my last employer\u2019s 401-k.  I rolled the remaining balance of my 401-k into a mix of low-cost index funds.  I currently take a quarterly withdrawal from the 401-k bond fund.<\/p>\n\n\n\n

During the second \u00bd of 2020 and all of 2021 it was like magic!  I would take out my quarterly withdrawal and by the next quarter the account balance had grown back.  My other investments continued to grow as well.  The \u201cMoney Making Machine\u201d was alive and well!<\/p>\n\n\n\n

The 1 Engineer on FIRE<\/strong> withdrawal strategy is simply to continue to make quarterly income withdrawals from my bond fund.  Maintain 5-7-year bond buffer in good markets (the average bear market lasts ~4.5 years).  In bear markets I may tighten my budget belt (reduce or eliminate lifestyle budget items) and draw down my bond fund allowing my equities to recover. <\/p>\n\n\n\n

Conclusion<\/strong><\/p>\n\n\n\n

So, I guess I have a Modified 2 bucket<\/strong> strategy!<\/p>\n\n\n\n

What do you think?  Do you have a withdrawal strategy?<\/p>\n\n\n\n

1EngineerOnFIRE.com<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

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