Q.
I see lots of posts about how to get to early retirement and financial independence, but have you considered writing a post specifically for optimal draw-down strategies once you are in retirement. Specifically, would you address the following subjects?
A.
I actually get this complaint fairly often. While I have certainly written on many of these subjects in the past, there are three reasons I don’t spend a lot of time on the subject. The first is that I have little personal experience with it. The most valuable writing is when I can share my own experience. The second is that the vast majority of my readers aren’t in retirement. In fact, only about 1/3 of readers are attending physicians. (1/3 are residents, 1/6 are med studs, and 1/6 are dentists, veterinarians, lawyers etc.) Finally, the truth is if you can get the early stuff right, the retirement issues are relatively minor. Those who really need to be sweating the retirement issues are those who didn’t do a great job in their early career. That said, this reader asked 7 specific questions, all of which are very common and worth addressing, so let’s do that.
How do I go on so many trips while working as a doc and running WCI? Personal Hotspot. There are very few places left in North America without cell coverage. This was a campground in Banff.
Q.
Is 25x yearly income enough or is 40x better?
A.
This question has an issue. The issue is the word income. To retire successfully there is no important ratio between the size of your nest egg and your pre-retirement income. However, there is an important ratio between the size of your nest egg and the size of the portfolio withdrawals you need to cover your expenses. For example, if you plan to spend $100K a year in retirement, and Social Security will provide $30K, and you have a pension or a Single Premium Immediate Annuity (SPIA) that covers another $30K, then you only need the portfolio to cover the last $40K. At “25X,” or a 4% withdrawal rate that’s a $1 Million nest egg. At “40X,” or a 2.5% withdrawal rate that’s a $1.6 Million portfolio. Obviously, having $1.6 Million and only needing $40K a year is better than having $1 Million and still needing $40K a year from it.
Unfortunately, predicting what is the ideal withdrawal rate for any given individual is dependent on many factors, including their asset allocation, their fees, their taxes, future performance of their investments, and especially how long they will live. Since most of the variables are unknown and unknowable, there are two methods you can take to try to guess an answer.
The first method is to look at the past and see what worked in the past. This resulted in the Trinity Study which gave us the 4% rule. However, one thing many people forget is that if you used a 4% withdrawal rate in the past, not only did you not run out of money something like 95% of the time, but most of the time you died with 2-3 times as much money as you started retirement with. So if you get hyper-conservative and use a 2.5% withdrawal rate, the most likely thing is you won’t spend anywhere near as much as you could have. No big deal if you’re already buying everything that could possibly make you any happier, but if you skimped on something to keep your spending that low, that’s kind of a tragedy.
The second method is to use current valuations to predict future returns and then use that data to calculate some kind of a safe withdrawal rate. Wade Pfau prefers this method and ends up with some really, really low recommended withdrawal rates (like 2.5%.) While I think there’s a very good chance that future returns, especially in the next decade, will be lower than past returns, even that isn’t guaranteed. Before signing onto a plan like that you should consider that, ignoring inflation, if you just stuffed all your money under the mattress you could take out precisely 3.33% per year to spend and guarantee your money will last 30 years. So when you start getting very far below that number, I think you’re probably being overly conservative. I mean, you can easily buy a TIPS for each year of retirement at 0% or better and ensure you keep up with inflation.
If you are so worried about running out of money that you’re using a 2.5% withdrawal rate, you are a great candidate for annuitizing more of your nest egg. But most retirees use what I like to call the Taylor Larimore method of retirement spending. He says he basically looks at what he has each year, looks at how it did over the last year, and then decides how much to spend. It’s not like most of our spending is fixed anyway. So I think the wisest thing to do is to annuitize a little such that most or all of your fixed expenses can be covered by guaranteed income and then adjust as you go rather than adhere to some slavish withdrawal rule. Next question.
Q.
For a physician who has a Roth, a 403/401k, 457, Taxable Brokerage account what is the optimal withdraw strategy, which comes first?
A.
This question is a little easier than the last but can still get a little bit complicated. Here is a general list:
1) Required Minimum Distributions from Tax-deferred Accounts
If you don’t take out your RMDs, you have to pay a monstrous tax on what you should have taken out. So if you’re 70+, that’s your first priority.
2) Taxable account dividends, capital gains distributions, rental income
This one is also a no-brainer. The money is coming out and is going to get taxed. You might as well spend it. While we’re discussing taxable account no brainers, tax loss harvesting is also a no brainer. Be sure to rebalance your account, of course, by buying that same asset class either in taxable or one of your tax-protected accounts, but there is no reason to hold on to a taxable asset with a loss if you can exchange it for a very similar asset with little expense and claim the loss on your taxes.
3) Guaranteed payments
Now, if you are receiving Social Security, or pension payments, or have purchased a SPIA, this is your next source of revenue. They’re already coming to you and you’re already going to be paying tax on them, so you might as well spend it next.
4) 457 money
A 457 is different from other tax-deferred accounts in one major way- it is really deferred compensation from your employer that technically still belongs to your employer. So this should be an account that is tapped and depleted relatively early in retirement lest your employer go bankrupt and take your 457 with it.
5) Taxable assets with high basis
At this point, your main goal is to prolong the tax-protected growth aspect of retirement accounts as long as possible, without doing anything stupid in your taxable accounts. And by stupid, I mean paying taxes you could otherwise not only defer, but avoid completely. But if you have taxable assets that don’t have much of a capital gain (with an associated capital gains tax) this is the best asset to tap next. Even better if there is a capital loss.
6, 7, 8) Taxable assets with low basis, additional tax-deferred withdrawals, and tax-free withdrawals
This is where things start to get a little murkier. The general rule is to spend taxable assets before tax-protected (and asset-protected) assets, but not to do so stupidly. For example, if Grandpa is on his deathbed with terminal cancer and has lots of low basis taxable investments, don’t cash those out. Take money from the tax-deferred account instead. When he passes, the heirs will get a step-up in basis to the value on the day he died. Likewise, if you flush low basis taxable investments out of your account using charitable contributions, don’t sell those investments, donate them.
Additional tax-deferred withdrawals are fully taxed at your marginal tax rate, but you do get to fill up the low brackets first. So if you spend a 6 figure amount in retirement each year, and you only fill up the 0% (remember deductions and exemptions) and 10% brackets with guaranteed income, investment income, and RMDs, then using tax-deferred withdrawals to fill up the 15% and 25% bracket can be very smart. If you want more money above and beyond one of those lines, that’s a good place to use your tax-free withdrawals such as from a Roth IRA. Combining your tax-deferred and tax-free accounts in this manner allows YOU to set your marginal and effective tax rate in retirement.
However, estate planning considerations also come into play. For instance, if you plan to leave a large chunk of your portfolio to charity, then spend tax-free money in preference to tax-deferred money since it all goes to the charity tax-free. But if you plan to leave most of your money to your kids, then spend tax-deferred money in preference to tax-free money, since Roth IRAs don’t have RMDs and your kids would much prefer to inherit something that won’t generate tax as they stretch it over decades. Of course, if your kids are in a much lower bracket than you, you might want to spend the tax-free money and leave them the tax-deferred money. Like I said, it’s complicated at this point.
9) Life insurance cash value
If you got suckered into buying cash value life insurance as a retirement account and then decided to keep it since you had already paid the huge commissions, you’ll need to figure out how you want to use it. “Withdrawals” from this account have their own rules. The first money you take out is tax-free and interest-free, since it is technically a partial surrender. So you can use that just like a Roth IRA. However, beyond that it is a loan with the policy as collateral. So, like any other loan, it is tax-free but not interest free. I would put that way down here near the bottom of the list. Life insurance is a great asset to leave behind to your heirs as it is very liquid and passes income tax-free. So only spend it if you get desperate.
10) Reverse mortgages
While we’re down here at the desperate end of the list, we should probably mention a reverse mortgage. Wade Pfau makes a pretty good academic argument for these, but the issue is that you don’t buy them in an academic world. You buy them in a world full of scammers and high fees. I would rather see most people sell their house and downsize or move in with kids or let their kids supplement their income in exchange for the house they’re going to inherit anyway than introduce this fee-laden, difficult to understand product into the mix. But you know what? If you did a terrible job saving for retirement, have no kids capable of assisting you, and are living on nothing but Social Security with a paid-off house, there’s probably a place there for a reverse mortgage.
Next question.
Q.
Should you get a SPIA for a portion or all fixed expenses in retirement? If so, which type of account should the money come from? When is the optimal time to get the SPIA, should one wait for a higher interest environment or do an annuity ladder? Should one split the annuity among different companies?
A.
It depends. How comfortable are you with market risk? If very comfortable, that leans away from using an annuity. If your portfolio is mostly bonds anyway, an annuity makes more sense. How much of your fixed expenses does your guaranteed income cover? If you could live mostly or completely off your Social Security and a pension, there’s no reason to buy a SPIA. What are your desires for leaving money behind? Remember SPIA money is gone when you die, even if you die next month. Are you close to the edge when it comes to having enough retirement assets, or do you have plenty? The higher your necessary withdrawal rate, the more useful a SPIA can be. If you’re looking at a withdrawal rate much over 4-5%, you should seriously consider a SPIA.
Personally, I would fund a SPIA using a tax-deferred account. That keeps things relatively simple, as everything it pays you is taxable and the money that went for the SPIA is no longer used to calculate your RMDs. But you can also buy them with taxable money, but then part of the payment is taxable and part isn’t. Plus, you likely will have to pay capital gains taxes before you even buy the SPIA. I suppose you could also use tax-free (Roth) money to buy a SPIA, but that’s such a great asset for your own and your heir’s use, that I probably wouldn’t blow it on a relatively low return vehicle like a SPIA.
As a general rule, SPIAs should be bought around age 70. You can buy them earlier and later, but at that age the rate offered on the SPIA is starting to depend much more on your life expectancy than prevailing interest rates. You can also ladder annuities, buying one at 65, another at 70, and another at 75 for instance. There is no right answer to this question. There are two nice things about laddering. First, it helps protect against inflation. Since most SPIAs are not indexed to inflation, laddering allowed you to leave some of your assets in vehicles that were likely to keep up with and beat inflation for an extra 5 or 10 years. Second, you probably want to split annuities up between several different companies to make sure each annuity gets the maximum state guaranty corp coverage. Those later annuities also pay a much higher rate than an earlier one.
Splitting up annuities between multiple companies is a good idea, especially if you are annuitizing a lot of assets. Most state guaranty corporations only cover about $250,000 per company. So if you want to annuitize $750K, you probably want three separate companies. Next question.
Q.
Should one look a market conditions and change withdrawal locations (Brokerage vs 457 vs 401k vs Roth) based on that?
A.
Great question. I’m not sure anyone has worked out a great answer to that. The issue with doing anything based on market conditions is that you really need a functioning crystal ball for it to work out well. Ideally, you would withdraw from tax-deferred accounts and taxable accounts at market bottoms, and tax-free accounts at market tops. But if you can reliably figure out when we’re at market bottoms and tops, you should be so rich you don’t need to worry about which account to take your withdrawals from. Obviously if you have losses or very high basis taxable assets in a taxable account, those are a great place to find spending money. Next question.
Q.
How much cash reserves should I keep in case of a down market?
A.
Like all the other questions, it depends. If your entire spending needs are met by guaranteed income sources, you probably don’t need much at all. Likewise, if the rest of your portfolio is in risky assets (stocks, real estate, precious metals etc), then you probably need to have more cash than you would if your portfolio were mostly short-term treasuries. The idea behind keeping cash in the portfolio is not to maintain liquidity, since you can liquidate any stock or bond fund any day the market is open. The idea is to keep you from having to sell assets when stocks, real estate, AND bonds are all down. That doesn’t happen often, and when it does, it usually doesn’t last long. If you just look at bear stock markets, the average bear market lasts 14 months, although it can take longer than that for your portfolio to get back to even. Bear in mind that even in a very long bear market with a long recovery time, once you burn through your cash you can usually tap bonds and so might not even need to look at selling stocks low for a decade or more.
So there isn’t any good academic answer. But what would I do? I think 10% of the portfolio in cash is a good idea. At a 4% withdrawal rate, that’s 2.5 years of withdrawals that don’t depend on how the stock, bond, or real estate market is doing at all. That should also be plenty to cover those “one time” items like replacing a car in a recession (great time to get a great deal, by the way.) Next question.
Taken the same day as the previous shot. Call it a working vacation. WCI Model earning her dough.
Q.
What about some of the fancy withdrawal strategies like those that depend on a cyclically adjusted P/E ratio (CAPE) to determine how much to withdraw each year?
A.
I know there are a lot of people who have written endless articles, blog posts, and even books on these strategies. Wade Pfau and his peers make their living researching, talking, and writing about nothing but this. However, I think it’s all a bit of hooey. The point of the Trinity Study was not to discover that the Safe Withdrawal Rate was precisely 4% and not 3.7%. It was to point out that 8% or 10%, as many advisors were recommending in the 90s, (and Dave Ramsey still is,) was not safe. It wasn’t to actually tell you how to spend your money in retirement. Here’s the bottom line:
When you retire, plan to spend something like 3, 4, or 5% of your portfolio in any given year. If that isn’t enough income for you, or if that makes you uncomfortable, annuitize enough of your portfolio until you can sleep at night. Then keep an eye on things. If it turns out you retired on the eve of the worst bear market in the history of the world, you’re going to need to make some adjustments and spend less. But if things turn out like they usually do, and your portfolio is continuing to grow despite your withdrawals, then you can be confident in your plan and maybe even spend a little more. Adjust your income as you go, like you did for your entire working life. Next question.
Q.
What investments should I have in retirement? Should I use a target retirement fund or keep a mix of index funds like I do now? What should my stock and bond ratio be?
A.
There is no perfect answer to this question, but there are a few considerations. First, you want an investment mix that is going to have a great return over your retirement. The more your portfolio makes, the more you can spend or leave to heirs or charity, especially with the effects of inflation over 30 years. But you also want a portfolio with relatively low volatility in case sequence of returns risk shows up. A very volatile portfolio that has bad returns before good returns, combined with withdrawals from the portfolio, can end up being much worse for you despite having a higher average return. So, high returns and low volatility. Unfortunately, it’s tough to find that holy grail of investments. Some interesting data suggests that because sequence of returns risk is highest in the few years just before retirement and just after retirement that you should have the least risky asset allocation of your life during those years and then can actually INCREASE your stock to bond ratio throughout retirement. Of course, you also need a portfolio that lets you sleep at night. If the future resembles the past, you basically want the riskiest portfolio that you can both tolerate in the short run and handle as far as sequence of returns risk. If the future doesn’t resemble the past, and more risk shows up, you’ll be happy you had a lower stock to bond ratio.
Another consideration in retirement is your own declining abilities and those of your spouse. This argues for a simpler portfolio, such as a target retirement or life strategy type fund, or perhaps the use of an advisor or trusted family member. But you don’t necessarily need to switch everything over the day you retire. In reality your portfolio the day before you retire should be precisely the same as your portfolio the day after you retire.
What do you think? How do you intend to invest/withdraw/spend your money in retirement? Will you/do you use a SPIA? Why or why not? If you are retired how much of your portfolio do you spend each year? Comment below!
Great summary and I plan to reference this when I’m closer to retirement. I did have a comment about cash reserves in retirement: Although the average duration of a bear market is just over a year, the recovery period can be up to 5 years, as seen in the 2007-2009 bear market (http://www.mooncap.com/wp-content/uploads/2016/04/bear-markets-Mar2016.pdf). Assuming no social security, employer pensions, or SPIAs, I plan to keep 3-5 years worth of “bare minimum” living expenses in a savings account to avoid drawing down my portfolio during a prolonged bear market. This compares similarly to the “10% of portfolio in cash” you recommend and will help to reduce the sequence of returns risk that I consider the most concerning issue with retirement spending.
As I approach a likely early retirement in my 50’s, my portfolio has naturally moved in this direction. It just so happens that currently my portfolio is about 10% in cash, which is also about 3-5 years in bare minimum living expenses (that is, for us), while we both still work out professional jobs for a few more years.
My rationale has been that if we both lost our professional jobs tomorrow (highly unlikely, but I have seen stranger things), we would have a few years to figure out the next steps (including launching the teens in to college and beyond, downsizing the house, reinventing our careers or starting a business, etc.) without feeling despair or feeling forced to sell risk assets at the wrong time. I also recognize that docs and lawyers (lawyers, especially) in their 50’s may have a more difficult time replacing high paying jobs than someone recently trained and early in his/her career.
Years ago, pre-2000, I thought “cash is trash” and only limited portfolio returns. Now, I view cash as much a tool as stocks, bonds, real estate and asset clases that have higher return potential. As a mid-late career doc, it is very comforting to know that if things go south quickly, I have 3-5 years in the bank (savings account, CDs, and money market) to right the ship. As an early retiree, I expect that I would likely feel the same.
“savings account”: please ladder CDs (or whatever cash account pays best but is fully liquid and doesn’t lose value so long as the government continues to guarantee it for a while). I do this for my possibly upcoming expenses- weddings, college, next new car- and roll the CD over a few more years or months if it is not needed yet. Have 1 maturing every few months now, and at college time enough to cover the parents’ maximum likely share.
Another thought about annuities – viewing them purely as purely as longevity insurance, you could buy a deferred annuity at age 65 that starts payments at your life expectancy, say 86. Or a 20 year TIPS that you use to buy an annuity when it matures. That way you can feel better about spending a bit more of your portfolio when you are likely more healthy in you early retirement years, knowing that this money is there if you make to your mid 80’s.
It is called a qlac
Lots of interesting stuff out on that strategy in the last couple of years. I like the “permission to spend” aspect. I see whole life sold that way a lot, but think longevity insurance is a far better way to get that insurance if you want it.
A great resource for investing after retirement is http://www.theretirementcafe.com . I’m not associated with the site but find the posts very informative.
One advantage to self-employment is that I can’t lose my job. I can decide to retire. I was going to retire at 50, then 55, then 60. I am 59.5 and am considering working part-time until 65. I have a large enough taxable account that I can easily live on dividends and interest. I have about 2% of assets in cash, mm, and short term bonds. This is the highest cash allocation I have ever had. I think 2 years of expenses is about right. When I was younger I really paid no attention to how much income my portfolio produced. I do now since it will soon be my paycheck. I may buy a qlac annuity in my Ira to get some longevity insurance and lower RMDs.
Love this article! I was just thinking about some of these issues the other day.
Of course, I anticipate being 30+ years away from retirement (for now) so hopefully this is something I bookmark and come back to a long time from today 🙂
my philosopy on asset allocation in retirement: Can I afford a 50% loss in my equities in one year and still maintain lifestyle. As such I keep a fixed $ amount in stocks and rebalance yearly. Past history is fine but hardly a predictor of the future. I am at 3.5% withdrawal rate
Jim – feel free to delete this comment – but in Answer 2, Para 4, did you mean for the last word to be “inflation” rather than “retirement”? It seems like that was your intent when talking about TIPS.
Great post. I agree with the cash issue – not 10% for military retirees with a pension (which I look at like a SPIA made up of Treasuries), but for most readers I think they could potentially skip the SPIA if they had their first 2 years in cash
Thanks for the correction. Fixed.
This needed repeating. It’s the best succinct advice I’ve seen on the topic of spending rate vs portfolio size.
“When you retire, plan to spend something like 3, 4, or 5% of your portfolio in any given year. If that isn’t enough income for you, or if that makes you uncomfortable, annuitize enough of your portfolio until you can sleep at night. Then keep an eye on things. If it turns out you retired on the eve of the worst bear market in the history of the world, you’re going to need to make some adjustments and spend less. But if things turn out like they usually do, and your portfolio is continuing to grow despite your withdrawals, then you can be confident in your plan and maybe even spend a little more. Adjust your income as you go, like you did for your entire working life. “
I account for enough sway in my 4% SWR that in a lean year or two or three we could just withdraw less and still be better than fine. If we start getting ahead by having better than the awful returns the 4% SWR historically protects from, we can start ratcheting up our SWR
https://www.kitces.com/blog/the-ratcheting-safe-withdrawal-rate-a-more-dominant-version-of-the-4-rule/.
I have always considered cash a position along with stocks and bonds. Going into retirement we will have 2 or 3 years in cash and then make up the rest in bonds to give us 7-10 years in less volatile assets then the rest in stocks. This works out as a 60 stock/ 40 bond portfolio for us at retirement which I am comfortable with for now. I am confident in our ability to adjust as needed. We are not in the retire early crowd (by choice not ability), so a 30 year horizon works just fine for us.
It is complex! I am approaching retirement (5-7 years away) but am FI now (using a 4% draw). I am not sure how best to access our funds in retirement. A fair amount of our investments are in taxable accounts (64%), so this limits our flexibility in making changes. I started a donor advised fund at Vanguard in 2016 to help get rid of some no longer wanted stocks that had low basis. This has the advantage of starting to simplify the investments, as well.
For most of my retirement portfolio investing time frame we were essentially 100% stock and stock funds (except for a moderate portion in target date retirement funds, Vanguard), but I had a conversation with a Vanguard advisor (no fee involved) who convinced me to go to 80% stocks (better risk-adjusted return, decrease in my ‘human capital’ as I get older). More recently, I have been doing a lot of reading (here, at the Bogleheads site, Jane Bryant Quinn’s book on retirement “How to Make Your Money Last”) and moved towards 70% stocks. This was not based on a concern about panic selling during a stock market decline, but rather was based on the “bucket” idea (as described above) of having a significant bond allocation to spend during retirement when stocks are down. I can’t change the allocation much more without paying capital gains by changing positions in the taxable account.
Our current asset allocation follows. I plan to work on building up the cash portion to a 2 year spending ‘cushion’ but otherwise leave it be. I would prefer a simpler system, but as I indicated above, purchases made in the past in taxable accounts would be expensive to unwind.
29% domestic stock (if exclude balanced fund, then 32%)
14% international stock (if exclude balanced, 15%)
6% REIT (if exclude balanced, 7%) (sadly, this is in 2 taxable accounts – my biggest mistake in asset allocation)
14% Berkshire (if exclude balanced, then 16%)
28% bonds/cash (if exclude balanced, then 31%)
9% Vanguard Target Retirement
Any suggestions?
That’s a lot of money in a single stock, even if it is run by Warren Buffett. Consider the impact on your portfolio of Buffett keeling over.
Good point! I do worry about that.
I am no longer adding to that position. The Berkshire is held in taxable accounts, so I would have to pay capital gains to switch. I am in a high tax area, so would pay capital gains of 34.53% (according to an online calculator). I have held these shares for a while, so I think I would have to pay out about 18% of the total value in capital gains (at least for those shares I can readily find the basis – the other shares I have held even longer).
I hold the stock for a number of reasons – primarily to act as a different investment philosophy from the index funds. Secondarily, as discussed by DeMuth (thanks for recommending that book “The Overtaxed Investor”!), there are good reasons to hold zero dividend stocks in taxable accounts From DeMuth “Zero-dividend stocks are the best investment choice for the taxable portfolios of high-earning, very-high-net-worth investors” and “Berkshire Hathaway is the cornerstone of the zero-dividend portfolio.” However, he points out that it has gone down in price by half on 3 occasions, so diversification is in order. I am clearly not diversified in the choice of zero-div stocks!
Berkshire does not appear richly valued now. So the big question is – how much of a long-term decline in Berkshire is expected on Buffett’s death? If it is 10% then I still come out ahead keeping the shares. (An efficient market theorist would say that the inevitability of Buffet’s death is already priced into the shares.)
I have no idea, but would diversify at every reasonably priced opportunity (i.e. gift shares to heirs early, donate shares for charity, not buy more etc.)
I think it’s a mistake to worry about taxes when it comes to diversifying out of single stock risk. Every time you write a check to Uncle Sam, you are increasing your liquid net worth by a great deal more than that amount.
I have some BRK, too, but don’t let it get more than 5% of my portfolio. When it does, I prune it back and fly business instead of coach.
I have been retired for 6 years and have a somewhat unusual idea for myself. Have enough after tax income so you never have to sell any assets, you might want to do so but you should not have to. Use the bucket methods three years of cash and a reserve. Now for others you need an investment plan that meets your needs and desires, then execute it. Have options to account for events that might happen. It is an individual plan and what I have won’t work now or for some other people.
That plan is fine if you’re rich enough and don’t have anything else to spend on that would make you happier. Just be aware that it is likely to end with you leaving GOBS of money behind.
Yes I know part of my assets is the gobs of money my father left me. I am working on putting some into a vehicle to do charity type work after I am no longer on this Earth. I also have another cash pile to finance my retirement home in another state as well. Fortunately my desires for spending are limited, I as you did some fun stuff while I was employed. Good point Thanks.
My plan is to stick with my slightly modified 3 fund portfolio (the modification is using tax-exempt funds in my taxable account.)
When I go part time I will have a 60/40 portfolio
When I retire it will be 50/50.
Between going part time and retiring I will be building a 5 year CD ladder. Transitioning from my 60/40 to a 50/50 portfolio. The purpose of this ladder is to provide 5 years of expenses. So, If I plan on retiring on $100K/yr
My portfolio will be $1.25million in equities, $500K in my CD ladder, $750k in bonds.
When we start collecting social security the plan is to go back to a 60/40 portfolio since our ability to take risk will increase.
Sounds sensible to me
This post is full of sensible advice, but I hope there is a problem with:
“4) 457 money
A 457 is different from other tax-deferred accounts in one major way- it is really deferred compensation from your employer that technically still belongs to your employer. So this should be an account that is tapped and depleted relatively early in retirement lest your employer go bankrupt and take your 457 with it.”
I looked into this a few years ago because I am employed by a government hospital with a 457b plan. As I remember, there are two categories of 457b; the one you mention, and those run by qualifying government employers. The latter are secure without threat of loss due to bankruptcy or other local catastrophe.
Isn’t this correct? If not, I need to inquire again.
I think I’d still spend 457 money first, even if it is with the more-protected, government type 457. I might not even use a non-government one at all. I’d certainly take the stability of the employer into account and max out other tax-protected options before doing so.
listen to BOGLE “AGE IN BONDS”-no one brighter than this man who invented indexing
They don’t call it income tax, but the costs of Medicare coverage increase dramatically for people realizing high Modified Adjusted Gross Income who are on Medicare. (MAGI is Adjusted Gross Income plus tax-exempt interest income.) Income for 2015 is used to set the 2017 Medicare rates.
From medicare.gov:
File Individual File Joint File Married but Separate Extra Annual Parts B&D costs, per person
$85,000 or less $170,000 or less $85,000 or less 0
$85,001-107,000 $170,001-214,000 n/a $810.60
$107,001-160,000 $214,001-320,000 n/a $2,017.2
$160,001-214,000 $320,001-428,000 $85,001-129,000 $3,234.00
Over $214,000 Over $428,000 Over $129,000 $4,449.60
Especially for those filing Married but Separate, this factors into the decision of how much to take from various accounts. If a couple filing jointly can keep MAGI under the $170,000 threshold, for example, it saves them $1621.20 (=$810.60×2) in Medicare costs two years later.
These thresholds are not like income tax thresholds, where amounts over a threshold are taxed at a higher rate; having income $1 over the thresholds triggers substantial extra Medicare costs. A little finesse in keeping MAGI below one of these limits may save a lot in Medicare costs.
WCI. I am a long-time reader and fellow ER doc, now 53, FI, not quite RE. I keep coming back to Bernstein’s recommendation for retirement, a wise man who has been through two deep recessions in the past couple decades, which is I believe to put the 25X entirely in riskless assets “once you’ve won the game, get out”. Then can be aggressive with any investment monies beyond 25X. Makes a lot of sense. Obviously that seems a much more risk averse plan that many are espousing on this post. Seems to me given everything I’ve read and learned from you, a cash reserve of a couple years, a bond % near ones age, 4% wd rate, adjusting ones spending in down years seems like a safe plan. Am I wrong?
While I think there’s something to be said for 25X in riskless assets, there is also something to be said for 50X and a 2% withdrawal rate. If you have the luxury of doing that….why not?
The one issue I have with Bernstein’s advice, is that when you hit 25X you go into turtle mode and basically never really get much more than that because you’re not taking any risk with all those assets. I’m not sure that’s what he intended to say, but maybe it is.
So I like the idea of taking something off the table, but I don’t know that you need it all off the table.
Jim;
I didn’t realize the high proportion of med. students and residents using your blog; they are very fortunate. I wish I had this information when I was a resident, 1978-82.
However, I take issue with your negative comments about Wade Pfau, et. al. I find their discussions thoughtful and helpful. In fact, I follow the recommendations of Pfau and Kitces (“Increasing Retirement Withdrawal Rates Through Asset Allocation, AAII, 4/2015) which proposes adjusting equity exposure in retirement based on stock valuations; i.e. decreasing equity percentage to 30% in years when CAPE is > 21, increasing equities to 60% when CAPE < 10, with equity exposure 45% at neutral valuations. Note: CPAP is now 28, (http://www.multpl.com/shiller-pe/).
Kites also has a nice article on the accuracy of the CAPE ratio "predicting" future stock returns over a 10 yr. horizon; "Shiller CAPE Market Valuation: Terrible For Market Timing, But Valuable For Long-Term Retirement Planning" (https://www.kitces.com/blog/shiller-cape-market-valuation-terrible-for-market-timing-but-valuable-for-long-term-retirement-planning/).
I know you enjoy Pfau’s writings, as I think you send me several of his articles a month, no?
I disagree that those strategies should be followed by the masses. I would bet in 10 years no one is even talking about using CAPE to determine your withdrawal rates but that lots of people are adjusting as they go. I just think that’s lots more practical.
As Zaphod said in a related discussion on the forum today:
Larry Swedroe has a new article on this topic: “Predictive Nature Of Valuations”, http://www.etf.com/sections/index-investor-corner/swedroe-predictive-nature-valuations
Thank you for this post. 10% – good number to remember. A question – how about iBonds for this 10%, starting now? It will take a few years – 10 k for single, 20 k per year for a married couple, and in 20 years – 200k – 400k.
if you oversave you can have your base secure and use the excess to take more risk with equities
I continue to follow the “Larry (Swedroe) portfolio.” High quality bonds (Treasuries, Intermed Term Munis) are the basis of 70% of the portfolio. Small Cap Value and International stocks constitute the 30% remainder. I can integrate the safety and low volatility of bonds with the highest risk-adjusted returns of the Stock funds. Having two S&P500 funds is not diversified. Having a no-dividend DeMuth portfolio is not diversified.
Generally, cash is a drag on portfolio returns. “Bucket” strategy smacks of account bias. You must be knowledgeable of behavioral issues and tracking error to play this strategy, otherwie you bug out too early.
Taxes are by far my largest expense, so cap gains are the most desirable. I can play with my AGI with 401k contributions, TIRAs, HSAs, health insurance deductions, DAFs to get just the right mix and stay in the 15% bracket (0% cap gains rate).
This is not a bad way to go if you can handle the “tracking error.” It is similar to a “barbell” style of investing that I first learned of from N.N. Taleb
Predicting the future performance of markets is just that and really does not serve anyone well
having an asset allocation model with periodic rebalancing seems to be the proven method
Government 457b accounts are not impacted by the financial health of the governmental agency. Each employees account must be funded, meaning the funds are monthly placed in a trust or custodial account exclusively for the benefit of the employee.
The union that I led was part of the effort that got this protection codified after the Orange County (CA) bankruptcy. The OC employees did take a hit before this protection.
I’d still spend it first as the withdrawal options are usually poorer than what you can get in a Roth IRA or 401(k).
Another 457 alternative is to roll it into an IRA at retirement, if your plan allows (mine does). Beyond addressing concerns about employer fund going under, this can greatly increase investment options and decrease fees. That monthly “Asset based charge” tacked on by the 457 custodian over-and-above fund expenses is a drag.
Some very good points raised here. I believe in living well below your means so you can retire early. This will only get more challenging as life goes on and everything becomes more expensive. But I will try.
“The first is that I have little personal experience with it. The most valuable writing is when I can share my own experience.” So true, yet you have done a great job of summarizing this.
I am retired and I have found the perfect methodology for my needs. My spreadsheet computes the amount of cash available to spend each year for the rest of my life (age 100 assumed for conservatism). Each month I complete a one line summary of my actual spending (excluding income tax) — no detail, but it does note unusual expenditures. I am HNW, like many of your readers expect to be, so each year I top off my personal spending with gifts to kids, grandkids and charity to use up that year’s annual available spend. The spreadsheet showing such annual spend is continually updated.
Of course, the spreadsheet can be adjusted to show the effect of major expenditures, declines in the market, and/or increases in inflation. I am prepared to deal with any such changes by adjusting future spends or investments. With this knowledge in hand, I use the Taylor Larimore approach, but based upon much more knowledge of my personal situation.
Makes perfect sense, but the spreadsheet requires a detailed knowledge of Excel, income taxes, expected return possibilities, cash flows, etc. Most of your readers would not have this knowledge, and most advisors would be unwilling to undertake the task, because it would not be commercial from their standpoint. For anyone interested, they can go to the link at my name and read the main article.