Withdrawal Phase

Upon retirement you will leave the accumulation phase of the plan and enter the withdrawal phase. Of course, how much you can withdraw depends on how much you have to begin with. If you have been following the plan since age 35, you will have a significant $$$$ portfolio.

Here’s What To Do

  1. Determine the amount you need, per year, to support the lifestyle you can afford  after retirement.
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  2. Determine how much of that amount will be filled by other income sources (social security, pension, etc).
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  3. Subtract your post retirement income from the required amount. The difference represents the amount that you need to withdraw from your portfolio each year. Call that amount “$MinWithdrawal”.  For the sake of simplicity let’s say it is $24,000 per year.
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  4. Put aside, in cash or near cash, two years worth of “$MinWithdrawal”s ($48,000 for our example).  You will make monthly withdrawals from this cash stash if the market is tanking. It keeps you from having to sell shares at a distressed price. Remember, they will increase in value later.
    Again, Warren Buffet concurs!  Here’s what he said with regard to the money he will leave his wife when he passes away:

    I’ve told the trustee to put 90% of it in an S&P 500 index fund and 10% in short-term governments. And the reason for the 10% in short-term governments is that if there’s a terrible period in the market and she’s withdrawing 3% or 4% a year you take it out of that instead of selling stocks at the wrong time. She’ll do fine with that. And anybody will do fine with that. It’s low-cost, it’s in a bunch of wonderful businesses, and it takes care of itself.

    Read the entire article HERE

    Alternatively, and even better, secure a line of credit on your house if possible. This keeps all your money working for you while still giving you access to $MinWithdrawal if necessary.

  5. Use the Proof of Plan calculator to determine the probability of being able to withdraw the “$MinWithdrawal” amount until age 100.
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  6. If you are satisfied with the results, fine, you are done.If you are not satisfied with the results, you will have to make a change to the amount you need each year. You will not be able to do some of the things you wanted to do. All the more reason to do everything you can now to ensure your portfolio will support the retired lifestyle you want to enjoy.

Once $MinWithdrawal is Determined

  1. Withdraw at least $MinWithdrawal / 12 each month You can take more if you are in a bull market, but don’t get greedy.
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  2. If the market is tanking, take the $MinWithdrawal from your line of credit or cash stash to avoid reducing the number of shares of VTI. You want to keep the number of shares intact so they will be there when the market improves – as it inevitably will. To continue to sell shares when the market is in free fall is the equivalent of eating your seed corn.
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  3. When the market recovers, slowly repay your line of credit / rebuild your cash stash. (Sell a few additional shares at the now higher price).

That’s It

The Withdrawal Phase is as simple as the Accumulation Phase

What the Naysayers Will Say

Conventional wisdom is

    • You must have a diversified portfolio.
    • Your equity/fixed income ratio should move towards more fixed income as you approach and reach retirement age.  Subtract your age from 100, and that’s the proportion of your assets you should hold in stocks. The rest should be invested in bonds and other safe investments such as CDs.
    • You should only withdraw some “safe” percentage e.g. 4.5 – 5% each year from your portfolio.
    • You should not withdraw principle from your portfolio.

I see it differently.

RE: Diversified portfolio

I have already presented the case for VTI only, VTI is diversified enough. I do have a long and deteailed presentation about diversification. Click HERE if you need to be convinced that you are sufficiently diversified with VTI. There is no reason to leave VTI once you have retired.

RE: Move from Equity to Fixed Income

Using the conventional rule of thumb, a 65 year old should have 65% in bonds and CDS, only 35% in stock. This is the worst thing you could do. Your annual withdrawals will soon consume your nest egg because it didn’t have enough fuel (equity) to grow.

You need to keep your money invested in the stock market so it will grow. This is as true now that you are 65 as it was when you were 35. You are still expected to live for 17 more years.  You will run out of money sooner if most of your money is tied up in fixed income assets.

What to do? Do what I and Warren Buffett suggest: Keep two years worth of withdrawals in bonds, CDs, or cash. Dip into this cash stash when the market is down.

RE Withdrawing a “safe” percentage

Not a useful strategy. Many times, 4.5% of your portfolio is a lot of money. After 35 years of investing 6K a year, your portfolio could easily be over 600K. 4.5% of 600K may be more than you need and may reduce your portfolio too quickly.

On the other hand, 4.5%  may be too conservative. You may pull out less money than you NEED.  Thus we see that instead of withdrawing a percentage, you should determine a minimum withdrawal amount you can live with and a maximum amount that it would be “nice to have”.  Withdrawals should be within this range. Experiment with the model to see what you are comfortable with.

BTW: By withdrawing a fixed percent each year you will never run out of money. That’s true but as your portfolio declines 4.5% of very little is even less.

RE: Don’t Withdraw Principle

Not take principle?  It doesn’t take a Financial Planner to recognize THAT as a good idea. Great if your portfolio is big enough. The only problem is that most of us don’t have a large enough portfolio to pull that off.

You might have enough to take dividends only if you follow the plan religiously.

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