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Author: scooter45242 Date: 10/29/01 7:44 AM Number: 7427
Can anyone help get me started in researching strategies for withdrawing income from a portfolio for retirement. I'm not talking about how much you can take out of an IRA, etc. I've got this pot of retirement money (all of it in the market), and I'm realizing I don't have the foggiest as to the best way to extract money to live on in retirement. I'm not necesarily looking for specific advice, although that's always welcome. Where do I go to get info on questions like: do I sell an equity for cash, do I choose an income fund and take the income portion in cash, do I do a bond ladder on a portion of it? What are the pros/cons of this, that and the other? Are there any key words or phrases to search on? "Retirement withdrawals" only produced info on IRA minimum withdrawals which is not yet an issue for me.

intercst gave you great advice about reading the Retire Early Home Page. I thought I would add another dimension.

I have recently gone through this thought process, and had the same questions as you. There is simply not much written about the myriad of ways to actually take your money out, especially if you desire to hold a complicated, diversified portfolio.

It would be much easier if all you held in your portfolio was a total stock market index fund and a cash/bond buffer. That is the basic starting point used in the withdrawal studies that intercst mentioned at the Retire Early Home Page. But, that's certainly not the way my portfolio is constructed. I own high dividend stocks, some TXN stock that I can't get my hands on yet, six individual REITs, bonds and bond funds, a European index fund, and a two year cash buffer.

So, after much study, I realized that in real life, there are literally hundreds of strategies to live from your investments. I think the most difficult choice is deciding which method you want to follow. Here are a few of the methods I studied:

1. Simple Dividend Strategy: You put all of your money in high dividend stocks, and live from the dividends. You adjust your portfolio only when neccesary, ie, to replace a stock that has reduced its dividend or to adjust your income. This method generally requires more money due to the low dividend rates, but is probably the simplest.

2. Diversified Dividend Strategy: Here you still put all of your money in high dividend stocks, but now, you also diversify your portfolio. For instance, you could chose an allocation of 50% Dow Blue Chips, 25% Dow Utilities, and 25% REITs.

3. Balanced Dividend/Interest Strategy: Here you put half your money in high dividend stocks, and the other half in a bond ladder. Then you live from the dividends and interest. As a bond matures, you buy a new one of the chosen duration of the ladder (most often used is five years). Adding bonds substantially reduces the volatility of the portfolio which makes it much easier to sleep at night.

4. Long Term Capital Gains Equity Strategy: In this case, you put all of your money in low dividend growth stocks (or an S&P 500 or Total Market index fund), and at the end of each year you sell enough shares for your next year's living expenses. This strategy will keep income taxes at a minimum because dividends are low and the long term capital gains tax rate is 20% max. This is also an easy strategy to utilize a specific withdrawal percentage each year, remembering that 4% is max historically safe withdrawal rate.

5. LTCG Equity/Bond Interest Strategy: This is the same as #4 above except, a percentage of bonds are held, and interest from those bonds contributes to funding the cash buffer each year. The addition of bonds reduces volatility of the portfolio, and increases the max safe withdrawal rate somewhat. This is similar to the portfolio mixes studied for determining the max safe withdrawal rate.

I could go on and on. As you can see, this list is probably endless, as you can keep coming up with all sorts of permutations and combinations of these basic approaches, and I think the approach chosen depends a lot on the personality of the investor. Some people just don't like to ever sell shares (it scares them), and want to live on the dividends. Others don't want dividends due to the higher tax rate. A very large book could be written that covers all this in detail. So, as I said, the hardest choice is deciding which strategy you will use.

Once you chose your strategy, you have to monitor and maintain it carefully. If you chose one of the diversified strategies, you will need to rebalance it regularly (once a year is recommended) to maintain the balance.

This process is much more difficult to manage if your portfolio is small enough to place you close to the 4% max withdrawal limit.

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