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I have recently gained a great interest in the question of how to manage one's funds after retirement, as I am on the edge of retiring (or as I prefer to call it interest-shifting) at age 48. These are my musings on the subject, I have no definite conclusions here, but I am actively researching this topic, and perhaps in a few weeks or months will have something more concrete than musings to share.

Most of the recommendations, projections, and spreadsheets I see are a bit unreal when I try to put myself into the scenario and project 5 - 10 years.

What do I mean by this? Lets say I have a million in retirement funds, and as several people suggest, I want to begin taking 50K per year. So far fine. But where are these funds? in my retirement (pension and profit sharing) and IRA. If I take them out of my P/PS then I get a 10% pretax penalty unless I take out a programmed amount, which doesn't permit me to increase with inflation.

What if I use the Foolish four approach? If my funds are in a sheltered retirement account, then I can change the allotment every 18 months as recommended without problem. But if they are outside of a sheltered account, then I have an additional (unplanned for) capital gains hit. (of course if they are in a retirement account, and I withdraw funds, it is even worse, while I avoid the cap gains, I get hit with regular income tax)

Another point: lets say everyting is saling along wonderfully, and my 1,000,000 after 15 years of 50,000 withdrawals and 15-20% appreciation is now worth 29,000,000. I think that I would be very happy to declare the start of a NEW retirement and begin taking out 5% of the amount present at this time or 1,450,000 per year (of course, we have to be sure to index for inflation, the cost of fuel for the yacht MUST be accounted for). This scenario is presented as an illustration of what I see is some lack of reality basing of the scenarios I have read. WHo among us, 10 years into a retirement, where you have been taking 50k per year would look at our 12M nest egg and say, "I'm sorry dear, but that trip to see ancient greek ruins with the kids and grandkids is simply outside of our 4,000 travel budget"
Since reality is a theme here, I think it is more realistic that we wouldn't let things get this far out of hand. It is more likely that one would adjust one's payout to match the apprecation (or, perish the thought, depreciation) experienced for that year. You would do this after perhaps 5 years of stable withdrawals, to sheild you from the possibility of depreciation of the account in the early years of the withdrawals.

All these thoughts leave me as confused as when I first started looking into this. One advisor suggested 11% withdrawals (whoopee!). Then some suggested 4% (Burgers and Beans again??!). Coming from a science background, it would seem to me that there would be an algorithm possible to account for these variabilities. When I discover it, you may purchase my book!;)

ONe parting thought, something else that I have discovered while working on these topics. I only ask that I don't get a chorus of Duh's if I am the last one on the planet to realize this, but I haven't seen it printed. When I began to manage my retirement portfolio, I thought how generous of the government to allow this to accumulate tax deferred. Silly me, I presumed that that meant I would be paying capital gains rates on my withdrawals. Nope, regular income tax rates. So all those capital gains I have made, the goverment gets a much higher amount of money out than they would have otherwise.
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Greetings, Pshaffer, and welcome. You wrote:

<<I have recently gained a great interest in the question of how to manage one's funds after retirement, as I am on the edge of retiring (or as I prefer to call it interest-shifting) at age 48. These are my musings on the subject, I have no definite conclusions here, but I am actively researching this topic, and perhaps in a few weeks or months will have something more concrete than musings to share.

Most of the recommendations, projections, and spreadsheets I see are a bit unreal when I try to put myself into the scenario and project 5 - 10 years.

What do I mean by this? Lets say I have a million in retirement funds, and as several people suggest, I want to begin taking 50K per year. So far fine. But where are these funds? in my retirement (pension and profit sharing) and IRA. If I take them out of my P/PS then I get a 10% pretax penalty unless I take out a programmed amount, which doesn't permit me to increase with inflation. >>


Essentially, that is correct.

<<What if I use the Foolish four approach? If my funds are in a sheltered retirement account, then I can change the allotment every 18 months as recommended without problem. But if they are outside of a sheltered account, then I have an additional (unplanned for) capital gains hit. (of course if they are in a retirement account, and I withdraw funds, it is even worse, while I avoid the cap gains, I get hit with regular income tax)>>

Actually, you would change every 12 months plus one day in a taxable account to achieve a capital gains rate. And, as you noted, it doesn't really matter in the traditional IRA because only regular rates apply there. Additionally, you've got the 10% penalty again, too, unless you're using substantially equal periodic payments.

<<Another point: lets say everyting is saling along wonderfully, and my 1,000,000 after 15 years of 50,000 withdrawals and 15-20% appreciation is now worth 29,000,000. I think that I would be very happy to declare the start of a NEW retirement and begin taking out 5% of the amount present at this time or 1,450,000 per year (of course, we have to be sure to index for inflation, the cost of fuel for the yacht MUST be accounted for). This scenario is presented as an illustration of what I see is some lack of reality basing of the scenarios I have read. WHo among us, 10 years into a retirement, where you have been taking 50k per year would look at our 12M nest egg and say, "I'm sorry dear, but that trip to see ancient greek ruins with the kids and grandkids is simply outside of our 4,000 travel budget"
Since reality is a theme here, I think it is more realistic that we wouldn't let things get this far out of hand. It is more likely that one would adjust one's payout to match the apprecation (or, perish the thought, depreciation) experienced for that year. You would do this after perhaps 5 years of stable withdrawals, to sheild you from the possibility of depreciation of the account in the early years of the withdrawals.


IMHO the part of your statement I highlighted is precisely what would (and probably should) happen. Also, bear in mind that expenses do tend to change in retirement. From what I've observed (at least for older retirees) is that expenses tend to be higher in the early years, decline significantly in the middle to late years, and then increase due to medical problems in the final years. What those expenses are is also a function of lifestyle.

<<All these thoughts leave me as confused as when I first started looking into this. One advisor suggested 11% withdrawals (whoopee!). Then some suggested 4% (Burgers and Beans again??!). Coming from a science background, it would seem to me that there would be an algorithm possible to account for these variabilities. When I discover it, you may purchase my book!;) >>

Truth be known, the latter was probably much closer to realism for a conventional portfolio considering how long your funds must last. But again, that must be tempered with judgment or you could die with far too much money that could have been used for you to enjoy life. As to the first advisor, I trust you sent him packing in short order.

<<ONe parting thought, something else that I have discovered while working on these topics. I only ask that I don't get a chorus of Duh's if I am the last one on the planet to realize this, but I haven't seen it printed. When I began to manage my retirement portfolio, I thought how generous of the government to allow this to accumulate tax deferred. Silly me, I presumed that that meant I would be paying capital gains rates on my withdrawals. Nope, regular income tax rates. So all those capital gains I have made, the goverment gets a much higher amount of money out than they would have otherwise.>>

And now you have discovered why I preach that tax deferral is not the be all and end all of investing. There are many occasions when it's totally inappropriate if the idea is to come up with a large stash after all taxes have been considered.

Regards..Pixy
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pshaffer wrote

All these thoughts leave me as confused as when I first started looking into this. One advisor suggested 11% withdrawals (whoopee!). Then some suggested 4% (Burgers and Beans again??!). Coming from a science background, it would seem to me that there would be an algorithm possible to account for these variabilities.

Frequent TMF poster BluesH has devised a variable "safe" withdrawal model and accompanying Excel spreadsheet. You can download it for free at the following link and run some scenarios on your own.

http://www.geocities.com/WallStreet/8257/varwith.html

intercst
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If 4% of $1M is a safe withdrawal rate, then so is 4% of $29M. (and probably more so - because you can easily reduce it to 3% or 2% if times get tough :-)
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If 4% of $1M is a safe withdrawal rate, then so is 4% of $29M. (and probably more so - because you can easily reduce it to 3% or 2% if times get tough :-)


That is what one would think, but all the withdrawal tables I have seen withdraw a percent (say 4) of the INITIAL amount, NOT of the appreciated amount. Most also have an allowance for inflation, so at year 15 you are removing an amount equal to 4% of 1M, plus a bit for inflation, not 4% of the amount available at year 15. This is the crux of my message, that the withdrawal tables do not stand my reality test, that is to say if I put myself into the 15 year situation, I'm sure not going to be taking out 60 or 70k when I could take much more perfectly safely.
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pshaffer wrote,

That is what one would think, but all the withdrawal tables I have seen withdraw a percent (say 4) of the INITIAL amount, NOT of the appreciated amount. Most also have an allowance for inflation, so at year 15 you are removing an amount equal to 4% of 1M, plus a bit for inflation, not 4% of the amount available at year 15. This is the crux of my message, that the withdrawal tables do not stand my reality test, that is to say if I put myself into the 15 year situation, I'm sure not going to be taking out 60 or 70k when I could take much more perfectly safely.

You're right!

The 4% (or whatever) withdrawal is what's necessary to allow you to survive a repeat of the "Crash of 1929" happening immediately after you commence your retirement withdrawals. If the "Crash" doesn't happen, you don't have to wait 15 years. You can logically increase your withdrawal in Year 2 if your portfolio has grown in value. If your portfolio is equal to or less than the previous year's year-end balance, then the most you should withdraw is the 4% plus the inflation adjustment.

I call this the "Pay Out Period Reset Model" and I'm currently modifying the Retire Early Safe Withdrawal Calculator to test the effect of this strategy on the Terminal Values at the end of a pay out period. This method won't change the "100% safe" initial withdrawal rate, but it should reduce the Terminal Values for all but the minimum case, and allow a retiree to spend more money over the course of the pay out period. It's just that there is no way to know up front when and how much the retiree can increase the annual withdrawals.

I hope to post the "Pay Out Period Reset Model" on the Retire Early Site on Jan 1st.

intercst
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me: If 4% of $1M is a safe withdrawal rate, then so is 4% of $29M. (and probably more so - because you can easily reduce it to 3% or 2% if times get tough :-)


That is what one would think, but all the withdrawal tables I have seen withdraw a percent (say 4) of the INITIAL amount, NOT of the appreciated amount. Most also have an allowance for inflation, so at year 15 you are removing an amount equal to 4% of 1M, plus a bit for inflation, not 4% of the amount available at year 15. This is the crux of my message, that the withdrawal tables do not stand my reality test, that is to say if I put myself into the 15 year situation, I'm sure not going to be taking out 60 or 70k when I could take much more perfectly safely.


So if you retire and begin withdrawing 4% of $1M, and this goes on for 10 or 15 years, and meanwhile your assets grow to $29M, then you return to work for a few weeks and retire again. At that point, what is the safe withdrawal amount ? I think it would be 4% of $29M according to all the charts. (now, do the same thing, but skip the few weeks of working in between :-)
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That is what one would think, but all the withdrawal tables I have seen withdraw a percent (say 4) of the INITIAL amount, NOT of the appreciated amount.

It's your money. There aren't any retirement police running around saying that you can't declare a new starting point at any time you desire...


Cheers,
soui
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So if you retire and begin withdrawing 4% of $1M, and this goes on for 10 or 15 years, and meanwhile your assets grow to $29M, then you return to work for a few weeks and retire again. At that point, what is the safe withdrawal amount ? I think it would be 4% of $29M according to all the charts. (now, do the same thing, but skip the few weeks of working in between :-)


That is entirely my point. I would modify your plan, though, I think that I would feign working. Just start up MS word (if it still exists) and pretend to write a memo and call it work. Then start again. Let's see, instead of 40,000 you would begin drawing 1,200,000 simply due to the fact that you pretended to work. Now that's satisfying!
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That is entirely my point. I would modify your plan, though, I think that I would feign working. Just start up MS word (if it still exists) and pretend to write a memo and call it work. Then start again. Let's see, instead of 40,000 you would begin drawing 1,200,000 simply due to the fact that you pretended to work. Now that's satisfying!

A 4% safe withdrawl rate is NOT 4% of starting assets kept constant. If you wanted to keep it constant - you could use a higher rate. The entire idea of using a low(safe) withdrawl rate is that is gets adjusted every year. So you would never have this problem of a raise from 40,000 to 1.2 Million - you would have gradually increased your withdrawl.

Year 1: 1,000,000 x 4% = 40,000
then we get lets say a 7% return on our remaining $960,000 yielding 1,027,200.

Year 2: 1,027,200 x 4% = 41,088(you just got a raise!)
then lets say we only get 6% on the net (1,027,200 - 41,088) = 986,112 yielding 1,045,278.72

Year 3: 1,045,278.72 x 4% = 41,811.1488(wow - another raise!)

and so on - your withdrals remain a constant 4% of your portfolio. With greater returns - you get bigger 'raises'. This of course slows down the growth of your portfolio and prevents the silliness of saying that 40,000 is a safe withdrawl from 29,000,000 just because you retired years ago.

I hope this helps.
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Greetings, Pshaffer, and welcome. You wrote:

<<So if you retire and begin withdrawing 4% of $1M, and this goes on for 10 or 15 years, and meanwhile your assets grow to $29M, then you return to work for a few weeks and retire again. At that point, what is the safe withdrawal amount ? I think it would be 4% of $29M according to all the charts. (now, do the same thing, but skip the few weeks of working in between :-)


That is entirely my point. I would modify your plan, though, I think that I would feign working. Just start up MS word (if it still exists) and pretend to write a memo and call it work. Then start again. Let's see, instead of 40,000 you would begin drawing 1,200,000 simply due to the fact that you pretended to work. Now that's satisfying! >>


Nothing prevents you from changing your payout at any point in time. In fact, starting with an initial inflation-adjusted withdrawal of 4% is very safe. If after a few years you see the portfolio has grown to a substantial sum, nothing says you can't change to a new 4% base. That's especially true when you've seen the base go from something in the low six figures to something in the multi-millions.

Regards..Pixy
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soui says...
It's your money. There aren't any retirement police running around saying that you can't declare a new starting point at any time you desire...


I believe that the Retirement Police is called the IRS. The only time that it is your money and you can do what you want with it is between ages 59 1/2 and 70 1/2. On one side you better not take to much and on the other side you better not take to little or the Retirement Police will pay you a visit.

TMFPixy says...

Nothing prevents you from changing your payout at any point in time. In fact, starting with an initial inflation-adjusted withdrawal of 4% is very safe. If after a few years you see the portfolio has grown to a substantial sum, nothing says you can't change to a new 4% base. That's especially true when you've seen the base go from something in the low six figures to something in the multi-millions.


I don't like to disagree with TMFPixy but I understood pshaffer at 48 to be talking about pre-59 1/2. I thought that once you chose your payout amount there could be no change in that amount until 59 1/2 no matter how much your portfilio grows with the exception of maybe cost of living. Unless the rules changed for 72(t) withdrawals the last few weeks and I missed it, the withdrawal percentage and amount has to stay the same till 59 1/2. If not, please let me know how I would change it without penalties and without a visit from the Retirement Police.

Vagabond


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Vagabond writes:

<<TMFPixy says...

Nothing prevents you from changing your payout at any point in time. In fact, starting with an initial inflation-adjusted withdrawal of 4% is very safe. If after a few years you see the portfolio has grown to a substantial sum, nothing says you can't change to a new 4% base. That's especially true when you've seen the base go from something in the low six figures to something in the multi-millions.

I don't like to disagree with TMFPixy but I understood pshaffer at 48 to be talking about pre-59 1/2. I thought that once you chose your payout amount there could be no change in that amount until 59 1/2 no matter how much your portfilio grows with the exception of maybe cost of living. Unless the rules changed for 72(t) withdrawals the last few weeks and I missed it, the withdrawal percentage and amount has to stay the same till 59 1/2. If not, please let me know how I would change it without penalties and without a visit from the Retirement Police.


You are correct. I missed that point while trying to address the scads of posts and emails I've had in the past two weeks. Sorry about that.

Regards..Pixy
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[[TMF Pixy says...

Vagabond writes:

<<TMFPixy says...

Nothing prevents you from changing your payout at any point in time. In fact, starting with an initial inflation-adjusted
withdrawal of 4% is very safe. If after a few years you see the portfolio has grown to a substantial sum, nothing says you can't
change to a new 4% base. That's especially true when you've seen the base go from something in the low six figures to
something in the multi-millions.

I don't like to disagree with TMFPixy but I understood pshaffer at 48 to be talking about pre-59 1/2. I thought that once you
chose your payout amount there could be no change in that amount until 59 1/2 no matter how much your portfilio grows with the
exception of maybe cost of living. Unless the rules changed for 72(t) withdrawals the last few weeks and I missed it, the
withdrawal percentage and amount has to stay the same till 59 1/2. If not, please let me know how I would change it without
penalties and without a visit from the Retirement Police.

You are correct. I missed that point while trying to address the scads of posts and emails I've had in the past two weeks. Sorry
about that.

Regards..Pixy ]]

But the 72(t) withdrawals only apply to tax-deffered portfolios, you can take whatever you want out of taxable portfolios (subject to Retirement Police "fines"). Or am I sufferring from the heat...

azholmes.
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by "fines" I mean capitol gains taxes.

azholmes.
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Azholmes,

That's what I thought of when I read that - I think Pixy was right - until he said he was wrong :)

The 4% is from your 'retirement portfolio' so while you could have fixed 72t withdrawls or even huge forced withdrawls at 70 1/2 - you can just invest some of the money in taxable accounts if your withdrawls add up to more than 4%.

Think not of the 4% as your withdrawl rate - think of it as your consumption rate - you may only spend 4% of your retirement assets per year. Where you get it is up to your planning. If its all tax deferred - then you are in a bind - but most of us will have a mix.

Of course - if you are constantly withdrawing over 4%and paying capital gains and/or income tax - that could effect the calculations used to come to 4% - I guess it might be lower?

Helter
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I don't like to disagree with TMFPixy but I understood pshaffer at 48 to be talking about pre-59 1/2. I thought that once you chose your payout amount there could be no change in that amount until 59 1/2 no matter how much your portfilio grows with the exception of maybe cost of living. Unless the rules changed for 72(t) withdrawals the last few weeks and I missed it, the withdrawal percentage and amount has to stay the same till 59 1/2. If not, please let me know how I would change it without penalties and without a visit from the Retirement Police.


Indeed I am speaking of prior to 59.5. Like now.

From what I understand at the moment, it is correct that you have to withdraw a certain amount constantly until 59.5 TO AVOID A PENALTY. It may be worthwhile to take the penalty to get the additional $. I also have a question about the mechanism of this, as it would seem to me that there might be a loophole to allow changes in the event of major changes in the value of the funds, in the event of illness, etc. In my case, I have about 4 funds and I wonder if I can use one at a time. I wonder if I can roll part of one to an IRA, etc. ATTORNEYS ARE WORKING AT THIS TIME! Results will be in soon and I will inform all.
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Pshaffer writes:

<<From what I understand at the moment, it is correct that you have to withdraw a certain amount constantly until 59.5 TO AVOID A PENALTY. It may be worthwhile to take the penalty to get the additional $. I also have a question about the mechanism of this, as it would seem to me that there might be a loophole to allow changes in the event of major changes in the value of the funds, in the event of illness, etc. In my case, I have about 4 funds and I wonder if I can use one at a time. I wonder if I can roll part of one to an IRA, etc. ATTORNEYS ARE WORKING AT THIS TIME! Results will be in soon and I will inform all.>>

Yes, you may use different IRAs from which you take SEPP. Additionally, you may use a different one of the three IRS-approved payout in each IRA and start those withdrawal methods at different times. SEPP only apply to one IRA at a time, so this year you could start with IRA #1 using the life expectancy method of withdrawal. If you find that's not enough, then later you could go to IRA #2 and start a SEPP using the amortization method. All that's required is that SEPP continue in each IRA for the longer of five years or reaching age 59 1/2 from the date the SEPP started in that IRA and that the chosen SEPP method in that IRA is not altered after the process has begun. As to moving money out of those IRAs after you have begun (i.e., moving money from a SEPP IRA to another IRA), there you better take great care to ensure the SEPP can continue at the rate dictated by the method chosen. Otherwise, in the absence of a Private Letter ruling giving you the ability to do that, you can be in a very unpleasant situation with the IRS.

Regards..Pixy
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