No. of Recommendations: 0
Greetings, Jeffjay843, and welcome. You asked:

<<I hate to sound stupid, never mind foolish, but what technique does one use to take, say a 5% payout from an IRA account. Lets assume I have 500,000.00 in a self-directed IRA and I have calculated that I can safely take 5% of it in a payout. It contains all equities.
Do I sell 5% of the value at the begining of the year? Or do I sell 5% of the value each month? Sorry if I missed something in an article, but I can't seem to find this explained anywhere. >>

I explained how it works for the official Retiree Portfolios in last week's column as quoted here:

Q. In the Reasonable Retiree Portfolio, do you take 6% every year? And how do you decide how many and what stocks to sell, or does it all come from the bond funds?

"A. As far as the Retiree Portfolios are concerned, the initial rates of withdrawal were established based on my subjective judgment of the success of the various portfolios using those rates over the years 1961 through 1998 for the various withdrawal periods. In the Reasonable Retiree Portfolio I decided to take a 6% initial withdrawal because in a 75% Foolish Four (FF) and 25% bond portfolio it was successful over all time periods analyzed. Therefore, using that portfolio, I start with $100K from which I take $6K for income. The remaining $94K gets invested as 75% ($70.5K) in the Foolish Four and 25% ($23.5K) in bonds.

I now reach my anniversary date at the end of the year. At that time I note the inflation rate for the year was 2.5%. That means the income I want for year two is $6,150 ($6K X 1.025). Suppose the market value of my portfolio is $80,370 for the FF and $25,028 for the bonds, or $105,398 total. I subtract the $6,150 from the $105,398 to get $99,248. Of the $99,248, I want $74,436 invested in my new FF (75%) and $24,812 in bonds (25%). I take the $6,150 in cash, and readjust the FF and bond holdings to reflect the allocation desired.

At the end of year two, I repeat the process, except that the inflationary increase in income is now applied to the $6,150 in income I took for year two. The use of the FF (which requires annual adjustments) and bond funds (which are easily traded) makes the process very quick and easy. I don't have to agonize over which or how many shares of stock to sell, and I don't have to worry about bond maturity dates."

If you aren't using a mechanical strategy like the Foolish Four, then you can still do the same thing except you must decide which stocks to sell to take your 5% for the year.

Print the post  


The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.