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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.

Thanks for any guidance.
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scooter45242 asks,

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.

You might take a look at the Retire Early Study on Safe Withdrawal Rates at the following link:

http://www.geocities.com/WallStreet/8257/restud1.html

intercst
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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.

Russ
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You can also visit the Retirement section right here at the Fool.

Good luck,
John
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My husband and I retired this year, and this was indeed the most difficult question for us. I am STILL debating on one part of my plan - about whether or not to take a monthly pension or take the cash settlement to rollover into an IRA.

The pro of taking the pension is that there is not a 10% IRS penalty for early withdrawal (I'm not 59-1/2). You also have a (pretty safe) guaranteed life-time income. The con is that you relinquish control of that money to others - my former company buys an annuity from an insurance company to provide me with the pension.

The pro of rolling over to an IRA is that I keep control. The con is that, in order to avoid the 10% penalty, I will have to take a certain amount out each year at least for 5 years, based on complicated IRS life expectancy calculations. Aaah, me.

For simplicity's sake alone, I am leaning toward taking the pension instead of rolling it over. We have set aside enough cash in a money market for about 3 years - our Credit Union assisted us there by setting up a new-to-them program to make monthly deposits into our accounts. Most of the rest of our portfolio is in stock market mutual funds, where we will leave it for the time being. We will decide at the end of the 3 years how to go from there.

To tell the truth, I am just having too much fun being retired right now to sweat all the planning, so am trying for simplicity. Husband and I just got back from 2 months in Costa Rica!
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<The pro of taking the pension is that there is not a 10% IRS penalty for early withdrawal (I'm not 59-1/2). You also have a (pretty safe) guaranteed life-time income. The con is that you relinquish control of that money to others - my former company buys an annuity from an insurance company to provide me with the pension.

The pro of rolling over to an IRA is that I keep control. The con is that, in order to avoid the 10% penalty, I will have to take a certain amount out each year at least for 5 years, based on complicated IRS life expectancy calculations. Aaah, me.>


You are correct that there are many variables that must be considered in making the decision. As with many things in this area one size does not fit all. One other factor to consider that makes rolling it over look better is the fact that it then becomes YOUR asset.

If you take the pension it will probably be reduced if you want to establish a survivor benefit. You should also clearly understand if there is a minimum payout period. If you both reach normal life expectancies, the issue may not be important. However if either or both of you pass away early (we hope not!), the IRA will be an asset that you can pass on to your heirs. This can hold true even if you live past the normal life span. The pension offers no such provision (outside of any stipulated minimum payouts).

Of course, the IRA involves YOU being personally responsible for it's proper management. If you do a poor job of managing it, you could run out of IRA before you run out of life. If the SS "Trust" fund also happens to run short down the road, you could get hit with a hard 1-2 punch. Hopefully, however you make your plans, there will be enough of a "comfort zone" for you to allow for down periods and government screw ups. Good luck!


BRG

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Just hot wind...

Is retirement really as difficult as I have been reading in the last umpteen posts?? It sounds like you have to be an accountant, a tax expert, a stock broker, a financial advisor, and I don't know what else just to enjoy retirement without worrying yourself sick! Continual adjustments to this and that part of your portfolio, constructing a perpetual ladder (whatever that is), etc., etc.

It seems to me that retirement should be a much simpler, less complicated life than I see portrayed here. Something must be wrong with our system. Any thoughts??

Bill
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wcfenton asks,

Just hot wind...

Is retirement really as difficult as I have been reading in the last umpteen posts?? It sounds like you have to be an accountant, a tax expert, a stock broker, a financial advisor, and I don't know what else just to enjoy retirement without worrying yourself sick! Continual adjustments to this and that part of your portfolio, constructing a perpetual ladder (whatever that is), etc., etc.

It seems to me that retirement should be a much simpler, less complicated life than I see portrayed here. Something must be wrong with our system. Any thoughts??


You can greatly simplify retirement by putting in your 20 years and getting an inflation-adjusted gov't pension.

The rest of us have to make other arrangements. <grin>

intercst
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It seems to me that retirement should be a much simpler, less complicated life than I see portrayed here. Something must be wrong with our system. Any thoughts??

I'm glad you asked!

Keep in mind that most posters have time on their hands and might very well be over re-allocating their portfolios. On the Index board many of the posters are advocating the "KISS" -Keep if simple stupid approach to retirement investing. Two or three funds will do.

One does not need to be overly involved in daily and weekly portfolio analysis. Pick you allocation and let it ride. If you want a bond or cd ladder, get it set up and then let it ride. Most bonds and cd's can be rolled over into new instruments automatically.

If you want your portfolio on automatic pilot, go with Index Funds and bond funds, then sit back sip lemonaide and enjoy life. That's the route I have chosen and it's a great life.

Happy trails...rclyde
(Disclosure: I hold some individual stocks, index funds, bond funds and activily managed funds, in both taxable and non-taxable accounts. I've been retired 6 months.)
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rclyde...

Thanks for the information - I like your perspective!

Best regards,

Bill
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Author: rclyde Date: 10/31/01 10:56 AM Number: 7441
If you want your portfolio on automatic pilot, go with Index Funds and bond funds, then sit back sip lemonaide and enjoy life. That's the route I have chosen and it's a great life.

I think that as long as you hold two or more asset classes, there is a little more to this:

1. You have to rebalance your equity/bond split at least once a year to bring it back to your chosen allocations. Of course, you also have to chose your allocation, and that may change as you get older.

2. You have to decide how to withdraw funds for your next year's expences or your cash buffer (ie, do you take it out of bonds, equities, both?). What if we're deep in a bear market? That would indicate that you might not want to liquidate equities.

3. You have to decide what to do with dividends and interest. Send them to your cash buffer? Reinvest them?

4. If your portfolio is marginal, and you need to maximize your withdrawals, then taxes need to be minimized. You would want to live as much as possible from long term capital gains. This means you would liquidate your equities if possible each year. And add them to your dividends and interest?

Russ
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Author: wcfenton Date: 10/30/01 9:49 PM Number: 7439
It seems to me that retirement should be a much simpler, less complicated life than I see portrayed here. Something must be wrong with our system. Any thoughts??

The thing that greatly complicates your retirement strategy is a marginal portfolio. If you are right on the 4% limit, then you have to go through all these hoops we've been discussing.

If you have a portfolio big enough to live on, say 3% withdrawal per year, you can really simplify things. You just buy a no-load Balanced Fund, and live from the dividends. Take the Vanguard Balanced Index (VBINX) for example. It is 60/40 equities/bonds, and pays a 3.57% dividend. The 60/40 mix replicates the Wilshire 5000 on the equity side and the Lehman Bros Aggregate Bond Index on the fixed side. This type of fund should assure long term growth of principle while spending the dividends. Also, the dividends (not the dividend yield) have historically increased faster than inflation in this type of fund. On top of that, the expense ratio for this particular fund is only 0.22%.

So, this is truly simple! You just put all your retirement money in a fund like this, have the dividends automatically sent to your checking account, and do nothing but spend the money (saving out enough to pay quarterly estimated taxes, of course)!

Russ
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<Is retirement really as difficult as I have been reading in the last umpteen posts?? It sounds like you have to be an accountant, a tax expert, a stock broker, a financial advisor, and I don't know what else just to enjoy retirement...It seems to me that retirement should be a much simpler, less complicated life than I see portrayed here.>


Some of the points discussed in this and other threads can indeed get complicated. I think each person has to define for themselves just how much time and energy they want to put into the various decisions they make. When you have a matter that is clearly beyond the scope of your experience it is not wrong to get professional advice from someone who has no financial interest in your decision. Before doing that you should learn enough so that you can ask the right questions.

I have learned the hard way that being ignorant in financial matters can be very costly. When I was younger and too busy in my daily life, I thought that all mutual funds charged 4.75% for the privilige of letting you buy into their fund (with the help of the kind broker). I also thought that 12b-1 fees of 1% were the norm along with annual expenses of an additional 1-2% (note the irony: these funds were primarily bought for income). When my broker told me about the "class B" funds where all of my money went to work right away, I thought he was looking out for my interests. Of course the "B" funds had high back loads, higher annual expenses and a higher 12b-1 fee.

Much later, with the advent of the internet, it became easy to see that many of these funds I was directed to were always in the bottom 25% when measured against their peers. One of the main reasons for this underperformance is because of the fee structure. The existance of the FOOL has been a valuable educational tool for many to be able to make their own investment decisions. Of course doing it yourself does not guarantee positive results, as many have crashed and burned along the way. Many who rode the wave never stopped to ask themselves if they were properly diversified. Over time, the market has a habit of bringing those fools back to earth.

This board seems to consist of many traditional retirees as well as many visitors from the Retire Early Home Page. The two types are often of very different mind sets. The typical REHP person is interested in shaving years or decades off of their traditional working life. Reaching their goal is not based on passsively managing their income and investments. They often base their plans on the idea that SS will not likely be there for them. For the traditional retiree SS is usually a cornerstone of the retirement plan. Many of the issues that confront both groups overlap and provide the basis for useful discussions.

As others have said, you can make things as simple or complicated as you wish. If you read some of Intercst's posts you will see that his method does not require a lot of his time to manage at all(probably much less than he spends arranging for tee times).<g>


BRG




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Retirement can be pretty simple, but that's less fun to write about than all the complicated situations you could imagine. Look at the Index board for ideas about how to invest your portfolio simply and rationally. You only need reallocate among a few index funds once a year to maintain the balance you deem appropriate to you, and draw around 4% each year for living expense.

Best of all, if you can adjust your living expenses so you can cover them with social security and whatever retirement payment you might get from former employers, then you can observe market flucuations without worry. That old Shaker verse "Tis a gift to be simple, 'tis a gift to be free" makes a lot of sense, even though I'm sure I'm misappropriating the Shaker's meaning.

I think simplifying your needs is an important aspect of retirement.

db
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In all the discussion of methods to obtain income from one's portfolio during retirement, there has been little attention given to what type of funds to use first. If one has both tax deferred funds and taxable accounts, consideration needs to be given to which type of funds one uses first. Some prefer to use taxable accounts first while their tax deferred holdings grow tax free. Using taxable accounts first might give the benefit of selling long term holdings and obtaining the benefit of lower capital gain rates. However, if one plans to leave funds to hiers or needs to leave funds to provide care for a challenged dependent, it may be better to use up their tax deferred funds first and give the benefit to hiers inheriting funds in a traditional account so that they would inherit them at the value on your date of death and not owe taxes on the funds. (Of course this is subject to limitations & current tax laws.) Your thoughts, please.
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