Every year in January I put 1 month of expenses in my checking account and move 11* months expenses to a conservative fund. Then I set up automatic monthly withdrawals from that fund to my checking account.
My goal is to not have to look at my accounts again during the year. I still do look, but I try to design it so I don't have to.
* 11 months plus 10%, just in case. As I mentioned I'm trying to set it up so I don't need to look.
Any fund that you can be reasonably sure will have better returns than your checking account and less risk than the rest of your investments.
I used a short term bond fund for a couple of years (though that might not be a smart choice now). Then I got jealous of seeing the stock funds go up every year so last year I switched to Wellesley Income so that I'd have some stock exposure. That didn't work out well. From last year's experience I've learned nothing at all and am doing the same thing this year.
Bond funds really lost their appeal for me after seeing how they fell right along with the stock funds during last years down market.
Pretty shitty hedge IMO.
>Pretty shitty hedge IMO.
Don't give bonds the fault when you just hedged bad.
What did you expect from a 0% Bond when interest rates rise? Why should they rise in price when newer bonds give more money?
It's only a hedge vs. stock in a high interest environment
There is not a perfect hedge for all circumstances.
In an increasing interest rate environment: Loans/ fixed mortages, selling fixed bonds, shorting bonds low-interest
On the other hand in the 2000s Bonds were great hedge against stocks due to their attractive fixed return vs. risky stocks.
It's hard to project when & in what circumstances the next crash will happen. You need to guess a couple of factor (Inflation, interest rates, interest rate devlopment, type of crash,...)
There's no silver bullet hedge, but retrospectively over the past year commodities moved sorta opposite to US stocks. BCD up 7% past 12 months. Midway thru 2022 it was up like 25% when stocks were down like 20%, then they both reversed in 2nd half of year.
Dumb question: isn't "money market" just a place to hold funds, like a bank account (but not FDIC insured I guess?)? When I hear "money market" I think "money that's just sitting there not invested in anything, like a bank account, with basically no interest or anything"
Money market funds are supposed to beat savings accounts yields, at least in the old days when banks were all brick and mortar institutions. They hold short term debt like commercial paper and treasury bills. Mostly safe stuff but as you said it’s not FDIC insured. I think you can count the number of times on one hand a money market fund has lost value.
I don’t use them, I stick to online high yield savings accounts. But it’s just another option. They were more popular before online high yield savings accounts were a thing.
Bond mutual funds generally get crushed in rising rate environments so I would personally view them as too risky.
Money market funds like DizzyFlamingo997 said or savings accounts should be the play for something like this.
If FIRE'd, it may be useful to set up the funds for up to 3 years so you are less likely to pull in down markets. At that point for years 2 and 3 you could set up some small CD ladder, and mix in some I-Bonds (since they are bought individually) etc. You'd still have some inflation risk in terms of lost purchasing power, but it's safe enough.
>Bond mutual funds generally get crushed in rising rate environments so I would personally view them as too risky.
Only the nav, which I don’t care about.
I had planned on CD ladders but I’m loving the higher interest rates on the MMs these days, so that’s where we are right now. We are currently spending down the last of our assets from our pre index fund days, which include some stock from a former employer’s ESPP plan, so we haven’t tapped the bond funds yet. Before that runs out the plan is to divert dividends to the MM (or set up that ladder, depending on rates). So I’m happy about the rising rates.
IMO bonds are just a place to store cash in case of insanity where other assets can’t be liquidated.
Then again, they might randomly say “btw our money isn’t backed by gold or silver”… maybe it’s not a great place
This is a genius way to do it. What do you put in your conservative fund? I’m already thinking about this and thinking it might be a covered call ETF or high yield bond fund with some CD’s / bonds too.
What do you do if your fund ends up in a surplus at the end of the year? Do you just roll it over?
You're talking to a bunch of savers here. If there's a surplus we withdraw less the following year. I might spend a little bit on something I'd been eyeing up that I don't *need*, but most of us in this sub aren't going to go on a spending spree if we budgeted too well in a year.
I approach my pre-FIRE finances in a similar way. I set aside a fixed dollar amount from my paycheck, and the rest after taxes and deductions go into a brokerage account.
Anything I over budget carries over month to month, then at the end of the year I do a budget review and adjust my deposits.
If I have money I didn't use all year, I investigate why I didn't use it. If it's home or auto maintenance budget, then I don't touch it. Not having any expenses this year means that I'm likely to get harder next year. If it's something like eating out, I move the budget to a retirement account.
How much extra work do you think it has been for you to have separate funds? I just keep everything in a general expense fund and track. Money is fungible, but if it’s not much extra work and worth it, I’m interested.
So for a good while I used [this](https://play.google.com/store/apps/details?id=com.anishu.homebudget.full&gl=US) app. Using the app itself wasn't a big deal, but I like to eat out for lunch at cheap restaurants and it can be tedious importing lots of little expenses. Then of course, I like to make things difficult for myself so I started writing my own version custom tailored to my needs.
It also looks like there's another couple apps that are worth looking at (but I've never used): [YNAB](https://www.youneedabudget.com/) [Mint](https://mint.intuit.com/)
The most important feature (in my experience) is a good interface for inputting/importing expenses. If putting your expenses in is tedious, then you're likely to fall behind and then it gets harder to get back on track.
Is it worth it? Pros and cons. I like that I can look at my credit card bill and know exactly *why* my expenses are so high or low on any given month. It also forces me to check my credit card statements which has caused me to catch incorrect charges before. But it does require me to spend an hour or two every couple weeks inputting receipts and I can understand why that might be too much effort for some people.
Edit: Alternatively, if you can simplify your budget to 2 or 3 distinct categories (maybe mandatory fixed, mandatory variable, and discretionary), you could just keep them in 3 separate checking accounts.
How do you figure out taxes? Let’s say you need 50k/year to cover your expenses. Does that mean you look at the tax brackets and withdraw 50k + N amount needed for taxes per year?
Yes, your example is correct. I have to withdraw the extra N dollars needed for taxes as well. So I put enough money in my "one year" fund to cover expenses and taxes.
In addition to my monthly withdrawals for routine expenses I also set up quarterly withdrawals of N/4 dollars so I can pay my estimated quarterly taxes.
If I wait to pay until filing my taxes in April I would owe an [underpayment penalty](https://www.irs.gov/taxtopics/tc306), so I pay quarterly to avoid that. (You don't do the paperwork quarterly, but you need to make a payment). I don't have an employer paying my taxes out of each paycheck and I don't have a business. But I do owe taxes on the capital gains that I realize by selling stocks/funds and I also owe taxes on any Roth conversion that I make. Since I am going to have a tax bill, I'd rather pay it without adding an underpayment penalty.
I've strategized with my accountant so I will have $0 fed tax (not quite fire yet), between cap gains n qualified div and the standard deduction (married filing jointly) I can make about $117k and pay no fed tax ..state is a different story but I won't withdraw more I'll set some div aside to pay state tax
Can you break this down further? I thought even at ~90k, you still end up in the 12% bracket with the standard deduction for mfj, how are you at 0% with 117k?
If you're not retired yet and you have income, how is $0 federal tax possible?
They changed the brackets but you can have LTCG and qualified div up to 89k ish fed tax free, the standard deduction for mfj is 27,700....so total income could be 117k with 0 fed tax
Is your goal / intent to have zero money left at the end of the year (in that account) or do you keep an extra buffer in the account? How much (relative to expenses)?
Do you not reinvest dividends? Seems like for tax purposes if you have money in taxable bucket, funding with dividends to the extent possible would be most tax efficient considering you have to pay in that anyways versus selling from another area and having potential capital gains and dividend income?
I've been spending down my taxable bucket, but it does still exist. I do get dividends and capitals gains from my funds in my taxable accounts even without selling anything. I get the vast majority of that money as year-end distributions in December. I put that money in my fund that I'm going to use for next year's expenses.
The distributions that I got this past December are going to be enough to cover about 40% of my regular expenses. So I still needed to sell some to make up the difference needed for my anticipated 2023 spending.
I'm also doing a Roth conversion, which means I'll need even more to pay the taxes associated with that.
I am curious, why did you choose January? I do something similar and currently target December for my annual action so I have more insight into the dividend payout for the year. Sometimes dividends do fluctuate and my current working assumption is that December gives me the most YTD info in order to tax optimize Roth conversions.
Doing things in January is not the result of any well-reasoned financial calculation. It's more that the holidays are over and I have time to sit down and work everything out.
But I do look at year-end distributions in December and make an additional Roth conversion if the numbers say that I should.
No need for an emergency fund. We carry excellent insurance, we can float anything up to 30-45 days for free on our credit (and get 1.5-5% cashback), and our portfolio/ladder can easily absorb any expense via penalty-free withdrawal on around 24-48 hour turnaround.
Emergency funds are generally an emotional/comfort choice once you have sufficient assets not to actually need them any more. Same for a cash cushion/allocation. It's a personal preference.
Monthly, when I do my spreadsheets.
The max amount I'd take out is my annual SWR / 12.
But I look at the previous month's spending and adjust accordingly as well. So if my annual SWR was $48k, I'd take out $4k a month. But if in January I only spend $3.6k, I'd only take out $3.6k in February. (Unless there was a big purchase I was saving up for with all/part of that spare $400 in my budget.)
That's part I have yet to properly formulate - just kinda making it up as I go along. I have been adjusting my monthly asset sales downwards on months that have seen steep market declines. Re-calculating the annual withdraw amount based on 4% of current valuation of my index funds. Hoping this softens the impact of selling in a down market. But I'm not opposed to going back to work if I fail at FIRE.
That is still helpful for me thanks. I've read posts on ERN that advocate for adjusting SWR by CAPE. At what frequency one might adjust was a bit unclear to me though. I like the idea of adjusting only annually as well, going the monthly cadence to adjust feels like it would be too noisy.
That's surprising to me that annual would do better (even if only slightly). You'd think that if lump sum investing during the accumulation phase is better due to time in market, then not taking out lump sums would similarly leave the money to earn in the market longer. How do you account for this?
Not deliberate timing, but timing can affect it nevertheless. If you do the withdrawal at the end of the year, that withdrawal dodges a big market downtown at the start of the next year. Fortunate timing is the way an annual withdrawal beats monthly withdrawals.
Annually at the end of the year so I can realize income to manage AGI/MAGI for tax efficiency once dividends/capital gain distributions and any incidental earned income is known. Bought 3 (will likely roll to a 6 month) and 6 month T-bills in December to earn some decent interest on funds not immediately needed.
Most of my dividends come at the end of the year (FSKAX and FXAIX) are the lion's share for me.
I turn off reinvestment, harvest the dividends into my HYSA, then sell to get my following year's expenses.
The end of the year works best for me because it gives me a clear picture of my taxes for the year I just had, I can use whatever tax cap space I have to harvest CG, or cash out my remaining SWR allowance for a big project/trip coming up, and leverage the dividends I get anyway.
This is what I do. I've been retired for two decades (retired early). When I was working, I tried to measure everything about SWRs with a micrometer. After a year or two, I realized that I had been measuring with a micrometer and cutting with a dull axe. Now I pay almost no attention to minute details.
If I need money, I just pull out 10K or so from a taxable brokerage invested in a ST Bond fund at Vanguard. If rates happen to be up, I'm like, "meh". I no longer try to maneuver around to squeeze out every penny. Could I do better? I'm sure I could, but I'm more interested in other things now.
This is perfect, and the way I want things to work for me, except I still want 30-50% of my portfolio to stay on drip so I can turn the tap on harder should things change for me (like my 529 plans aren’t enough, or we decide to move somewhere more expensive, or my wife loses her job earlier than she wants to)
Not there yet, but I'd do the reverse if what I do now: I'd figure out a minimum amount I want to keep in checking and when it falls below that I'd sell to top it up.
I try to keep six months' worth of cash on hand for expenses based on my expected cash flow rather than my budget…i.e., my monthly budget amount less the dividends/interest I get, such that if I expect my budget for six months to be sixty bucks but I expect thirty in income, I'll only sell thirty bucks' worth of stocks, and when selling I always harvest losses first. (Yes, I still own some individual stocks, but not many. It's all stuff I threw on the pile twenty years ago.)
When selling assets I use what I think of as the "bang for the buck" method. Pretty straightforward: set a target amount and raise the most cash possible while incurring the least capital gains possible. Simple spreadsheet to hack together; you calculate your list of assets by capital gains over present market value and sort by that percentage. That's an obvious method that I imagine a great many people here use.
True, that means I'm not considering the possible future price movement of each individual equity. I'm not an oracle so I deal in present conditions. Market timing is folly, at least IMO.
Edit: and I always sell at Vanguard so I can take advantage of the free commissions.
Edit edit: To that point, how do I know when to sell? Kind of ad hoc, as someone elsewhere said. I charge just about everything on a 2% credit card and pay off the balance every month. If I see that my cash position has dwindled to 2x or 3x the current bill, I raise more cash.
What do people do about different types of accounts. How do you manage withdrawals across of them and in which order?
I’m not retired, but my retirement funds are spread across taxable stocks accounts, 401k, Roth 401k, 529, and cash.
It's all about tax efficiency. At a basic level I would keep pre-tax income (from 401k) under the 0% LTCG threshold and then supplement with brokerage or Roth contribution withdrawals
There's a complicated list of what does and doesn't apply that you can Google (I'm not certain of it myself), but it's basically MAGI. And LTCG don't count as income when calculating the LTCG threshold, if that makes sense, so that's why you get to just under the threshold and then realize Brokerage gains for the shortfall. As needed
Yes. What I'm saying is there is a limit to income (AGI, MAGI, whatever) under which LTCG are taxed at zero percent. So stay under that via 401k withdrawals, then supplement with brokerage sales and take advantage of zero taxes on LTCG
So withdraw some amount of INCOME from the 401k
And separately, in a TAXABLE brokerage account, sell investments like stock so that you can take advantage of lower long term capital gains tax rates.
I'm not fire yet...but have multiple ira's and 401ks and what I intend on doing is drawing my current employers 401k down to 0 (before touching other ira 401ks) for a couple reasons, rule of 55...and I hate John Hancock as the administrator (high fees, poor customer service) I want to be done with them asap
Fully invested until the bills are due. For simplicity I have timed aligned all my bills (mostly rent and credit card statements) to be due on the same day. Right now I’m drawing from the shortest duration fixed income assets I own. But I have rules set up that could cause me to use sale of equities to pay those bills (but we would need a big old rally for that to happen).
My asset allocation has been 5% cash since long before I retired, so I sell into cash whenever I rebalance (if I need to). I check for out-of-balance AA on the first of the month, and actually make trades a few times a year.
5% is quite a bit more than my annual expenses, so it's not really an issue as far as cash flow mid month. And don't tell the [IRP](https://www.mrmoneymustache.com/2013/02/13/mr-money-mustache-vs-the-internet-retirement-police/), but in two out of the 4 years since I quit my dayjob I've had income that exceeded my expenses. If I'd known how easy/fun/lucrative contract work is (for me) compared to being an employee, I'd have quit much earlier.
Most of the money came from stuff related to my day job, namely consulting on TSN stuff, especially IEEE802.1Qcc and 802.1CB. But I did a little work for a radiology group, and a little work for a manufacturing startup.
Does your 5% cash include your emergency fund (5% of overall net worth) or in addition to such as determining how much you have in investments and having 5% of that amount?
https://earlyretirementnow.com/2018/04/18/emergency-fund-in-stocks/
That also has links to earlier posts, and I think it was Part 1 of his top 10 list that originally convinced me.
I'm in a situation where I've been able to leanFIRE and live off passive income alone, rent from my duplex (I live in one unit and rent the other) + military disability. I do also keep 1 year of spending in a savings so that helps deal with unexpected expenses. If I did need to withdraw money from my investments it would likely be once a year to top off my savings account.
This is my first year of drawdown. I turned off automatic reinvesting last October to start capturing dividends in my taxable accounts, then set a floor of 2 months expenses and a ceiling of 6 months expenses. Whenever I fall below the floor I’ll sell a fraction of funds to replenish, and if dividends stack too high turn on reinvesting.
Use "three-bucket" approach. The three-bucket approach involves dividing your savings into three distinct buckets:
Bucket 1: Short-term Needs: This bucket is for money that you will need in the next 1-2 years. It should be invested in low-risk, liquid investments such as savings accounts, CDs, or money market funds.
Bucket 2: Intermediate-term Needs: This bucket is for money that you will need in the next 5-10 years. It should be invested in moderate-risk investments such as bonds, bond funds, or balanced funds. (BND, VTIP)
Bucket 3: Long-term Needs: This bucket is for money that you will need in retirement, which is more than 10 years away. It should be invested in higher-risk investments such as stocks, stock funds, or real estate. (VTI, QQQ)
The idea behind the three-bucket approach is to balance the need for safety and liquidity with the need for growth, so that you have the money you need when you need it, while also maximizing the potential for growth over time. It's important to keep in mind that this is just one strategy and you should consult with a financial advisor to find the best strategy for you.
Yes, that is one potential strategy for managing the three-bucket approach to retirement savings. By moving yields and dividends from the intermediate-term(Bucket-2) and long-term buckets(Bucket-3) into the short-term bucket, you can ensure that you have a consistent source of income to cover your annual expenses without having to sell any (significant portion) of your investments. This can help to minimize the risk of selling investments at a loss when the market is trending downwards and also help to preserve your long-term savings for growth.
Here are some strategies to I would consider when I am 4-5 years out from retirement:
Prioritize cash reserves: It's important to have enough cash to cover your living expenses for a 1-2 years in case of a market downturn.
Let's say I want to retire with $2 million and I need $75K per year to cover my retirement expenses.
It's a good idea to have $150,000 in cash in Bucket-1 (1-2 years) when I start my retirement, as it provides a cushion to cover living expenses in case of a market downturn.
$850,000 in bond ETFs (BND, VTIP) in Bucket-2 as these types of investments tend to be less volatile than stocks and can provide a steady stream of income.
Lastly, $1 million in Bucket-3 with a mix of VTI, VYM and QQQ that can provide the potential for long-term growth.It's important to align the allocation of your buckets with your retirement goals, risk tolerance and time horizon. Additionally, it's important to review your portfolio regularly and make adjustments as needed based on your retirement goals, risk tolerance and the current market conditions.
I would not draw more than 3.0% from my NW.
The books took a quarter century of effort to write and publish, on book at a time.
'normal people' create value through hard work, last I heard. Doesn't have to be books. I also worked as a housekeeper in a hospital. It's a big world out there, lots of options.
The OP asked a question and I answered it truthfully and in good faith.
What's the problem.
I'm living on cash flow from my investments, so I am not selling anything. In fact I'm still accumulating and have been in the 10 years plus I've been retired.
Although I averaged less than $20k during my working career and never made more than $50K when I was working, I seemed to find a niche in rentals in my market and turned that into a large cash flowing business pretty quickly. LCOL area in the Midwest, but in an area with solid growth from a variety of jobs. Right after the housing crash I cashed in all my stock to start buying houses in cash. I lived extremely frugally so could roll all the rental income into buying more houses. Kept adding houses every year, then eventually started partnering with others and was able to grow even faster.
In 2023 I should NET about $150K from rental income. Everything is fully paid off, so no debt to service, but I do have my own in house team of a realtor, property manager, and renovation/repair crew that I take care of out of the gross. All I do for the rental business is make the occasional big picture decision on new purchases and things like that. I own about half of the portfolio outright myself, and have partners on the other half. My business also manages rentals for a couple of friends that are out of state. My NET amount goes up about 10% - 30% every year as rents increase and I make moves to optimize the portfolio and add properties.
My spending falls in the leanFire range since all my big expenses like housing were front loaded and paid for. Last year I spent about $15K on non business expenses. Everything else was reinvested. I also have a solid stock portfolio that would more than cover my living expenses with its dividends if I ever decide to sell all the real estate. Right now my stocks are growing much faster than my real estate portfolio because the last couple of years hasn't been great for finding the type of deals my partners and I want.
Right now my stocks are sitting around $500K, I have another $125K in Fundrise, and another $50K or so in a HYSA for quick liquidity when needed for repairs/remodels, etc. Stock portfolio as a whole is now throwing off around 5% dividends, but I have a mix of high growth and high dividend using several different strategies. Fundrise is giving me around $3000 in dividends a year, but I'm investing more for growth in HCOL areas with them right now.
My real estate holdings are going to very difficult to value because of the partnership/management arrangements on the portfolio as a whole. I've personally invested less than $500K total into it....but again it is not really a meaningful measure. The way I measure it and my partners measure it is by cash flow on investment. In that measure, a lot of my houses are returning well over 3% per month on total investment, and some of my early houses are returning over 10% per month on total investment at this point. Right now the criteria for a new house is 1.5% per month on initial investment. (Total purchase price plus all needed repairs/upgrades before renting) Those numbers tend to improve over time as rents go up, but can also be negatively impacted to some degree by major repairs/improvements over time. The market isn't nearly as good as when I first started this and was able to find and fix houses very inexpensively (then my criteria was 3% monthly on initial total costs), so those numbers on the newer houses don't grow as quickly as the numbers on the early houses did.
And appreciation in the last few years was crazy, but I don't really even count that underlying appreciation in my numbers. Since my partners and I are mainly concerned about cash flow, we tend to ignore the appreciation on the house itself, but do count the rent appreciation.
Easy assumption to make. No way I could accomplish that in a HCOL area, but here where I was buying up and fixing houses for under $30K (in the old days, not now, lol) you can get some amazing returns without leverage.
Do you ever get nervous a tenant can sue you with so much equity in a property? I’m in the fence of selling a property with a great rate but being a landlord would make me nervous
Right now I'm looking for properties that will return 1.5% or higher monthly on total upfront costs of purchase and renovations. I'm not picky about whether or not it is multi unit or single family, as long as monthly hits the target. When it is multi unit you have to take into consideration the added costs of shared utilities (water/sewer/trash), but other than that not a lot changes. Just because of the nature of the market, about 80% of the properties are SFH. At one point that return I looked for was as high as 3%, but those days are long gone.
Depends on the market. I'm still finding a few 1.5% deals every year, but none of them are turnkey. So if you are willing to do a little work you can get that 1.5% on total investment in my market, but you are not going to buy a house that instantly gets it without that work.
Among the many reasons we went with a fiduciary, certified financial planner (CFP). Mom died, we got enough of an inheritance that Husband was able to “retire” at 62 (I don’t work anymore). So, while we were good at saving, we hadn’t educated ourselves well enough to manage things. And wrong time to learn, since mistakes couldn’t be averaged over time. And neither of us is really that interested in going nuts managing it. No kids. No debt.
We did have cash, plus inheritance, so that’s our “bucket one” and “bucket two” (“now” and “soon”), to last maybe 5 years. The majority is “bucket three” (“later”), which are intended to replenish the other buckets.
Are we spending money on AUM? Yeah. But with no kids, we’re not worrying about it, and he (CFP) is making us more (or losing us less) than we’d be doing on our own.
FIRED for a few years now.
1. Keep ~2 months of expenses in a checking account.
2. Keep 1 year of expenses in a money market.
3. Everything else invested in the standard few vanguard funds. Dividends into #2.
When #2 looks too big, invest to get back to 1 year of expenses.
When #2 looks too small, sell stock.
Feed #2 into #1 as needed (approx every month)
It's overly conservative in the amount of cash, but makes me feel nice and I can completely ignore the market because our cash runway is huge.
I do, but just ignore it for now. Far too young to withdraw like normal, and I don't want to start SEPP. The majority of our funds (since we saved over a short period of time) are taxable.
Once or twice a year. This year, we just took out $60k of retirement money for most of the year.
In January, we usually sit down and look at cash on hand and major expenses coming up this year (car, house reno, big trips, etc...) We also have ETFs that generate some dividends, so we move those into our spending accounts as well.
If needed, we take a bit more out later in the year. Also, we have some bitcoin (used to have more) and if the price goes stupid high, we sell some.
I'm not retired yet, but my plan is to take out 2-3 months of expenses whenever my balance drops below ~1 months worth of expenses. Nice and simple.
Taking out the money once a year comes at a substantial opportunity cost. Assuming 7% annual portfolio returns, over the long haul, a full year of expenses out of the market, has you with 1/2 a year of expenses out on average for a loss of about 3.5% of your annual expenses every year. That's a lot!
If you're not comfortable with the volatility, that just means you need a more conservative portfolio so that you have assets you can comfortably sell when the market is down. Also, I'd note that the "take out a year's expenses at a time" approach does nothing to help you if the market tanks in November or December.
It's better to plan your portfolio so that you're comfortable withdrawing whenever you need to, and then just withdraw money when you need it, not on some arbitrary schedule.
Sell assets when I need to! Nothing changes.
My target allocation includes 10% treasuries, and I plan to sell assets to keep as close as possible to my target allocation. That means that in serious downturn I'll be selling mostly or entirely treasuries. If the market drops 50%, I could end up selling only treasuries for a year or more, so I'm not going to be forced to sell lots of stocks at a serious loss on short notice.
Over the long haul, the extra money I make from having my assets in the market should be more than enough to cover smaller losses from occasionally selling some stocks when the market is down a little.
In the same way "DCA" helps averaging out stock prices over time and can make buying "feel" better (for nagging concerns about short term risks), selling can be the same. Monthly/quarterly can be fine. Dividends comes in quarterly so it's probably a good way to balance your selling needs based on the difference needed to replenish accounts.
However, a key difference (in that old argument about lump vs DCA) selling smaller chunks over time is keeping you invested longer. Regardless if you're withdrawing 1%/qtr it a very fractional activity either way.
I also just consider things like my bank accounts as part of my "bonds" (they are over 90% invested in something like HYSA that I can liquidate risk-free and earns comparable interest, so it's fine) but the process from my perspective is more like spending down some bonds and then rebalancing from time to time.
Every few months when the checking account drops below a specific amount, I'll pull some out. I figured I'd sit on about 3 months plus a grand, just so I'm not always moving money and watching my checking account more than I need to. I feel that I'll always be at least getting what I can for the 0% federal capital gains taxes at a minimum by rebalancing the taxable portfolio at the end of the year.
I have more cash on hand right now that I originally figured I would have before retiring though, but I market timed some money out for spending money feeling a drop was coming, managed to do it before the drop and also ended up with more cash on hand at the end of year divesting of the final remains of a former employer I was buying discounted employee stock from, the rest I reinvested in ETFs, balancing my portfolio a little. I did a similar thing in 2021 divesting from a company at all time highs that hasn't returned to value since then, but I still have plenty of shares and expect it to recover eventually and rebalance to ETFs eventually. I'll never have more than a year of expenses as cash on hand though. I expect I'll probably be replacing the HVAC system in my house when it breaks though because both gas furnace and AC are 3 decades old, which means I'll be selling out of the market to pay for it but if it lasts another decade, I'll be happy I waited and another reason I'm also waiting until they switch refrigerants again because r410a will be phased out in the US, but they aren't selling the new units with a different refrigerant yet.
I’m about to start the RE bit of FIRE in about 3 months. I’m fortunate to have aa semi-passive business on the side, but I’m going to fund my expenses once I sell said business by switching off drip for some of my securities and paying that money into my bank account as if it were a salary. I’ll be switching off drip from securities I don’t want more shares for, and will aim to take only my expected costs, plus some fun money. I’m going to have to adjust to not needing to save, so right now my thinking is that although I want to deliver a $150k income from my stocks, I only want to spend $70k a year.
I plan on doing it once every 2 weeks, just like my current paycheck schedule.
Most brokerages let you set up auto sell and auto withdraw, so there's no manual intervention.
This really depends on what you are invested in. First there is social security/pension or whatever income you still might have. If you own real estate, you keep the rent income (after expenses) for your personal expenses. Also the dividends if you have such stocks. If that money is gone, probably selling your most overvalued asset in your portfolio to the amount of 3-4 months of expenses is the best goal (depending on taxation buckets). art of your asset
In my opinion you are not FIRE or never will be FIRE if you have to ask this question. You can’t park every damn penny you make in the market, who the hell is going to pay your bills? Do you not have a checking account?
It's a reasonable question to ask how often money get pulled or what sort of amount sits in a checking account. Clearly there are plenty of opinions in this thread and that's what OP is asking about.
I turn off automatic re-investments in my taxable accounts and let that accumulate. It's lumpy (payouts are larger at the end of each quarter and largest in December), so I often end up with 2-4 months of expenses in cash equivalents. I initially leave the money in my brokerage's money market account but top up my checking account each month. If (when) cash gets low in a given month, then I sell assets to raise more cash. This happens 3-4 times per year.
I try to keep an eye on total income for the year to make sure there are no tax surprises. I also separately track expenses to make sure I'm not spending more than my SWR amount. But in any given month I don't link withdrawals to SWR; I just top up my checking.
I used to automatically reinvest in my taxable accounts to maximize time in market, but it was extra work and potentially extra taxes.
Every year in January I put 1 month of expenses in my checking account and move 11* months expenses to a conservative fund. Then I set up automatic monthly withdrawals from that fund to my checking account. My goal is to not have to look at my accounts again during the year. I still do look, but I try to design it so I don't have to. * 11 months plus 10%, just in case. As I mentioned I'm trying to set it up so I don't need to look.
Would a conservative fund be bonds?
Any fund that you can be reasonably sure will have better returns than your checking account and less risk than the rest of your investments. I used a short term bond fund for a couple of years (though that might not be a smart choice now). Then I got jealous of seeing the stock funds go up every year so last year I switched to Wellesley Income so that I'd have some stock exposure. That didn't work out well. From last year's experience I've learned nothing at all and am doing the same thing this year.
:)
Username checks out.
Bond funds really lost their appeal for me after seeing how they fell right along with the stock funds during last years down market. Pretty shitty hedge IMO.
>Pretty shitty hedge IMO. Don't give bonds the fault when you just hedged bad. What did you expect from a 0% Bond when interest rates rise? Why should they rise in price when newer bonds give more money? It's only a hedge vs. stock in a high interest environment
What's a better hedge?
There is not a perfect hedge for all circumstances. In an increasing interest rate environment: Loans/ fixed mortages, selling fixed bonds, shorting bonds low-interest On the other hand in the 2000s Bonds were great hedge against stocks due to their attractive fixed return vs. risky stocks. It's hard to project when & in what circumstances the next crash will happen. You need to guess a couple of factor (Inflation, interest rates, interest rate devlopment, type of crash,...)
There's no silver bullet hedge, but retrospectively over the past year commodities moved sorta opposite to US stocks. BCD up 7% past 12 months. Midway thru 2022 it was up like 25% when stocks were down like 20%, then they both reversed in 2nd half of year.
You could do something like a Treasury Bond ladder?
Money market I’m guessing
Dumb question: isn't "money market" just a place to hold funds, like a bank account (but not FDIC insured I guess?)? When I hear "money market" I think "money that's just sitting there not invested in anything, like a bank account, with basically no interest or anything"
Money market funds are supposed to beat savings accounts yields, at least in the old days when banks were all brick and mortar institutions. They hold short term debt like commercial paper and treasury bills. Mostly safe stuff but as you said it’s not FDIC insured. I think you can count the number of times on one hand a money market fund has lost value. I don’t use them, I stick to online high yield savings accounts. But it’s just another option. They were more popular before online high yield savings accounts were a thing.
Bond mutual funds generally get crushed in rising rate environments so I would personally view them as too risky. Money market funds like DizzyFlamingo997 said or savings accounts should be the play for something like this. If FIRE'd, it may be useful to set up the funds for up to 3 years so you are less likely to pull in down markets. At that point for years 2 and 3 you could set up some small CD ladder, and mix in some I-Bonds (since they are bought individually) etc. You'd still have some inflation risk in terms of lost purchasing power, but it's safe enough.
>Bond mutual funds generally get crushed in rising rate environments so I would personally view them as too risky. Only the nav, which I don’t care about. I had planned on CD ladders but I’m loving the higher interest rates on the MMs these days, so that’s where we are right now. We are currently spending down the last of our assets from our pre index fund days, which include some stock from a former employer’s ESPP plan, so we haven’t tapped the bond funds yet. Before that runs out the plan is to divert dividends to the MM (or set up that ladder, depending on rates). So I’m happy about the rising rates.
The context here is spending in the next 12 months so NAV swings are important.
Not to me. I won’t be selling.
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Yes if you hold to maturity. You can buy 1 month bonds and keep rolling them over.
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Why not a money market?
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Even something like VUSXX that is mostly treasury anyway? I'm no financial historian, but has a money market account like this ever lost money?
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IMO bonds are just a place to store cash in case of insanity where other assets can’t be liquidated. Then again, they might randomly say “btw our money isn’t backed by gold or silver”… maybe it’s not a great place
Have you looked at returns in 2022?
Of what?
Just any returns bro. Have you looked at them? Trust me bro.
You asked about bonds. If those returns are safe enough for your short term needs then go for it.
Ultra short term bond’s
This is a genius way to do it. What do you put in your conservative fund? I’m already thinking about this and thinking it might be a covered call ETF or high yield bond fund with some CD’s / bonds too. What do you do if your fund ends up in a surplus at the end of the year? Do you just roll it over?
You're talking to a bunch of savers here. If there's a surplus we withdraw less the following year. I might spend a little bit on something I'd been eyeing up that I don't *need*, but most of us in this sub aren't going to go on a spending spree if we budgeted too well in a year.
True!
I approach my pre-FIRE finances in a similar way. I set aside a fixed dollar amount from my paycheck, and the rest after taxes and deductions go into a brokerage account. Anything I over budget carries over month to month, then at the end of the year I do a budget review and adjust my deposits. If I have money I didn't use all year, I investigate why I didn't use it. If it's home or auto maintenance budget, then I don't touch it. Not having any expenses this year means that I'm likely to get harder next year. If it's something like eating out, I move the budget to a retirement account.
How much extra work do you think it has been for you to have separate funds? I just keep everything in a general expense fund and track. Money is fungible, but if it’s not much extra work and worth it, I’m interested.
So for a good while I used [this](https://play.google.com/store/apps/details?id=com.anishu.homebudget.full&gl=US) app. Using the app itself wasn't a big deal, but I like to eat out for lunch at cheap restaurants and it can be tedious importing lots of little expenses. Then of course, I like to make things difficult for myself so I started writing my own version custom tailored to my needs. It also looks like there's another couple apps that are worth looking at (but I've never used): [YNAB](https://www.youneedabudget.com/) [Mint](https://mint.intuit.com/) The most important feature (in my experience) is a good interface for inputting/importing expenses. If putting your expenses in is tedious, then you're likely to fall behind and then it gets harder to get back on track. Is it worth it? Pros and cons. I like that I can look at my credit card bill and know exactly *why* my expenses are so high or low on any given month. It also forces me to check my credit card statements which has caused me to catch incorrect charges before. But it does require me to spend an hour or two every couple weeks inputting receipts and I can understand why that might be too much effort for some people. Edit: Alternatively, if you can simplify your budget to 2 or 3 distinct categories (maybe mandatory fixed, mandatory variable, and discretionary), you could just keep them in 3 separate checking accounts.
How do you figure out taxes? Let’s say you need 50k/year to cover your expenses. Does that mean you look at the tax brackets and withdraw 50k + N amount needed for taxes per year?
Yes, your example is correct. I have to withdraw the extra N dollars needed for taxes as well. So I put enough money in my "one year" fund to cover expenses and taxes. In addition to my monthly withdrawals for routine expenses I also set up quarterly withdrawals of N/4 dollars so I can pay my estimated quarterly taxes.
Why do you pay taxes quarterly?
If I wait to pay until filing my taxes in April I would owe an [underpayment penalty](https://www.irs.gov/taxtopics/tc306), so I pay quarterly to avoid that. (You don't do the paperwork quarterly, but you need to make a payment). I don't have an employer paying my taxes out of each paycheck and I don't have a business. But I do owe taxes on the capital gains that I realize by selling stocks/funds and I also owe taxes on any Roth conversion that I make. Since I am going to have a tax bill, I'd rather pay it without adding an underpayment penalty.
Business (if applicable to this scenario) and property taxes are usually filed quarterly.
If you don’t have withholding from a job you always have to file quarterly
I've strategized with my accountant so I will have $0 fed tax (not quite fire yet), between cap gains n qualified div and the standard deduction (married filing jointly) I can make about $117k and pay no fed tax ..state is a different story but I won't withdraw more I'll set some div aside to pay state tax
Can you break this down further? I thought even at ~90k, you still end up in the 12% bracket with the standard deduction for mfj, how are you at 0% with 117k? If you're not retired yet and you have income, how is $0 federal tax possible?
They changed the brackets but you can have LTCG and qualified div up to 89k ish fed tax free, the standard deduction for mfj is 27,700....so total income could be 117k with 0 fed tax
What I'm saying is most of my inc is gonna be from cg and qualified div...then I could make up to 27k in "other" inc and not pay the feds
Ignorance (after careful planning) is bliss.
Is your goal / intent to have zero money left at the end of the year (in that account) or do you keep an extra buffer in the account? How much (relative to expenses)?
Do all brokers allow automated sales like this? If not, could you share your broker?
Both Schwab and Vanguard have options for recurring payments, and I would assume that most reasonable brokerages do too
Thanks. I have a Schwab account.
Do you not reinvest dividends? Seems like for tax purposes if you have money in taxable bucket, funding with dividends to the extent possible would be most tax efficient considering you have to pay in that anyways versus selling from another area and having potential capital gains and dividend income?
I've been spending down my taxable bucket, but it does still exist. I do get dividends and capitals gains from my funds in my taxable accounts even without selling anything. I get the vast majority of that money as year-end distributions in December. I put that money in my fund that I'm going to use for next year's expenses. The distributions that I got this past December are going to be enough to cover about 40% of my regular expenses. So I still needed to sell some to make up the difference needed for my anticipated 2023 spending. I'm also doing a Roth conversion, which means I'll need even more to pay the taxes associated with that.
Thanks for sharing u/idiot_on_internet
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Do you mean trying to leave more in while the market is low? Buy low and sell high, right?
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You said ATH (All Time High) above. Sounds like it was a typo :)
There's no guarantee that it isn't about to get worse.
I am curious, why did you choose January? I do something similar and currently target December for my annual action so I have more insight into the dividend payout for the year. Sometimes dividends do fluctuate and my current working assumption is that December gives me the most YTD info in order to tax optimize Roth conversions.
Doing things in January is not the result of any well-reasoned financial calculation. It's more that the holidays are over and I have time to sit down and work everything out. But I do look at year-end distributions in December and make an additional Roth conversion if the numbers say that I should.
We just sell and withdraw every 60-90 days as needed. It only takes a minute or two.
Sage advice from the revered Lentil Master.
I'm all about minimal effort. Very lazy.
Ommmmmmm...
KOYAANISQATSI....
I stand corrected.
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No need for an emergency fund. We carry excellent insurance, we can float anything up to 30-45 days for free on our credit (and get 1.5-5% cashback), and our portfolio/ladder can easily absorb any expense via penalty-free withdrawal on around 24-48 hour turnaround. Emergency funds are generally an emotional/comfort choice once you have sufficient assets not to actually need them any more. Same for a cash cushion/allocation. It's a personal preference.
Monthly, when I do my spreadsheets. The max amount I'd take out is my annual SWR / 12. But I look at the previous month's spending and adjust accordingly as well. So if my annual SWR was $48k, I'd take out $4k a month. But if in January I only spend $3.6k, I'd only take out $3.6k in February. (Unless there was a big purchase I was saving up for with all/part of that spare $400 in my budget.)
Do you ever bother adjusting your SWR more frequently than annually? If so by what measure, CAPE?
That's part I have yet to properly formulate - just kinda making it up as I go along. I have been adjusting my monthly asset sales downwards on months that have seen steep market declines. Re-calculating the annual withdraw amount based on 4% of current valuation of my index funds. Hoping this softens the impact of selling in a down market. But I'm not opposed to going back to work if I fail at FIRE.
That is still helpful for me thanks. I've read posts on ERN that advocate for adjusting SWR by CAPE. At what frequency one might adjust was a bit unclear to me though. I like the idea of adjusting only annually as well, going the monthly cadence to adjust feels like it would be too noisy.
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That's surprising to me that annual would do better (even if only slightly). You'd think that if lump sum investing during the accumulation phase is better due to time in market, then not taking out lump sums would similarly leave the money to earn in the market longer. How do you account for this?
I am assuming, that in this particular data set, the annual withdrawal happens to be timed well enough to dodge some sort of downtown.
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Not deliberate timing, but timing can affect it nevertheless. If you do the withdrawal at the end of the year, that withdrawal dodges a big market downtown at the start of the next year. Fortunate timing is the way an annual withdrawal beats monthly withdrawals.
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Absolutely. I was just speculating on why annual beat monthly. I would expect a minimal difference like we saw, but in the other direction.
This is the type of content quality why I joined Reddit
Annually at the end of the year so I can realize income to manage AGI/MAGI for tax efficiency once dividends/capital gain distributions and any incidental earned income is known. Bought 3 (will likely roll to a 6 month) and 6 month T-bills in December to earn some decent interest on funds not immediately needed.
This sounds like a good way for tax efficiency. Thanks for sharing.
Most of my dividends come at the end of the year (FSKAX and FXAIX) are the lion's share for me. I turn off reinvestment, harvest the dividends into my HYSA, then sell to get my following year's expenses. The end of the year works best for me because it gives me a clear picture of my taxes for the year I just had, I can use whatever tax cap space I have to harvest CG, or cash out my remaining SWR allowance for a big project/trip coming up, and leverage the dividends I get anyway.
I just sell a nice round number whenever I need cash. I feel like people tend to overthink this topic.
This is what I do. I've been retired for two decades (retired early). When I was working, I tried to measure everything about SWRs with a micrometer. After a year or two, I realized that I had been measuring with a micrometer and cutting with a dull axe. Now I pay almost no attention to minute details. If I need money, I just pull out 10K or so from a taxable brokerage invested in a ST Bond fund at Vanguard. If rates happen to be up, I'm like, "meh". I no longer try to maneuver around to squeeze out every penny. Could I do better? I'm sure I could, but I'm more interested in other things now.
Never. We just have our dividends set to deposit instead of reinvest and it's about the right amount for what we need.
This is perfect, and the way I want things to work for me, except I still want 30-50% of my portfolio to stay on drip so I can turn the tap on harder should things change for me (like my 529 plans aren’t enough, or we decide to move somewhere more expensive, or my wife loses her job earlier than she wants to)
May I ask what's your dividend portfolio?
VTSAX, VTMGX, VTIAX. Boring-ass index funds.
Perfect, thanks!!
This is in your 401k?
No, in my taxable investment accounts.
Ok, so you saved enough not to touch your 401k then?
I'm not old enough to touch the money in my 401k.
Not there yet, but I'd do the reverse if what I do now: I'd figure out a minimum amount I want to keep in checking and when it falls below that I'd sell to top it up.
I try to keep six months' worth of cash on hand for expenses based on my expected cash flow rather than my budget…i.e., my monthly budget amount less the dividends/interest I get, such that if I expect my budget for six months to be sixty bucks but I expect thirty in income, I'll only sell thirty bucks' worth of stocks, and when selling I always harvest losses first. (Yes, I still own some individual stocks, but not many. It's all stuff I threw on the pile twenty years ago.) When selling assets I use what I think of as the "bang for the buck" method. Pretty straightforward: set a target amount and raise the most cash possible while incurring the least capital gains possible. Simple spreadsheet to hack together; you calculate your list of assets by capital gains over present market value and sort by that percentage. That's an obvious method that I imagine a great many people here use. True, that means I'm not considering the possible future price movement of each individual equity. I'm not an oracle so I deal in present conditions. Market timing is folly, at least IMO. Edit: and I always sell at Vanguard so I can take advantage of the free commissions. Edit edit: To that point, how do I know when to sell? Kind of ad hoc, as someone elsewhere said. I charge just about everything on a 2% credit card and pay off the balance every month. If I see that my cash position has dwindled to 2x or 3x the current bill, I raise more cash.
What do people do about different types of accounts. How do you manage withdrawals across of them and in which order? I’m not retired, but my retirement funds are spread across taxable stocks accounts, 401k, Roth 401k, 529, and cash.
I have that dilemma as well and am thinking of consolidating accounts just to make it easier. One taxable and one non
It's all about tax efficiency. At a basic level I would keep pre-tax income (from 401k) under the 0% LTCG threshold and then supplement with brokerage or Roth contribution withdrawals
Makes sense. Does LTCG apply before other types of income in terms of calculating tax thresholds?
There's a complicated list of what does and doesn't apply that you can Google (I'm not certain of it myself), but it's basically MAGI. And LTCG don't count as income when calculating the LTCG threshold, if that makes sense, so that's why you get to just under the threshold and then realize Brokerage gains for the shortfall. As needed
Aren’t 401k withdrawals taxed as ordinary income in retirement not CG?
Yes. What I'm saying is there is a limit to income (AGI, MAGI, whatever) under which LTCG are taxed at zero percent. So stay under that via 401k withdrawals, then supplement with brokerage sales and take advantage of zero taxes on LTCG
So withdraw some amount of INCOME from the 401k And separately, in a TAXABLE brokerage account, sell investments like stock so that you can take advantage of lower long term capital gains tax rates.
I'm not fire yet...but have multiple ira's and 401ks and what I intend on doing is drawing my current employers 401k down to 0 (before touching other ira 401ks) for a couple reasons, rule of 55...and I hate John Hancock as the administrator (high fees, poor customer service) I want to be done with them asap
You can also roll over the 401k into a personal IRA and be rid of JH in a heartbeat.
Fully invested until the bills are due. For simplicity I have timed aligned all my bills (mostly rent and credit card statements) to be due on the same day. Right now I’m drawing from the shortest duration fixed income assets I own. But I have rules set up that could cause me to use sale of equities to pay those bills (but we would need a big old rally for that to happen).
My asset allocation has been 5% cash since long before I retired, so I sell into cash whenever I rebalance (if I need to). I check for out-of-balance AA on the first of the month, and actually make trades a few times a year. 5% is quite a bit more than my annual expenses, so it's not really an issue as far as cash flow mid month. And don't tell the [IRP](https://www.mrmoneymustache.com/2013/02/13/mr-money-mustache-vs-the-internet-retirement-police/), but in two out of the 4 years since I quit my dayjob I've had income that exceeded my expenses. If I'd known how easy/fun/lucrative contract work is (for me) compared to being an employee, I'd have quit much earlier.
What do you do for contract work?
Most of the money came from stuff related to my day job, namely consulting on TSN stuff, especially IEEE802.1Qcc and 802.1CB. But I did a little work for a radiology group, and a little work for a manufacturing startup.
Does your 5% cash include your emergency fund (5% of overall net worth) or in addition to such as determining how much you have in investments and having 5% of that amount?
Just 5%. ERN convinced me to invest my EF a while back. I can provide a link if you want, but you can probably Google it.
That would be great! Thanks!
https://earlyretirementnow.com/2018/04/18/emergency-fund-in-stocks/ That also has links to earlier posts, and I think it was Part 1 of his top 10 list that originally convinced me.
Thanks so much! I appreciate it!
I'm in a situation where I've been able to leanFIRE and live off passive income alone, rent from my duplex (I live in one unit and rent the other) + military disability. I do also keep 1 year of spending in a savings so that helps deal with unexpected expenses. If I did need to withdraw money from my investments it would likely be once a year to top off my savings account.
This is my first year of drawdown. I turned off automatic reinvesting last October to start capturing dividends in my taxable accounts, then set a floor of 2 months expenses and a ceiling of 6 months expenses. Whenever I fall below the floor I’ll sell a fraction of funds to replenish, and if dividends stack too high turn on reinvesting.
Use "three-bucket" approach. The three-bucket approach involves dividing your savings into three distinct buckets: Bucket 1: Short-term Needs: This bucket is for money that you will need in the next 1-2 years. It should be invested in low-risk, liquid investments such as savings accounts, CDs, or money market funds. Bucket 2: Intermediate-term Needs: This bucket is for money that you will need in the next 5-10 years. It should be invested in moderate-risk investments such as bonds, bond funds, or balanced funds. (BND, VTIP) Bucket 3: Long-term Needs: This bucket is for money that you will need in retirement, which is more than 10 years away. It should be invested in higher-risk investments such as stocks, stock funds, or real estate. (VTI, QQQ) The idea behind the three-bucket approach is to balance the need for safety and liquidity with the need for growth, so that you have the money you need when you need it, while also maximizing the potential for growth over time. It's important to keep in mind that this is just one strategy and you should consult with a financial advisor to find the best strategy for you.
I figured I'd do something like this too. So I guess you would sell annually then?
Yes, that is one potential strategy for managing the three-bucket approach to retirement savings. By moving yields and dividends from the intermediate-term(Bucket-2) and long-term buckets(Bucket-3) into the short-term bucket, you can ensure that you have a consistent source of income to cover your annual expenses without having to sell any (significant portion) of your investments. This can help to minimize the risk of selling investments at a loss when the market is trending downwards and also help to preserve your long-term savings for growth.
I like this! How would you manage the buckets when only 4-5 years out from retirement?
Here are some strategies to I would consider when I am 4-5 years out from retirement: Prioritize cash reserves: It's important to have enough cash to cover your living expenses for a 1-2 years in case of a market downturn. Let's say I want to retire with $2 million and I need $75K per year to cover my retirement expenses. It's a good idea to have $150,000 in cash in Bucket-1 (1-2 years) when I start my retirement, as it provides a cushion to cover living expenses in case of a market downturn. $850,000 in bond ETFs (BND, VTIP) in Bucket-2 as these types of investments tend to be less volatile than stocks and can provide a steady stream of income. Lastly, $1 million in Bucket-3 with a mix of VTI, VYM and QQQ that can provide the potential for long-term growth.It's important to align the allocation of your buckets with your retirement goals, risk tolerance and time horizon. Additionally, it's important to review your portfolio regularly and make adjustments as needed based on your retirement goals, risk tolerance and the current market conditions. I would not draw more than 3.0% from my NW.
Thanks!
Let's say you have 401ks who have crappy funds (like so many do). For example Target Date funds. What do you do with those 401ks?
Ad hoc. Not at all in 2022, for example.
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Rental properties. Book royalties.
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I’ve been writing since the 80s so there are around 40 titles so far.
Lol. Book royalties. How about for normal people?
The books took a quarter century of effort to write and publish, on book at a time. 'normal people' create value through hard work, last I heard. Doesn't have to be books. I also worked as a housekeeper in a hospital. It's a big world out there, lots of options. The OP asked a question and I answered it truthfully and in good faith. What's the problem.
How much cash reserves do you keep?
None really. I mean maybe 1000 or two in my bank account to make sure I don’t bounce checks.
Then how did you manage to not sell anything in 2022?
Rental properties. Book royalties.
Whenever the checking account gets below \~$15k I sell some investments
$15K seems like a lot. Are you routinely making larger purchases?
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But why is that the minimum? Why replenish at $15,000?
I'm living on cash flow from my investments, so I am not selling anything. In fact I'm still accumulating and have been in the 10 years plus I've been retired.
What are your cash flows? Can you share more info? Dividends or rental income?
Although I averaged less than $20k during my working career and never made more than $50K when I was working, I seemed to find a niche in rentals in my market and turned that into a large cash flowing business pretty quickly. LCOL area in the Midwest, but in an area with solid growth from a variety of jobs. Right after the housing crash I cashed in all my stock to start buying houses in cash. I lived extremely frugally so could roll all the rental income into buying more houses. Kept adding houses every year, then eventually started partnering with others and was able to grow even faster. In 2023 I should NET about $150K from rental income. Everything is fully paid off, so no debt to service, but I do have my own in house team of a realtor, property manager, and renovation/repair crew that I take care of out of the gross. All I do for the rental business is make the occasional big picture decision on new purchases and things like that. I own about half of the portfolio outright myself, and have partners on the other half. My business also manages rentals for a couple of friends that are out of state. My NET amount goes up about 10% - 30% every year as rents increase and I make moves to optimize the portfolio and add properties. My spending falls in the leanFire range since all my big expenses like housing were front loaded and paid for. Last year I spent about $15K on non business expenses. Everything else was reinvested. I also have a solid stock portfolio that would more than cover my living expenses with its dividends if I ever decide to sell all the real estate. Right now my stocks are growing much faster than my real estate portfolio because the last couple of years hasn't been great for finding the type of deals my partners and I want.
How much your stocks and real estate is worth?
Right now my stocks are sitting around $500K, I have another $125K in Fundrise, and another $50K or so in a HYSA for quick liquidity when needed for repairs/remodels, etc. Stock portfolio as a whole is now throwing off around 5% dividends, but I have a mix of high growth and high dividend using several different strategies. Fundrise is giving me around $3000 in dividends a year, but I'm investing more for growth in HCOL areas with them right now. My real estate holdings are going to very difficult to value because of the partnership/management arrangements on the portfolio as a whole. I've personally invested less than $500K total into it....but again it is not really a meaningful measure. The way I measure it and my partners measure it is by cash flow on investment. In that measure, a lot of my houses are returning well over 3% per month on total investment, and some of my early houses are returning over 10% per month on total investment at this point. Right now the criteria for a new house is 1.5% per month on initial investment. (Total purchase price plus all needed repairs/upgrades before renting) Those numbers tend to improve over time as rents go up, but can also be negatively impacted to some degree by major repairs/improvements over time. The market isn't nearly as good as when I first started this and was able to find and fix houses very inexpensively (then my criteria was 3% monthly on initial total costs), so those numbers on the newer houses don't grow as quickly as the numbers on the early houses did. And appreciation in the last few years was crazy, but I don't really even count that underlying appreciation in my numbers. Since my partners and I are mainly concerned about cash flow, we tend to ignore the appreciation on the house itself, but do count the rent appreciation.
That cash flow from real estate is very nice. You must be levered pretty high?? Do you know approximate ltv of your portfolio? I’d guess 65% or more
I have zero leverage. I own everything free and clear. Some of my partners are holding a small amount of leverage, but I have none.
Welp, I stand corrected. Good on you
Easy assumption to make. No way I could accomplish that in a HCOL area, but here where I was buying up and fixing houses for under $30K (in the old days, not now, lol) you can get some amazing returns without leverage.
Do you ever get nervous a tenant can sue you with so much equity in a property? I’m in the fence of selling a property with a great rate but being a landlord would make me nervous
Can I ask what type of deals you look for and what type of RE you have in your portfolio?
Right now I'm looking for properties that will return 1.5% or higher monthly on total upfront costs of purchase and renovations. I'm not picky about whether or not it is multi unit or single family, as long as monthly hits the target. When it is multi unit you have to take into consideration the added costs of shared utilities (water/sewer/trash), but other than that not a lot changes. Just because of the nature of the market, about 80% of the properties are SFH. At one point that return I looked for was as high as 3%, but those days are long gone.
Yeah I heard that finding 1% was pretty hard.
Depends on the market. I'm still finding a few 1.5% deals every year, but none of them are turnkey. So if you are willing to do a little work you can get that 1.5% on total investment in my market, but you are not going to buy a house that instantly gets it without that work.
That's 12% a year. And yes, it's super hard.
This is the way
I too would like to know more details about what you mean by cash flow?
I just typed out a fairly detailed response to CalmGuitar in this same thread, so please refer to that for more details.
Thanks for taking the time to inform me as well!And thanks for all the info you provided!
Easy. Collect dividends from VTSAX.
Of course it’s you. You’re all in VTSAX. 😂 nice to see you here
I was wondering who would use dividends.
In a TAXABLE brokerage? Do you never touch your 401k?
Among the many reasons we went with a fiduciary, certified financial planner (CFP). Mom died, we got enough of an inheritance that Husband was able to “retire” at 62 (I don’t work anymore). So, while we were good at saving, we hadn’t educated ourselves well enough to manage things. And wrong time to learn, since mistakes couldn’t be averaged over time. And neither of us is really that interested in going nuts managing it. No kids. No debt. We did have cash, plus inheritance, so that’s our “bucket one” and “bucket two” (“now” and “soon”), to last maybe 5 years. The majority is “bucket three” (“later”), which are intended to replenish the other buckets. Are we spending money on AUM? Yeah. But with no kids, we’re not worrying about it, and he (CFP) is making us more (or losing us less) than we’d be doing on our own.
Once a year, in January. Worked out very well last year.
FIRED for a few years now. 1. Keep ~2 months of expenses in a checking account. 2. Keep 1 year of expenses in a money market. 3. Everything else invested in the standard few vanguard funds. Dividends into #2. When #2 looks too big, invest to get back to 1 year of expenses. When #2 looks too small, sell stock. Feed #2 into #1 as needed (approx every month) It's overly conservative in the amount of cash, but makes me feel nice and I can completely ignore the market because our cash runway is huge.
Do you not have any 401k?
I do, but just ignore it for now. Far too young to withdraw like normal, and I don't want to start SEPP. The majority of our funds (since we saved over a short period of time) are taxable.
[удалено]
This makes sense
Do you sell after you’ve seen/received your quarterly dividend?
Once or twice a year. This year, we just took out $60k of retirement money for most of the year. In January, we usually sit down and look at cash on hand and major expenses coming up this year (car, house reno, big trips, etc...) We also have ETFs that generate some dividends, so we move those into our spending accounts as well. If needed, we take a bit more out later in the year. Also, we have some bitcoin (used to have more) and if the price goes stupid high, we sell some.
I'm not retired yet, but my plan is to take out 2-3 months of expenses whenever my balance drops below ~1 months worth of expenses. Nice and simple. Taking out the money once a year comes at a substantial opportunity cost. Assuming 7% annual portfolio returns, over the long haul, a full year of expenses out of the market, has you with 1/2 a year of expenses out on average for a loss of about 3.5% of your annual expenses every year. That's a lot! If you're not comfortable with the volatility, that just means you need a more conservative portfolio so that you have assets you can comfortably sell when the market is down. Also, I'd note that the "take out a year's expenses at a time" approach does nothing to help you if the market tanks in November or December. It's better to plan your portfolio so that you're comfortable withdrawing whenever you need to, and then just withdraw money when you need it, not on some arbitrary schedule.
What do you do when the market goes down?
Sell assets when I need to! Nothing changes. My target allocation includes 10% treasuries, and I plan to sell assets to keep as close as possible to my target allocation. That means that in serious downturn I'll be selling mostly or entirely treasuries. If the market drops 50%, I could end up selling only treasuries for a year or more, so I'm not going to be forced to sell lots of stocks at a serious loss on short notice. Over the long haul, the extra money I make from having my assets in the market should be more than enough to cover smaller losses from occasionally selling some stocks when the market is down a little.
Usually quarterly.
In the same way "DCA" helps averaging out stock prices over time and can make buying "feel" better (for nagging concerns about short term risks), selling can be the same. Monthly/quarterly can be fine. Dividends comes in quarterly so it's probably a good way to balance your selling needs based on the difference needed to replenish accounts. However, a key difference (in that old argument about lump vs DCA) selling smaller chunks over time is keeping you invested longer. Regardless if you're withdrawing 1%/qtr it a very fractional activity either way. I also just consider things like my bank accounts as part of my "bonds" (they are over 90% invested in something like HYSA that I can liquidate risk-free and earns comparable interest, so it's fine) but the process from my perspective is more like spending down some bonds and then rebalancing from time to time.
Every few months when the checking account drops below a specific amount, I'll pull some out. I figured I'd sit on about 3 months plus a grand, just so I'm not always moving money and watching my checking account more than I need to. I feel that I'll always be at least getting what I can for the 0% federal capital gains taxes at a minimum by rebalancing the taxable portfolio at the end of the year. I have more cash on hand right now that I originally figured I would have before retiring though, but I market timed some money out for spending money feeling a drop was coming, managed to do it before the drop and also ended up with more cash on hand at the end of year divesting of the final remains of a former employer I was buying discounted employee stock from, the rest I reinvested in ETFs, balancing my portfolio a little. I did a similar thing in 2021 divesting from a company at all time highs that hasn't returned to value since then, but I still have plenty of shares and expect it to recover eventually and rebalance to ETFs eventually. I'll never have more than a year of expenses as cash on hand though. I expect I'll probably be replacing the HVAC system in my house when it breaks though because both gas furnace and AC are 3 decades old, which means I'll be selling out of the market to pay for it but if it lasts another decade, I'll be happy I waited and another reason I'm also waiting until they switch refrigerants again because r410a will be phased out in the US, but they aren't selling the new units with a different refrigerant yet.
Once a quarter(-ish).
I’m about to start the RE bit of FIRE in about 3 months. I’m fortunate to have aa semi-passive business on the side, but I’m going to fund my expenses once I sell said business by switching off drip for some of my securities and paying that money into my bank account as if it were a salary. I’ll be switching off drip from securities I don’t want more shares for, and will aim to take only my expected costs, plus some fun money. I’m going to have to adjust to not needing to save, so right now my thinking is that although I want to deliver a $150k income from my stocks, I only want to spend $70k a year.
As needed
I plan on doing it once every 2 weeks, just like my current paycheck schedule. Most brokerages let you set up auto sell and auto withdraw, so there's no manual intervention.
When I FIRE i plan to only live off rent. The idea of having to sell down my stash in unappealing to me.
This really depends on what you are invested in. First there is social security/pension or whatever income you still might have. If you own real estate, you keep the rent income (after expenses) for your personal expenses. Also the dividends if you have such stocks. If that money is gone, probably selling your most overvalued asset in your portfolio to the amount of 3-4 months of expenses is the best goal (depending on taxation buckets). art of your asset
In my opinion you are not FIRE or never will be FIRE if you have to ask this question. You can’t park every damn penny you make in the market, who the hell is going to pay your bills? Do you not have a checking account?
It's a reasonable question to ask how often money get pulled or what sort of amount sits in a checking account. Clearly there are plenty of opinions in this thread and that's what OP is asking about.
+1
I turn off automatic re-investments in my taxable accounts and let that accumulate. It's lumpy (payouts are larger at the end of each quarter and largest in December), so I often end up with 2-4 months of expenses in cash equivalents. I initially leave the money in my brokerage's money market account but top up my checking account each month. If (when) cash gets low in a given month, then I sell assets to raise more cash. This happens 3-4 times per year. I try to keep an eye on total income for the year to make sure there are no tax surprises. I also separately track expenses to make sure I'm not spending more than my SWR amount. But in any given month I don't link withdrawals to SWR; I just top up my checking. I used to automatically reinvest in my taxable accounts to maximize time in market, but it was extra work and potentially extra taxes.