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Drawdown phase of a PP in retirement

Posted: Mon Apr 05, 2021 2:37 pm
by ppnewbie
Does anyone have thoughts about how to start drawing down from a PP, GB, or even any specific portfolio in retirement?

Re: Drawdown phase of a PP in retirement

Posted: Mon Apr 05, 2021 3:03 pm
by vincent_c
I would suggest liability matching.

So any money needed within 1 month is in cash.
Less than 1 year in SHV or other T-Bill equivalents.
You could have some other guaranteed fixed income laddered between 1-5 years.

For me personally, I would probably be comfortable in investing anything I didn't need in 5 years in the standard PP and you're basically hoping to be able to replenish each bucket before money runs out in that bucket.

You'll probably at some point realize that a unleveraged PP is too conservative for money that is only needed 15+ years out. You can consider either moving that money into 100% equities or you can leverage the PP.

Re: Drawdown phase of a PP in retirement

Posted: Mon Apr 05, 2021 3:03 pm
by Don
Take from cash first to avoid tax implications. Then rebalance when cash reaches the bottom of the band.

Re: Drawdown phase of a PP in retirement

Posted: Mon Apr 05, 2021 3:30 pm
by ppnewbie
Ahhh - so basically use the cash as the bank (whatever form) and then apply the usual rebalance rules. That makes sense.

Re: Drawdown phase of a PP in retirement

Posted: Mon Apr 05, 2021 3:37 pm
by snedgar
I have not actually done it in practice yet, but that is my plan, as well. Just using the cash until hitting a band and then rebalancing. It should work just as in the accumulations phase, as in nice and smooth.

I think I even read this in one of the HB books, maybe "Failsafe Investing," but I can't find it now.

Of course, in the real world this will also require paying attention to the mix of pre-and-post tax accounts.

If anyone has actual experience from using this method of draw-down, I would be very interested to learn from your experience.

Re: Drawdown phase of a PP in retirement

Posted: Mon Apr 05, 2021 4:29 pm
by buddtholomew
I’m about to begin withdrawals from my version of the PP - 35/15/0/50 starting in 2022. I plan to drawdown the cash to 25% and then rebalance (while considering tax consequences). I’ve built the added cash buffer at recent highs so might as well deplete that first without incurring a taxable event. Probably not optimal so looking for suggestions as well.

Re: Drawdown phase of a PP in retirement

Posted: Mon Apr 05, 2021 4:51 pm
by mathjak107
I am using the pp in retirement..

I do not count the portfolio cash as cash for living on ..it is an active part of the portfolio which balances out the long term bonds and acts as options to buy asserts on sale but with no expiration date .

So initially we use a years out side cash thrown in the checking account ....with an emergency fund as well ...

We start to fill next years money with interest and dividends ...

Next year we will rebalance the portfolio and create more cash

Re: Drawdown phase of a PP in retirement

Posted: Mon Apr 05, 2021 7:36 pm
by pugchief
buddtholomew wrote:
Mon Apr 05, 2021 4:29 pm
35/15/0/50
Are we supposed to just guess which asset each of those is or would you care to elaborate?

Re: Drawdown phase of a PP in retirement

Posted: Mon Apr 05, 2021 7:38 pm
by buddtholomew
pugchief wrote:
Mon Apr 05, 2021 7:36 pm
buddtholomew wrote:
Mon Apr 05, 2021 4:29 pm
35/15/0/50
Are we supposed to just guess which asset each of those is or would you care to elaborate?
Usual, stocks/gold/LTTs/cash

Re: Drawdown phase of a PP in retirement

Posted: Mon Apr 05, 2021 7:38 pm
by ppnewbie
mathjak107 wrote:
Mon Apr 05, 2021 4:51 pm
I am using the pp in retirement..

I do not count the portfolio cash as cash for living on ..it is an active part of the portfolio which balances out the long term bonds and acts as options to buy asserts on sale but with no expiration date .

So initially we use a years out side cash thrown in the checking account ....with an emergency fund as well ...

We start to fill next years money with interest and dividends ...

Next year we will rebalance the portfolio and create more cash. <---- QUESTION HERE
When you rebalance - Do you rebalance extra into cash and then move it into the checking to top off the gap that dividends did not cover?

Re: Drawdown phase of a PP in retirement

Posted: Mon Apr 05, 2021 7:55 pm
by pugchief
buddtholomew wrote:
Mon Apr 05, 2021 7:38 pm
pugchief wrote:
Mon Apr 05, 2021 7:36 pm
buddtholomew wrote:
Mon Apr 05, 2021 4:29 pm
35/15/0/50
Are we supposed to just guess which asset each of those is or would you care to elaborate?
Usual, stocks/gold/LTTs/cash
Thanks for the clarification. I did not realize there was a standard order to the assets.
And if there were, I would have guessed Stocks / LTT /Gold / Cash.
Damn, that's a lot of cash %-wise. Any particular reason?

Re: Drawdown phase of a PP in retirement

Posted: Mon Apr 05, 2021 10:31 pm
by snedgar
Thanks, Mathjack.

That sounds like a more elegant approach, and I really like the concept of separating your living expenses from such close linkage to the PP.

Have you been doing approach for long?

Any significant issues to watch out for?

Thanks,

Re: Drawdown phase of a PP in retirement

Posted: Tue Apr 06, 2021 2:03 am
by mathjak107
I have been doing things this way going on six years but not just with the pp ....the mechanics are the same no matter what I use.

At to,es my other portfolio held a money market or ultra short bond fund and it was always separate from the living expenses..especially because on a moments notice that can be reinvested in something else .

Once a year cash is put in the checking account and done ..

Re: Drawdown phase of a PP in retirement

Posted: Tue Apr 06, 2021 3:27 am
by pors
ppnewbie wrote:
Mon Apr 05, 2021 7:38 pm
mathjak107 wrote:
Mon Apr 05, 2021 4:51 pm
I am using the pp in retirement..

I do not count the portfolio cash as cash for living on ..it is an active part of the portfolio which balances out the long term bonds and acts as options to buy asserts on sale but with no expiration date .

So initially we use a years out side cash thrown in the checking account ....with an emergency fund as well ...

We start to fill next years money with interest and dividends ...

Next year we will rebalance the portfolio and create more cash. <---- QUESTION HERE
When you rebalance - Do you rebalance extra into cash and then move it into the checking to top off the gap that dividends did not cover?
I'm curious about this as well. But I guess that in mathjak107's case the dividends are sufficient ;D

Re: Drawdown phase of a PP in retirement

Posted: Tue Apr 06, 2021 3:43 am
by mathjak107
I add all interest and dividends to next years money that way this years money is buffered and I know what I have . Any shortfall will be from rebalancing ...

Because we sold off all our real estate and closed our llc i had extra cash so there were few times I had to sell to raise cash .

But the mechanics are always to let dividends refill along with interest any of next years money then refill the shortfall from asset sales.

It helps too keeping taxable income down if you plan to go in to retirement with the first two years in cash in case you need aca subsidies.....

Re: Drawdown phase of a PP in retirement

Posted: Tue Apr 06, 2021 7:41 am
by barrett
mathjak107 wrote:
Tue Apr 06, 2021 3:43 am
I add all interest and dividends to next years money that way this years money is buffered and I know what I have . Any shortfall will be from rebalancing ...
Just to be clear, MJ, you have turned off auto-reinvest on your three non-gold assets, correct? This is similar to what Tyler has outlined on here several times for his living-off-the-PP strategy, I believe.

Re: Drawdown phase of a PP in retirement

Posted: Tue Apr 06, 2021 10:28 am
by pp4me
Don wrote:
Mon Apr 05, 2021 3:03 pm
Take from cash first to avoid tax implications. Then rebalance when cash reaches the bottom of the band.
If your income is low enough you can sell stock without any taxes.

I managed to do that in my first year of retirement while I was delaying SS to age 70. Sold enough VTI that year to pay cash for a new car for my wife to drive to work. One advantage this had over using cash was that all that money in VTI grew back and then some.

Now that I'm collecting SS and my wife is still working that door is now closed for a while until she decides to retire.

Re: Drawdown phase of a PP in retirement

Posted: Tue Apr 06, 2021 10:33 am
by buddtholomew
pugchief wrote:
Mon Apr 05, 2021 7:55 pm
buddtholomew wrote:
Mon Apr 05, 2021 7:38 pm
pugchief wrote:
Mon Apr 05, 2021 7:36 pm
buddtholomew wrote:
Mon Apr 05, 2021 4:29 pm
35/15/0/50
Are we supposed to just guess which asset each of those is or would you care to elaborate?
Usual, stocks/gold/LTTs/cash
Thanks for the clarification. I did not realize there was a standard order to the assets.
And if there were, I would have guessed Stocks / LTT /Gold / Cash.
Damn, that's a lot of cash %-wise. Any particular reason?
25/50 would have been in LTT’s but I am not holding bonds in taxable at this time. The 25% previously in bonds is now in cash comprising 50% of the portfolio.

It is a ton of cash but I plan to start withdrawing from these funds next year.

I harvested gains from stocks, gold and LTT’s last year for cash. This portfolio needs to bridge the gap between 47 and 59-1/2. The retirement account is 65% stocks, 35% bonds.

Re: Drawdown phase of a PP in retirement

Posted: Tue Apr 06, 2021 1:27 pm
by buddtholomew
pp4me wrote:
Tue Apr 06, 2021 10:28 am
Don wrote:
Mon Apr 05, 2021 3:03 pm
Take from cash first to avoid tax implications. Then rebalance when cash reaches the bottom of the band.
If your income is low enough you can sell stock without any taxes.

I managed to do that in my first year of retirement while I was delaying SS to age 70. Sold enough VTI that year to pay cash for a new car for my wife to drive to work. One advantage this had over using cash was that all that money in VTI grew back and then some.

Now that I'm collecting SS and my wife is still working that door is now closed for a while until she decides to retire.
I expect to get to the point when cash is low and I need to sell stocks and/or gold to replenish.
Right now I’m 50/50 (stocks and gold) and cash.
It may be too light in stocks and too heavy in cash but doesn’t make sense for me to put it back in stocks and gold when I just sold out of them last year.
No taxes due for the foreseeable future is nice as well.

Re: Drawdown phase of a PP in retirement

Posted: Tue Apr 06, 2021 1:57 pm
by mathjak107
barrett wrote:
Tue Apr 06, 2021 7:41 am
mathjak107 wrote:
Tue Apr 06, 2021 3:43 am
I add all interest and dividends to next years money that way this years money is buffered and I know what I have . Any shortfall will be from rebalancing ...
Just to be clear, MJ, you have turned off auto-reinvest on your three non-gold assets, correct? This is similar to what Tyler has outlined on here several times for his living-off-the-PP strategy, I believe.
I only turned it off in the taxable account ...we are years away from rmds and the taxable account has about half our assets.so we have no reason to do any selling in the tax deferred account other than within for rebalancing

Re: Drawdown phase of a PP in retirement

Posted: Tue Apr 06, 2021 5:05 pm
by Tyler
Here's how I generally do it:

1. Turn off automatic reinvestment of funds and let the dividends and interest collect in your brokerage cash account.
2. During your annual rebalance, plan on taking out 1 year of expenses. If the cash that has already collected doesn't cover it, set aside some of your investment proceeds to make up the rest.
3. Transfer your expenses for the next year into a checking account to take care of all the bills. Fully automate the bill-pay so you never have to think about it other than to check periodically to make sure you're covered.
4. Go back to normal life and enjoy the year.

BTW, #1 is IMHO the most tax-efficient way to handle it for two reasons. 1) You're already paying income taxes on that dividend/interest income, so you might as well use it for expenses now rather than have to sell it again later and create another taxable event. And 2) reinvested dividends (even in a tax-deferred account) can trigger a wash sale if you're tax-loss harvesting. So it's always safer to do it manually.

If you prefer rebalancing bands, I'd still plan on transferring a year of expenses (or whatever pace you choose) out at a time. Just start with the brokerage cash and top it off by selling short term treasuries until a rebalance is required. You might also keep an eye on tax-loss-harvesting opportunities along the way.

Also, I try to be smart about it and adjust as needed rather than treating it like a script that must be exactly followed. When push comes to shove, it's generally best to default to the simplest and most tax-efficient solution. Just make the best choice with the options provided while minimizing the amount of retirement time you waste on cash management rather than living.

Re: Drawdown phase of a PP in retirement

Posted: Fri Apr 09, 2021 2:02 pm
by t-bear52
This very helpful. TY!

Re: Drawdown phase of a PP in retirement

Posted: Sat Apr 10, 2021 7:29 am
by t-bear52
In this current environment, What percentage withdrawal do feel is safe to maintain principle going forward in the classic HBPP?

Re: Drawdown phase of a PP in retirement

Posted: Sat Apr 10, 2021 7:44 am
by mathjak107
4% initially is fine...

To maintain a 4% inflation adjusted draw you need at least a 2% real return over the first 15 years but that says nothing about your balance left ..

A typical 60/40 has left you with more than you started with 90% of the 129 30 year cycles to date with the failures being 1907 ,1929, 1937 , 1965 and 1966 .

I would never guess for the pp as it is not as conventional and also fails to develop as a high a balance more often than not....

So I would start with 4% and see how it goes ....if you find five years in you are below a 2-3% real return a red flag should pop up ..by 10 years a pay cut is in order...


With conventional portfolios raises being taken are far more common then cuts ..in fact odds odf 4% failing is identical to the same odds of ending with 6x what you started with

Kitces rule of thumb is start with 4% and when the balance hits 50% more than you started with take another 10% plus inflation adjusting ...repeat every three years if the balance is still 50% above

Re: Drawdown phase of a PP in retirement

Posted: Sat Apr 10, 2021 7:54 am
by mathjak107
I use a system of withdrawal called 95/5 from bob clyatts book work less live more .

Firecalc actually has a tab for selecting 95/5 ..

It is very simple .

Each dec 31st I take 4% of the BALANCE ...I set it a side in the checking account and done .

If it is a down year you take the higher of 4% of the balance or 5% less than the previous year .

The system includes all inflation adjusting and all raises automatically just by the way it works ..in down years it keeps you from getting to big of a cut and rewards you in up years