Home     Forum     401k     401k Rollovers
    Register   Login   Members   Search   FAQs     Recent Posts    




Retirement withdrawal rate

Reply to topic
Money Talk > Retirement Planning

Author Thread
den75
New Member


Cash: $ 0.85

Posts: 4
Joined: 10 Jul 2016

Retirement withdrawal rate  Reply with quote  

Hi all,
From what I understand the typical portfolio mix in retirement should be 50% stocks 35% bonds and 15% cash/money market. Long term return rate with such a mix is in the 8% range if I'm not mistaken. I also have heard of the 4% rule where you should take no more than 4% from your retirement savings yearly. So, if you're Taking 4% and realizing an 8% return, even 6%, wouldn't your savings continue to grow and you'll never touch your original principal? What am I missing here?
Post Sun Jul 10, 2016 7:02 pm
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 719.40

Posts: 3499
Joined: 21 May 2006
Location: arizona
 Reply with quote  

You have it right. You earn 7% or 8%/y, and you take-out 4%/y. And Inflation decreases the purchasing power of your account by about 3%/y. So when you're about age 100, you'll have more cash - but it will buy about the same goods and services as your "now" money.

http://www.in2013dollars.com/1912-dollars-to-2016-dollars
Post Sun Jul 10, 2016 9:38 pm
 View user's profile Send private message
den75
New Member


Cash: $ 0.85

Posts: 4
Joined: 10 Jul 2016

 Reply with quote  

So, if you're Taking out 4% and getting 7-8% you can live to 150 and not run out of money, in fact, you will still have your original principal?
Post Sat Jul 16, 2016 7:56 pm
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 719.40

Posts: 3499
Joined: 21 May 2006
Location: arizona
 Reply with quote  

Yes, the original principal should keep growing at about 3%/yr (ie, double about every 24 years) Rule of 72.
Post Sat Jul 16, 2016 10:35 pm
 View user's profile Send private message
den75
New Member


Cash: $ 0.85

Posts: 4
Joined: 10 Jul 2016

 Reply with quote  

So why is the recommendation 4% annual withdrawal from your retirement funds? If you can realistically expect a 7% return you can take out 7% annually and STILL have your original principal. Granted it will have less buying power, but you still will never run out of money.
Post Sun Jul 17, 2016 6:22 pm
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 719.40

Posts: 3499
Joined: 21 May 2006
Location: arizona
 Reply with quote  

quote:
Granted it will have less buying power, but you still will never run out of money.


You're technically right. But say that you did that for 30 years, ie, started with a $500,000 fund, took out $35,000 each Jan 1 and the fund built back up to $500,000 by Dec 31. So, at Year30, you'd still have $500,000. Unfortunately, 30 yrs of 3% inflation would mean that you now need $85,000 to live for one year. You need to have $1,214,000 in your fund (to get $85,000).

Instead, you would build a $875,000 fund and take out 4%/yr ($35,000). Each year the fund will grow by 3% and you'll take out 4% - $35,000 (Year1), $36,050(Year 2), and so on.

Sorry, kinda hard to follow.
Post Sun Jul 17, 2016 6:58 pm
 View user's profile Send private message
den75
New Member


Cash: $ 0.85

Posts: 4
Joined: 10 Jul 2016

 Reply with quote  

That makes sense. I guess it's the inflation thing I wasn't taking into consideration.
Post Sun Jul 17, 2016 11:41 pm
 View user's profile Send private message
rajat
New Member


Cash: $ 1.40

Posts: 7
Joined: 18 Jul 2016
Location: delhi
 Reply with quote  

Complete percent is good but many times this not avaibale
Post Mon Jul 18, 2016 1:04 am
 View user's profile Send private message
mathjak107
New Member


Cash: $ 1.20

Posts: 6
Joined: 19 Jul 2016
Location: bayside queens ny
Re: Retirement withdrawal rate  Reply with quote  

quote:
Originally posted by den75
Hi all,
From what I understand the typical portfolio mix in retirement should be 50% stocks 35% bonds and 15% cash/money market. Long term return rate with such a mix is in the 8% range if I'm not mistaken. I also have heard of the 4% rule where you should take no more than 4% from your retirement savings yearly. So, if you're Taking 4% and realizing an 8% return, even 6%, wouldn't your savings continue to grow and you'll never touch your original principal? What am I missing here?


average returns mean little when spending down .it is the sequence of those returns when spending down that count . you can have the exact same average return and yet depending on the sequence the gains and losses come in you can have a 15 year difference in how long the money will last
Post Tue Jul 19, 2016 2:23 pm
 View user's profile Send private message
ken-do-nim
Full Member


Cash: $ 15.40

Posts: 76
Joined: 08 Sep 2016
Location: Mansfield, MA
 Reply with quote  

quote:
Originally posted by den75
So why is the recommendation 4% annual withdrawal from your retirement funds? If you can realistically expect a 7% return you can take out 7% annually and STILL have your original principal. Granted it will have less buying power, but you still will never run out of money.


For me it's all about the tax rates. Married/Joint today is

10% 0 to $18,550
15% $18,551 to $75,300
25% $75,300 to $151,900

Notice that big jump from 15 to 25%? If you can only get taxed 15% on your 401k money, you should take that offer every time. The minimum you should therefore pull down is $75,300 minus your other income (social security, part-time job). If you don't need that much to live, reinvest what you don't need. Municipal bond funds help because they don't give you taxable income, so you can continue to maximize the low tax rate.

Also note that if you intend to move your estate into a trust, you can't move the money in your 401k.
Post Thu Sep 22, 2016 2:10 pm
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 719.40

Posts: 3499
Joined: 21 May 2006
Location: arizona
 Reply with quote  

quote:
The minimum you should therefore pull down is $75,300 minus your other income


Yes. But when you start cashing out your 401k, the RMD kicks in (age 70 1/2). So the govt may require that you sell above the $75k point (your SS & DWs SS will be over $40k).
Post Thu Sep 22, 2016 3:26 pm
 View user's profile Send private message
ken-do-nim
Full Member


Cash: $ 15.40

Posts: 76
Joined: 08 Sep 2016
Location: Mansfield, MA
 Reply with quote  

quote:
Originally posted by oldguy
quote:
The minimum you should therefore pull down is $75,300 minus your other income


Yes. But when you start cashing out your 401k, the RMD kicks in (age 70 1/2). So the govt may require that you sell above the $75k point (your SS & DWs SS will be over $40k).


Yeah, my plan is to retire in my early 60s, have one year of converting all my stocks to muni bonds and not paying ANY capital gains tax because I am in the 15% tax bracket (who needs roth ira?), and then the year after that start cashing out my 401k annually and adding the funds to my muni bonds. But yeah, when the RMDs kick in, it may be hard to avoid the higher tax brackets for some of it. Part of the reason why I am lowering my deferral percentage back down to 6%.
Post Thu Sep 22, 2016 6:09 pm
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 719.40

Posts: 3499
Joined: 21 May 2006
Location: arizona
 Reply with quote  

quote:
and then the year after that start cashing out my 401k annually and adding the funds to my muni bonds. But yeah, when the RMDs kick in, it may be hard to avoid the higher tax brackets for some of it. Part of the reason why I am lowering my deferral percentage back down to 6%.


Be careful not to 'cut off your nose to spite your face'. Look at your 'net' after taxes, not your tax bill. Eg, it's better to pay a 15% cap gains tax on a 6% bond profit than to earn 1 or 2% on a tax-free muni.
Same with cutting your deferral percentage - a 15% cap gains tax on a 11% return is better than tax-free returns under 9%.
In my own case (retired) my taxable bonds give me a higher net return than muni's.
Post Thu Sep 22, 2016 7:25 pm
 View user's profile Send private message
ken-do-nim
Full Member


Cash: $ 15.40

Posts: 76
Joined: 08 Sep 2016
Location: Mansfield, MA
 Reply with quote  

quote:
Originally posted by oldguy
quote:
and then the year after that start cashing out my 401k annually and adding the funds to my muni bonds. But yeah, when the RMDs kick in, it may be hard to avoid the higher tax brackets for some of it. Part of the reason why I am lowering my deferral percentage back down to 6%.


Be careful not to 'cut off your nose to spite your face'. Look at your 'net' after taxes, not your tax bill. Eg, it's better to pay a 15% cap gains tax on a 6% bond profit than to earn 1 or 2% on a tax-free muni.
Same with cutting your deferral percentage - a 15% cap gains tax on a 11% return is better than tax-free returns under 9%.
In my own case (retired) my taxable bonds give me a higher net return than muni's.


You are right I should check my math. My prospective tax-free muni funds are XMPT, PYMDX, and HYD, and today they all pay in the 4.5-5.1% range. If I were to maximum my dividend income, I'd go with NLY and its 11.5% dividend. Now let's see how this plays out tax-wise when I draw down from my 401k at the same time, up to the 25% taxable mark.

I.e.: Let's say I have a million dollars in my taxable brokerage account and 2 million in my 401k, and I try to draw down $151,900 from my 401k.

Option 1:
1 million invested in NLY @ 11.5% gives $115,000 taxable income. + $151,900 from my 401k = $266,900 taxable income. Total taxes paid:
10% x 18,550 = 1855
15% x 56,749 = 8512
25% x 76,600 = 19150
28% x 79,549 = 22,273
33% x 35,450 = 11,699
Total: $63,489 in taxes
Net income: $203,411

Option 2:
1 million invested in HYD @ 5.1% gives 0 taxable income, $51,000 non-taxable income. Total taxes paid:
10% x 18,550 = 1855
15% x 56,749 = 8512
25% x 76,600 = 19,150
Total: $29,517 in taxes
Net income: 51,000 + (151,900 - 29,517) = $173,383

Verdict: NLY's dividend is so crazy good, it wins, but I doubt I'd put my eggs all in one basket. On the other hand, since we are talking about dropping my 401k down to 6% so I can increase my taxable account, I'm getting no way near 11% in my 401k. They say if you can do 2% or more better in your taxable account, you should do that instead, so ...
Post Tue Sep 27, 2016 1:28 pm
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 719.40

Posts: 3499
Joined: 21 May 2006
Location: arizona
 Reply with quote  

quote:
They say if you can do 2% or more better in your taxable account,


"they" ??

Usually, you can calculate it . Say that company A sells both taxable & tax-free bonds. They may have to pay 7% to sell the taxables and 5% to sell their taxfree. The factor is 7/5. So for $1000 5% the 'net' is $50. At 7%, the gross is $70, so if your marginal tax is less than $20 (28%) you would choose the taxable bond.
Post Tue Sep 27, 2016 4:20 pm
 View user's profile Send private message

Goto page 1, 2  Next
Reply to topic
Forum Jump:
Jump to:  
  Display posts from previous:      





Money Talk © 2003-2016