Retirement Withdrawal Strategy

[1nd3x1nv3stor]

Based on your username, I would hope that the majority of your investments are in index ETFs rather than individual stocks.

At least most retirees’ stock portfolios should be in broadly diversified funds (unless you are incredibly wealthy and can afford the risk of not being diversified!). And if that is the case, you don’t need to choose which stock should be bought or sold, the index fund automatically does that for you - leaving you to simply sell shares when needed.

Let’s say you start out with an ETF portfolio of $1m and you receive $25k in dividends for the year, you could then sell $15k worth of shares to make it a $40k total withdrawal for the year - that puts you at a 4% withdrawal rate. This is a typical withdrawal strategy.

I wish I could claim that my investment is all or majority is in index. But it is not.
As much as I believe in indexing, I am trying to diversify my portfolio too. That is why I am looking for way to decumulate the investment during the retirement.

Currently, I have 5 different themes (Index, REIT, SG blue chips, growth, and ESPP).
I am looking a systematic way how to decumulate among them.

 

[1nd3x1nv3stor]

I am trying to streamline my portfolio into 100% equity and bond etfs so i just need to sell either when the time comes.

Woukd you share your plan which asset class to sell when the time comes? Are you selling more equities when it has higher than average return during that year and sell more bond otherwise? Or you have a fix percentage for both asset class?

 

[zoneguard]

I am looking a systematic way how to decumulate among them.

You can use the (annual or some other frequency) rebalancing exercise to withdraw for your expenses during decumulation.

 

[celtosaxon]

I wish I could claim that my investment is all or majority is in index. But it is not.
As much as I believe in indexing, I am trying to diversify my portfolio too. That is why I am looking for way to decumulate the investment during the retirement.

Currently, I have 5 different themes (Index, REIT, SG blue chips, growth, and ESPP).
I am looking a systematic way how to decumulate among them.

Decumulation can be done the same way as accumulation - dollar cost average over time. Pick your recurring date and amount and start executing.

Alternatively, you can just do what is called a sideways move - decumulate everything at once and buy the same value of replacement securities ASAP.

I find that the latter is generally better if you’ve made the decision to decumulate anyway. The more important thing is not to hesitate on reinvesting… there is a real risk of being out of the market.

 

[little pupsky]

Decumulation can be done the same way as accumulation - dollar cost average over time. Pick your recurring date and amount and start executing.

Alternatively, you can just do what is called a sideways move - decumulate everything at once and buy the same value of replacement securities ASAP.

I find that the latter is generally better if you’ve made the decision to decumulate anyway. The more important thing is not to hesitate on reinvesting… there is a real risk of being out of the market.

The latter sounds hefty in terms of fees?

 

[little pupsky]

I have managed to pick stocks and beat the index consistently for 12 years. These funds always have some kind of theme thus they only invest in specific theme thus resulting in them underperforming, nothing surprising. As a retail investor, I do not have bounds and you should have a 50% chance of beating the index since its a fair game.

Curious which index have you consistently beaten for the past 12 years. The S&P500 or the total world index, or?

 

[1nd3x1nv3stor]

You can use the (annual or some other frequency) rebalancing exercise to withdraw for your expenses during decumulation.

I am just replying here to get more in-depth discussion on this topic. Thanks for all that already replied with your thoughts.

Here is more details on the topic.

Assume, someone has $1m equity portfolio that he needs to decumulate during the retirement period.

The question of when is quite straight forward. He can do it once a year, for example.

The question of strategy, there are many articles discussing this.
He can use constant dollar with inflation adjusted. For example the popular 4% rule with say 2% inflation. So he can decide to withdraw $40k 1st year and $40.8k 2nd year and so on.
Or he can use constant percentage, always 4% for example. So when market return is good, 4% is more than when market return is not as good.
Btw, I just read a 2012 paper "Optimal Withdrawal Strategy for Retirement-Income Portfolios" BY DAVID BLANCHETT, CFA, MACIEJ KOWARA, PH.D., CFA, AND PENG CHEN, PH.D., CFA. Quite interesting paper while researching for this topic.

The one that I am looking is more details from above.
Say, we decided to withdraw $40k in this year.
But the hypothetical portfolio consist of this:
1. $250k of index investing: $200k in IWDA and $50k in EIMI.
2. $250k of REIT: $25k each in 10 S-REIT stock such Keppel DC Reit, Mappletree Ind Trust, etc
3. $250k of SG Blue Chips: $25k each in 10 SG blue chips such as DBS, OCBC, UOB, etc.
4. $250k of Growth: $25k each in 10 US growth stocks such as Sea Ltd, Facebook, etc
Assume portfolio 2 and 3 above gives 2% dividend which is $10k.
Question for discussion, where should he gets the remaining $30k?
Which 32 counters above that he has to sell?
Should he sell equally? $7.5k from each portfolio?
Selling $750 from each stock and $6k of IWDA and $1.5k of EIMI?

Thanks in advance for all your thoughts!

 

[highsulphur]

Woukd you share your plan which asset class to sell when the time comes? Are you selling more equities when it has higher than average return during that year and sell more bond otherwise? Or you have a fix percentage for both asset class?

Honestly I haven't plan that far. Just focusing on accumulating at the moment

 

[zoneguard]

Say, we decided to withdraw $40k in this year.
But the hypothetical portfolio consist of this:
1. $250k of index investing: $200k in IWDA and $50k in EIMI.
2. $250k of REIT: $25k each in 10 S-REIT stock such Keppel DC Reit, Mappletree Ind Trust, etc
3. $250k of SG Blue Chips: $25k each in 10 SG blue chips such as DBS, OCBC, UOB, etc.
4. $250k of Growth: $25k each in 10 US growth stocks such as Sea Ltd, Facebook, etc
Assume portfolio 2 and 3 above gives 2% dividend which is $10k.
Question for discussion, where should he gets the remaining $30k?
Which 32 counters above that he has to sell?
Should he sell equally? $7.5k from each portfolio?
Selling $750 from each stock and $6k of IWDA and $1.5k of EIMI?

Thanks in advance for all your thoughts!

We maintain the target percentages allocated to each constituent during rebalancing:
1. I 25%
2. R 25%
3. B 25%
4. G 25%
R has 2.5% each in each S-REIT. B has 2.5% each in a blue chip. G has 2.5% each in a growth stock. I has 20% IWDA and EIMI 5%.

R and B has grown to R + D/2 and B + D/2. So after receiving the dividends D, the percentages of R and B go back to 25%. EDIT: If R and B have capital gains, they may not go back to 25%.

Let W be withdrawal amount. So shortfall of W - D for expenses, sell off W-D value to restore the target percentages of every constituent. We start with the G and I baskets first as R and B baskets already produce D. If it is insufficient for W-D, we sell from R and B as well.

 

[Okenba]

Would be a lot easier to drawdown from a 1-2 etf portfolio. Can't imagine the transaction fees that one would need to sell off 30 different counters...

 

[hwarzoner]

sorry so the 4% withdrawal rule is to draw from the 4% dividends right?

so the capital is left untouched?

 

[$ingaporean]

Hi All,

I would like to seek your view about your strategy of the withdrawal when you start your retirement journey, says from age 65 onwards.

in addition to the monthly CPF life payout, how much do you intend to withdraw (of course, if also depends on how much you want per month)? Do you withdraw 4% of your total savings yearly? If it is 4%, your savings can last you 25 years (65 + 25 years = 90 yo).

Any comments?

Hi, not sure if your 4% is due to the 4% withdrawal rule, but if it is, the withdrawal is based on a diversified assets of US stock/bond combination. It is based on historical data that you will have the most probability to be able to retire sufficiently using that rule.

If you withdraw based on saving, or any other asset class or even index other than us stock/bond portfolio, the 4% rule might not apply.

https://www.investopedia.com/terms/f/four-percent-rule.asp

 

[celtosaxon]

sorry so the 4% withdrawal rule is to draw from the 4% dividends right?

so the capital is left untouched?

The 4% SWR is what you draw off your portfolio in the first year of retirement regardless - so assuming you collect 2% from dividends, you will need to sell off some securities to make up the other 2%.

The following year onwards you do the same, but you take the prior year withdrawal plus inflation (you do not take 4% of the portfolio value again, this is a common misconception).

 

[celtosaxon]

Hi, not sure if your 4% is due to the 4% withdrawal rule, but if it is, the withdrawal is based on a diversified assets of US stock/bond combination. It is based on historical data that you will have the most probability to be able to retire sufficiently using that rule.

If you withdraw based on saving, or any other asset class or even index other than us stock/bond portfolio, the 4% rule might not apply.

https://www.investopedia.com/terms/f/four-percent-rule.asp

Understand that 4% is based on the worst possible set of 30 year US inflation and US market performance with a 50/50 stock & bond portfolio - in other words, in 19 times out of 20, you end the 30 years without running out. In most cases, you end up with a huge surplus! That is why it is considered “safe” because it would have lasted 30 years even in the worst case.

There are ways to mitigate the risk of exhausting your portfolio - for example, by skipping inflation increases in years where your withdrawal would exceed 4% of your portfolio value. In the same US model, this small change can increase the safe withdrawal rate from 4% to 5.9% without adding any additional risk. Therefore, even if you are thinking 3% would be safer, 4% is just as safe as 3% if you are prepared to skip inflation in cases of portfolio stress.