"In your other post you said: “When I was doing the planning to retire, I knew our portfolio would need to cover about 90% of our expenses with a small pension to cover the rest.”
So that 90% includes the cash you would generate from the stocks dividends and the sales of stocks, right?"
My pension covered about 10% of our expenses and the portfolio was to supply the other 90%.
“You maintain a 3 years cash cushion so the dividends and proceeds from stock sale goes in that buffer and your current expenses comes out. I get that during times of highs in the market, you would take out more to replenish your cushion and/or to cover your extra expenses like this house.”
I will say no, not exactly. Everything stays in our portfolio until I decide to flow some cash to our cash cushion.
Here is something I just used in another post:
I think of our cash cushion as a water balloon. The balloon is connected to a “T” with 2 hoses on the “T”. One hose goes to a supply reservoir (portfolio) and the other connects to a usage point (our check book).
The supply side has a valve that is normally turned off. The usage side has a regulator (timer) that allows a steady flow of drops (dollars) to drip into the usage container (check book) over set periods of time. Normally, the balloon (cash cushion) provides the source of water (dollars).
When the reservoir (our portfolio) is full, I open the valve a little, allowing water (dollars) to flow into the balloon (cash cushion), expanding it. When it is full, I close the valve.
I may open the valve all the way or just let it trickle for a longer period. It is driven by the situation. If things are going well, I may top-off the balloon every month. At times like the present, the valve stays closed and the balloon shrinks a little every month.
When the balloon (cash cushion) is full, I close the valve. I only open it when the reservoir is full.
If push comes to shove, I can let the dividends flow through since they are not dependent on selling shares.
“But when you take out a large sum, you would be paying more taxes?”
From tonight’s update to my profile page:
Portfolio Makeup: _Indiv. Stock: 78.71% _Bond ETF: 0.81% _Bond Annuity: 6.98% __ Stock: 78.71% Bonds: 7.79% Cash: 12.93% _Options/Short: 0.57% __By Acct Type: Taxable: 2.65% _Trad IRA: 0.00% _Roth IRA: 97.35%
I do not pay tax on withdrawals. I started converting our trad IRA’s to Roth in 2010. I did annual conversions every year since. In January 2022, I took my first and only RMD then converted the remainder of my IRA. I finished DW’s IRA a few years ago.
My first draw to fund part of the land purchase and initial expenses was $480K. Coming out of a trad IRA would have been a big tax hit.
Doing annual conversion kept the numbers lower and in a lower tax bracket.
“In the FIRE or other retirement guidelines, they are talking about taking <4% of the portfolio/year.”
The 4% guideline is a planning guideline. That is it. Nothing more.
You can plan to take out 4% but if 3% is all that you need, just take 3%. Right now, our living expense shortfall, what the portfolio needs to provide, is about 1.4% of our portfolio. In 2005, it was about 4%.
I use 6% annual appreciation for planning. Yes, 6%!
But our XIRR from 2005 is just over 20%. You could say that is 14% additional growth each year, over plan.
“I guess end of 2020 and 2021 were great times to take more money out from the stock market but I guess you didn’t see the market goes up and decide then that you have your funds to build a new house. If the market did not rise to its extent, would you have hold off on building your house?”
Actually, the 2020 gains allowed us to decide on our change of plans. In November and December, I sold off stock to fully fund this build. The cash was in our portfolio and our expense cash cushion since. The funds still in our portfolio will stay there until needed (in Roth IRA’s). If I don’t need it, the money will just stay in the portfolio for use there.
"In more ‘normal times’, how do you decide to sell when and what to replenish your cushion?
For example, do you tend more to sell some at the end of the fiscal year or at the beginning or are those time spread evenly over the year?"
I don’t manage based on a calendar. I decided a long time ago that it is stupid for me to even try. The stock market does not follow a calendar.
Our portfolio has never set an all time high on Dec 31 of any year. For 2020, it was close at Dec 22. For 2021 it was Nov 9. For 2019 it was Aug 1! For 2018, it was Sep 13. Going back farther shows the same.
Using a Dec 31 number is arbitrary at best.
When our portfolio hits a new high, I know, in dollars, how much higher it is than the previous. I can decide right then on a plan of action which may be selling something, just taking cash or doing nothing.
Usually, I wait for a few day where I hit a series of new highs. Here are the last few from 2021 with the percentage higher than the previous:
281. 10/13/2021 2.39%
282. 10/14/2021 2.20%
283. 10/15/2021 0.53%
284. 10/18/2021 2.01%
285. 10/19/2021 0.58%
286. 10/21/2021 0.04%
287. 10/25/2021 0.52%
288. 10/26/2021 0.33%
289. 10/27/2021 0.58%
290. 10/29/2021 0.66%
291. 11/01/2021 0.36%
292. 11/02/2021 0.06%
293. 11/04/2021 0.10%
294. 11/05/2021 1.52%
295. 11/08/2021 1.64%
296. 11/09/2021 0.85%
(296 is the count of highs starting with 12/1/2012 and covers a 400+% rise in our portfolio.)
Usually there will be 3 to 5 or 6 in a row then a week or a few months to the next series.
In order to set a new high, any withdrawals need to be recouped. Example:
Our portfolio sets a high at $1,000. The next day I withdraw $100, leaving $900. It has to grow to $1,001 to set a new high.
So, the timing of withdrawals is at the whim of the markets. Our longest dry spell was July 2007 through Oct 2010 without selling stock and doing a full replenishment of our cash cushion.
That “water balloon” is a very nice thing …
Does that help you?
All holdings and some statistics on my Fool profile page