The “Physician on Fire” started a blog chain talking about draw-down plans for early retirement. (chain anchor)
Here’s my two cents. It’s not part of the chain itself, as so far I’ve managed to escape the clutches of Twitter and most other “social” media. I tend to be less social the more I use social media. 😉
I think of my portfolio in three parts.
First comes the “floor” portfolio. This covers the non-discretionary living expenses: food, clothing, shelter, transport, and the like. Though they aren’t actually fixed, they might as well be: I’ve been tracking for over two decades now, and the household inflation rate on non-discretionary expenses is slightly negative. (!)
Second comes the “upside” portfolios, one for me and one for my wife. These cover the discretionary expenses we each have, plus our own shares of joint travel as a couple or with the household.
Last comes the “cache” portfolio. This covers specific earmarked expenses, such as a certain amount for the daughters’ undergraduate education.
Before FI transition
We accumulate equity index funds in 401k and IRA and Roth-IRA accounts, and dividend-bearing blue-chip stocks in a taxable account at a large conservative broker. What goes where depends wholly on what we can get our hands on. Preference to Vanguard (when available) in 401k (when employed), and stocks with dividend yield above 4%.
Our current broker has an upcoming mandatory conversion of our accounts from semi-self-directed to advisory with high commissions and ongoing fees. Bad mojo, those fees. We’ll transfer these to Vanguard as a low-cost broker, which will open up VTSAX and ETFs for the tax-deferred accounts.
For ease of tracking, we each accumulate into a different mutual fund, held directly at the mutual fund provider. One of us uses Pax World Balanced Fund (PAXWX), the other one of Vanguard’s dividend-focused mutual funds (VDIGX).
These are in municipal bonds held at a large conservative broker, a relic of past living in a high income-tax state here in the US. Selling them all at once would incur a very large capital gain hit, which I would prefer to avoid or at least spread across several years.
After FI transition
Once we transition to Financial Independence, each portfolio draws down differently. To be ornery, I’ll take them in reverse order this time.
Cache will draw down as expenses are incurred. Since the cache is sized to the expense, and those all will complete in ten years, this portfolio will draw down to zero within the next ten years.
My wife and I will spend from our upside accounts when we want. I target what would effectively be a bog-standard “25 times annual spending” 4% safe-withdrawal-rate regime for each account separately. Again, with two decades of records, I feel confident on my projections.
This one’s the odd-ball, which is probably enough of a clue for you to guess why right now. Ready?
No draw-down at all, in true rentier manner. I target the floor portfolio to cover our non-discretionary expenses by dividends alone.
Well, really, not quite “no draw-down at all”. Since it’s aimed to over-cover our needs with a noticeable margin of error, we expect it to grow exponentially. We’ll prune occasionally by gifting chunks of it to our children once dividends exceed 150-200% of our stable baseline of expenses.
Side note: the dividend yield I target is higher than the safe-withdrawal-rate I’d target were I going with a pure depletion strategy. So I’m perfectly happy to be ready to transition sooner as a rentier than as a depleter.
My wife’s insistence on how much to fund colleges and relatives delays the transition until we can empty the nest and downsize the current house. (My discontent elided but you could guess it’s there.) We’re ten years out from transition, yet everything’s in place. We’d need a sudden quarter-million-dollar windfall to transition earlier, thanks to the house.
And that’s how we expect money will flow in and out after we transition the household to Financial Independence.