A Retirement Investment Drawdown Strategy is a key element in retirement planning. The strategy used in the “Withdrawal” phase is fundamentally different than the “Accumulation” phase, and it’s important to define your withdrawal strategy prior to your retirement date. Today, we’ll outline our personal retirement investment drawdown strategy as an example for you to consider.
I think about the “Accumulation” vs. “Withdrawal” a bit like an escalator. On one side, you’re working your way up. On the other, you’re working your way down. They’re fundamentally different motions, but both entail the same escalator. In the same way, both Accumulation & Withdrawal entail the same assets, but the motions are markedly different. On the way up, energy is expended to lift you higher. On the way down, brakes are used to slow the descent. (Another analogy I thought of is an airplane taking off vs. landing, hence the Featured Image at the top of this post)
In full transparency, I stole the idea for this post.
I stole it from a Doctor. A really smart doctor. I told him I was stealing it. He didn’t seem to mind, and in fact encouraged me to write this piece based on his original post. I’m replicating his original format to allow easier comparison between his drawdown strategy and mine. Perhaps we’ll start a trend (See The P.S. at the end of this post…I’ve got an idea), it’d be interesting to compare strategies between bloggers.
Prior to today’s post, I did not have a written document outlining our Retirement Investment Drawdown Strategy. I had it clearly defined in my head and knew what we were planning to do, but had never committed it to paper. It’s a good thing to do, and the writing of this post has been a good exercise for this writer. Thanks again, Doc.
(Not paper, actually, but rather mysterious electrons flying around some Cloud, whatever that means. Isn’t our technology amazing?).
Starting at a high level before moving into the details of our plan, let’s have a look at our current Asset Allocation:
As we’ve moved closer to retirement, we’ve reduced our stock exposure from ~70% to ~50%, and increased our bond allocation accordingly. If When there’s a market correction, we’ll likely rebalance a bit back into equities, but as a conservative investor I’m comfortable with our overall Asset Allocation at this stage, especially given the current CAPE Ratio of 29.5 (then again, I suffer from The One More Year Syndrome). We’re intentionally positioned a bit defensively at this critical point leading up to retirement.
This pie chart shows the “big picture” of our retirement holdings by tax status. We have 56% of our retirement money in Before-Tax accounts, which will be a tax management challenge in retirement (you’ll see details on our strategy for minimizing taxes in the detailed strategy below).
Unfortunately, the Roth wasn’t available until well into my career, so the only option we had was to invest our 401(k) into the Before-Tax fund. Never give up that company match! When the Roth was added, we began contributing to it as well. We’ve also done some “Mega Back Door Roth” conversions, which are outside the scope of this article but have contributed to increasing the Roth piece of the pie to 24% (I wish it were larger, like Doc’s 50% in After-Tax. He’s in good shape from a tax perspective, whereas I have bigger challenges in that department).
While “Doc” presented his detailed holdings in his strategy post, I’m going to skip that in my document. I have all of the detail, but I don’t think it adds significant value to this post (ah, the freedom of being a blogger. You can decide what’s in, and what’s out. Poof, it’s done! Have I told you lately that I love to write?).
As an example of the level of detail I track, below are the holdings from our after-tax accounts, in the same format as Doc’s original post:
A word of caution: don’t draw any conclusions by looking simply at our After-Tax holdings. The various tax accounts must be looked at holistically to understand how we’re allocating our assets on a broader scale. Having said that, note the 16% in Muni-Bonds. These make sense for us in the after-tax block, given our high-income (& taxes) and the favorable tax-free treatment of muni-bond interest payments.
Asset Location Strategy – Tax Optimization
An important part of retirement income planning is to ensure you put the “right” kind of investments into the “right” kind of tax structure, such as my Muni bond example above (it’s best in after-tax since earnings are tax-free).
Some other examples: where should a REIT be held? (Real Estate Investment Trusts pay high dividend yields, which are taxed as income if held in an After-Tax account) What about bonds? What about equities? While Doc didn’t address this in his post, I think it’s important, so I’ve added it here (and, just like that, it’s in. I love this stuff….)
Below is a summary of the types of funds best suited to various tax accounts:
Delay The Pension
One of the biggest decisions we have to make prior to our retirement date is when we’ll start our pension. I’m sincerely blessed to be the “Last Of The Dinosaurs” with a Corporate Pension, and I’m thankful. I’ve worked hard for that benefit over the past 32 years (yes, the entire duration with one company! Wow, I really am a dinosaur), and it’s an important part of our retirement plan. We have to insure that we optimize this piece of the retirement income puzzle. 3+ decades of effort and finally our payday is on the horizon.
Just like Social Security, a pension grows if you can delay the start date. In the case of our pension, it grows ~6% annually during the deferral period. Big number, especially in this low-interest-rate / high equity valuation environment. There are few investments where you can get a guaranteed 6% rate in an ultra-safe investment, so we’d like to defer the pension as long as feasible.
The chart above shows the impact of delaying our pension, with a deferral to 2020 increasing the % of our retirement spending that would be covered by our pension from 69% to 78%. That’s huge.
Unfortunately, delaying the pension means we’d be pulling 100% of our spending needs from our investment assets during the period of the deferral, and it’s critical to ensure we have the liquidity for that large of a pull in the first few years of retirement. We can’t defer forever, and we have to figure out how long we can push this thing. We’d be looking at a withdrawal rate close to 8% during the deferral, which would decline to 2% after the pension kicks in. Alternatively, we would start on Day 1 with a withdrawal rate closer to 3%. Interesting analysis, glad I have some time before I have to finalize our pension start date decision.
To support our pension deferral analysis, we’re taking a creative approach to debt. After being 100% Debt Free for the past 15 months, we’ve decided to get a loan in conjunction with our “Good To Great” relocation that’s currently underway (Quick Update On The Move: the old cabin hits the real estate market this week, fingers crossed for a strong selling price! And, we LOVE the new “Great” cabin, having moved in a few weeks ago. It’s perfect for our retirement, and we’re glad we made the second move just 13 months after our last downsizing move. Exciting times! I’ll break down the final financial impact in Good To Great #4, or #5, after we get the final numbers. Hoping to…