Over the past could of weeks, I’ve been writing a lot about investing for retirees. We keep talking about how to build a portfolio for your retirement, but we often forget how to manage it once you get there. It’s like everything is over once you cross the finish line… but’s that just the start of another adventure. And this adventure starts with a simple question: how do I withdraw my investments once I’m retired?
I’m obviously not ready to retire, so why would you listen to me? Because I’ve planned this hundreds of times. Obviously, each situation is a case by case scenario and my personal plan may or may not fit yours. But at least it will give you a starting point of how to withdraw your money once you retire. Here’s my plan if I was to retire next year…
Step 01: Check my numbers
If you have followed my pension lump sum investment series, you know how I like to calculate everything. I find it very important as my calculations will determine if I live a happy and stress-free retirement or if I keep wondering what the hell happened to my portfolio! Throughout my many retirement scenarios, I can’t find one that will not allow me to have less than $1 million dollar at 65. Considering this is in 29 years from now, $1 million isn’t much. Still, it should be enough to pay for my daily glass of wine and a little bit more.
Imagine I will require about $50K per year to live. In today’s dollar, this would be about 30K. Since I can split this amount between my wife and I, taxes will be minimal and therefore I will not take it into consideration. Since I will also benefit from the small Government pension, my monthly budget should be around $3K. I can definitely live a happy retirement on that budget!
Imagine my portfolio is worth $1M and generate an average dividend of 3%. Then again, I’m using conservative numbers that are not difficult to reach. The point of planning my retirement so many years in advance is to give me a peak of what it could look like. However, I must remain very conservative to make sure I don’t overestimate my situation.
So now that I know I can generate about $30K/year in dividend, but I need $50K, I’ll need to get down and make some calculations to establish a solid withdrawing plan. The last thing I want is to take up at 77 and realize I only have 6 years’ worth of savings! I’ve run some calculations with an inflation rate of 2%, portfolio return of 2% plus a dividend of 3% and my $950K portfolio will survive me.
Step 02: Get my first year ready
If I was retiring next year, I would make sure that I have at least the equivalent of my yearly budget in cash. In this case, I would sell for $50K of my 1M$ portfolio. I would not pick my winners or losers, but rather aim at keeping each holding equally weighted. Imagine a portfolio with 30 companies, each weighting about $33K. I would make sure that if one company worth 45K, I would sell shares of this one to bring it back to $33K.
By having 1 year worth of savings, I make sure I don’t have to sell stocks at a bad timing. Keep in mind I only need to sell for 20K of my portfolio each year to complete my budget. If I already have 50K in my pocket and my portfolio now generates $28,500 in dividend (3% of 950K), I can wait 18 months before I sell a single shares. This is perfect if I hit a market correction.
Step 03: Sell to rebalance
Each year, I would need to sell about 2-3% of my portfolio. I would proceed the same way as for my first year: I would rebalance my portfolio while selling. Each year, I would identify my largest positions and sell shares from them. Throughout years, a well-diversified portfolio will show different winners depending on how the economy goes. By maintaining an equally weighted portfolio, I would make sure that I don’t suffer from high fluctuation that would jeopardize my whole retirement plan.
Step 04: Follow-up on my holdings quarterly
Once everything is set and ready, all I needed to do would be to follow my holdings on a quarterly basis. Being retired doesn’t mean not making any modification to my portfolio. I would definitely use Dividend Stocks Rock tools to make sure I’m well invested. I’ve used them to build my pension plan portfolio back in September 2017 and my results are definitely good!
If I retire at 65, this means I have 20, maybe 25 years in front of me to manage my portfolio. Many things can change during the period and I must make sure I keep track of each holding and make sure it stands to my investment thesis!
In the end, managing your portfolio as a retiree isn’t that complicated. I believe in efficient processes that provide me with optimal results. I think that by keeping a year worth of saving at all time along with a well-diversified portfolio are enough to ensure that I will be stress-free at retirement.
Funny thing though, I didn’t this whole series thinking I don’t expect to retire…ever. In fact, I consider myself retired from the corporate world already and managing DSR is more like having fun each day and not really working!