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First Physician on Fire (PoF), and then Fritz. The FI community is abuzz. And when I see two FI rock stars jump on something, I take notice.
So what the heck did PoF and Fritz do?
They shared their drawdown strategies. That’s right. They stood before the FI community and boldly proclaimed how their accumulated riches (i.e., investment portfolios) were going to provide adequate retirement income for however long their retirements lasted. What chutzpah! These are my kind of guys.
First, all kidding aside, I got to give kudos to PoF and Fritz. We in the FI community are very good when it comes to the accumulation phase of financial independence. Follow the advice of the FI community and you’ll build yourself a formidable nest egg. When it comes, however, to spending that nest egg, and making sure it never runs out, the FI community is a little weak. As PoF observed, “We’re good at building it up, but don’t talk as much about how to tear it down.” So thanks again, PoF and Fritz. You’ve made the drawdown phase of financial independence a little less mysterious, a little less daunting.
Second, I want in. My drawdown strategy may not have the sophistication of PoF’s, or the elegance of Fritz’s, but it’s hardly chopped liver. I am Mr. Groovy, after all. And I’m actually retired (unlike those two laggards). So without further ado, here’s the Groovy Drawdown Strategy as of 6/21/2017.
Groovy Income Needs
In 2015, the first year Mrs. Groovy and I tracked our spending, we spent a grand total of $32,386. In 2016, we spent a grand total of $36,327 (damn, dental implants are expensive!). Our average spending for the past two years comes to $34,356.
Based on the above average, Mrs. Groovy and I have concluded that $3,000 a month should be a sufficient income for the next couple of years (12 x $3,000 = $36,000).
In 2017 thus far, our monthly spending has averaged $2,660.
| January | February | March | April | May | Average |
|---|---|---|---|---|---|
| $2,149 | $4,348 | $2,231 | $2,308 | $2,265 | $2,660 |
Groovy Income Streams
Like Fritz, I am one of those dinosaurs who has a pension. For 21 years I worked for a municipality on Long Island. This entitles me to a monthly check of $1,643.
Aside from my New York State pension, the only other source of income for the Groovy household is the dividends generated by our portfolio. Right now, our portfolio is generating roughly $1,657 per month in dividends.
When you combine the two Groovy income streams, you come up with an annual household income of $39,600 ($3,300 per month).
Note: Social Security will not become an income stream in the Groovy household until ten years from now. And Mrs. Groovy gets a $206/month AFTRA pension in 7 years. That should be enough to cover Groovy Cat’s cat food bills—the little piglet!
Groovy Portfolio
The Groovy portfolio is very conservative. Mrs. Groovy and I retired this past October, and we made a sacred vow to never know the sting of mandatory work again. In other words, we don’t want to blow this retirement thingy. Waking up every day knowing that we completely own our time is nothing short of euphoric. And the last thing we need is another 2008-like market implosion coming along and smacking us back into the wretched world of cubicles, bosses, and W-2s. So to guard against the dreaded sequence of returns risk, we’ve designed our portfolio as follows.
- Our portfolio is comprised of three asset classes: a total stock market fund, a total bond market fund, and cash.
- Because our portfolio is spread across two brokerage firms (Vanguard and Fidelity), we are invested in a total of four low-cost index funds. For the total stock market portion of our portfolio, we’re invested in VTSAX and FSTVX. For the bond portion, we’re invested in VBTLX and FTBFX.
- The asset allocation of our portfolio is 40% stocks, 48% bonds, and 12% cash.
- Our portfolio is broken down along tax lines as follows: 49% in taxable accounts; 19% in Roths; and 32% in IRA rollovers.
- Roughly half the dividends generated by our portfolio come from taxable accounts.
Groovy Drawdown Strategy
Our drawdown strategy right now is pretty simple. We have over $100K in cash handy. This will cover at least four years of expenses when combined with my pension. This will also give us ample money to cover any emergencies or wildly extravagant vacation whims that might surface over the next few years. Since we have pretty much secured the first few years of our retirement, we haven’t invested a lot time formulating our drawdown strategy. Our game plan is to devise a more comprehensive one by year four of our retirement. Here, then, is our drawdown strategy in all it’s simplistic glory.
- On the first day of every month, move $1,357 from savings to checking. This, when combined with my monthly pension check, will give us $3,000 of monthly income.
- Transfer money from savings to checking as needed to cover emergencies and larger than expected vacation expenses (right now, we’re budgeting $5,000 annually for vacations).
- Rebalance our portfolio periodically to maintain a 40/60 split between stocks and bonds/cash.
- Devise a bucket strategy by year four of our retirement that will move money from our stock and bond funds to our cash account in the most tax-efficient way possible.
So that’s our Groovy Drawdown Strategy. Nothing riveting. Very straightforward. I should also note that we’re toying with the idea moving to a 30/70 split between stocks and bonds/cash by the end of the year. This will put us in a great position to load up on stocks—perhaps jumping to a 60/40 split—when the bull market finally ends and there’s “blood in the streets.”
The Healthcare Fly in the Retirement Ointment
The only thing that slightly concerns us right now is healthcare. Currently, because Mrs. Groovy and I are income poor, 95% of our healthcare premiums are picked up by Mr. and Mrs. Taxpayer. This degree of taxpayer generosity is not likely to survive whatever repeal legislation makes it to President Trump’s desk. So the cost of healthcare for us will surely rise in 2018. Will it rise enough to warrant an overhaul of our simple drawdown strategy? Maybe so, maybe not. The plot thickens.
Final Thoughts
Okay, groovy freedomists, that’s all I got. I hope our drawdown strategy is a worthy companion to the ones already offered by PoF and Fritz. So what say you? Does our drawdown strategy make sense? Or is our drawdown strategy a joke? Let me know what you think when you get a chance. Peace.
The Drawdown Chain Gang
Anchor: Physician On Fire: Our Drawdown Plan in Early Retirement
Link 1: The Retirement Manifesto: Our Retirement Investment Drawdown Strategy
Link 2: OthalaFehu: Retirement Master Plan
Link 3: Plan.Invest.Escape: Drawdown vs. Wealth Preservation in Early Retirement
Link 4: Freedom Is Groovy: The Groovy Drawdown Strategy
Link 5: The Green Swan: The Nastiest, Hardest Problem In Finance: Decumulation
Link 6: My Curiosity Lab: Show Me The Money: My Retirement Drawdown Plan
Link 7: Cracking Retirement: Our Drawdown Strategy
Link 8: The Financial Journeyman: Early Retirement Portfolio & Plan
Link 9: Retire By 40: Our Unusual Early Retirement Withdrawal Strategy
Link 10: Early Retirement Now: The ERN Family Early Retirement Captial Preservation Plan
Link 11: 39 Months: Mr. 39 Months Drawdown Plan
Link 12: 7 Circles: Drawdown Strategy – Joining The Chain Gang
Link 13: Retirement Starts Today: What’s Your Retirement Withdrawal Strategy?
Link 14: Ms. Liz Money Matters: How I’ll Fund My Retirement
Link 15a: Dads Dollars Debts: DDD Drawdown Part 1: Living With A Pension
Link 15b: Dads Dollars Debts: DDD Drawdown Plan Part 2: Retire at 48?
Link 16: Penny & Rich: Rich’s Retirement Plan
Link 17: Atypical Life: Our Retirement Drawdown Strategy
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