Our First Investment Withdrawal

The goal of financial independence is to reach a point where you can sustainably live off your investments.  So... are we there yet?  I don’t know.  What I do know is that we have enough invested to work minimally while our kids are young.  We will keep reevaluating our finances and determine if or when we need to jump back into full time employment.  For now, things look good.  In the two years since we closed our brewery and moved to a lower cost of living area, our expenses have been low enough and the market has been up enough that our net worth has continued to increase.   

We have lived off of savings for the last two years, but now it's time to make our first investment withdrawal.  It's both terrifying and exciting!  After some back and forth discussion, Dave and I settled on a plan to keep 3 to 6 months’ worth of expenses in our high yield savings account.  Each 3 months, we will withdraw an additional 3 months’ expenses from our investments to replenish that savings.  Meaning our saving account will accordion-style fluctuate from holding 3 to 6 months’ worth of expenses.

Our goal with the withdrawal is to both take out the cash to cover 3 months’ expenses and also rebalance our portfolio to our ideal allocation.  We are not old enough to have required withdrawals from our retirement accounts, so we are only taking money out of our taxable investment account. I will walk you through the process I used, but with simplified accounts and numbers to make it easier to understand.

STEPS TO WITHDRAW AND REBALANCE

1.      List Current Investments and Portfolio

I created a spreadsheet where I listed my current investments and the accounts they are in.  Then I calculated the total amounts in each category and their percentage allocation of my portfolio.

Table with example numbers.

2.      Determine Withdrawal Amount

I looked back our last year of expenses and divided by 12 to determine our average monthly expenses.  Our plan is to quarterly withdrawal 3 months expenses, so I multiplied this number by three months.  This is the amount I need to be converted to cash in my taxable investment account. 

3.      Create the Ideal Portfolio After Withdrawal

I subtracted the cash withdrawal amount from my total investments to determine how much will remain invested.  I then took my ideal portfolio allocation and figured out how much would be invested in each category to be rebalanced perfectly.  To do this, I multiplied the category % by the total remaining invested.

In the example, I am withdrawing $1,000 and then rebalancing:

4.      Calculate Category Changes

I calculated the changes that need to happen for each investment category to be rebalanced after the withdrawal.  To do so, for each category I took the ideal amount invested and subtracted the current amount invested.  The changes will add up to $0.

Following our example portfolio:

5.      Determine Trades to Make

Now that I knew the total changes that had to be made in each category, I needed to figure out which investment accounts to make trades in because the account totals have to stay the same.  This part is a bit nuanced and honestly was a fun math puzzle (because I really like math puzzles) – with a goal of getting the row and column totals equal, and the least amount of changes.  I’m sorry if you don’t like math puzzles. 

I started with the taxable account and made the least amount of changes in there, because each trade in that account has tax consequences.  When you do this, make sure (if possible) that what you plan to sell in your taxable account will create long term capital gains instead of short term capital gains.  You can check this by looking at the tax lots of your investments – long term means you have held it for at least a year.  The amount of growth on the stocks or funds you sell (from your taxable account only) will be treated as income when you make the sale.  You will pay taxes on that income, and the type of tax you pay is based on whether they are short or long term holdings.

Puzzle time!  Put numbers in the yellow squares to make both the rows and columns add up to the correct totals:

One possible solution: 

6.      Make the Trades

Once I determined what I was going to sell and buy, it was time to take action.  Note that prices are always in-flux so the numbers I entered when I made my spreadsheets were slightly off.  This is inevitable, prices are constantly in flux, and it was close enough to go on.  I started by doing all my “sell” trades first, then doing all my “buy” trades. 

Steps to selling stocks:

• Click the button to make a “trade”

• Make sure you’re in the correct account and choose the correct stock/fund

• Take the total amount you want to sell and divide it by the current stock price - this gives you the number of shares you want to sell

• Choose to “sell specific” and this will open up a list of all your purchase lots

• Find the long term lots and sell those first, up to the total number you want to sell

• I do “market” order so it will trade immediately

• Sell stock!  Shoulder shimmy!  Champagne toast!

Note – I use Fidelity, your process may be slightly different depending on your brokerage.

Steps to buying stocks:

• After all the sale orders are entered, it’s time to do all the buy orders

• Click the button to make a “trade”

• Make sure you’re in the correct account and choose the correct stock/fund

• Take the total amount you want to buy and divide it by the current stock price - this gives you the number of shares you want to buy

• Choose “buy” and enter the number of shares to buy

• I do a “market” order so it will trade immediately

• It will give you an estimated total for the purchase.  MAKE SURE you have that much available in your account.  In Fidelity it lists “cash available to trade” at the top of the trade screen.  I make sure my estimated total is a little below the cash available in case the stock prices goes up a little bit when the trade processes.

• Buy stock!  Shoulder shimmy!  Champagne toast!

Note, if you sold mutual funds instead of stocks or ETFs this may be a multi-day process as it can take a few days for the cash from mutual fund sale to be available for purchases.

7.      Move Cash to HYSA

Done!  Big money moves made and feeling baller!  I then put a reminder in my phone for the next business day to make the final money move once the trades have settled.  That cash needed to get out of my investment account and into my high yield savings account ASAP so it’s earning interest until it gets spent!

I did my first withdrawal from investments in my FI life!  Dave and I have multiple investment accounts and more stocks/funds than the example used above so my process was the same, but with bigger spreadsheets.  We have eight investment accounts in total: Taxable, Haley’s Roth IRA, Haley’s Traditional IRA, Dave’s Roth IRA, Dave’s Traditional IRA, Dave’s Rollover IRA, HSA, and Treasury I-Bonds.  And we are currently invested in 15 different stocks/funds/bonds, closely matching the portfolio allocation in the example.  In all, I ended up doing 14 trades during my withdrawal and portfolio rebalance process.  It was an exciting and fun process, especially with my love of spreadsheets, and I look forward to doing it again in three months.  Though I'm sure in a down market my feelings would be different... Until next time!