I’ve been promising to write about what it’s like to start “de-accumulating” the funds you’ve invested and saved over the years as it’s a fairly massive part of everyone’s retirement plan. I’ve already drafted a few posts talking about the subject but, to be honest, they’re almost too depressing even for me to read! That’s how painful I found the process of cashing in investments on a monthly basis as opposed to salting them away.
Why though? It’s not as if I hadn’t knew this day was coming. It’s not as if I hadn’t planned for it and it’s not as if I didn’t have countless spreadsheets predicting what my future funds might look like under various financial scenarios. From that point of view, and depending on my mood, things did actually look quite comfortable. On a rational and logical level, my financial situation seemed to be relatively secure.
The trouble is that money is an emotional subject. You can have a rational and logical approach to it for sure, but we’re not Vulcans. We have “feelings” about money that aren’t necessarily connected to any rational or logical part of the brain.
One of the hardest things I had to handle about cashing in investments was something that I didn’t see as either rational or logical on one level but, on the other hand, really felt on an emotional level. I called it “financial swing”. Let’s say I had to pay myself an income of three grand a month to cover all my expenses. In order to do that, I had to sell a portion of my index funds every month, regardless of where the markers actually were. I needed to “cash them in” – just to live! This was hard enough, but let’s also say I used to earn the same amount and was used to having three grand a month coming in. When I put both these facts together, it felt like I was six grand a month worse off!
Now, I know that the reality was actually that my if my total monthly outgoings were three grand, then that’s the sum that I was “worse off” by. And that three grand was actually buying me freedom from work – from that perspective surely it was money well spent? Unfortunately that perspective was lot less intense than my “financial swing” one. (I’m not quoting the actual figures here of what my monthly budget was, and I know that monthly income is probably top end for retirement, but it serves to illustrate a point. Whatever your working income now, it’s unlikely you’ll want to totally slash that when you step off the working life treadmill. I know I didn’t.)
So, this figure became stuck in my head and I couldn’t shake it: my retirement, my non-working, non-earning lifestyle, was actually costing me six grand a month. Net. What kind of salary would I have to be earning to compensate that?
I’m back to work now and I sometimes compare my current “pay day” to the same one I’d marked up in my Google Calendar with the same notation last year – at that point, “pay day” was the day on which I’d have to sell a portion of my investments to see them appear in my bank account the following week. I came to dread that day each month. I’d open up my Fidelity account and scan the various funds that I could sell to release some cash – should I shave a portion from the fund that was returning great growth, or just dump that underperforming one instead? Past performance is no indication of future, after all, and what if that Emerging Markets fund suddenly emerges? Should I continue to ride the wave of my best performing fund or take profits from it? Were the markets peaking, and should I take six months income before it crashes? Or are we at the start of a boom time that I need to benefit from? As ever, there was no answer to these questions. I had to make up my mind and take action.
“Had to”. That’s another key phrase when it comes to deaccumulation. When you can choose to sell, or not sell, your funds in a given period then these financial projections are quite a nice, comfortable piece of speculation. “Wow! If I sold that fund today it will have returned me over thirty percent on my investment! Fantastic. On the other hand, that dog that’s losing me ten percent, maybe I should just shoot it? Oh well, I’ll go and have a cup of tea instead and check again next month”. Not when you’re in deaccumulation you won’t. You have to choose, and if not today then definitely tomorrow. You still have bills to pay. You haven’t quite escaped that rat race yet.
sex health money death 
I know how you feel. I hit 55 back in October 2015 and I’ve spent a year putting off taking any cash (my girlfriend still works, and is cash flowing me).
I need to bite the bullet before the end of the tax year.
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I intend to take my first pension at 55. I’m kind of hoping that will be different as a pension is expressly saved to retire upon. I am beginning to see another side to annuities, all the same!
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I think you’ve discovered that you are a miser at heart!
The 6k argument is clearly daft. Its more like the rollercoaster where you gradually climb the slope earning 6k, only worth 4k after tax&NI, saving 1k, then go over the top and spend 3k, but realise the tax position is much better for investment income, and enjoy the ride.
If you hate selling, switch from ACC to INC units and just let the dividends roll in, and take pleasure in them. Do a painful rebalance once a year to top up your cash pile
If you had money in an active p2p scheme you could have played with that, but treating all the income as winnings from your great business acumen, rather than the drip-drip-drip of ruin.
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I agree, the 6k argument is daft, and yet, I used to earn 3k, I now spend 3k of my savings for my monthly budget, so that’s a 6k swing….damn!
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Its still only a 3k swing. Imagine you are driving a boat with a 4kt engine up a 3kt river, Your bank speed is 1kt upstream. Switch off the engine, and its now 3kts downstream. The swing is only 4 kts, And you could always do some light paddling…
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It seems like your issues with retirement were:
– groupthink over the value of “work”
– inability to spend money previously accumulated, because the “number” would go down
if you really are wealthy enough to retire and these are your reasons for not wanting to be retired, you kind of have some issues…
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Was I wealthy enough to retire? Well, I kind of thought I was but it felt differently when I started to spend my investments! Perhaps if I wasn’t spending down the “number” and living off the income it generated then no doubt I’d have a much different view, but I wasn’t in that financial position. I doubt many people are.
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I’m self-employed and had the same issues with my first few ‘paychecks’. Three months money would hit my account at the same time and I’d spend it all in a splurge thinking I had earned it.
So now I have a direct debit from my business account that pays me my ‘salary’ monthly. That way I hide the fluctuations from myself and it seems as if I’m paid regularly on time, which is soothing.
maybe you could do the same – sell investments in chunks at preset times – then drip feed from that account into your bank as if it’s still a salary..
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I’m not sure I had the right approach, selling investments every month when I found it so painful to do. I’m thinking about how I could refine this next time ’round….
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By the time I stop accumulating, my dividend income still won’t be enough for me to live on so I too will be selling off chunks of my capital.
There could also be dealing charges too (eg for the ETFs), so perhaps it would be more economically viable to sell quarterly rather than monthly?
But could I really stomach such a big hit if I sold quarterly? I won’t know until I’m faced with making that decision…
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I think the majority of us will be in the same boat, selling off chunks of capital in retirement to live and fund the chosen lifestyle, but you don’t find a lot of bloggers writing about it. Plenty of articles about protecting your investments and living off the income they generate, but really, how many people are going to be in that position?
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My co-blogger The Accumulator plans to do this, so he might write about it some day.
I couldn’t do it, as I’ve said before. I thought your post was excellent and honest.
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I wonder if your hurt would have been somehow less if you had to sell your funds once a year instead of once a month? I’m assuming that the decision which fund to sell is not imediate, meaning you would think about it for a couple of days every month. If so, maybe going once a year and assessing would not have been so painfull.
I think it would hurt me too, if I were in your position. So in order to not be in that situation, our retirement strategy is based on cash-flow: we can retire when our investments bring in enough cash each year to cover our expenses. This means that we have chosen different investment vehicles and it might mean that we need to work longer, but it would at least lessen the impact of retiring on our mental well-being.
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Fantastic if your investments can fund an income that you can retire upon. That is the ideal position to be in for mental peace, but I wasn’t there. While I didn’t go back to work for the money, I’d be lying if I didn’t admit it was a security factor in my thinking.
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I am part funding my early retirement for the next two and a half years via savings, and having squirrelled away money all my life I’ve found it difficult not to save, and to see the pot reducing each month. I relate very strongly to the sentiments you express. It has taken some to get used to my new financial situation (and forsaking the habits of a working lifetime). I’ve veered between being a scrooge and a spender, but overall I’ve found that the benefits of having time and energy again far outweigh the monthly discomfort of seeing my savings pot reduce. I’ve made the right decision to retire early, but it is an individual judgement call, with many emotional as well as financial factors at play. Thank you for an insightful article.
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Part of retirement, I found, was mentally coming to terms with it across a number of levels. It wasn’t a piece of cake for me, which was why I started to blog about it. Money was certainly a factor but if it had been the only factor I think I could have come to terms with it more easily.
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A solid post – I would also find it painful selling investments to meet my monthly spending. So that’s why I’ve gone down the ‘High Yield Portfolio’ approach. Current portfolio yield is around 4%, so 3K per month is a capital pot of £900K. Hopefully the capital and income keep pace with inflation. If not then it’ll be paper round time.
Perhaps the problem is that you have chosen the ‘total return’ approach, whereas the high yield approach is better suited to your personality. I suggest you try it – convert a chunk of your investments to income producing assets and see how you feel about the monthly income. Could you spend it without worry? Or perhaps spend a proportion of it and let some stack up for the future. Just like the saving you used to do in the (previous) working days?
BrodieBoy.
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Good advice and I have read about HYP in the past. Trouble is, although I’m interested in finance I’m just not THAT interested! Part of my training for my next attempt at retiring will be to better understand and refine some financial strategies.
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Hi Jim,
Interesting to read your thoughts and also the comments on how others are finding it. I am hoping that my dividend income will cover my expenses (apart from mortgage, thats another story). I dont think I could actually cope with selling off units every month – I have a problem now even selling when I probably ought to – so the thought of doing it for need, I couldnt
I of course have to hope I have enough income to cover my expenses!
London Rob
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That’s really interesting, because you always hear about the 4% Rule, but not what that means practically. To have a whole 100% stock-based portfolio throwing off 4% in dividends ever year would be concerning! A more reasonable ratio would be like 2% in dividends and 2% from sales, I guess. But selling 2% of my investments every year would feel odd!
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Norm – why would a 4% yielding equity portfolio be concerning? I’m interested in why you would prefer to be a forced seller (of 2% of portfolio) than in receipt of cash dividends.
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I think your difficulty has three parts:
1. you don’t like the fact that your pot is reducing;
2. you don’t like having to choose which of your holdings to sell;
3. you don’t like having to face 1. and 2. above every month.
You can solve 2. by having all your money in one widely-diversified fund or trust (e.g. VWRL), so no choice is involved – you only have one thing to sell a chunk of.
You can solve 3. by selling infrequently, e.g once a year, which should work fine if you have at least a year’s worth of cash as a buffer.
No 1. above is more problematic but could probably be dealt with by one or more of: (a) reminding yourself that the whole point of saving for retirement is to be able to spend the savings in retirement – that’s what the portfolio is for; (b) having a bigger pot so you feel less insecure (but would you?); (c) having a very conservative withdrawal rate so you feel less insecure (but would you?).
On the other hand you could just move away from a total return approach toward just taking the natural yield. As you don’t want the faff of a HYP, you could still follow a natural yield approach by putting everything into one widely-diversified fund or trust with a higher yield, e.g. VHYL. That would address each of your three problems.
BTW I empathise with your plight. I have early ‘retired’ within the last year and find myself unable to spend all that is notionally ‘available’ to me, not because there’s squillions of it – I should be so lucky – but for the sorts of peculiar behavioural tics you seem to be experiencing too ….. and actually I can’t stop myself saving (!) so not only am I *not* drawing on all the sources of income I expected to, but I am actually still shoving money into pensions and ISAs from the meagre sources I am allowing myself to access. I hope to get over this soon. 🙂
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I found it massively difficult not to be saving anything after nearly twenty five years of monthly investing. In fact, I’d try desperately hard to save money out of my personal spending budget and usually managed it.
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Hmm… I kind of know how you feel about selling investments. But not about wanting to work for not financial reasons, obviously. I don’t think I’ll ever understand that bit. But I do hate selling investments. When it comes to rebalancing it’s always new money, and yet a day will come when that won’t be possible and I’ll have to either sell something or consciously run positions outside my “manifesto” . At times I wonder if that’s a form of hoarding, though I take comfort from reminding myself that this behaviour does not extend to any other areas of my life — possessions, pets, relationships 😉
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I think wanting to work for non-financial reasons very much depends on what you ‘like’ or ‘enjoy’ about work – right now, aside from being paid a regular salary and getting my other benefits, the things I get out of work include (but are not limited to), respect, friendship & camaraderie, a little power (yes, I can say ‘no’ and people will listen and accept!), sense of achievement, enjoyment of solving problems and striving towards a common goal. All these are pretty much social aspects, which I know I would miss and I would have to find something similar elsewhere if I no longer worked.
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The social aspect of work is one of the reasons I went back. I worked in about five different organisations and miss some of the people from all of them. Maybe I was lucky in working with good teams, but I doubt it. I can’t say that I found my year out as “lonely”, but I did miss the camaraderie found in the workplace.
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Take a look at the Bucket Strategy. It’s designed to take the psychological edge off a total return approach. It provides a cash / bond buffer against being a forced seller of equities and would drastically reduce the monthly dreaded decision syndrome.
I’ve often wondered whether I’d have the same struggle turning on the spending tap once FI. Perhaps a transition period is needed. As in, work part-time for a few years so incoming cash is maintained (along with social structure) but work is gradually tapered as the shock of FIRE subsides.
+1 to Tyro’s idea of using one diversified fund.
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A transition period from work would be good, and anything that might mitigate the monthly cashing in of shares is worth a look at!
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After all your preparation it seems strange to me that you got yourself into a position where you needed to sell investments on a monthly basis.
Surely you’d want to have a buffer so that you aren’t forced to be selling so frequently and also at times when shares have just fallen?
I presume that this is what the “bucket method” referred to above is? Anyway my plan which comes into operation sometime next year (exact retirement date TBD) is a three year cash buffer.
Every six months I’ll take a look at investment performance over that period. If it’s been poor, I’ll withdraw from cash. If it’s been good I’ll sell some surplus investments if needed to build up the buffer if it’s fallen below three years, if not I’ll let it run. Basically minimising the chances I am being forced to sell at a time where performance is low and so future impact of selling now has a lasting long term impact.
If I deplete my three year buffer, by then I’ll have taken steps to minimise the hit – basically spending less, so it would likely end up being four or five year buffer as my discretionary spending in good years will be at least 2x what I can survive on. Basically a few less fancy holidays and meals out. But if worst comes to the worst then I will just have to directly sell investments, but that is very much plan Z.
Whilst having a cash buffer seems to me pretty obvious,the three year period I’m allocating is the result of reading a study where this was the optimum balance of investments vs cash in terms of riding out stock market crashes vs not being invested and missing out on growth. That may even have been pointed to from this website ?
I’ll also reserve the right to sell some investments where I think performance has been really good and that’s something I’d like to capture right then. This is of course “market timing” but I rationalise it by thinking that market timing only doesn’t work on a long term basis. On the short term, and conscious of my mortality, if at say age 75 I grab some cash that will do me for 10 years or so I don’t mind I’ll be losing out had I held it for another 20 years afterwards.
The second part of my plan is that I won’t have a constant spend rate. Retiring next year age 62, I’m expecting the initial 15 years at a high burn rate, probably 6%, the last 15 years pretty low, 2 or 3%. After a few years have gone by, depending how my investments go, I can adjust the burn down percentages, and the split.
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Although it’s a long time out so I don’t really have to worry about it yet I can totally see where you’re coming from here. I think I’ll likely do some sort of work all the way up to maybe 60 or even older but it will be part time or on my own terms (self employment) to maintain most if not all of my retirement pot until as late as possible. Hopefully this will ease me into living off that pot. I also like the idea of a large cash buffer, I’m going for 1 year in the near term but maybe 3 years is the way to go when full retirement comes about as the above commenter mentioned!
Cheers for the honest post as always Jim and hope the new job is keeping you busy!
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Cheers, still enjoying the job and not reducing my own cash buffer! It’s nice to have options and, as you say, having the ability to choose what you want to do is a luxury you can work toward.
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Great article, makes me nervous! I am 25 and just started blogging with advice for people in my generation to start off on the right foot financially. Where to invest, how much to save, etc. Interesting to come across an article that’s the exact opposite a few days later! Best of luck
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