What it means
A withdrawal plan sets the principle, and the schedule sets out the details. It states the first payment date, the frequency, the amount, the account that receives the money and the order in which investments will be sold.
It may also set out how the amount will change from year to year. A good schedule matches the investor's spending.
Someone who pays rent monthly might choose monthly withdrawals, while another who has quarterly bills might prefer quarterly payments. Aligning the dates avoids holding too much idle cash or selling investments at awkward times.
Most schedules include a rule for adjusting the amount. A common approach is to increase each year's withdrawal by inflation, so that purchasing power is maintained.
Others use a percentage of the current portfolio value, which means the payments rise and fall with the markets. The schedule should also say which assets to sell first.
Many investors hold cash or bonds as a buffer and sell those after a fall in shares, to avoid selling shares at low prices. Taxes also affect the order, as it can be efficient to draw from taxable accounts before tax-sheltered ones, though the right order depends on local rules.
Finally, a schedule is a living document. It should be reviewed at least once a year, and after major events such as a market crash, a change in health or an unexpected expense.
The aim is to make withdrawals predictable without making them rigid. A schedule also helps with record keeping and tax.
Each withdrawal can be logged with the date, the amount, the investments sold and the cost basis, which is the original price paid, so that gains are calculated correctly. Accountants find it much easier to prepare tax returns when the schedule and the statements match, and this can reduce professional fees.
In practice
Real-world examples.
Example
A retired couple sets a schedule of $3,000 on the first day of each month, paid into their current account. They review it every January and raise the amount by the rate of inflation.
Example
A nonprofit foundation withdraws $50,000 each quarter from its investment fund. The schedule sells cash first and then bonds, and it only sells shares when their price is above a trigger level set by the investment committee.
Example
A consultant who has a variable income arranges a smaller monthly withdrawal plus a larger annual one in March to pay her tax bill. The written schedule helps her accountant forecast her cash flow and set aside the right amount for the March tax payment well in advance.
Formula
Calculation
Payment per period = Annual withdrawal / Number of periods per year
Next year's annual withdrawal = This year's annual withdrawal x (1 + Inflation rate)
Suppose the first-year withdrawal is $24,000, paid quarterly, and inflation is expected to be 3% a year.
Year 1: $24,000 / 4 = $6,000 a quarter
Year 2: $24,000 x 1.03 = $24,720 a year, or $24,720 / 4 = $6,180 a quarter
Year 3: $24,720 x 1.03 = $25,461.60 a year, or about $6,365.40 a quarter
Total withdrawn over three years = $24,000 + $24,720 + $25,461.60 = $74,181.60.Case study
Seen in the real world.
Linden Hill Partners is an illustrative, fictional advisory firm that prepared a withdrawal schedule for a client with a $750,000 portfolio. The client wanted $2,500 a month, rising by 2.5% a year.
The adviser's schedule set payments for the first 12 months at $2,500, or $30,000 a year, and then $2,500 x 1.025 = $2,562.50 a month in year two. It specified that the first two years of payments would come from a cash and short-term bond reserve of $90,000.
In the illustrative outcome, a market fall in year two did not force any sale of shares, because the reserve covered the payments. The written schedule made the decision automatic, and the client avoided the temptation to change course when markets were weak. The adviser also scheduled a review each January to top up the reserve from investment gains, so that the buffer would not be exhausted after a few lean years.
Watch out
Common mistakes.
- Setting up regular payments without any rule for which assets to sell, which can lead to selling at the worst time.
- Fixing the amount for ever, so that inflation slowly erodes its value.
- Never reviewing the schedule after a major change in markets or personal circumstances.
Questions
People also ask.
What is the difference between a withdrawal plan and a withdrawal schedule?
The plan is the overall strategy, and the schedule is the detailed calendar of dates, amounts and sources.
How often should I take withdrawals?
Monthly suits regular bills, while quarterly or annual withdrawals can reduce admin and trading costs.
Should the amount rise with inflation?
Many investors adjust for inflation each year to maintain their standard of living, though this raises the risk of running out of money.
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