I recently took a look back at my financial journey over five years of relying solely on my investment portfolio to maintain my retirement lifestyle. The upside? I’ve managed to grow my liquid net worth by a decent 6.3% since stepping away from the nine-to-five. The downside, though, is when you adjust those numbers for inflation, there’s a 13.9% dip.
In that post, I pointed out I hadn’t given myself a pay raise despite inflation climbing significantly. Instead, I tweaked my spending habits, cutting corners on things like frequent dining out, the newest outdoor gadgets, and opting for a used Subaru rather than splurging on a new ride.
But here’s the thing—all these penny-pinching moves haven’t really cramped my style. My standard of living remains untouched, even while shielding my portfolio from inflation’s sneak attacks.
Today, I want to explore how five years of withdrawals have influenced my investment portfolio through the lens of four enlightening charts. These visuals reveal some alarming details, especially the financial bruising from a couple of mental slip-ups.
Related: Am I as Rich as I Think?
To Tax Now or Later?
Like many planning or living through retirement, my savings are spread across Roth IRAs (tax-free), Traditional IRAs (tax-deferred), and various taxable accounts. There’s a school of thought advocating for depleting those taxable accounts first to let tax-advantaged funds grow, cutting back on interest and dividends in taxable accounts as quickly as possible.
However, this approach might corner you into larger tax bills later when you’ll inevitably need to pull significant sums from Traditional IRAs or 401(k)s. One strategy to avoid this is to withdraw from both taxable and tax-advantaged accounts simultaneously to even out the tax burden through retirement.
Starting retirement at 53, I picked the first option since I couldn’t access tax-advantaged money without heft penalties until hitting 59.5. With a trusty taxable account already in place, the decision was straightforward.
Related: The Benefits and Drawbacks of Taxable Accounts
Analyzing My Taxable Portfolio
My taxable accounts are divided into a checking account for cash and a brokerage account with ETFs and mutual funds. The checking account serves as my main financial hub, with monthly transfers from the brokerage to cover all bills like mortgage and utilities.
Is Bitcoin Really "Rat Poison"?
I should note here that I own Bitcoin, a digital asset famously dubbed "rat poison" by Warren Buffett. While technically part of my taxable portfolio, I leave it out of this analysis because its volatility skews the data. I hold Bitcoin as a hedge, not out of any ideological belief, as a small wager against the dominance of the U.S. dollar.
Related: Should Bitcoin ETFs Change Your Investment Strategy?
The Mattress Bank
Predicting when I’ll exhaust my taxable money is more art than science, but I have a decent handle on it. It’s simply a matter of subtracting monthly expenses from my account balance until the latter hits zero.
Think of the red line in the chart as my monthly spending from the mattress bank—cash not invested in income-generating assets. It shows actual spending from March 2019 until now, becoming more predictable going forward as I average out past expenses.
If I keep spending at this rate, my "mattress" funds could run dry by August 2029. Likely sooner when you factor in unexpected costs along the way.
The Investment Premium
Of course, I’m not literally hiding cash under my mattress. I’m investing it instead, hoping the returns beat that stagnant mattress burn rate. The real trajectory of my taxable account is marked by the blue line, showcasing more volatility as it tracks the ups and downs of investments.
Since February 2020, for example, the pandemic saw my taxable account dip dramatically. The blue line indicates that currently, I’m outpacing the mattress burn rate, at least for now, warranting a small pat on the back.
Supercharged Diversification
Initially, my retirement kicked off in March 2019 with a portfolio mix I now see as overly complicated:
- Cash (8%)
- Energy Select SPDR Fund – XLE (8%)
- SPDR Gold Trust – GLD (7%)
- Vanguard European Stock Index Fund ETF – VGK (10%)
- Vanguard Financials Index Fund ETF – VFH (8%)
- Vanguard Global ex-US Real Estate Index Fund – VNQI (11%)
- Vanguard Real Estate Index Fund ETF – VNQ (8%)
- Vanguard Total Stock Market ETF (9%)
- Various Brokered CDs (29%)
- WisdomTree Chinese Yuan Strategy Fund – CYB (2%)
This mishmash of diversification didn’t really serve me well. Mutual funds and ETFs naturally blend stocks, bonds, and cash, so tossing in more variations only added needless complexity, fees, and less transparency.
Streamlining for Simplicity
About a year ago, I simplified my holdings. Now it’s just three ETFs and one mutual fund:
- Vanguard Total Stock Market ETF – VTI (23%)
- Vanguard Total International Stock ETF – VXUS (26%)
- Vanguard Total Bond Market ETF – BND (26%)
- Vanguard Federal Money Market Investor Fund – VMFXX (25%)
The chart, now with a gray line, shows how much more my taxable portfolio would’ve grown had I started retirement with this sleek setup, registering an 8.6% improvement.
How much of this could be chalked up to lowered taxes and fees? Quite a bit, I’d wager.
Related: 5 Reasons to Simplify Your Investment Portfolio
Facing the Fear Factor
Beyond over-diversification, a good chunk of my portfolio’s retirement woes came from a bigger mistake.
The green line, noted as "4-Fund (Revised)," outlines how my decision-making error played out. While the blue line reflects my actual taxable portfolio performance despite market circumstances.
Panic Mode
In August 2020, after the market rebounded from its steep decline, I got jittery and moved to cash, selling nearly everything except for GLD and brokered CDs.
I hadn’t sold at the market’s lowest, thankfully. But dumping my holdings when they reached pre-pandemic levels still had a stark, perceptible impact.
If, back then, I’d stuck with my streamlined 4-fund set-up without panicking, I’d be much better off today as the green line suggests.
My investments didn’t start flowing back into the market until over a year later, unfortunately missing a golden opportunity.
What Was I Thinking?
Why’d I drop everything for cash? In short, panic got the better of me. As a new retiree leaning solely on my portfolio for living expenses, the uncertainty of August 2020 made me nervous. The massive market recovery might’ve been leading to a deeper crash for all I knew.
However, the following year was one of the brightest for the stock market, soaring over 30%. Meanwhile, my cash was sitting idle.
Related: Put Your Money Fears in Perspective
Key Takeaways
From this financial introspection, several lessons stand out. First, attempting to over-control my investments is a poor strategy. Hence, I’ve dramatically decluttered my portfolio and intend to stay the course with minimal intervention.
Fortunately, my tax-advantaged portfolio fared better without rash changes during the pandemic, though I’m also streamlining it to avoid similar pitfalls.
The critical lesson lies in recognizing and controlling fear-driven decisions, clearly demonstrated by the gap between the green and blue lines. To better withstand future market uncertainties, adequate cash reserves need maintaining.
For those keen on diving into simulations for retirement, the Best Retirement Calculators offer robust analyses, considering factors like withdrawal strategies and healthcare costs. If tracking your investments is top priority, a free Empower account can seriously help manage asset allocation and cash flow.
Who Am I? I’m David Champion, a software developer turned retiree before I hit 53. To shape my retirement path, I absorbed diverse resources, with CanIRetireYet being a standout. It’s one of the few financial newsletters I follow for its insightful advice. This blog post serves to add my tidbits to the wealth of knowledge the readers have come to enjoy here.
Whenever you click on affiliate links here and make a purchase, we earn a bit from it. These earnings keep our blog up and running, always striving to offer you value without upping your costs. Ads, however, are a whole different story, and we do our best to keep any unsavory stuff out of view.
