Investment Workshop 15: Withdrawing From Your Portfolio

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Here on the Investment Workshop, we talk almost exclusively about how to BUILD your portfolio, but we haven’t really touched on what to do when you actually retire and need to start withdrawing from it. Until now. New readers, please click here to start from the beginning.

The Withdrawal Method

Managing a portfolio is kinda like sex. It’s important to pull out at the exact right time. Pull out too late and your future gets boned. Pull out too soon and you just make a huge mess all over everything.

And now it’s disgusting. Photo by Alex E. Proimos @ Wikipedia.

Ahem. OK, that analogy kinda went off the rails. MY POINT IS, it’s important to manage your portfolio withdrawals in retirement carefully.

First, though a quick recap of the 4% rule. The 4% rule states that:

A retiree invested in low-cost Index ETFs can withdraw 4% of their initial portfolio balance, adjusting for inflation each year and not run out of money over a 30-year retirement period with 95% certainty.

This is a general rule-of-thumb the Early Retirement community uses to figure out when it’s relatively safe to pull the trigger and give the ol’ 9-to-5 the finger and ride off into the sunset.

But what is this actually like in practice? And how is investing in retirement different than investing when you’re still working?

Yields Matter with You’re Withdrawing

When you’re building your portfolio from scratch, your portfolio yield, meaning the percentage of your total portfolio value that’s paid out as dividends or interest every year, isn’t really all that important. Sure, yield is all fun and good, because who doesn’t like free money? But when your investment time-frame is 15-20 years, the majority of your gains will come from capital gains, not dividends.

This is because any temporary losses that happen due to bad market conditions don’t really hurt you all that much. Your day-to-day expenses are taken care of by your day job (or emergency fund, if things go south), so you can ride through the storm without being forced to panic-sell. You just hold on for the ride, DCA into the storm and come out smiling on the other end. That’s how we made it through the Great Financial Crisis of 2008 without losing any money.

But when you’re retired? The game changes.

The most dangerous period of any retirement is the first 5 years. Why? Because if a market downturn happens right as you retire, you will be forced to withdraw assets to fund your retirement at the worst possible time. Then later, when the market inevitably recovers, you’ll have less assets than when you started with and won’t be able to participate fully in the recovery. Which just sets you up for a worse crash later, etc.

But what can you do? The 4% rule requires you to raise money each year by harvesting capital gains. And if you don’t have any capital gains to harvest? Too bad, you’re in trouble.

This is where yield comes in.

Yields, in the form of dividends or interest, are paid to you without having to sell anything. So if you had a $1 Million portfolio yielding 2.5%, even if the market crashed and took the portfolio down 10% to $900,000, you still get paid $25,000, or 2.5%. And that’s 2.5% of the ORIGINAL amount, not the new, lower value. This is because yield gets locked in when you buy, and generally isn’t affected by the day-to-day gyrations of the stock market.

So when you retire, you want to have as much of your annual living expenses covered by your portfolio yield as possible. This way, you’re not vulnerable to a sudden market crash that blows up your retirement withdrawal plan.

But how do you do this? Well, generally there are 3 ways to do this:

  1. Lower your living expenses. This is the most straightforward way of ensuring your retirement plan goes smoothly. If you had a $1 Million portfolio and an annual spend of $40k, that’s great. That’s 4%, and you will have a 95% chance of success of making it 30 years without running out of money. But if you used global arbitrage like we did to lower your expenses to just 3%? Your chance of success jumps to 100%.
  2. Shift your asset allocation towards fixed income. When you’re young and building your portfolio, you generally want a high equity allocation. This is because you care less about volatility and more about long-term capital appreciation. But in retirement? You want safety, stability, and above all else, income. Thus, shifting your allocation more towards fixed income as you approach retirement can do this.
  3. Pivot towards higher-yielding assets. Shifting your asset allocation trades off volatility for income, and most of the time that’s exactly what you want to do. But in our low-interest world, investors searching for yield (like us) have to look at higher-yielding fixed income assets. Assets like Corporate Bonds, Preferred Shares, REITs, and High-Yield bonds. These assets, however, are far more volatile then their boring safe Bond Index cousins, so you end up losing the volatility-dampening effect that the fixed-income side of your portfolio gives you. But in exchange, they DO pay higher yields. At the time of thie writing, our Preferred Shares Index (CPD) is paying 4.6%, while our REIT index (XRE) is paying 5.2%.

The Cash Cushion

Creating a cash cushion in your portfolio is the 2nd line of defense in your withdrawal strategy. This is your buffer if you happen to hit that stock market crash at the beginning of your retirement. And the strategy behind making this work is actually pretty simple.

Basically, keep 5 years of living expenses as cash in your portfolio.

Simple right? And why 5 years? Well basically, most stock market crashes recover in 1-2 years, but the worst ones can take up to 5 years to recover. The worst stock market crash ever in recorded history (1929) took about 4 1/2 years to recover its value after inflation and dividends were taken into account. So a safety net of 5 years is sufficient to survive any stock market crash up to and including the worst one that’s ever happened.

But wait, you might be saying, that sucks! If my living expenses were $40k, then I’d have to keep $200k just lying around in cash?


Because in order to calculate your cash cushion, you have to take into account your portfolio yield. Remember, this is money that’s going to be coming in whether you sell anything or not. So to calculate the size of your cash cushion, you use the following formula.

Cash Cushion = (Living Expenses – Yield) x 5

So if you, for example, had living expenses of $40k, and your portfolio was yielding 2%, or $20k, then you only need to keep a cash cushion of ($40k – $20k) x 5 = $100k, or half of what you were expecting.

Plus, you can see how as your portfolio yield increases, you would need to keep less and less in cash. At a yield of 2.5%, you would need ($40k – $25k) x 5 = $75k. At 3%, ($40k – $30k) x 5 = $50k. At 3.5%, ($40k – $35k) = $25k. And of course, at a yield of 4%, you would need ($40k – $40) x 5 = $0.

Bucket List

So now to put it all together, in a structure I call “The Three Buckets.”

Picture this.

You have 3 buckets, positioned one above the other.

The bottom bucket contains money you need to fund your current year’s retirement expenses.

The middle bucket contains money that can fund 5 years of retirement.

And the top bucket contains the rest of your portfolio.

As the year goes on, you spend down the bottom bucket to fund your living expenses. In January, it’s full, and by December, it’s empty.

The middle bucket contains enough money to fund 5 years of retirement, structured as the Cash Cushion we just talked about. At the beginning of every year, that bucket tips over a bit and refills the bottom bucket with enough money to fund the rest of the year.

And that top bucket? That’s the rest of your portfolio. Sometimes it’s growing with the markets, and sometimes its shrinking as markets crash. But regardless of what markets do, it drip drip drips its yield into the middle bucket keeping it from going empty too quickly.

So here’s how this works.

The bottom bucket we use to fund our living expenses. And the middle bucket gets sized just right using the simple formula we described above so that it can cover 5 years of living expenses in down markets without being TOO big that it takes up too much of the portfolio. And finally, the top bucket drips down its dividends continuously, and when the markets rise (as they usually do), it sells off some of its assets to replenish the middle bucket. When markets fall, it does nothing but continues to drip its dividends.

And that is how you implement a safe withdrawal strategy.

And We’re Done

Now, feel free to disagree and add your own flair to this. Think you don’t need such a large cash cushion? Go ahead and reduce it! You don’t like Preferred Shares and would rather stick to safe government bonds? Be our guest. Just understand how each financial decision you make changes the size of each bucket, and as long as you’re confident it will work for you, then go for it. Everyone’s retirement journey is different.

So what did we end up doing ourselves? We started off with a living cost of $40k and a 2% yield, which meant we had to keep a cash cushion of ($40k – $20k) x 5 = $100k. However, after our first year of retirement we discovered the power of global arbitrage (i.e. staying in cheaper places like SE Asia) to bring our living costs down to around $30k. We then pivoted towards higher-yielding fixed income assets to bring our total portfolio yield to around 3.5%. This allowed us to reduce our cash cushion to $0. And as a result, we now make money as we travel.

So let’s hear from you guys! What will your withdrawal strategy look like?

Continue onto the next article!

76 thoughts on “Investment Workshop 15: Withdrawing From Your Portfolio”

  1. Wow. Very informative. I love the buckets explanation! I wish there were a picture to go with it, but I get it.

    You said, “[…] as your portfolio yield increases, you would need to keep less and less in cash” and you also said that the “[…] yield gets locked in when you buy […]”. So when does the portfolio yield increase then? It doesn’t decrease if there’s a downturn in the market, does it only increase when dividends are reinvested instead of withdrawn? thanks

    1. It might not be exactly what Wanderer had in mind but generally your yield will increase because most companies that pay dividends like to keep them around the same % yield over time. So, for example, a company might decide they want to have a dividend yield of 2%. Assuming it is a well run company its price will increase over time and therefore the amount it is paying in absolute terms will also increase. For example, say you buy the aforementioned company at $10, you will initially be getting dividends of 20c/share (2% yield). Two years after you have bought the company imagine its price is now $15. The company will still be paying out a dividend yield of 2%. Because this dividend yield is based on the price of the shares you will now getting 30c/share in dividends which makes your actual dividend yield 3% – voila, your yield has just increased by doing nothing but holding onto the company’s shares!

      1. Correct. Normally your portfolio yield changes when you change your portfolio allocation and make a buy, but they can also increase over time as companies increase their dividends.

        1. Thanks for the great article. So I’m wondering now where do you transition from a VTSAX type fund (set it and forget it) to now needing to manage which stocks get you a higher yield.

    1. I think that his analysis of the Trump administration has echoed my own, so that’s good to know.

      His take on Indexing, however, is interesting but useless. He’s right that if everyone Indexed then the market stops being efficient. However, I think there will always be a space for active traders to make money by investigating and betting on individual stocks, and the really skilled ones will beat the market. However, I believe it’s impossible for average retail investors like us to predict which ones will beat the market enough after fees.

      So average people like us should continue to Index, while Hedge Fund Management professionals with reams of spreadsheets and High-Frequency-Trading server farms should continue to actively invest. Both styles can coexist.

    1. I use VGSLX as my Vanguard REIT. It’s Admiral shares, so it takes $10k to invest, but the expense ratio is only 0.12%.

  2. I like the bucket explanation! What a great visual. It’s a good way to think about “cushioning” your emergency account needs.

    What are your thoughts on overall long term growth (capital growth plus yield)? I think you’ve touched on it before, but JLCollins sticks with mostly stocks and avoids REITs because the REITs combined long term growth is lower than the stocks.

    1. Yeah I was gonna draw a picture of buckets but I ran out of time πŸ™

      I think the highest long-term growth assets are stocks, and always have. They are also the most volatile.

      So at different points in your retirement journey, you will value one thing over the other. When you’re accumulating, you want more long-term growth and you care less about volatility. When you’re about to retire, you want the yield. And when you’ve been retired for > 5 years or your portfolio value has grown so much that you can get by on a 2% dividend, you want to swing back towards equities again.

      1. Now you’ve given me something to think more about. I had been planning on switching to a part time work schedule to make the transition and give my security gland a break. I’ll need to do some more homework. It’s such an emotional decision, it may not change my plan. But it’s nice to think about alternate scenarios.

        Good luck on the lab results! We’re all pulling for you!

  3. I love this post! The accumulation part of this series didn’t interest me as much and have been waiting more for posts related to retirement withdrawals. Thanks for the explanation on the cash cushion! Keeping such a large cash cushion doesn’t appeal to me so I like the idea that you are only keeping the difference of the actual living expenses and yield. I have a couple of questions/comments though.

    First, isn’t it possible that your yield dollar amount might drop during a major downturn? If so, then wouldn’t you need a larger cash cushion?

    Second, I’m not comfortable with the idea of preferred shares. It doesn’t seem as well diversified as just the (canadian) index. Although the yields may be more guaranteed, it seems more risky to me. I probably feel the same with high-yield bonds.

    Third, is it not better to just incorporate your cash cushion to be part of your asset allocation instead of keeping it separate? Like keeping 5% in cash from your fixed income allocation.

    On the health front, I hope you hear good news soon. I’ve also gone through a few traumatic events in recent years that gave me the same realizations for having a free life.

    1. Glad to hear it. We aim to please here at Millennial-Revolution πŸ™‚

      1) Typically, higher-yielding assets like Preferreds and REITs come from banks or office buildings (for REITs). For these to start defaulting, banks will have to start falling over, or a recession to happen so severe that office towers stop paying their rent. And even during 2008/2009, this didn’t happen. So it’s possible, but I believe that 2008/2009 was a once-in-a-generation event that won’t be repeated.

      2) Preferreds, REITs, and high-yield bonds ARE riskier and less diversified. That’s why they’re more volatile, but that’s why they market is demanding a higher yield from them. But in the first 5 years or retirement, my judgement is relying on yield is safer than relying on capital gains because I don’t have to sell anything to get my living expenses.

      3) Sure, I do. For convenience my 5% cash cushion just sits in the same trading accounts as the rest of my assets. It’s only every January that I pull out 1 year of living expenses into my checking account for day-to-day spending.

      And thanks for your concern on the health front. *fingers crossed*

      1. Thanks so much! Just another question…

        Would your yields not drop if you had to rebalance from fixed income to equities during a downturn and that downturn lasts more than a year or two? If so, wouldn’t your yields drop then and you would need to see the principle?

  4. Most the time I read these FI blogs nowadays not much surprises me and I don’t feel I learn too many new things anymore (still like to read them though). This post was really useful though, I love the buckets analogy and hope I can remember this when I’m retiring in God knows how many years.

    Working for an extra year or two to get that $100k cash cushion might seem a PITA but it could easily come back and save you if the markets do turn at the wrong time.

    1. Glad to be of service πŸ™‚

      Yeah, we discovered the value of that accidentally. When I quit, my boss asked me to stay behind for 8 months because he was going on paternity leave, so I said yes to help him out. The extra $100k we saved was meant to get blown on our self-indulgent year-around-the-world trip, but when we discovered travelling the world only cost less than half of that ($40k), the gears started turning and that’s when we came up with this withdrawal strategy.

  5. I feel like I need a cold shower after that analogy, hahaha.

    Also, thanks for writing this. Still trying to wrap my head around investing and it’s good to know about the best withdrawal methods. Do you go by the 4% rule? I’ve seen a lot of people debating it lately and I was just curious.

    1. Yeah that intro went off the rails, but FIRECracker insisted I keep it in because she’s just as filthy as I am.

      And yes, we used the 4% rule as a guideline to figure out when to pull the trigger. After retiring, however, we devised this withdrawal strategy to turn that 95% success rate into as close to 100% as we can make it.

  6. Great article!! I feel like i have the asset accumulate phase down and it’s always nice to hear about withdrawal strategies. After all, once you’re FI, the goal is to stay that way and not go back to work. I like the buckets category and the discussion of the yields vs cash. It’s a little too early for me to plan withdrawal strategies hahaha but it’s always good to know ahead of time!

  7. It’s nice to see an article that addresses the mechanics of what happens after FI. You don’t see too many of those around… keep them coming! I appreciate your blog so much and am learning a ton!

    Rookie question – Using the 4% rule, if my annual income will be $40,000 on a $1M nest egg, what exactly do you do in subsequent years when your nest egg is inevitably up or down? Am I always withdrawing 4% of the current value of my nest egg (assuming I have retired and am no longer in the building stage), so say, after a few up years the amount is $1,200,000.00, do I then withdraw 4% of that amount? Or, are you always shooting to stay at $40,000 no matter what the market is doing (adjusting for inflation when needed) because that is the amount you shot for in the beginning? My hunch is it’s scenario 2, but this has always puzzled me a tad about the 4% rule. Thanks guys!

    1. Glad to help.

      The rule assumes you continue withdrawing at 4% of your initial portfolio value adjusted for inflation to get a 95% success rate.

      If your portfolio value goes up in the first few years from $1M to $1.2M, your success rate climbs because the odds of you being in the scenario of “retire-and-crash” goes down (since the market clearly didn’t crash). In fact, if you continue to withdraw your pre-determined $40k from your new $1.2M portfolio, you essentially have a 100% success rate going forward since you’ve escaped being part of the dreaded 5% failure scenarios.

      However, if you reset your spending now to be 4% of $1.2M (or $48k), you are resetting your success rate from 100% back down to 95%, since it’s like you’re restarting the experiment at a new portfolio value.

  8. I’ve been on disability for at least 10 years. I’ve been saving most of my life but now my husband is jobless at 55. I also had the 3 buckets and now the middle one is gone because of paying off a line of credit $40,000. I mostly have stocks that yield 4% to 6% and that’s when I make most of my money an amount I’m proud of $2,900.00 tax free. Of course I would have liked more… We are living with TFSA $70,000 bucket 3. My disability $28,680 tax free bucket 1. He has 5 years and then he could get the federal pension. If my husband can’t find a job then I will have trouble replenishing bucket 2. He doesn’t have written French which is a problem here in Quebec. Just to let you know things change fast. My husband also has a company making small financial gains. Feeling very depressed! All sacrifices we do may result in nothing in the end. Only one regret, not having saved more money ??. Thank you for your blog, I love it and tell absolutely everyone about it.

  9. I’ve always thought a bucket approach is the best way to go in retirement. It provides safety in knowing you have your next several years of expenses covered and also provides you with the growth still needed in retirement to ensure you don’t run out of money. I think it’s the perfect mix of conservative with a bit of risk taking growth mixed in.

  10. Good post Wanderer!

    About the 4% SWR tho, that rule states that the success rate is 95% for a 30-year period.

    Now, for an early retiree the period will not be 30 years but more like 60 years (for someone “retiring” at 35 for example).

    Any thoughts about it? (Does it mean that that person wont be able to fully retire but just semi-retire?)

    1. Over a 60-year retirement period (i.e. 2 back-to-back 30 year periods), your success rate would be 95% x 95% = 90.25%. BUT, if you use the withdrawal strategy we described to reduce that 5% failure rate in the first 30-year period even further, you can get that success rate pretty close to 100%. And if you’re 100% for 30 years, you’re 100% for 60 years by definition.

  11. So lets say you have enough dividends to completely cover your expenses thus no need for a cash cushion.
    Is it possible in the absolute worst case scenario that the market crashes and your stocks reduce / eliminate their dividend completely?
    Would it be safe (for peace of mind) then to still have a Cash cushion for 3-5 years despite having your dividends cover all your expenses or is that a big waste of lost opportunity costs and in itself risky due to factors such as inflation?

    Thank you kindly for your response in advance πŸ˜€

    1. For such a scenario to occur, all banks will have to go bankrupt AND our government would have to collapse and default on their bonds. In such an end-of-the-world black-swan scenario, cash wouldn’t help either since it would become worthless because our country would be gone.

      We have to assume that such an event won’t happen because it’s basically impossible to prepare adequately for it (aside from stocking up shotgun shells and canned food in a bunker somewhere).

  12. When researching early RRSP withdrawals, it seems that if you withdraw money early, you get stuck with a withholding tax in additional to the withdrawal amount being considered normal taxable income. How does this play out? My plan is not so much to completely retire early, but rather to start working less (because I really like what I do), say 3 days a week, and use my portfolio to supplement that income. So I’m not so sure I would be classified as “retired” in that case. Do you know much about those additional withholding taxes and when they’re applicable or not applicable, in my scenario with my early “retirement” just being working part time? Thanks!

    1. There’s a withholding tax but you get that back when you do your tax returns if your actual tax owed is 0. There’s no penalty for withdrawing early unlike the American 401(k)’s (though even that can be worked around using a 5-year Roth IRA conversion ladder)

      1. I’m not sure I understand…. There’s always tax to be paid, no? Even the lowest tax bracket is still paying a small amount of taxes. And given my plan would be to still be working, just working less, I’ll still have to pay some tax most likely. Would I then be subject to the withholding tax? Thanks!

      2. I don’t think I understand either. If I want withdraw $5500 each year to contribute to my TFSA, there is a withholding tax of 20% that is held at source and so I will need to withdraw $6875 so I get $5500 from the bank.

        That is outside what I would pay as income tax. Let’s say I was working part-time and making 30k a year, I would be taxed as though I had a total income of $36,875.

        Even if I weren’t working part-time, I would still be taxed at $6875 income which is $0 for provincial but not for federal

        How would you get around the withholding tax?

        Could you please clarify?

        1. Correct, that amount gets added to your taxable income. So if you are making earned income of $30k, you would be taxed as if you made $36875.

          However, if your earned income was 0 (i.e. living off the dividends), you would add $6875 to your taxable income but since your personal exemption is $10k, you would pay no taxes on that amount. And as for the 20% withheld, you would get it back as a tax refund. We just did this for the first time this year.

  13. Hey Wander,

    Fantastic post. A couple of questions:

    (1) I am not familiar with how yields are determined or how they change with time. You have mentioned the yield of your 60/40 portfolio is around 3.5%. Do you think of this value as “indexed to inflation”?

    (2) My wife and I are currently saving ~60% of our take home pay, and we plan to FIRE in 7 years. From what I have read on MMM, on this timeline our savings rate is more powerful than market returns. Do you think there is an argument to be made for adjusting our portfolio to include REIT, high yield bonds, and preferred shares now? Or should we wait until we are closer to our FIRE date?

    (3) If this is not public information, please feel free to ignore it — which ETFs do hold in your current portfolio?

    Thanks very much for your time. My wife and I are head-over-heals in love with your blog, and we have our fingers crossed for good news on the medical front.

    1. Thanks! Glad you’re enjoying our weird little blog πŸ™‚

      1) Sorta. Bonds and preferred shares usually pay out a fixed interest rate. REITs and common dividends generally do increase with inflation. So depending on how much of your yield is derived from each source, part of it may rise with inflation over time. That being said, your equity portion of the portfolio is the part of your portfolio that will save you from inflation, not fixed income.

      2) 7 years out, I’d stick with a more simple indexed portfolio and not mess with higher yielding stuff just yet. Higher-yielding assets will increase your portfolio volatility so you don’t want that leading up to your retirement. I only switched over to higher-yielding stuff once I hit my FI number, not before.

      3) My core portfolio follows the couch potato portfolio we use in the workshop. As for the other asset classes, I basically use whatever ETF tracks the broadest possible index of that class. For REITs, I use XRE, for Preferreds, I use CPD.

  14. One of the best articles of this blog.
    I have one big and itching question. Why not invest like 80% in high yield dividend stocks ETFs or in stock basket and make the 4% rule only w/ dividends without having to sell ever (hopefully).
    OK I get that it will grown a little less than a total market index however isn’t it safer?

    Etfs like HYG, HDV, SDIV, PFF aren’t good options in your view?

  15. Hey, really enjoying this workshop so far. Since you guys like math shit up, here’s something I’m having difficulty wrapping my head around.

    What is the advantage of constant mix rebalancing (periodic or to stay within a % range or a combination) over a consistant contribution of say 80/20 (or whatever targeted asset allocation) WHEN BUILDING your investments through REGULAR contributions? I understand the need for rebalancing as maintenance for an existing portfolio but here is where I get confused:

    If I start with $10,000 and contribute $1,000 Monthly for 20 years, why should I NOT contribute a consistent $200 to bonds and $800 to stocks even as my portfolio grows (as opposing to using my contributions to rebalance, say $900 bonds one month when stocks portion of portfolio is soaring and $50 another month when stocks are falling, or whatever is need to maintain the 20/80 allocation across the portfolio).

    My idea is this: a consistent contribution (as opposed to consistent rebalancing through contributions) will result in more of a buy and hold strategy and in buying FEWER bonds over time (because stock market outperforms bond market over time).

    Can you guys math this shit up? Pretty please?

    1. Well, dumping cash into a portfolio and then rebalancing has the effect of counteracting the effect of asset prices moving around as you’re accumulating.

      Consider this: If you had a $100k portfolio in an 80/20 split, you would have $80k equity/$20k fixed income. Now you decide to add another $100k over the next year. So you figure always add each contribution if, say 10 equal contributions of $10k each in a $8k/$2k ratio.

      This would be just fine if over the year the initial portfolio doesn’t shift too much. Let’s say stocks drop and bonds rise, changing your initial portfolio to 70/30 ($70k equity/$30k fixed income). If you persisted in your pre-determined buy amounts, you would end up with a $70k + $80k = $150k equity allocation, and a $30k + $20k = $50k fixed income allocation, resulting in an overall portfolio split of 75/25, not 80/20 as you originally intended.

      On the other hand, if you treat each contribution as a rebalance, you would recalculate your contributions each time to meet your 80/20 target allocation. So in this case, if the portfolio unexpectedly shifted to 70/30, a contribute-and-rebalance strategy would have caused you to contribute $90k to equity and $10k to fixed income, resulting in a portfolio of $160k equity/$40k fixed income, or 80/20.

      So rebalancing has the effect of automatically “correcting” your buys towards your target allocation.

      Hope that helps.

  16. Hi,
    Excellent blog post.

    If your portfolio is spread between RRSP, TFSA and non-registered accounts, and with each having different ETFs based on tax advantage, what would be the general withdrawal strategy to use in this case?

  17. hi Tan,

    I would recommend viewing their post for the investment workshop #6 (

    I think this will likely explain what you are looking for, I know when I first read it, it seemed to be the most straightforward approach i have read. it aligned with everything I already knew, but made it SOOO much clearer. I’m still no where close to retirement, but it’s still nice to see how to structure things for tax minimization.

  18. This is the second (or third) time that I have read this article, because it is so informative. Thank you for taking the time to lay things out so clearly!

    I am curious about your yields and overall returns in view of your relationship with the great bearded one. I assume his services come with a premium of ~1%. Do your ~3.5% yields effectively pay out as 2.5% yields after his firm’s services have been taken care of? Or are you managing everything yourself after a one-time portfolio review?

    Thank you for the inspirations that you are!

  19. Just wondering after almost 6 months of running this workshop how you (and other followers here) are finding Questrade? I’m thinking about moving over from TD but slightly worried about the safety, in terms of Questrade going bankrupt, of keeping most of my investments with Questrade. It looks like they are covered by the CIPF so, theoretically at least, they should be as safe as one of the big banks (I don’t have over $1M in investments (yet!)). Wondering how you feel about this. The account you’re using for the workshop is “only” $10k but would you feel comfortable holding a larger portion of your investments with Questrade?


  20. What can you guys say about the ERE strategy “Dogs of the Dow” and if you would consider that or no way and why.

  21. I am really grateful for your blog. I am learning so much and i am getting really excited about investing. I just don’t really understand why we should only get REITs and preferred shares when we retire. Even if it is more volatile, didn’t you say that it shouldn’t matter because we are currently working and getting an income. Shoudn’t it be better to have those because it gives us a bigger yield than the index portfolio? Or include it in our portfolio?

    1. When you’re accumulating, you want to focus on growing your capital. When you’re working, you don’t need the yield to live on because your job pays you. So to chase yield, you’d be trading off on performance and capital gains.

      The yield is more important as a steady income when you retire. It’s a delicate balance. You want to mitigate risk but not so much that you’re trading off capital gains.

  22. Hi.
    My core portfolio I’ve separated 5% for gold and 5% for oil.
    What’s your opinion about that? Why don’t you have gold in your portfolio?

  23. Your blog is like a eye opener. I read this like 5 times but the part i am very confused is the middle bucket. You said- “And finally, the top bucket drips down its dividends continuously, and when the markets rise (as they usually do), it sells off some of its assets to replenish the middle bucket. When markets fall, it does nothing but continues to drip its dividends.”

    Wouldn’t selling of assets to replenish middle bucket result in lesser yield ? Wouldn’t this effect future dividends ?

    Please clarify


  24. Sorry if this is a stupid question. But a novice here that just started reading your blog and following your investment workshop. I’ve bought the BND, VEU, VTI just like you showed us, but are they different from the higher-yielding assets? Do they still fall under index investment?
    I am only 26 and not planning on withdrawing the money any time soon, so I am ok with volatility. Should I still stick with BND, VEU, VTI or which other higher-yielding assets should I invest? Thanks so much in advance

    1. That is index investing and very good choices. If you don’t plan on wd any time soon you don’t want yield but growth instead which VTI and VEU will give you. Once you are close to retiring than you’d focus on higher yielding assets (preferred shares etfs like PFF, more allocation to bond etfs, etc).
      Don’t worry about yield now while you’re young because you’ll end up paying more taxes for money you won’t wd as your tax bracket is probably higher now than it will be when retired…worry about diversification and growth now instead, but your ETF choices provide plenty already. Sit tight and relax and don’t trade.

  25. Anyone knows if its possible to open a spousal TFSA and contribute to it? Also I’m not sure if I understood correctly, but are you saying if I contribute to the max of my TFSA (52 000$) and it rises to 82 000$ ( hypothetically speaking) and take it all out, the following year my new maximum for my tfsa would be 87 000$?

    thank you for your answer

  26. Congrats on the article, one of the best descriptions of the bucket strategy. Question – what if the top bucket drips its yields straight to the bottom one? And how do you invest the money in the bottom and middle ones ?

    1. My interpretation of your question is what if the middle bucket is full, does it drip into the bottom one? In that case, we would just re-invest the dividends in the portfolio (ie it would remain in the top bucket).

  27. I’m sad that I just discovered your blog now but glad I can binge on your Investment Workshop for hours! Just want to say thank you Wanderer and FIRECracker for all the information you put out here! I’m new to investing and recently discovered the FIRE community. I’m a long way from it (still drowning in six-figure debt) but I’ve learned so much from reading your blog! Love your sense of humor! You both really make learning about investment so fun(ny)! Hoping to one day join you guys in FIRE in a couple years!

  28. Part of my plan for black swan type events is a HELOC. I know this only works for those of us with real estate but I think it’s a very viable plan for those of us with paid for homes. We have a HELOC in place that costs us all of $50 a year to maintain with zero balance. If we ever needed a large cash infusion, or to cash flow our way through a stock market crash, I’d much rather use a low interest HELOC that I can tax deduct vs. selling off financial assets at fire sale prices. When the market rebounds we can pay back the HELOC with fresh capital gains or cash flow it with dividends/interest, or a combo of both…whatever makes the most financial sense at the time.

  29. Hi, very interesting post. I have 2 doubts though, maybe I missed something.

    Assuming you retire with 1mln and start withdrawing 4% of the initial capital (40k) and adjust by inflation every year. Then on the second year unfortunately the market crashes and keeps dropping for multiple years.

    Doubt #1: during those bad years you withdraw the yield + some of the emergency bucket?

    Doubt #2: when do start to withdraw 4% of the original amount again? when you portfolio value is back up to 1mln?

    Thanks a lot, really appreciate your blog.

  30. So I’m enjoying this course, but I looked at your “How we got here” post and it’s pretty discouraging! Not everyone’s an engineer making $10000 a month. My husband makes about $5000 after taxes, and I am currently unable to work unfortunately. Is there any hope for us?

  31. Hi Guys, just watched you on the Playing with Fire documentary and loving your blog.

    Re – your 5 years cash buffer you refer to, are you saying that if your FI number is $1m ($40k pa) then you actually need to save a further 5 years worth of cash – so really your FI number becomes $1.2m, and would therefore take 4 or 5 years extra to reach?

    Or are you saying to keep 5 years worth of cash as part of your portfolio, in which case the investment returns would be based on only $800k not $1m and thus likely insufficient to generate the return to sustain a 4% SWR?

    Thanks in advance for clarifying

  32. Neither. I’m saying that you have to take into account your portfolio yield and use that to calculate how much extra cash you would need to keep as a cash cushion. After that, you would to save your FI target + this cash cushion number in order to retire.

    However, if you use the formula I wrote about, you’ll realize that the cash cushion amount is a lot lower than you think it is.

  33. Hi,
    Can you help me understand?

    1. You mentioned that if my investment time-frame is 15-20 years, the majority of my gains will come from capital gains (CG), not dividends. If CG is the difference between sell and buy, then is it not risky that my overall gains is derived mainly from CG considering that the stock price for the ETF is subjected to market fluctuations? For instance – if I were to purchase XYZ ETF for $100/unit x 10,000 units ($1m worth of XYZ) today, this ETF may depreciate, or stay stagnant, or may only appreciate modestly in the next 15-20 years. Therefore if I wish to withdraw 4% annually and XYZ is trading at $80/unit, I wouldn’t have enough to cover my annual requirements, yes?

    2. You’ve mentioned that yield gets locked in when I buy, and generally isn’t affected by the day-to-day gyrations of the stock market. Isn’t dividend yield a function of the share price? If so, if the $1 Million portfolio yielding 2.5% crashed to $800k, then the yield for that moment in time will be less, yes?

    Also, can you give your opinion to Umberto’s comments dated 26th Feb 2019?

  34. Hi Wanderer and FIRECracker,

    Just need some clarification on the Yield Shield.

    Wouldn’t it go down during a financial and economic crisis? This is from my novice understanding below:

    1. During a crisis, bonds prices goes up (as a lot of money goes to bonds for safety) and in turn interest rates does down, however in actuality, the actual value of coupon payment will remain same. Is this correct?
    2. During a crisis, isn’t it that company earnings could go down which will results in lower dividend amount paid per share? This referring on how I think it would affect preferred shares and dividend stocks. Thus, wouldn’t it cause the total money you get from Yield Shield will reduced because of this part of the Yield Shield?

    I might have been ignorant of some info or just misunderstand how Yield works . So it would be great if you could clarify why you mentioned that the amount of money you will get from your Yield Shield will remain the same. Thank you.

  35. Hi Wanderer and FIRECracker,

    Just need some clarification on the Yield Shield.

    Wouldn’t it go down during a financial and economic crisis? This is from my novice understanding below:

    1. During a crisis, bonds prices goes up (as a lot of money goes to bonds for safety) and in turn interest rates does down, however in actuality, the actual value of coupon payment will remain same. Is this correct?
    2. During a crisis, isn’t it that company earnings could go down which will results in lower dividend amount paid per share? This referring on how I think it would affect preferred shares and dividend stocks. Thus, wouldn’t it cause the total money you get from Yield Shield will reduced because of this part of the Yield Shield?

    I might have been ignorant of some info or just misunderstand how Yield works . So it would be great if you could clarify why you mentioned that the amount of money you will get from your Yield Shield will remain the same. Thank you.

    1. Hi 007,

      Great questions.

      1) Correct. As interest rates go down, the value of our existing bonds goes up but interest payment is the same. That is a portion of our Yield Shield.
      2) It depends. The preferred shares and dividend stocks we own did not get their dividends cut even during 2008. Companies resorted to laying staff off before cutting dividends. That is not to say that dividends will never be cut. That is why we have a 3 bucket strategy (as defined in our book Quit Like a Millionaire) where the first level is Yield Shield, second level is cash cushion, and third level is geographic arbitrage. Hope that

  36. Does this mean that you have to have a guaranteed 4% yield? Because you do have to live off of 4% of your Investments, right?

    Will this work if I choose not to travel? Especially during covid-19. It really changes things.

    Thank you for the interesting articles.

    PS it took 25 years for the crash of 29 to recuperate its former value from 1929 to 1954. Unless I’m reading it wrong. Hopefully that will never happen again!

  37. Prior to early retirement when you were living in Toronto and working and saving for FIRE, was your cash cushion strategy any different?

  38. Hi, I love this blog and I’m reading QLAM for a second time. After reading this post and this section in your book, I’m still not sure at what point you recommend creating the yield shield? Should I start building one now, and should I do it in my IRA or individual brokerage account? Or do I wait until I’m ready to retire and start shifting my assets to the allocation on page 185 of your book? Thank you, your book has been life-changing, and I recommend it to everyone I talk to.

  39. The one thing I can’t figure out is how does an early American retiree withdraw their yield shield every year to fund their annual living expenses when they haven’t reached legal retirement age yet? From what I can find online, you can’t withdraw any dividend earnings from a tax-sheltered retirement investment account until age 59.5. And I couldn’t find a step in this workshop where you put money in a non-tax-sheltered “regular” brokerage account. So how are you all living off your yield shield in your 30s?

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