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Episode 378 of 800

#378 - Should You Withdraw Money From Your Investment Account To Pay Monthly Expenses?

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Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to answer the question, “Should you withdraw money from your investment account to pay monthly expenses?” In this case, I wanted to read actually a member email that I got. And as you guys know, I get a lot of these emails which serves as the basis for a lot of the questions and topics that come up on the daily call. If you want to get your question answered or if you have some topics that you haven’t heard us cover yet, please go ahead and shoot me an email, send me a tweet, Facebook message or submit your question at which is the best place to go. This person said, “Well, what are your thoughts on withdrawing money from your account to pay for expenses? I know that you prefer to take a standard monthly draw, but what percentage of your account is too high where you risk having to constantly decrease your account size? Obviously, in an ideal world, your monthly expenses would be low enough that if you were very small percentage of your account size, you can handle it. But what do you consider to be a safe level where you can continue to grow your account? Have you ever considered withdrawing a percentage of the monthly profits for smaller accounts where you have a strict monthly amount that might cause too much of drawdown in total account size?” The idea here is just trying to find this wiggle room of where is the perfect amount of money or how do you calculate the perfect amount of money to withdraw from your account. Now, there’s a lot of talk on the 4% rule or the 5% rule as far as like an annual draw from your portfolio and although it has a good merit as far as basis for guideline post that we can potentially use, it doesn't always serve as the principal amount that you should necessarily take from your account. What I mean by this is that when people talk about say the 4% rule for finance and withdraws, that takes into account a lot of different things that could happen based on when you start actually taking a 4% drop. In many respects, that 4% rule was done on research that was in the bottom of a market and started to have this huge bullish uptrend throughout the end of the research. What this means is that if we start drawing money on our account based on a percentage, maybe we want to allocate a little bit less of a percentage during the top of a market and potentially more of a percentage during the bottom of the market. To put number to paper, I guess, if we were at the top of a market which I think we are right now or at the top of a cyclical cycle, you maybe want to start withdrawing less than 4% from your account because there's a good chance that if you're holding a big stock portfolio or if you're holding too much long equity exposure, you could lose some of that value. If you're holding something at the bottom of the market, so say we were at the bottom of the market in 2008, 2009 and you wanted to start withdrawing money, maybe you could do something at or a little bit above 4%, so maybe 4% or 5% from your account per year. I'm not a fan of doing the percentage basis. My thought process on withdrawing money from your account is to figure out what your monthly expenses are, do all of the personal finance stuff that we don't even have time to get into, but things like pay down non-preferred dept, get rid of all your student loans, all your credit card debt, any lines of credit that you have, reduce your monthly expenses as much as possible. What me and my wife did is we ended up moving from outside of DC to Pennsylvania. We had a drastic change in living expenses. It was about five years ago when we actually made that move and ended up reducing our expenses dramatically. We don't have any ancillary stuff. We’ve done all the right personal finance stuff that you need to do and I truly say you have to do that stuff first. Pay down all that stuff first. Try to allocate some of your resources towards non-preferred debt or high interest rate stuff that you have. Once you do that, figure out what your minimum monthly expenses are going to be, the minimum amount that you truly need to live off of after you’ve cut everything else out and I suggest if you have enough money in your account to do this and if you're at the point in your life in which you feel like you can retire from doing this, then I suggest just taking a monthly draw or salary. Now, me and my wife calculated this figure for ourselves and we’ve literally lived within this same figure now for almost eight years. We've done the same monthly draw, month in, month out, every month, no matter where our portfolio goes. We take the same monthly draw and that forces us to keep our expenses low even in the face of rising prices like fruit prices now with kids and diapers. We’ve forced ourselves to cut back on other things to keep our budget within the monthly draw that we take. And I thin