Retiring, or how to start taking money out of your index funds
Once you are ready to start taking money out of your investments, i.e. retire, there are a bunch of options:
* Most turn off auto-reinvesting of dividends and then sell some quantity as well, to equal their 2 - 4% a year they are living off of.
They take the equity stocks they sold to buy bonds, and live off of the bonds.. So over the year you sell your fixed-income/bonds as needed, and then once a year (or whenever the market is up, etc) you sell some equity to replace the bond holding(s) to keep your 60/40 or whatever Asset Allocation you have between equity(stocks) and fixed income(bonds).
* You can also borrow against your stocks too. I'm not saying you should, but that you can.
This is apparently how the "super rich" company founders live day to day, they get un-vested stocks that take many years to mature before they can sell, but in the meantime, they borrow against them, and get cold hard cash to spend on rent, airplanes, and the like. As they get more stocks instead of compensation, they just keep borrowing more. This allows them to live their private plane life, while keeping their stock holdings, so they remain in control of the companies they founded, because they never sold a stock, they just borrowed against it.
* Of course you can make this as complicated as one wants, including if you have enough, at time of retirement, just sell a huge portion of your equity and buy treasuries in a ladder, so that every month a chunk of treasuries get paid out to you, that you then live off of. So your entire retirement $$'s are in treasuries. an example:
Say 50k/yr * 25yr retirement equals buying $1,250,000 of treasuries(TIPS) where ~ 4k come due every month. Of course this means you have > $1.3 million laying around, but this will then (assuming the USA doesn't collapse) guarantee $4k/month for 25 years, since it's ALL in treasuries. Then it doesn't matter at all what your equity holding does, as you are guaranteed your 4k/month for 25 years. This is the ultra safe conservative option, and typically called a 'Liability Matching Portfolio' or LMP.
* Another option is buy a pension, called a Single Premium Immediate Annuity(SPIA). This is something you buy from an insurance company, and they then promise to pay you X dollars (either Cost of Living Adjusted(COLA)/inflation adjusted or not). This is what Social Security is, a US government SPIA for basically everyone, that is COLA. Most math recommends waiting to take an SPIA or SS until late in life(68-80yrs old - depending on health) As generally the longer you wait to take it the better off financially you will be in the long-run.
Or of course any combination.
If you still have a mortgage or other minimum things you really want to guarantee gets paid @ retirement time, it might make sense to do a LMP(buy TIPS) or an SPIA for that amount, so that no matter what happens with your investments, you are good to have a roof over your head and food in your tummy.
As you get into retirement, you want to try and be tax-efficient in your pulling, backdoor ROTH's are a great way to do this, but need to start happening about 5 years before you actually retire.
Resources/Tools around retiring.
- Canasta Strategy The idea is, you withdraw a variable amount, if the stock market did well last year, then this year you draw your max amount. If last year went poorly, then you withdraw your minimum amount(and stay home and play canasta, hence the name).