Funding a withdrawal needs a rule for what to sell

A withdrawal is not a single action. It requires deciding which holdings to convert to cash, and that decision recurs every time money is needed.

The decision arrives repeatedly

Someone drawing an income faces this question several times a year for decades. Made from scratch each time, it becomes a recurring judgement under a deadline.

Deadlines favour whichever answer is easiest, which is usually selling whatever has performed best or whatever is largest. Neither is a considered basis.

Because the decision repeats, the effect of a poor rule compounds. A single unconsidered sale is unimportant; a pattern of them across twenty years is not.

Selling to restore the allocation

One common rule is to fund withdrawals by selling whatever has grown beyond its target weight. The withdrawal then does the work of rebalancing.

This has the advantage of requiring no separate rebalancing trades, which reduces both cost and the number of occasions on which decisions get made.

It also means the portfolio is trimmed where it has risen, which is the direction most people find difficult to execute deliberately.

Holding withdrawals in cash ahead of time

An alternative is to keep a period of planned withdrawals in cash, replenished periodically, so no sale is required at the moment money is needed.

This separates the selling decision from the spending event entirely. Sales happen on a schedule when nothing is urgent, which is when they are best made.

The cost is that cash held for this purpose is not invested. That drag is the price of not having to sell during a period when prices are poor.

Selling proportionally is the neutral option

Selling a slice of everything in existing proportions leaves the allocation unchanged and requires no judgement about which holding to reduce.

It generates more transactions than selling from a single holding, which matters where dealing is charged per trade rather than as a percentage.

Its main virtue is that it cannot be argued with in the moment. There is nothing to decide, which removes the opening for a decision to be made badly.

The rule has to be written before it is needed

Whichever approach is chosen, its value comes from being fixed in advance. A rule invented at the point of withdrawal is not a rule.

Writing it down also makes it transferable. Somebody else administering the withdrawals later can follow it, which an unstated preference does not permit.

Any tax consequences of disposals vary by jurisdiction and change over time, and where those consequences are material the rule should be checked with a professional before being fixed.