Withdrawal Strategies for Retiring Early

Investing
#1

Hello Jeremy and the Personal Finance Club Community!

First of all - Jeremy I love all of your content and am so thankful for how you make it so incredibly tangible and engaging!

I listened to you on a podcast today on FI/RE here and really enjoyed it. You directed us to your website and the FI/ RE calculator (linked below).

My spouse and I currently save over 60% of our income and are fortunate to be high-income earners. While we have done a good job of saving, I do not know very much about strategies for withdrawing the money every month once you do first your retirement number. Can you provider any guidance on this via the below questions?

Numbers Input Into This Calculator

  • 32 years old
  • $471,000 invested today ($160K Taxable Funds, $310k in Roth 401K/ Roth IRA)
  • $8,000 monthly invest
  • 7% rate of return
  • 37 - retirement age
  • $80,000 Cost of Living
  • $1,243,786 - Investment at Retirement

On the podcast you said that if we withdraw 4% we will never lose our investment. However in the above scenario I am withdrawing close to 6.5%:

  • 4% Withdraw Rate on the above = ~$50,000
  • 6.5% Withdraw Rate on the above = ~$80,000

THREE QUESTIONS

  1. Is there a reason why withdrawing more than 4% that the “Your Total Investment” in the above scenario does not go to zero? Is this a terrible strategy or would you wait a few more years and get your withdraw rate closer to 4%?
  2. How would you factor taxes into the above strategy? If I am withdrawing $80K/ year and that is my only income I assume taxes would be at Capital Gains rates and would reduce overall take home pay?
  3. Can you provide any guidance on how you withdraw your income from the following places at a younger age than 62 (i.e. 37 years old):
  • Vanguard Mutual Funds (Taxable Investing)
  • Roth 401K/ Roth IRA

Thank you very much!

#2

Welcome @OutlandishWombat!

Well, first of all, congratulations on killing it! 32, almost half a million bucks and well on your way to millionaire status. Very nice work!

Let’s go through the questions:

So the calculator is just doing a dumb projection of a guaranteed 7% rate of return. But there is no such thing as a guaranteed 7% rate of return. The market returns about 7% historically, after accounting for inflation. But some years it’s up 30% and sometimes there’s 3-4 down years in a row! So if you retire, then start taking your 7% per year on top of the 3-4 down years in a row, you can get yourself into a situation where your nest egg doesn’t have enough time left to recover before you spend it down to zero. All this stuff is purely “rule of thumb” since we don’t know the future, but the answer to your question is basically “volatility.” To play around with it go back to the calculator and instead of 7% try “Random period of the S&P 500” for your rate of return. Every time you click “calculate” it will pick a different time period. You’ll get much more volatile results, and may go broke in some scenarios! Also, even 4% is definitely not a guaranteed thing. It just works for almost every starting/ending year historically speaking. If you’re looking at retiring THAT young, I might want to target 3.5% or 3% to play it safe. Or plan to have some sort of side income for a few years before you go cold turkey. I wouldn’t want you to get into a situation where you retire at 37, go hog wild for 13 years, then realize at 50 you’re on trouble and have to try to reenter the job market at 50 with a 13 year gap on your resume.

Yep, taxes are a factor. But like all things, “it depends”. If you really retire in only 5 years, you may not have a ton of capital gains. Almost all of the money in your accounts will be principle. So you can just withdraw money from your taxable account, and you’ll owe minimal taxes. If we have an incredible 5 years of the market and your account doubles, then half of the value in there will be taxable at the long term capitals gains rate. But they only tax you on the growth. So, as they say, it’s a good problem to have.

You would definitely not touch the 401k/IRA as long as you have money in the taxable account. Let those tax-free Roth accounts grow as long as possible, living off the taxable account. If you do deplete the taxable account, the principal of your 401k an IRA can both be withdrawn tax/penalty free (since they’re both Roth status). If you blow through the taxable and all the principal and all you have left is the growth of the retirement accounts, you’re probably in bad shape. You can take it out with a 10% penalty, or there’s a few other ways to get at retirement funds, but I wouldn’t want to count on that. I’d want to have a bigger nest egg where you’ll never get there. (and the retirement age is actually 59.5, not 62)

But broad strokes, you’re killing it and every month that goes by you’re making your financial future that much brighter! :slight_smile:

4 Likes