Retirement planning normally consists of two broad phases – accumulation and withdrawal. Early retirement is difficult to achieve because there is less time to build wealth and more time to use it up. For most people, the accumulation phase is the difficult part. Many families spend too much and don’t save enough. The median retirement savings of households near retirement age is just $17,000. That’s not going to work out well. For us, the accumulation phase has been relatively smooth. Our household income has been good and we live modestly. The withdrawal phase is more questionable because I will have 40+ years in retirement. Can our savings last that long? Today, we’ll take a look at our unusual early retirement withdrawal strategy and see how to make our retirement savings last.
*This post is a part of the Drawdown Strategy chain started by Physician on Fire and Fritz @ The Retirement Manifesto. You can see other bloggers’ retirement withdrawal strategy at the end of this post. Check them out.
Traditional Withdrawal Strategy
To clarify the concept, here is a graph of regular folk’s retirement savings. Normal people can save 15% and retire when they are 65. In the ideal case, their net worth and retirement savings should look something like this.
Retirement is the natural inflection point because the earned income will cease and retirees will need to fund their cost of living with their savings.
Early Retirement Withdrawal
Early retirement is more difficult because the accumulation phase is shorter and the withdrawal phase is longer.
To retire early, you’d need to save more than 15% of your income. Saving and investing more will translate directly into how early you can retire. In this graph, we see the ideal case for an early retiree who stops working at 55. The real world is more complicated than this so you’d need to make your own graph. Basically, if your net worth is 25x your annual expense, then you probably can retire. That’s financial independence and it should work very well at 55 and older.
Joe’s Withdrawal Strategy
What if you can’t wait until 55? Here is an alternative that I’m pursuing. I added another phase into the traditional retirement planning model. We need to be more flexible because our time in retirement will be so long.
Basically, I split retirement into early retirement (semi) and full retirement. I retired from my engineering career when I was 37 and this is early retirement for me. However, I still make some income from blogging. Now, there are 3 phases instead of 2.
- Accumulation phase – I worked full time and saved a sizable portion of my income.
- Holdfast phase – The beginning of this phase is when I quit my full time job. The goal in this phase is to avoid drawing down from our retirement accounts and minimize withdrawal from our taxable accounts. We can do this by having some passive and active income (blogging for me). Our net worth gain would slow way down because we won’t save much, but it should still grow slowly.
- Withdrawal phase – We’d go into the traditional withdrawal mode when we’re 65 and probably won’t earn much money.
Currently, we are at the first inflection point. I’m already early retired, but Mrs. RB40 is working full time. Our income still exceeds our expenses and we continue to save more than $50,000 per year. Once Mrs. RB40 retires, we will be 100% into the holdfast mode.
Whew, we finally get to the withdrawal strategy. My drawdown strategy is spread over 2 phases – the hold fast and withdrawal phase. Let’s look at our investable assets to see the mechanic of the withdrawal process.
We’ll just look at the major categories and ignore the smaller ones in this post.
- Taxable accounts – This is our dividend growth stock portfolio. We’re reinvesting the dividend now, but this income will help fund our early retirement.
- Rental properties – Our rental properties are worth a lot, but they don’t generate that much income.
- Tax Deferred – These are our 401k and traditional IRAs. We will try to avoid withdrawal until the withdrawal phase after 65. These are all invested in vanguard funds.
- Tax Free – Our Roth IRAs. We will try to avoid withdrawal here too, but we could take some money out if we need to. These are also in vanguard funds.
- Business – My online business. It’s not worth much, but the income is good at this time.
- Other – P2P lending and real estate crowdfunding with RealtyShares.
If you need help keeping track of your finances, try using Personal Capital to help manage your investment accounts. We have many accounts and Personal Capital shows me the big picture. I can see how our taxable and/or nontaxable investments are doing compared to the S&P 500. See your balances and more. It’s a great tool for DIY investors.
Holdfast Phase withdrawal plan
As I mentioned earlier, we’re still in the beginning of the holdfast phase. Currently, we reinvest all of our investment income, but this will change once Mrs. RB40 retires. Her target early retirement date is 2020, but she may leave earlier if the planets align.
Once Mrs. RB40 retires, then we’ll support our family with these sources of income. Currently we spend about $55,000 per year.
- Online income – My online income is pretty good this year and it can pay 100% of our expenses. However, the blogging income is volatile and I can’t count on it to be steady or lasting 20 years. I’m pretty sure it can cover at least 60% of our expense for the next 5 years, though. We’ll just count 60% here.
- Dividend income – Currently, we receive about $12,000 in dividend annually, but it is increasing every year. By the time Mrs. RB40 retires, our dividend income should cover about 25% of our expenses.
- Rental income – This one is tough. In a good year, we make about $10,000 from our rentals. However, one big maintenance expenses can cut that in half or more. Also, we plan to move into one of our rentals. It will reduce our monthly expense, but also cut into our rental income. This one is too complicated to predict so I’ll just assume the rental income will cover about 10% of our expenses for now.
- Other income – We have some income from crowdfunding and side hustles, but it’s insignificant at this time. Once Mrs. RB40 retires, we will try to increase this to 5% or our expenses. That’s about $2,500 annually so it should not be that difficult.
That adds up to 100%, but there are a lot of moving pieces here and we will need to be flexible to make it work. On good years, we will have extra money to save, but we might have to sell some stocks in the lean years.
For example, if we’re short about $10,000 in a lean year. Here are some things we could do.
- Hustle a little more. I’m sure Mrs. RB40 could pick up some contract work. I could even pick up some seasonal work if we really need the money.
- Cut back on expenses. We could vacation locally instead of visiting other countries. There are a lot of local attractions that we haven’t been to yet.
- Withdraw from our retirement accounts. We could withdraw some money from our tax free pile. The Roth IRAs don’t have early withdrawal penalty when you withdraw the contributions.
- Sell some dividend stocks. I prefer not to do this because it will reduce our future dividend income.
I’m sure we will be fine with any combination of the items above. Our tax free accounts shouldn’t be impacted much even if we withdraw $10,000 annually for a few years.
If we can holdfast like this for 20 years, then our retirement savings should continue to grow and we’ll have a very comfortable retirement ahead of us. We’ll also opportunistically roll over some of our tax deferred investment to our tax free pile over the years. This is call building the Roth IRA ladder. It will make future withdrawal easier.
Full Retirement Withdrawal
Full retirement is still 20 years off for us so there are a lot of uncertainties. We’ll just make some broad assumptions and go with that. Our asset mix will change over the years and this is what it could look like in 2038.
Here is how we’ll support ourselves when we’re 65.
- Social Security benefit – We’ll have some income from our Social Security benefit. It should cover a good portion of our expenses.
- Tax deferred accounts – Next, we’ll make annual withdrawal from our tax deferred accounts.
- Taxable accounts – If we need more income, then we’ll sell stocks from our taxable accounts.
- Tax free – We’ll leave this one alone.
- Primary residence and other assets – Leave this alone.
- Cash – We’ll maintain enough cash for one year of expenses.
- Pension – I have a very small pension from my old job. It might be enough for a nice meal out in 2038…
This drawdown phase is light on the detail because we have 20 years to get there. I don’t want to spend too much time on it because there will be a ton of changes over the next 2 decades. Our asset mix probably won’t look anything like this. This plan will firm up as we get closer to our full retirement date. Right now, we need to focus on our holdfast phase and make sure we get through it with minimal damage to our retirement savings.
No need to over plan
So that’s my withdrawal strategy. The additional holdfast phase suits me very well because I really enjoy working part time on my own projects. The extra income will help minimize withdrawal over the next 20 years and give us a big margin of safety when we’re 65. Our retirement investment will have time to grow if we can just holdfast for the next 20 years.
Lastly, I don’t think you need to worry much about the withdrawal strategy unless you’re close to retirement. If you’re in the accumulation phase, just focus on saving and investing as much as you can. I’m sure you’ll work out a withdrawal strategy after retirement. You’ll have a lot more time to do it then.
More Withdrawal Strategies
Here are more retirement strategies from the PF blogger community. Some of these are much more detailed than mine. Check them out!
Anchor: Physician On Fire: Our Drawdown Plan in Early Retirement
Link 1: The Retirement Manifesto: Our Retirement Investment Drawdown Strategy
Link 2: OthalaFehu: Retirement Master Plan
Link 3: Plan.Invest.Escape: Drawdown vs. Wealth Preservation in Early Retirement
Link 4: Freedom Is Groovy: The Groovy Drawdown Strategy
Link 5: The Green Swan: The Nastiest, Hardest Problem In Finance: Decumulation
Link 6: My Curiosity Lab: Show Me The Money: My Retirement Drawdown Plan
Link 7: Cracking Retirement: Our Drawdown Strategy
Link 8: The Financial Journeyman: Early Retirement Portfolio & Plan
Link 9: Retire by 40: Our Unusual Early Retirement Withdrawal Strategy
Link 10: Early Retirement Now: The ERN Family Early Retirement Captial Preservation Plan
Link 11: 39 Months: Mr. 39 Months Drawdown Plan
Link 12: 7 Circles: Drawdown Strategy – Joining The Chain Gang
If you’d like to join the chain, then share your withdrawal strategy and tweet with #DrawdownStrategy. Then add these links above and new posts on the chain. I’ll check Twitter periodically and keep this list updated.