≡ Menu

Early Retirement Draw Down Strategy


Early retirement is a double whammy to your retirement savings.  Making your money last through retirement is not easy and it becomes much more difficult if you retire early. Quitting your job and taking an early retirement means less time to save AND more time to spend.

Let’s look at some numbers here. We’ll keep it simple and use the life expectancy of 80. We’ll also assume $30,000 per year in expenses. We’ll ignore inflation and investment returns in this post.

Roy – Regular retiree Alex– Early retiree Bob– Retire at 40
Age of retirement 65 55 40
Years in retirement 15 25 40
Savings prior to retirement needed due to expenses at $30,000 per year $450,000 $750,000 $1,200,000

It’s clear that the earlier you retire, the more retirement savings you’ll need. If we take social security payments into account, the regular retiree will need less savings. The average social security benefit for a retired worker is $15,000 per year. This will enable Roy, regular retiree, to save less for retirement. He only has two years to go before he reaches 67 and be eligible to receive full social security retirement benefits. He needs to spend $30,000 for two years. After that he can spend $15,000 of his own savings plus $15,000 from social security benefit for a total of $30,000 per year.

Taking the social security benefit into account.

Roy Alex Bob
Years before social security benefit 2 years ($60,000) 12 ($360,000) 27 ($660,000)
13 years with social security benefit (15k/yrs) $195,000 $195,000 $195,000
Saving needed $255,000 $555,000 $855,000

So you can see that if you retire 10 years earlier you’ll need twice as much saved prior to retirement. If you retire at 40, you will need more than 3x the retirement savings of a regular retiree.

This is one reason why most people can’t conceive of retiring from their job in their 40s or 50s. Most people over 60 years old have less than $100,000 in retirement savings. Is it possible to save 2x or 3x so you can retire early?

Retire By 40 draw down strategy

All is not lost. There are other ways that we can stretch our retirement savings. Moving to an area with lower cost of living is one way to make our savings last longer. Another is working part time or making money from a hobby/micro business. Every situation is different and I am very lucky that Mrs. RB40 likes her job and is planning to continue to work.
early retirement draw down strategy

Here is my personal draw down strategy. This is the targeted goal and it might fluctuate a bit. That’s why we have a large cash savings set aside at the moment.

40 to 55 years old

25% of expense – Rental and dividend from taxable account (including 11% from Peer to Peer lending) generate passive income.

25% of expense – My online and other freelance income.

50% of expense – Mrs. RB40 continues to work and contribute to her retirement fund.

55 to 65 years old

Mrs. RB40 can retire around this period and take a full or partial pension as needed.

25% – Passive income from rental and dividend from taxable investment.

25% – My online and other active income.

50% – Mrs. RB40’s work or pension.

65 to 70 years old

At this point, we might have a big college tuition bill and we can withdraw from the retirement account for this purpose. We probably need to spend more money on our health at this point as well. Let’s say I’m tired of freelancing and decide to just sit next to the pool at this point too.

25% – rental and dividend from taxable account

50% – Mrs. RB40’s pension

25% – Roth draw down

College tuition for baby RB40 or health spending – 401k withdrawal

Fun money – If we get any social security benefits, we’ll ear mark it for fun and travel. The more likely scenario is that we’ll use the extra social security benefit to cover inflation.

70 to 80 years old

Continue with what we were doing and take minimum distribution from 401k.

That’s my plan for the next 40 years. Of course real life rarely goes as planned so we might have to make some adjustments. If our investment crashes completely or if we run into other problems, I might have to go back to work for a corporation. However, if we keep our lifestyle inflation down and I can make some money freelancing, then I think everything will work out. The key to my early retirement is putting off the retirement account withdrawal until much later. The mix of passive income and online/freelance/part time job income are a big part of my plan. The truth is I can’t stop working completely yet, but I only need to make a bit of money every month to make ends meet. If I don’t make any money for a few months, we can use part of our cash saving to help pay the bills.

Early retirement is not easy, but if you invest a large percentage of your income and live a reasonable lifestyle, then it is possible.
Trade Free for 60 Days at E*TRADE Securities LLC

Update: I left my job in July 2012 and I’m being a full time stay at home dad for the time being.

Get new articles via Email:
RB40 won't spam you

The following two tabs change content below.
Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
Get update via email:
Sign up to receive new articles via email
We hate spam just as much as you
{ 48 comments… add one }
  • Mr. Everyday Dollar July 30, 2012, 7:25 am

    Your 1.2M is exactly the figure I’m targeting for early retirement. Is your taxable portfolio 100% dividend producing securities?

    • retirebyforty July 30, 2012, 7:53 am

      Good luck! The taxable account is probably 75% dividend stocks. I have been converting the holding to dividend stocks, but it’s a slow process.

      • Mr. Everyday Dollar July 30, 2012, 7:59 am

        I hear ya. I figure I will need to convert my portfolio from growth to dividend/REIT/MLP when I near early retirement. However, by that time some of my growth stocks should mature and switch to dividend paying companies – like Chipotle. It’s already happened with Apple, Coach, Starbucks and Whole Foods in my portfolio.

        • retirebyforty July 30, 2012, 11:11 am

          That’s a good point. I hope those companies increase the dividend payout in the decades ahead.

  • Mike July 30, 2012, 8:01 am

    I am aiming a little higher than you ($1.5 to $3 million) to be able to retire a little earlier. I am already seeing results with passive incomes so I think once these get going it is going to be easier to achieve that result.

    • Miss T @ Prairie Eco-Thrifter July 30, 2012, 9:31 am

      We are similar. With having kids and preparing for some other stuff we are hoping to be closer to 2.5 or 3 million when we retire. It all depends on your needs.

      • retirebyforty July 30, 2012, 11:18 am

        Having kids will make it harder to accumulate that much money, right? You are still young and have a lot of time left. Good luck!

    • retirebyforty July 30, 2012, 11:12 am

      That’s a great goal. It will enable you to spend a little more and be more comfortable in retirement. Are you on track? When do you think you can retire?

  • [email protected] July 30, 2012, 8:45 am

    Good post!

    Actually, I do retirement calculators online occasionally and get frustrated when they say I need some ridiculous amount of money- like 4.6 million dollars. That is what the last one told me!

    We have incredibly low expenses…and only mortgage debt. Our house will be paid off in 3.5 years and we will be totally debt free at age 36. We plan on retiring at 55…so we will have almost 20 years completely debt free to save for retirement (we also have 401k and Roth IRA). What in the world do we need 4.6 mil for?!?!?!?!?!?1

    • retirebyforty July 30, 2012, 11:14 am

      4.6 million dollars?! How many people can realistically accumulate that much money?
      Most of the online retirement calculator assume that people will spend all their income which is not true.
      Debt free at 36 is awesome! What’s your target amount? 2 million dollars?

      • [email protected] July 30, 2012, 2:36 pm

        I guess we don’t really have a target amount. I think we will just “know when we get there.” It’s hard to say because we have two rental properties now and plan to have 6 or 7 by then….so we should have a considerable amount of (somewhat) passive income to live off of as well. But since things may not go as planned (they never do), it’s hard to say. We’re just doing the best we can and when that day comes we will hopefully know it!!!

  • Financial Samurai July 30, 2012, 10:12 am

    Nice job amassing the $1.2 million by age 39 Joe!

    It’s really great to see Social Security get factored in, b/c I think most people age 40 and under, including myself DO NOT factor in SS b/c we don’t believe in the system.

    In reality, SS will be there, perhaps only 70%, or perhaps when we are 67+ instead, but it will be there, or else there will be a revolt!

    Just make sure the wife works for as long as possible! 🙂


    • retirebyforty July 30, 2012, 11:20 am

      I don’t really factor in social security in our retirement either. If it’s there, we’ll use it for fun money, if not, we’ll still be ok. 70% is still better than nothing. I’m sure Mrs. RB40 will keep working even if she retire from her current job. She is very restless and can’t really stay at home.

      • Sam July 31, 2012, 7:46 am

        Nice. It is great to see your wife want to work for a long time.

        One thing is be curious about is how you feel drawing down savings. Because I’ve saved for so long, I am loathing spending savings, or even my passive income.

        And so, I just sped my micro biz income instead. But really, it’s all the same.

        • retirebyforty July 31, 2012, 2:35 pm

          I don’t like drawing down on the saving at all. That’s why I only plan to use the rental income and dividend payout to fund the next 20 years. Along with my micro business, they will cover 50% of our expense. If I can keep my principle from shrinking, I’ll be happy. I’ll leave the retirement plans alone so they will have time to grow.

  • [email protected]&More July 30, 2012, 10:31 am

    Seems like a decent strategy. Hopefully the freelancing goes well and you can save extra to retire from freelancing as well whenever you decide the time is right. I need to make a plan to see when I want to retire but for now I am OK saving a large percent of my income!

    • retirebyforty July 30, 2012, 11:21 am

      Saving a large % will give you the flexibility to do what you want later. You can switch career or work for less if you don’t need a big paycheck.

  • phr3dly July 30, 2012, 10:34 am

    I think your SS assumptions are incorrect.

    SS payouts are dependent on what you put in. If you stop contributing at age 40, you will almost certainly not be entitled to the same payout as if you stop contributing at age 65.

    The SS statement I get (well, used to get) every year would say something like “If you continue to contribute to SS until age 65, you can expect your annual payment to be $X”.

    • retirebyforty July 30, 2012, 11:09 am

      I was just using the average social security benefit of $15,000 per year. I thought social security benefit depends on the points. I already maxed out at 40 points and even if I keep working, it wouldn’t increase the benefit. I’m not sure though and will have to check it.

      • phr3dly July 30, 2012, 11:44 am

        I’m not sure of the exact formula (my early retirement plans are being made assuming that social security will not provide any benefit).

        I did find this:

        Your Working History Affects the Amount of Your Social Security Retirement Benefits

        The Social Security Administration (SSA) considers your highest-earning 35 years. If you worked less than 35 years, then you will have years where the SSA simply uses $0 for your earnings. Not surprisingly, the higher your earnings, the greater your retirement benefit will be. Note, however, that earnings over the annual limit are not considered in your benefits calculation.

        In other words, if you paid into SS for 20 years and then retired early, you would probably expect your SS benefit to be a little over half what it would be if you paid into it for 35 years.

        • retirebyforty July 30, 2012, 1:10 pm

          I’ll do a bit more research and see if I can figure it out. I still have income from various sources so my contribution won’t be $0, but it will be less than when I had a full time job.

        • Sam July 31, 2012, 7:48 am

          You are on the right track and correct on the averaging of the last $35 years and the $0,s for none working years.

          At the same time, joe is correct on getting the maximum credits.

          Gotta do some calculations!

        • jim July 31, 2012, 11:14 am

          This is correct. TO figure your benefit amount you average your best 35 years of income adjusted for inflation. The 10 years (40 credits) is to be eligible for a benefit.

          Another point for RB40 to consider is that he is also eligible to get the better of his own SS benefit OR 50% of his wife’s benefit. So if his wife works for 35 years with a good income then 50% of her benefit could possibly be worth more than his benefit for working 15-20 years and he’d get the larger amount instead.

          • retirebyforty July 31, 2012, 2:32 pm

            I did some research and it’s pretty interesting. I will write a post on how early retirement impact my social security benefit next week. I’m pretty sure my benefit is higher than the spousal benefit, but we’ll have to wait and see.

  • SavvyFinancialLatina July 30, 2012, 10:40 am

    Nice job! $1.2? You need to share your strategies, so us youngsters, can follow!

    • retirebyforty July 31, 2012, 12:21 am

      That’s hypothetical. 🙂

  • JW @ AllThingsFinance July 30, 2012, 12:19 pm

    A non-qualified distribution from a retirement account will also incur a pretty large penalty. If you’re not 59 1/2, a 10% penalty will usually be assessed further reducing the amount that you have towards your retirement.

    • retirebyforty July 30, 2012, 1:11 pm

      That’s one of the reason why I plan to put off withdrawal as long as possible.

    • phr3dly July 31, 2012, 3:43 pm

      Note that you *can* take early withdrawals from a 401k without paying a penalty. Google “401k 72t”. This option does not work well if you want to take a big chunk out for a purchase, but it works great for early retirement.

      • retirebyforty July 31, 2012, 10:06 pm

        Yes, that’s true, but I will try to avoid early withdrawal so the retirement funds will continue to grow.

  • jefferson July 30, 2012, 12:44 pm

    i am only 34.. and am not factoring social security benefits at all into my retirement calculations.. i just expect the benefits to get slashed and burned well before then..

    joe, what methods are you planning to reduce your cost of living significantly now that you are retired?

    • retirebyforty July 30, 2012, 1:13 pm

      I’m not counting on social security either, but I think it will still be there. At the worst case, we’ll probably see 50% of the promised payment, but we still should see something.
      I can reduce the cost of living only a little bit at this point. Our biggest expense is housing and Mrs. RB40 isn’t willing to move yet. Once she leave her job, then we’ll be able to move to a cheaper location if we need to.

  • krantcents July 30, 2012, 1:23 pm

    I definitely agree that nothing goes exactly as planned. That is the prime reason, I have multiple income streams. I have Social Security, pension, 403B, IRA, Roth IRA and a brokerage account. In addition, I am “slowly” generating additional income through my blog. I could generate additional income by tutoring, teaching extra classes or covering classes. In retirement, I expect there will be new ways to generate income as well. Opportunities do not stop because you retire!

    • retirebyforty July 31, 2012, 12:22 am

      You’ll have a great retirement. I have multiple streams too. The only thing I’m missing is a pension. 🙁 I’ll work part time if I need extra income.

  • Little House July 30, 2012, 4:42 pm

    Looks like a pretty solid plan, but where’s the “Life between 80-95” range? Just asking since there is always the possibility that may happen in our lifetime. I’m sure your passive income will remain solid, but what about the remaining retirement accounts? Will there be enough in there to fund another 15-20 years?

    In my case, I’m just planning to work until around 75. 😉 That then gives me about 20 years of official “retirement.”

    • retirebyforty July 31, 2012, 12:25 am

      You are right. Here it is.
      80-100 years old: sponge off baby RB40. 🙂
      I will probably keep doing freelance or part time job until later if I need to. We can also move to Thailand to take advantage of the lower cost of living.

  • Leigh July 30, 2012, 10:11 pm

    Life expectancy of 80?! I’m assuming 95 in my calculations. Sounds like you have done a pretty good job of saving money over the last almost-twenty years of working.

    I’m working at saving a lot in my twenties so I have options later on. I don’t necessarily know if I want to move into management, so I want to be prepared in case I get stuck at a particular level at work or managed out to be able to retire by 40 like you did.

    I’m definitely curious to see how your retirement unfolds 🙂

    • retirebyforty July 31, 2012, 12:26 am

      My family doesn’t have a history of longevity so I’m not too worried about living to 100. 🙂

  • We all dream of retiring early and enjoying life more; however, I decided that there will be no age for me to retire. I realized that I can enjoy life, travel, eat, and bond with my family though I am working. I can bring my work anywhere and enjoy the food on the table, as long as I have my laptop and a good internet connection; hence, I can work even while in travel. This means that I will only stop working, saving, and investing when my body says it is time for me to stop.

    • retirebyforty July 31, 2012, 2:36 pm

      It’s great that you can take your work anywhere. This means you enjoy your work too right? 🙂
      I will probably keep working on the side for a long time as well. I think full retirement will be a bit too boring.

  • Cassi July 31, 2012, 4:46 pm

    The woman in my family have been known to live from 80 to 95 years, and my retirement isn’t for… forever, so by the time i am near that, we might have holographic bodies. (I read somewhere that they want to have them by 2045! I’d be 51 by then.) As a future senior, as in high school senior, these numbers baffle me.

    Also, I surprised to have social security when I am older…. Sigh.

    • Cassi July 31, 2012, 4:47 pm

      I would be surprised to have social security when I am older!

      Alas, my typing skills are failing me.

    • retirebyforty July 31, 2012, 10:08 pm

      Where is my jet pack? 🙂 I think immortality is still quite a long way away, but who knows.
      I don’t know about social security for your generation either. Maybe once all the baby boomer passed away, social security will be in a better shape. Just in time for your retirement.

  • Cat Alford @ BudgeBlonde.com July 31, 2012, 10:25 pm

    I’m definitely impressed by your diligence and persistance. I think this is completely awesome – the best part being that you get to be there for your kiddo!

Leave a Comment