My Early Retirement Spend Down Strategy – Put It Off

My Early Retirement Spend Down Strategy - Put It OffEarly retirement is tricky. If you retire early, you will have a longer retirement and less retirement savings. That’s a double whammy. The average life expectancy in the US is 78.9 and rising. Let’s just round it off to 80 and work with that. When an average person retires at 65, she will have about 40 years of work behind her and 15 years in retirement. On the other hand, if you retire at 40, you will only have about 20 working years and much longer time in retirement, 40 years.

That’s why early retirement seems impossible to most people. You have to save a large portion of your income and live well below your means to have a shot. Of course, winning the lottery is an option too, but not many of us are that lucky. Retiring by 40 is only possible for a very small minority.

My Early Retirement Spend Down Strategy

My spend down strategy is simple — put it off as long as possible. Who knows what can happen over the next 40 years. I think it’s better to be conservative and put off withdrawal. Here is a quick recap of my strategy.

Age 20 to 40: Accumulate Phase – We lived a modest lifestyle and invested a large percentage of our income. I didn’t keep track of our cash flow in my 20s so I’m not sure of the actual percentage. By the last few years of my engineering career, we were saving over 60% of our income.

Age 40 to 60: Compound Phase – This is why I was confident enough to quit my engineering career at 38. In this phase, we will let our retirement fund compound for 20 years. Currently, Mrs. RB40 is still working so we are still adding over $50,000 to our retirement fund every year. Once she quits her job in 2020, then we will stop adding to our retirement funds.

Age 60 to 80: Spend Down Phase – At this point, I would be comfortable spending down our retirement funds. Our time in full retirement will be relatively normal, around 20-30 years. The retirement accounts should also be in a great shape with the additional 20 years to compound.

Age 80+: Bonus – Hopefully, I will be healthy and lucid enough to enjoy this late phase in life.

Making the Compound Phase Work

The compound phase above is just my strategy to put off spending down our retirement funds. How does this work? Let’s see. We’ll leave Mrs. RB40’s pay out of this calculation because she will retire in just a few years.

Non-W2 Income                     Projected 2016 monthly income

Dividend Income                     $900

Rental Property                        $650

Part time work                          $3,000

Our monthly expense averages around $4,500 so it’s pretty much right on the dot. As mentioned above, Mrs. RB40 still works so we have a little breathing room and can continue to save. By the time she quits in 2020, our non-W2 income should comfortably cover our monthly expenses.

Alternatively, I could withdraw from our retirement fund instead of working part time. Currently, we have about $900,000 in our retirement fund. I could take 4% withdrawal per year and that would come out to about $36,000. Right on target again! That’s just enough to replace my blogging income. I don’t want to spend down yet, though.

By working part time on something I enjoy, we could put off spending down for a long time. A little active income goes a long way in retirement.  I don’t want to start spending down right now because it looks like we are near the crossover point. If the we have a prolonged recession, then our current retirement portfolio wouldn’t be able to handle 40 years of withdrawal. On the other hand, if we leave our retirement accounts alone for 20 years, we would be financially secure for the rest of our lives.

Strategies to put off spending down

Here are some ways to put off spending down your retirement funds when you retire early.

  • Part time work. Many retirees work part time. It’s best to make work on something you enjoy. Otherwise, why bother retiring in the first place.
  • Cut expense. When Mrs. RB40 retires in 2020, we will consider moving to a location with lower cost of living. This could cut our monthly expenses by a huge amount. Portland is catching up with the rest of the west coast in terms of the price of real estate.
  • Minimize lifestyle inflation. Some lifestyle inflation is inevitable. You need to keep a sharp eye on this, though. Any lifestyle inflation will carry into the future. It’s like reverse compound interest…
  • Grow passive income. We should be able to grow our passive income at a good rate until Mrs. RB40 retires. I’m adding money to our dividend portfolio and this should increase our monthly dividend income. Our rental income should also increase because rent has been growing in our area. The rate of growth will decrease after 2020, but we should still beat inflation handily.
  • Generate Intellectual properties. You can write a book, build a brand, make an app, or create art. Who knows what can happen?
  • Invest wisely. Come up with an asset allocation strategy you can live with and rebalance once a year. Don’t abandon your strategy when the market crashed.

We are putting off our spend down phase for as long as we can. It’s better to be conservative when you have such a long retirement timeline. Of course, we will keep an eye on it and evaluate our finance every year.

What’s your retirement spend down strategy?

Image credit: by guuleed

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.
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32 thoughts on “My Early Retirement Spend Down Strategy – Put It Off”

  1. I’m in a delay phase as well (although I retired this year at 50). A good time to review your asset allocation and risk tolerance. Even though you’re “compounding” while your wife still works, you also want to preserve your $900k fund.

  2. The fact that Mrs. RB40 is still contributing over $50,000 to our retirement fund every year while you are retired is phenomenal. My wife has dropped down to part-time for the time being and is in the non-profit arena which doesn’t really pay a lot to begin with, without even taking into consideration the part-time status. That’s one of the reasons I need to continue my job for a little longer than I wanted.

    She still hasn’t decided when she wants to retire though, so we’ll still have some trickle-in income once I do pull the trigger for at least a little while. I’m also hoping to be able to bring in a little more on the rental income (we are closing on another property next month!), along with some dividend income (though I’m a lot weaker on that side than you are).

    I do agree that the being able to live below your means is a pretty big factor to retire early for most folks. We’ve never really had a problem with that side of things so I think we’re going to be Ok in that aspect.

    Thanks for the great article!

    — Jim

    • Mrs. RB40 contributes about $23k to her retirement fund. I also contribute about $30k to my i401k and Roth IRA. It’s nice that we don’t use all our income.
      Part time is great. I think that’s the ideal way to live if you can figure out how to do it. Good luck on your next rental.

  3. RB40 —

    I always enjoy reading your articles.

    You always give me some things to think about and consider as retirement draws near.

    Keep up the great work, sir.

    Thank you.

  4. I like the phases you’ve outlined here as well. I’m a little late to the game, but hope to be in the compounding phase by 45ish. We’re on target for my goals this year and next year I’m going to get even more aggressive. If my grandparents are any indication, I’ll be around into my 90’s so I don’t want to hit spend down too early either.

  5. To start I must say that I retierd back in 2013 after 25 years of very intensive engineering work. In my case it was ‘retired by 50’.
    For me to retire means not to feel engaged. If I work even part time it means moving from one job that I like less to another that I like more. I would call it switching jobs, like what I did all my working life, not retirement. Even to manage a rental looks to me as work because I feel engaged and not really free. When I read your blog I feel that to be an active bloger plus a rental manager is not much less engagement than to be an Intel engineer. If I add to it that you also take care of your son for sure it’s not less work but much less money. It is clear that you like it much more so in my eyes you have switched the job in Intel that you liked less with your current job that you like more. Good for you but in my eyes it’s not retirement.

    My budget is calculated so I can manage with 2-3% of my dividend based portfolio per year. This way it should last forever. For years of dividend crash I have some cash on top of my portfolio so I do not have to sell shares at low price.
    The last three years were very good and in fact my portfolio generated more than 3% so I used the extra money to increase both my portfolio and my cash reserves. I’m now more ready for the less good years to come.
    The risk that I see is an unexpected expenses that I can not plan. My general idea is that this could be covered by reverse mortgage of my house.

    Last point about retirement that I would like to share is that I find it a bit different from what I was told: People say that when one retires he actually reduces his expenses. I feel that it goes the opposite way and in fact I and my wife spend more now compared to the time when we worked. The main reason I think is because when we worked we have had less free time to spend money and also many of our expenses were covered by our companies. We are lucky that our $ currency is stronger these days so we spend much less when traveling to Europe or Brazil. Also we enjoy airbnb that is much cheaper than hotels.

    • Congratulation!
      I don’t think it’s good for the long term to disengage so completely. You’re still young and active at 53. I’m afraid you will get bored in a few years. I’ve heard it from many early retirees who stop working completely. Anyway, enjoy your retirement. 🙂
      Studies have shown that retirees spend more money right after they retire and then tapers off as they get older and less active.

  6. If we keep going as we’re going, most internet calculators have us never spending down. However, there’s no guarantee that returns will be as predicted or that we will continue getting raises or even that we will keep our high-paying jobs. We’ll see what happens.

    • Right, you can’t trust the internet calculator when you’re 40. There are too many uncertainties. I think it’s probably more accurate when you get to 65. You enjoy your high paying jobs so there is no need to quit. 🙂

  7. My plan is to make my withdrawals vary with market value of the portfolio. The standard 4% drawdown scheme pulls out 4% the first year and increases withdrawals based upon the inflation rate regardless of portfolio performance. Such a scheme has historically worked almost all of the time over 30-year periods, but as you point out, we may live longer and asset markets may not be quite so friendly going forward. If the future is unprecedented this could mean depleting down to zero at the worst possible time.

    So my plan is to pay myself as if I were managing a hedge fund– withdraw 2% of the market value of the portfolio at the time of withdrawal, plus 20% of the annual gain. With my scheme the portfolio should never deplete, but my income will fluctuate. This I handle by keeping a large cash buffer to buy time to slowly make expense adjustments as they are needed. I plan to roll the 20% of annual gains portion into my cash buffer (and not spend it) even if interest rates are minimal.

    My scheme raised my number from 33x annual expenses to 50x annual expenses, but since my expenses have been very low all my adult life, that wasn’t a problem. I don’t think active income will be an option for me once I retire.

    • I’m planning to withdraw a flat 4%. We’ll just take 4% of the investment income every year when we reach 60. Maybe a few years earlier if things go well.
      Your hedge fund idea is great. 2% + 20% annual gain would be great in a good year. Our portfolio might not support our lifestyle at that rate, though. We’ll have to see if it works when we’re 55 or so.

  8. I am really digging the phases you outlined in this post. Just like you, I am hoping that when I do reach the dividend crossover point, I will have other streams of income to spend down on. That way the nest egg may end up compounding on its own, and I will just spend down on any active income ( 1099, w2, etc). In addition, starting at age 62, there will be social security to fall back on ( for every dollar in social security, I will have to spend one less dollar from dividend income)

    If those estimates for non-investment income turn out to be wrong, I could just spend the dividends and call it a day. Perhaps I should question myself as to why I need so many safety layers before calling it quits. On the other hand, I will have a long retirement in decades ahead, and the uncertain future makes it tough to plan the future.

    • Thanks! A little active income really goes a long way. You don’t need to work much at all for it to make a big difference in your cash flow. I’m looking forward to social security benefit too.
      Even if the non-investment income isn’t steady, that’s okay too. You can use your dividend on slow years. I think it’s good to be conservative when you retire early. Once you’re in your 60, then it’s much easier to draw down.

  9. The best laid plans of mice and men…

    We planned to retire early in our 30’s and live off the dividends and capital appreciation of our portfolio by pulling around 3-4% of the value each year. That amount is more than enough to cover our budget of $33k/yr.

    As it turns out, my wife ended up sticking around work for 2 years since I retired, and negotiated almost 5 months extra paid time off and worked out a part-time-for-full-time-pay arrangement working remotely. So we still have her full paycheck and get to routinely enjoy long 3, 4, or 5 day weekends. I’ve started a couple of side projects that turned out pretty well including my blog and my small early retirement consulting business. My side hustles will pay for all of our expenses this year (and leave some cash on the table!).

    So we’re sort of in a compounding mode right now even though we have “enough”. I might slow down my side hustles once the wife isn’t working any longer (if she decides to quit), we’ll see.

    • It’s hard to stop working when they give her so many concessions. It never hurt to let your retirement fund marinate a few more years. 🙂

    • The “4% Rule” does a lot of good – keeping people from withdrawing too much in the early years of retirement – but it also does a lot of harm. You have to worry about 3 types of inflation in your retirement: regular price inflation (macro level), medical cost inflation (macro level), and medical usage inflation (your own personal need for procedures/care).

      The 4% drawdown rule only works long term if the second two inflations don’t exist (ok, I’ll grant that MAYBE it can cope with medical cost inflation, if the existing trends go way down). But eventually you’ll be drawing 4% of a decreasing pool of assets, meaning your income will slowly decrease at a time when prices and medical costs and medical usage should be expected to go up.

      The logical alternative is to think about your nest egg as a “personal pension” and build in a COLA (cost of living adjustment). That way you’ll start with lower withdrawals and ramp up, which has the added benefit of allowing compounding to work for you even longer. Please don’t pull 4% of your portfolio’s value in your 30s (60-year-old you will thank you for keeping that principle intact). Your side projects sound interesting.

      Disclaimer: I’ve worked in the retirement industry and healthcare industry, and seen a lot of poorly-thought-out financial plans fall apart. I already had enough trouble sleeping with 65-year olds retiring with a $200,000 balance in their 401(k) accounts. It’s made me go super conservative on my own retirement planning, with LOTS of wiggle room and excess capacity.

  10. My dad is actually retiring this week! Thursday will be his last day as a pharmacist. And that’s one day before his 62nd birthday. My mom’s going to work for another 5 years or so. They’ve been saving 61% of their income, so they should still be able to save while my mom is working. Plus, he’s probably going to get a part-time job. My mom will probably start her second career as an art therapist in retirement. So they may have some income from that, too.

  11. My strategy is also to delay draw down of my retirement saving as I plan on continuing to work to some degree and use the extra active income as my mad money. Working is not really work if you like what you do so why stop? My two biggest fears are my health and the possibility of becoming bored. Like Ernie Z said it doesn’t make a lot of sense to die leaving a lot of money in the bank so I need to adopt some sort of spending/investing program in the years ahead a combination of fun adventures and charitable giving seems the way to go. I’ve invested money to ensure my kids received a good education and a good start in life so I’m not concerned about leaving them any money at the end. They can earn it the old fashioned way like I did.

    • My biggest fear is my health as well. Becoming bored isn’t really a concern for me. I never found enough hours in the day to do all the things I want to do.
      I think leaving money in the bank is okay. You can always give the remainder to charities. I’d probably give some to my kid as well. I want him to earn it himself, but I’m sure he would appreciate a little inheritance.

  12. Working, either part time or full, when you don’t need the money can be very enjoyable. If you don’t keep yourself engaged in interesting pursuits, you age a lot faster. They key is having more control and being able to make choices.

    • Exactly! Working on your own term can be very rewarding. Surprisingly, doing nothing but having fun gets old after 3-4 years. Working a little bit makes you feel useful.

  13. In some cases a “spend-up strategy” may be the right one. I would like to time it, as I believe David Chilton (author of “The Wealthy Barber) advised, “so your last check that you write is to the undertaker — and it bounces!”

    These words of wisdom resonate with me:

    “Any man who has $10,000 left when he dies is a failure.”
    — Errol Flynn

    “If you want to really know what your friends and family think of you — die broke, and then see who shows up for the funeral.”
    — Gregory Nunn

    “It’s better to live rich than to die rich.”
    — Henry David Thoreau

    “It’s a wise man who lives with money in the bank; it’s a fool who dies that way. ”
    — French proverb

    “To die rich is to have lived in vain.”
    — Jiddu Krishnamurti

    “He who gives while he lives also knows where it goes.”
    — Percy Ross

    “Thy money perish with thee.”
    — New Testament

    “Leaving your heirs a lot of money doesn’t guarantee tears at your funeral.”
    — Sandra Block

    “If you want them to mourn, you had best leave them nothing.”
    — Martial

    “No matter how rich you become, how famous or powerful, when you die the size of your funeral will still pretty much depend on the weather.”
    — Michael Pritchard

    • I think the spend-up strategy is great for some people. We might do that when we get older. I’m just being conservative because we still have a long time left (hopefully…)

    • As an economist, I’d usually agree. Platitudes aside, it makes a lot of sense on the individual level (lead a more exciting life) and the population level (maximize and smooth the consumer spending aspect of GDP growth).

      But I don’t buy it for practical reasons – it truly only works if you consider each person an individual with absolutely no monetary ties to anyone else. Leaving an estate for your kids is good parenting, and it’s a hedge against disaster: what if your child has a mental or physical disability which prevents him/her from working? What about an accident after your death? Also, and I can’t state this enough, I don’t want to have to worry about money in my old age.

      One of the biggest goals of my personal finance – especially the dividend growth investing portion – is to create a pool of money the next generations of my family. If my projections are at all accurate, I’ll die with a couple million left. You’re welcome, ungrateful (hypothetical/future) brats! 🙂

  14. Our version of putting off the spend down phase is to live cheaply for our first ~20 years in retirement. Basically we’re planning to live as cheaply as we can stand from age ~40 to 60, which also fits since our taxable investments are the smallest part of our portfolio and we want those to stretch (supplemented by rental income and any part-time or intellectual property work). Then, once we can tap our much heftier 401ks, which will have decades to compound, we’ll be able to step up our standard of living a few notches. But like you, we don’t want to get to that spend down phase too soon, so we’re not planning to spend our assets evenly over the course of our long retirement, but instead back load most of it.

    • Great minds think alike. 🙂 I will evaluate our finance when we’re 50. If we are really comfortable, then I wouldn’t mind spending down a bit of our taxable account.

  15. Good idea to delay for as long as possible. I plan on doing the same and just consult PT until I can’t take it no more.

    My goal is to donate my principal when I die, so I’d like to just have enough to live off the interest.


    • That’s a great goal! I would like to donate some, but probably not the whole thing. We’ll see how much we have left by then. 🙂


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