Retirement planning normally consists of 2 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. The timing makes a big difference. 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 a modest lifestyle. 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 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. Workers 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 disappear and retirees will need to fund their cost of living with their savings and other sources (pension and Social Security benefits.)
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 much 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 can consider early retirement. 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 38 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 7 years into the first inflection point. I’m already retired, but Mrs. RB40 is working full time. Our household income still exceeds our expenses and we continue to save more 50% of our income every year. Once Mrs. RB40 retires, we will be 100% into the holdfast mode.
*Update* In reality, our holdfast phase is more complicated than the chart here. We’ll have another inflection point in 2020 when Mrs. RB40 retires. We won’t be able to save 50% anymore, but we won’t have to start withdrawing yet. Our passive income now exceeds our expense. That’s not counting my blogging income.
Whew, we finally get to the withdrawal strategy. My drawdown strategy is spread over 2 phases – the holdfast 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 stock portfolio. We’re reinvesting the dividend for now, but this income will help fund our early retirement.
- Rental properties – I downsized to just 2 rental units in 2019. I need to spend more time out of town and I can’t be a hands-on landlord anymore. Eventually, I’ll move all my real estate investment to REITs and real estate crowdfunding.
- Tax-Deferred – These are our 401k and traditional IRAs. We plan to avoid withdrawal until we’re 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 out some money out if we need to. I plan to build our Roth IRA conversion ladder after Mrs. RB40 retires. Hopefully, we can move most of the investment from our tax-deferred account to our Roth IRA before we’re 70. This will help us minimize RMD.
- Business – My online business.
- Real estate crowdfunding – I plan to increase our investment with CrowdStreet to 5%. I’m taking it slow because I want to make a ladder. These big commercial projects require 5-10 years of commitment. I’ll invest $25,000 to $50,000 every year so I can have a steady stream of income.
Sign up for a free account at CrowdStreet to check out their projects. CrowdStreet specializes in commercial properties across the USA. You can invest in apartments, self-storage, strip mall, office buildings, medical offices, and more. Real estate is a great way to diversify your investment portfolio.
Holdfast Phase withdrawal plan
We are 7 years into the holdfast phase, but this is still beginning. Once Mrs. RB40 retires, we’ll probably have to make some adjustment. We should be able to continue saving as long as I continue with blogging. Here is the plan after Mrs. RB40 retires.
- Passive income – Our passive income now exceed our expense! However, I haven’t look at taxes yet. It’s a bit too complicated to estimate right now. Luckily, we have income from other sources.
- Online income – My online income is good this year, but it can be volatile. My blog income probably will drop significantly if we have a recession.
- Side hustles – I have several side hustles – charge scooters, market research, JobSpotting, and more. These side hustles don’t generate a lot of income, but they don’t take much time either. The income goes straight into savings. Mrs. RB40 might work a bit after retiring from her full-time job too.
As long as we keep our lifestyle inflation reasonable, these sources of income should cover our expense until we’re 65. Social Security benefits and pension will kick in a couple of years later at 67. Retirement should be smooth sailing after that point. I doubt I’ll ever stop working completely, though. Working part-time is really good. It helps me stay physically and mentally active. Full retirement can wait until I’m 80.
Our holdfast phase looks good right now, but everyone has a plan until they get punched in the mouth (Mike Tyson’s quote.) What happens if we get a deep recession and my online income disappear? We might have to live lean for a few years. Don’t worry, I have some contingency plans for those lean years.
- Hustle a little more. I’ll pick up more side hustles like driving for Uber or renting out an Airbnb. Mrs. RB40 could pick up some contract work or find something part-time. I could even pick up some seasonal work if we really need the money.
- Cut back on expenses. We’ll vacation locally instead of visiting other countries. There are a lot of local attractions that we haven’t seen yet.
- Relocate to a low cost of living location. We like living in Portland, but we’re open to relocation. My brother moved to North Carolina and the cost of living is much lower there. We could move there or even relocate to Thailand for a few years. It’ll be a fun adventure to live outside the US for a while.
- Sell some dividend stocks. I prefer not to do this because it will reduce our future dividend income.
- Withdraw from our retirement accounts. If we really need some extra money, we could withdraw money from our tax-free accounts. The Roth IRAs don’t have early withdrawal penalty when you withdraw the contributions. We also could borrow from our 401k. That would be the last resort, though.
Hopefully, we won’t have to put these contingency plans into action. The US economy is still strong. Even if we get a recession, it shouldn’t be a huge one like the global financial crisis. I’m optimistic about our holdfast phase. If we can holdfast like this for 20 years, our retirement savings will continue to grow and we’ll have a very comfortable (full) retirement ahead of us. It looks good for now.
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 I want it to look like in 2038.
Here is how we’ll support ourselves when we’re 65.
- Passive income – These will come from the dividend stocks in our taxable accounts and real estate crowdfunding.
- Tax-deferred accounts – We’ll withdraw from our tax-deferred account. This will help reduce it so we won’t have so much RMD (required minimum distribution) when we turn 70.
- Social Security benefits – We should have a nice income from our Social Security benefit. Hopefully, we won’t need it and can use it as a donation fund.
- Tax-free – I plan to use our Roth IRAs through the conversion ladder before we turn 65. Once we turn 65, I want to leave these accounts alone. We can pass them onto our son as an inheritance because they have some tax advantages.
- Primary residence – I used to think we’ll downsize when we get older, but now I’m reconsidering. Being a homeowner is a lot of work! Maybe we’ll just rent instead. It’ll be much easier when we’re older. We’ll just have to wait and see how it goes.
- Cash – I put down 5% cash here, but that’s probably too much.
This drawdown phase is light on the detail because it’s 19 years away. 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 grow a huge amount if we can just holdfast for the next 20 years. It’s best to delay withdrawal until you really need it.
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
Link 13: Retirement Starts Today: What’s Your Retirement Withdrawal Strategy?
Link 14: Ms. Liz Money Matters: How I’ll Fund My Retirement
Link 15a: Dads Dollars Debts: DDD Drawdown Part 1: Living With A Pension
Link 15b: Dads Dollars Debts: DDD Drawdown Plan Part 2: Retire at 48?
Link 16: Penny & Rich: Rich’s Retirement Plan
Link 17: Atypical Life: Our Retirement Drawdown Strategy
Link 18: New Retirement: 5 Steps For Defining Your Retirement Drawdown Strategy
Link 19: Maximize Your Money: Practical Retirement Withdrawal Strategies Are Important
Link 20: ChooseFI: The Retirement Manifesto – Drawdown Strategy Podcast
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.
Image by Nick Pampoukidis
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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