#190 | The financial mechanics of early retirement

February 27, 2023

Episode Summary:

 

In this week’s episode, we discuss the specific mechanics of different ways you can fund early retirement and different withdrawal strategies. We start with a reminder of how early retirement works and then review the various levers that could provide income during your early retirement. We discuss various withdrawal strategies, tax advantages, and other considerations. We also use our own real-life scenarios as examples of withdrawal approaches.

 

Episode Notes:

 

A reminder of how early retirement works:

  • You know your math. You know what it costs to live for a year, your net worth, and other key future financial needs.  
  • You save up enough money to fund the rest of your life.  You really need compound interest at work to do this effectively. We talk through the 4% rule or 25X rule, end-of-life planning spreadsheet and concept, and more.
  • You keep your cost of living low.  This might include getting debt-free.

 

The different levers that could be available for income during early retirement:

  • Cash
  • Deferred compensation programs
  • Investment income – selling off investments, dividends, etc. 
  • Passive income/side hustles – rental property income, a new hustle you start, selling off a rental property
  • HSAs 
  • More advanced techniques to get to your retirement funds early – e.g. Roth IRA 5-year ladder conversions
  • Part-time or full-time work – You can always go back to work!  This might be your backup plan, your parachute cord, or perhaps a new passion you discover and are excited to do.  
  • Generally speaking, though, you need to make sure that you’ll have enough cash every year to cover your living expenses until you’re 59.6 and your retirement funds kick-in.

How you plan your withdrawal strategy for early retirement:

  • It depends is the real answer.  It’s going to be different for everyone based on the reality of their portfolio and their goals. 
  • We share high-level how Maggie and Greg are funding their early retirement.  
  • What should you do?  Have a plan, understand the levers, and consult with someone if needed.
  • To early retire, meaning before 59.5 in our definition, you’ll need to have income + safe withdrawals of taxable accounts. So if you need $100K a year, you need to find a way to generate that cash. Having passive or some active income makes things infinitely easier and less risk. You’ll need to plot it out though: If I have $1M of taxable assets and that grows at 5% a year, if I withdrawn $110K a year for 10 years, you’d basically eat up most of that and then could start using your retirement accounts.
  • How specifically do I start withdrawing money?  We discuss short and long-term capital gains and other factors you’d want to consider. We also briefly discuss how these withdrawal strategies change for 60+.

 

Top 3 Takeaways:

  1. There are a bunch of different ways to fund and structure early retirement.
  2. Make a general plan for how you plan to do yours.
  3. Understand the principles Know that you’ll need to adjust and pivot your plan over time.

 

References:

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