Author Topic: Withdrawal Rate from Taxable Accounts During First 5 Post-Fire Years  (Read 1953 times)

EngineeringFI

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For those of you using the Roth pipeline strategy to access 401K / IRA funds in FIRE, I'm curious about what your withdrawal strategies are for the first 5 years post-FIRE? I'm assuming that you start the pipeline in your first year of early retirement when you drop to a substantially lower tax bracket. But this means that you can't touch the first-converted lump of money until 5 years later. In the meantime, while you're waiting for that money to "season" is your withdrawal rate from your taxable accounts much higher in those years? And is this not a concern just because we should be looking at SWR in terms of total assets and not on an individual account basis? Thanks!

Melf

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Re: Withdrawal Rate from Taxable Accounts During First 5 Post-Fire Years
« Reply #1 on: October 22, 2017, 01:51:39 PM »
I haven't really given it any consideration yet due to my haphazard, unorganized approach to FIRE.  I've been RE for almost a year now and I still have around 3 years worth of expenses in savings accounts.  After that, I've probably got well over 10 years of expenses in my taxable investment account.  After that, I guess I'll have to start worrying about drawing down my tax advantaged accounts.  I'm 51 now so that will put me pretty close to SS eligibility age at that time also. 

I still started my first IRA to ROTH conversion a couple of weeks ago though.  My plan is to use the conversion ladder to provide the taxable income that I need to qualify for ACA health coverage and subsidies for as long as they last.  I know I should pay closer attention to the bigger picture but I'm just too lazy at the moment.  My current SWR is probably in the area of 2.6% of my net worth so I guess I'll put off the worry for a little while longer.
« Last Edit: October 23, 2017, 06:14:16 AM by Melf »

EngineeringFI

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Re: Withdrawal Rate from Taxable Accounts During First 5 Post-Fire Years
« Reply #2 on: October 22, 2017, 03:41:45 PM »
I haven't really given it any consideration yet due to my haphazard, unorganized approach to FIRE.  I've been RE for almost a year now and I still have around 3 years worth of expenses in savings accounts.  After that, I've probably got well over 10 years of expenses in my taxable investment account.  After that, I guess I'll have to start worrying about drawing down my tax advantaged accounts.  I'm 51 now so that will put me pretty close to SS eligibility age at that time also. 

I still start my first IRA to ROTH conversion a couple of weeks ago though.  My plan is to use the conversion ladder to provide the taxable income that I need to qualify for ACA health coverage and subsidies for as long as they last.  I know I should pay closer attention to the bigger picture but I'm just too lazy at the moment.  My current SWR is probably in the area of 2.6% of my net worth so I guess I'll put off the worry for a little while longer.

Thanks for chiming in, you make some interesting points. First, 3 years of expenses in a savings account was a little more than I was planning (I was thinking 2 years worth is a good number) but that's definitely a nice cushion to have. ACA subsidies being tied to taxable income was something I hadn't even considered! My plan was to keep my taxable income in the 15% tax bracket so that I'm not taxed on capital gains, but I'll have to make sure it's high enough to take advantage of ACA subsidies!

To me, it seems like there is a lot of information online about getting to the FIRE point, but once you walk away from work the picture doesn't seem so clear about how to draw down accounts to minimize taxes or maximize other benefits.

jim555

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Re: Withdrawal Rate from Taxable Accounts During First 5 Post-Fire Years
« Reply #3 on: October 22, 2017, 04:07:17 PM »
You can take the low road or the high road.  Low road, minimize income, maximize ACA benefit.  High road, ignore ACA, pay full price, do Roth conversions. 
I'm doing the low road right now.

bacchi

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Re: Withdrawal Rate from Taxable Accounts During First 5 Post-Fire Years
« Reply #4 on: October 22, 2017, 04:24:02 PM »
Year 1 12/2016-10/2017: Cash

I have about 3.5 years in brokerage accounts and easily 1 year in annual Roth contributions. There's also half a year in a Roth 401k. That's 5 years but it's cutting it a little tight for my comfort.

Year 2 2018: Brokerage accounts
Year 3: Brokerage accounts
Year 4: Brokerage accounts
Year 5: ?????
Year 6: Profit

*Year 5 will probably be from annual Roth contributions.

Mr. Green

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Re: Withdrawal Rate from Taxable Accounts During First 5 Post-Fire Years
« Reply #5 on: October 22, 2017, 06:07:33 PM »
You can take the low road or the high road.  Low road, minimize income, maximize ACA benefit.  High road, ignore ACA, pay full price, do Roth conversions. 
I'm doing the low road right now.
We plan to take the low road as well. We're hoping to have a child soon so taking the high road has a double whammy of substantially higher deductibles and Max OOP costs to go along with higher premiums. We have enough in brokerage accounts to run us longer than five years so we can keep the rollover pipeline low at ~20k per year for longer than five years and still have it cover more than 20k of expenses when we switch to withdrawing Roth money. Once we clear the pregnancy/infant stage we'll probably take a middle of the road approach for ACA purposes, assuming the system hasn't changed by then.
FIRE, Take Two.

Melf

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Re: Withdrawal Rate from Taxable Accounts During First 5 Post-Fire Years
« Reply #6 on: October 23, 2017, 06:36:51 AM »
Quote
Thanks for chiming in, you make some interesting points. First, 3 years of expenses in a savings account was a little more than I was planning (I was thinking 2 years worth is a good number) but that's definitely a nice cushion to have. ACA subsidies being tied to taxable income was something I hadn't even considered! My plan was to keep my taxable income in the 15% tax bracket so that I'm not taxed on capital gains, but I'll have to make sure it's high enough to take advantage of ACA subsidies!

To me, it seems like there is a lot of information online about getting to the FIRE point, but once you walk away from work the picture doesn't seem so clear about how to draw down accounts to minimize taxes or maximize other benefits.

I didn't really intend to have this much of my stash to be in cash at this point.  I only began thinking about FIRE maybe a handful of years ago.  I had been saving and investing mostly after-tax dollars so I was evenly split between my brokerage account and work 401K.  Most the the cash savings now is a result of my severance package from work when that opportunity came up late last year and I decided that it was time to FIRE.  I figured I'd just sit on the cash and use it for living expenses now.  I've still got almost 45% of my invested money sitting in cash because I've been afraid to invest it due to the markets being too high.  I know I'm losing ground due to this but I'm living with it for now since my SWR is currently so low.  I guess I'm playing it extremely safe for now.  I'd probably be a millionaire by now if it had been invested though!  I'll worry more about it after I get past this first year of filing taxes while FIRE'd and see if things work out as planned.

mandy_2002

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Re: Withdrawal Rate from Taxable Accounts During First 5 Post-Fire Years
« Reply #7 on: October 24, 2017, 06:49:35 AM »
Year 1 12/2016-10/2017: Cash

I have about 3.5 years in brokerage accounts and easily 1 year in annual Roth contributions. There's also half a year in a Roth 401k. That's 5 years but it's cutting it a little tight for my comfort.

Year 2 2018: Brokerage accounts
Year 3: Brokerage accounts
Year 4: Brokerage accounts
Year 5: ?????
Year 6: Profit

*Year 5 will probably be from annual Roth contributions.

But when do underpants come into the equation?
Retired:  April 2016
Currently:  Serving in the Peace Corps
Sure this is technically a job (the toughest you'll ever love, I hear), but I went from 60-90 hrs a week to living in a foreign country on Uncle Sam's dime teaching English ~20 hrs/week when schools in session, so I'll take it.
What's next?  Spain!  Vietnam!  Several countries in South America!  I may have a problem.

RWD

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Re: Withdrawal Rate from Taxable Accounts During First 5 Post-Fire Years
« Reply #8 on: October 24, 2017, 08:25:05 AM »
And is this not a concern just because we should be looking at SWR in terms of total assets and not on an individual account basis? Thanks!

SWR is based on total invested assets because money is fungible. Of course there is a slight difference for each individual account based on your tax situation and other minor factors. As long as you have enough to not be worried about running out of taxable account funds before the end of five years then the individual account withdrawal rate won't matter.

Pootie22

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Re: Withdrawal Rate from Taxable Accounts During First 5 Post-Fire Years
« Reply #9 on: October 24, 2017, 04:01:34 PM »

But when do underpants come into the equation?

Phase 1!!!
lmao

bacchi

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Re: Withdrawal Rate from Taxable Accounts During First 5 Post-Fire Years
« Reply #10 on: October 24, 2017, 04:24:55 PM »
Year 1 12/2016-10/2017: Cash

I have about 3.5 years in brokerage accounts and easily 1 year in annual Roth contributions. There's also half a year in a Roth 401k. That's 5 years but it's cutting it a little tight for my comfort.

Year 2 2018: Brokerage accounts
Year 3: Brokerage accounts
Year 4: Brokerage accounts
Year 5: ?????
Year 6: Profit

*Year 5 will probably be from annual Roth contributions.

But when do underpants come into the equation?

I knew someone would catch it. ;)