Author Topic: What types of accounts does post-FIRE income come from before age 60?  (Read 6090 times)

koralcem

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I'm familiar with the 4% rule: save 25 times your desired spending, then you're ready to retire. But if you accumulate that stash following the suggested investment order, you'll end up with the total stash split between retirement accounts and regular, taxable brokerage accounts. There's a penalty for drawing from retirement accounts before age 60 (with some exceptions), and I'm assuming people are hoping to retire before then.

So for the folks who are already FIRE'd: From which accounts do you actually draw your income? I saw this sticky post about dipping into an IRA before 60 without penalty. Is doing that the norm? Because I'd imagine it would be tough to bridge the gap between FIREing and age 60 with just the taxable account alone, no? Or do you somehow do the math such that you draw only on the taxable account before 60, it depletes right around age 60, at which point you tap into the retirement accounts?

JLee

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The Roth conversion ladder (in post 2 of your link) is commonly recommended, with taxable accounts / savings to carry you through the five year interval before the ladder funds are available.

Goldielocks

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Still in my first year.  Honestly,  I built up 3+ years of savings, so I am only using cash accounts for now, and slowly, as I am making $10k per year in income in my side hustle, and DH is still working.  We plan not to touch the big retirement accounts until they are $2million, so quite a while yet.

Linda_Norway

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Disclaimer: I am not living in the US, so I don't have a Roth or IRA.

I expect to sell a part of my privately invested index funds every year to cover the 4%. But in my case, I don't plan to save 25 x my expected expense level, as I expect another pension fund to pay out from the age of 67. Therefore we plan to eat up a part of the stash every year as well, by selling more stock. So that at the age of 67 we are just on the positive side of having savings. However, I hope we can generate some extra income from a future side-gig, so that we can reduce the stash as little as possible.

jim555

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All from after tax accounts.  CDs, interest, dividends, sales of shares.

WannaGoOutside

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Note that I'm retiring at the end of this (!!!) month, so we are early in our RE journey.

We have a bucket approach due to our age and investments.  We have roughly 1/3 of our savings in after tax investments, so that will be bucket 1.  DH is 53, so his 401k/IRA qualified investments are our bucket 2.  And I'm 45, so we have a while before we will dip into my 401k/IRA qualified investments, which are bucket 3.

We will likely start Roth conversions on my qualified investments, but not for early access.  Doing so should make for "smoother sailing" in the old folks years, as all withdrawals will be tax free and not subject to Required Minimum Distributions.
« Last Edit: June 01, 2017, 10:09:10 AM by WannaGoOutside »

ShortInSeattle

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We're using after-tax investment dollars and will begin ROTH conversions this year.

SIS

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We have a combination of strategies we are planning on using:

1) We are planning on doing the Roth conversion ladder, assuming it continues to be viable (i.e. tax laws still allow it). 
2) For immediate use, we will rely on investments in our taxable account. 
3) My wife is planning to continue working part time until the beginning of 2019, which is the year in which she turns 55 -- if she decides to quit entirely at that time, she will be able to withdraw without penalty from her 401k plan (of the employer she retires from).

Thinking longer-term, the Roth conversion ladder will allow us to move money out of 401k (or traditional IRA) accounts at a low tax bracket -- currently anticipating doing all such conversions within the 15% bracket.  This will allow us to lessen RMDs at age 70 1/2.

respond2u

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The Roth conversion ladder didn't make financial sense for me because of the exorbitant reduction in ACA subsidy. Maybe in 202X when the ACA is amended it will make sense again. I guess the people that use it are living off savings anyway and need manufactured income to avoid Medicaid, or have health care already taken care of.

This year, I'm living off savings and an unexpected part-time job (with a friend, it was hardly work, but it was fantastic $$$), and I plan to start my first 72(t)/SEPP this month (out of 3). Along with that, I have about 20% of my budget funded from dividends in a taxable account.

One of my bigger financial regret is that I didn't put more money into my SEP-IRA because I didn't know about the 72(t) program. I could have saved a lot more money on taxes over the years...


Shane

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When we FIRED last year we also sold our primary residence and invested the proceeds in a taxable brokerage account.

The dividends from that account are funding ~1/3 of our FIRE spending. The other two thirds of our RE income comes from selling shares in the taxable account twice a year.

At that withdrawal rate, the money in our taxable account should last, at least, 20 years.

While we are drawing funds in our taxable account down, the investments in our tax deferred retirement accounts will continue growing with dividends reinvesting.

If we end up earning any money during FIRE, we'll likely put 100% of it into our Roth and SEP IRAs and just keep spending down the taxable account. If and when our taxable savings runs out, by then, we'll be old enough to withdraw from our tax deferred accounts.

Ideally, we'll never need to touch the money in our retirement accounts, but it's nice to have them there as a backup in case we need the money.

koralcem

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Re: What types of accounts does post-FIRE income come from before age 60?
« Reply #10 on: June 08, 2017, 05:55:37 PM »
Thanks everyone. It helps to see hear how different strategies are actually playing out.

WannaGoOutside, congrats on getting to the finish line!

WannaGoOutside

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Re: What types of accounts does post-FIRE income come from before age 60?
« Reply #11 on: June 09, 2017, 10:55:48 AM »
...

WannaGoOutside, congrats on getting to the finish line!

Thanks!  3 more weeks!!!

Meadow Lark

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Re: What types of accounts does post-FIRE income come from before age 60?
« Reply #12 on: June 09, 2017, 07:05:33 PM »
DW just retired at 55 so her 403b is now open with no penalty. 

Holyoak

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Re: What types of accounts does post-FIRE income come from before age 60?
« Reply #13 on: June 15, 2017, 11:48:26 AM »
Pretty much for me, it's dividend income from my taxable accounts, a few stock/fund sales, and too much cash I have had laying around, to buy a home.

Acastus

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Re: What types of accounts does post-FIRE income come from before age 60?
« Reply #14 on: July 13, 2017, 10:44:31 AM »
I am on the cusp of FIRE in my 50's. My plan is spending taxable accounts plus 401k first (55+ retirement rule). If that does not take me to age 60, I can tap contributions to Roth IRA's, equal to about 10% of 'stache. Health insurance is up in the air. As long as ACA works, I will be doing minimal Roth ladder to keep income below 80k limit. If things change, I may be able to ramp that up. I would like to have money earmarked to pay off my mortgage at about the 5 year mark. The interest is mighty low for now, so I plan to keep it until we relocate & downsize.

This is one of the delays to FIRE for me. My money was not in the optimum account types 1 year ago. Taxable accounts are now at 6 times burn rate, so I am almost there.
« Last Edit: August 01, 2017, 08:06:22 AM by Acastus »

zinethstache

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Re: What types of accounts does post-FIRE income come from before age 60?
« Reply #15 on: July 21, 2017, 12:01:23 PM »
1. Rental Income (ongoing indefinitely, covers us for monthly living + some discretionary ->
2. Cash as needed for unexpected expenses or drop in rental income due to rental maintenance/repairs (should last into next year) ->
3. Pension cash out (should last another year+) ->

2019 and beyond
4. Possible Roth conversion begins depending on ACA - Penalty Draw from 401k if necessary or Possible 72t until 59 1/2

skip207

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Re: What types of accounts does post-FIRE income come from before age 60?
« Reply #16 on: July 25, 2017, 12:17:41 PM »
Rental income should cover the majority of the budget here.  80%

On top of the rental income we have savings and investments which is the tricky bit, when to spend that and at what rate. 

Then 55 onwards our pensions will kick in (assuming no change in SIPP age).


Pylortes

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Re: What types of accounts does post-FIRE income come from before age 60?
« Reply #17 on: August 01, 2017, 08:54:44 PM »
Retired at 42 knowing I'd get a small  government pension once 50 so cash (laddered CDs and bonds) to cover the gap. Also had government 457 plan I could access at any age penalty-free if needed. Although I plan to leave the 457 and IRAs for old age. Also downsized housing so had extra after-tax $$ to invest or use as needed.

Spartana mentioned an important little known point in passing.  If you have a 457 account (typically these are used by govt employees and certain non-profits) you are able to withdraw funds in early retirement with no penalty (as opposed to a 401k which levels a 10% penalty unless you pull off the Roth conversion pipeline).  You can't however rollover the 457 into a 401k or IRA or else you lose the penalty free early withdrawals (note withdrawals are still subject to ordinary income taxes like any other income).  That makes a 457 account (along with taxable accounts) ideal to pull from first in early retirement.  In my case my wife has a 457 and I have a 401k.  I'll probably roll my 401k into an IRA after I leave work but we will keep the 457 after my wife separates from her employer as we plan to tap this along with taxable accounts for the first few years and it will hopefully allow me to keep all IRA and Roth IRA funds untouched and growing longer.

merlin7676

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Re: What types of accounts does post-FIRE income come from before age 60?
« Reply #18 on: August 03, 2017, 11:22:07 AM »
Retiring at 55 so have a 5 year gap when I do. Will use a combination of savings and taxable account (dividends and shares) to bridge it. As it stands now I have almost 1 of the 5 years now covered and have 14 more years till FIRE so I will be fine with that.
Then at 59 1/2 I can start dipping into the 401K if necessary or keep using the taxable (more likely a combination of both). SS at 62 for sure.

El Marinero

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Re: What types of accounts does post-FIRE income come from before age 60?
« Reply #19 on: August 03, 2017, 05:31:58 PM »
Retiring at 55 so have a 5 year gap when I do. Will use a combination of savings and taxable account (dividends and shares) to bridge it. As it stands now I have almost 1 of the 5 years now covered and have 14 more years till FIRE so I will be fine with that.
Then at 59 1/2 I can start dipping into the 401K if necessary or keep using the taxable (more likely a combination of both). SS at 62 for sure.

Meadow Lark alluded to this with a 403(b) account, but it also applies to 401(k) accounts.  You can withdraw tax free before  age 59 if you left that employer during or after the year you reached the age of 55.

« Last Edit: August 03, 2017, 05:33:31 PM by El Marinero »
Yo soy marinero, no soy capitán

ponyboy

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Re: What types of accounts does post-FIRE income come from before age 60?
« Reply #20 on: August 04, 2017, 09:29:56 AM »
Ponyboy has thought a lot about this too.  Besides roth and savings...there really isnt much more to pull from assuming you have no other income streams. 

JLee

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Re: What types of accounts does post-FIRE income come from before age 60?
« Reply #21 on: August 06, 2017, 12:36:57 PM »
Ponyboy has thought a lot about this too.  Besides roth and savings...there really isnt much more to pull from assuming you have no other income streams.

Taxable accounts?

Villanelle

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Re: What types of accounts does post-FIRE income come from before age 60?
« Reply #22 on: August 07, 2017, 03:35:26 AM »
Ours will come from pension, taxable accounts, possibly rental income (and if not, then likely the sale of a rental property), and possibly some dividends, as well as maybe side hustles.  If necessary, we will do Roth ladders.

Of all the things I worry about WRT FIRE, this is nowhere on the list, although we wont' be super early retirees (mid 40s at the earliest, but likely later for DH who will want to keep working, not need to).

NaturallyHappier

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Re: What types of accounts does post-FIRE income come from before age 60?
« Reply #23 on: August 07, 2017, 06:26:00 PM »
We are both 51 and fired this year.  We are drawing on taxable accounts for the next 8-9 years.  I am finding that if I limit our taxable income to about $64K I can save about $7K in ACA subsidies, so I am limiting our roth conversions to maintain $64K in income.  I had a health conditioned that forced fire a little earlier than planned so we will likely be a little short in the taxable accounts and have to pay a penalty the last year or two before 60, but it is better to pay the penalty the last year or two for the subsidies for the earlier years.

We are downsizing so I am looking to get a mortgage on the new house to get extra taxable income so we don't have to pay the penalty, but so far we are having an issue finding a lender who will give us a mortgage with no income.  They don't care if we have plenty of money and could get by fine without a mortgage, they just want to see income.
« Last Edit: August 07, 2017, 07:06:02 PM by NaturallyHappier »

nottoolatetostart

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Re: What types of accounts does post-FIRE income come from before age 60?
« Reply #24 on: August 08, 2017, 05:11:45 AM »
Naturally Happier - yes, I agree that the penalty is better than losing out on ACA subsidies. That gets very steep very quick.

I remember reading about your story in a different thread so I am sorry about the mortgage thing and the ill timing of it. Have you looked into SS disability at all? That might give you some stable income (from mortgage co's perspective). I don't know if that even fits your situation or how it plays into your broader planning. Just wanted to throw that out there....

gerardc

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Re: What types of accounts does post-FIRE income come from before age 60?
« Reply #25 on: August 08, 2017, 03:17:01 PM »
People here don't withdraw from their accounts. They just reach FIRE, declare victory, spend 2-3 months doing nothing, then keep earning enough to live and watch their stash grow even more. Just slightly exaggerating ;)

NaturallyHappier

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Re: What types of accounts does post-FIRE income come from before age 60?
« Reply #26 on: August 08, 2017, 04:19:08 PM »
Naturally Happier - yes, I agree that the penalty is better than losing out on ACA subsidies. That gets very steep very quick.

I remember reading about your story in a different thread so I am sorry about the mortgage thing and the ill timing of it. Have you looked into SS disability at all? That might give you some stable income (from mortgage co's perspective). I don't know if that even fits your situation or how it plays into your broader planning. Just wanted to throw that out there....

Yes, I am currently applying for disability, but it is a bit of a process and there is no guarantee I will be approved.  I am planning as if I will never see it.  That way if I get it, then it will just be a bonus.  I probably won't be approved before we close on the new house anyway.

Thanks for the input.

Ken