This girl might be on FIRE or about burn. Help with drawdown strategy?

[FIREGirl]

Hi,
It seems like I might just could be FIRE. I will soon pay off my house, and I will have $625,000 in assets, not including home equity, after that. I think I need about $23,000 to live on each year. Bad news? I have no idea how to draw down my assets correctly to maximize their long-term value. And, I think I either quit in the next few weeks or I will be let go. Not that it would be a bad thing because this job has just been soul-crushing, but it makes the decision more pressing.

Can anyone help me understand how to withdraw while making the money last and grow best? I don’t see that MMM has dealt with drawdown strategies, even hypothetically. His own first system of redundancy when he first retired – a paid-off rental throwing off enough money to cover all their expenses – is less a system of redundancy and more of an alternative to living off of the saving of 25 times the amount you need to live on. So.

I have about:
$46,000 I want to keep in cash to use in down years so I don’t have to sell stocks at losses in those years
$100,000 in taxable accounts
$400,000 in 401k accounts
$90,000 in Roth IRAs

Other info:
Worried about: Insurance costs, health care emergency, big expense like needing a new roof or car, down years in the market toward the start of retirement
FIRECalc says 95% chance of success over 40 years.
I’m 51, so technically I can’t touch the retirement money for another 8-ish years without conversion ladders or something.

Do I take distributions from taxable? Capital gains from taxable (if so, which kind)? I don’t think distributions and capital gains will be enough each year, so I would have to sell something in addition. What?

I figure in a few months I will start looking at other things to do with my time that might earn money, but right now, I feel completely incompetent because of my current job and don’t have a side gig. 
Thanks for your help!

[mbl]

Take a look at this tool:

https://www.i-orp.com/GOPtax/index.html

I ran it and thought it was interesting and helpful.

[TheAnonOne]

Even with conversion ladders its a 5 year run, you can dump money into ROTH but it must sit for 5 years. That still leaves you with 5 years to fund and then, it may only be worth doing for 3 years (because 5+3 gets you to your federal retirement age)

If you TRULY only need $23k to live, congrats you are FIRED but remember, 23k a year must INCLUDE money for car replacements, house repairs (roof/furnace/ect)

If you have not included these in your 23k it is HIGHLY likely that you are NOT within the 4% rule range. However, luckily, due to your age SS and other retirement plans *pensions if you have any* are not really that far off. So you might not need to be down in the 4% SWR range to make it, as SS will take over nearly all of your spending at 62.

[the_fixer]

I am learning about how to drawdown as well so no help here but a couple of other things to think about.

If you are fired you could potentially go on unemployment if things do not work out the way you had planned. Not saying you have to use it but it could act as a safety net / backup.

You might be able to get Cobra so check the price VS ACA plan. You can also extend it under certain circumstance.


Sent from my Pixel 2 XL using Tapatalk

[Laura33]

First, you should be well set-up for a Roth ladder.  You will need 5 years post-FIRE to be able to draw from the ladder, but it looks like you have about 6 years of expenses in accessible accounts.  In addition, you can withdraw your contributions to your existing Roth at any time, and you can withdraw the earnings tax-free if the Roth has been open for at least 5 years.

The two biggest things to consider in your withdrawal strategy are (1) your asset allocation, and (2) taxes.  First, you want to look at your entire portfolio as one bucket, and then figure out what you want your overall asset allocation to be across that entire bucket.  Then on a regular basis (e.g., annually), you can start by selling from the part of your portfolio that is too high.

The other thing is taxes: remember that when you do the Roth ladder, any money you take out of your 401(k) to put in the Roth counts as income.  But the IRS doesn’t tax you on all of that:  under the new tax plan, you get a $12k standard deduction, meaning that you can convert $12k from your 401(k) into a Roth* every year without paying a penny in federal taxes (assuming you have no other income).  You will want to do this beginning in the first tax year after you leave your job, because you want to take advantage of that “free” $12k.  In addition, your regular taxable accounts will have tax consequences, too:  they will throw off some distributions every year that will incur capital gains, and when you sell, you will pay capital gains taxes on the growth of those assets.  But as long as your taxable income remains below about $38k, your capital gains rate is 0%.  So you will want to manage how much of your 401(k) you convert and how much of your taxable accounts you sell each year to stay within these 0% tax brackets - and you will want to take maximum advantage of those before other income sources (SS/pension) kick in.

Here’s the good news:  you don’t need to know this all right now.  You have two years’ expenses covered in cash!  And once you are out of this job, you will have tons more head space to figure out the “how” - not to mention figuring out if you want to FIRE or if you’d rather go back to work to give yourself more of a margin for error.  You may be FIRE, but at the very least you have very serious fuck-you money to buy yourself time to figure out the rest.

*You would do this by rolling over your entire 401(k) into a traditional IRA when you retire, then convert a portion of that IRA every year to a Roth.

[aetheldrea]

Well, you might be FI, but you won't be RE until you quit your job.
Your projected spending in retirement is close to what my employer pays for insurance for my family, so that budget wouldn't work for me, but everyone has different needs.
Your Roth IRA contributions should be able to be withdrawn at any time without penalty (assuming your account has been open for at least 5 years), so think of that as your emergency fund and spend your cash first. If something crazy happens the rest of your money is there and you can get it, just might have to pay a penalty.
Between your cash, taxable accounts and Roth basis, you should be good to reach 59 1/2 without having to do any funny tricks, though you should do the Roth ladder as described by Laura33 above for the reasons she explained.

[FIREGirl]

Take a look at this tool:

https://www.i-orp.com/GOPtax/index.html

I ran it and thought it was interesting and helpful.

Thanks -- This is an interesting tool. I need to read it more carefully when I get some time. I noticed it thinks you need closer to 37 times your income, I'm thinking based on a conservative investment strategy. Thanks again!

[FIREGirl]

Even with conversion ladders its a 5 year run, you can dump money into ROTH but it must sit for 5 years. That still leaves you with 5 years to fund and then, it may only be worth doing for 3 years (because 5+3 gets you to your federal retirement age)

If you TRULY only need $23k to live, congrats you are FIRED but remember, 23k a year must INCLUDE money for car replacements, house repairs (roof/furnace/ect)

If you have not included these in your 23k it is HIGHLY likely that you are NOT within the 4% rule range. However, luckily, due to your age SS and other retirement plans *pensions if you have any* are not really that far off. So you might not need to be down in the 4% SWR range to make it, as SS will take over nearly all of your spending at 62.

Yeah, the 23k is mostly regular bills, not "saving for the broken thing on the house or car" money. I think that's the downfall of the 25x strategy -- MMM is posting how much he spends every year, but he doesn't include money for the inevitable replacement of big-ticket items. It probably doesn't matter to him with his extra income sources, but someone trying to live by 25x only would probably get burned by those expenses. And then there's the deductible for insurance. One serious medical issue, and you have to come up with maybe $6,000 (or 12,000 if it happened at the end of one year and treatment extended into the next). Definitely agree with you that you have to plan for those expenses. Thanks for your thoughts!

[FIREGirl]

I am learning about how to drawdown as well so no help here but a couple of other things to think about.

If you are fired you could potentially go on unemployment if things do not work out the way you had planned. Not saying you have to use it but it could act as a safety net / backup.

You might be able to get Cobra so check the price VS ACA plan. You can also extend it under certain circumstance.


Sent from my Pixel 2 XL using Tapatalk

Thanks so much -- drawdown is really important but not dealt with much, or it's dealt with by people with a lot of money. Not an easy topic. Yes, thanks for the note on the income source -- I had thought of that. Unfortunately, COBRA isn't an option at companies with fewer than 20 people, which a lot of people might not know. Good to plan with both of those in mind! Thanks again.

[FIREGirl]

First, you should be well set-up for a Roth ladder.  You will need 5 years post-FIRE to be able to draw from the ladder, but it looks like you have about 6 years of expenses in accessible accounts.  In addition, you can withdraw your contributions to your existing Roth at any time, and you can withdraw the earnings tax-free if the Roth has been open for at least 5 years.

The two biggest things to consider in your withdrawal strategy are (1) your asset allocation, and (2) taxes.  First, you want to look at your entire portfolio as one bucket, and then figure out what you want your overall asset allocation to be across that entire bucket.  Then on a regular basis (e.g., annually), you can start by selling from the part of your portfolio that is too high.

The other thing is taxes: remember that when you do the Roth ladder, any money you take out of your 401(k) to put in the Roth counts as income.  But the IRS doesn’t tax you on all of that:  under the new tax plan, you get a $12k standard deduction, meaning that you can convert $12k from your 401(k) into a Roth* every year without paying a penny in federal taxes (assuming you have no other income).  You will want to do this beginning in the first tax year after you leave your job, because you want to take advantage of that “free” $12k.  In addition, your regular taxable accounts will have tax consequences, too:  they will throw off some distributions every year that will incur capital gains, and when you sell, you will pay capital gains taxes on the growth of those assets.  But as long as your taxable income remains below about $38k, your capital gains rate is 0%.  So you will want to manage how much of your 401(k) you convert and how much of your taxable accounts you sell each year to stay within these 0% tax brackets - and you will want to take maximum advantage of those before other income sources (SS/pension) kick in.

Here’s the good news:  you don’t need to know this all right now.  You have two years’ expenses covered in cash!  And once you are out of this job, you will have tons more head space to figure out the “how” - not to mention figuring out if you want to FIRE or if you’d rather go back to work to give yourself more of a margin for error.  You may be FIRE, but at the very least you have very serious fuck-you money to buy yourself time to figure out the rest.

*You would do this by rolling over your entire 401(k) into a traditional IRA when you retire, then convert a portion of that IRA every year to a Roth.

Thank you so much for your detailed reply! Part of this I knew, but plenty here I didn't. Need to absorb it. And yes, I really do need the FY money to be able to sleep at night. :) Love your avatar, although it is weirding me out a bit. :)

[FIREGirl]

Well, you might be FI, but you won't be RE until you quit your job.
Your projected spending in retirement is close to what my employer pays for insurance for my family, so that budget wouldn't work for me, but everyone has different needs.
Your Roth IRA contributions should be able to be withdrawn at any time without penalty (assuming your account has been open for at least 5 years), so think of that as your emergency fund and spend your cash first. If something crazy happens the rest of your money is there and you can get it, just might have to pay a penalty.
Between your cash, taxable accounts and Roth basis, you should be good to reach 59 1/2 without having to do any funny tricks, though you should do the Roth ladder as described by Laura33 above for the reasons she explained.

Thanks! Mind-blowing on your insurance cost. Of course, you wouldn't probably pay that much if your income coming in were much lower. Of course, that's assuming that ACA survives the current gov't assault. Yes, lots to think about on funding. Roths have been open 5 years at least...Thanks and good luck to you, too!

[Thegoblinchief]

This is the best piece I've ever read on drawdown:

https://livingafi.com/2014/05/09/drawdown-part-1-the-basics/

[WoodStache]

Even with conversion ladders its a 5 year run, you can dump money into ROTH but it must sit for 5 years. That still leaves you with 5 years to fund and then, it may only be worth doing for 3 years (because 5+3 gets you to your federal retirement age)

If you TRULY only need $23k to live, congrats you are FIRED but remember, 23k a year must INCLUDE money for car replacements, house repairs (roof/furnace/ect)

If you have not included these in your 23k it is HIGHLY likely that you are NOT within the 4% rule range. However, luckily, due to your age SS and other retirement plans *pensions if you have any* are not really that far off. So you might not need to be down in the 4% SWR range to make it, as SS will take over nearly all of your spending at 62.

Yeah, the 23k is mostly regular bills, not "saving for the broken thing on the house or car" money. I think that's the downfall of the 25x strategy -- MMM is posting how much he spends every year, but he doesn't include money for the inevitable replacement of big-ticket items. It probably doesn't matter to him with his extra income sources, but someone trying to live by 25x only would probably get burned by those expenses. And then there's the deductible for insurance. One serious medical issue, and you have to come up with maybe $6,000 (or 12,000 if it happened at the end of one year and treatment extended into the next). Definitely agree with you that you have to plan for those expenses. Thanks for your thoughts!

This isn't a downfall of the 25x strategy, though, because it's part of the strategy. In the same way that you wouldn't just multiply your January spending by 12 to get your annual budget, you also can't just take 1-2 year's worth of data and make an accurate projection. To FIRE you need 25x your average annual expenses, otherwise you're RE, maybe, but not FI.
 
There has been argument in the past about what MMM does and doesn't include in his personal expenditures, but his FI Plan undoubtedly included future large expenses. The thing is, on the year he needs to replace a car he might NOT need to replace a roof, etc. Even if they all happen in one year it balances out over time.

FWIW, I say this but I also wouldn't be super concerned if I were you, unless your plan and desire is to never work for money again. I don't see a situation where I'd ever stop making money altogether, which would allow me to be a bit less conservative should I ever want to pull the plug on my formal career.

[FIREGirl]

This is the best piece I've ever read on drawdown:

https://livingafi.com/2014/05/09/drawdown-part-1-the-basics/

Thank you! Will read it this weekend in more depth...

[FIREGirl]

Even with conversion ladders its a 5 year run, you can dump money into ROTH but it must sit for 5 years. That still leaves you with 5 years to fund and then, it may only be worth doing for 3 years (because 5+3 gets you to your federal retirement age)

If you TRULY only need $23k to live, congrats you are FIRED but remember, 23k a year must INCLUDE money for car replacements, house repairs (roof/furnace/ect)

If you have not included these in your 23k it is HIGHLY likely that you are NOT within the 4% rule range. However, luckily, due to your age SS and other retirement plans *pensions if you have any* are not really that far off. So you might not need to be down in the 4% SWR range to make it, as SS will take over nearly all of your spending at 62.

Yeah, the 23k is mostly regular bills, not "saving for the broken thing on the house or car" money. I think that's the downfall of the 25x strategy -- MMM is posting how much he spends every year, but he doesn't include money for the inevitable replacement of big-ticket items. It probably doesn't matter to him with his extra income sources, but someone trying to live by 25x only would probably get burned by those expenses. And then there's the deductible for insurance. One serious medical issue, and you have to come up with maybe $6,000 (or 12,000 if it happened at the end of one year and treatment extended into the next). Definitely agree with you that you have to plan for those expenses. Thanks for your thoughts!

This isn't a downfall of the 25x strategy, though, because it's part of the strategy. In the same way that you wouldn't just multiply your January spending by 12 to get your annual budget, you also can't just take 1-2 year's worth of data and make an accurate projection. To FIRE you need 25x your average annual expenses, otherwise you're RE, maybe, but not FI.
 
There has been argument in the past about what MMM does and doesn't include in his personal expenditures, but his FI Plan undoubtedly included future large expenses. The thing is, on the year he needs to replace a car he might NOT need to replace a roof, etc. Even if they all happen in one year it balances out over time.

FWIW, I say this but I also wouldn't be super concerned if I were you, unless your plan and desire is to never work for money again. I don't see a situation where I'd ever stop making money altogether, which would allow me to be a bit less conservative should I ever want to pull the plug on my formal career.

Thanks -- I didn't see where MMM did add the long-term into the budget, but I might have missed it. He also might have been planning on covering them with another income source -- he had not only the 25x but the rental and other assets, as well. I know it might be anti-Mustachian to worry, but the price for being wrong is pretty high. And I don'tthink that the hiatus would be permanent. I don't think I could just sit still forever -- I'm sure I'd find something to do. Thank you!

[Ryland]

Congrats! So epic that you're where you're at. It's 100% time to get a 'soul-filling(!)' travel trip in and move into a job/freelance/business that you love waking up for.

Here's some helpful articles on pulling the 4%.

http://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/
http://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

Stoked for you to create the self-fulfilling part of life. I did something similar last year (didn't hit FI by the numbers, but 10+ years of lifestyle cost saved), so building the new, fulfilling income stream has been more critical, but enough time to create something I love.

[AccidentalMiser]

I scanned the thread but didn't see how old you are. 

Never Mind, I see that you're 51.  Thx.

[FIREGirl]

Congrats! So epic that you're where you're at. It's 100% time to get a 'soul-filling(!)' travel trip in and move into a job/freelance/business that you love waking up for.

Here's some helpful articles on pulling the 4%.

http://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/
http://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/
http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

Stoked for you to create the self-fulfilling part of life. I did something similar last year (didn't hit FI by the numbers, but 10+ years of lifestyle cost saved), so building the new, fulfilling income stream has been more critical, but enough time to create something I love.

Thank you so much for the articles and kind words! You're right about finding the time now. And good for you for reaching where you are! Love to hear if you have any tips on finding that next phase.

[FIREGirl]

I scanned the thread but didn't see how old you are. 

Never Mind, I see that you're 51.  Thx.

Yes, I keep thinking I'm 41, but noooooo. :) I'm not sure when that happened. Good advice to everyone is that time really does speed up, so get crackin' on goals.