After you retire early, which account should you take money out of to pay bills?

[TheWorstAtIt]

Hi everybody!

I started reading MMM a month or so ago and am still coming up to speed on how this works.

After you retire early, where does the money come from to pay your bills? Are you pulling money out of your 401k? Are you pulling money out of your VTSAX? How do you choose which one to use? What if it becomes a bad time to pull from your VTSAX because the market takes a hit etc.? Or did you pull everything from your VTSAX when you retired?

I'm pretty sure this question is basic to the point of stupid, but I couldn't find an answer searching the main site or the forums so hopefully no one will hate me too much for posting it...

I want to ask this because I think it will help me better understand how to save now if I understand how the money will work for me after I actually retire early (if I can get there...).

Thanks so much for reading!

[MoneyCat]

Take from your taxable accounts first.

[Jack]

Are you pulling money out of your 401k? Are you pulling money out of your VTSAX?

These questions as paired together do not make sense. "VTSAX" is an investment fund, not an account -- they are separate and orthogonal concepts. In fact, depending on the fund choices available it is possible for your 401k to be invested in VTSAX so that the answer to both questions could be "yes" at the same time!

First, you need to figure out what accounts you have (taxable account, traditional 401k and/or IRA, Roth 401k and/or IRA, HSA, etc.) and then figure out what investments (stock index funds, bond index funds, balanced/target date funds, individual stocks, individual bonds, money-market/cash, etc.) you have inside each of those accounts.

Then, you decide what to withdraw based on (a) the tax characteristics of the account type, (b) the performance of the investment type and the effect withdrawing it will have on your asset allocation, and (c) the tax characteristics of the investment type (e.g. capital gains on stocks vs. ordinary income from bonds) if held in a taxable account.

[TheWorstAtIt]

These questions as paired together do not make sense. "VTSAX" is an investment fund, not an account -- they are separate and orthogonal concepts. In fact, depending on the fund choices available it is possible for your 401k to be invested in VTSAX so that the answer to both questions could be "yes" at the same time!

First, you need to figure out what accounts you have (taxable account, traditional 401k and/or IRA, Roth 401k and/or IRA, HSA, etc.) and then figure out what investments (stock index funds, bond index funds, balanced/target date funds, individual stocks, individual bonds, money-market/cash, etc.) you have inside each of those accounts.

Then, you decide what to withdraw based on (a) the tax characteristics of the account type, (b) the performance of the investment type and the effect withdrawing it will have on your asset allocation, and (c) the tax characteristics of the investment type (e.g. capital gains on stocks vs. ordinary income from bonds) if held in a taxable account.

Jack, thanks much for the clarification and well worded reply.

I didn't honestly understand the difference between an investment and an account as I pictured an investment as basically an account with an interest rate (which, judging by your reply is incorrect).

I have to lookup quite a few terms here before I will fully grasp what you are saying, but I am excited to do so.

Thanks for providing 3 clear criteria for helping to choose which account. As I go through these terms I think it will be more and more clear.

Thanks!

[Rubic]

J L Collins discusses the mechanics here:

http://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/

If you're confused while reading his post, you may want to start reading at the
beginning of his stock series to bring everything into context.