friends on FIRE
friends on FIRE
friends on FIRE
#190 | The financial mechanics of early retirement
47 minutes Posted Feb 27, 2023 at 5:05 am.
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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 You’ll need to plot it out though: If I have $1M of taxable assets and that grows at 5% a year, if I withdrawn $110K a year for 10 years, you’d basically eat up most of that and then could start using your retirement accounts.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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Other Links

Maggie’s Blog: Mostly Minimal Life

Mike’s Book: Your New Relationship with Money