Show notes
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 You’ll need to plot it out though: If I have $1M of taxable assets and that grows at 5% a year, if I withdrawn $110K a year for 10 years, you’d basically eat up most of that and then could start using your retirement accounts.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:
- There are a bunch of different ways to fund and structure early retirement.
- Make a general plan for how you plan to do yours.
- Understand the principles Know that you’ll need to adjust and pivot your plan over time.
References:
- Friends on FIRE podcast #004 - Spending Less – Pillar #1
- Friends on FIRE podcast #005 - Growing Wealth – Pillar #2
- Friends on FIRE podcast #006 - Finding Freedom – Pillar #3
- Mike’s Book: Your New Relationship with Money
- Friends on FIRE podcast #112 - How to know if you are FI
- Friends on FIRE podcast #096 - Freedom is the ultimate financial goal, not retirement
- Friends on FIRE podcast #059 - The amazing tax benefits of FSAs, HSAs, and DCAs
- Friends on FIRE podcast #138 - How a family of 5 can afford to retire at 41 and 43 (part 2 of 5)
- https://cfiresim.com/
- Social Security Administration website
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Other Links
Maggie’s Blog: Mostly Minimal Life
Mike’s Book: Your New Relationship with Money