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When it comes to financial independence and retiring early, accumulating money is only half the story. Once you have reached your retirement number and leave the rat race, you have to decide how you are going to get all of your money out of these accounts to cover your annual costs for your way longer than average retirement. Retiring results in a 50+ year retirement plan!
Thank you to TheRetirementManifesto and Physician on FIRE for starting this group series on retirement draw-down strategies. Below, I am going to detail the retirement strategy I have never written down before.
Since the goal of financial independence and retiring early started changing from a distant dream to a distinct possibility, I have focused on the accumulation of funds. Of course, I have read and thought about the drawdown phase, it just wasn’t a priority. Seeing everyone else in this series post has inspired me to join and detail our atypical drawdown strategy.
The Atypical Retirement Plan
First, we need to address our plan for retirement. Without an idea of where we are going and what we are doing, there can be no plan for how to fund it.
Having regular discussions with your spouse to make sure you are on the same page when it comes to a retirement plan is a must. To that end, I reviewed again with Mrs. Atypical before writing this post to make sure we are still aligned on the goals below.
Our atypical plan for early retirement has many facets now but hinges around the distinct possibility of retiring after my contract ends here in China. After my contract ends, we plan on traveling full time for a few years. We plan to spend a lot of time on our tandem bicycle touring the world. The tandem would be used to travel from location to location where Mrs. Atypical plans to work temp jobs on different horse farms that last from a few weeks to a few months. That way she would be able to get some more horse related experience, network around the world, and even help in funding our first few years of retirement.
During this period of full-time travel, we plan to continue to build our blogs to reach a larger and larger audience to supplement the income from temp jobs. Who knows? Maybe someday it could even pay all the bills. The goal here is not to make a full-time income. I currently make more than 4x our annual expenses. In early retirement, I would be extremely happy to make 2/3 or our annual expenses. At that rate, we would only need to withdrawal $10,000 per year to cover miscellaneous costs.
After this period of travel, should it last 2 years or 5, we plan to eventually return to the US, settle down, buy a house with property away from the city, and raise a family. At this point, our expenses will likely rise and the question of whether to pay for the house outright or get a mortgage will need to be answered. As we are 28 and 25 currently, we have a very long ways before “real retirement” beckons. We certainly plan on making money in retirement to help supplement the extreme savings we made during the accumulation phase. The frugal habits that were learned during accumulation will stay with us throughout our lives and help make the dream a reality.
Once we return to the US and settle down, we plan to remain rooted for a long time. However, we plan to continue to travel both throughout the US and abroad each year for extended periods. That is the glory of being retired early in life. We will have the time to do things that are replaced by money when not retired.
I just wrote a post on the retirement numbers for 13 people in the FIRE and personal finance community this week. In it, I explained my choice of a retirement number of $1,000,000. However, the goal now is to retire at the end of the contract instead. We will likely have about $500,000 at that point and it will be allocated as detailed in the chart below.
The 4% rule applied to $500,000 gives us $20,000 of withdrawal availability forever out of that $500,000. There are a lot of factors that go into whether or not that will work. However, we know we have a baseline of $20,000 to keep our expenses at if we make $0 throughout the year.
The possibility of making $0 in a year is just about 0% for us as we are actively working on side hustles to bring about financial independence sooner.
So how much can we expect to make through side hustles?
That is hard to estimate. If we can make $2,000 per month then we can cover $24,000 of expenses during retirement. If it is less, then we tighten the belt on expenses and pull from savings or we find other side hustles. The fact that we have sizeable enough savings allows us the opportunity to try. The most secure part of “retiring” at 30 is the knowledge that I have applicable skills and experience in international industry to return to work if the need arises.
Our idea for funding retirement lies in working temp jobs and side hustles to pay for our annual expenses. We do not need to save any more money, so our income does not need to be high at all. You can see from the above plot, if I retire at age 30 and we are able to not take distributions from our savings but fund it with side hustles, then our portfolio will grow past $2,000,000 by age 60. That is with a truly conservative 5% growth rate too! Who knows what we would do with all that money, but it is certainly nice to have around.
The retirement assumption currently is we are able to fund 100% of our low expenses ~$30,000 per year with side income until we want to fully retire and make no money around age 60.
Roth Conversions and Investment Optimization
Because of our tax equalization situation as expats in China, our Traditional IRA contributions are also after-tax, so can be rolled over to Roth IRAs tax-free. Therefore, we will not need to do a Roth IRA conversion ladder for those contributions. We do, however, plan to begin the conversion ladder for all of our 401k contributions that are pre-tax. This will allow us to withdraw the funds whenever we want to after the 5 year holding period on conversions. Obviously, from above, we plan on not drawing down our contributions in the beginning of retirement so the distribution simply shifts all pre-tax accounts to the Roth.
After we are complete with our rollovers, our money will be allocated in accounts as indicated by the pie chart. This distribution is a target allocation after converting all pre-tax retirement to after-tax retirement accounts. The taxable brokerage account may fluctuate due to housing cost if we dip into it to buy a home.
The other facet of investment optimization is to harvest gains in the taxable account when I have room in tax brackets. This will allow us to raise our basis and withdraw from the taxable brokerage account without capital gains taxes.
HSA and Health Insurance
We are certainly aware of the major cost of healthcare in the US. No retirement drawdown plan is complete without addressing the skyrocketing costs that are the American healthcare system. Simply put, we plan to more or less, self-insure, by using the cheapest plans available that qualify for the HSA. However, if the need arises we can move away from the US in order to chase down more reasonable health care costs abroad. We have talked at length about where we will settle down and have come to no definite conclusions yet. One of the factors in deciding is the total living cost which includes the country’s healthcare systems.
I will be 30 in 2019, so it will be around 2049 when I am 70 and I will begin to take social security distributions.
Will social security still be around at that point?
I doubt it. Certainly, I am not counting on it. If we do get social security benefits, great. If not, we will have plenty of money from the growth of our portfolio during early retirement when we continue with side hustles.
The final piece of the puzzle is the withdrawal order. While drawing down our savings, we have to keep in mind tax minimization in order to not be surprised by a large tax liability at the end of the year. The withdrawal priority is:
- Taxable brokerage account
- Roth IRA contributions and 5-year aged rollover funds
- Roth growth after age 59.5
There is a caveat to the taxable brokerage account withdrawals. If I deem a withdrawal to have too many capital gains associated with it, I will split it up between withdrawals from the brokerage account and Roth contributions.
We plan to not need to withdraw funds from these accounts prior to age 60, but as the saying goes:
TL;DR Retirement Drawdown Plan
The question begs, is this a retirement plan?
I think yes. Working as an engineer at an international chemical manufacturing facility, then changing to an easy paced life, living and traveling while making just enough to get by definitely qualifies as retirement. We will still be making money. We still count on having an income in retirement. However, the time will come down the road when it is no longer even necessary for that.
We live the atypical life now with a huge savings rate and we will continue living the atypical life in early retirement. It may not be the normal route or the conventional definition of retirement, but it works for us.
What do you think of our retirement plan?
The Full Chain of Retirement Drawdown Plans
Check out the rest of the chain of retirement plans below. I will update the link list as more people join. If you are interested in joining the chain, check out the rules at the bottom of the post on The Retirement Manifesto.
Anchor: Physician On Fire: Our Drawdown Plan in Early Retirement
Link 1: The Retirement Manifesto: Our Retirement Investment Drawdown Strategy
Link 2: OthalaFehu: Retirement Master Plan
Link 3: Plan.Invest.Escape: Drawdown vs. Wealth Preservation in Early Retirement
Link 4: Freedom Is Groovy: The Groovy Drawdown Strategy
Link 5: The Green Swan: The Nastiest, Hardest Problem In Finance: Decumulation
Link 6: My Curiosity Lab: Show Me The Money: My Retirement Drawdown Plan
Link 7: Cracking Retirement: Our Drawdown Strategy
Link 8: The Financial Journeyman: Early Retirement Portfolio & Plan
Link 9: Retire By 40: Our Unusual Early Retirement Withdrawal Strategy
Link 10: Early Retirement Now: The ERN Family Early Retirement Captial Preservation Plan
Link 11: 39 Months: Mr. 39 Months Drawdown Plan
Link 12: 7 Circles: Drawdown Strategy – Joining The Chain Gang
Link 13: Retirement Starts Today: What’s Your Retirement Withdrawal Strategy?
Link 14: Ms. Liz Money Matters: How I’ll Fund My Retirement
Link 15a: Dads Dollars Debts: DDD Drawdown Part 1: Living With A Pension
Link 15b: Dads Dollars Debts: DDD Drawdown Plan Part 2: Retire at 48?
Link 16: Penny & Rich: Rich’s Retirement Plan
Link 17: Atypical Life: Saving Is The Easy Part: Our Retirement Drawdown Strategy
Link 18: New Retirement: 5 Steps For Defining Your Retirement Drawdown Strategy
Link 19: Maximize Your Money: Practical Retirement Withdrawal Strategies Are Important