55 comments

  • What do you see as the advantage of drawing from the 457(b) before taxable? Would your taxable income be lower by using all taxable vs part of a 457(b), for Roth conversion purposes? I’m asking because I honestly don’t know. Kitces has an article on paying 0% capital gains in retirement that I will need to review when I get closer to the date.

    Like you, I had planned to use dividends first, and then sell taxable lots in early retirement. I have a DAF with Fidelity (as I know you do), and it feels good to kill 2 birds with one stone: get rid of lots with the highest capital gains, and donate to charity in process.

    Happy planning!
    Dr. C

    • Arkad

      I am in a similar situation but a bit older and maybe a bit more in my 457(b). I plan to tap my 457 first for a few reasons:

      Our hospital may force a lump sum in the future once I leave. I do not want to take that chance and the big tax hit if it did.

      I only need to supplement some income and plan keep my withdrawal of the 457 under the amount that will keep my capital gains and dividends at 0% and take advantage of that opportunity while I can.

      Although unlikely, I do not like the fact that the 457 is open to the risk of my hospital and would like to be done with that concern as early as possible.

      These reasons plus the 457 lets me use the money before 59 1/2 without penalty is why I plan to use that as my first income stream.

      • Mike

        Lump sum.

        Is there not the ability to roll the 457 into an ira when the lump sum is required?

        • The only rollover option for a non-governmental 457(b) is another 457(b) at a new employer. Governmental 457(b) has more options, including rollover to an IRA.

          • HospitalDoc

            When I left my hospital job I have to specified the date I would like to start distribution of my 457B and you can change it only once. They told me that once I start the distribution may be it lump sum or staggered withdrawal, it will be taxed 20% withholding.

            • It will be taxed at your marginal state and federal income tax rate. The lump sum would presumably push you into a higher (likely the highest) tax bracket, so I would spread it out over a number of years.

              I will likely have mine paid out at a rate of $2,000 to $3,000 a month over 6 to 10 years (depending on performance of the funds in it). The $24,000 to $36,000 a year likely won’t push me into the next tax bracket, but I don’t want to prolong the withdrawals indefinitely, as the money’s not technically mine until I’ve received it from the fund.

              Best,
              -PoF

    • Good question, Dr. C.

      I have been thinking about this and crowdsourced an answer in this WCI forum thread.

      Ideally, one would stay in the 15% tax bracket to have 0 capital gains (see the Taxman Leaveth).

      Arkad’s point about the money belonging to the hospital until it’s paid out to you is also a concern. I could see stretching out to maybe 10 years with a lower withdrawal rate, but I wouldn’t want to prolong the 457 drawdown indefinitely with a 4% SWR.

      Regarding the DAF, be sure to frontload your giving by loading up the DAF before you slow down or retire to get the maximum tax deduction.

      Cheers!
      -PoF

  • Looks like a great plan PoF. You’re way ahead of me but I worry about the RMDs getting too big and not minimizing my tax hit in retirement.
    I guess you don’t have as much to worry about since you plan on staying under the 15% tax bracket and your capital gains won’t be taxed. Letting RMDs get above that 15% bracket seems to open a bag of worms.
    The capital gains start getting taxed and the tax bill goes up quickly. I’d be interested to know your thoughts on a family that might wander outside the 15% bracket and might need to take some traditional IRA tax deferred money out earlier to save taxes later.

    Tom @ HIP

    • I don’t think there’s anything wrong with taking withdrawals or making Roth conversions in the 25% bracket if you expect to be at that bracket or higher later on due to RMDs.

      The biggest threat I have to remaining in the 15% bracket is income from this site. Donating some profits will help, but if I end up in the 25% or higher bracket, you won’t hear me complain!

      Best,
      -PoF

  • Doc, we’re in very similar situations, tho I envy your 50% after tax balance. Sounds like a great plan, and I may give you the most sincere compliment via copying your post idea with a post of my own.

    One difference which I’ll do: intentionally defer my pension start date, allowing it to continue to grow (not unlike delaying the start date of Social Security, which I’ll also do). Great to see your thoughts on this important topic, thanks for sharing!

    • Yes, you should post your plan. I think it’s a common question — what is the optimal way to access this money. We’re good at building it up, but don’t talk as much about how to tear it down.

      Everyone’s situation will be different, so numerous examples are good for the community. I didn’t mention it in the post, mainly because it’s 29 years away for me (and 36 years for my wife), but we plan to delay social security until age 70 based on the current law.

      Cheers!
      -PoF

  • Great plan. We plan to use similar strategies but still counting on projected amounts since we have two more years until retirement.

    Our drawdown draft includes:
    1) Having 3 months of expenses in the checking account.
    2) Using the quarterly dividends from the VG funds.
    3) Take advantage of the Roth ladder.
    4) Sell from taxable accounts if we need more money.
    5) Sell from Roth account if needed.

    As of now we’re saving to buy a home in cash while continuing to max out 401(k) and Roths accounts. We also have a paid off rental property but we’re going to sell it after we retire and invest that money in either real estate crowdfunding companies or in the brokerage account. I have no land lording desire in retirement.

  • Wow, I’m impressed with how much you’ve managed to convert to Roth. Having more than 80% of your money available without penalty is amazing. I’m jealous!

    Since Mrs. Freaky Frugal and I’ve FIREd, we’ve been living off taxable accounts. I’ve done Traditional to Roth IRA conversion every year but I’d plan to do to a lot more. We unfortunately have a large proportion of our wealth tied up in Traditional IRA accounts.

  • hatton1

    Well guys I have made it to the first age goal of retirement planning (59.5). I am still working 3 days per week. When I decide to throw down the speculum (gynecologist) I plan to live on my taxable account (dividends, interest, cap gains). I can do this because I have some how managed to accumulate a large taxable account. I may do more roth conversions if we have another opportunity like the brexit pullback. I expect to be in a high tax bracket at 70 unless the laws change. The main roadblock right now to firing is the unpredictably of health care expenses.

    • Forgive me if I sound like a broken record, hatton1, but the best way to deal with healthcare expenses is to pay a pretty penny for healthcare for 5.5 years.

      I am confident you can easily afford it and probably stay well under a 3% withdrawal rate. If you enjoy working, by all means keep up the 3-day a week schedule, but if you’re only doing it for healthcare coverage, you may want to reconsider.

      Best,
      -PoF

  • Seems like a solid and well organized plan PoF. You’ve already mentioned it and I agree with you that in ER phase you will have more opportunities than you have now: small business income, speaking and writing.
    I think and hope you will have to withdraw less money from your accounts.

  • HospitalDoc

    Thank you for a great article.
    What do you think of investing my taxable account to a higher yield index funds specifically SPHD and SCHD. At least in the taxable account the dividend is treated well tax wise if my income from taxable account is less than 96,000 for married couple filing jointly. In tax deferred account the dividend is treated as income when you withdraw from it. Thanks!!!

    • I’ll be writing a post about my thoughts on dividends, and I alluded to them above, but I don’t like holding high dividend funds while gainfully employed.

      You can hold a Zero dividend fund or stock (like BRK-B) and create your own tax-free dividend by selling shares for long-term capital gains, which are treated the same as dividends. And you don’t have the issue of tax drag during the years you hold it while earning a physician’s salary.

      Cheers!
      -PoF

      • HospitalDoc

        Thanks!

      • I’ve done something similar, holding the high dividend stocks in my tax sheltered account and the low to no dividend stocks in my taxable accounts.

        The only downside is that dividends tend to be sticky whereas share prices are more volatile. Berkshire has the same effect as a mutual fund but with better tax planning.

  • Nice plan.
    PoF, In one of the earlier comments somewhere else you had mentioned for healthcare expenses, to work one year and save that money to pay for healthcare in retirement. I think it is an excellent idea for calculation purposes. It needs elaboration, especially where to keep this money- cash, TIPS, bonds?

    • Yes, that’s what I’ve been telling hatton1. If the fear is not being able to afford it, just set aside enough to cover X number of years for healthcare.

      Money is fungible, so I don’t think you have to keep that allocation separate from the asset allocation set up for your portfolio. But if you want to be sure that money is there and separate, maybe put $20,000 to $30,000 needed per year in fixed income (TIPS, CD ladder, short term bond, etc…).

      So for Hatton1, maybe buy 5 CDs at $30,000 each with the money she earns over the next year. Buy durations of 1, 2, 3, 4, and 5 years. Voila, health care covered!

      Best,
      -PoF

      • CM

        $30K may not do the job. In my market a 57 yo married couple with no kids would have paid $25K/year (medical premiums, no dental) in 2016 (based on quote obtained by a friend). I’ve read reports of 40% year-over-year increases in some markets while other markets have no ACA insurer at all.

        Of course, the ACA itself may disappear and then it might be impossible to obtain an individual policy for someone with a pre-existing condition.

        It’s difficult to take that worry too seriously when one has never had an important health problem. At 42 yo I was less worried about that possibility than a lightning strike. Then lightning struck when I was 52 yo.

        In any event, I hope you will report on your experiences with healthcare costs and access in real-time if you do retire from medicine. I’m sure many of us will be very interested. Hatton1 isn’t the only reluctant early retiree. Healthcare costs are the number one concern for most.

        • RocDoc

          Here’s another old codger who totally agrees with CM’s and Hatton1’s concerns about health care. My husband and I are healthy but by ages 54 and 53 we’ve had a few health issues here and there. Our worry is partially the price, which some doctor friends in my Houston area worry could bump up to $40,000 per couple ages 55 to 65, once ACA converts to AHCA. Many of the doctors my age worry if we’ll even have any AHCA insurance options accepting patients in our age group in Houston. In the meantime, just like Hatton1, I keep working along.

          • In that case, replace my $30,000 with $40,000. Ultimately, it’s a ton of money, but it’s just money. It’s worth exploring other options, too, like healthcare sharing ministries. I’ll be reviewing all the options available to me in the next year or two.

            Best,
            -PoF

          • hatton1

            I am glad I am not the only old doc worrying about this problem. I am generally healthy but I am starting to have joint issues. I have an appointment with an orthopod today. I find myself thinking for the first time well I have met my deductible maybe I should get this fixed now because who knows about next year.

          • Sneezedoc

            A bit of a rabbit-trail, but one seldom mentioned additional benefit of tapering or part-timing rather than hanging up the stethoscope entirely, is to maintain the “insider” factor in the hierarchy of healthcare, which may be more beneficial than socking away extra $$$.

            Networking and collegial recognition as a practicing physician is a nice fringe benefit. Not all the time, or in all situations, of course. But a cell phone with competent specialists’ numbers in it has value; being an attending at the hospital where a family member shows up in the ER or gets admitted does make a difference, and is unrelated to personal finances.

            I am not trying to argue that someone should postpone retirement merely on these grounds, but just acknowledging that there is healthcare benefit beyond the financial.

            What may be a crazy-maker when working 60+ hours a week to sock away the nest egg may not seem so bad if one was only working 2 or 3 days a week and taking a couple months off a year besides…

  • Great plan! Have you considered delaying the 457 distributions (I believe they are taxable as ordinary income)? Instead, withdraw only from the taxable account and generate only dividends/LT cap gains that are taxed at mostly 0% federal. Then use the Standard Deduction, Exemptions, and maybe even the 10% federal bracket to do more Roth conversions. Just a thought!

  • 30x your expected annual expenses. Looks like you’re in a healthy place! I follow WCI as well, and I remember him saying in one of the forum posts how surprised he is that people forget that human beings in general are very adept at adjusting. At a 4% or 3% SWR, you always have the flexibility to change to a VWR, if times get tough. No one would stupidly go with a fixed withdrawal if you have a sequence of bad returns year over year. People adjust, and worst case scenario one can always work a little on the side and it’ll increase the probability of not running out of money fairly dramatically. Even with just a little bit of extra income.

  • Solid plan PoF.

    The main roadblock for us in determining our drawdown plan is that we haven’t yet fully decided where we will finally be located (we do have it down to just 3 alternatives though). One of the locations we’re considering has a ‘wealth tax’ – you are taxed a fixed rate on your invested assets (and then there is no tax on capital gains). A 401k does not count towards invested assets in that country. A Roth IRA does. So whether or not we should pursue aggressive Roth conversions is still up in the air.

    • Interesting, Mrs. B. I’ll be the first to admit I haven’t looked into retirement in different countries. The taxation you describe adds another layer to the decision-making process.

      Cheers!
      -PoF

  • Good reading!

    We will likely adopt the following plan, some of it in common with your own:

    1. Pension income, accessed when I retire at age 51, will pay an annuity (100% joint and survivor) approximately equal to 25% of our annual expenses. It’s not inflation adjusted – BOO! But still, a decent and not insignificant income stream until we both depart this world. We see this income stream as a somewhat solid “floor” to our overall income.
    2. Divert dividends from taxable to checking account. Taxable accounts at FIRE will be ~50% of our portfolio, give or take a percentage point or two.
    3. Roll over Mr. and Mrs. PIE 401k’s to our respective IRA’s . Roth convert from each to mitigate potential issues with oversized RMD’s after age 70. But staying within the 15% tax bracket. Hopefully the current administration will not take a swing at abolishing Roth conversion strategies……
    4. Withdraw from my UK savings plan at age 55 – a sum saved during my early years of working in the UK. It was a small sum when I left the UK in 1998 but compounding interest has worked its magic since then. Who knew! Kinda nice that I can access this at age 55. Just have to work out how taxes will be handled – Looks like I will get full relief from paying UK taxes due to the “Digest of Double Taxation Treaties” – thank you very much HMRC and Uncle Sam for agreeing on something! I will pay tax based on my much lower tax bracket in the US. No doubt it will be lots of filling out of forms, but then again, I will have time on my hands to do that sort of stuff….
    5. Sell from funds in taxable to meet the deficit on our annual expenses. Analyzing CAPE to determine whether to sell equities or bonds
    6. Transfer HSA from Mrs. PIE company to another provider and only tap into it when necessary.
    7. Likely each take SS at our respective age 67. We have yet to strategize in detail on that particular topic.
    8. Any consulting income in the first few years after FIRE will be gravy on top. I won’t be seeking it out but I have a sense it may come my way and I’ll decide on a case-by-case basis. Anything that gets in the way of our family adventures will be a clear NO.
    9. Ensure two to three years of living expenses at hand in checking account. What I mean by that is an amount equal to 3 x (annual expenses minus pension income)

    There you go, a mini-post on our strategy. Like Fritz, I hope you will allow me to expand on it by writing up a post ourselves.

    Bye for now.

    • You’ve got a great plan, and a solid outline for that blog post!

      Personally, I don’t plan on doing #9. Big ERN has done the math and shown that the “cash cushion” tends to be a loser over the long haul. Yes, it will keep you from having to sell shares low in a down market, but the opportunity cost of having that cash during normal / good years outweighs that benefit. But if it helps you sleep better at night, go for it.

      Cheers!
      -PoF

  • OMMD

    By removing funds from your 401(K) and moving it to an IRA doesn’t that money lose its protection against lawsuits?

    • I’m not an asset protection expert, but it appears both are good places in terms of asset protection. From LegalLees:

      “401(k)s are almost bullet proof asset-protected funds. IRAs are subject to state laws, so whether or not you can lose them depends on the state. Many states have protected them like 401(k) plans. We do know that the IRAs are protected in federal bankruptcy cases (Supreme Court ruling), but for common lawsuits, the protection isn’t absolute in some states. I am sure that some day the Supreme Court will extend absolute protection to all IRAs in all states. Bottom line: not only do the IRAs, 401(k)s, and other retirement vehicles give you a great tax advantage, they are the best asset protection you can get. In my book, Protecting Your Financial Future, I cover the basics of creating a great retirement estate plan.” Lee R. Phillips, JD, US Supreme Court Counselor

      Umbrella insurance is a good idea, too.

      Best,
      -PoF

  • wishicouldsurf

    That looks like a solid plan…. I am exiting corporate America shortly (17 days woot woot!) and over the past 18 months I’ve been obsessed with the mechanics of how I actually pull this off and access cash flow in my taxable accounts to meet my needs. I’ve got a slightly different mix of investments but a good chunk in non retirement accounts as well and planning on taking advantage of Roth conversions as opportunities to do so arise… I just hope to get through the first 5 years without selling off many shares, or any, if I did this right. Thanks for sharing your plan! Of course now I’m going to think through a few new scenarios…. but ready to see if this actually works.

  • Ron Sanders Jr

    Nice article! Enjoyed reading it 🙂

  • That is a well thought-out plan , PoF. I’m going to take what you structured in this post and use it as a framework for me to plan how I should invest now so I can access my money efficiently later.

  • Doc, thanks for launching a great concept. This has now been officially launched as “The Drawdown Strategy Chain”, with a formal linkage of all posts on the topic to be tracked at this link on Rockstar Forum.

    Consideration is being given to compile all related posts into an e-book, with all proceeds being donated to charity. Thanks for starting something that’s been under-reported in the FIRE Community!

  • Joe

    I’ll work on a post too. Great idea.
    You’ve done really well setting up for ER. It’s great that 80% is accessible. Most of our investments are in the traditional IRA so we still need to pay tax on that. RMD sounds like it will be a big problem for us too.

  • I’d add to the chain, if I actually used Twitter. 🙂 Next best is to note my little side-addition here.

    http://www.sabbaticalia.com/?p=374

  • This seems like an excellently crafted plan. This is why I want to focus my investing in my Roth and taxable brokerage. Fewer variables to consider when it comes time to spend it.

  • Great plan POF. Nice job being so thorough. I’ve admittedly not done any of this because I have a plan of never touching principal until I die! My goal is to just keep on trying to make more than I spend, and slowly increase my spending to coincide with inflation.

    Didn’t realize with this plan, I don’t have to make a investment drawdown strategy plan. Don’t you think there’s a good chance you might not have to draw down anything since you’ll still be working PT?

    Cheers,

    Sam

  • Hi POF,

    Looks like you have set off a chain of events – I have been reading people’s retirement posts for a week now.

    My retirement, whenever that ever happens, will be entirely paid for by dividends. It is really very simple – if I spend X amount each year, I need an X amount of dividends to cover that. Tax minimization matters, but I try not to let the tax tail wag the investing dog either 😉

    Right now I am living off my dividend income from taxable portfolios, as well as any side income to fill the gap. I save and invest my full salary in tax-deferred accounts. I also save and invest a portion of side income into tax-deferred accounts as well.

  • Great synopsis. Hopefully all will go according to plan, for both of us.

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  • Gasem

    PoF I like your plan. I took some out of my stock account to live on, but I’ve made several times that amount on the portfolio’s return so I haven’t really noticed. The money is in muni bonds so it still shows up in my net worth in the bond category. The reason I say that is to give a little insight into draw down psychology. It is not like accumulation but It’s not as scary as it seems. It does take some getting used to no paycheck coming in, but that’s actually a blessing. It means your time belongs exclusively to you.

    My plan is laid out by epochs:

    I’m a big fan of a post tax, tax efficient no dividend stock account. My post tax account is about 3 times my pretax investments. I’m also a fan of LT cap tax loss harvesting. I consider cap loss harvesting a separate asset allocation. I am using my post tax acct and some cap gains loss to fund my life while I Roth convert up to the 15% level (hopefully the 12% level next year). I tilted towards bonds at retirement with some LTIPS and put some money from the taxable account (60 months worth) into short term muni bonds both as hedges against inflation and bear market. In other words I took some money off the table. In the event of a pull back, I won’t notice in my month to month living, and I have chosen a period longer than twice the bear average. If we go through a bear, I have money available to invest on the way back up. This isn’t the most efficient but its note very different than if you are messing with the portfolio all the time.

    I also hold a little gold, 5% for the same reason. Gold tends to leverage fear, and I can’t afford to own the VIX which is the perfect hedge against fear. I’ve read multiple papers that recommend tilting towards bonds in what I call transitional (epoch 1) retirement.

    Since I tax loss harvested over the past 20 years I can pull a LOT of cap gains out of my taxable account tax free, just like a Roth. I call this my rich man’s Roth. I’m also watching Mint to keep tract of expenditures more closely than I did pre-retirement. I’m not really budgeted but just more aware. Overspending, inflation, bear market are killers in early retirement and deserve some attention.

    As I approach 70 I will convert a big chunk of tIRA into Roth at a very low tax rate and am putting that Roth money back into stocks so my AA is automatically re-balancing itself back toward stocks. 65 to age 70 represents epoch 1 Since Roth’s are indifferent to dividends that will open up a range of assets I have not invested in.

    Epoch 2 will be RMD and SS annuitization. I will live off those annuities plus if I have some expense like to buy a car I’ll slice off a piece off the post tax roast and mix it with some LT cap loss demi glace for a tasty little tax free treat.

    Epoch 3 will be when my wife claims SS at 67. I’ve used Big ERN’s calculator to mix in our annuity streams. It’s extremely useful because it’s written to understand safe withdrawal % for a given scenario. Goldman reports bonds, credit, and stocks are all at the 90th centile so growth could be very subdued going forward. I like the % safe withdrawal approach and the ability to add several streams into that calculation.

    Epoch 4 will be when she RMD’s at 70.

    Epoch 5, my wife will likely outlive me so this sequence should see her through.

    Epoch 6 The Roth will likely go to the kids but be available in time of need.

    I use an adviser which gives me access to more efficient funds and strategies and risk adjustment than the Vanguard DIY approach and to my estimate the difference more than pays for itself. The cost is about $3K per million per year and is tax deductible, and tends to go down as portfolio value goes up. It also gives my wife recourse and guidance if I happen to meet the widow-maker. I’m not dissing Vanguard DIY just giving my different experience. I see a lot of boilerplate about being charged $30k per year and to pay that level you would likely be into the 8 figure range in terms of portfolio size. Again just my experience.

    I started Medicare this year but my wife is well under medicare age and kids are still in college so we went with MyDirectMD and Liberty Healthshare. We have a primary care doc and can use her service anywhere via telemedicine. She is 30 miles away but my kids can access her from college via skype which I like, and so far this has worked for us. There is ample access to laboratory and exams like pap smear and ultra sound etc. prn. Liberty Healthshare is like major medical insurance. The program is ACA complaint and the cost is about $400 a month. The deductible is small compared to Obamacare plans. I’m still licensed with 25 years in my community, so I can call in a script or get seen by any specialist if push comes to shove. Between medicare and the other insurance it’s about $800 per month. It turns out when you make a lot of money, medicare charges you double for part B and extra for part D, which is a little treat I didn’t know about.

    This retirement plan is more for an older retiree, but it’s actualized and not just presumptive and so far is working exactly as predicted. If you RE you can start with epoch 0. I actually retired at 58, but a job fell into my lap, (epoch 0) so I worked another 7 years and retired again.

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