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When discussing the funding of early retirement, I’m guilty of being fairly vague. Save at least 25 years’ worth of anticipated expenses and you should be good to go. That’s what the 4% Rule says, right?
The vagueness is intentional. Everyone’s situation is different, and you have to customize the way in which you’ll access your money, based on how much you have, in which accounts it’s located, and what income streams you might currently have or expect to benefit from in the future.
I’ve shared a tentative drawdown plan in the past, but such a plan becomes outdated over time. Any plan should be dynamic, and it should change as your money situation changes.
One way to think of your retirement is in terms of epochs. Not to be confused with the fuzzy tree-dwellers from Return of the Jedi, an epoch is a period of time that can be differentiated from others based on defining characteristics.
In this case, the epochs of early retirement will be defined by the source of your spending money, how you access it, and what you spend it on. Kudos to Gasem for inspiring this post with this comment.
The Epochs of Early Retirement
There will be numerous important years that define your epochs.
21. You can legally drink! But you’re not early retired yet unless you inherited a fortune or became a Youtube sensation.
Retirement. Obviously, the year in which you retire from your main source of income is a pretty big deal. For me, that happened in the summer of 2019 at age 43.
55. The year in which you turn 55 is a milestone for those who remain employed with a 401(k). That’s the year in which you can leave your employer and start accessing that money.
59.5 When you turn 59.5, you are able to easily access all IRA money without penalty or the necessity for “tricks” like the SEPP via Rule 72(t).
62. You are eligible to start taking Social Security, although most people reading this blog will probably be better off delaying until full retirement age or age 70.
66 to 67. Depending on when you were born, your “full retirement age” at which you can collect a full Social Security benefit is in this range.
70. At age 70, you can collect the maximum amount of Social Security if you delay until then to begin receiving your benefit.
72. The year in which you turn 72, you will be forced to start drawing down traditional IRA and 401(k) money. Forced withdrawals start at about 4% and increase incrementally to over 10% as you age.
Personally, my plan is to retire from medicine well before age 55 and delay Social Security until age 70. Therefore, I can break the future down into three main epochs:
- Epoch I: Retirement to Age 59.5
- Epoch II: Age 59.5 to Age 70
- Epoch III: Age 70 to Infinity (and Beyond!)
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Epoch I: Retirement to Age 59.5
The early years can be the trickiest, depending on how your portfolio is structured. Money that can easily be accessed penalty-free includes taxable investments, 457(b) investments, Roth contributions, and Roth conversions (after a 4-to-5 year “seasoning period”).
It’s best to leave Roth money alone if you don’t need to access it. They’re the most valuable dollars in your portfolio.
Also available at this age are passive income streams you may have built from small business investing, crowdfunded and other real estate investing, and more.
I will have two income streams that will probably continue through age 59.5, so there will be two or three distinct periods within this timeframe — subepochs, if you will.
457(b) Income While it Lasts
I have a non-governmental 457(b) that is essentially deferred compensation; it’s not mine until I withdraw it. It’s got two to three years worth of living expenses in it, and I plan to drain it down over 5 to 6 years or more, depending on market returns.
Small Business Income While It Lasts
What started as a blog in early 2016 has become something of an online business venture. By the time I pay expenses and shareholders, donate a big chunk of the profits and pay taxes, I’m left with about 25 cents per dollar of revenue.
Nevertheless, 25% of a profitable business is nothing to sneeze at, and we’re about at the point where it’s about enough to support our living expenses… as long as the good times last.
When Those Income Streams Cease to Age 59.5
The future is unknowable, but let’s say those income streams run dry by the time I’m 50 years old. I’ve got about another decade to cover before the next epoch.
I could use Substantial Equal Periodic Payments to access tax-deferred money early, but I don’t foresee that need. I could also build a Roth ladder to make that money more accessible, but I don’t plan on spending money from a Roth IRA unless I have no other option.
Taxable Account
We’ve got at least half of our portfolio invested in a taxable brokerage account, and that money’s accessible at any age for any reason, and it will serve us well during this decade.
There will be dividends of about 2% of the value of our index funds (at least based on the current dividend yield). I’ll take them, although I’d just as soon create my own dividends by selling shares and maintaining control of how my “income” is taxed.
I don’t automatically reinvest dividends, as doing so can foul up attempts at clean tax loss harvesting, and I’ve got the money redirected to a money market fund. In retirement, rather than manually reinvesting the dividends, I can have them sent to a high-yield savings or checking account as needed.
If that dividend yield does not fully support us, I will gladly sell some of those shares. Some people scoff at the idea of selling principal. However, if I invested $1 Million dollars in the brokerage account and it’s eventually worth closer to $2 Million, am I selling principal as long as the value of the account exceeds my cost basis?
Even if I do draw down principal to below my cost basis, there is money in tax-deferred and Roth accounts that will be compounding untouched for more than a decade. The goal is not to drain the taxable account down to nothing, but as long as it lasts throughout this first epoch, there would be no real cause for concern, and there’s little chance of that happening.
529 Plans
The latter part of this first epoch includes the years in which we will be drawing down the 529 Plans we built up for our sons. It’s important to plan for your children’s higher learning before retiring early, and the college and graduate / professional school years will be upon us within the next decade.
Epoch II: Age 59.5 to Age 70
The second epoch of early retirement occurs over an approximately eleven-year period from late in my sixth decade to the beginning of my eighth.
There will be some carryover from the latter part of the first epoch with continued dividends and selling of shares from the taxable account.
IRAs and 401(k)s
What’s new is the ability to make withdrawals of any size as needed from an IRA (which could contain money rolled over from a 401(k) or 403(b). Even if the money isn’t necessarily needed now, it might make sense to start withdrawing it as soon as it’s available while watching your total taxable income to ensure you’re not pushing yourself into a higher federal income tax bracket that you don’t want to be in.
Roth Conversions
Another strategy that could begin in the first epoch and will certainly continue into the second is strategic Roth conversions. Instead of withdrawing funds from a tax-deferred account to create taxable income, you can convert the money to Roth instead, paying income tax at your marginal bracket, which could be quite low as a retiree.
The main reason to either take traditional IRA withdrawals or make Roth conversions at this stage is to reduce or avoid Required Minimum Distributions (RMDs) that will start in the third and final epoch.
Another reason to do so would be the anticipation of higher future income tax rates. I don’t know what the future holds, but if I had to guess if income tax rates will go up or down after the current rates sunset after 2025, I’d put my money on “up.”
Social Security
One could start collecting Social Security as early as age 62, but that’s not currently part of my plan. Delaying Social Security offers an excellent return on investment, as the monthly benefit at age 70 could be about 1.8x that at age 62.
A reason to start collecting checks early (at 62) would be a lack of faith in the solvency of the program and the corresponding uncertainty that you’ll be receiving any money at all if you wait. A bird in hand is sometimes better than a few in the bush.
A second reason to get that money as soon as possible is poor health or a family history of early demise. The decision to delay Social Security pays off somewhere in your earlly to late eighties depending on how you do the math. If you feel very unlikely to see your 80th birthday, delaying until 70 makes very little sense.
I anticipate there will be changes made to the program in the nearly twenty years between now and my eligibility at age 62, but as of now, I anticipate delaying Social Security as long as possible.
Medicare
Smack dab in the middle of this second epoch is Medicare eligibility at age 65. Don’t make the mistake of believing your healthcare expenses will be minimal from here on out. Many of today’s Medicare recipients are spending in excess of $10,000 a year on healthcare.
Nevertheless, if you’ve been purchasing health insurance off the rack for years, you could see your healthcare costs cut by half or more at the age of 65. If some form of a Medicare for All plan becomes the law of the land, this could be a moot point.
Age 70 to Infinity (and Beyond!)
When I reach the age of 70 late in 2045 (according to current law), I’ll start collecting Social Security. I do not anticipate receiving the largest benefit possible, which would have required 35 years of paying the maximum possible), but I do expect I’ll have passed the second bend point, so my benefit won’t be that far below the max.
If you have very low taxable income, you might pay little or no tax on your Social Security benefit, but I fully expect to be taxed on 85% of my benefit. Most readers of this blog can expect to have enough taxable income to have most of their benefit taxed at their marginal income tax rate, as well, but 15% of the income is exempt from taxes.
Required Minimum Distributions
If, and this is a big if, I still have tax-deferred money sitting in a 401(k) or IRA, the government will make sure I start depleting it. If you don’t start taking out the mandated amount annually starting in the year in which you turn 72 (2047 for me), the penalty is 50% of what the RMD would have been.
I hear it’s surprisingly easy to have the penalty waived if you goof this up, but I’m not going to take my chances with the federal government.
As mentioned above, RMDs start at just under 4% and reach over 20% if you make it to 104. At the tender young age of 115, the RMD is over 50%.
A lot of people like to talk about having an RMD problem. As in, their RMDs will be so large, they’ll be forced into the highest tax brackets in retirement.
It would take a very large tax-deferred balance for this to be an issue. For example, a couple with a $9 Million total IRA balance would give you an initial RMD of about $330,000. After subtracting $24,000 for the standard deduction, they are easily in the 24% federal income tax bracket (based on today’s bracket which goes up to $321,450).
So one way to not have an RMD “problem” is not to have an 8-figure IRA balance. I would argue that if you do have an 8-figure IRA balance, paying taxes on the withdrawals should not be much of a problem.
Nevertheless, I’m not keen on being told what to do with my money, and I’d just as soon have those tax-deferred balances down to zero by the time I would be forced to withdraw what the government demands I take each year.
Under the current tax code, I think Roth conversions to fill up the 24% federal income tax bracket make perfect sense. When truly retired, I should have lots of room in which to do so.
Estate Planning
While I jokingly refer to the age of infinity (and beyond!), I expect my telomeres will continue to shorten, my coronaries to continue receiving deposits from the meat that I eat, and I will eventually pass away.
Estate planning should begin well before even the first epoch of early retirement, but the specific plan becomes most important when needed, which I hope will be at least a decade or two into the third epoch.
Proper estate planning should include the following at a minimum:
- Beneficiaries named on all accounts
- A Last Will and Testament
- A Living Will
- Healthcare Power of Attorney
- Revocable Living Trust if you have assets subject to probate
There is certainly more to estate planning than a handful of bullet points, but that’s a good starting point.
If you find yourself in the fortunate position of having another so-called problem like an estate worth more than the federal estate tax exemption (currently $22.8 Million for a married couple), you will have more work to do.
An easy way to deal with it is to donate enough during your life or upon your death to bring your estate value below the exemption level. Cash value life insurance can also play a role; this is one of the few instances in which it might make good sense to own a permanent life insurance policy.
Estate and inheritance taxes vary widely by state and can start at much lower net worth values. Depending on the potential cost and how important it is to remain in place, it could make sense to spend your latter golden years in a state where an estate tax will be a non-issue.
So that’s how I’m looking at my early retirement financial timeline. There will be three main epochs with a few subepochs as the milestones come and my hair grays and goes. It’s never too early to start thinking about how you’ll approach the spending aspect of all that money you’ve been diligently saving.
Have you thought about the different phases of your post-retirement financial life? How many epochs will your retirement have?
35 thoughts on “The Epochs of Early Retirement”
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This undated article is over a year old, from June 2019 or earlier. Tax laws change. For example, The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 pushes back the start of RMDs from 70.5 to 72 years.
It also promotes converting all IRA/401k/403b accounts to Roth before RMDs
start. I prefer to level out my yearly taxes, by partial Roth conversions over my expected lifetime. This is a cheap way to annuitize tax deferred accounts.
Retirement as a “side hustle millionaire” in transition is a sweet feeling soon to happen. 🙂
I think there is one more epoch to add for some (maybe most?) That is a long term care phase. Expenses will be different from the prior phases. Many here will self-fund LTC. Some attention early on should be paid to how one expects to cover those expenses. Pulling from a traditional IRA might be desired since a lot of those expenses will be deductible. You may not want to Roth convert it all.
Question. Am retired from TPMG. Can start non COLA pension whenever I want but every year I delay pension goes up 8%. Have substantial 401K. I am 65 y.o. live in California. What makes more sense. Taking money out of the 401K for living expenses and delaying my pension until age 70, or taking the pension now and letting my 401K alone. The 401K is 100% in equities and so far has done well.
It sounds like you’re in good shape, either way. That works very much like Social Security, which goes up each year you don’t take it from full retirement age to 70 by 8%.
If you’re in decent health and expect to have a better than average chance to live another 20+ years or so, you could delay the pension. Starting to draw from the 401(k) now will also help reduce your RMDs when you hit 70.5
Best,
-PoF
A very nice summary. And I’m glad Gasem got some credit – I’m sure I’ve used a number of his comments as the basis for posts without full attribution!
I feel like we are all done talking about the accumulation phase and SWR’s, and now I can’t read enough about the spendown phase. In my view the sequencing of withdrawals along with the concurrent tax optimization should be *the* issue for FIRE discussion at the moment.
I think it’s also the richest area for future ongoing discussion since history tells us that tax laws, healthcare options and savings options will all change in the future requiring course corrections to our plans. This is unlike the accumulation phase where ‘spend less than you earn’ and ‘invest it and forget it’ are immutable tablets of stone.
Spend down is nothing like pump up. During accumulation you have a job to supply your hamburgers and a boss who takes over a considerable part of your risk (health care paid vaca maybe disability etc) When you hit spend down all of that risk returns to your domain. I’ve found you need to consider the volatility of your portfolio in the mix. Also once the portfolio is open to withdrawal is when you become liable to SORR, otherwise SORR doesn’t really affect you (except for inflation) while in accumulation mode.
What a nice way of thinking about the future! Instead of just wrinkles and arthritis, now there’s something good to look forward to at 59.5 years of age, 62 years of age, and beyond.
I’m already salivating at the thought of unlocking my retirement accounts!
… but first, I should stuff them to the gills for a while longer.
— TDD
Like you said, reaching subepoch (phase 65.0) definitely isn’t the promised land of free healthcare some people think it is. So many people wait to hit that magic number (65) and then get hit cost shares and Part B premiums they weren’t expecting. They borderline need to have mandatory classroom education for onboarding seniors to the program to help them through some complexities.
Depending on income level part A and Part B can cost more also. It turns out the millionaire does not pay the same as the regular Joe but up to 3 times more. You also get charged the Medicare surtax if you’re the millionaire earner. The government loves to soak the rich
Great writeup, though it feels like I couldn’t be further away from it. I’ve been in the process of outlining a series of stages for myself around the transition from trainee to attending, but really it just boils down to ‘where do I throw money now?’.
Anyway, this is a really good piece and probably an instant classic. Thanks!
I just wrote a series on peri-age 65 conversion strategy over on my blog The series is a 4 parter called Parsing Cash Flow and covers how to work backward from death to RMD age to create a plan that is tax efficient. The way things are with most TIRA is your growth will go to pay more and more taxes. By having 3 accounts taxable Roth and TIRA plus SS you can create a plan that is tax efficient AND predictable.
In doing the analysis I found top of the 24% costs you more in taxes. There is a tax bump at 250K which causes a higher medicare payment as well as a medicare surtax so I’m keeping my Roth conversions below 250K. I found after considerable analysis that if you have a TIRA in the 500K range the government kind of leaves you alone from a tax perspective so I’m keeping my bonds and enough stock in a 20/80 TIRA which will allow some RMD income that slowly grows and should keep up with inflation while not kicking you into a higher tax bracket for a couple decades. Beyond 500K I Roth convert the rest of the TIRA over 4-6 years the goal to end up with at least 1M in the Roth, more if you have a bigger TIRA This is called partial Roth conversion. I use the Roth for self insurance in case of a cancer diagnosis or ND diagnosis. If I don’t get either of those and my wife stays healthy after 10 years the Roth has grown enough to take an additional 2-2.5% / yr out for whatever. The taxable funds all of this. Early on I converted about 600K of stock to cash to live on while Roth converting. The government is about to pass the SECURE act which will take RMD age out to 72 from 70 so you can convert the same 1M over more years for a tax savings. At 73 you retire and are virtually bullet proof till you die and so is your wife. Both of you are covered for bad diagnosis and plenty of dough for fun as well.
http://mdonfire.com/wp-admin/post.php?post=986&action=edit
Like you when I need money I sell stock. I make about 40K/yr on dividends which I reinvest because of the potential growth but I already have a pile of tax loss harvested, no need to harvest more
Quant analysis and Epochs are the way to go
Funny, I’d already segmented my ER into pieces like you’ve described as your “epochs”, but I didn’t have a name for them. I similarly expect to wait until age 70 to draw upon SS, and in the meanwhile convert sizable chunks of pretax money to the Roth while living off of other savings. Most of my current retirement savings are in pretax accounts, so this strategy is more pressing for me than for others. I hope however to stay mostly in the 12% top tier tax bracket. The year I sell my farm however will likely be a year I don’t do any Roth conversions.
If I were done with earned income today, I’d probably do big Roth conversions to fill up the 24% tax bracket every year until these low brackets sunset after 2025. Depends on the size of your tax-deferred balances and how much space you have under the limit (very different for single filers vs MFJ), but I think 24% is an attractive bracket in which to do conversions.
Best,
-PoF
Thanks for your reply. I admit I had not yet done the math to figure out best case scenario between only filling up a lower bracket vs filling up a higher bracket leading up to the RMD age, given I plan to file for SS to start at age 70. I just know I want to avoid the nasty certainty where, if I do nothing, that 85% of my SS will become taxable once RMDs start.
I just did a quick analysis, and figured out, based on current balances, I can basically decimate my pretax accounts if I do Roth conversions at a level that no more than fills up the 22% bracket for the next 8-9 years. And if the market has dropped a large amount during any of those times that conversions are done, then that’s a plus.
But Ha, as you pointed out, the current tax rates expire in 2025 so I might want to rethink my strategy and go for the 24%.
I find the tax concerns on RMDs kinda funny. If your RMDs are so high you’re worried about taxes, you’ve saved a boatload of money, and you’re fine. I know it always hurts a bit to pay in the higher tax brackets, but at the point of RMDs, the account is funding the tax completely.
Yeah, but why give away more money to Uncle Sam than is absolutely necessary? I’d rather donate it to causes that are near and dear to my heart than donate to the federal government.
To clarify – in retirement take my 401K and IRA assets and liquidate them up to a 24% tax each year then convert as much of the result as possible to a Roth until age 70.5 Is that 24% federal or 24% state and federal? Sounds like a good plan to run by my accountant.
I love the idea of epochs! Its both fun and gives a reasonable roadmap!
You forgot the epic epoch of realizing you are financially independent at age X and running around living a magical fantasy dream life.
I’ve actually discovered I’m in an epoch of ‘getting too excited and overspending a bit’. Hopefully, I can get that under control sooner rather than later 😛
Lifestyle inflation is probably the easiest to magically be transforemed from living the FI fantasy to longer being FI! But as long as you stay under 4% with the annual spending, you can grow both your net worth and your lifestyle in an average year.
Cheers!
-PoF
I was fortunate enough that Gasem did a guest post on with his personal version of Epochs on my blog and got me thinking along similar lines as you Leif.
It makes sense to divide your lifespan into various stages and have different strategies of money management for each.
One of the great side benefits of an early retiree is that the number of years available for Roth conversion increases dramatically and thus you can convert smaller amounts helping you stay in the favorable tax brackets. Gasem, like you, believes that filling up to the 24% tax bracket is the best use of conversion.
It is a good problem to have but I am slowly in the process of building a passive income stream behemoth so it will be a little more tricky to find space for conversion if this pace continues.
The ideal goal for me would be to have a cash equivalent of 2-3 years of living expenses at time of retirement in an easily accessible money account that could fund my lifestyle as well as the Roth conversion taxes incurred.
I hear you on the first world problem of being incomed out of the 24% bracket. My suggestion: donate a portion of your passive income streams and you can create as much space as you want!
Cheers!
-PoF
Excellent review. You have added to the RE discussion in so many ways!
If you had more space in this blog, I would love a discussion of the fungibility of money and asset allocation in RE.
On a different note, as left over Roth money will likely be the legacy you leave to you children, your conversion decision does not depend on Your future tax rates, it depends on Theirs! If you think your tax rates in retirement are unfathomable, try to predict what theirs will be! I would suggest that 24% might be too aggressive, but you might as well pay taxes once and get the government out of your tax-deferred accounts for ever!
The plan makes sense to me!
You’ll have plenty of time to convert to Roth to limit the “RMD” problem, and with the extra income streams that will be there (As long as they last), you’ll have a bit of a cushion in case the market takes a tumble right when you retire. Having that padding to deal with sequence of return risk is a great plan.
I’m looking forward to following your journey on “the other side” of FIRE. It does make me really look forward to start funding a taxable account (finally) after we are debt-free outside of our mortgage.
Jimmy / TPP
Interesting idea with the epochs POF. For me this journey is early but I wanted to share more from my journey 0-40 yrs since this range could use some more love too:
Age 17-23
Really internalized the miracle of compound interest. Made the choice to save and invest.
Age 23-34
Balances grew and got interesting. Got really really active in investing and side hustles. Also started family which ups the financial ante.
Age 35-39
Savings reached levels where work not mandatory. Changed decision making processes to adjust.
These probably shift a bit for physicians (I am not one). I would guess less early savings (med school) but then rapid wealth building (practice).
That’s pretty good! Career epochs, if you will.
Most physicians, including a younger me, are flat broke in their early thirties, but things can ramp up quickly if you pay off debts and live like a resident for a while.
Cheers!
-PoF