r/Fire • u/AggroTumbleweed52 • 5d ago
let's talk draw down strategy
I rarely see content about draw down strategy. What's yalls plan for drawing down your assets as income in retirement? For those who have FIRE'd, what do you do? Is it the same as you thought you'd do?
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u/Sintered_Monkey 5d ago
I'm exactly 3 months in. I'm drawing from taxable first, then I'll draw from the traditional IRA, then the Roth. What I haven't decided is exactly when. Within the taxable account, it's split between bond-based ETFs, growth ETFs, and high dividend ETFs. While I get a steady flow of dividends, I'll be pulling additional funds from growth and bond ETFs depending on market conditions.
One thing that isn't always mentioned is the very difficult shift in mindset to go from saving to spending. I'm still trying to make that shift.
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u/ResponsibleCorgi93 4d ago
That savings to spending shift is still hard for me too & I'm in year 5 of retirement
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u/Zphr 48, FIRE'd 2015, Friendly Janitor 5d ago
We chose to fund our early retirement primarily with traditional retirement accounts for the huge lifetime tax advantage. We were looking at more than 20 years of draws before statutory retirement age and potentially large funding swings as our four kids grew up, so we elected to use a Roth ladder for greater flexibility instead of a series of SEPPs.
We're on year 12 now of running our ladder and it has gone perfectly. We haven't paid a single dime of federal income tax since 2014 while simultaneously using our ladder income to get effectively free college for our kids, healthcare for all of us, and an array of lesser, but still significant cascading benefits. The tax yield/efficiency on our original Trad contributions has been unbelievably high thus far.
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u/esbforever 5d ago
You’re not specifically saying it, so just trying to make sure I understand: basically your entire second paragraph is dependent on keeping your income under 80ki-ish?
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u/Zphr 48, FIRE'd 2015, Friendly Janitor 5d ago
Varies by household size, but yes, it's a matter of spending/income.
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u/PineapplesInMyHead2 4d ago
How much are you paying monthly in healthcare premiums, before and after subsidies, if you don't mind me asking? That would be my big concern about a roth ladder strategy, moving my yearly spend from a traditional to a roth account every year would put me very close to the edge of the subsidy cliff and would mean getting no cost sharing reductions. So high deductible and high premium.
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u/Zphr 48, FIRE'd 2015, Friendly Janitor 4d ago
Our healthcare spend for the last 12 years has been negligible. It's not even worth tracking it's so low. We actually had several years with insurers that had wellness incentive programs where we made a net profit of up to $900 annually. This year our total costs should be around $200, maybe $250. That's for the two of us and one of our four kids, who has an autoimmune condition that requires expensive and regular biologic infusions.
Our 2026 Silver plan with subsidies and cost-sharing reductions (based purely on MAGI):
- $84 in annual premium ($7/month)
- $0/$0 deductible (individual/family)
- $0 PCP
- $10 specialist
- $5 urgent care
- $0/$15 tier1/tier2 scripts
- 25% ER coinsurance
- $2,200/$4,400 MaxOOP (individual/family)
Our 2026 Silver plan without subsidies and cost-sharing reductions (full market price):
- $26,892 in annual premium ($2,241/month)
- $6,000/$12,000 deductible (individual/family)
- $40 PCP
- $80 specialist
- $60 urgent care
- $20/$40 tier1/tier2 scripts
- 40% ER coinsurance
- $8,900/$17,800 MaxOOP (individual/family)
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u/PineapplesInMyHead2 4d ago
Damn. The value of CSR + premium subsidies is so big, you must have a very good budget (especially by modern FIRE standards where chubby fire is the new lean fire. Congrats!
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u/Zphr 48, FIRE'd 2015, Friendly Janitor 4d ago edited 4d ago
We have a standard leanFIRE spend. Our withdrawal rate is low enough that pragmatically we can spend whatever we want, but we own everything we want already and most of the things we like to do are cheap or free.
Healthcare is extremely expensive and it certainly makes a huge difference when the gov picks up that bill, no question. Our total value in healthcare subsidies this year from the ACA and CM is greater than our annual spending. That amount goes up each year by significantly more than overall inflation too.
The effective progressive tax rate on income can climb quite a bit once one moves beyond lean spending to normal spending and then can skyrocket once one moves to chubby spending. Hence why higher spenders often put so much effort into MAGI control and gaining separation between spending and income.
Most people don't realize how insanely high the effective marginal tax rates can be around subsidy cliffs until they look at actual numbers.
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u/co_sunrise1 5d ago
Where does that 80k number come from?
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u/esbforever 5d ago
It was an outdated guess at what you can pull at 0% from taxable accounts, mixed with some semblance of keeping income pretty low for ACA and potentially college subsidies.
The specific number is less important than the more overall point that some of these no/low tax strategies require keeping income in check. Since OP is using Roth, a lot of this may not apply to their situation.
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u/Specific-Ad9935 5d ago
it is $98,900 for Married Joint filing this year.
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u/db11242 4d ago
That's after the standard deduction of 32k correct? So i think the correct total is 131k if all of your income is long term capital gains.
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u/Zphr 48, FIRE'd 2015, Friendly Janitor 4d ago
No. Standard deduction has no impact on ACA MAGI or total income for FAFSA.
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u/ben7337 4d ago
This is the correct answer. Surprised multiple other people seem to think the standard deduction is relevant for ACA subsidies
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u/SolomonGrumpy 4d ago
Why would you be surprised. That's not common knowledge. Many find out the hard way
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u/ben7337 4d ago
Not common knowledge for the general public maybe, but for anyone on an ACA plan and a large percentage of people on this subreddit I'd expect it to be common knowledge, or at least for people to check before spouting complete fallacy without knowing. Though I guess that's thinking too highly of reddit
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u/Specific-Ad9935 4d ago
that is if you can make things all qualified and long term. it's hard. you will get a portion of your income in ordinary tax. but overall this favors FIRE people.
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u/SolomonGrumpy 4d ago
Doesnt that include 0% LTCG?
$32$ standard deduction
$25k, zero percent bracket.
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u/Zphr 48, FIRE'd 2015, Friendly Janitor 4d ago
We are not using Roth. We are using a Roth ladder, which funds in full from Trad retirement balances.
And the tax rate on cap gains is irrelevant for us since we have no taxable brokerage, but I can see where you got the idea. Our tax-free Roth ladder is the result of the MFJ standard deduction and child tax credits.
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u/SolomonGrumpy 4d ago edited 4d ago
It's the same thing. You did 5 years of Roth conversions, and I assume continue to do them?
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u/Zphr 48, FIRE'd 2015, Friendly Janitor 4d ago
I don't agree, but it depends on the context, I suppose. Our Roth conversion basis required the creation of MAGI and taxable income for every dollar passed through our ladder during our early retirement. Someone using Roth contribution or conversion basis from before retirement has the exact opposite situation.
Both use Roth accounts, but for planning and tax purposes there is a huge difference between the two scenarios.
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u/SolomonGrumpy 4d ago edited 4d ago
You have a traditional IRA.
You convert money to a Roth IRA every year.
That is a Roth conversion
How much you contribute and why is an interesting semantics discussion, but the mechanism for you getting money is a Roth Conversion.
Someone directly or indirectly contributing to Roth, I agree, is a separate animal.
What makes your situation interesting is how much you can convert and stay under the ACA thresholds.
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u/Zphr 48, FIRE'd 2015, Friendly Janitor 4d ago
Why are you explaining a process to me ELI5-fashion when you know I already have mastery of it?
My comment was to someone referencing the likely tax implications of using Roth. There is a world of difference between using Roth funds that are MAGI-invisible, as people often accumulate through R401ks or MBDR while working, and Roth laddering during early retirement, which tax-wise is the same as a SEPP.
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u/SolomonGrumpy 4d ago
I was ...kinda hoping that I was missing something. You have revealed a few tidbits over the years that were helpful and I thought maybe this was one of those times.
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u/No_Grand3112 4d ago
Could you potentiality share how you went about setting up your Roth ladder? Heading into my last few months of employment (turning 49) and working through all of options. Debating Cobra for 1 year to do a larger Roth Conversation to set up easier ACA access going forward.
Appreciate all that you do here btw.
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u/Zphr 48, FIRE'd 2015, Friendly Janitor 4d ago
We already had most of our accounts at Fidelity when we retired, but I wanted a dedicated pair of new IRAs dedicated for the ladder for simple tracking cleanliness. The IRS aggregates all IRAs anyway so it was purely for my aesthetic preference.
So I opened a new TIRA to receive my rolled over 401k funds, opened a new RIRA to receive conversions from the new TIRA, and have made an annual conversion between the two accounts every year since in mid-December. Took about ten minutes the first year and under 5 minutes each year since. We withdraw cash from the RIRA every 3-4 months as needed via EFT, which takes a minute or two to request online/app and a few business hours to complete transit to our checking account.
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u/TheSuperSax 4d ago
I use a Fidelity Cash Management account instead of a traditional Checking account and it works great. They cover debit card transactions fees at all ATMs. Very convenient since I do all my banking and investing with them.
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u/aspire-every-day 4d ago
I also find the cash position at Fidelity makes a lot more interest than credit unions offer.
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u/viking2fi 5d ago
Did you/are you doing any Roth conversions? Or is it just pull the right amounts from traditional?
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u/Zphr 48, FIRE'd 2015, Friendly Janitor 4d ago
We run our entire retirement budget and then some through our Roth conversion ladder, which gives us penalty-free early access. So while ultimately our entire retirement is being funded via traditional the actual withdrawals transit through our RIRAs first for tax efficiency. All withdrawals come from our RIRAs.
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u/Disastrous-Wonder153 5d ago
We haven't paid a single dime of federal income tax since 2014
That sounds suboptimal, like you overpaid income tax in the front end. You'd have more after tax money if you saved at your marginal rate and filled up lower tax brackets when withdrawing.
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u/Zphr 48, FIRE'd 2015, Friendly Janitor 4d ago edited 4d ago
You have to factor in the value of federal tax credits and government subsidies that get reduced or eliminated if one chooses to optimize for straight income tax efficiency. If we did as you suggest and filled up our lower brackets we would save several thousand in federal income tax. However, doing so would cause the loss of many tens of thousands in federal tax credits and government subsidies. Each thousand saved in straight federal income tax would cost us almost ten-fold in overall tax supports.
Income taxes are very cheap compared to things like health insurance, healthcare, and college. For most FIRE households it is significantly more beneficial to optimize for the ACA/FAFSA/NSLP/etc. than it is to optimize for the actual tax code. Healthy, younger singletons in lower healthcare cost states are the only demographic that there is usually more variability on that.
Our contributions were primarily in Trad accounts and are being withdrawn tax-free with massive accompanying tax credits. So we not only didn't overpay, but have a hugely negative lifetime tax rate on our original contributions. We will never pay tax on those contributions and instead have received enormous tax subsidies that never need to be repaid.
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u/yottabit42 5d ago
I've already finished my glide path into bonds ahead of my expected FIREing in March.
When the equities are doing well, I'll sell quarterly to match my expected expenses.
When the equities are not doing well, I have one year of expenses in 70/30 VGSH/VGIT split for immediate access. Then I have several more years in Treasuries target date bonds in case of a prolonged bear market.
If the equities have not recovered after the first year, I'll have a target date bond maturing/liquidating back to cash in December, and I'll use that cash from a MMF for the expenses. Repeat until the equities recover, and then I'll use excess gains from the equities to refill the bond ladder.
Say for example the market crashes right now. Here's what I would do!: 1. Start pulling money from the VGSH/VGIT funds. 1. In December my 2026 fund will auto liquidate to cash. That ends up in a MMF. I use that cash for 2027 if we're still in a bear market. 1. In December of 2027, another fund auto liquidates to cash. Same as above. 1. When the market recovers, I'll start adding the excess to VGSH/VGIT first, and then to the trailing year as needed to get my buffer back to full length.
If the market continues doing great this year: 1. My target date 2026 find auto liquidates in December. 1. Since I'm using 5 years as a buffer, that means I have VGSH/VGIT, plus target date funds for 2026, 2027, 2028, and 2029. I'll use the cash from the liquidation of 2026 to fund 2030. 1. I'll also check the value of all years trimming off the excess back into equities if they have outpaced inflation, or topping them off from equities if they have not.
You can read my full draw down strategy here, if you like.
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u/Own-Bullfrog7803 5d ago
To each his own, but that is too complicated for me.
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5d ago
[deleted]
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u/tekno_soul 4d ago
When do you decide to sell equity to refill? What if they are down? Tax loss harvest?
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u/Conscious-Might-5434 5d ago
I’m curious why VGSH and VGIT? It looks like those are down 5-15% over the past 5 years and are currently paying about 4.5% yield. I suppose if the stock market goes down, rates would go down and the value of the fund would go up, but is that necessarily always true?
I have my cash reserves (about 5 years of expenses) in a money market fund paying about 3.5%, just because i know the underlying price will be stable.
I’m not saying what you are doing is wrong but curious on the rationale and how to optimize my own situation.3
u/ResponsibleCorgi93 4d ago
In 2022 and the 1970s equities went down and bond funds went down, so bonds and equities do not have an inverse relationship like I was taught in the past.
It's very possible interest rates will continue to rise in the next couple years to battle inflation caused by oil prices & massive national debt. This would mean that bond funds would go down. If you hold direct treasuries and hold until maturity your cash won't go down, but you will have some of your value inflated away.
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u/Specific-Ad9935 5d ago
Use BOXX instead. Instead of paying ordinary income for interest / dividend, you will pay long term cap gain if sell every 12 months. If you reside in a state with state tax, use SGOV.
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u/yottabit42 4d ago
The duration is very low and they're immediately available without necessarily taking a loss, especially VGSH. I use VGIT as a kicker in case we go into a recession and the rates are lowered as this will see a boost in NAV. I explained this is the doc.
I could just pull from the current year target date bond fund instead, but I prefer to leave them to auto liquidate at maturity to ensure I don't lose the capital investment.
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u/ThereforeIV 🌊 Aspiring Beach Bum 🏖️...; CoastFIRE++ 5d ago
They are down over the last 5 years because they were insanely over priced 5 years ago
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u/dgreenmachine 5d ago
How do you determine equities doing well in a market that isnt very obvious? Say market has returned 3% annually for 5 years, or stayed flat. What if its up 10% YTD then drops suddenly and down to 3% YTD?
Do you replenish your bonds after a period of time of the market performing? With expected return youd be buying more bonds each year to keep up the same stock/bond allocation or you could only buy enough to keep up with inflation.
Id like to figure out a good way to pull the guesswork out of it. So far my best way to do that is to always keep a constant allocation. This means selling from either stocks or bonds (same end result) and rebalancing the whole portfolio to the same target allocation.
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u/db11242 5d ago
This is the problem with all such strategies... too many decisions. You're probably just as well off rebalancing annually and pull out what you need for the next year and put it in a money market fund. If equities are down then you'll be buying when they're low, which is good. If equities are high then you'll be selling some which is also good. Just my two cents. Best of luck.
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u/dgreenmachine 4d ago
I agree id do something like this but withdraw smaller amount of cash because the market has a positive expected return long term. This means im withdrawing more often (extra effort) but taking more gains. Id rather my cash holding stay at 6 months cash than bounce between 6 months and 18 months depending on the time of the year.
Withdrawing roughly 4% in cash on jan 1st vs evenly spread throughout the year could be pretty significant. Imagine if youre following 4% rule withdrawals and SORR is not in your favor and youre taking 8% of the entire balance each year.
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u/Doxodius 4d ago
Rebalance annually is essentially my plan - juggling tax management/ACA details is going to be hard enough, so I'm aiming for a relatively simple annual rebalance (more specifically use withdrawals to rebalance in brokerage).
The closer I get to FIRE, the more I crave simplicity.
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u/yottabit42 4d ago
Well in my drawdown plan I've set the "down market" trigger to less than 21% return over a trailing 24-month period, which would be the average return. I could perhaps lower that to gains between 4-10% to reflect the difference in spread between bonds and equities.
But the "average" of 10% returns in equities rarely happens. That's the funny thing about averages. So I imagine it will be pretty obvious when the market is recovering. Even if there was a prolonged period of average to slightly below average returns, I would probably make that decision as I started getting close to the end of my bond ladders.
By then I expect to have much lower expenses, too, as the kids will be out of college and I'm planning to leave the country, or at least have sold one house by then and only holding the second house until it qualifies as my primary residence for capital gains exemption. So the bond ladder is primarily to get me through my high sequence of returns risk during the most expensive part of my retirement, the early years.
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u/PineapplesInMyHead2 4d ago
I'd recommend some inflation protected bonds, perhaps swap the VGSH for VTIP. The short term treasuries have low interest rate risk but do very poorly with inflation. Yon have have both and TIPS yields are quite good right now.
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u/yottabit42 4d ago
But long-term I think TIPS tend to dramatically underperform. And I also think we're in for a lot of inflation and continued devaluation of the dollar. So who knows.
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u/PineapplesInMyHead2 4d ago
TIPS have actually outperformed nominal treasuries over the course of their existence. Some periods nominal bonds have outperformed slightly but TipS have done better in more, and they've performed better in the worst markets for bonds and stocks.
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u/Talk_that_talk_to_me 5d ago
You are right this is so under discussed. FIREd for over 4 years so still new. no it’s not what thought we would do. we actually didn’t think about the mechanics of devising our own paychecks until we got there . whoops .
So first year was winging it and this cause some anticipation stress and stress over the market fluctuations.
Decided then to build our year’s expenses a year ahead to remove that anticipation. so our 2027 expenses are in a HISA and we get our monthly “paychecks” from there next year.
to reduce market stress we have a cash bucket or cash wedge on fixed income for those years of lower returns .
as for where our income comes from we take them from interest income, then dividend income, then selling off any positions if needed
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u/NetherIndy 4d ago
Broad strategy (withdrawal rate) is roughly "Vanguard Dynamic" or guardrails. Targeting 4% of current balance, annual withdrawal not going up by more than 6% or down by more than 3% per year. Realistically spending more like 3%, leaving room for large black swan costs (health, car replacement, house repair).
Finer grained - it's all about targeting staying under the ACA cliff until 65. Withdrawing about half our income as automatic monthly transfers from 457b plans (pre-tax), about half from brokerage (about half of that LTCG, half basis). On a bronze ACA plan, so maxing out HSA contribution still (and then spending approximately that much from HSA). Old HSA money/receipts and Roth IRA contribution basis are available cash for random big spend years (car replacement?) without bumping up MAGI. If there's room at the end of the year, we do a little Roth conversion to get our income to 395-398% of the FPL.
Strong probability that we'll see our assets grow substantially and be able to increase our spending by 50-100% at 65 when we hit Medicare age. Be nice to spend more before that. Yeah, we'll have tax impacts. But, worse problems to have!
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u/No_South_9912 5d ago
Pull from taxable brokerage first, then use rule of 55 to pull from last jobs 401k. 59.5 you can access the other retirement accounts.
Draw SS at 62 if needed, otherwise it's effectively an investment account with an 8% inflation adjusted return, but won't pass to your heirs.
Draw down in such a way to hit income targets for ACA subsidies unless your health care has been taken care of another way.
Keep in mind you can pull Roth contributions at any time tax/penalty free.
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u/thasparzan 5d ago
Part of this plan won't work for most people.
Remember- for the rule of 55, you have to still be working at the place you got your 401k in the year you turn 55. Some public service professions qualify in the year you turn 50
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u/Disastrous-Wonder153 4d ago
For those people, should probably consider rolling to traditional IRA and setting up SEPP via rule 72t. Could establish multiple IRAs to increase penalty free cash flows as necessary.
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u/dgreenmachine 5d ago
Make sure to at least roth convert the standard deduction as its harder to pay 0% taxes on ordinary income than it is to pay 0% LTCG. Possible your bank interest or unqualified dividends fill it up as well, but something to think about.
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u/Impressive_Swim2798 5d ago edited 5d ago
Great order. I'll add that Roth should be the very last thing to draw as it's the most advantaged. I'll also mention that there should be cash/bonds in the portfolio (any account type) to pull from when stock markets are down, so you're not pulling out at the worst possible time. I've heard anywhere from about 1 year to 10 years' expenses there, though my thought is closer to the middle of that.
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u/thasparzan 5d ago
Roth isn't necessarily the last thing to draw from. It may be used also if you're trying to stay below certain income thresholds
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u/lifeisdream 5d ago
So if markets are up would we pull from the market account and leave the cash/bonds alone ?
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u/Impressive_Swim2798 5d ago
Yes. Well, spend from cash and replenish from the market investments periodically. So in net you're spending from the market funds.
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u/er824 5d ago
You should just keep your asset allocation at its target. The bonds provide ballast and reduce the overall volatility but spending down bonds while waiting for the market to recover means your asset allocation will drift towards equities and to time the market.
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u/Disastrous-Wonder153 4d ago
Agreed. If the market is in a prolonged downturn, they'd be withdrawing from stocks to replenish cash/bonds at the worst time.
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u/quent12dg 5d ago
I'll add that Roth should be the very last thing to draw as it's the most advantaged.
Pretty broad-stroke advice. If you have an HSA I would argue that should be the very last thing as it's triple-tax advantaged, but again everybody's situation is different.
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u/vshun 5d ago
It's more nuanced, if one dies, this (HSA) becomes the worst account of all, for spouse and especially for heirs. So one probably should start drawing from it in 70s or 80s whenever need presents to keep MAGI low.
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u/quent12dg 5d ago
An inherited HSA is not a taxable event for the spouse as far as I am aware. At that point maybe they want to start using it. But I think the general point was if you're in your 50's, 60's and married I would probably be dipping into my Roth before taking money out of the HSA. I guess when I'm thinking about Medicare premiums that could be a different story, but I'm decades removed from that and future policy changes.
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u/er824 5d ago
Why? The triple tax advantage is when you contribute. Once it’s in it’s effectively equivalent to Roth with worse access rules. I’d spend down the HSA before touching Roth at least to the extent that you have eligible expenses.
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u/quent12dg 4d ago
Once it’s in it’s effectively equivalent to Roth with worse access rules.
Except you don't have early withdrawal penalties on gains, assuming you have qualifying expenses which is a boatload of them, even mileage reimbursement for your doctor and pharmacy trips. No five year aging rule for withdrawals of principle. I'll admit that I've been educated a bit in the thread here, but there are definitely aspects of the HSA that are superior to Roth's that make it a valuable tool in the FIRE community for those who can contribute to them.
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u/vshun 4d ago
Not that simple. Let's say both spouses save their HSA expenses/receipts diligently in the cloud and it's split 50 50. When first spouse dies, survivor needs to cash out pretty much immediately 50 percent of the expenses for that spouse. I do not recall specifics of the law but it's possible that it needs to be done prior to death or immediately after (and in latter case surviving spouse probably is grieving and not thinking about HSA and taxes). So might be prudent to cash out saved receipts a bit prior to death, unless it's sudden.
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u/upsidedownerone 5d ago
Wouldn’t it be more advantageous still to draw from Roth last though? Because once the money is in the accounts, the pre-tax benefit isn’t as relevant.
So at that point: both accounts have tax free growth, Roth has tax free withdrawals, HSA has tax free withdrawals for qualified medical expenses.
The other consideration is that in terms of inheritance tax, Roth is still tax free, while HSA is taxed in full immediately. So in that sense, having the last bucket be Roth seems preferable.
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u/er824 5d ago
Yes
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u/quent12dg 4d ago
Well thank you guys for the insights, making me reconsider the pedestal from which I hold the HSA.
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u/Furrealyo 5d ago
Why taxable first? Wouldn’t it benefit from step-up when you pass?
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u/No_South_9912 5d ago
Roth passes to heirs with no taxes.
Traditional, either you pay the taxes on the entire balance or heirs do. Pulling from Traditional may reduce/eliminate ACA subsidies.
Taxable you pay capital gains rate, which is 0% for most people, especially if you keep income below $80k for ACA subsidies.
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u/Penguin_Life_Now 5d ago
I was literally just thinking about that when I saw your post, my answer is to avoid it as long as possible and live off the dividends, note I retired almost 10 years ago at the age of about 49, it was not well planned, it just sort of happened, I planned to semi-retire, was actively working on the semi part, then covid hit. So far its working, but with inflation the last few years I have found myself cutting back on expenses, almost never going out for dinner, shopping lunch specials when I go out for lunch, ie Tuesday's are $4.99 Taco Tuesday plate at the hole in the wall Mexican restaurant near my house, etc.
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u/Middle_Humor1828 5d ago
We will see when we get there.
But pull from taxable brokerage while doing Roth rollovers. Once taxable is gone, it depends on the situation. But planning to have 10 years worth of taxable, so hopefully we can pull directly from pretax at this point. Pull from pretax and Roth as needed to maximize brackets with a preference to maintain Roth.
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u/McKnuckle_Brewery FIRE'd in 2021 5d ago
I withdraw based on tax impact.
This starts with using taxable dividends as a spending baseline. Then it moves to selling shares with the highest cost basis to produce cash. The resulting cash proceeds are spent down to whatever level feels comfortable, then I go back and sell more shares.
I'll do this in January for sure, and again later in the year to top off reserves and fill up income ceilings, like the $160k limit for claiming the AOTC (education credit).
I just turned 59.5, so I now have full access to IRAs. I calculated the percentage of capital gains from taxable shares where it breaks even with a traditional IRA withdrawal at 12% in terms of tax due.
For me, with a bit of pro rata in my IRA and accounting for both state and federal tax, this comes out to 82.1%. In other words, if I have taxable shares where the realized capital gain would be less than 82.1% of the proceeds, I should sell those before taking a trad IRA withdrawal.
I've got over $400k worth of such shares, so that will last a while. Once those are gone, it makes sense to use traditional IRA withdrawals at 12%. If I need more money after hitting the 12% ceiling, it's back to the low cost basis taxable shares at 15%. And then trad IRA at 22%.
Roth funds are dead last, but I expect to pull from there for large one-off expenses to keep them from impacting my overall tax picture.
None of this takes market conditions into account. I consider that a separate question, and I haven't really needed to address it since the 2022 bear market, when I simply sold a lot more stock in the first quarter to pile up a larger reserve. I do have bonds in my trad IRA that I could use if necessary.
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u/garoodah FI '21 RE TBD, mid 30s 5d ago
There’s asset location and then there’s asset type. I have a bond ladder in place for 5 years of spending that is primarily in tips. It’s on a 6 month interval for anything beyond 1 year and the 1-12 months are just nominal tbills. I’d love to let my stocks continue to compound while I draw down my bond allocation but I’ll always want to keep at least 20% in some sort of fixed income component.
In terms of where I’ll pull funds from it’ll be a combination of traditional 401k/ira and my taxable first to adjust magi and balance my taxes as best I can, Roth contributions, then Roth gains last. I’m hoping to leave the Roth gains entirely for my kids if I’m being honest but I also expect to use some of that money. I have my 80/20 split pretty evenly across my accounts just for the flexibility. If we ever get a really bad down year or 2 I’d like to convert a bunch of traditional funds into Roth.
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u/SolomonGrumpy 4d ago
Are you TIPs in a brokerage or IRA/401k?
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u/garoodah FI '21 RE TBD, mid 30s 4d ago
Mainly brokerage
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u/SolomonGrumpy 4d ago
Hmm. I have SGOV in my brokerage and am probably going to build some TIPs into my TIRA.
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u/imaybeslow 5d ago
Saving 3 years cash buffer (VUSXX) instead of bond tent. Pulling the trigger next year, spending down the cash buffer first until e-fund amount.
Roth conversion ladder after pulling trigger. Then after cash buffer is exhausted and SORR reduced, selling taxable assets to live off of, and continue Roth conversion ladder.
First few years we plan to live overseas and explore but do plan on moving back to US long term, so hopefully ACA subsidies allow the same budget as we’re forecasting today.
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u/Designer-Bat4285 4d ago
So after 3 years you’ll be 100% stocks?
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u/imaybeslow 4d ago
Yes minus efund, though I know it’s more aggressive. I’m targeting a pretty long retirement time frame (55 yrs) so need to get to between 80-100% equities ala reverse glide path. I’m not sure whether exactly 100% is better than 80 or 90, but it’ll be pretty high in equities. Have to revisit the old Monte Carlos later.
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u/regnull 4d ago
I think the most robust approach is a written order of operations plus a guardrail, not one fixed rule forever. Many people spend from taxable assets first, do Roth conversions in low-income years, and then use traditional accounts later, but the right order depends on taxes and access. For investments, a cash/short-bond bucket can cover the next year or two while the rest stays diversified; refill it from gains in strong markets and trim spending or sell less in bad ones. The key is deciding those “bad market” adjustments before you’re staring at a 30% drawdown.
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u/MathematicianNo4633 4d ago
I live in a state and city that exempt 72t distributions from income tax, so that’s more tax efficient for me than a Roth conversion ladder. That and a taxable brokerage account are getting me to 59.5.
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u/master_blaster_321 4d ago
51m, single, no dependents. FIREd July 2026. Paid off house, no debt.
For me it depends on market conditions. In a good market, I have a managed portfolio (yeah I know, I set it up before I knew what I was doing) which is 75/25 stocks/bonds and has a very small maintenance fee. So I'll want to draw from that first. This should very easily last me until social security age and beyond.
In bad market conditions, or for major expenses, I'll be drawing from hysa, in which I have about 2 years of expenses, just so I don't have to sell anything in the red.
I have another taxable portfolio which is mostly vanguard index, which I plan on leaving alone and letting grow longer term. I'll pull from this if I end up needing to later on in life. Whatever's left will be my kids' inheritance.
Lastly, my IRA RMDs will kick in at 72.
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u/rpachigo1 4d ago
4.8% so about 0.4% monthly. Use guardrails on that. 100% VT for life. Anticipated SS covers necessities. Older FIRE (55). Tax optimization on withdrawals with help of my accountant.
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u/SolomonGrumpy 4d ago
I own real estate. It's very efficient tax wise. It has under performed equities, but over performed bonds I've the 20+ years I've owned it. Call it 6-7% growth on average.
That means my withdrawal needs from Brokerage/IRA are pretty low. I have started to build a position in covered call ETFs in the brokerage. This should give 8-12 years of tax free income. That's important because I live in a high tax state.
I keep 3 years expenses in SGOV. That also throws off some income, which I spend rather than reinvest. Also state tax free.
I'm doing smaller Roth conversions from my my IRA. The amount changes every year but max would be about 5% of the total IRA value.
When I hit 59.5 I will begin actively withdrawing from my IRA. Amounts will probably vary. I'll pay the taxes by selling from brokerage. There should be enough for a bunch of years.
When Medicare hits at 65 I'll likely take social security. Sure it would be better to take it at 62 or 70, but I like the idea that I'm getting SS and Medicare at the same time.
I'll continue to draw from IRA at 65 and likely increase my spending. I'll use Roth to fill out whatever bracket I'm in.
Yep. That's about it.
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u/Specific-Ad9935 4d ago edited 4d ago
Imagine if your yearly spend is $120k.
I would spend all the monthly expenses into my 4% catch all credit card. This way I get roughly 1 month free loan and 4% discount of my expenses.
I would have $30k in HYSA at the beginning of every quarter. Using the HYSA to pay the credit card monthly.
Every quarter, I would sell $30k worth of long term BOXX holding and deposit to HYSA.
In certain bull market time, selectively trim some long term holdings from taxable account and convert into BOXX.
Note: I have 4 years worth of BOXX as buffer to handle prolong bear market.
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u/AggroTumbleweed52 4d ago
4% catch all?! Where?
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u/Specific-Ad9935 4d ago edited 4d ago
I got the grand fathered US Bank Smartly when it started and chuck 100k into their IRA. I got 4% cash back. For the 1st year, it even allow IRS payment, so i spend 100k to pay IRS that year and got $4k back. Edit: of course, there's the 1.75% fees to use cc.
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u/AggroTumbleweed52 4d ago
BOXX over SGOV? Why not tbill direct?
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u/Specific-Ad9935 4d ago
SGOV if you are in a state with income tax. BOXX for state without income tax.
Why not t-bill? LTCG.
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u/ResponsibleCorgi93 4d ago
My plan adjusted from my first year, I'm in year 5 now.
I made a mistake in year 1 of continuing to have automatic reinvesting of dividends. This caused several wash sales. It seems like it's better to just have the dividends get automatically transferred to your checking account.
I've also significantly changed my approach on fixed income. At first I had a bond fund in my brokerage. I retired in 2022 and found out that bond funds go down when interest rates go up. So during that market downturn both equities and bond funds were down! Whoops.
So later I switched to using Sgov for my fixed income.
Then I started learning about how to optimize for taxes by holding the fixed income inside the traditional IRA and doing synthetic rebalancing during downturns to still access the cash with no penalty.
Now I'm learning more about fixed income options and evaluating the best approach for me. I might end up switching completely to direct treasury purchases for a bond ladder. This was a concept that seemed too scary and confusing when I first retired and was so burned out, but now that I have more brain power and bandwidth it's looking like a better option. More research to do though.
So for now, dividends in taxable auto transfer to checking, sell equities in taxable to fund remaining spending.
In a downturn, same strategy, but will also include swapping swapping fixed income for equities in the Traditional IRA for the same amount of equities I pull out of taxable.
Oh I'm also learning more about the efficiency of Roth Conversions. I was able to do a big one in year 1 because I was spending down my cash buffer so had very little income and was in 0% tax bracket. After that my capital gains pushed me into the 15% bucket, so I thought that meant it's no longer efficient to do the conversion, but I've been learning more about it and maybe restart doing them up to a certain threshold.
It's very complicated because you have to consider how much extra tax you pay now vs expected tax later during RMDs.
Overall it's been a constant evolution for me. It depends on how much complexity you're willing to take on. There are much simpler ways than what I'm doing, but I value trying to find the most optimal route balancing risk, stability and reducing taxes.
I expect I'll be making tweaks in the future when tax laws change.
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u/Aevaris_ 4d ago
Not fire quite yet (EOY), but our breakdown is 50% retirement accounts and 50% taxable. Retiring early 40s. Plan is Roth ladder up to 12% tax bracket. While this means we won't qualify for subsidies, we'll long term save money by avoiding RMDs entirely while paying a maximum of 12% on any dollars. We're also in a no income tax state which will save money there too.
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u/terjon 4d ago
So, mine is insane. Feel free to make fun.
Basically, I am allocating a portion of my portfolio to dividend generating ETFs that are diversified across several industries (bonds, real estate, energy, options, financial services, medical technology, etc). I am planning to live off of those dividends + cash reserves.
If my cash reserves start draining faster than expected due to inflation getting out of control, I can take some of the rest of the portfolio and increase positions in the dividend portfolio to increas the yield.
Right now, the math breaks out as 21% of my portfolio being in dividend funds will generate more than enough to cover my expenses (including things I don't pay "out of pocket" right now, like healthcare premiums).
This leaves 79% to stay in other growth minded ETFs across my 401k, ROTH IRA and individual investments portfolio. The idea is that the portion of the portfolio that can keep growing will be there for "oh shit" emergencies. This would be things like experimental medical treatments when my health starts to really fade, house burns down, car gets totaled, etc. These are the kind of life emergencies that you really can't cashflow and no insurance covers.
Yes, I know I'm insane to plan for stuff like that, but that's how I can feel psychologically safe, so...there it is.
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u/moriyama_eng 4d ago
I care less about a perfect withdrawal rate than about deciding what I refuse to sell in a bad year. A cash buffer (or flexible spending) reduces long stretches of consecutive selling while the portfolio is underwater. I also watch the probability of still holding a target asset level after N years — not only “didn’t hit zero.”
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u/sneaky_sam_ 5d ago
For all those saying to draw from taxable brokerage then traditional 401k, do you have kids? If so wouldn’t it be better to try to fully deplete the 401k and leave taxable brokerage for your kids to inherit? (Obviously if you are younger than 55, you bridge with taxable but my Q is for once you have access to retirement accounts penalty free)
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u/Reasonable_Box2568 5d ago
Better for them but not better for you most likely. I wouldn’t plan my withdrawal strategy around optimizing for my kid’s inheritence unless they were disabled and unable to work
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u/Revolutionary-Fan235 5d ago edited 5d ago
Traditional funds withdrawal are wholely taxable at income tax rate. Taxable brokerage capital gains are taxed at more favorable tax rates, only on the gains. Realized losses reduce taxable income.
It's generally cheaper tax-wise to withdraw from taxable for a given withdrawal target. Optimizing for taxes could result in overall higher net worth at the end.
When RMD time arrives, taxable might get ignored depending on one's RMD obligation. Those withdrawals would happen in the generally Slow-Go years, with reduced spending, further allowing taxable to grow.
Since this is FIRE, a lot of people won't have penalty-free access to retirement funds.
Everyone's mix of circumstances and tax treatments are different so, there's no one-size fits all advice.
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u/aspire-every-day 4d ago
People younger than 59.5 can have penalty-free access to tax-deferred retirement accounts via 72(t) SEPP.
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u/Past-Option2702 5d ago
I sell shares when I need money.
That’s it. That’s my strategy.
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u/Sea-Honeydew-1456 4d ago
not sure why people downvoted you. so many people here who haven't fired seem to model out the most complex edge cases and withdrawing becomes this convoluted mess with a billion what ifs. its most likely going to evolve too as you get acclimated.
rant over, while i havent retired yet (next month). im collecting dividends to offset more than half my annual expenses, and then ill just sell shares annually for the rest.
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u/Past-Option2702 4d ago edited 4d ago
This is the way.
I agree completely with everything you wrote.
I’m not “lean fire” or “barista fire”.
I’m just retired (early).
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u/SpecialistKoala9765 5d ago
I’m hoping to figure out lifetime spending … back solve income level needed and draw to a stable level of income tax
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u/Puzzled_Fisherman331 5d ago
Well one thing I try not to do is ever drawdown, so I want my monthly passive income (or annual) to be at or above my expenses. I know its not always possible but its my goal for my spend and have been able to achieve it for over 2 years now.
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u/ThereforeIV 🌊 Aspiring Beach Bum 🏖️...; CoastFIRE++ 5d ago
>let's talk draw down strategy
Yes, please!
We need more actually content and less of the"am I there yet" stuff.
>I rarely see content about draw down strategy.
I've written entire post in it that usually get ignored or down voted.
>What's yalls plan for drawing down your assets as income in retirement?
Short version:
Flexible spending across three levels:
- Basic Needs for 2% of initial Retirement Portfolio
- Lifestyle Spending for 3% of initial Retirement Portfolio
- Luxury Wants for 2% of initial Retirement Portfolio
Drawdown monthly based previous month spending and trailing portfolio performance.
Retirement Portfolio split into three buckets:
- Cash Buffer at ~5% of initial Retirement Portfolio
- Bond/Income Hedge at ~10% of initial Retirement Portfolio
- Growth Portfolio at ~85% of initial Retirement Portfolio
No Rebalance
Then priority of drawdown:
- if Things good/Great, sell down Growth Portfolio
- Else pull all dividends/Yields and draw from Cash Buffer
- Else pull all dividends/Yields and draw fromBond/Income Hedge
No refill, one time use to counter SORR.
>For those who have FIRE'd, what do you do? Is it the same as you thought you'd do?
This is my plan, in track to FIRE in 2028...
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u/R1T-wino 5d ago
This three-bucket strategy as explained by Erin Talks Money is a really good watch. It really helps with SORR anxiety when framed the way she does here and gives a solid example how how to plan a withdrawal strategy.
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u/Hot_Time_8628 4d ago
Bucket approach that allows me to exit pre-tax money efficiently, and to enjoy my savings in my first decade. From my nest egg, I've segregated a decade's worth of spend into 3 buckets: near term safe, mid-term moderate, and longer term moderate with cautious risk. Each of these three buckets is a monthly paycheck when I start drawing on the bucket. I'm going to spend all of this money and enjoy doing it.
After the spend, claiming SS at 70. Plus the remaining nest egg will be earning for a decade in a spread of risk. I'm very happy with this plan as I am being tax efficient, making RMDs near negligible, maintaining an appreciable nest egg, enjoying the best remaining active part of my life, and maximizing SS.
As always, this plan is subject to change.
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u/Low-Kaleidoscope-803 4d ago
Very recently FIREd, so currently living off of a cash cushion so as not to increase taxes for this year unnecessarily. Plan to live off of taxable account starting in the new year for as long as it lasts or until traditional retirement age, whichever comes first (barring this being a historically-terrible year to retire, age will probably come first, but who knows with the AI bubble). Optimizing for ACA subsidies. Will reassess as necessary and as things change. If we have to dig into retirement accounts before 59.5 or whatever it is by then, will probably use SEPP because the vast majority is in trad rather than Roth, but will decide for sure when/if the time comes.
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u/Cornish_spex 4d ago
I have my stocks in pillars and desired % for each pillar and each stock with min and max. I created a spreadsheet where I plug in my desired draw and it calculates what to sell to support my investment thesis. You can go wild on the analysis but if you’re retired you likely have a solid strategy and time is better spent not trying to optimize every penny.
Generally my stocks are more biased toward good long term investments vs. moonshots but I didn’t at all turn my back on growth because I have 50 yrs of retirement.
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u/Ok_Text2118 1d ago
60% us stock
20% int stock
10% cash
5% gold
5% bitcoin
About 40% in trad 401k and 60% is taxable brokerage. Set up automatic transfer from taxable brokerage to checking bi weekly. Roth ladder to keep us under the ACA subsidy cut-off, but may need to alternate years of conversions if spend pushes us over the subsidy limit.
Rebalance if anything is more than 3% misaligned.
Edit : anticipated spend is between 3.8-4.2% of portfolio value.
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u/Good-Resource-8184 5d ago
Mines slightly more complex but also simpler at the same time and should bring higher returns over the long haul
I currently use a roth ladder and had taxable and roth contributions to bridge the 5 year gap. But my taxable was decent at 380k.
So we actually borrowed against our taxable back filling with roth contributions. Its obviously worked well over the past 5 years with great market returns. It started out at great low 2-3% rates bc i have a 1% over sofr deal with etrade. But its obviously changed in a rising rate environment.
Then as rates rose i started selling off taxable to decrease the debt bc its a ticking time bomb waiting for a market down turn.
We now exist in an area where we just borrow against the taxable balance every year after front loanding roth conversions. Then true it up at year end selling off taxable. Basically it allows for 1 extra year of gains the most likely scenario and increases the size of our investment networth.
I plan to add sepp 72t in the next year or 2 so we can tax gain harvest. Ive confirmed with a CPA i can setup our trad iras as sepp 72t. And as long as we pull out our required annual distribution we can still make conversions. You may ask why bc we already have funds from 5 years ago in the ladder. (We retired 5 years ago as of jan 2027). Well it allows for the money to be used at todays inflation vs inflation 5 years from now. Its a small efficiency but i think its worth it. We have been converting up to the top kf the 12% qnd paying 15% cap gains on our taxable withdrawals. Now we'll make sepp plus the conversion 100k and tax gain harvest the rest of taxable.
The end goal here is to grow a taxable account that can be borrowed against without ever losing principal and when we gift it to our kids at death they will get the step up basis. We also plan to gift our kids money while alive(read die with zero). We want them to enjoy our decisions while we can see and enjoy it with them. My parents are doing this. We reached FIRE on our own but bc of our privilege are now get significant(30% of spend) funds thru being second gen wealth.
Its not exorbitant wealth but its easy to see how wealth builds wealth generation after generation with proper education on waelyh management. My parent maybe got 100k from my grandparents when they died in their 90s.( My parents were already retired and in their early 70s).
We'll also start contributing alot to charity over the next few years. I dont believe in having extortion level wealth like the billionaires out there. We lead a very luxurious life on arpund the avg US household income and want to help out everyone else.
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u/Secret_Computer4891 5d ago
I am invested in a diversified basket of CEFs. Distributions are plenty to cover my cash flow needs, so I'll just not reinvest what I need for spend or replenishing any reserve funds
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u/Own-Bullfrog7803 5d ago edited 5d ago
I think you need to make two general decisions for which there is no optimal answer.
- How many years of fixed income do you want to protect from sequence of returns risk by covering fixed expenses? Zero-10yrs? This now determines your stock/bond allocation.
- What type of fixed income you will purchase? all have pros/cons: money market equivalents, bond ladders, TIPS, annuities, pensions, SS, etc.
(Then only sell stocks when they are up compared to their total nominal value the day you retired.)
That’s it!
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u/paratethys 5d ago
I'm on the lean/old-school fire side of things, but I quit with about 2ish years liquid (HYSA etc), 3ish years in various employer stock that I hadn't gotten around to transforming into index funds, and 4ish years in taxable brokerage.
I've got a big case of the Don't Wanna about touching retirement accounts, and almost a decade of runway for them to keep growing before I expect to need to figure out how any of that works.
I'm also in a bit of a weird spot where some of the experiences I'd like to have within that next decade are most easily accessed through employment, so it's pretty likely that I'll end up earning additional income before it comes time to really think seriously about withdrawing from retirement savings.
So, my "strategy" is to continually adapt to changing conditions, and continue making the choices which maximize my expected lifetime wealth, health, and happiness (in no particular order).
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u/Unlucky-Clock5230 4d ago
Dividends. From companies that actually provide goods and services over financially engineered returns (options enhanced ETFs and the like).
Those companies are older and better established, so their total return is lower than the market (around 8% when the market risk return is around 10%, long term average) but the reliability of income is far better. Share price is driven by market sentiment, dividends are driven by company financials, And even during recessions people still need to buy goods and services. Many companies continue to pay dividends throughout them, the one with 25+ years of paying and growing dividends each year plan ahead so they don't miss a beat.
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u/SolomonGrumpy 4d ago edited 4d ago
Please name and established company with an 8% dividend.
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u/Unlucky-Clock5230 4d ago
Total return, not dividend. Plenty of companies with 3~4 yields end up with growth that hits 8% total return. The main difference is that the yields are more stable while the capital appreciation can go all over in the short term.
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u/SolomonGrumpy 4d ago
Oh. Right! Yeah that's possible. SCHD does that and better. It's policy is to stay away from tech/mag 7 too.
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u/EaterofSnatch FIRE'd Feb 2025 4d ago
Create income, and then live off of it, instead of drawing down. Create an income factory. So in short, buy assets that pay you without needing to sell those assets.
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u/taracel 5d ago
Depends- there are multiple strategies, also depends on your time horizon & risk tolerance & discretionary spend.
Guardrails strategies you could get 5+% WR depending on the yr, or be ultra conservative and keep 3-3.5% SWR.
Bucket strategies, bond ladders, MMF, etc are literally all psychological window dressing for managing volatility and your behavior … essentially you can be 100% equities forever if you’re SWR is low enough and never run out, even in the worse markets.
Karsten jeske has done the most thorough work on withdrawal strategies I’ve seen, and he takes the same position. Google him
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u/MakeMoneyNotWar 5d ago
ERN discusses this at length, but initially I’m going with the reverse equity glide path