We discuss a lot in the Millionaire Money Mentors forums.
Sometimes we are fun, sometimes we are practical, and sometimes we get into theory and philosophy.
This post mostly covers the last two areas.
It came about in a discussion of extravagant purchase members had made or were contemplating. This topic was a spinoff from an initial conversation about moving from being a saver to a spender in retirement (an issue many people have trouble with). We also had a related thread on the balance between saving for FI and enjoying life now.
Millionaire Interviewee 18 had some insightful comments on the subject and introduced the group to his concept of ISE (the reverse of ESI). I asked him to elaborate on the subject and that’s the post that follows…
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A long and rewarding career followed by a traditional ten-to-fifteen-year retirement where your home is paid off, social security covers the basics, savings covers the rest, and the government pays most of your medical expenses is no longer the goal of many people today. If you are on this site and you believe that the Earn, Save, and Invest strategy will give you a longer “retirement” and free you from work then you are headed in the right direction to get there “early”.
But what comes next? Many people actually do not include the after part as a continuation of the first. Today we will talk about that, specifically what happens in the “spend” down years.
We will go through what I call the ISE phase of FIRE. It’s the Invest, Spend, and Enjoy phase of the journey.
Spending money sounds easy but believe it or not without a plan for how you will spend your money, your plan for how you SAVE and GROW your money is incomplete. We will address what holds many back, how your relationship with money during the ESI phase can help or hurt your ISE phase, how you have to have a withdrawal strategy for your money and most importantly what does it take to actively manage that phase of your FIRE journey?
Moving from Saving to Spending
Leaving a career in your 30’s, 40’s, or 50’s means having to cover items that traditional retirees get from the government (income in the form of Social Security and healthcare in the form of Medicare) for possibly decades before the government pays those medical expenses and provides that financial safety net. While you may get a subsidy for your medical care, the fact remains that adding an extra 15 to 20 years to your retirement means you must think more about the first 20 years of your professional life and how that would enable you to FIRE. But before then you really have to think through the spending profile of your retirement phases (yes there are more than one).
The ESI mantra is there to guide you and help you achieve the goal of getting to financial independence. Many however greatly underestimate the cost of replacing these two items (and for social security the lower benefit in your 60’s and beyond will be lower than the average retiree because of not putting in a full 30 years of work). When you underestimate these things upfront the ability to put more money into the ENJOY phase will be at risk.
There are no secrets to what the foundation of a successful FIRE strategy is. You must accumulate and grow enough assets so that regular work is no longer needed to provide for your basic living needs and you can then be free from regular structured work to do as you please (which may still be work in some form though I believe the NEED for some GIG work means your plan isn’t truly complete financial independence).
Ok but what comes next? Is just covering the basics the goal? What role does money play in retirement? What SHOULD it play?
When I created my plan in college and started my work and married life, I had thought through the accumulate phase and the spend phase. I looked at it as one plan. My plan was not based on being lean and frugal to maximize the accumulation and growth of my assets.
In fact, when I started following the FIRE movement much later in life, I found a great deal of emphasis on frugal living. I often referred to this as the “shelter in place” strategy, a life built around minimizing spend to maximize savings, often to the point of living near the poverty line in terms of annual household expenditures. That was followed by the post work phase of living life minimally too as the asset base was only designed to deliver that value. A bad few years in the early second half of the game and it could be back to work.
This approach just didn’t resonate with me and while I know that there are families with incomes near or below the median income executing FIRE strategies, I also know that if you are in that income bracket a 40 year work and saving horizon can make you a millionaire. You will just work into your 60’s but retire comfortably. You will have more security than if you retire at 40 with $500,000 in the bank trying to stretch that money for 40 years or more.
So frugal across the journey was not going to be my approach, but being a smart spender and saver and investor was, and the goal was to have an oversized retirement. When FIRE took off and I learned how people were discussing their accumulation phase, as I mentioned above I saw a big emphasis on the frugal approach and the denial of experiencing as much life as you can as a blind spot in the FIRE movement and where I felt many FIRE proponents were missing the point of both the accumulation phase and the post work phase of life.
My long-term plan had the basics covered in retirement AND a bunch of extras. The freedom to travel anytime, a second house, lots of leisure activity, and disposable income for when some new adventure presented itself. Today it’s often referred to as FAT FIRE, but if you think your goal will only just cover the basics and FAT FIRE is out of reach, or even possible, you may be surprised what a complete end to end plan may reveal to you. I believe that more discretionary income post work is out there you just have to develop a more in-depth plan and expand into a new way of thinking about what your money is for. Do you live for work, or work to live?
Now do not get me wrong it can be very rewarding for some to get to FIRE as soon as possible by frugal and or spend-thrifty living and building the wealth as fast as possible that will be needed to cover the basics for the next 40 to 50 years because they really value their time and want as much of it as possible (as opposed to working 9 to 5 for 30 years to reach a bigger type of post work goal) but for me the greatest joy in life is accumulating experiences that enrich us as a family and bring us joy. Not extravagant mind you but giving yourself permission to not let saving dictate everything you do.
I apologize if you think I am being negative on the live frugal approach to saving for not working / early retirement from regular work but see the next paragraph for why.
Saving for Future Versus Living Today
Recently a Motley Fool article outlined the 5 things retirees wished they could have told their younger selves. Four were traditional items about finance and health, but one stuck out to me and affirmed my thoughts on the issue of how a FIRE journey could best be played out.
That item was this: Balance saving for the future with living for today. In other words do not sacrifice so much that you miss out on opportunities that can truly make a difference in your life. If your twenty-year FIRE plan must change by five to ten years in order to accommodate this goal, retirees felt that was worth it. Do not let life pass you by while you are saving up so you can stop regular work to enjoy life later. Seek and find and execute on that need for balance. Enjoy ALL of your life, not just the end. You may never get there since none of us are guaranteed tomorrow.
I personally believe more in a FAT FIRE approach and my plan (decades before any of us knew what FIRE was) was built on a thirty-year horizon for two reasons. The first was that we would save but we would enjoy life and make sure as a family we created those joyful moments we could all share. We bought a house when we married, I finished my masters before the kids were born, we started our family early and planned that at the thirty year mark we were finished educating the kids and they would both be working adults by then.
The second reason is that peak earning years tend to be (for men) in their mid 40’s to mid 50’s – women tend to plateau almost a decade earlier. It would have been difficult to compress this sequence. I created this plan when retiring in your early 50’s was really rare and a luxury. I still believe thirty years gives enough time to achieve a healthy and well-financed early departure from work.
While it’s critical to save early and save a lot in those early years to build that foundation that will have the longest time to compound, it is also important not to lose sight that the third decade of work is when you can really add to your assets both in contributions and in compounding on a larger base before you begin to spend them. If your goal is to retire at 35 you just may miss grossing another one to two million in income over another 10 years. Or more.
I became a millionaire around age 37 but exceeded $10 million by age 50. My goal was never the quintessential one million in the bank. It was initially $2.5 million (in 1989 dollars), which became approximately a $5 million goal by 2018 with inflation.
When I reached $5 million it was easy to see how a few more years of work (about 4) would turn that into $10 million or more which happened in late 2016. I was in those peak years and it was too good to pass up. We had learned to enjoy our money (not let it control us) and when we hit $10 million we were ready to quit full time work.
That extra work would provide both an incredible safety net as well as a foundation to enjoy life in what I called earlier the spend down phase. We were now in the ISE part of the journey!
Wait you say, you are not typical and that type of outcome isn’t the average FIRE outcome. Perhaps that is true, but my asset base isn’t the point of this article — you can have a retirement with extras and never worry about running out of money if that is what you plan for. Again most people under-estimate what they will spend so their plan is built to provide that when in fact your plan may really require another five more or ten more years if your first plan was to retire at forty-five. An early exit of the ESI phase may mean a very different post work life than one that a few more years working would provide.
The Spend Down Phase
Most people think of life after earning that regular paycheck as the conserve principle phase – the live off the “interest” but not the nest egg phase. Avoid the sequence of risks, tread lightly to the end of life phase.
I maintain that if your retirement is at risk if your nest egg drops 20% or even 30% in your first five years then your plan was not a good one. It was too lean and likely meant that you would outlive your money or have to cut back on essentials while you conserved cash some day.
You do not need as much as I have, this could be accomplished with $2 million (which is still a good number today if your housing is covered) as that amount in a lower cost metropolitan area should more than cover a thirty to forty-year retirement.
So while I admire those who want to quit traditional W2 work in their thirties or early forties, it is hard (though not impossible) to accomplish (and given the recent creation of the idea of FIRE itself we do not yet have data on how people did or are doing if they are now in their 80’s and have been retired for 40 years). So what truly is the goal of saving and quitting work? It is about freedom but what kind of freedom?
To me it is simply this. Freedom to pursue MORE joy. You should always have joy in your life (remember live for today is as important as living for tomorrow) but find more and treat yourself. You have earned it.
Look to bring more joy to your life and others, find enjoyment in an every day life that makes living fun and free of worrying about paying the bills. Initiate a passion project or take a job or role that is purely a passion project where the rate of pay is inconsequential. Treat yourself.
That kind of life is entirely up to you, which leads me to this: What happens after you have spent ten, twenty, thirty maybe forty years accumulating and you are now ready to enjoy a work free and worry free life? The lessons of ESI still prevail and they have an equal and opposite force that brings balance to your plan and eventually your financial journey full circle. That’s where ISE takes over.
Invest Spend Enjoy
As mentioned earlier it stands for Invest Spend Enjoy! It’s the natural culmination of the ESI mantra and an extension of the critical part – invest.
You never STOP investing. Your nest egg / money is a tool for enjoyment. Use it, let it bring you joy. Give yourself permission to spend. However you have to remember it’s still an investment and you do have to manage it. It has to last.
My belief in the ISE phase of life is that you have to spend it – you saved it not so you can simply leave it all to someone else to enjoy, or to postpone spending it until you realize you are no longer able to do the things you want to do with it.
It is ok to feel this way. I believe if you accomplished this goal you deserve to enjoy it. Give yourself permission. You can still plan to leave a legacy, donate to your favorite charity, give it away. But before you get to that point make sure you give yourself that permission. Think of it as de-accumulation.
I have spoken to many who got to the end of work by living spendthrift and frugal lives. They have a difficult time on a splurge purchase or a dream vacation, even though they could easily afford it.
There is no score keeping, no one is judging you but yourself, there is no perfect answer or outcome to how life is to be lived. But if you give yourself permission to enjoy it and share that with others I believe the outcome will be as close to perfect for you and your circumstances as it can be.
The fear of dying broke should never be a thought you have in retirement if you have planned well. Fear should never rule your decision making process. Life doesn’t have to be perfect to be wonderful. And in most instances the decision to splurge isn’t the item that will make or break your plan. Your plan should have already accounted for the splurges or extras you want in retirement.
ESI to ISE
So how does one switch from ESI to ISE?
As I have said it is actually ALL ONE PLAN. The FIRE plan doesn’t end when you stop saving and working. In fact in my opinion that’s when it REALLY starts.
The ESI phase is fundamental and over a few decades to some degree it is on autopilot. The ISE phase is to some degree a plan with frequent milestones and decision points and is a much more involved plan that I believe many people truly do not prepare for.
After years of saving, switching to SPENDING can be a traumatic transition. If you spent 30 years conserving assets that habit can be hard to break. It is why I believe during the ESI phase you MUST learn to balance saving with spending so you know how to spend when you do retire (see that important item retirees wished that they had passed onto their younger selves).
That spending muscle needs to be exercised too. It is not a careless or reckless type of spending but measured thought out and weighed against the saving side of the equation. I have always felt learning to spend AND save at the same time was important to knowing yourself best and understanding what makes you tick and what brings you joy.
And you do not have to be rich to practice this. Doing it in your twenty’s will help you develop a healthy relationship with the two. It will help you use debt appropriately (it is not always a bad thing) and it will help you better prepare for the ISE phase.
The conventional wisdom is that as you age your investments need to become less risky – and I agree with that. Investing is NOT roulette where you put it all on one number and hope it comes up a winner. It isn’t based on winning the lottery either to put you over the top of your goal.
But your assets will not deliver for you if you simply put them all in a bond fund for the next 30 years when in the post work phase. You will need to remain in the broader market for some of your assets for most of your retirement to beat inflation.
Remember my 1989 goal of $2.5 million that nearly thirty years later was really $5 million in purchasing power. If you want to spend money and enjoy life in retirement you will likely need to continue to grow your assets as you spend them.
As a result in retirement you have to become a more active investor than you may have been while fund managers were managing your 401K or index funds. That is why I believe during the ESI phase you have to boost your financial literacy and understand how to invest. To understand the impact of taxes, to understand how you will pay yourself and from which sources and in what order. In the ISE phase it is your most important job.
So now that you are retired and you want to spend money and enjoy it, how do you plan to pay yourself and how often? Again our habits are hard to break and I believe that in the ISE phase you should pay your self just like you were earning a bimonthly paycheck. If you want to pay yourself $80,000 a year, then pay yourself $3,334 twice a month. You should still have an emergency fund of cash equal to a half years expenses so if you need an extra $10,000 this month for a trip you do not have to alter your withdrawal plan (or liquidate assets), or negate a critical tax threshold (more on this later).
So now where does that money come from? You should have at least three asset pools (taxable account / savings, 401k / IRA, and home equity). You may also have a Roth and if you are one of those rare workers today even a pension. Even more rare you may have passive income from a rental real estate portfolio. But for this discussion we will focus on the first four listed here.
But before I outline an example of how those sources of funds are going to be used I would like to point out that Barron’s recently published an article on the four types of spenders in retirement: typical spenders, home spenders, health spenders and discretionary spenders.
You can find the article to understand all the types but what I am proposing in the ISE phase is that you consider your plan to deliver for you a discretionary spenders profile. The researchers categorize this as those people who spend 25% or more of their retirement income on discretionary items like entertainment, gifts and charity. They cite that only 13% of people between 55 and 64 are in this category, but that increases to 18% after 64 (either when most people retire or the early retirees realize they can shift from typical to discretionary).
My point is why wait?
Sources of Funds
How you mix and combine withdrawals from these sources may be unique to your plan based on your balances (and what percentage of your nest egg each one occupies).
If you retire early and roll over your employer sponsored 401K plan to your IRA for example, that money is often looked at as off limits because early withdrawals are subject to penalties. If you are 45 how do you wait 15 years?
However this isn’t entirely true. There is a section of the IRS tax code that lets you withdraw from an IRA penalty free. I suggest researching the 72(t) option of Substantially Equal Periodic Payments.
This strategy can help preserve balances in taxable accounts and Roth accounts if most of your assets are in your IRA. With the new laws on how non spouse beneficiaries have to spend IRA funds (no longer over their lives but now over or at the end of a 10 year period), the stretch IRA is no longer as attractive. It will bring the Roth conversion strategy and the 72(t) strategy into play for early retirees in my opinion.
Taxable accounts can provide tax free income in the form of capital gains if you happen to keep your gains and AGI under the cap where rates kick in. These are funds you should think about as drawing on strategically before you get to the RMD phase of retirement. This is a great way to help reduce your effective tax rate.
Home equity is a source of funds and for most completely tax free. Many people will downsize at some point in their life (and some day we will even though we just upsized) and when they do that can provide years of tax free cash. This depends on how you downsize of course but with mortgage rates as low as they are taking on or keeping housing debt in retirement on the retirement home, could leave cash in the bank from the equity of the sale of the previous residence.
This can be a very effective way to pay yourself tax-free, conserve investable assets and lower your income taxes. Remember you can finance a house, you can finance an education, but you cannot finance retirement. It’s the same idea as a reverse mortgage but on much better terms.
Roth withdrawals are tax free (if you have followed the rules) but after tax contributions can be withdrawn at any time so there is no need to believe that the magic age of 59.5 means these cannot be a factor in how you pay your self before that age. However this is the last account you should tap.
IRA withdrawals are fully taxable (assuming there are no non deductible assets in the account). For example purposes below we will assume that is the case for planning purposes.
The bottom line is how will you pay yourself, how will you consume your assets and how will you minimize taxes. All are critical to how much you have to spend to enjoy! So the goal of enjoying your money is linked to a great extent on how you manage the issue of funding your spending, investing your assets and the taxes you pay. You need a very well thought out ISE plan (and as I mentioned I think this issue is WAY under represented in the FIRE movement).
Sample Plan
Over in the Millionaire Mentor section I plan to discuss in greater detail the topic of order of withdrawals and how you pay yourself a “salary” after you stop working for that paycheck and enter the ISE phase. How to draw down is critical and will vary depending on your account balances but for now we will use real numbers and give an example that reflects how a $2,500,000 asset balance can be drawn down in the ISE phase of your ESI-ISE plan.
Example: Retirement at age 50 for a married couple
- Home equity of $350,000 ($100,000 mortgage balance at 4.5% 12 years left)
- Taxable account balance of $750,000 ($100,000 cash, $650,000 in securities with a $450,000 cost basis)
- IRA balance of $1,250,000
- Roth IRA $150,000
- Basic Needs $7,000 a month ($84,000 a year)
- Discretionary addition: $16,000
- Desired income of $100,000 a year
Important Assumptions
Healthcare:
- Cost of healthcare (average based on the Kaiser Family Foundation web page for 2 adults aged 50, silver plan is $1,260 per month / $15,120 a year)
- If you pay yourself $100,000 in taxable income from any combination of your taxable assets you will not qualify for any subsidy. In order to qualify for an $8,435 tax credit (which could cover almost 100% of your federal tax liability) your Modified Adjusted Gross Income would have to be $68,000 or less. Remember the ACA subsidy is a cliff. Go over the 400% of the FPL (even by $1 and the subsidy evaporates). This example will be optimized to receive that subsidy 9 out of 10 years.
Tax deductions:
- None – taking the standard deduction
Rates of return:
- Equities 7%
- Bonds 1% (fed tax exempt)
- Cash 0%
- Inflation 2.5%
- Dividend rate 2%
Age 50 to 55 IRA, Roth and Taxable accounts 100% invested in equities. 56 to 60 75% equities 25% bonds (except the Roth which remains at 100% equities)
Housing:
- Downsize to smaller home with value of $250,000 (put $50,000 down to avoid pmi and take a 30 year mortgage at 3%, invest $200,000 into equities in your taxable account and $100,000 into bonds to pad your initial cash balance)
Withdrawal methodology:
- 72(t) the IRA for 10 years @ $40,000 per year
- Target is for $100,000 per year cash adjusted for inflation @ 2.5%
- Qualify for the ACA Subsidy 9 of 10 years (the subsidy effectively pays your federal tax bill)
- Use cash, dividends, and targeted sales in the taxable account to approach but not exceed the MAGI limits for the ACA and to make up the balance between the $40,000 72(t) amount and the total cash target for each year.
In year 6 when the taxable account is rebalanced there is a large capital gain of $75,000 but based on income the capital gains taxes will be approximately 11% of that gain. In all other years there are essentially no capital gains taxes paid based on AGI.
Downsizing lowered the property taxes and mortgage payment in terms of net cash outflows compared to pre retirement costs
At the end of 10 years the balances will approximate:
- Home equity of $135,000 ($150,000 mortgage balance at 3% 20 years left)
- Taxable account balance of $1,015,000 ($90,000 cash, $965,000 in securities with a $650,000 cost basis)
- IRA balance of $1,760,000
- Roth IRA $295,000
Here are the specifics laid out by year if you are interested in seeing them.
Example Summary
Total cash amount withdrawn over 10 years to spend on essentials and discretionary items comes to $1,128,000.
Net worth went from $2,400,000 to $3,205,000.
At age 60 the IRA can be accessed for any amount necessary and so can the Roth. However with 5 more years before Medicare starts the plan may be worth following so the ACA subsidy continues to be paid.
At Age 65 there are a few different strategies to potentially implement that will shift money from the IRA to the Roth as well as when to claim Social Security. It is quite likely if you continued to apply the strategy from age 60 to 65 that at age 65 your net worth would exceed $4,000,000 – or more.
Additionally I generally believe that there should be three years of cash on hand after age 55 and before that anywhere from one to one and a half. Any more than that leaves too many assets on the sidelines.
One last thought (and I expect some push back on the strategy and I am glad to make the spreadsheet available) is that this strategy and this income amount could be accomplished with a net worth of much less than where we started at $2,400,000. This is NOT the simple 4% rule applied. It was based on understanding the role of taxes, which assets to draw down, which assets to invest aggressively and how to use cash on hand and the taxable account to keep taxable income low while having the government subsidize your medical costs.
For example, if the target cash needs were $180,000 a year the ACA subsidy would not have been an option and therefore a different asset utilization would likely apply to put the annual cash needs in place. This is why there is no single answer and why individuals need to expand their investment and tax knowledge in the ISE phase.
Conclusion
Please remember money is a tool for living and life should be about finding joy in your life and giving it to others. No one wants to be the richest person in the cemetery or known for leaving it all to someone else to enjoy. In this scenario this couple would still leave a great legacy.
You Earned it, you Saved it, you Invested it. So continue to Invest it, Spend it and certainly Enjoy it.
The ESI-ISE extended plan can lead you to a great deal of freedom to truly enjoy what you have worked so hard for.
This is a great post – and I think you’re absolutely right: When you transition from the saving chapter of your life to the spending chapter of your life, it really requires such a different mindset.
In my opinion, so many people idolize “retirement.” It’s a glorified next stage in their life. However, they typically fail to see past retirement – and without proper retirement planning, often times retirees fall victim to depression because they don’t know what to do with themselves. With retirement, you lose your salary, your social circle and often times your work status.
The earlier you prepare you mindset, the better off you’ll be once you enter this next chapter of your life – regardless at which point in your life.
Cheers!
Fiona
Although I never had a name for it, I basically lived the suggested plan laid out within this article, with some deviations of course. Now, being in retirement for over 17 years, and with the current pandemic situation, savings have changed dramatically over the past year, and medical expenses are more likely to be a greater concern than before. With Medicare, tricare for life I initially thought I was well prepared, now things are changing with a rapidity that requires more thoughts to maintain the right balances. Good posting, one I will share with my beneficiaries, with high recommendations for reading and developing their own plans.
Very thoughtful and important post. Its the flip side of all the FIRE planning, saving, and frugality that doesn’t get much coverage. I’ve thought about this myself. While I think its a good thing to have some frugality and good spending discipline, you don’t always want to take it too far either. It can be hard sometimes to get yourself to do it, but I think its important to spend on some things along the way that you can enjoy now, rather than waiting until your 65+. If you read or watch the local or national news, its easy to see not everyone makes it to your traditional retirement age for various reasons. Its good to find that balance between planning for the future and enjoying some things in life now.
This is gold! Thank you for your thorough analysis of the process. It really brings everything into clear focus as I approach early retirement. The ACA information is especially valuable to me as health insurance will cost just as much as our vacation costs.
This is a great post. I feel like my spouse and I almost the example 50 year old married couple in the post, but with no mortgage, somewhat higher account balances, and lower spending needs (though we do have a 15 year old child who won’t be independent for quite a while yet). I really need to either see a financial advisor (which I cringe to do, as my experiences have been poor) or really study up on the things mentioned in this article. Terms used like “72(t) the IRA for 10 years @ $40,000 per year” and “approach but not exceed the MAGI limits for the ACA” just totally go right over my head.
Well done on your accumulation phase.
I would encourage you to “study up” on things. No one, absolutely NO ONE will care more about your money…than YOU.
If you read something and it doesn’t “click”, don’t get discouraged, keep reading and learning. Talk to others and never be afraid to say to someone, I still don’t understand.
It takes time, but eventually you will get it and then you can help others too.
Thanks for mentioning the ACA subsidy and FPL level. I didn’t consider that in my model. My wife and I are both 48 years old, and have already reached our target retirement number. However, my wife and I have decided to work for 1.5 more years for our remaining RSUs, options, and bonuses.
Our target yearly retirement budget is $120k (2020 value then adjusted for inflation). I’ll recreate your calculations for our needs then see what options we have to still be below 400% FPL. For instance, I’m thinking that we could use loss harvesting (if we still have some available) or tax lots with lesser capital gains on our first 5-10 years.
@Pass Boone says
The ACA is one of those things you can move in and out of depending on how you navigate your draw down spending phase of FIRE, notice in my example the year the couple could not qualify for the subsidy because of the large capital gain at portfolio rebalancing time.
While I do not know your details if you are capable of generating $120,000 a year adjusted for inflation for the rest of your lives you should have assets that could be positioned in some years to be taken tax free (unless its all passive income like rent collection). Congratulations on retirement at 50 when you get there in a year and a half!
MI-18, thank you!
Yeah, I’ve read the rules regarding the ACA, FPL, CSR, and it boils down to the estimated income for the current yet. So care must be given when drawing funds, and any pulls must be strategic (e.g., when rebalancing or drawing cash to replenish the buffer). Also, the subsidy will adjust because it’s benchmarked by the 2nd lowest silver plan rate in the household’s rating area (all silver plans of all carriers in the rating area).
Based on the simulations that I’ve done (100k iterations) with my retirement model, my wife should have enough even up to $180k/year with 0 chance of going bankrupt at age 100. 🙂 We’ll see if we can increase that spend at a later time.
We don’t have a Roth IRA, unfortunately. I’ll consider Roth conversion once we’re on a much lower tax bracket. Anyway, my initial plan is to use cash + dividends from taxable account to get to $120k/year. However, I will need to make some tweaks because my current estimate is that we’ll generate around $80k/year of dividends from our current taxable account portfolio. We’ll see how it goes once I’ve modeled it this weekend.
Thanks for the detailed explanation and for sharing your model.
I developed a strong penchant for savings from my Depression-era parents. Even with $5+ Million and in my mid-60s and semi-retired, I still have an entrenched fear of becoming a bag lady. Fortunately, my husband doesn’t have this hang up.
A recent Wall Street Journal article suggested a budget line item for what folks like me might call frivolous spending. I plan try it.
I am currently working my way to buy a new (used) car so I can carry more artwork, a new phone (my screen is seriously scratched and cracked after an encounter with a road), and a new mattress. One is done and two to go.
This post is like a good financial therapy session for me. Thank you!
@Bsue
I get to witness this with my mother (similarly influenced by her depression era immigrant parents). As a widow worth several million dollars she looks for bargain air fares the one or two times a year she flies and will suffer in a middle seat instead of paying $300 for a first class seat. When my father was still living they would split entrees and always thought the $40 Filet was WAY too much. None of those decisions will change her asset base. I know its a “to each their own” issue but then she COMPLAINS to me about the (pick one) middle seat, bad fish, tart wine…
In the Millionaire Mentors section I have posted about how the emotional fear of “not enough money” impacts practical decisions that even if made in excess if added up really are not impactful. When I took her to the airport the other day for that middle coach seat flight I told her that for $150 she could upgrade to coach. She is 75 years old. When she said that is expensive I told her she had enough money to buy over 20,000 upgrades. Over the next 10 years (god willing) she will fly 20 times or so. So spending the money isn’t going to be a difference maker so treat yourself! Her response: Maybe on the flight home…. It wont happen its SWA!
Thanks for reading and best of luck to you on your journey!
MI-18
John,
Thanks for pulling this post together… I will definitely revisit it a time or two!
Great post! A whole new learning curve to embrace.
I 100% relate to your comments about the extreme frugality often espoused by the FIRE movement. Not going to work for me (or my dependents!).
This is an awesome and much needed post. Thank you so much for taking the time to write this and lay this out for all of us. This one is a real gem. I especially love the real world example.
I hope no one misses the most essential point: once you’ve accumulated millions of dollars, you should enjoy it before you die!
Over and over in the millionaire interviews here, we read of people with multi-million dollar net worths who are living on $30,000, $40,000 or maybe $50,000 a year. That always makes me a little sad. I think people who have the discipline and work ethic to accumulate such significant net worths have a very difficult time learning how to finally begin to enjoy it.
This post explores the technicalities of how to convert a nest egg into spendable cash, but I think many people need at least as much time spent on the psychology of the shift from savings to spending.
I think this post highlights the need for much more education about how to actually convert net worth into spendable cash in retirement years. There is not enough information about this on blogs like this, let alone main stream media or even personal finance media. I think many of us instinctively shudder at the prospect of paying a financial advisor to help us navigate this, given our previous interactions with such advisers. It would be really useful to have a series of articles that explain and expand on what is in this post.
Finally, I think it makes owning real estate even more appealing. In our case, we own five duplexes worth about $2 million that generate $120,000 of pretax income for us. It is a lot easier to solve this puzzle when you start with that kind of income coming in automatically. In addition, it’s a 6% draw instead of the 3% or 4% withdrawal rates I see people talking about frequently (which I think way too conservative in most cases).
Thanks so much for a great blog post in the beginning of and important education for many of us!
@Millionaire206
I intend to continue to share my thoughts on this in the Millionaire Mentor section and agree 100% that this topic is under addressed in general in the FIRE movement, its why ESI gave me the go ahead to write this. I am glad you are looking at this much like I have and I am also glad you have things set up extremely well for yourself.
This is the post I’ve been waiting for! Thank you so much for this. My situation is a bit different as I’m single. Is it possible to share the spreadsheet so that I could plug my numbers in and see where I’m at? I may b closer than I think!
The spreadsheet is linked above (to a Google drive) right before the “Example Summary” section.
Thanks! I saw that. Is it editable? Spread sheets are not my strong suit. My techie daughter tried too without luck.
Save a copy of it from the Google drive – the original is probably locked but once you save a copy of it, you can edit however you desire.
Hi Dave,
When I click on the link it is only saving as a PDF on my google drive – I have tried both on a Windows and IOS operating system. I have found no way to convert the document into an excel spreadsheet to edit it. Is there something I am doing wrong?
Thanks for the help.
It’s a PDF. I don’t think you can change it.
That said, it wouldn’t be too hard to recreate on a spreadsheet.
i am glad to give @ESI the spreadsheet after i clean it up and make it more automated for everyone who wants to use it!
What a great post! Thank you MI-18. If you are willing to share your spreadsheet, I’m sure this entire group would LOVE it. @ESI — More of this for those of us who are crossing this line to the ISE side of the equation!!
Actually not so easy or I’m dense today, how do you get to $100k in the first year, I’m not American so I don’t understand the MAGI, but it’s just a limit? Not part of the 100k? Or are they taking less than the target cash each year?
20+23+9+40=92 vs. 100?
Ok, getting closer
20+23+17+40=100
Thrown off by not adding numbers in the same row.
But not sure what the 9 is. Does it have something to do with tax? Was the 100k a before or after tax target?
Which part of this post are you responding to? It has been more than a year since I started this thread.
Let me know so I can help you with the answer you are looking for
MI-18
I was just referring to ESI’s comment “ it wouldn’t be too hard to recreate on a spreadsheet.”, it did take some trial and error to figure out how to get some of the numbers. In the current article ESI has a link back to this article which I did find an interesting read.
I agree that this is an extremely important post. I wish I had done a better job of preparing for ISE. I retired in early 2020 at the age of 50. My spouse is 60. Our NW is around 1.5M and our annual budget is around 40k. We certainly are not FatFIRE, but when you are debt free and live in a low cost of living location, you really can live a comfortable life at reasonable income levels. Our travel/vacation budget is our largest line item. We use Obamacare and strive to maximize its subsidies. This is one of the reasons for our target annual budget. I just sold off around 30k in stock funds to set us up for 2021. Some of this will be moved into cash account, since other income sources will help cover our expenses this year. This may not be the ideal way to withdraw from taxable account, but our shares were at a 1 yr high and it also helped rebalance the stocks/bonds mix. Utilizing the healthcare.gov option can strongly influence your income/spending options. We have a combination of taxable, retirement accounts and 3 yrs of living expenses in cash. Cash provides a source for large unexpected/unplanned purchases. Enough cash also provides an alternative to selling investment shares during strong market downturns. We can’t predict the market or changes to Healthcare.gov. We already know that the spouse will be forced to move to medicare when she hits 65. Our healthcare insurance premiums will almost certainly increase significantly when this occurs. We will also eventually have to decide when to start taking spouses SS, my pension payments at some point and later, my SS. I’m still learning how to best withdraw funds for annual expenses and will likely do it differently next year. My point is that your ISE approach will have to evolve and adapt just like your ESI did.
@bmjohnson35
You are absolutely right that your ISE approach will have to evolve and adapt. I do think that if you are paying yourself in that time before SS or Medicare commence your plan can be mostly a wash rinse repeat plan since the plan itself should be self driving – however market conditions will force you to react. Asset prices inflation and your own needs will force a review of how its working.
In the hypothetical plan I set as an example the 72t played an enormous role in why the plan ran the course that it did. If you violate the terms (and it has to run past 59 and a half) the penalties are expensive. So as a result the 10 year point of view HAD to be the the point of view to take. That is why I generally see it used for 5 years (which is the approach I have personally taken)
Best of luck
MI-18
Why come from a position of scarcity ? Why not focus on NOT becoming a W-2 employee and building a sustainable business with residual income ? Why not set that business up so that there is no reason to retire ? Why not set up a life that involves having a job/ business but not having to work there.
Why invest in the gambit of business ownership early?
We need to teach our children better.
@M-124
All good questions / observations about a path in life. I agree most people get near zero education as children at school about all the ways a person can make a living and worse (much worse) any semblance of financial literacy education. Great Forbes article here that gets into the details of who works for themselves vs W2 work what they make and the industries they work in
https://www.forbes.com/sites/elainepofeldt/2020/05/30/survey-nearly-30-of-americans-are-self-employed/
This article however didn’t address business ownership and arguably Elaine (the author) is all about the solo owner operator who can make a million with zero employees (the data shows that is rare) but your point of starting a business, employing others to work for you and to earn substantial income from other than a paycheck are all valid points and are the leading path to substantial wealth.
I have said my W2 results are the exception, not the norm so I wrote this to point out how someone who has been on a W2 journey and is faced with what comes after you stop that paycheck you do with the assets you have accumulated. It was written for people who do make it to that point with a million or more likely a few million. I presume that is the readership of this site.
I do believe that ownership produces the chance for a bigger outcome and a much different post work life. A solid majority of my retired friends I golf and socialize with owned businesses their kids or former partners run and they just collect the residuals.
Most will tell you they first worked for someone in the industry they are in and then went out on their own. That’s a good way to do it (apprenticeship essentially).
So yes kids don’t learn these things. I personally would like to see the education system add more life skills to the curriculum to help foster these type of outcomes but sadly since no one even has gym class every day anymore I don’t see schools expanding, only shrinking.
Thanks for confirming my theory on early retirement and the way to get there. We’re in our fourth year after retiring at 54. Given my exit age, we also used the often overlooked 72t distribution tax law to supplement our cash flow needs. Now that the RMD and inherited IRA rules have changed, it’s even more apparent a spend down strategy is critical for long run financial planning. Another item we agree on is the “non financial” element of retirement. What is your “purpose project” which you describe similarly as a passion. This sustains you and brings meaning to all the hard work and dedication that lead up to being able to join this great club we call early retirement. Here’s to a great 2021.
So appreciate this post..
Life is to short.
I think I’ll take the wife out for steak tonight !!!
Hello,
Thank you for this helpful article and strategy. You mentioned: It will bring the Roth conversion strategy and the 72(t) strategy into play for early retirees in my opinion. I was curious about the fact that there are no Roth conversions in the plan. For instance, I’ve seen other strategies where you’re pulling from your Roth account while also making conversions. Could you explain further why you didn’t include conversions in the 10-year strategy?
@Mary
Thank you for the comment and I would be glad to explain
A Roth IRA is a powerful thing over time and in this instance my example had access to tax free cash to augment spending with no tax consequence available. Also that ash was not growing where as the Roth invested in equities was. If I were to show you the next 12 years of this plan it would be heavy in converting the IRA to the Roth before the RMDs kick in.
Since a Roth would generally be the last item to withdraw from, taking money out in your 50’s and forgoing all that tax free growth is something to avoid
Even if cash or low balances in a taxable account are not an option to draw on in early retirement I have read advice from people online to tap the Roth and then the IRA when reaching 59.5. The early IRA withdrawal penalty is often cited for why you should do it. I almost NEVER see anyone advise the 72t. They pretend it doesn’t exist.
I would be glad to show what’s “next” for this couple in a follow up post if ESI wants me to
Thanks MI-18 for this article. This is what I needed. Though a lot of things went over my head. lol. I need to read it couple of times and do some research on 72T.
But I agree to tap on Roth IRA the last.
I would love to see how draw down and roth conversion works. step by step..
Thank you so much!! 🙂
You are always welcome to post here. 😉
Will do!
Also I am glad to make the spreadsheet available so people can play with the formulas
I will clean it up make it a little more intuitive / programmable with the variables and send it to you in a few day
It might not post until July…just FYI…LOL.
I am way too far ahead in my schedule!!!
Anybody else kind of feel a little slimy that multimillionaires retiring early and having tax payers subsidize their health care costs? The vast majority of these tax payers who realistically will never be able to retire.
I’m one of them being an 8 figure NW guy myself, but I’m choosing not to. My retirement side gig business also had the ability to legitimately take a “free” $20,000 PPE check that didn’t have to be paid back. I decided against it because it didn’t feel right when I have so much and don’t need it.
I don’t blame people for taking advantage of what’s legally offered to them, I do think this is sort of the smarmy side of the LeanFire/Fire/FATFire that I struggle with when there are those struggling. I’m most likely a giant dummy for thinking this way.
There are many ways to look at this, but I can see how you could feel that way. It’s up to our elected officials to pass legislation that results in reduced healthcare costs and/or improved options for affordable healthcare insurance. Until then, this was our best option for reasonably low risk long-term FIRE, given our NW and limited income streams.
“low risk long-term FIRE, given our NW and limited income streams.”
But you don’t have limited income streams unless you are disabled or not capable of providing for yourself anymore. By taking the subsidy at a young age you are making a conscious choice to take more out of the system than you contributed into, and it is a system that already cannot afford it.
Its all good though, I just feel like it really makes no sense that our country is subsidizing people who absolutely do not “need” it. The money would be much better spent on teachers salaries, improved infrastructure, or heaven forbid allowing our country to live within its means like what allowed all of us here to be in the positions to FatFire. Granted it is a very small segment of the population, but it is this segment that needs to be the leaders.
I say this all with peace and love!
@ol1970
I agree the federal government as well as state governments have greatly under invested in the foundational categories that if done right lessens or eliminates the need to subsidize anyones daily living needs. We can certainly debate whether politicians really want to solve some of these problems because if they did what else would we need them to do?
I lead with my time that i donate, the money that I donate and the things i feel I do everyday to make the world around me as best that I can make it. I would gladly lead with additional dollars to solve big problems if the federal government could prove themselves worthy. That unfortunately is a hurdle that may be too high for them to clear in my lifetime. When the debt begins to absolutely crush the economy and we finally as a nation decide no incumbent will be return then that day might be the day we get people in who will make the changes needed to solve the issues you raise above. Until then…..
MI-18
1. I make too much money, so I’m out anyway.
2. That said, I’m not sure what I would do if I did qualify.
On the one hand, I certainly pay enough taxes (close to 50% of my 2020 spending as you’ll see in my upcoming financial update), get little access to other government benefits (like stimulus checks), and there’s clearly nothing illegal about it, so the government is basically telling me it’s “ok”.
On the other hand, it doesn’t really feel morally correct either. Plus we’re pretty satisfied with Samaritan Ministries.
The big issue IMO is one we’ve talked about before here many times. Most politicians and journalists define “rich” and “wealthy” as “high income” when net worth is the measure of wealth.
ol1970, that’s a valid point, and it goes back to preference.
Although most of the ACA funding comes from Medicare, there’s also the net investment income tax (NIIT) of 3.8%. We’ve all paid in the Medicare throughout our employment years, and I and likely others here as well have paid NIIT a few times since 2013. So, my reasoning for this is that it’s a social service that’s we’ve all paid into, so it’s a benefit that’s available. It’s up to the eligible person to avail of such benefit. It’s no different from Medicare Parts A&B benefits — you can opt to have it or not, but it’s a benefit that’s available.
Would you feel the same way using Medicare benefits?
@ol1970 and @Pass Boone
I did not take the PPE money for loss of consulting money as an independent contractor because I don’t need it and because it was a stretch to say that the limited consulting I do was LOST in the early days of the pandemic. There was no doubt that a lot of people did.
As for the ACA subsidy I know personally that I will never get a subsidy but I have paid a lot in NIIT and Medicare tax over the years that if I did need it or want it I wouldn’t feel bad taking it.
If we open the can of worms on this subject about the retirees paying themselves $100,000 we would have to ask should a family of 5 (three young healthy children making $122,000 a year living in the midwest) get $6,400 from the government to subsidize their health care purchase? Is a $122,000 a year family income representative of citizens requiring direct government assistance? As it stands this family with 3 children will get $6,000 in credits for the kids and if they took the ACA subsidy would pay zero federal tax and actually receive money from the government.
So as far as I see it we as citizens can always avail ourselves of things we are eligible for and do so with a clear conscience as that is what the law provides for. If as you say people with 7 figures or more in net worth should never take it because they can afford it (even though they probably paid along the way) that is always their right just as those who want higher taxes could (in the absence of the raising rates) simply send more money in.
As long as its not fraud (and there is plenty of it) then the program as they say is working as intended (even if the laws of unintended consequences applies)
Thanks for sharing your opinions, i am sure somewhere in this forum we can discuss the role of government subsidies and tax laws in shaping behavior
So, I did a quick estimation to see if we’d be eligibility for ACA subsidy, and it turns out that I’d have to make some drastic movement of our assets which would trigger capital gains. Even with our taxable account having 100% equity ETFs (VTI, VBK, VTV, VXUS), I estimate that we’d exceed the income threshold. 🙁
I’ll keep this in mine in case dividend yields end up drastically getting lower. However, looks like we’ll have to either go with an ACA bronze or silver plan, or with a multi-year short term plan.
Anyway, it was a nice mental exercise 🙂
If you put aside the debate about the subsidies, don’t underestimate the importance of the pre-existing conditions protection. I looked into Samaritan and other coverage operations, but none met our needs. If you don’t have pre-existing conditions and/or regular need for expensive medications, there are other options than Healthcare.gov.
MI-18, just wondering how an HSA would play into this scenario. Use it before Medicare age? After? Thanks again for this post. I’d love to hear how this ‘couple’ fares after age 60.
Would like to see 72t distribution post. I’m 51 and will be setting up plan soon. Topics could include…..
401k vs rollover IRA pluses and minuses for 72t plan and asset liability considerations
3 methods for calculating max yearly draw for 72t plan
Offsetting 72t distributions w rental real estate passive losses
Would you like to write it?
I find that the best people to cover topics are those into/interested in it.
I would write it once I set up my 72t plan to share my experience and considerations.
Now I’m looking for help w setting up plan since I’m trying to figure it out in the topic areas I mentioned.
@kevin.
I have set mine up so I would be glad to share my experience with you if you like
MI-18
Thanks for the detailed plan. I retired 2 years ago at age 56, with many similarities to your 10-year look. If I read this back then, it would have been a great second opinion that financial risk of retiring early is manageable. I would like to offer a couple of additions:
A) 401Ks also have early distributions without penalty: just need to separate from the company after age 55. Like rule 72t, it provides early access to funds – so don’t be to quick to roll-over 401K to IRA.
B) There are other thresholds in ACA besides 400%. I’m pulling from my 401K to stay under 200% FPL, which provides subsidies on premiums and also on out of pocket costs (Silver plans only, copay, prescription by mail cost, …). Total medial cost is about half of what it would be at the 400% level, including my chronic condition. Our spreadsheet jumps to the 400% level when my pension starts at age 60.
Healthcare.gov has details on all the plans, prescriptions covered, out of pocket, subsidies – I ran scenarios at various income levels before retiring. kff.org is also a good resource. To the comment about wealthy people taking subsidies, it’s not like I have a choice. I tried to price catastrophic coverage directly from insurance companies, and found that ACA wiped-out plans that don’t meet its full requirements.
@Dave
I use the Kaiser Family Foundation site for insight on the way to view how the ACA can and does subsidize costs. Its a great tool. I tried to keep it simple and in my example it would have been hard to keep this family at 200% and have $100,000 to spend so I intentionally tried to show a six figure retirement AND an ACA subsidy.
In the case of my example this couple retired at 50 – staying in the workplace 401k for an extra 5 years could cost them money in terms of their investment preferences so i had it rolled over into their IRA where they could have more investment options.
Before the ACA I had planned for a catastrophic plan paid for or by an HSA. Once the ACA hit 10 years ago that plan changed as they disappeared – only people under 30 could have them. My challenge was I worked corporately up until I retired at 52 and funneling money into an HSA wasn’t an option for me in the years leading up to it because of my employers Cadillac plan for its employees. 26 million HSA accounts in the US have money in them. Average balance is $2,400. So there are not a lot of W2 people with $50,000 or more in their HSA.
Great points and I appreciate your comments.
MI-18
To me personally, this is the most helpful ESI Money post so far. Thank you very much!
@diogenes
I’m glad you found it helpful and I do apologize about the length. If you have any questions or comments for me please feel free to reach out
MI-18
Bravo MI-18. This is a long overdue look at the drawdown in detail. I would like to hire you to consult on our situation if it is possible. Thanks for providing a cleaned up worksheet whenever you can.
How did this subject turn out for you?
Why aren’t rule 72(t) distributions part of your MAGI? Thanks.
@Mr Curious.
I did include them in my calculation. For example in year 1 MAGI is $66,000
17,000 in dividends
9,000 in capital gains
40,000 in 72(t) withdrawals
The remainder of the money needed to reach the expected cash needs came from after tax cash on hand
If you would like me to go into any greater details I would be glad to do so
MI-18
Oh I see it now! Thanks for the great post and quick response.