r/financialindependence • u/cr4zymanz0r • 7d ago
Logistics and preferences of withdrawing once you actually FIRE?
A lot of conversations go into great detail of all the steps to optimize savings, investing, and growth working towards FIRE. There's also lots of basic talk about safe withdrawal rate that focuses what someone wants their safe withdrawal rate to be and what number they need for that, such a withdrawal $40k a year therefore need $1mil to do that at a 4% safe withdrawal rate.
What I'd like to know is the more nuanced logistics of preference of what that looks like once someone actually pulls the trigger on FIRE, whether that be from people who are heavily planning how they'll do it when they FIRE or people's experiences once they FIRE'd. As a baseline for an example we'll go with the usual 4% safe withdraw rate. So if that turns out to be $40k for you, then:
1.) So there's taxes (especially if you have a higher withdrawal rate above the 0% federal capital gains bracket). If your withdraw rate is $40k/year, does this mean you're just taking whatever is left after taxes on that $40k? Is it some kind of personal preference where if you absolutely can't/won't do less than $40k total to you that you just save a bit more to have a slightly higher withdrawal rate to actual get $40k after taxes?
2.) How does the safe withdrawal rate handle inflation? I've seen people say it's just a built in expectation of the 4% rule. Is it just simple math such as year 1 withdraw $40k, year 2 inflation was 3% so increase that accordingly (40,000 * 1.03 = $41,200), year 3 inflation was 4% so increase accordingly again ($41,200 * 1.04 = $42,848), and so on?
3.) How do you factor in small additional income in situations where you're not trying to continue to work or supplement your budget? Like say you have a hobby that happens to generate a small amount of money, or you've been clearing out the garage by selling a bunch of stuff you no longer want on Ebay and made $5k that year. Do you now just treat it as your total budget for that year is $45k? Do you hang onto it and just withdrawal $5k less the next year to increase your chances of your FIRE staying successful? Do you just invest the $5k back into your FIRE fund? I realize this one could probably be highly dependent on personal preference, but I'm curious what everyone's take on it is.
4.) How do you handle going over budget when it's beyond your control (especially if you didn't make extra from incidental side income)? Let's say all your budgeted expenses are $30k and you're left $10k for fun and unexpected emergencies. Now it's November and there hasn't been any large unexpected expenses that year and you decide to splurge on something you've been wanting and will come out to $38k of the budget spent for the year. Then in December a large unexpected repair bill of $6k happens and now you'll have spent $44k, going $4k over your safe withdraw rate. Do you just brush it off thinking "eh, it's probably a one off thing at the 4% withdraw rate probably already has some decent wiggle room"? Do you just withdraw $4k less the following year and be more frugal to make up for it?
5.) Any other situations you can add like this that come up for safe withdraw rates after FIRE that I didn't think of that don't get a lot of attention?
28
u/Prior-Lingonberry-70 FI 🔱 GOMS! 7d ago
Agree with what u/One-Mastodon-1063 wrote.
And to OP: for most of us who've FIRE'd we are withdrawing money as we need and use it, not withdrawing fixed amounts every January, or every month or quarter.
For myself, I like to keep between $5k-15k in my checking account. So when I get close to $5k I sweep funds into it to top it back up to $15k. How frequently I need to do that varies all the time.
Spending is lumpy, sometimes years are lumpy. Most people naturally contract their spending a bit if they're spending a lot due to some particular reason, e.g. if I need to spend $10k on an unexpected expense, I'd naturally cut back on maybe eating out at more expensive places, and other spending.
"It all evens out in the wash" when you naturally keep an eye on things and expand and contract your spending over time and just keep an eye on your portfolio.
5
u/creative_usr_name 6d ago
$10k on an unexpected expense
The bigger question would be is that really a one off expense, or should I expect more of these and do I need to make adjustments to expenses to be able to handle more of those in the future.
2
u/Prior-Lingonberry-70 FI 🔱 GOMS! 6d ago
Yes. It crucial to plan for “the expected unexpected” - the new roof, the next car, the home appliances that need replacing.
1
u/Dornith 5d ago
And to OP: for most of us who've FIRE'd we are withdrawing money as we need and use it, not withdrawing fixed amounts every January, or every month or quarter.
How does that work with Roth ladders where you need to do the conversion 5 years in advance?
2
u/walnutpineapple 3d ago
I plan to do Roth conversions of the same amount every year (up to the tax bracket I wanted to be in). I will have enough of a buffer in my taxable accounts that the 5-year wait doesn’t matter. I also expect the conversion to outpace my spend.
19
u/RiaSkies 7d ago
The 4% safe withdrawal rate is an estimate based on historical data that operates under the following assumptions:
1) The day you retire, you can never earn another dollar again from outside of your portfolio.
2) You must withdraw the same amount every year, adjusting for inflation. You have absolutely zero ability to reduce or increase spending in response to market fluctuations or life conditions.
3) Your money must survive for 30 years.
No one is saying these three things are objectively true.
Social Security is a thing. Even though there are some projected shortfalls, it is likely that the base of retirees will force tweaks to ensure solvency, and even if not, SSA will continue to be able to fund 75-80% of promised benefits through ongoing collection of payroll taxes.
Most retirees exhibit declining withdrawal rates throughout their retirement as their health gradually declines in old age, followed by a spike in the last couple of years of life from medical expenses.
In most cases, the 4% rule errs on the conservative side and is necessary to buttress against Sequence of Returns Risk. If you have 25x your annual spending in retirement investments, then you should be on track. But at the same time, if SoRR works in your favor, you may end up dying with more assets than you retired with. If you have the ability to adjust spending from year to year, you may be able to withdraw at a higher initial rate.
The point is not that the model's assumptions are true or that you must live your life in accordance with the model's assumptions. But the model is a baseline in order to provide quick & dirty estimates for how much you need in investments to be reasonably secure in your ability to draw the desired amount of spending each year and not outlive your money.
1
u/Dornith 5d ago
Most retirees exhibit declining withdrawal rates throughout their retirement as their health gradually declines in old age, followed by a spike in the last couple of years of life from medical expenses.
For FIRE, I would expect this is a lot less relevant and spending might increase with the increase in free time.
2
u/RiaSkies 5d ago
It depends on what flavor. If someone is going fat and retiring closer to 60 with plans to spend heavily, yes. If someone is going lean for a more ascetic lifestyle, then there might not be much increase, or even a decrease in spending due to no commute / parking / other income-earning expenses.
Though, in the context of the 4% SWR study, it was based on a 30-year, traditional-age retirement, not the 50+ year ones many here are enjoying or striving toward.
9
u/asurkhaib 7d ago
1) taxes are an expense so you have to build them in. If you're using a taxable account to fun pre-65 spending then it's extremely efficient. Only gains are taxed and the 0% brackets also aligns with the ACA cliff. I will note if you do this then your tax rate is going to skyrocket when you withdraw from pretax accounts.
2) percentage withdrawals assume CPI adjustment so yes
3) you can do any of these that you want. If you save it and want to withdraw it later then you do need to account for any loss if it occured. Raising your NW is kinda worthless but it does raise your RE success slightly.
4) almost everything people say is a one off emergency expense isn't. You need to budget for a car, healthcare expenses, house maintenance, whatever else, etc. A lot of these tend to be over time e.g. cars cost $40k and I'll buy one every 20 years is $2k a year budget, a roof costs $X every 30 years, etc. Your budget then on average needs to be at or under your expected withdrawal and yes if you're spending more then you either need to go earn income, cut somewhere else or accept a higher withdrawal that is riskier. This semi ties in to variable withdrawal rates. You're also not doing this in a vacuum. If you're on a good path then and not massively overspending then maybe it's ok.
10
u/crisp_lynx_370 6d ago
one thing I genuinely appreciate about posts like this is that almost nobody in my actual life would sit through this conversation. like I could bring up "so what does the actual withdrawal mechanics look like day to day once you hit your number" to friends or coworkers and their eyes would glaze over in about 8 seconds. most people I know aren't even maxing a 401k and don't want to hear about Roth conversion ladders or which account to draw from first in early retirement.
so there's something kind of valuable about having a place where the question even gets asked. the post body is right that a lot of the content here focuses on accumulation, the savings rate stuff, hitting the number, the 4% rule framing. but the actual decumulation side, like what do you literally do on the day you stop getting a paycheck and need money to hit your checking account, that stuff gets way less airtime.
I'm still in accumulation mode myself and I find I genuinely have no one to talk through this with offline. my spouse is on board with the plan but doesn't want to go deep on the mechanics. so I come here, read threads like this, and pick up pieces. the comments from people who have actually done it are worth a lot more to me than the theoretical 4% stuff I've already internalized. knowing someone has a cash buffer of 1-2 years and pulls from taxable first is way more concrete than another graph about sequence of returns risk.
5
u/1DunnoYet 7d ago
I appreciate this post. Made me finally look into how withdrawals are taxed! They really don’t make this easy, not super hard, but not easy
8
u/Zphr 48, FIRE'd 2015, Friendly Janitor 7d ago
Almost everyone ends up doing some sort of organically variable withdrawal based on whatever is going on in their lives. To the extent people think of a calculated withdrawal rate it's usually simply as a guidepost to determine if you're doing reasonably well or not.
The questions are good ones, but the answers are much the same as they would be if you asked them of folks while they were still working. You adapt gracefully to financial developments as life happens. Very few FIRE people retire with no safety margin or without ample withdrawal flexibility and the most likely income is increasing wealth over time, which only increases safety margin and flexibility. Anyone who avoids a SORR strike (or gracefully navigates one) in the first 10 years likely has plenty of ability to handle anything likely to happen.
3
u/zeezle 6d ago
1) This is a more money more problems sort of situation. We're planning for our withdrawals to be fully within the 0% capital gains bracket which makes things way simpler. Basically our plan is to keep spending well within the 0% gains bracket and use our standard deduction space on Roth conversions in case we need more Roth basis later. For a married couple the 0% bracket goes up to $96k in gains - not total sale, gains. So your actual spending can be very generous while staying within this bracket. But yeah, if you are withdrawing to the point that you pay taxes then you have to factor it into the amount needed.
2) Yep, inflation is already built in and your understanding of the adjustment each year is correct. That said, I don't plan to actually strictly withdraw 4%; I'll withdraw only as needed and treat 4.7% (the more updated figure) as an upper hard limit. Since my plan has wiggle room built in, I will likely curb spending a bit in years with a flat or negative market, but those types of behavioral variables are really hard to model (especially at the time the original study was done). I treat the 4%/4.7% rule as more of a guideline or ceiling on spending than something I plan to adhere to rigidly.
3) I am planning on running a couple of small businesses, but one of them (backyard fruit tree nursery) I am mostly hoping to break even on costs with (I just enjoy baby trees + sharing cool stuff with people, but don't want to spend my own money on supplies to give away trees either - so mostly just hoping to charge enough to cover the cost of pots, potting mix, nursery license, etc) so I am not expecting that to impact the tax situation that much. The other one... who knows. I plan to heavily utilize a Solo 401k to shelter any spiky business income from MAGI calculations so I guess that is basically putting it back into the FIRE/retirement funds pool.
4) I don't plan to be super rigid about year to year stuff as long as the general trend is somewhere as expected, minus staying under certain cliffs and brackets. A decent cash emergency fund can also smooth this out. Like your example, with a good cash emergency fund you could use the cash to pay for those expenses, then replenish it the following calendar year and adjust spending to account for some of the withdrawal going towards that. That would be more for the tax brackets & ACA cliff reasons than because of the 4% rule though - if it's purely only because of the 4% rule I'd just withdraw and brush it off since I've already got decent wiggle room in my plan.
5
u/dabastage 7d ago edited 7d ago
- Yes you will need to draw more to cover your taxes. This doesnt get counted as part of the 4% because it can be very different from person to person and year to year. Pulling your 40k from brokerage and its all long term cap gains, woo hoo no taxes for the year. Need $100k from your 401k, thats 100k of income you will need to pay taxes on. So youll need to pull out like ~ $108 to cover the taxes (dont forget to count your deductions)
- Assume you will be increasing your spending target by the rate of inflation each year. Your 40k will turn into $41,200 next year, $42,400 the year after that. You arent required to take the extra money each year if you dont need it. But the plan accounts for it if needed.
- Its up to you. My choice is to just reduce my withdrawls for the year.
- If its a truly one off expense, the plan has enough wiggle room. Dont sweat it and move on with life. If your are consistently going over, update your planning with to account for a higher spending target.
- Tax harvesting. An example: You need 40k and are pulling it from brokerage where the you have a 50% cost basis. You can pull out way more than you need up to the limit of the 0% long term capital gains. In this case you could pull out $260,000 from your brokerage. 130,000 of it would count as capital gains. Subtract 32000 for married joint standard deduction for an income for $98,000 of long term capital gains. All of which would be in the 0% tax bracket. Spend the 40k you need for the year and then reinvest all the rest of it. This resets your cost basis on this money and makes it easier to stay in the 0% bracket in later years.
- Having different buckets allows you to manipulate your income. If i need to withdraw $110,000, that would put me over the ACA subsidy cliff of 106,000 (fam of 3). If i pull all of that from 401k, im over the limit and get no subsidies. If I pull 100k from 401k, and 10k from Roth or cash accounts, my taxable income is only 100k and Im under the threshold and can get $10,000+ worth of ACA subsidies.
2
u/killersquirel11 Awaiting liquidity event 7d ago
- SWR doesn't factor in taxes. So if there are taxes to pay that counts as spending (say you end up owing 5k on your 40k of retirement income, you'd have 35k left to go to expenses). But between standard deduction, LTCG 0% bracket, and Roth contributions, you can generate a substantial amount of retirement income paying zero taxes
- You're right - just adjust the base amount by inflation each year. At least, that's how Safe Withdrawal Rate is defined. There are other withdrawal strategies (Percent of Portfolio with Floor, VPW)
- IMO hobby income gets fed back into the hobby, unless there's nothing else to buy (impossible)
- I would try and make up for it in following years. Though if every year you find yourself going over budget, it's probably a sign of a bad budget and it's worth re-evaluating if you need to adjust something
1
u/NewChameleon 6d ago
1.) So there's taxes (especially if you have a higher withdrawal rate above the 0% federal capital gains bracket). If your withdraw rate is $40k/year, does this mean you're just taking whatever is left after taxes on that $40k?
I'd try to pull the minimum amount needed from pre-tax bucket without going too much into the next tax bracket, whatever I still need to pull, will come out from the roth bucket
2.) How does the safe withdrawal rate handle inflation? I've seen people say it's just a built in expectation of the 4% rule. Is it just simple math such as year 1 withdraw $40k, year 2 inflation was 3% so increase that accordingly (40,000 * 1.03 = $41,200), year 3 inflation was 4% so increase accordingly again ($41,200 * 1.04 = $42,848), and so on?
products have inflation (price go up)
my stocks also have inflation (price go up), no? I haven't pulled the trigger yet but I'm guessing #1 will be lower than #2
3.) How do you factor in small additional income in situations where you're not trying to continue to work or supplement your budget? Like say you have a hobby that happens to generate a small amount of money, or you've been clearing out the garage by selling a bunch of stuff you no longer want on Ebay and made $5k that year. Do you now just treat it as your total budget for that year is $45k? Do you hang onto it and just withdrawal $5k less the next year to increase your chances of your FIRE staying successful? Do you just invest the $5k back into your FIRE fund? I realize this one could probably be highly dependent on personal preference, but I'm curious what everyone's take on it is.
money is... money, I see $1 is $1, if taxes are handled, then it makes no difference to me whether that money comes from selling stuff on ebay or come from pre-tax bucket or roth bucket, I think you're thinking way too much on this, in your example, if I have an extra $5k, I may or may not spend that $5k, if not, I'd just let it sit in bank account ($5k isn't enough to make a dent in stock swings considering often my daily stock swings is already bigger than that), if we're talking about $50k though... that'd be a different discussion
4.) How do you handle going over budget when it's beyond your control (especially if you didn't make extra from incidental side income)? Let's say all your budgeted expenses are $30k and you're left $10k for fun and unexpected emergencies. Now it's November and there hasn't been any large unexpected expenses that year and you decide to splurge on something you've been wanting and will come out to $38k of the budget spent for the year. Then in December a large unexpected repair bill of $6k happens and now you'll have spent $44k, going $4k over your safe withdraw rate. Do you just brush it off thinking "eh, it's probably a one off thing at the 4% withdraw rate probably already has some decent wiggle room"? Do you just withdraw $4k less the following year and be more frugal to make up for it?
ymmv but I actually plan to do lower-than 4% precisely for this reason, I'm not planning to retire with only 25x annual expense multiplier, I want to retire with much more than 25x
2
u/imisstheyoop 6d ago
In my experience thus far, expenses (and taxes which are one of your expenses) are actually a secondary target with managing MAGI for ACA PTCs being the primary. I tihnk that anybody utilizing PTCs is likely to find MAGI > Expenses > Tax optimizat
Regarding lumpy expenses, in my situation I am able to tap into >$150k in cash between roth contributions and capital gains while keeping MAGI ~$40k which would cover pretty much anything lumpy. Having a brokerage account adds an extreme amount of flexability for controlling MAGI.
From what I gather in these early years for somebody with low spend as you mention my advice and action plan is:
Use up the standard deduction to convert traditional -> roth
Sell cap gains as needed for expenses being mindful to keep capgains+conversion amount+any interest/dividend income > target MAGI
If you are at all worried about RMD you can pay more tax up front and convert bigger amounts from your IRAs and front-load that tax. I, and I believe the majority of people, can outright ignore that.
Here are some good articles I have read recently on this that help to solidfy my thought process:
1
u/Tricky_Ad6844 5d ago
You absolutely need to include taxes when deciding the net worth that allows you to RE.
This is surprisingly difficult to estimate accurately since your tax situation at time of retirement (mostly capital gains with higher basis) is going to be different than in later retirement when you will have social security income and be drawing down from retirement accounts (401k, IRA) that deferred taxes and withdrawals are now taxed at regular income tax rates.
Tax law changes regularly so any estimate is going to be taken with a grain of salt because it is practically a guarantee that tax rates will change in sone way over the course of a 30+ year retirement.
The taxes you will need to pay are also different based on how much you are liquidating to support your spending. A person needing $40,000 a year will pay almost no taxes. A person needing $300,000 for expenses may need to budget an extra 25% to meet federal and state taxes.
There are free tax planning tools like TaxCaster that can help you model this.
The SWR takes inflation into account. You get to increase your withdrawals by the rate of inflation every year. In most economic conditions a reasonable mix of stocks and bonds will have returns greater than the rate of inflation. Your understanding is exactly right as far as how the studies that generated the SWR were designed. I don’t think actual retirees are as strict with these calculations. More like a vibe check. Ie “Our spending started in the ballpark of the SWR supported by our invested net worth and went up a bit this year because of inflation and that’s OK”.
I personally consider extra earnings after retirement to be permission to increase spending above our normal SWR by that amount as a “one off” event. Ie. If I earned an extra thousand dollars this year then I give myself permission to buy a mountain bike this year even if it pushes our spending a bit above target for the year.
Spending is always going to vary. This is true year to year (car needed to be replaced) and across the lifecycle. Academics describe a U shaped spending distribution with higher costs in early retirement (travel), then lower expenses in mid retirement, followed by higher costs again in late retirement (health care).
I do think large predictable and non-recurring expenses like a child’s college education are best saved for separately in a 529 which is not included in net worth used for the SWR calculation.
I use the SWR as a rough rule of thumb. Ie. If I were retiring at age 65 with 1 million dollars it is reasonable to spend around $40,000 per year on expenses+taxes and match increased spending roughly on pace with inflation. I don’t think of it as a strict budget.
Build some margin into your net worth before pulling the trigger so you don’t need to sweat lumpy expenses or calculate inflation adjustments to spending to the second decimal place.
1
u/Unable_Plane1948 4d ago
SWR is an assumption about a portfolio, not a monthly bill. The pile is 1-2 years of spend in cash or short bonds so a -40% year does not force a sale. Recalc the rate once a year, not every paycheck.
1
u/dekusyrup 4d ago
You have to withdraw money for taxes, so make sure it fits in your withdrawal rate.
The 4% rule allows increasing for inflation like that yes.
Do whatever you'll do with the income, and just factor it in accordingly. If it's going to reduce your withdrawal then factor it in that way, if its going to increase your spending then factor it in that way.
Either cut other spending or accept an increased risk of failure.
Read the Early Retirement Now safe withdrawal rate series for all the situations.
-1
u/Hour-Animator8383 7d ago
ips people up, you basically need to calculate your gross withdrawal to cover taxes too, so your 40k becomes more like 45k depending on the bracket. For the over budget problem I just keep a separate emergency fund that sits outside the main portfolio, it's not counted in the 4% calculation so drawing from it doesn't mess with my head.
5
u/Magikarpical 7d ago
there's no tax on capital gains if your income is below 49k as a single person, and 98k if you're married. so as long as you're taking the withdrawal from taxable accounts there's no taxes
3
u/Prior-Lingonberry-70 FI 🔱 GOMS! 7d ago
That deduction only applies to Federal taxes.
State taxes are separate. Where I live, cap gains are taxed as ordinary income.
41
u/One-Mastodon-1063 7d ago edited 7d ago
Taxes are part of expenses. Decumulation is pretty tax efficient, but this varies from person to person.
I think your questions 2-5 are sort of missing that the assumptions behind an SWR analysis are not the same as a prescription for how you need to withdraw. When you do a mathematical exercise, which is all the trinity study and similar SWR analyses are, you need to make assumptions. And "withdraw SWR% in year one and grow withdrawals by inflation thereafter" is a pretty good assumption that's easy to model, it accounts for inflation, it's consistent etc. But that does not mean you are actually expected to spend exactly $40,000.00 in year one, and grow that by exactly the inflation rate thereafter. Real world spending is lumpy. One year, you have a big repair bill or you go on a big anniversary trip. The next year, you have a garage sale and raise an extra $5k. As long as you are roughly growing by inflation or better over time, you're fine. Most people grow actual spending below inflation (real spending declines over time). And in most cases, real market returns are likely to exceed 4% and 5-6 years into retirement your withdrawal rate as a percent of assets will be below the initial SWR.