The Best Early Retirement Withdrawal Strategy (6 Proven Frameworks)

21:59Mindy Jensen:I think this is really good, Scott. I think that this is a lot more complicated than even we have alluded to in the past because there's so many moving pieces. And when this turns a little bit, then this one turns too, and then this one turns and you're like, oh, wait, I didn't mean to turn this one so much. So understanding what is going to affect all of the different things that you want or don't want them to affect is going to be key to having as optimal as possible, which is not possible, but as optimal as possible, a withdrawal strategy. My goal in retirement is to reduce the taxes that I'm paying.

22:38Mindy Jensen:When? When? That's the question, right? Like, I want to reduce taxes too. Do I want to reduce them now? Or do I want to reduce them in the future? And that may be a big decision. And that's where we come back to a worldview, because here's what a linear thing would look like in a nice, smooth continuum. The real world is going to have a Monte Carlo, right? Where things are going to go up in some years and down in other years. And the tax code is going to change. Maybe it gets even lower. Maybe it goes up. Maybe it goes way up. And so we all want to pay lower taxes. How do we do it? I don't know.

23:05Mindy Jensen:Oh, don't look at me. I don't have the answers. I am still searching for them. But I think that's really important, Scott, is to your worldview. I do want to pay all of my fair share. I am not a taxationist theft person. I think that taxation funds the roads and the schools and the police department and the fire department and all the things that you need in a society. but also the government sometimes tends to waste my tax money. So I want to keep as much of it as I can. That has always been my goal, which has caused me to be a little short-sighted. So now I am looking with my worldview and seeing all the things.

23:41Mindy Jensen:Here's maybe some breaking news, Scott. I am going to die. I hope it's not for a really, really long time, but eventually I will cease to live. And I want to leave my children the money that I have. and I want to do it in a very optimal way tax wise. So now all of my money, I love your middle point here. Don't overfund your pre-tax. Thanks a lot. I could have used that information about 25 years ago. Scott, where were you? Fifth grade? Yeah, well, and look, I get that that's controversial. I don't think it's that big of an issue. I don't think it's that controversial. I think it's gonna be a real problem for many of the bigger pockets money listeners in particular.

24:19I think, again, if you're in the lean FI or traditional FI camp, and have very modest spending or wealth targets to achieve financial independence, that's great. You may not have this problem. I think that there's a fair argument that this is not something to worry about nearly as much. But if you're in that chubbier fatfire range and you have a huge balance in your 401k, you have this problem. And now that's going to be, for me, I think one of the top tax planning items for the next few decades is how do I get that money out? And when do I pay the taxes? And how do I manage that effectively? So that's going to be the problem here.

24:49And that brings us to the last framework here, which is have a worldview. I shared this earlier. I think my worldview is that for me, I will be in a high tax bracket for most of my adult life. And there's a good chance, I believe, that tax brackets go up for folks like me that are high earners and have wealth that is compounding and that that will be taxed. And so if all else is equal, then I'm willing to pay a little bit more tax right now to reset my basis, to convert, you know, pre-tax positions to Roth, those kinds of things. And I understand the gamble I'm taking with that. And that may not work out.

25:20It's an unknowable. It's a political bet. Right. But it's a worldview I have that then informs the rest of the strategy. You need to write that down, I think, about what you believe. Right. Maybe you believe listening to this. Maybe somebody else believes that, hey, I'm going to I'm going to have a one point five million dollar position and I'm going to draw it down. And I'm not going to ever really get into these higher income tax brackets. And I don't think that they're ever going to go up for me, for people like me, you know, materially. So I'm going to keep my taxes low now. And I think that they'll be low for the rest of my life.

25:46That's a very coherent and valid worldview. Just make sure that you understand that that's what you're betting on here, because I think of a lot of advice in this space fixates on that lower kind of modest phi number and presumes that if you have larger balances, that's a good problem. Who cares? I care. I think that's a big deal for some people. And I think you got to understand that. The second worldview you got to have, I think, is around kids. How much do you want to leave and win? Mindy, probably a good idea for you to get an estate plan if you're trying to leave money to your kids.

26:10Mindy Jensen:If you listen to the show, you know that I recently did finally get an estate plan. Oh, good. OK. Now that my oldest is an actual legal adult. Well, great. So, yeah, so you got to have that. And then you got to say, OK, how do I want to leave it? And any money you leave in the 401k needs to be distributed and there's going to be ordinary income. And that may be left to your kids in their high income years, which is very tax inefficient. That's one of the reasons why we want to get that money out of the 401k if we can in lower income tax brackets here. I think the third world view we got to have is this concept of drawdown nerve.

26:42So I got another framework here. What do I want from a drawdown perspective here? And I'm still building this. I'm not yet confident enough to fully publish my Monte Carlo simulation here. But what I found is when I think about running a portfolio and assessing risk, I want to zoom in on those tails, like the worst case scenarios here. And so if I have a$2.5 million portfolio, I want to look at the absolute worst tail out of several thousand simulation history. I want to look at the bottom second percentile, the bottom fifth, the bottom tenth. I don't care about the best one. I know that there's potential I win huge in my portfolio and it goes up, but I want to look at that.

27:17And what a golden ratio or risk parity portfolio, for example, does that's designed to be decumulated at a high rate is it pushes out. It makes these worst case tails. it pushes them out and it really does a good job of protecting you over a 30 or 40 year retirement it's very you know you have very few failures in there but over a 60 year retirement for example if you go to a stock portfolio you get way way way way better outcomes over that period of time in almost all situations that that explodes your wealth you know if you're using if you're using historical or you know average return data here compared to that golden ratio so it's not really a decumulation portfolio.

27:56But if you do that and you adjust your spending down, all of a sudden, you have enormous outcomes and you have to start zooming in further and further on the tail to even begin to comprehend what's going on in these worst situations. So I think that there's a real, like a worldview for the FIRE community of, are you actually going to be comfortable drawing down your portfolio at age 40 through to age 65 and ending with less wealth than you started with, Right. The 4 % rule, in many cases, you end up with more wealth. But in many cases, you don't. You just don't run out of money. And that's success with the 4 % rule.

28:31And I think that's going to be very mentally challenging for a lot of people in the community. And a portfolio that's a little more conservative, that pushes you, you know, with your withdrawal a little bit less, can not only, you know, never run out of money, but also begins to compound your wealth over time and increase your options throughout your FIRE journey. And I think that that's going to be heresy in the FIRA community, but also something that a lot of people are going to be drawn to if they're honest with themselves around it. And so I think that's something to consider about yourself.

28:59What is your worldview on tax rates, your kids, and whether you really want to actually draw down your portfolio or if you want to go that extra hair conservatively so your portfolio compounds forever and your spending can increase across your FIRA journey there. And I think that plenty of people that are kind of in this cusp of fire are fine working an extra couple of years or doing a little bit of side business or whatever to get that option. That's a very powerful component here. And you got to be honest with yourself about that. You know how the change in seasons hits and suddenly you just want to declutter the garage, clean out the closets, and get everything all organized?

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31:19Mindy Jensen:Scott, last week in our newsletter, I sent out a couple of articles. One of them was called What Would It Take to Make You Feel Secure? And this was one of the most clicked on articles last week in the newsletter, basically I'm asking people, why is it that you don't feel secure? I have conversations with people coming through Longmont. I see them at Camp Fi and Economy and all these different Fi events. And I get a lot of the same conversation. I think I'm Fi, but I'm probably just going to work one more year. And you look at their numbers and you're like, you could have a 1 % withdrawal rate and you would still be okay.

31:57Mindy Jensen:1 % is more than you need, and you're still not ready to retire, I want people to start thinking about what is it that is holding you back from your retirement? Because I think there's going to be a lot of people who are in the FI community who never retire because there's nothing that's gonna make them feel secure. That's not a money problem. That's not a math problem. That's a psychological problem. I'm gonna send you to The Psychology of Money by Morgan Housel. That's an amazing book. I'm going to send you to my article at biggerpocketsmoney.com slash security. What would it take to make you feel secure?

32:33Mindy Jensen:I want to know why people don't feel secure to leave because I have a lot of friends who are retired and it's all working great for them. Yes, we've had a really great run in the stock market, but most of my friends who have retired have backup plans and backup plans and lots of ways to fund their lifestyle should something change. I also think that the community is too hard on people who are working one more year in many ways. Like this is like a bad thing. Some people like their job and want to pad it and understand that, hey, I can work another year. I can be in all stocks for the rest of my life and pound forever and still support my lifestyle for that.

33:11And I'm fine with that. That's not like I'm not like sacrificing my retirement to get there. I actually don't mind doing that. That sounds great. And I'm happy with where I'm at in my life. Like that's fine. that's different than I'm scared to retire when the numbers say I should, or I hate the situation. I'm grinding it out to amass millions I'll never spend. Those are different. And I think like, it's too simplistic to say that's unhealthy to work that extra year. I don't, I don't think it is. I think it's, I think that that's a, that's a preference. And many people seem to really be happy with that preference.

33:40I think these things are starting to get challenged. So anyways, have a worldview and then note that we've got the six frameworks, right? We've got the withdrawal sequence. We've got the MAGI cliff, the healthcare subsidies. We've got using the 0 % long-term capital gains tax bracket and the standard deduction. We've got our portfolio that we want to target. We've got our asset location as the fifth framework, and we've got our sixth framework of our worldview. And they weight one another, right? There's like, which one's most important? I don't know. It depends on your situation. If you're right on the cusp of that cliff, maybe MAGI becomes the most important consideration and begins to trump the other items in your stack here.

34:15Maybe if you have a huge 401k balance and you're going to be over the magic cliff anyways, it's getting that balance out of the 401k and into your raw. It's just going to be so context dependent. And that's why it's going to be so challenging. So I thought I'd illustrate this with three case studies here with three fictional people who I call Barb, Kevin, and Eileen. Barb has got her pre-tax bomb that's going to become an RMD problem. It's going to become an RMD problem. She really does have an RMD problem here in this situation. As if, you know, 45-year-old early retiree with$2.5 million, mostly in her 401k.

34:51Kevin, you know, got a$2 million net worth and has half real estate and then half stocks and bonds in his portfolio. And he's going to handle things differently than Barb, as I'll get into. And then I've got Eileen. Eileen is actually inspired by a local political candidate, Eileen Lawbacher, who's the challenger to Lauren Bobbert, who actually represents our district right now. So Eileen is a retired military, and she's got a$1.5 million traditional stock bond portfolio spread across pre-tax, post-tax, and Roth, or their equivalents from the military. She's got a$50 ,000 pension, and she's got a$20 ,000 to$60 ,000 side hustle going on.

35:26And that variable income and that ordinary income from the pension, they also impact how we're going to think about dehumulation, right, and how these frameworks intersect. So sound good, Minnie? Should we go through these frameworks here?

35:36Mindy Jensen:Yeah, Scott. Let's start with Barb. This one is near and dear my heart because I have a pre-tax balance that is going to become an RMD problem. So Barb's got, you know, let's call it$2 million over$2.5 million is in the 401k. We've actually talked to several people that have very similar setups here on the BiggerPocketsMoney podcast in the past. So I've had a couple of thoughts here. So first is let's assume in this first year, Barb is about to be on the cusp of financial independence. She's working. It's July right now. She's already at health insurance for the first six months of this year. maybe for 2026, you know, we've got 50 to$100 ,000 in income so far.

36:13Maybe this year we decide, you know, we're going to go over the Magi cliff and we're going to do a big Roth conversion up to that 20 % or federal tax bracket, rather 22 % federal tax bracket. And I'm going to do that in the year when I'm not going to have the Magi cliff anyways, or I'm very likely to go over that anyways. Maybe that's a consideration that Barb brings to her CFP or tax planner because she can make a big dent in that balance in the first year and then spend the rest of the years catching up to some degree with conversions downstream. Maybe in the second year, if the balance is really big, she does it again.

36:45And we forego those subsidies and go big on that rollover because those healthcare subsidies will be more and more impactful with each year as she ages, as the premiums increase. And then from there, we optimize for the MAGI subsidies going forward, and we've got a more balanced position, right? So you can see that that's one way to apply this framework. Maybe that's not appropriate for Barb in this situation. Maybe there are drawbacks. But those are the types of questions that I'd be thinking about in the Barb situation in particular with that pretty hefty pre-tax balance, because that is my number one goal is to get that money out of there.

37:17And I'm willing to maybe relax on the optimization across some of the other frameworks in order to get it out. Okay, let's look at Kevin's situation. All right. So Kevin's got a completely different situation, right? Kevin's got 2 million bucks, and that's half in real estate, half in stocks and bonds. Now, the depreciation on his rental portfolio is offsetting the cash flow that his portfolio is generating. So Kevin could conceivably have very little, if any, taxable income from his rental property portfolio in the first few years. And so Kevin has a good chance of avoiding this MAGI problem because his taxable income will be so low.

37:52That may give him a lot of Affordable Care Act room, and he may be able to go a little bit more aggressively in filling up those tax brackets. So Kevin, as a real estate investor, there's certainly drawbacks to real estate on the journey where he may not have gotten the cash flow he wanted or whatever. But at this point, at the end, there could be some really big advantages because that wealth is actually translating to spendable liquidity for him in a way that it might not be for Barb. And so he can maybe optimize a little bit more for taking advantage of that long-term capital gains 0 % tax bracket and his full standard deduction here with Roth conversions, for example.

38:23So that might be a game that Kevin is looking at in his first few years of early retirement in contrast to Barb. OK. And what about Eileen? So Eileen, I think, is interesting because Eileen is going to have variable income. I framed it as, hey, one year she might make 20K from her side hustle and another year she might make$60 ,000 if she gets elected and defeats Bobber. Right. So now we've got a difference in how we're going to think about our tax optimization here. So the first thing I'd be thinking about for Mylene is because she has self-employment income from her side hustle, there's a circularity tier, but she should be maxing out her HSA because that offsets MAGI, and she should be tracking all of her health insurance premiums because she can deduct those against self-employment income.

39:05That's circular, so she wants to stay far away from the Magi cliff if she can in most years. But that's a really important benefit for her, and that HSA is going to be directly offsetting her Magi in her situation because she's self-employed. By the way, a big vote in favor of some kind of self-employment some years in early retirement. There's a whole bunch of reasons for why that's powerful, and also it's poo-pooed by a lot of people, a certain portion of the fire community. But in Eileen's case, it's very powerful. Now, in a strong year, let's say she has a big year and makes like$100 ,000 from her side hustle.

39:34It goes really well. And she's going over the Magi cliff. Well, OK, she's not going to get subsidies this year. But maybe this is the year where we, again, because we've missed that Magi cliff, maybe this is the year where we do a fairly large Roth conversion of some kind and begin moving that money out of the 401k into her Roth. So you can see why, you know, in each of these situations, we get to a different conclusion about how we want to optimize our positions here. Right. We want to think about the intersection of these six frameworks and make a choice that's right for us in each given year, knowing that their optimal approach is going to be dependent on a large number of unknowable factors.

40:11So this is kind of why it gets so complicated here.

40:14Mindy Jensen:It is complicated, but it's a lot less complicated once you start seeing how everything interconnects. Because this is complex, I think that one of the ways to get you started on this journey is you just take this deck. We've been presenting a deck here for those who are listening on the podcast. There's not really that many visuals that you missed, so you can watch this on YouTube. It's always great, but this is fine if you listen to it on the audio. But take this deck at biggerpocketsmoney.com slash withdraw, download it, and upload it to an AI. and then think about talking about some of the high level number.

40:44You don't want to give them accounts or anything like none of your personal data, but you can begin playing around with these frameworks with the AI grounded in this structure, these six trade-offs, right? If you don't ground it in the structure, it may give you something very generic that's very dangerous. Then you can take that and you can learn a little bit and understand these trade-offs and have an opinion when you go to your tax preparer or your financial planner to begin thinking about these things. So that's the approach. I hope that that's helpful. I think this is going to iterate a lot in the coming years.

41:13And you can see why if you talk to the tax guy, you're going to get a tax opinion. If you talk to the portfolio guy, you're going to get a portfolio opinion. If you talk to the estate guy, you're going to get an estate plan opinion here. And you've really got to address all the frameworks and ideally not bias any of them going into the conversation, except for what you think is most important in your situation. Again, this is not like a potion you can brew by following a recipe. you've got to understand the interlocking frameworks, like the conceptual goals that we have here and the trade-offs.

41:43There's no right answer if you wanna do this the right way for you.

41:47Mindy Jensen:Yeah, Scott, I really appreciate you writing this all down and taking the time to create these slides. I think this is really, really helpful. What's that URL again to find these slides? Biggerpocketsmoney.com slash withdraw. Okay, that is great. There's also on Bigger Pockets Money, we have a ton of resources for you. Scott has been busily coding and working with our tech team to create a whole bunch of things. You can keep up to date with these if you subscribe to our newsletter, which you can do on our website, biggerpocketsmoney.com. We also have calculators, like I said, templates for you to really help you on your path to financial independence.

42:25Mindy Jensen:And hey, Scott, what's the latest thing that you guys created? It's a forum, a place where you can come and ask questions of Scott and I, chat with your other fellow BiggerPocketsMoney listeners on our forum. You do have to create an account, but you can find that all at BiggerPocketsMoney.com. Yeah. And the goal for this forum, by the way, is to allow people to ask questions anonymously, but for all replies to be from real people with their real names. I think that that will foster a healthy discussion where we can talk about numbers transparently, but also, you know, get real people responding to them versus anonymous handles that you don't know who they are.

43:04So I think that hopefully that's helpful. We'll see if that experiment goes anywhere, but I'm excited about that. The biggerpocketsmoney.com forums.

43:11Mindy Jensen:Yeah, I am super excited. And so we hope to see you there. All right, Scott, should we get out of here? Let's do it. That wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench. I am Mindy Jensen saying see you soon, Loon. I'm skeptical of a lot of financial products, but life insurance isn't one of them, at least not term life. For the vast majority of you listening, term life is simply the right answer. And the smartest way to buy it isn't one big policy, it's a ladder. Your need for coverage isn't flat. It declines over time. You've got a 30-year mortgage, a couple of young kids, maybe a spouse mid-career.

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44:26Mindy Jensen:understands financial independence isn't easy. That's why Scott and I created the FI Friendly Professionals List. This is a curated network of CXPs and tax professionals who understand the FIER mindset, early retirement, and wealth building. We're adding more vetted experts all the time. Find someone who speaks your FI language at biggerpocketsmoney.com slash FI Pro. That's biggerpocketsmoney.com slash F-I-P-R-O.