The Proven Path to Financial Independence by 44

24:13That makes me being a fiduciary, but I can charge a fee for, you know, for financial advice. OK, so you saw one whole life insurance product per year, and that bridges the entire gap between the 140 or 150 ,000 supported by the 4 % rule and the 180 ,000 in target spending. Is that correct? Absolutely not, man. Between my business, my wife's business that she started, and also I started doing some trading online through, you know, doing some swing trading and selling options. We only brought in about 30 grand a year. So that's about 20, you know, 20 percent of our overall spend, which I mean, at the end of the day, you know, that's not a lot, but it's not a little either.

24:53You know, the money I brought in for my business, man, that funded my Starbucks, you know, crave and everything. Love it. You're spending 5.2 % instead of 4%. And if you look at Bill Bengen's original research and his updated research, I mean, his updated research says what's got 4.7%. So you're not that far off, but that's the safe withdrawal rate based on historical, including like the time that it really didn't work was the late 60s into the 70s when we had that incredibly high inflation. All the other times you could have been taking out six, seven percent and still had enough money to get you to 30 years of retirement, which is what his original study was.

25:37So I don't have a huge problem with your plan because you're thinking about it. When I start to have a big problem is when people are like, yeah, you know, I just wanted to spend more. So I did. You've thought about it. You've got reasons behind it. Your wife wants to spend more. You have the money to spend more. You're generating extra income. So the money that you are generating this, you know, 30 ish thousand dollars a year on top of your 4 percent of one hundred and forty thousand is pretty close to what you're actually spending. Are you enjoying your life? We're really enjoying it because when we came up with that spending range, Mindy and Scott, what we didn't want to do was be held every year like, man, OK, if we're going to spend one hundred grand or one hundred and ten grand, that's all we're going to do.

26:20That's all we're going. No, it's like, hey, if we spend 140 this year, it's still within the range. If we spend 170, it's still within the range. If we spend 130, it's in the range. We didn't want to have to constantly worry about it because it's like, hey, we're still good and not coming back and like, oh, maybe we can cut back or so. Because again, my wife said she wanted to enjoy it. I want to enjoy it. I want her to have comfort because when she's comfortable, life gets a lot better in my household. I think all of us can attest to that. I have a couple of more detailed questions here. So let's use this last year, 2025 as an example, right?

26:55What did your portfolio look like in terms of stock bond ratio or asset, you know, the types of things you're investing in? You said you're, are you still in active funds right now? What does that look like? Since I found about index investing, I've been slowly moving my mutual funds over to index funds. I still got some that's mainly like in our 401k and in our traditional account as well, but usually low cost ETFs. And also I would call them mid cost mutual funds where the, you know, I guess you can say the basis points that we're paying is probably about, you know, 25 basis points or so. I guess to answer your question from an asset allocation across all our portfolios, and I mean, all our four different buckets of 529s, tax deferred, taxable and tax free.

27:43Our asset allocation is a 75 % equity and 25 % fixed income. Where do you put the fixed income? Is there a specific asset location, like the tax deferred account that you typically hold those? Most of our fixed income is in our taxable brokerage account and also our 529s because our kids are now, at least with my son, he's in college currently. And so we're drawing down his 529 plan. So we got that mostly in conservative investments. As well as my daughter, who's a junior, she's going to be starting school to within the next year and a half. So I want to make sure that her money is available and safe as well.

28:19But between our tax deferred and our Roth IRAs, we're talking about 85 to 95 % equity and very little fixed income in those. You mentioned this casually, but walk us through how do you think about tax optimization in the context of your current situation? How are you realizing income? And you said you were doing Roth conversions, I believe. How does that work? And what tax bracket are you optimizing for, generally speaking, in that world? One thing when it comes to the accumulation, the first thing you got to ask yourself, one, how much do you want to spend? And a second, how can you take out the money at the lowest cost as possible?

28:56And that's where you got to have a good tax strategy. So for us, our plan was, if we're going to speak for like at least 2025, as an example, we wanted to be in the 12 % tax bracket. And the reason why we want to be in 12%, that's, I would say, a very low cost bracket that gives us a lot of flexibility to allow our taxable brokerage account money to go farther as well. Because the next bracket up is 22%, so that's a 10 % jump. So we want to stay in the 12%. We also utilize the standard deduction and using the standard deduction to do Roth conversions as well, because I don't want to let that standard deduction to go to waste.

29:37I think that's a great thing that the government has given us, especially this enhanced standard deduction to say, hey, you know, like for 2025, you're able to put thirty one thousand five hundred. And if you realize that that's more than four times than what you can contribute just to a Roth if you're under the age of 50, because, you know, the Roth contribution amount is 7 ,000. Well, man, you're able to put, we're able to put in four times as much, you know, doing that through Roth conversions. That is a wild way to think about it. I've never actually internalized what you just said there in terms of the power of Roth conversions in contributing to that, but that, that, you know, especially that 0 % tax bracket, but that's an awesome way to frame it.

30:16Yeah. I love it. I think that makes a lot of sense. And I think that, you know, I wouldn't almost argue that it seems to me at this point, not, not, you know, still, still kind of amateur and really understanding optimization for decumulation. But it seems like best practice for me would be optimizing up to that 12 % tax bracket on moth conversions. That would be my heavy bias going into a decumulation phase. And at the same time, we balance out the amount we convert with also getting some Affordable Care Act subsidies as well. Yep. That was the next piece I was going to ask about. Yep. What I always put into my tax strategy each year is what's the maximum income limit that we have to maintain in order to keep our subsidies.

30:57So for example, we're a family of four. And so the poverty level for a family of four, you know, for last year was$31 ,400. So you multiply that by four. If I do my public math right, that's$124 ,000. And the other thing that we're doing is also fully utilize all qualified tax credits that we have. So we have two kids, so we get child tax credits right now. And eventually those two will move into just dependent credits. However, now when they get into college, they also qualify for the AOC, which is the American Opportunity Credit. And that credit is basically$2 ,500 per year per child. And you can do it over their four years of college.

31:41That was our strategy last year was, again, pulling money out of our brokerage. We got money coming in from our business and we also doing Roth conversions. just to stay within that 12 % tax bracket and still get subsidies as well. That's been our decumulation process. However, it's going to change down the road. Yeah. What's going to change too? You mind if I share something on my screen? Please do. So this is kind of what I call our retirement plan on a page. So originally when we first, you know, these, what we call our four buckets. So for your audience to understand what I have showing is just an illustration of four buckets and they're labeled are tax-free, tax-deferred, college funds, and taxable.

32:25What we do is we have a timeline showing from the time that I retired, and there's different phases on this timeline for the different ages of how the money is being withdrawn from each of these buckets. So again, in our taxable brokerage account, when I first retired, we had at least 12 to 15 years of runway, which was great. That's good. You know, so we felt, hey, we really felt comfortable. So we was pulling some of that down to live off of. And we're also in the phase of withdrawing money from our college funds from the 529s to fund at least my son, who's a freshman in college right now. And this is going to be a period for between the ages of 48 and 54.

33:05I'm at age 48 right now. Now, where things are going to change is this. So originally, my plan was just to withdraw all our money from our taxable account and then still continue to do Roth conversions that we're doing every year to take advantage of standard deduction and then pull out on our tax deferred and tax free buckets at age 59 and a half. However, at age 50, a couple of years, my wife and I just realize both our children will be in college for most of the year at that time. So we decided, let's scale back on our businesses then. Let's go do more traveling. And since we're going to do more traveling and we have less income from our business, we now have more income room available within our tax bracket.

33:51And at the same time, I said, hey, this tax deferred bucket is just growing astronomically. It's that right now our current portfolio value, you know, we're sitting in January of 2026, all of this is at 4.5 million. And what's in this bucket is 60 % of that. Nice. So you have been withdrawing from your accounts and you're still up a million dollars over when you retired. A million dollars more. And so what we're going to do is we're going to put in a 72T two years from now and just let it just start trickling out. Just, you know, a little bit of cash. And when I say, you know, and for basically if say if we reduce in our business income about 20 grand, let's just start 20 grand of a 72DT every year.

34:37We may need that money. We may not need that money, but let's just start trickling it out and to fill up our bracket some more, fill up our tax bracket because we, you know, we don't want to leave any money, you know, wasted within that 12%. And at the same time, we know now the taxes that we have in place are at the lowest they're going to be. There's something to change down the road. I don't know when I don't have a crystal ball, but hey, let's get a little sum of it out right now at age 50 versus wait until 59 and a half. I love that. And I love that you are thinking about this. I have a question about your Roth conversions.

35:12Do you wait till closer to the end of the year just to see where all of your income shakes out before you do your Roth conversions? Or are you doing those throughout the course of the year? No, ma 'am. I do them at the beginning of the year because if we have a great year, I'd rather that money that's been converted grow in a tax-free space than in a tax-deferred space. Ah, okay. Every month, I check my taxes on how we're doing each month, kind of first give a little estimate. And over each month, I get it more refined and refined as I know what other income sources that we have coming in from dividends, interest, self-employment, income as well.

35:49And then I'm able to shift around, maybe take some losses on some equity, that are depressed to maybe offset some income to help me stay within the tax bracket. It makes perfect sense why you're setting up a 72T the way you explained it. But if I were to be a devil's advocate and say, hey, one of the biggest risks I see for someone in your situation is the tax brackets going up over the next couple of years. And in your case, I would imagine you are a potential candidate for one of those RMD tax bombs down the road. If that's the case, would you consider changing your withdrawal strategy to be much more, to be bumping up to that 22 % tax bracket or doing much larger Roth conversions at the end of the year to preempt that problem?

36:37Does that worry you at all? Or do you think about that at all in your situation because of your large tax deferred balance here that's grown so much? Not at all. I mean, one, if we convert to the 22%, that actually is going to push us out of being eligible for subsidies as well. So I don't want to do that. And our plan would be when I turn 65, when I'm on Medicare, then we'll bump up to the 22%. And the other side is with RMDs, Scott and Mindy, I've ran the numbers. I've looked at it and I know people make it such a fearful thing. Like, man, you know, you're going to have, you know, going to be so much, got to get it out, got to get it out.

37:15Well, here's where I look at success. If I get to age 75 and I still have maybe two to three million dollars in my tax deferred bucket, the RMD at 75 is like little over four percent. It's like maybe four point zero six percent. That's the life expectancy that you got to pull out. So let's just call it three, two and a half million dollars. So two and a half million dollars. So what I have to pull out is a little over one hundred thousand dollars at that point. I'm actually going to be using that money. I would expect my expenses or so would be high or so. Now, I've done some modeling of my RMDs.

37:48The financial software said, hey, you're based on this plan. That's even modified strategy I'm doing. Your RMD is going to be eight hundred thousand dollars. Guess what? That's based on, hey, getting the same rate of return every year for, you know, getting like at least over nine percent rate of return. You know, and I know in reality, your rate returns can go up. We can have 10 percent. I can have minus 20 or so, but let's just say it's half right. Instead of being 800 ,000 RMD at age 75, I may be 400 ,000. You know what? It's just going to be Christmas that year for my family and everybody else.

38:23Just dishing on out. Your line of thinking here, I think, opened up another question for me. You know, frankly, my question's premise was wrong entirely, not just because of the great rationale you just shared, but because of the ACA. That is actually much more dominant of a concern at this point here because going over that cliff is a huge game changer. I mean, it's going to cost, it's going to be probably a matter of $20 ,000 or so in terms of healthcare costs for you, given the expired enhanced premium tax credits. So the game for 2026 has got to be to stay under that federal poverty line cliff, a 400 % of the federal poverty line, which I think is 83 ,720 bucks.

39:04Does that change your withdrawal strategy in terms of the timing of your Roth conversions? Are you going to do those at the end of the year to be sure that you can get there, even though your bias typically is to do those conversions at the beginning of the year and to have them grow tax deferred or tax free? Not at all, Scott. I'm still going to continue to do it for 2026. And because here's our limit right now for a family of four for ACA income for I guess what's your magi it's a hundred and twenty eight thousand six hundred and I'm just converting up to the standard deduction of thirty two thousand so I have probably you know what so what's that probably what ninety six thousand dollars or something of income or so that I have to you know use or that's my limit that I can use I got all these different buckets right here of cocktails of mixing different incomes that I can have to whip it up for that income.

40:03I suppose if in the unlikely event that you had extra income or an opportunity to generate extra income, you could just contribute it to your tax deferred account as well. Right. So, I mean, there's there's not as well to keep that low. Right. And the other thing I have is within our taxable brokerage account, I know we didn't go there, but when I first started our early retirement, I had five years. I used lift off strictly cash my first two years because of the down market of 2022 and all. And since then, we still got almost three years of cash still sitting in there. You know, it's still getting good interest rates of four percent or more, but I can just use that without selling any equities or so to keep that income low.

40:44The real thing, though, Scott, Mandy, to bring upon ACA subsidies is this is kind of like the next step in our plan that we're going to change. So at age 55, that is the year that hopefully my kids, they should be both out of college, successful and off our payroll. So now we drop down to a household of two. Then all of a sudden our ACA income limit is compressed significantly. I think right now, if you know, if we were just a family of two, our income limit would be$84 ,000 versus$128 ,000. So that's a$44 ,000 difference of income that I have to stay low. So what I'm going to do is, hey, at age 55, I've already had 10 plus years of Roth conversions that I've been doing.

41:33And, you know, a ladder already started. Let me just now put a little spigot on this bucket and start just trickling out just a little bit to help me. All right, we're going to take a short early retirement and come right back to work after this.

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43:29Thanks for sticking with us. I have our most important question here before we get out of here. What do you do with your day? Today's Thursday. If you weren't recording this podcast with us, what did your day look like from wake up till bedtime? Man, let me tell you. I wake up, I'll go have coffee and watch the news with my wife until nine o 'clock. And then we would go into our respective gyms. I'll go hit the weights, play some basketball, come home, have lunch with her, watch the market, look at some things, fresh articles. And then wait for my daughter to come home from high school and find out how her day go.

44:05Living the dream. Man, I am. I mean, I will tell you right now, this early retirement thing, you know, I've been doing it for four years. and now I'm a fifth year, there's a lot of wins that I got from this, a lot. It's just awesome to hear that power. That kind of thing being just like an exclamation point on what sounds like a wonderful day-to-day life, but that's real meaning and value that you've gotten out of this early retirement for your family and your son. Thank you. Yeah, thank you. That's what it's all about. There's no money, there's no bonuses, nothing that can ever take the place of just getting that love and admiration from your children.

44:40Well, thanks for making me cry. Uh-oh, I'm sorry. Uh-oh. Scott, you okay? I hope to get there one day, you know, when my three-year-old graduates from high school. Let me tell you something. You're doing it right. Congratulations on this new adventure you're on, you know, stepping down as CEO and stepping into your version of retirement. Number one, you've done a good job as well of your company, but I think you're going to like this new transition as well to spend quality time with your two kids. You know, your daughters are going to really really appreciate that and mandy i know your daughters have really appreciated the time and effort that you and carl has spent with them as well yeah thank you my oldest one is in college she's a freshman too and uh she goes back on monday she goes back to college i'm like oh i've kind of gotten used to having you home again yeah you know my son he just knocked on my door and he wanted to come in and see me and i'm like right now not right now this is a great a great place to wrap up here, especially now that your son's back here.

45:41And so thank you so much for joining us here on BiggerPocketsMoney, sharing such great detail about your journey, the emotions, the mental, the physical, and the financial across that and the wonderful outcome that you've achieved here in a day-to-day life and with your family. So congratulations on everything. I hope you enjoy many, many more years of your early retirement and get to travel the world coming up with the bittersweet departure of your daughter to college in 18 months here. Yes, sir. Thank you so much, Mindy and Scott. Really enjoyed it. Take care. Stephen, thank you so much for your time today.

46:14This is a great story and we'll talk to you soon. That was Stephen with his amazing story of how he got to FI and then his decumulation plan. And I love that there is so much thought into his decumulation plan. I love that he's thinking ahead with regards to his 72T and the fact that his children will be out of the house and no longer dependent children and thinking about his Roth conversions now so that he'll have a bigger Roth bucket to pull from down the road. Scott, I know you're a big fan of this episode. What do you think of Stephen's story? I loved it. I think Stephen has achieved what folks who listen to BiggerPockets money and are interested in financial independence want to achieve, right?

46:57This is a guy who worked hard, built a career step by step, scaled his income. And I hear the retirement police say, oh, you're in this huge income. yeah, like after 15 or 20 years in a career as an engineer, you're going to probably scale your income into that$150 ,000 to$200 ,000 range. It's not going to be an outlier outcome for that kind of consistency across a career to field like engineering. And many people who listen to a show like Bigger Pockets Money will be able to achieve that over the course of a 20, not everyone, but many people, many people listening to this will be able to achieve an income trajectory where their end state income is that high for a few years.

47:30And then I think that the life that he lives now is exactly what I think a lot of people really want. That's the American dream, I believe, is to be able to do what you want with your day. Maybe you're in a little extra income here and there doing something you're interested in and spend time with your kids before they graduate, move on to college or the real world. And so what a wonderful story, what a wonderful example of the power of financial independence and the achievability of financial independence. I can't speak highly enough of Steven and the outcome that he's achieved for himself and his family.

48:00Just one of my favorite interviews we've ever done here at BiggerPockets Money, Mindy. Scott, Stephen was inspired to reach out to you based on our recent episodes with the different decumulation strategies. And he said to himself, you know what? I've got a slightly different one on that. I'm going to reach out to Scott. I'm going to share my decumulation strategy with you. I think having that visual bucket was so interesting. And I can't wait to share that with our newsletter audience in a blog post when this episode comes out. it's really always a privilege when people reach out to us here at bigger pockets money scott at biggerpocketsmoney.com and mindy at biggerpocketsmoney.com it's wonderful to hear from folks we try to respond to every single one of them and steven reached out to us and it was that that's how we get we're able to put this show together so please if you're ever thinking about you know reaching out or asking a question or or just want to say hello we love to do that that's why we do this podcast so please please feel free to reach out anytime we do typically i mean i don't know if i every single response.

48:57I try to hit every single response that comes in over time. I may have missed one or two, you know, a handful over the years, but, but we, we respond to them and we love hearing from you guys. Um, if you have a criticism or complaint, we have a no email form for that as well at, I don't care at tell somebody else.com. Um, I believe that's Mindy's, uh, doing there, putting that one up there, but, uh, for everybody else, feel free to email us at Scott at biggerpocketsmoney.com and Mindy at biggerpocketsmoney.com. And this is not the only place you can find more financial independence information from Scott and I.

49:26We have a Instagram account, Facebook group. We're on YouTube at BiggerPocketsMoney. You can head over to BiggerPocketsMoney.com, our new website, for free resources, calculators, and templates to accelerate your FI journey. And don't miss our weekly newsletter. It is packed with actionable tips delivered straight to your inbox every single week. You can sign up on our website, which again, biggerpocketsmoney.com. 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 until we see you again, Penguin.

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