The Ultimate Guide to Early Retirement Drawdown (2026)

21:13Mindy Jensen:If you're a traditional retirement age, you simply withdraw from your 401k plan. After that, they recommend withdrawing from your Roth IRA. And then finally, your HSA reimbursements. So the HSAs is where your qualified medical expenses can come out of. If you are part of the FIRE community, you've probably already heard us recommend that you cash flow any health expenses that you can and save the receipts so you can withdraw from the HSA later. Remember, you're not paying taxes going into the HSA. You're not paying taxes on anything that grows. and you're not paying taxes when you withdraw as long as it's a qualified medical expense.

21:48So the advantage here is for many years of early retirement, you can be in a 0 % income tax bracket with this approach and you're not having to really declare much in the way of ordinary income at all, if done correctly here. And I think that the challenge with that is that if you are one of these people who has a large 401k balance, for example, and that's the bulk of your wealth, then you risk having this concept of a tax bomb hit. If you're going to do that, then this concept of required minimum distributions could hit at age 73. So let's say that you're 45 years old and you're going to fire, right?

22:29So life is good. You're in position to fire here. And you've got a million four in your 401k. You've contributed for 15, 20 years and compounded and taken the match and maxed it out between you and your spouse and it's compounded to a nice number, most of your wealth is in that location. If you were to do this strategy, you could end up at age 73 with 5 million bucks in that 401k, your tax deferred accounts. And you're going to then be forced to withdraw from those accounts at a pretty high rate. That could be as much as, you know, three,$400 ,000 a year. And at that point in time, tax rates could be higher.

23:09Now, some would argue that this is a great problem, but it is a real problem. And if you're thinking about how you think about it from an estate planning perspective, if you pass that account to your heirs, they're going to pay ordinary income on that inherited account. And so for some people who are safely in that camp of, I'm easily going to hit my financial independence number, they may want to do a different approach that has them paying some more taxes today to avoid that tax bomb later. They may pay a much, much, much, much, much, much less in lifetime taxes if they think about another order of operations here.

23:43So Mindy, do you want to explain what an example of sequential drawdown looks like in practice?

23:48Mindy Jensen:Scott, in this slide, we are seeing gross income of$64 ,000, and that is coming entirely from our first bucket, which is our after-tax portfolio. So we are taking the standard deduction of$15 ,750. This is for a single person. And the taxable income is$48 ,250. The reason that we are paying$0 in taxes in this first year is because the long-term capital gains tax rate of 0 % goes up to$48 ,350 for a single person. In year two, on the right-hand side of this slide, we are again withdrawing$64 ,000. We have depleted our after-tax brokerage account in year one. So going into year two, we're pulling that from our 401k.

24:39Mindy Jensen:That is a tax-advantaged account. It's a traditional 401k. So again, we've got the standard deduction of$15 ,750, giving us a taxable income of$48 ,250, which is now subjected to the 10 % and 12 % tax brackets. For a single person, the 10 % tax bracket goes up to$11 ,925. So we're paying just over$1 ,000 in tax there. Then the remainder of the income, the$36 ,325 is taxed at 12%. So we're paying about$4 ,300 in taxes there. That gives us a grand total of$5 ,500 that we're paying in taxes in year two with the sequential drawdown. So we've first withdrawn all of our taxable brokerage account, and now we're moving into the 401k.

25:29Mindy Jensen:You have another option for us though, Scott. If the sequential drawdown is again, withdrawal from the taxable brokerage accounts, the after, you know, these are non-retirement accounts first. The next option is going to be to do a blended approach where we're going to do a little bit of drawdown from our tax deferred accounts, like the 401k, and then we're going to use up the capital gains, the qualified dividends from our after-tax brokerage account up to the 0 % or the next low marginal tax bracket from a federal standpoint, right? So the advantage of this approach is that we're able to begin doing at least a little bit of withdrawal from our 401k without much of a tax consequence.

26:09So one example of this is to withdraw up to the standard deduction, right? You know, the two commandments that Mark Bakewell, our enrolled agent, who is a champion of this approach has when it comes to tax planning and early retirement is one, never waste the standard deduction. And two, never waste the 0 % marginal tax bracket on capital gains and qualified dividends. And so this approach is designed to maximize that. So let's say you're married filing jointly, you would withdraw$31 ,500 from your pre-tax R-401K. That would then offset your standard deduction by that amount. And from there, you would harvest your long-term capital gains and you could recoup basis as well in your after-tax account and up to the 0 % federal marginal tax rate for long-term capital gains in qualified dividends, which is$96 ,700, a really high amount.

26:58This is a great way to generate a hundred plus thousand dollars in spendable liquidity without paying any federal taxes. You may pay some taxes in your states, Colorado, for example, does have a tax rate on long-term capital gains and qualified dividends of about 4.5%. Okay, after we deplete the after-tax account or the pre-tax accounts, then we would use our Roth IRAs. And of course, we're using the HSA reimbursement approach and all of these approaches in an intelligent way, right? As a reminder for HSA best practices, everybody listening to this, if you have an HSA, you should be contributing to that or maxing that out as one of the top items in your order of operations.

27:38If you're healthy and can qualify for one of these plans, they're not spending that on medical expenses. You should be keeping a shoebox of receipts, a digital shoebox. I have a folder in Drive where every time I get a medical receipt, I post it in there. And you let this HSA account ride and grow, and you can reimburse yourself from your HSA as long as you have those receipts at really any point in the future. So that's how we're going to tap into the HSA accounts. And it's a really good time to use those. For example, if you want to keep your income lower in one year to do a Roth conversion or some of these other advanced tactics, or you want to spend more, you have an emergency expense, that's a really great time to then tap into the HSA and get those distributions tax-free from the HSA in there.

28:17So we're going to use that on a strategic basis in all of these areas.

28:21Mindy Jensen:Let's go and look at what that actually looks like. First, let's look at the tax rates. So this is for a single taxpayer. The 2025 tax brackets are 10 % goes up from zero to$11 ,925. 12 % is from 11 ,926 to 48 ,475. So almost$50 ,000. You are paying only 12 % tax. 22 % tax goes from the 48 ,476 all the way up to$103 ,350. And I'm going to stop there because people can look this up if they are above that, but also for the purposes of our next slide. We're not really going to go above there. And the capital gains tax rates, the long-term capital gains tax rates for a single filer is 0 % all the way up to$48 ,350.

29:10Mindy Jensen:So you can realize gains after you've held it for more than a year, realize gains up to, and that's just the gain, Scott. I don't think we've talked about that yet. Let's say you bought a stock for$50 and it increased to$75. So you have$25 in gates that you'll pay$0 in taxes on up to$48 ,350. But if you sell that$75 stock, you get all$75. You're just paying taxes on the 25 on the gate, which I just, I think taxes is kind of fascinating. You can really generate a ton of liquidity as an early retiree without paying much in the way of taxes in most of these cases. And as long as you're aware of these income brackets and thinking, hmm, the 10 and the 12%, you know, paying, paying no tack, realizing all of my income up to 0 % is a no brainer, right?

29:59What, like, let's say I had a hundred, let's say that, like, let's use your example, right? I bought a$50 ,000 stock and it's now worth$75 ,000, right? And that year I just, I just live off my savings. There's no reason you're, in fact, it's a mistake not to realize that gain up to that 25 ,000 bucks. if you're married filing jointly, for example, at a 0 % effective tax rate when you take the standard deduction. You're not going to pay any taxes up to this$48 ,350 mark on capital gains if you're single. Why wouldn't you do that? This is a core component of retirement planning in early retirement is making sure that you do actually realize all that income.

30:37Because guess what? Now that stock, you could sell it and then after a reasonable period of time, or if you want to transfer it into another asset class or rebalance your portfolio immediately, you can just put it back in the market. And now the gains on that$75 ,000 are going to be taxed, not gains from the$50 ,000 basis. So don't waste these in-year deductions. And you might even consider going up to these lower tax brackets, like the 10 % or 12 % range, because they're very, very low in a historical context and can be very helpful to you as you plan out longer-term retirements with what is presumably a multimillion dollar portfolio.

31:11Mindy Jensen:Okay, Scott, let's look at how this works with the blended drawdown. Year one, we are still taking that same 64 ,000 that we did before, but this time we're doing it 50-50 after tax and pre-tax. So we have$15 ,750 of the same standard deduction for the same taxable income of$48 ,250. This is because we split it 50-50, We've got$32 ,000 in the long-term capital gains, which is hitting at 0 % because that's less than the$48 ,000 and change that is the limit for the 0 % capital gains long-term tax rate in the single taxpayer. And$32 ,000 of regular income minus the$15 ,000 for the standard deduction gives us$11 ,925 tax at the 10 % rate for$1 ,100 in taxes.

32:05Mindy Jensen:and 4 ,325 remaining tax at the 12 % for$500 in taxes. Total tax amount this year is$1 ,712. In year two, we are doing the same blended 50-50 after tax and pre-tax income, same standard deduction, same taxable income, same tax bill, assuming of course all numbers are equal, which they never are, but assuming all the numbers are equal, for the same amount of taxes at$1 ,700. So over the course of two years, you are paying$3 ,423. Whereas with the sequential drawdown, you are paying$5 ,552 or$2 ,000 in tax savings simply by doing this blended strategy. And of course, this assumes that you have an after-tax portfolio to withdraw from, and you don't have other strategies.

33:04Mindy Jensen:And we have to caution against just giving a blanket statement. Oh, everybody should do this. Your tax position and your portfolio is specific to you. So this might not be the best strategy. But for our fictitious person here, this is a better strategy. They're paying$2 ,000 less in taxes. It's all subject to your personal situation. We're going to talk about that later and what what we're working on to attempt to solve for that. But I think that the school of thought here is if you go with the sequential drawdown where I'm going to sell or I'm going to realize the gains or use the positions in my after-tax brokerage account, you probably have a great shot at paying little or no taxes for the near-term future until that account is depleted.

33:45And then you're going to realize ordinary income from your tax-deferred accounts. And I think the school of thought that supports that is either I'm going to pay less taxes now and I'm going to have more wealth sheltered from taxes. So if things go poorly, I'm even more secure in my financial position. And if I have a huge pile of money that I got and I'm forced to withdraw at age 73, that's a good problem. And there's nothing wrong with that school of thought. That's a great way to go about it. That's why we're presenting these as options. This school of thought is the 10 % and 12 % income tax brackets are so low right now that I don't mind realizing a little bit of income here in 2020.

34:23You know, I'm fine with, I can also, I'm going to realize a little bit of income and begin to frame my tax deferred account up to the standard deduction. But I'm also fine with realizing a little bit of income on top of that and paying taxes because my effective tax rate on$48 ,000 in income is going to be what, like three or four or 5 % across my total portfolio. And I'm fine to pay that because of the advantages of at least beginning to dip into that tax deferred account and not having it grow and creating that huge tax bomb later.

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36:39All right. Thanks for sticking with us. The third approach, the third philosophy, the third option for retirement drawdown is going to be this concept of RMD suppression. So this is something that I worry about personally, and maybe other people do too. But I look at the tax rate here under the Trump administration in 2025 as one of the most favorable in United States history from an income tax project, at least in the last 100 years or so. In 1945, the top tax bracket was 91 % on the next marginal dollar over$400 ,000, right? Adjusted for inflation, that's well over a million today. Just a few years ago, just a few decades ago, that marginal tax bracket was 39.6 % on the top dollar.

37:19And if I'm a 45-year-old early retiree who has any interest at all in business, may earn a little bit of dollars here and there, maybe has some real estate or some extra security blankets in their position, there's a very real chance that this million or million and a half in my 401k could swell to four or five or six million dollars if I go with the sequential drawdown approach and don't touch it for a very long period of time or even if I go with the blended approach here by the time I retire and that's going to result in this RMD issue right where I'm going to have to realize several hundred thousand dollars in inflation adjusted income every year until I die and then I'm also going to pass along a large 401k to my heirs.

38:03So if I'm in this bucket of somebody who's very secure in their overall plan, feels like it's going to be, there's a very good chance that they become very wealthy by the time that they die and hit traditional retirement age, even as an early retiree, there's a case to be made for beginning to withdraw from that 401k relatively early and maybe up to the top of like that 12 % marginal income tax bracket, or maybe even higher, depending on how aggressive your assumptions are for later in life. So the approach looks like this. You're going to withdraw from the 401k or your tax-deferred retirement account until it is depleted.

38:35Then you're going to withdraw from your brokerage account and then your Roth. Let's say that your spending is$50 ,000 a year. You may decide that you actually want to spend much more than that, maybe up to the 10 % or 12 % marginal tax bracket for a married filing jointly couple, for example, if you're married filing jointly. and realize all of that income every year, pay taxes on it, and then just put the excess into your after-tax brokerage account or do a Roth conversion with those amounts. After we've depleted the 401k or the tax-deferred account, then we're going to use our after-tax account, our brokerage account.

39:08Then we're going to do our Roth IRA withdrawal. And of course, whenever we need the extra funds or have the opportunity or have a medical expense that comes up, we're going to be reimbursing ourselves from our HSA. So that's this approach. And again, the idea here is that if you're way past your goal for FIRE and you're feeling very, very comfortable with that, this approach will reduce ordinary income later in life, potentially greatly reducing your total lifetime taxes paid, and potentially greatly increasing the tax favorability of your estate to your heirs later in life. It's also a little bit of insurance against this fear that I have, maybe you have as well, that tax brackets may go up over time, especially for higher income earners who are forced to realize large amounts of income, like in the context of RMDs.

39:56So what are your thoughts about RMD suppression? One here, Mindy.

39:59Mindy Jensen:I really love this RMD suppression option personally, and also for other people who are in a similar situation. If you have been a member of the FIRE community for a while, you have seen a really favorable stock market. We've been investing for quite some time, but even if you started investing 10 years ago, 2015, 2013, you've got some big gains. It's very plausible that you will continue to have these big gains in your pre-tax accounts, which will cause you to be subjected to these RMDs when you turn 73 if you were born in 1951, If you were born in 1960 or after, you aren't paying RMDs until age 75.

40:44Mindy Jensen:However, there is no specific pre-tax balance that triggers RMDs. Instead, RMDs are triggered by age. So if you have anything in your 401k, then you are going to be required to take distributions starting at age 73 or more likely age 75 if you are listening to this show, born after 1960. The more you can take out, the less you have to actually take out when you're forced to. And I would rather take money out on my own terms, not because the government is telling me you have to do this. I think there's a very real place for RMD suppression in the fire community for those who are particularly secure or have some interest in continuing to work, right?

41:30Perhaps a semi-retired podcast co-host, for example, might lean towards this approach if they have a very large 401k or tax deferred balance, right? So again, we have these three options for retirement drawdown. And I was trying to think about which one is best. And it's really hard. It's really difficult. And the answer is, as always, and as it so frustratingly often is in personal finance, it depends. So where should you invest in your decumulation portfolio? And I think the themes that we've uncovered here are your Roth and your HSA should contain your aggressive positions. In a 60-40 stock bond portfolio, that means the stock portion.

42:11The tax-deferred accounts, like the 401k, should have the more conservative positions. That would be bonds in a 60-40 stock bond portfolio. The after-tax position should have the more balanced positions. And most people are not going to be able to neatly match this in all of these. Like the example that I used, they had to get to that target allocation by putting everything in the tax deferred and Roth and HSA in the aggressive position, and then using the 401k to balance the remaining portion of the position. The next tip we're going to have here is trial run, a test fund. Consider doing what Mindy's doing, what I'm doing, and putting aside 10 ,000 bucks into a test fund that you will actually begin to use to spend.

42:51If it's 10 ,000 bucks and you spend 40 bucks a month, 4167 or whatever it is, that's one twelfth of 5 % of the portfolio of portfolio distributions, you know, just use that to buy yourself pizza or whatever, and just get in the habit of doing that. It's not meaningful to your overall fire journey if you're getting close to the end state of your fire, but it may be very meaningful to the mental comfort you have with actually beginning to draw down a portfolio and begin to reap the rewards of financial independence that we always talk about here at BiggerPocketsMoney. Next, remember that early retirees in general pay low taxes, at least today, right?

43:24You're probably not going to have large realized taxable income until you reach retirement age. And even when you reach retirement age, you're only going to see that higher taxable income when you start withdrawing heavily from your tax deferred accounts, either voluntarily or via RMDs, and or as social security begins to come into play, and you should be careful about your social security assumptions. That can be difficult for an early retiree. The next tip is the paid off home mortgage is very helpful for all of this, because if you don't have a mortgage, you can realize less income and use more of those 0 % or 10 % or 12%, those very low marginal tax brackets to realize income, like with the Roth conversion and those types of things.

44:06And it also greatly reduces your risk, of course, for your portfolio. The sequence of returns risk is a widespread fear. The 4 % rule and variations account for this, but it's popular to hold a cash position like I have into that calculator to offset that risk, which you can spend down in those particularly challenging years if you get unlucky in those first few years after you retire, end up being bad in the market. So that can really reduce sequence of returns risk, as can the ability to be flexible from a spending perspective, as can the willingness to put in place an income stream for a few years if things get really bad.

44:44All of those things can reduce your risk and increase the probability of your portfolio surviving through that Monte DiCarlo simulation we run there. Two advanced mechanics that you'll need to be aware of if you want to pursue this are the 72T or the substantially equal periodic payments rule and the Roth conversion ladder. I've just monologued for a minute on the last slide. Mindy, do you want to talk through these ones?

45:05Mindy Jensen:The 72T, this is how you access retirement funds without paying the 10 % penalty if you're taking them before you're age 59 and a half. This is the tax deferred accounts. So your traditional 401k, your traditional IRA, it allows you to withdraw these funds, like I said, without paying that 10 % penalty. I don't want to pay a 10 % penalty. It is still a taxable event. You will still be paying taxes on this money unless you're doing it in these 0 % income tax brackets, which we just talked about. There are three different ways to determine the amount that you are getting from your 72T. and John Bowen from Equity Trust ran through the mechanics of how to perform a 72T back on episode 649.

45:53Mindy Jensen:And that is absolutely worth a big listen if you are thinking about doing a 72T. Just to kind of rehash something Mindy said there, the 72T rule scares, I think, is scary to me, a little bit scary to me, because it kind of requires you to keep withdrawing from that account, even if it no longer maybe makes as much sense later on in your journey. And we've unpacked a tool here, a very simple technique, where let's say you have this$1.4 million 401k balance that we used in the example from earlier. You don't have to start withdrawing one, two, or several percentage points of that$1.4 million portfolio.

46:31You could roll over$100 ,000 from that$1.4 million 401k into a new account and begin a 72T or substantially equal periodic payment plan on that$100 ,000. And then you can layer that in. Now you can't stop them once they begin in some of these. And the model, the calculator, it takes that into account in there. So there is, once you set up, you have to keep going, but you can fairly tightly control this and layer it in to get comfortable with the tool of the 72T. It's not as nice as being able to just withdraw whenever you want, but for the time leading up to traditional retirement age, it's an easy way or a relatively accessible way to begin accessing these funds.

47:12There just are some gotchas and some workarounds to those gotchas.

47:16Mindy Jensen:Yeah, Scott, thank you for reminding me of that. I am 53 and I only have six years until I have to stop taking withdrawals from my 72T. You have to take withdrawals for at least five years or until you turn 59 and a half, whichever is later. So Scott being 35 is going to have to take 72T withdrawals for a whole lot longer than I would if we both started them this year. Yeah. So for me, I would almost certainly not, if I was going to do this and I had a low income tax year, not do a 72T roll. I would do a Roth conversion ladder, right? If I had a year where I had low income and had this opportunity, I personally would roll them over.

48:00But someone perhaps like more like Mindy, who's closer to traditional retirement age, the 72T rule, the risk of overshooting it and having more than you want is not that large over a five, six year period.

48:11Mindy Jensen:Exactly. Yeah. And I forgot about that, Scott, because I'm only thinking about myself. How rude. Scott, this was super fun to sit here and talk to you about different ways to decumulate. And just like it has been super fun to talk to you for the last 700 episodes, I so appreciate your mind and the way it works because I never would have made that calculator myself. And I'm so thankful you are my partner. I'm so thankful to you, Mindy. Thank you so much for being my partner across nine years and 700 episodes of BiggerPockets Money. It is so fun. You do such a great job of grounding me. You're such a knowledgeable, a master of all things personal finance.

48:48I'm so appreciative of you. And I just have a lot of fun with this. So it has been an absolute blast. And I think that this world of decumulation, you know, I think it's this is all that we've learned. I'm sure there are people out there that are more masterful or more have mastered this subject, have our masters of the subject. But this is what we've learned so far. And I think a lot of it's relatively new thinking for the early retiree. I don't think this is this is a lot of the all of these concepts, I think, are going to evolve and be challenged and be explored by folks who are really masters in very specific circumstances.

49:22And so if you have situations or areas where what we said today, you know, needs to be adjusted or needs to be thought through, please send us that feedback. Scott at BiggerPocketsMoney.com and Mindy at BiggerPocketsMoney.com. And like I said, I think it's there's going to be a lot of it depends work here, permutations of these plans and opportunism where some years you're going to have very low income and a certain opportunity is going to present itself. Some years may have very high income and you need to do other creative things to lower that income or plan for additional expenses that come with it.

49:50So I think it's just going to be a fun challenge to really unpack this over time across actual lived experiences and realities rather than the fictional personas and hypothetical cases we invented today.

50:02Mindy Jensen:Yeah, I think this is going to be a lot of fun. And like you said, Scott, we would love to hear from you. If you think we made a mistake or if you'd like to see something different, please don't hesitate to reach out. All right, Scott, should we get out of here? Let's do it. That wraps up this 700th episode of the Bigger Pockets Money podcast. Thank you so much for listening. He is Scott Trench. I am Minnie Jensen saying cheers, dears. 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.

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