# Drawdown Strategy Analysis – using “Power of Zero”

After reading The Power of Zero  I decided to do an analysis on how effective this would be versus my current drawdown plan.  Some of the key aspects of the analysis include:

• Withdrawal amount after taking into account taxes
• Effect of revenue on social security
• Effect of revenue on medical subsidies

As you remember from my review, the book breaks your funding down to three buckets:

1. Taxable bucket (savings accounts, CDs, brokerage accounts, etc.)
2. Tax-deferred bucket (401Ks, IRAs, etc.)
3. Tax-Free bucket (Roth IRAs, LIRPs, etc.)

The way I chose to do my analysis is as follows:

1. Identify specific FIRE date to start. This is controversial, in that it is committing me to “retire”, not just hit FI, but keep working
2. Determine the amount of money I would have in each bucket at that time
3. Estimate growth of investments while taking out inflation from growth, tax rates, etc.
4. Determine withdrawal strategy for the two options and apply
5. Determine a time frame for investments. I am going to assume Mrs. 39 Months and I live till we are 99/97.
6. Determine if plan will enable us to survive

When going through our budget for retirement, I came up with a spend of \$65,104/year, which included \$8,892 for medical (insurance, co-pays, deductibles, etc.). Tack on \$5,615 for state & local taxes, and I’m coming up with \$70,719/year. For the basis of this analysis, I’m going to use \$66K/year for expenses (again, I will adjust out for inflation) and \$5K for taxes – bringing total to \$71K. Just to be “extravagant”, I’m going to assume a spend of \$84,000/year. Based on current tax rate and allowances, this would have me paying about \$8,500 in taxes (Fed & State).

For investment returns, I’m going to assume 70% stocks (6.8% returns after inflation) and 30% bonds (1.6% returns after inflation) for a blended return rate of 5.24%.

At my FIRE date (21 months from now) I should have the following assets:

1. Taxable bucket: \$364,030 (including \$156,689 in deferred that I will have just paid the taxes on)
2. Tax-Deferred: \$729,284
3. Tax-Free: \$294,922

So, unless being spent, the items listed will grow at 5.24%.

• Year 2020 (6 months): Pulling \$42K out of Tax-Deferred account (Pop’s IRA). Taxable, but I just got hit with a lot of taxes for my Deferred.
• Year 2021 & 2022: Withdraw \$63.5K from Taxable bucket & \$6K from Pop’s IRA. Pay reduced taxes because Deferred account already paid for them in 2020
• Year 2023: Withdraw final \$45,448 from Deferred, \$6K from Pop’s IRA, and \$18,052 from Taxable bucket (investments). Again, paying reduced taxes because Deferred account and investments already paid, or income small enough for Cap Gains
• Year 2024: Pull \$63.5K from Investments, \$6K from Pop’s IRA. Reduced Taxes
• Year 2025: Pull Final \$3K from Investments, \$14K for wife’s Soc Security, and \$76K from Pop’s IRA. Wife’s Soc Security pays full taxes on 85% because Pop’s IRA is treated as regular income. Since I am over the ACA limit, my medical costs jump up from \$8.8K to \$19.4K (ouch!)
• Year 2026: Pull final \$27K from Pop’s IRA and \$14K from Soc. Security. Begin drawing down Tax Deferred IRA money (\$54.5K). Again, over ACA limit, so high medical. Not taking Mr. 39 Month’s Soc Security at this time.
• Year 2027: Mrs. 39 Months starts getting medicare, so medical costs drop to about \$13.2K (overall revenue needed drops to \$89,364/year). Pull \$75.5K from Tax Deferred IRA and \$14K from SS. Now left with \$713K in Tax-Deferred and \$430K in Roth IRA.
• Year 2028-2031: Continue pulling all money from Tax-Deferred Pulling \$70-\$75K and \$14K from Wife’s IRA. All of this is taxable. At 65, Mr. 39 Months converts to Medicare and costs drop
• Year 2032-2045: Mr. 39 Months begins taking Soc. Security at age 67. However, I’m going to assume that, due to issues with Soc. Security, I am going to assume that I am only going to get half of what I will get (i.e. 50% cut in benefits), so that works out to \$16,908/year. So, each year roughly \$30K in Soc. Security and \$41K from Tax-Deferred accounts. All of this is taxable.
• Year 2046: Tax-Deferred IRA runs out of money, and have to switch to Roght IRA. At this time, Roth has about \$1.02M in it, so the 5.24% return rate will cover this out till we pass away.

So based on that, my excel chart came in at roughly \$1,102,346 remaining in my Roth IRA (all of which I could pass on to my heirs tax free). Not bad, though it shows that I could have taken out more and “lived a little more” in my years. In addition, I kept the \$9K in medical spending stable, which might not really be accurate. This also assumes the tax rates stay the same in the years ahead (a big “if”).

Tune in next time when I take the “Power of Zero” lessons and try to do even better.

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Mr. 39 Months

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