Drawdown Plan – Apr 2021 Update

Well, the last time I reviewed my drawdown plan was back in Oct 2018 (well before the Covid virus or our closing in on our FI number). I had previously written in 2017 at the start of my journey, and then updated in Mar 2018 (prior to our meeting with a financial advisor). Based on feedback from the advisor and some of the changes over the last year, we’ve had to update some of our assumptions. With that in mind, I thought we’d go back through the plan and lay out how we’ve hit our FI number and could (but probably won’t) retire now.

Assumptions:

  • Live expectancy for Mrs. 39 Months is 99, and I am 97 (passing away in 2061)
  • For the remainder of 2021, with Mrs. 39 Months working and my getting severance, vacation and unemployment, we can survive the remainder of 2021 without touching our investments
  • No investment gains/loses for the remainder of 2021 (so our investments on Jan 1, 2022 are where they are on Apr 1, 2021)
  • No changes in current tax code between now and beginning of 2022 (I know, that’s a huge “if”)
  • Don’t touch home equity in retirement, i.e. no reverse mortgage, geographic  arbitrage, etc. (safety bucket of money, just in case)
  • Expenses of $78,000 per year, indexed for inflation, starting in 2022
  • Will use Cobra insurance for first year out (2022) and then keep taxable income low to get the most healthcare subsidies possible till we can qualify for Medicare. Pay for Medicare Advantage after that.
  • Inflation at 3%
  • Social Security increase at 2% per year
  • Stock returns 7.8% before inflation, 4.8% after inflation (Financial Advisor convinced me to drop these below historical expectations)
  • Bond returns 3.1% before inflation, 0.1% after inflation (Financial Advisor convinced me to drop these below historical expectations)
  • 70/30 investment split returns: 6.4%, 3.4% after inflation
  • Both taking Social Security at 67 (full retirement age)

Assets

  • Savings: $175K (2+ years)
  • Roth IRA (no Tax): $501K
  • IRAs/401Ks (pre-Tax): $707K
  • Post-Tax Investments: $270K (investments which only have to pay capital gains)

My standard asset allocation with all the investments is:

  • 20% S&P500 Index
  • 20% Small Cap Index
  • 20% Foreign Stock Index
  • 20% REIT index
  • 20% Bond Index

With this, another way to look at my investments is:

  • Savings: 2+ years
  • Bonds: 4 Years
  • Stocks: 15 Years

If we had a sudden drop in the market, the plan would be to survive on the savings for the 2+ years it typically takes to get back, with 4 years of bonds/fixed assets to assist.

So year-by-year, how does this work out?

  1. Year 1 (2022)
    • Expenses: $80,340 (25,235 out of Pre-Tax and 55,105 out of Post-Tax)
    • Taxable Income: $0 (First $25,235 is offset by standard deduction, $55,105 is post-tax and if we keep our taxable income under $78K, we don’t have to pay taxes on dividends or capital gains)
    • Money remaining: $1,476K (530K Roth, 713K IRA, 232K Post Tax)
  2. Year 2 (2023)
    • Expenses: $82,750 ($25992 out of Pre-Tax and $56,758 out of investments)
    • Taxable Income: $0 (First $25,992 is offset by standard deduction. $56,758 is post-tax)
    • Money remaining: $1,480,037 (562K Roth, 729 IRA, 189 Post Tax)
  3. Year 3 (2024)
    • Expenses: $85,233 ($26,772 out of Pre-Tax,$58,461 out of investments)
    • Taxable Income: $0
    • Money remaining $1,482K(595K Roth, 744K IRA, 142K investments)
  4. Year 4 (2025)
    • Expenses: $87,790 ($27,575 out of Pre-Tax and $60,215 is post-tax)
    • Taxable income: $0
    • Money remaining $1,481K (631K Roth, 760K IRA, 91K investments)
  5. Year 5 (2026)
    • Expenses: $90,423 (28,402 out of Pre-tax, 62,021 out of investments)
    • Taxable income: $0
    • Money remaining: $1,477K (668K Roth,775K IRA, 34Kinvestments)
  6. Year 6 (2027) – Investments exhausted, have to start taking money out of Roth. Mrs. 39 Months eligible for Medicare
    • Expenses: $93,126 ($29,254 out of Pre-Tax, $35,981 investments, $27,901 out of Roth)
    • Taxable Income: $0
    • Money Remaining: $1,471K (680K Roth, 791K IRA)
  7. Year 7 (2028)
    • Expenses: $95,930 ($30,132 out of Pre-Tax, $65,798 Roth)
    • Taxable Income: $0
    • Money Remaining: $1,461K (654K Roth, 807K IRA)
  8. Year 8 (2029) – Mrs. 39 Months begins taking Social Security at 67. Mr. 39 Months eligible for Medicare
    • Expenses: $98,808 ($31,036 out of Pre-Tax, $14,249 Soc. Security, $53,524 Roth)
    • Taxable Income: $0. Income under Soc. Security limit for taxable benefits
    • Money Remaining: $1,462K (639K Roth, 823K IRA)
  9. Year 9 (2030) – Begin having to pay taxes, pretty much on Social Security $
    • Expenses: $103,493 ($31,967 out of Pre-Tax, $17,209 Soc. Security, $54,317 Roth)
    • Taxable Income: $17,209 – tax of 10% so 1,721
    • Money Remaining: $1,461K (623K Roth, 839K IRA)
  10. Year 10 (2031) – Kevin Begins taking Social Security at 67, further increasing taxable income. Won’t affect our medical as we’ve both been eligible for Medicare.
    • Expenses: $108,874 ($32,926 out of Pre-Tax, $40,485 Soc. Security, $35,463 Roth)
    • Taxable Income: $40,485 – tax of 10% so 1,721
    • Money Remaining: $1,478K (620K Roth, 855K IRA)

Years 11 – 20 (2032 – 2041) Our 70s

  • Expenses: Grow from $112,100 to $145,812. Still pull some out of IRA, some from Social Security, and some from Roth to keep taxes low.
  • Money Remaining in 2041: $1,544 ($539K Roth, $1,005K in IRAs)

Years 21-30 (2042 – 2051): Slowing down. While our expenses will probably go down, I didn’t assume that.

  • Expenses: Grow to $195,342 with inflation. Still pull some out of IRA, some from Social Security, and some from Roth to keep taxes low, but Roth almost exhausted.
  • Money Remaining in 2051: $1,224K ($127K Roth, $1,097K in IRAs)

Years 31+ (2052 – 2062): Going into our 90s. Keeping expenses in line as we wind down.

  • Expenses: Grow to $262,072 with inflation. Complete drain of Roth IRA, start sourcing entirely from Pre-Tax money from now on
  • Money Remaining in 2062: $357K in IRAs + savings + home equity

Obviously, its hard to plan out 40 years into the future, without an idea of how the world is going to look. Still, its good to know we are looking good at this point, and don’t “need” to continue to work.

More Withdrawal Strategies

Here are more retirement strategies from the PF blogger community. Some of these are much more detailed than mine. Check them out!

Anchor: Physician On Fire: Our Drawdown Plan in Early Retirement
Link 1: The Retirement Manifesto: Our Retirement Investment Drawdown Strategy
Link 2: OthalaFehu: Retirement Master Plan
Link 3: Plan.Invest.Escape: Drawdown vs. Wealth Preservation in Early Retirement
Link 4: Freedom Is Groovy: The Groovy Drawdown Strategy
Link 5: The Green Swan: The Nastiest, Hardest Problem In Finance: Decumulation
Link 6: My Curiosity Lab: Show Me The Money: My Retirement Drawdown Plan
Link 7: Cracking Retirement: Our Drawdown Strategy
Link 8: The Financial Journeyman: Early Retirement Portfolio & Plan

Link 9: Retire by 40: Our Unusual Early Retirement Withdrawal Strategy (http://retireby40.org/unusual-early-retirement-withdrawal-strategy/)

Read more

Mr. 39 months

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