← BiggerPockets Money Podcast
BiggerPockets Money Podcast
The Best Early Retirement Withdrawal Strategy (6 Proven Frameworks)
00:42:03
Loading summary
Transcript44 lines
- [00:00]
A
Your withdrawal strategy can save or cost you hundreds of thousands of dollars in taxes. Having a plan when you want to access your hard earned money is crucial. So today we're going to share the six frameworks for early retirement withdrawal. Hello, hello, hello and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen and with me, as always, is my not withdrawn co host, Scott Trich.
- [00:27]
B
Thanks, Mindy. That's a great frame for today's show. We're excited to talk about this, this big topic. It's really complex. Things get really hard. Accumulation is pretty simple. You spend less than you earn, you invest according to a tax efficient order of operations, you invest aggressively for long term growth and you keep piling it up for 10, 15 years. Withdrawal sequencing is harder. It's more of an art than a science. I don't think the word optimal can be really applied here. I think you can only approach optimal or, you know, within the context of a coherent worldview. I think it's really hard and there's a lot of competing prioritizations that we have to deal with. Right. We'll, we'll preview this very briefly, but like MAGI and Affordable Care act subsidies conflict with converting Roth conversions, for example, up to certain tax thresholds. So we're going to talk about six frameworks that are all independently ideal and then how they conflict and how that can help you make better decisions. If you're a Harry Potter fan. Yes, I'm going there. In the sixth book, you'll remember that Harry gets this like textbook, that's the Half Blood Princess textbook. And it gives them all the answers to the potions. Right? That's like the accumulation phase journey. But then one day they have this class where you've got to brew your antidote to a poison and you got to actually understand the theory and go after it. That's kind of like what withdrawals like, right? You can't just like follow a rule of thumb blindly. You've got to understand the theory and be able to play ball. And hopefully this episode will help you play ball. So that's for you Harry Potter fans, if you're lost, well, the episode is not going to get any better from there.
- [01:56]
A
Yes, it is going to get better. People are going to turn it off. Scott, if you are in or approaching early retirement or if you are thinking about early retirement, this episode is for you. It's not only how you are withdrawing, but you need to have funds in these different accounts in order to be able to withdraw them. Plus, I've got a fun little extra bonus tip halfway through the show.
- [02:22]
B
By the way, we have a slide deck here. It's just like 15 slides. It's pretty easy. What it I think will be valuable for though is if you're trying to play around with this and get some kind of like first rough draft to begin learning these concepts. Go download these slides@biggerpocketsmoney.com withdraw and then upload it to your favorite AI. There's a prompt at the end there as well that will help get things going and that will frame the discussion about withdrawal in a way that is not as simplistic as if you just ask it, hey, what's the right way to withdraw? It'll tell you. Taxable first pre tax, then Roth, which is right. But it's missing these other frameworks. So go ahead and download this presentation, upload it to your favorite AI. It's designed to be compatible with that and help sharpen your thinking.
- [03:00]
A
There's yeah, you know how when you ask an attorney a question on the podcast, his answer is always, well, it depends. The answer to everything in this show is it depends. It depends on what your specific situation is and your specific goals. So this is a great framework, a series of six great frameworks. And then you have to actually do the work to figure out which one works for you.
- [03:25]
B
Awesome. Well, let's get into those six frameworks. The first framework is going to be the withdrawal sequence. Like this is the kind of traditional taxable first pre tax, then Roth kind of thing. Then there's healthcare subsidies, which we've talked about at length here on BiggerPockets Money. We'll talk about how that interacts with the withdrawal sequencing. We'll talk about tax optimization across a lifetime. We'll talk about the target portfolio that you're holding. We'll talk about asset location, right? If you're going to hold 60, 40 stocks, bonds, you're going to want all the stocks in some accounts and the bonds in other accounts. And then last, we're going to talk about a framework which I call your worldview. And this is where things get contestable. Right? So for example, I have a worldview that for people like me who are, you know, fairly entrepreneurial, will probably have many investments in business interests in a 30 year year financially independent adult lifetime. I think I'm going to become fairly wealthy over time. My tax bill is going to go up, but somebody else may feel like, hey, I'm going to probably spend down my portfolio and I will live my entire life my Entire financially independent life in a low tax bracket. That worldview, how you view yourself and how you think that political environments will change your tax situation, for example, change, they impact how you're going to approach withdrawal sequencing. So you can see how this gets very complicated very quickly. And that's why I've provided six frameworks and how they stack or rank or interact with one another as you think about planning withdrawal sequencing for your early retirement.
- [04:41]
A
Okay, Scott, let's go to the withdrawal rules of thumb.
- [04:44]
B
Great mind. Do you want to take this one?
- [04:45]
A
Yes. So the typical withdrawal rules of thumb are the orders in which you are decumulating. So number one is your after tax cash flow, your interest, dividends, pension, Social Security, rental cash flow. These are kind of the passive income that's already coming in. Spend that first, it's already coming in. Don't continue to reinvest it because you're still getting taxed on that. You might as well use that to live your life. Number two, after tax brokerage, sell to rebalance to your Target portfolio. Number three is your pre tax accounts, your traditional 401k and IRAs. You can either withdraw after age 59 and a half or Roth convert or use a 72T to access those funds before age 59 and a half. Number four, HSA receipts reimbursed your banked medical bills. If that is how you're choosing to use your HSA plan that is tax free in any year you choose, you just have to have receipts and then you turn those in, you get the money. It's really awesome. And number five, last is the Roth accounts that you have. These are last for your spending and there are some conditions that apply. Now Scott, this is all well and good for most of our listeners, but I want to caution people who have huge gains in their after tax portfolio to look at every bucket available before making any moves. So Carl and I have a nice chunk of our net worth in our after tax stock, but our cost basis is practically nothing, which would make our tax obligations almost the entire amount that we would be selling. This is not an issue until it is. For a listener in a similar position, this could throw them off the subsidy cliff. So this is what you're talking about with the interlocking and we'll get to that a little bit more.
- [06:36]
B
So you know, just, just to recap what you said here you have your after tax cash flow, your after tax brokerage, your pre tax, your HSA and your Roth. But this is going to intersect like that's the, that's the perfect worldview. You know, if taxes, you know, if tax brackets were flat and there was no complications or whatever, we would. We want to follow something like this for a variety of reasons, right? The Roth is the best thing. The Roth and the after tax, for example, are generally speaking better things to leave to your descendants than pre tax or HSA components. There's an estate planning component to this. In practice, we also three sources of cash with our cash balance, our Roth contributions, not the gains, but the contributions and HSA reimbursements that can float liquidity for us. And we may use those from time to time in certain years if we want to control our income to maximize, for example, MAGI subsidies in another framework or keep below certain taxable cliffs. So this is like the starting hypothesis, the bias that we order to when attempting to accumulate. But there are many things that break this bias as we'll get into as they conflict with other frameworks. So the next framework is, at least for now, healthcare subsidies. We've talked about this at length. But if your modified adjusted gross income is too high, if it goes over 400% of the federal poverty line, then you get zero Affordable Care act healthcare subsidies. So most people know that there's a cliff and that you don't want to go over that cliff. You don't want to have too much modified adjusted gross income MAGI in a given year. So you exceed 400% of the federal poverty line and get no credits. But what you may not be remembering or thinking through is that the lower your magi, the higher those credits. So for example, someone like me in Colorado, if I were to just stay a hair under the cliff for my family, I might get a $7,600 credit this year in 2026 for affordable care act subsidies. But if I were to keep my MAGI much lower in the $45,000 range, my credit could be as high as $18,000. Right? So I've got two decisions here. One, I want to stay under that cliff and two, I may want to keep my MAGI as low as possible to maximize those credits. And depending on which tax brackets I'm in or how I'm thinking about my long term portfolio construction, maximizing credits this year may be more important than taking advantage of Roth conversions up to some tax bracket. Right? So you can see how we already in framework two, right? We have our optimal withdrawal sequence in a perfect fictional world and now we've got MAGI stacking in it and they conflict. And that's why this is impossible to get to, I think, I think perfection. I think you can only understand the trade offs and begin to make better quality decisions about what makes sense in your situation for you. And by the way, this is going to vary by state. If you're in a place like Vermont, this might be very, very meaningful for you to stay under the MAGI cliff. But if you're in a state like New Hampshire and you already have reasonably high magi, then going right through the cliff and doing Roth conversions up to the 20 or 22% tax bracket may only cost you like $3,000 in subsidies. So it's really important to understand this in your situation, how that's going to impact you, because it will impact whether you decide to optimize for these subsidies or you decide to optimize for some other tax goals when you're ready to
- [09:43]
A
start your business, Northwest Registered Agent helps you do more than just file paperwork. You get all the tools to build a real business identity from day one. A business address, website, phone number, operating agreement, free guides and more at no extra cost. Northwest Registered Agent has been helping small business owners and entrepreneurs launch and grow businesses for nearly 30 years. They are the largest registered agent and LLC service in the US with over 1500 corporate guides. These are real people who know your local laws and can help you in your business every step of the way. With Northwest, your business is set up to stand on its own from day one. That means your home address, personal email and phone number and stay private. Don't pay hundreds or thousands of dollars for what you can get from Northwest. For free, visit northwestregisteredagent.com money free and start using free resources to build something amazing. Get more with Northwest registered agent@northwestregisteredagent.com money free. When you're ready to start your business, Northwest Registered Agent helps you do more than just file paperwork. You get all the tools to build a real business identity from day one. A business address, website, phone number, operating agree free guides and more at no extra cost. Northwest Registered Agent has been helping small business owners and entrepreneurs launch and grow businesses for nearly 30 years. They are the largest registered agent and LLC service in the US with over 1500 corporate guides. These are real people who know your local laws and can help you in your business every step of the way. With Northwest, your business is set up to stand on its own from day one. That means your home address, personal email and phone number. Stay private. Don't pay hundreds or thousands of dollars for what you can get from Northwest. For free, visit northwestregisteredagent.com money free and start using free resources to build something amazing. Get more with Northwest registered agent@northwestregisteredagent.com moneyfree
- [11:42]
B
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 lad. 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. In 15 years the mortgage is going to be smaller and the kids are almost launched. So Instead of buying one giant 30 year policy, you'll overpay for you stack a few, say a 10 year, a 20 year and a 30 year layer so your total coverage steps down as your actual obligations step down. You only pay for what you actually need when you need it. Ethos is a platform that helps you find life insurance 100%. Online, you can get a quote in seconds and apply in minutes. There's no medical exam. You just answer a few health questions. Online you can get up to 3 million in coverage. Some policies are as low as $30 a month. That makes building a ladder genuinely fast. Get your free quote@ethos.com bpmoney that's e t h o s.com bpmoney Application times may vary and rates may vary.
- [12:43]
A
Scott, you just said something that I really liked. You said, if you're going to do this in a given year, I think a lot of people kind of get stuck on, well, this is my plan. That's it. I have to do this every single year. There's a lot of different ways to do a lot of different things. One thing that comes to mind is when you're contributing to a donor advised fund, if you know that you want to give every single year, maybe this year you fund two years or five years of giving, even though you're not giving it to the charity at that moment, you fund the donor advised fund and that gives you a huge tax reduction. So maybe you've decided that you want to do a Roth conversion and you want to make a big Roth conversion. Well then you can also do a big contribution to your donor advised fund and kind of balance that out. This is where having a conversation with a tax professional or a CFP can be really beneficial because you're not just playing for today. And this year's decision doesn't have to be the decision for the rest of your life.
- [13:46]
B
I'll go a step further. I think that there's a room for a CFP or a tax professional in this and that at the end of the day you've just got to understand how to play ball here. Let's use your example. We actually have three case studies here that I'll go through later on in the, in the deck. But for example, if you know you're going to go over the magi cliff anyways and you have a big pre tax balance, maybe you just Roth convert up to the 20 or 22% tax bracket that year because you've already lost your subsidies and you might as well take advantage of the fact that you're not going to get any. So you're going to go big and convert. Maybe you work half the year and so those subsidies aren't even a big deal and you're firing then and then that's, you know, that's another component of this. The giving is another component of that. Maybe you do that in a high tax year or maybe you do that to maximize your subsidy in a year if you're afraid they're going to go away in a few years. Like that's why you have to understand and stay abreast of all these things. Understand the conflicting frameworks. And we're only on framework two here. Right. We have our theoretical, you know, in isolation, idealized withdrawal order of operations. And now we've got the healthcare subsidies framework 3. By the way, if you want to play around with those healthcare subsidies, go to biggerpocketsmoney.com healthcarecosts I built a calculator. I'm not shy about telling everybody in the world that I built this calculator. I'm very proud of it. It was a lot of work. Go check it out and it will help you kind of understand these or little dial that estimates the subsidies in state this year and there's a projection for the next 30 years there as well.
- [15:02]
A
Yeah, Scott built an awesome calculator. He's going to be too modest to say how fabulous this calculator is. There's all sorts of things you can play with. And this is the biggest question that people have about early retirement. How am I going to get health care? There's a lot of moving parts to health care. So understand what your costs are going to be not only now in your 30s and 40s, but when you're my age, in your 50s and 60s, your health care costs go up.
- [15:31]
B
Okay, so that brings US to the third framework which is use the standard deduction and the 0% long term capital gains tax brackets. So if you're married filing jointly, you get a 32,200 standard deduction in 2026. That's a big deal. That's a lot of income. Like effectively all the interest income from your emergency reserve or high yield savings account. If you have REITs or rental income like those can all go in there and you can have a 0% tax bracket up to a pretty reasonable amount of income there. And then there's the 0% long term capital gains tax bracket which stacks on top of ordinary income. You realize 32,200 in ordinary income and then you have another $98,900 in long term capital gains. You've paid zero federal tax. Now some states may charge you tax, so you can play around with that kind of stuff. But that's a really valuable gift from the tax code to early retirees and we want to take advantage of that. But we should know that those income sources count towards magi, so they're going to impact your subsidy. So it may be in your state that you don't want to in some years take Advantage of the $98,900 0% long term capital gains tax bracket for a married filing jointly couple, because that may actually reduce your subsidy by more than whatever those benefits are. And again, that's why this is so hard, right? We're Only on the third framework here, which is we want to use the 0% long term capital gains tax bracket. We want to use the standard deduction, but we also want to keep in mind the trade offs that come with that in terms of our subsidies for health care. And we want to also think about how that intersects with the ideal order of operations for withdrawal sequencing.
- [17:04]
A
Scott at the bottom of this slide there is a link to an article that I wrote about the 0% capital gains tax bracket and how you can take advantage of it in a couple of different ways. The tax gain harvesting can also be part of this 0% capital gains. And the tax gain harvesting is actually something I want to talk about with our listeners who are not yet financially independent. Capital gains harvesting is selling investments that have appreciated in value while staying under your income brackets 0% or into the 15% if you have a lot of these gains that you want to realize to lock in the gains tax free. And then you are opting to rebuy if you choose the same or similar assets to reset your cost basis higher. This is something that I wish that Carl and I would have done over the years. Our cost basis on Tesla is incredibly low. So when we go to sell, the amount that we're selling is almost entirely taxable. If we would have reset our cost basis and trust me, we had some years that we had some room in that 0% long term capital gains bracket, if we would have reset it, our cost basis wouldn't be so low anymore. We still get to own the stock. There's no wash sale rule with the capital gains harvesting. This is a really interesting strategy that I want to encourage our listeners to go and check out. There's an article in there called@biggerpocketsmoney.com capital gains-harvesting and we'll include a link to that in the show notes as well.
- [18:37]
B
Love it. Where through three frameworks now, right our withdrawal sequence that we would want to do in a perfect fictional world which is, you know the, the taxable pre tax and then the Roth. Right with with some other other components in there like cash income streams and the HSA as a bridge or liquidity source when we need it. We've got the health care subsidies and We've got our 0% long term capital gains tax bracket and the standard deduction. And using those up and how they intersect and conflict already now we've got to layer in our target portfolio and the target portfolio. We've had many brilliant people with conflicting opinions on the BiggerPockets Money podcast to talk about what portfolio you ought to have in early retirement. And we don't give specific portfolio advice here, but we've had certainly had very strong opinions represented on the show. And I think four of those buckets that have emerged here are the all equity portfolio. Just keep it all in the S&P 500 and accept the larger volatility, the stock bond 80, 20, 60, 40, 90, 10, whatever it is that you're comfortable with. The risk parity or golden ratio portfolio where we've got multiple uncorrelated asset classes in differing amounts and constantly rebalance towards that target portfolio by selling off the relative winners, the positions that are highest. And then we had Paul Merriman come on and talk about tilts like factor investing, small cap value, international small cap value, those kinds of things. So you've got to pick one of these. And I will say that as time goes on for early retirees, I am personally more and more leaning towards the higher equity concentrations. I briefly drifted off off that a few years ago, but as I learned from these experts, I'm like, hey, it is a really long time horizon there's going to be volatility. And I think that those, those, all equity portfolios, including these factor tilts, have a certain appeal to me personally that make them more interesting here, especially if you're, if you're worried about, you know, risk in the S&P 500 or whatever. There's the, there's a really good and compelling evidence from the factor tilts that Paul Merriman and Ben Felix have shared on the, on the show here that have really swayed me and made me feel more comfortable with higher equity concentrations there. So that's one man's view. But there's a lot of conflicting opinions on this. And depending on whether you want to draw down or spend more than, you know, a three and a half or four percent withdrawal sequence, there are other portfolios that have good arguments for them. So you've got to pick a portfolio as the fourth framework. We won't spend too much time on this because we talked about that on other shows, but what that now has to intersect with is where that portfolio goes. So the fifth framework is asset location for that portfolio. And now we've got to say where we want, like let's say we have our risk parity or stock bond portfolio. Let's use a stock bond portfolio for, for the simplicity here. I'm targeting a 6040 stock bond portfolio. I'm going to keep my most aggressive positions as a rule of thumb in the Roth and my hsa. I'm going to keep the most conservative positions in the traditional or pre tax ira. And I'm going to use my taxable brokerage account to balance that distribution. Right. So let's say I have 30. 40. 30. Right. 30% of my wealth is in pre tax, 40% is in after tax. Another 30% is in my Roth. Well, I'm going to put the, the 30% in my pre tax account into the bonds. I'm going to put the 30% of my Roth into the stocks. I'm going to use the after tax brokerage position to bridge that gap. And so that's kind of the rule of thumb there. In reality, very few people have this balance in these ways. There's always a really big third or a different position here or that old stock investment that was one off from back when you used to pick stocks before you switched over to index funds. That's now a huge position and you've got taxable consequences for, for realizing that gain and moving towards your target portfolio. So that conflicts with this framework and that's probably arguably a seventh or eighth framework that you have to think about here. But these assets in these right accounts and then rebalancing as we withdraw or decumulate towards that target portfolio, that's the, the next piece that needs to come up here. And again, that also intersects with magi, with the right decumulation sequence, with the way that we think about harvesting the 0% long term capital gains tax bracket and the standard deduction. So it gets very complex here. But that's the fifth framework is the right assets and the right accounts.
- [22:32]
A
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 two and then this one turns and you're like, oh wait, 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. When. When that's the question, right?
- [23:13]
B
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, that's where we come back to a. 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.
- [23:38]
A
Don't look at me. I don't have the answers. I am still searching for them. But, 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 taxation is theft person. I think that taxation funds the road 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. Here's a 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. 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, 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?
- [24:42]
B
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 going to be a real problem for many of the bigger people pockets, money listeners in particular. I think, you know, again, if you're in the lean fi or traditional fi camp, you know, and have very, very, you know, modest spending or wealth targets to achieve financial independence, that's great. You may not have this problem. I think that, that there's a fair argument that this is not something to worry about nearly as much. But if you're in that chubby or fat fire 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, you know, few decades is how do I get that money out and when do I pay the taxes, taxes and how do I manage that effectively? So that's going to be the problem here. And that brings us to the last framework here, which is have a worldview. Right. 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 higher 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 gam gamble I'm taking with that. And that may not work out. It'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 gonna, I'm gonna have a $1.5 million position and I'm gonna draw it down and I'm not gonna ever really get into these higher income tax brackets. And I don't think that they're ever gonna go up for me, for people like me, you know, materially. So I'm gonna keep my taxes low now, and I think that they'll be low for the rest of my life. That's a very coherent and val and valid worldview. Just make sure that you understand that that's what you're betting on here. Because I think a lot of advice in the space fixates on that lower kind of modest FI 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, is around kids. How much do you want to leave and win? Mindy, probably a good idea for you to get estate plan if you're trying to leave money to your kids.
- [26:43]
A
If you listen to the show. You know that I recently did finally get an est.
- [26:47]
B
Good. Okay. Okay.
- [26:49]
A
Now that my oldest is an actual legal adult.
- [26:51]
B
Well, great. So, so yeah, so you got to have that and then you got to say, okay, how do I want to leave it? And, 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 worldview we got to have is, is this concept of drawdown nerve. So I got another framework here. What do I want from a drawdown perspective here? And I'm, I'm, 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. Right. I know that there's a potential. I win huge in my portfolio and it goes up, but I want to look at that and what a golden ratio 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. But 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. And 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, where you withdraw 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 fi journey. And I think that that's going to be, you know, heresy in the fire 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. What 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, increase across your, your fi journey there. And I think that, that plenty of people that are kind of in this cusp of phi are fine working an extra couple years or doing a little bit of side business or whatever to get that option. That's a very powerful component here. And you gotta, you gotta be honest with yourself about that when you're ready
- [29:58]
A
to start your business. Northwest Registered Agent helps you do more than just file paperwork. You get all the tools to build a real business identity from day one. A business address, website, phone number, operating agreement, agreement, free guides and more at no extra cost. Northwest Registered Agent has been helping small business owners and entrepreneurs launch and grow businesses for nearly 30 years. They are the largest registered agent and LLC service in the US with over 1500 corporate guides. These are real people who know your local laws and can help you in your business every step of the way. With Northwest, your business is set up to stand on its own from day one. That means your home address, personal email and phone number Number Stay private. Don't pay hundreds or thousands of dollars for what you can get from Northwest for free. Visit northwestregisteredagent.com money free and start using free resources to build something amazing. Get more with Northwest registered agent@northwestregisteredagent.com money free when you're ready to start your business, Northwest Registered Agent helps you do more than just file paperwork. You get all the tools to build a real business identity from day one. A business admin, address, website, phone number, operating agreement, free guides and more at no extra cost. Northwest Registered Agent has been helping small business owners and entrepreneurs launch and grow businesses for nearly 30 years. They are the largest registered agent and LLC service in the US with over 1500 corporate guides. These are real people who know your local laws and can help you in your business every step of the way. With Northwest, your business is set up to stand on its own from day one. That means your home address, personal email and phone number Number Stay private. Don't pay hundreds or thousands of dollars for what you can get from Northwest. For free, visit northwestregisteredagent.com money free and start using free resources to build something amazing. Get more with Northwest registered agent@northwestregisteredagent.com moneyfree
- [31:57]
B
if you've been putting off life insurance, I get it. The old process was miserable. Phone calls with an agent, a nurse coming to your house for a blood draw, then waiting weeks to find out what you'd pay for. That friction is exactly why so many people who should have coverage don't. Here's what I believe most BP money listeners need term life and the right move is to build a ladder. A few term policies of different lengths stacked together so your coverage steps down as your mortgage shrinks and your kids get closer to being financially independent or you get closer to hitting your financial independence number. The thing that makes that practical now is Ethos, a platform that helps you find life insurance all 100% online online, same day coverage, no medical exam. You just answer a few health questions online. Up to $3 million in coverage. Some policies as low as $30 a month. So building a two or three layer ladder that used to take a month of appointments is something you can knock out before your coffee gets cold. Get your free quote@ethos.com bpmoney that is e t h o s.com bpmoney Application times may vary and rates may vary.
- [32:58]
A
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, you know, why is it that you don't feel secure? I have conversations with people coming through Longmont. I see them at campfi and Economy and all these different FI events and I get a lot of the same conversation. I think I'm fine, 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. You know, 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 going to make them feel secure. That's not a money problem, that's not a math problem, that's a psychological problem. I'm going to send you to the psychology of money by Morgan Housel. That's an amazing book. I'm going to send you to my article@biggerpocketsmoney.com Security what would it take to make you feel secure? 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.
- [34:34]
B
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 pat it and understand that, hey, I can I work another year, I can be in all stocks for the rest of my life, compound forever and still support my lifestyle for that, for that and, and I'm fine with that. That's not like I'm not like sacrificing my retirement 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. 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 it's too simplistic to say that's unhealthy to work that extra year. I don't think it is. I think that's a preference and many people seem to really be happy with that preference. I think these things are starting to get challenged. So anyways, have a worldview and then note that we've got these six frameworks, right? We've got the withdrawal sequence, we've got the magicliff, 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 clip cliff, maybe magi becomes the most important consideration and begins to trump the other items in your stack here. Maybe if you have a huge 401k balance and you're going to be over the Magi cliff anyways it's getting that balance out of the 401k and into your, your Roth. 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 I lean. 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. He's a, you know, 45 year old early retiree with two and a half million mostly in her 401k. Kevin, 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. And as I'll get into and then I've got Eileen Eileen is actually inspired by a local political candidate, Eileen Backer, who's the challenger to Lauren Bobert, 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 for the military. She's got a $50,000 pension and she's got a 20 to $60,000 side hustle going on. And that variable income and that ordinary income from the pension also impact how we're going to think about, about decumulation. Right. And how these frameworks intersect. So. Sound good, Minnie? Should we go through these frameworks here?
- [37:15]
A
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.
- [37:23]
B
So Barb's got, you know, let's call it 2 million over 2 1/2 million is in the 401k. We've actually talked to several people that have very similar setups here on the Bigger Pockets Money podcast in the past. So I've had a couple of thoughts here. So first is let's assume in this, you know, first year, you know, Barbara's about to be on the cusp of financial independence. She's working, working. It's, you know, mid, it's July right now. She's already had 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. Maybe 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% federal tax bracket or the 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 anyway. 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 and 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 substitute 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 look 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. And I'm willing to maybe relax on the optimization across some of the other frameworks in order to get it out.
- [39:01]
A
Okay, let's look at Kevin's situation.
- [39:03]
B
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 port problem because his taxable income will be so low. That 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 you know that 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, of that long term capital gains tax bracket, 0% tax bracket, and his full standard deduction here with Roth conversions, for example. So that might be a game that Kevin is looking at in his first few years of early retirement, in contrast to Barb.
- [40:08]
A
Okay, and what about Eileen?
- [40:10]
B
So Eileen I think is interesting because Eileen's 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 Bobbert. Right. So now we've got a difference in how we're going to think about our tax optimization here. Right. 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. That's circular. So she wants to stay far away from the magi cliff if she can and 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 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, makes like 100 grand from her side hustle, it goes really well and she's going over the magic magi cliff. Well, okay, 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. So this is kind of why it gets so complicated here.
- [41:52]
A
It is complicated, but it's a lot less complicated once you start seeing how everything interconnects.
- [41:59]
B
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 it's you missed. So you can watch this on YouTube, it's always great. But you this is fine if you listen to it on the audio, but take this deck@biggerpocketsmoney.com withdraw, download it and upload it to an AI and then think about talking about some of the high level number. You 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, you know, 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 and you can see why. If you talk to the tax guy, you're going to get a tax opinion. If you talk to the, you know, the, 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 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. There's no right answer. If you want to do this the right way for you.
- [43:25]
A
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.
- [43:34]
B
Biggerpocketsmoney.com withdraw okay, that is great.
- [43:38]
A
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. 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 Biggerpockets, money listeners. On our forum you do have to create an account, but you can find that all@biggerpocketsmoney.com yeah, and the goal for
- [44:23]
B
this forum, by the way, is to allow people to ask questions anonymous 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. So I think that hopefully that's helpful. We'll see if that experiment goes anywhere, but I'm excited about that for the biggerpocketsmoney.com forums.
- [44:50]
A
Yeah, I am super excited and so we hope to see you there. All right, Scott, should we get out of here? 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. When you're ready to start your business, Northwest Registered Agent helps you do more than just file paperwork. You get all the tools to build a real business identity from day one. A business address, website, phone number, operating agreement, free guides and more at no extra cost. Northwest Registered Agent has been helping small business owners and entrepreneurs launch and grow businesses for for nearly 30 years. They are the largest registered agent and LLC service in the US with over 1500 corporate guides. These are real people who know your local laws and can help you in your business every step of the way. With Northwest, your business is set up to stand on its own from day one. That means your home address, personal email and phone number. Stay private. Don't pay hundreds or thousands of dollars for what you can get from Northwest for free. Visit northwestregisteredagent.com money free and start using free resources to build something amazing. Get more with Northwest registered agent@northwestregisteredagent.com moneyfree
- [46:03]
B
There's a reason most big wealth management firms don't like talking about flat fee planning. It's because it puts the power and the profit back in your pocket. I've been working with David Jackson at Domain Money because I wanted a fiduciary who didn't care about selling me products or making asset under management fees that grew as my portfolio grew. I wanted a partner who would look at my whole financial picture with all of its complexity and give me a personalized step by step roadmap to reach my goals faster. If you want a plan that's built for your benefit, not your advisors, you need to check out biggerpocketsmoney.com CFP this is a promotion for Domain Money, a registered investment Advisor with the SEC. BiggerPockets money may receive compensation if you choose to work with Domain Money as a client. I, Scott Trench, am a current client of Domain Money and receive non cash compensation related to this promotional activity. This is not personalized investment advice. For the full disclosures, visit biggerpocketsmoney.com CFP.