The Ultimate Guide to Early Retirement Drawdown (2026)

Summary

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Podcast Summary: BiggerPockets Money Podcast

Episode: The Ultimate Guide to Early Retirement Drawdown (2026)
Air Date: December 9, 2025
Hosts: Mindy Jensen and Scott Trench
Purpose:
A deep-dive into advanced decumulation (drawdown) strategies for those pursuing FIRE (Financial Independence, Retire Early). The hosts break down the primary approaches to retirement withdrawals, address tax optimization, give practical examples, and share new thinking relevant to those who have mostly focused on asset accumulation so far.

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Episode Overview

This landmark 700th episode focuses squarely on how to spend down (decumulate) your investment portfolio without running out of money, while minimizing taxes and maximizing what you leave to heirs or charity. The conversation assumes listeners already have substantial assets and are seeking nuanced, actionable strategies to fund decades-long retirements.

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Key Discussion Points and Insights

1. Why Decumulation is Harder Than Accumulation

• Main Message: “Building a $2.5 million portfolio is hard. Spending it without running out is even harder.” (A, 00:00)
• Most episodes have focused on accumulation; now the focus is on the mindsets and mechanics of spending assets—something 80% of their listeners have never practiced before (B, 04:14).
• Practical Tip: Try a “test fund” (e.g., $10,000) to physically practice withdrawals and get over the psychological hurdle of selling.

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2. Listener Feedback and Corrections

• Nuances on inheriting HSAs: Non-spouses can pay medical bills from the decedent within a year of their death (B, 01:22).
• Clarification of other experts’ views (Cody Garrett, Sean Mullaney, Mark Bakewell): All generally agree to use up standard deduction and 0% long-term capital gains brackets when optimizing withdrawal strategies (B, 02:30).

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3. Fundamental Goals of Decumulation

• Primary Goal: Don’t run out of money in retirement (B, 06:00).
• Secondary Goal: Maximize after-tax estate value (pass more to heirs/charity if possible) (B, 06:47).
  • “I would much rather leave $10 million, although I might want to spend a little bit more during my living years.” (A, 06:47)

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4. Portfolio Diversification For Withdrawal

• In accumulation, all-stock portfolios may be ideal; in decumulation, diversification (including bonds, alternatives, gold, managed futures, international stocks) helps protect against sequence-of-returns risk (B, 07:16).
• Golden Ratio Portfolio (Frank Vasquez): 42% stocks, 26% bonds, 16% gold, 10% managed futures, 6% international. Mindy tested this live and found it outperformed even after regular withdrawals (A, 09:04).
• Tip: “Take $10,000 and start withdrawing from it... to build that habit. I think it will make a big difference.” (B, 10:31)

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5. Tax Treatment of Account Types in Retirement

(B, 14:40)

• Roth IRA: Post-tax in, tax-free growth & withdrawal, best for inheritance.
• After-Tax Brokerage: Favorable for early retirees—0% capital gains up to significant limits; stepped-up basis for heirs.
• Tax-Deferred (401k): Tax on withdrawal as ordinary income, not as advantageous for heirs (ordinary income over 10 years).
• HSA: Highly efficient for you (tax-free withdrawals for qualified expenses), worst for heirs unless used for prior year medical bills.

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6. Investment Order of Operations (During Accumulation)

• 1. $1,000 cash buffer
• 2. Pay off bad debt
• 3. Take 401k match/ESPP
• 4. Build 6mo emergency fund
• 5. Max out HSA
• 6. Max out 401k, then Roth IRA
• 7. After-tax contributions
• Decumulation is NOT the reverse (A, 19:32).

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Retirement Drawdown Strategies (with Examples)

1. Sequential Drawdown

(A, 21:06)

• Order: After-tax accounts → 401k withdrawals (direct or via 72T/Roth conversion ladder) → Roth IRA → HSA.
• Advantage: Early years can be spent in a 0% income tax bracket.
• Pitfall: Risk of a "tax bomb" from required minimum distributions (RMDs) at 73 or 75 if tax-deferred accounts balloon.
  • “If you are one of these people who has a large 401k... you risk having this kind of a tax bomb hit.” (B, 22:26)
• Example Calculation:
  • Year 1: $64K from brokerage, $0 taxes due to 0% LTCG bracket.
  • Year 2: $64K from 401k, ~$5.5K taxes due to ordinary income treatment (A, 24:25).

2. Blended Drawdown

(B, 26:08)

• Order: Withdraw some from pre-tax accounts (up to standard deduction), and some from after-tax (to max out 0% capital gains), then move to Roth/HSA.
• Philosophy: “Never waste the standard deduction and never waste the 0% marginal tax bracket on capital gains and qualified dividends.” (B, 26:08)
• Example Calculation:
  • $64K/year: $32K from each of 401k and brokerage.
  • Total tax over 2 years: $3,423 (vs $5,552 with sequential, i.e., $2K+ in savings) (A, 33:57).
• Important Note: This is not always best; your personal tax position, portfolio, and state taxes all matter.

3. RMD Suppression Strategy

(B, 38:27)

• Order: Withdraw aggressively from pre-tax accounts (perhaps up to the top of the 12% bracket), even if you don’t need the money; then spend after-tax, then Roth, then HSA.
• Purpose: Reduces forced RMDs at higher brackets later; “insurance” against higher future tax rates.
  • “There's a real chance a million and a half in my 401k could swell to 4, 5, 6 million if I go with sequential... I'd rather take money out on my own terms, not because the government is telling me you have to do this.” (A, 41:47)
• For whom: Especially suitable for those well past their FIRE goal with large pre-tax balances or strong income prospects.

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Advanced Tools and Techniques

72T (Substantially Equal Periodic Payments)

• Allows pre-59.5 access to IRA/401k without penalty; must be maintained for >5 years or until 59.5, whichever is longer (A, 46:53).
• “The 72t rule scares me... you could roll over $100,000 out of your 1.4m 401k... and layer that in.” (B, 47:44)

Roth Conversion Ladder

• Convert traditional IRA/401k to Roth in low-income years, pay manageable tax, then withdraw principal from Roth tariff-free after 5 years.
• More flexible for those with longer retirement horizons.

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Decumulation Optimization Tips

• Place aggressive investments in Roth/HSA; more conservative in pre-tax; balanced in after-tax. (B, 43:07)
• Try a “decumulation test fund” ($10k, $40/month withdrawals) for hands-on learning.
• Early retirees generally enjoy low taxes until RMDs or Social Security (B, 43:07).
• Having a paid-off home helps reduce withdrawal needs and risk, letting you optimize tax brackets and ride out market downturns.
• Sequence-of-returns risk: Use cash positions and flexibility in spending.

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Notable Quotes & Moments

• “Most of the assets pass to the spouse pretty well. That's not always the case...” (B, 01:22)
• “If you want to decumulate, you'll have to be comfortable selling a stock.” (B, 04:14)
• “I had never sold a stock before to fund consumption... it is a little bit different to go in and just hit sell.” (A, 11:24)
• “Never waste the standard deduction and never waste the 0% marginal tax bracket.” (B, 26:08)
• “Your tax position and your portfolio is specific to you.” (A, 33:57)
• “There's going to be a lot of 'It Depends' work here.” (B, 50:23)

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Timestamps to Key Segments

| Time | Segment | |--------|-----------------------------------------------------------------| | 00:00 | The problem: Spending down a portfolio is hard | | 01:22 | Corrections: HSA inheritance and expert approaches | | 03:56 | From accumulation to drawdown—a new phase | | 09:04 | The Golden Ratio decumulation portfolio (Frank Vasquez) | | 14:40 | Account tax treatment in retirement | | 19:32 | Accumulation order of operations; why decumulation is different | | 21:06 | Sequential drawdown explained | | 26:08 | Blended drawdown explained | | 38:27 | RMD suppression approach explained | | 46:53 | 72T and Roth Conversion Ladder explained | | 50:23 | Final takeaways, conclusion, and listener feedback plea |

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Final Takeaways

• There’s no one-size-fits-all answer. Your withdrawal order and investment approach should be tailored to your tax profile, portfolio composition, and emotional inclinations.
• “It depends” is the right answer—be opportunistic and strategic annually.
• Practice now: set up a trial decumulation portfolio to ease the transition from saver to spender.
• Sequence-of-return risk, RMDs, and future tax rates are the biggest threats to FIRE spenders—use tax-advantaged withdrawal plans to mitigate them.
• The hosts encourage ongoing discussion, feedback, and learning as new rules and realities emerge.

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For calculators, slides, and resources, visit: biggerpocketsmoney.com/resources

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Transcript

[A]

Building a $2.5 million portfolio is hard. Spending it without running out is even harder. Decumulation strategies determine if your retirement succeeds or fails. Here's the ultimate guide to decumulation.

Hello, hello, hello and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen and with me, as always, is my Nothing is Certain co host, Scott Trench.

[B]

Nothing is certain except for death and taxes, right? But I think that for the fire community only death may be. We might be able to totally avoid taxes or for the most part avoid them with the accumulation approach. I am super excited to be here on the 700th episode of BiggerPockets Money. That. Wow, what has that been like eight years, Mindy? Nine years.

[A]

Almost nine.

[B]

Crazy. What a privilege and a joy it is to get to do this. Like this is. Like this is the ultimate possible way to work. Have a semi retired podcast hosting, light, whatever. I'm just so grateful to you, Mindy, to Blake, our producer, to everybody who listens to this show. Thank you, thank you, thank you for just enabling me to do what I love.

[A]

Well, you're welcome, Scott. And right back at you. I am so thankful as well to be able to do this with you twice a week, every week for the last almost nine years. This has been a lot of fun.

[B]

Before we get into today's episode, we wanted to discuss some feedback we got on last week's content. We love getting feedback from our listeners and we always want to make sure that the information we are sharing with you is accurate and up to date and treats everybody fairly. So please continue to let us know if anything we share is incorrect or you feel does not represent the reality of a situation the way it ought to be. That said, we want to make two shout outs today. First, we discussed that the HSA is the worst account to inherit, which we still agree with. But what we want to acknowledge is some nuance that a user was kind enough to remind us about, which is that both spouses and non spouses can inherit that account. Non spouses can use the deceased's HSA to to fund tax free any medical expenses that occurred before death, provided those bills are paid within one year of the account owner's passing, using the receipts and of course all the other documentation to offset the otherwise taxable inheritance. So that's a really key benefit. It's just a real reason to leave something behind potentially in that HSA at end of life for that potential benefit. And then spouses, of course, get even better treatment inheriting the HSA as their own. But for other heirs, that 12 month receipt deadline is crucial. So we kind of take it for granted that most of the assets pass to the spouse pretty well. That's not always the case, and so we should call it out. And this was great feedback from a listener, so thank you so much for providing that. And then second, I think we might have inadvertently misrepresented or not quite accurately discussed Cody Garrett and Sean Mulaney's stance on blended retirement approaches on their podcast. They and our recent guest Mark Bakewell are in very close alignment. Both, of course, agree that you ought to use up, at the minimum, the full standard deduction and 0% long term capital gains tax brackets. And the differences in the approach are very minimal between those two things. There's not a lot of disagreement here. And all three of those individuals, Mark, Cody, and Sean, are people we, Mindy and I regard as some of the best and brightest minds in the tax planning space for early retirees. So thank you to all of them and we apologize for any confusion that may have misconstrued their beliefs and their views on best practices. We know Cody and Sean have a great approach there. That's why we had them on twice and hope to have them on many more times in the future to talk about these subjects. So thank you, Cody and Sean, and thank you to the listener who pointed out that we may have misrepresented their views on how they feel about the blended approach to withdrawals and early retirement. All right, now let's get back into the Ultimate Guide to Retirement Drawdown.

[A]

Let's jump into talking about accumulation. Scott, we have spent so many episodes, about 689, talking about how to build up your portfolio. Now we're going to start talking about withdrawing. It's not as easy as just selling a stock.

[B]

That's right. Although it does start with that. And I want to point out that a huge percentage, some 80% of BiggerPockets Money listeners, have never sold a stock to fund consumption. So this episode is presuming that you are either going to get past that or are already past that and are willing to do that. So that is a mental hurdle that you will have to get over. If you want to accumulate. You'll have to be comfortable selling a stock. So with that, should we go ahead and get into it and talk about this presentation we put together?

[A]

We should. And Scott, obviously to celebrate, you have created a PowerPoint presentation, because that is your jam.

[B]

I think we have created a PowerPoint presentation. And by the way, all of these PowerPoint presentations and resources will be uploaded to biggerpocketsmoney.com resources. If you want to look at this or any of the other presentations or files that we talk about in the show, they're all free here. You don't have to give us your email or anything. You just can download them right to your computer or open them in Google Drive, if you prefer. Google Drive for accessing those files. So biggerpocketsmoney.com resources. All right, let's go ahead and get into it. Today's episode is called the Ultimate Guide to decumulation in 2026. We're going to talk about the differences between accumulation and decumulation. And first we're going to present the goals here. Right. So there are two goals that we're taking for granted in the context of a decumulation strategy discussion. Right. The first goal is don't run out of money in retirement. Almost everything we do around the 4% rule, withdrawal rates, diversification, you know, tax planning, all that kind of stuff, it all boils down to not running out of money in retirement. We don't want to run out. That's a huge fear that we have. It's a very real risk for the fire community. If you're going to take yourself out of work in your 30s, 40s, or 50s and lose that potential for the maximum earnings potential that you could have otherwise, you really got to be certain about this goal. So we're going to spend a lot of time thinking about how do we make sure we don't run out of money in retirement if that goal is achieved or if we're very confident that goal is going to be achieved, then we also have a secondary consideration here, which is maximizing after tax, estate value. So in the event that we can safely hit our goals, I think we'd rather pass on $10 million to our heirs or have the option to give away $10 million while we're alive or the inflation adjust equivalence of that, or distribute that to charity or give that to our heirs earlier, whatever it is, versus 2 million. When that option presents itself, we're going to take that if it has a minimal or negligible or no impact on our likelihood of not running out of money in retirement. So, sound good, Mindy, is that you agree with that?

[A]

I completely agree with that. I would much rather leave $10 million, although I might want to spend a little bit more during my living years.

[B]

That's fair. Yes. So we take it for granted that there's a we don't run in Retirement, we may want to maximize spending, but I presume that a lot of people are going to be well within the bands of spending. They're going to be very, very sure, very their portfolio allocations. And if they're able to achieve that, then yes, all else equal, they're going to want to maximize their estate value or the amount they can give.

[A]

Yep, absolutely.

[B]

So let's talk about diversification in the context of a decumulation portfolio. Right. Diversification in a general sense is going to reduce our long term returns. Right. We know that one of the best passive ways to build wealth is to invest in an all stock passively managed index fund over a very long time horizon. That should yield 8 to 11% nominal returns and probably 6, 7% real returns over a very long period of time. However, once we begin decumulating from a portfolio, if we're anywhere close to traditional retirement, rules of thumb, like the 4% rule, we can't do that with a decumulation portfolio because we run into a problem called sequence of returns risk. Right. If the stock market goes down dramatically and we're trying to, you know, if we have a $2.5 million portfolio and it goes down 50% as has happened in historical periods, to 1.25 million for eCamp, we would not be able to sustain our spending. We'd have to pull back or disrupt our lifestyle. And that's the whole point of what we're trying to do. We're trying to prevent that disruption to our lifestyle when we think about retirement planning. So diversification and putting our money into uncorrelated or even better negatively correlated assets so that we can withdraw from our portfolio over a long period of time much more safely or have much higher withdrawal rates is critical in this phase. So in an accumulation phase, our portfolio might look like 100% stock portfolios or highly levered real estate portfolios, private businesses or maybe speculative investments. But in our decumulation phase, we want to have a diversified portfolio with uncorrelated assets. And an answer to that, maybe not the answer or a specific answer, but an answer to that could be the one we went over with Frank Vasquez. The golden ratio portfolio, which you have set up mind. Do you want to tell us about that?

[A]

Yeah. The golden ratio portfolio is 42% stocks, which is 21% growth and 21% value stocks, 26% bonds, which is split in half, 13% intermediate and 13% long term bonds, 16% alternatives. I chose gold, which is Frank's favorite, and frankly that is the best performing stock, best performing holding that I have in my Frank Vasquez portfolio. 10% is in managed futures which is looking towards towards trends and 6% is in international stocks. Again split 50, 53% growth and 3% value. I have created a portfolio in July from which I have been pulling out the equivalent of 5% over the year. But I did it per month which is $42 a month out of my ten thousand dollar portfolio and I am up almost one thousand dollars after having withdrawn for five months. So I think Frank is on to something with his golden ratio portfolio. But the 4% rule was written with a 60% stocks 40% bond portfolio in mind. So going back to your comments, got this 100% stock portfolio that so many people in the fire community seem to have isn't what the 4% rule was based on. So you really need to be paying attention to what your portfolio is made up of when you get to the accumulation phase.

[B]

I think that there's many good examples of a decumulation portfolio. This is the one that Mindy is testing right now with her personal funds. I am doing the same personally here and I think that is a tip we would have for people is let's say that you're approaching your fire number. Let's say it's $2.5 million which is the midpoint for Biggerpocket's Money listeners is this $2.5 million number that supports about $100,000 in annualized spending at a 4% withdrawal rate. Let's say most of that is in stocks right now and you're thinking about building toward a decumulation portfolio. But you there yet? Just take 10,000 bucks, something small relative to your position and build this portfolio or build a portfolio that it will be whatever your decumulation portfolio might look like and start withdrawing from it. Just that 40 bucks a month to build that habit I think will make a big difference when it comes time to really seriously consider firing and leaving work.

[A]

Absolutely Scott. I had never sold a stock before to fund consumption. I had sold some stuff and then bought other things and it is a little bit different to go in and just hit sell. We have to take a quick ad break so while we're away we would love it if you would hop on over to our YouTube channel which can be found at YouTube.com biggerpocketsmoney. AutoTrader is powered by Auto Intelligence, the hyper personalized way to buy a car. Autotrader's tools sync with your exact budget and preferences to tailor the online car shopping experience totally to you. Budgeting lets you input your info to see listings in your price range. Search and inventory helps zero in on your dream car. You can choose from new or pre owned, the style of the car and features like engine size, color, all the way down to whether you want a trailer hitch. Go ahead and get picky. Don't worry about scrolling endlessly. AutoTrader powered by auto Intelligence only shows you vehicles based on what you can afford and what you want, and pricing shows you which listings are the best deals so you can feel like you're winning the negotiation without negotiating. You can even choose how to close the deal online at the dealership or a little bit of both. AutoTrader powered by auto Intelligence makes the process of buying a car less of a process. Try it today. Visit autotrader.com to buy your perfect ride. My husband and I have multiple investment accounts across several different companies. Throw in vehicles, investment properties and private equity holdings and it can be difficult to get a good idea of our actual net worth. And frankly, between the kids, work and just life in general, I don't have time to be logging into 47 different places. So I just didn't Scott walked me through setting up my Monarch account and suddenly everything was easy. It's all in one spot so I can check in quickly. Just like everything else on Monarch, the dashboard is customizable so I can see at a glance what's most important to me and dive deeper when I need to. Feel organized and confident in your finances with Monarch, an all in one personal finance tool that brings your entire financial life together in one clean interface on your laptop or your phone. And right now, just for our listeners, Monarch is offering 50% off your first year with code pockets monarch.com don't let financial opportunities slip through the cracks. Use code pockets monarch.com in your browser for half off your first year. That's 50% off your first [e-mail] with.

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[A]

Welcome back to the show.

[B]

Let's talk about tax treatment here of these accounts because that's going to make a big difference in terms of how we think about withdrawing from these accounts and it has to overlap with portfolio strategy, right? I think everybody's favorite account is the Roth account. This money goes in post tax, grows tax free and can be withdrawn tax free. After age 59 and a half, all gains, all income in the Roth account could be withdrawn tax free. This is also the best account to inherit to pass on to your heirs because they can distribute all of the contributions and gains tax free and they have 10 years to liquidate that account. The next account is going to be your after tax brokerage account. When a brokerage account the basis, let's say you put $100,000 in to buy stocks and it grows to 200,000 dol, your gain is $100,000, the difference between $200,000 and $100,000 and any income that comes out of it is going to be what's called a qualified dividend or typically is going to be a qualified dividend depending on what you invest in. This is also a highly tax favorable account for an early retiree because the marginal capital gains and qualified dividend rate is zero, up to about what, $98,000 for a married couple. And it differs based on your filing status. This is also a very favorable type of account to pass on to heirs because your heirs will receive the the account balances at a stepped up basis and so up to very high limits like $13 million. These accounts can be passed on tax free to heirs if they choose to then liquidate them. Of course the gains from there once they inherit them will be taxed. The next account is going to be our tax deferred accounts. These are going to be your 401k, your solo 401k. These pre tax retirement accounts, there's equivalents for military, for teachers, for government workers, all sorts of things like that. But these accounts are going to be tax deferred, so you're not going to pay taxes today when you contribute to these accounts and the amounts that you contribute, but when they're withdrawn are going to be taxed at ordinary income rates. These are unfavorable accounts, relatively speaking, to inherit to pass on to your heirs. Because your heirs are going to have to liquidate these accounts and all liquidations are going to be taxed at ordinary income rates and they have to liquidate them within 10 years. Those are often going to overlap with higher income years for your heirs in many cases as well. The HSA is the last account account here, and this is perhaps the most unfavorable account to inherit because all of the the proceeds are going to be taxed immediately as ordinary income by your heirs when they receive the account. It is, however, a very tax efficient account for you because money goes in pre tax, grows tax free or tax deferred, and can be used or withdrawn for qualified medical expenses without any taxes on gains or income or any of those sorts of things. So we want to be strategic with this account. We want to use this account during our lifetime and ideally, if possible, not pass this one onto our heirs. If we can use those proceeds for expenses while we're alive. How am I doing so far, Mindy?

[A]

You're doing great, Scott. And I just want to point out that even though the HSA is not the best type of account to inherit, your heirs are still getting a big pile of money. Yeah, they'll have to pay taxes on it, but it was essentially like, here's some money. It's not a bad account to inherit. There's just better ways to spend your money. Ooh, foreshadowing.

[B]

Scott, Absolutely agree. Yep. But we're a fire community. This is BiggerPockets money. We're not trying to say like everything is all good. We're trying to optimize here. Let's optimize this situation because we're financial nerds. You're listening to the 700th episode of Bigger Pockets Money after nine years, many of you have listened to all or most of the episodes. Wow. Thank you. We're going to optimize here. That's what we're here for.

[A]

Let's optimize.

[B]

So to reframe what we've talked about right. During our accumulation phase, phase one of our journey to early financial freedom. It's fairly simple. We're going to invest in concentrated positions in high growth asset classes, and we're going to invest for it with a long term outlook that could look like 100% stock portfolio, maybe a cash reserve, maybe a house hacker, a few rental properties. But we're keeping it simple and we're investing aggressively when we get to retirement. We now need to consider several things. One is where Is my money? Where's my asset location? Is it in 401ks? Is it in Roth? Is it in after tax brokerage accounts? Is it in HSAs? And two, what is my diversification looking like? Do I have a portfolio that actually is supported or actually has uncorrelated assets that can support these higher withdrawal rates throughout a long duration? Early retirement. Right. If you retire at 45 and you plan to live to 95, because why wouldn't you? That's a 50 year retirement. We need to be planning for very long sequences of withdrawals here. We have to have lots of safety margin in order to make sure that that lasts.

[A]

So.

[B]

So minimizing taxes is a huge part of this journey. During the accumulation phase, phase one, we often will invest in a tax advantaged order of operations. We've talked about this before, so we'll run through it quickly. Mindy, do you want to give us this one?

[A]

Yes. Okay. So the investment order of operations that we at BiggerPockets Money follow is to first build a $1,000 cash buffer, then pay off any bad debt you have, take your 401k match if your company offers it, take any free money like the employee stock purchase plan. Then we want you to build and maintain a six month emergency fund. After all of those have been done, we want you to start maxing out your HSA with any funds left over. We want you to max out your 401k and then max out your Roth IRA. Those two can be flipped if you choose. So you would instead max out your Roth IRA before maxing out your 401K. And then after that, we're looking at after tax contributions for any quote unquote leftover money. Now this is the accumulation phase, order of operations. The decumulation phase, which is the opposite of accumulation, is not the opposite of this strategy. Scott, let's look at decumulation.

[B]

This is really the heart of what we're trying to get to today. The challenge here is I can't give you one order of operations for withdrawal. So we're going to present all three retirement drawdown strategies that we've kind of seriously explored here at Biggerpockets Money. There are plenty more, but these are the three that we're going to explore and we're going to kind of walk through the pros and cons of each of these. So the first one is going to be sequential drawdown. Mindy, do you want to give us the overview of this particular strategy?

[A]

Number one, we are pulling from our after tax portfolio. After that they want you to do the pre tax 401k withdrawals if needed early, earlier than 59 and a half, you can do a 72T to access that money. If it's not needed in the early years, maybe a Roth conversion ladder. If you've got a little bit of space between your income cap, you might want to start doing a Roth conversion ladder. So you're taking money from your 401k, converting it to a Roth IRA, paying taxes on that money, that's a taxable event. And then after a Roth IRA has been opened for five years or you are age 59 and a half, you can access the contributions to the Roth IRA. If you are 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 not paying taxes when you withdraw, as long as it's a qualified medical expense.

[B]

So 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 kind 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? So 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 max 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 or 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. Now, some would argue that this is a great problem, but it is a real problem. And if you're thinking about how you're thinking 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 less in lifetime taxes if they think about another order of oper here. So Mindy, do you want to explain what an example of sequential drawdown looks like in practice?

[A]

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 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. 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 4,300dol there. That gives us a grand total of 50 $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. You have another option for us though.

[B]

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 401 without much of a tax component consequence. So one example of this is to withdraw up to the standard deduction. Right. You know, the, 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 zero percent 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, your pre tax R401k. 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 up to the 0% federal marginal tax rate for long term capital gains and qualified dividends, which is $96,700, a really high amount. This is a great way to generate 100 plus thousand dollars in spendable liquidity without paying any federal taxes. You may pay some, 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. If you're healthy and can qualify for one of these plans, are 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. 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. So we're going to use that on a strategic basis in all of these areas.

[A]

Let's go and look at what that actually looks like. First, let's look at the tax free rates. So this is for a single taxpayer. The 20, 25 tax brackets are 10% goes up from 0 to $11,925. 12% is from 11, 9, 26 to 48, 4, 75. So almost $50,000. You are paying only 12% tax. 22% tax goes from the 48-476-all the way up to $13,350. And I'm going to stop there because people can look this up if they are above that. But also for the purpose 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. So you can realize gains after you've held it for more than a year, realized gains up to, and that's just the gain. Scott, I don't think we've talked about that yet. The, let's say you bought a stock for $50 and it increased to 75. So you have 25 in gain 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, I just, I think taxes is kind of fascinating.

[B]

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 tax, realizing all of my income up to zero percent is a no brainer, right? What 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, 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% percent effective tax rate, when you take the standard deduction, you're not going to pay any taxes up to this 48,300 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. Because 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 and 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 multi million dollar portfolio.

[A]

Okay, Skills, 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 5050 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 gain 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 1100 dollars in taxes and and 4325 remaining tax at the 12% for $500 in taxes. Total tax amount this year is 1712 dollars. In year two we are doing the same blended 5050 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 at $1700. So over the course of two years you are paying $3423, whereas with the sequential drawdown you were paying $5552 or $2000 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. And we have to caution against just giving a blanket statement, oh, everybody should do 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.

[B]

It's all subject to your personal situation. We're going to talk about that later and how you know 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. And 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 a 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 that I'm forced to withdraw at age 70, 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. You know, I'm fine with, I can also, I'm going to realize a little bit of income and begin defraying 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 3 or 4 or 5% across my, 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. All right, we are retiring for one final ad break and we'll be back with more shortly.

[A]

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[B]

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All right, thanks for sticking with us. The third approach, you know, the third philosophy, the third option for retirement, you know, draw down is going to be this concept about of RMD suppression. So this is something that I worry about personally and maybe other people do too. But you know, 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 protect, at least in the last 100 years or so. 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. And if I'm a 45 year old early retiree who has any interest at all in business, has any interest, may earn a little bit of dollars here and there, maybe has some real estate or some extra security blankets in their position, position, there's a very real chance that this million or million and a half in my 401k could swell to 4 or 5 or 6 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. So 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, then 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 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, then 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. 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. So what are your thoughts about RMD suppression one here Mindy?

[A]

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, 20, 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. 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, rather take money out on my own terms, not because the government is telling me you have to do this.

[B]

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. Perhaps 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, impersonal 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, the tax deferred accounts like the 401k should have the more conservative positions that would be bonds. In a 6040 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. And just if it's 10,000 bucks and you spend 40 bucks a month, 4167 or whatever it is, that's 1/12 of 5% of the portfolio of portfolio distributions, just use that to buy yourself pizza or whatever and Just get in the habit of doing that. It's not me 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 BiggerPockets Money. Next. Remember that early retirees in general pay low taxes at least today, right? You'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 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% as very low low marginal tax brackets to realize income like with the Roth conversion and those types of things. It also greatly reduces your risk, of course for your portfolio 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 modeled 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 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. All of those things can reduce your risk and increase the probability of your portfolio surviving through that Monte Carlo simulation we we run there. Two advanced mechanics that you will need to be aware of if you want to pursue this are the 72 t t 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?

[A]

The 72t? This is how you access retirement funds without paying the 10% penalty if you're taking them before your age 59 and a half. This is the tax deferred accounts. So your traditional 401k, your traditional IRA, it allows you to withdraw these these funds, 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 Equity episode 649. And that is absolutely worth a big listen. If you are thinking about doing a.

[B]

72T just to kind of rehash something Mindy said there. The 72T rule scares. I think it's 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, later on in your journey. And we've unpacked a tool here where 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. You could roll over $100,000 from that $1.4 million, 401 into a new account and begin a 72 tier, 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 I did, it takes that into account in there. So there is a. Once you set it 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 possible way to begin accessing these funds. There just are some gotchas and some workarounds to those gotchas.

[A]

Yeah, Scott, thank you for reminding me of that. I am 53 and I only have six years until I have to stop taking withdraws 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, withdrawals for a whole lot longer than I would if we both started them this year.

[B]

Yeah. So. 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.

[A]

Right.

[B]

If, if I had a year where I had low income and had this opportunity, I personally would roll them over. But someone perhaps like more like Mindy, who's closer to traditional retirement age, the 72t was rule, the risk of overshooting it and having more than you want is not that large over a five, six year period.

[A]

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.

[B]

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. I'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, I think it's. This is all that we've learned. I'm sure there are people out there that are more masterful or have mastered this subject, are masters of this 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 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. And so if you have situations or areas where what we said today needs to be adjusted or needs to be thought through, please send us that feedback. Scottiggerpocketsmoney.com and Mindy 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. And so 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 than the fictional Personas and hypothetical cases we invented today.

[A]

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?

[B]

Let's do it.

[A]

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.