Work-Free Wealth

Income Investing for Financial Independence and Early Retirement

Simplified Withdrawal Rate FI checks

I found that when getting closer to call it quits and enjoy the post FI life, nervousness tends to increase.  With increased nervousness which is really nothing other than good old fashioned fear to run out of money, we have a tendency to seek certainty in running a bunch of calculations and checking a variety of different tools.  What about taxes, which account to withdraw from first, sequence of return risk, Monte Carlo simulations, etc…? It’s enough to drive an aspiring early retiree crazy when seeking certainty.   I am all for doing budgets and expense projections based on your real budget but in the end simplicity wins.

FI Quick Checks

Here are 2 basic checks for early retirees that want to call it quits before being eligible for pensions or social security.

Test 1:

  1. Divide any investments that you have in non-retirement accounts by the number of years you have until you can access your assets in retirement accounts (age 59 ½).
  2. Divide the projected value of your assets in your retirement accounts by the remainder of the years until the age you choose as your “end of plan” (e.g. 90 or 100 or whatever you consider a conservative estimate based on your health and family history).

Example: you are 50 years old and have 500 k in non-retirement accounts and 1 million in IRAs, 401k, etc.

That means you have 500k to live off for 9.5 years = $52,600 per year

Assume your 1 million grows in the next 9.5 years by 4% after inflation (e.g. total return of 7% – 3 % inflation).  That means at age 59.5 you would have $1,450,000.  If you plan to live to age 90, that gives you $47,540 per year plus whatever you get in pensions or social security

What about all the income and return that my money earns before I withdraw it?  Just keep it and take a cruise if the market is kind to you.  This is supposed to be a quick and dirty check.

Test 2:

Let’s assume that I want to calculate an overall withdrawal rate to make sure that I stay below the 4% initial withdrawal rate.  However, my initial withdrawal rate might be higher until pensions kick in.  The question is whether my overall withdrawal rate is too high considering the pension income in a number of years.  Let’s assume 12k in Social Security or pension income and expenses of 60k total. This means that I have 2 different withdrawal rates to average based on the number of years pre-traditional retirement age and post the age when I can get social security.

Example: Total assets of 1.5 million, current age 50, 17 years prior to age 67 to claim Social Security, life expectancy 90 years.

Withdrawal rate prior to age 67:  60k/1,500k=4%

Withdrawal rate post age 67: (60k-12k)/1500k=3%

Combined withdrawal rate = 4%*17 yrs/40 yrs + 3%*23 yrs/40 yrs= 3.43%


Once these scenarios look good, go for it and run the complex portfolio simulations and retirement calculators.  Just keep in mind, there is no certainty and flexibility and backup plans are key.


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