How I’ll Fund My Retirement

Many of the financial bloggers I follow are pursuing financial independence.  Not many of them are already there.  So there isn’t much information about how to fund your life once you are retired.

My fellow blogger, Fritz, at RetirementManifesto decided to correct that by creating a chain of articles discussing drawdown strategies.

I decided to join in the fun and lay out my draw down strategy.

I don’t have a pension.  I am counting on Social Security though I’ve reduced my expected payments by 30% because something has to change with Social Security, right?  At 52, with a husband in his 60’s (sorry Mr. Ms. Liz!) I feel secure in counting on this.

Curious about how I got here?  Here’s my savings rate and net worth growth.

First, a couple snapshots on where I am now.  I’m following Fritz’s lead on format.

Tax Allocation

This shows my available assets by type of account they are in–After Tax is money that is not in retirement accounts; Roth Retirement accounts will have no tax when withdrawn; Traditional Retirement accounts will be taxed when withdrawn.

Tax Allocation

The majority of my available assets are in after tax accounts.  This was intentional as the IRS doesn’t make it easy to get at traditional retirement accounts (401k, traditional IRA etc.) until 59 1/2 and I retired at 51.

I wish I had more money in my Roth accounts but they were not offered in my company’s 401k plan until late in my career and I was not eligible to contribute directly to Roth IRA’s because of our high income.  It also made more sense to reduce our taxable income with our retirement contributions because we were in a high tax bracket.  Hello retirement–goodbye high tax bracket!

During our early retirement years, we do plan to convert traditional retirement funds to Roth funds at 0% or very low tax rates.  But, unfortunately for me, it is likely we’ll convert Mr. Ms. Liz’s accounts because he is over 60 and receives an exclusion from our state tax for up to $20,000 of his conversions each year.  (A reminder that Mr. Ms. Liz and I keep our money separate).

Asset Allocation

Here’s how my money is invested:

Asset Allocation

A couple of explanations.

I have a lot of cash–too much actually.  But I do not like bonds and feel they carry high risk without adequate reward in today’s low interest rate environment.  So I carry cash to offset some of my stock risk and so I won’t have to sell stock when the market is in a downturn (which I assure it will be at some point).

I have two types of real estate investments. Real estate investment trust mutual funds and residential real estate.  The residential real estate is the value of our vacation home and a portion of our primary home.  I only include these in my spendable assets because we intend to downsize our primary home and sell our vacation home before Mr. Ms. Liz turns 85.  This is a huge, over allocation to real estate but our desired lifestyle of chasing summer and living in resort communities drive this.

Other than that stash of cash, this allocation is very aggressive, not very diversified and not appropriate for most people.

Drawdown strategy

If I spend up to my inflated, super cushy retirement budget, my after tax money should last until I’m 64.  At that time, I’ll either free up some money by downsizing our primary home or selling our vacation home or I’ll pull money out of my retirement accounts.

If I continue to spend at current levels, I’ll likely never run out of after tax money.  Crazy huh?  I should have retired earlier.   I’ll take my required minimum distributions from my traditional retirement accounts and transfer the funds to my after tax accounts.

If I do need to pull retirement funds, I intend to pull 1/2 from my traditional retirement accounts and 1/2 from my Roth retirement accounts.  This will keep me in a lower tax bracket than pulling 100% of my needed funds out of traditional accounts.  But this is in the distant future so I’ll have to run the various scenarios when we get closer.

I plan to take Social Security at my full retirement age of 67.  It would be smart to delay Mr. Ms. Liz’s until age 70 because he was the higher earner.  Then, I’d be able to switch over to his, higher amount if he dies before me (did I mention he’s 8 1/2 years my senior?).  But this will be his decision.  Either way, I won’t have to eat cat food . . .

Since the market is high, I’m currently selling stock mutual funds to support my spending.  Each month, on about the 20th, my “paycheck” is deposited into my checking account.  When my checking balance gets too high, I turn off the “paycheck”.  If my checking balance gets too low, I’ll transfer some more cash.

When the S&P 500 index is 10% or more below the previous 10 year high, I will switch over to pulling cash to fund my spending.  My hope is this will allow me to avoid selling stocks when the market is low.  If S&P history repeats itself, I expect I’ll be pulling cash about 1/3 of the time.  When the market recovers to its 10 year high, I’ll replenish my cash.

As I get within five years of needing my retirement funds, I’ll start building a cash or short-term bond cushion in those accounts.  I’ll continue to support my spending by selling stocks when the market is high and pulling cash or short-term bonds when the market is low.

Retirement budget(s)

You probably figured out that I have two budgets.  The inflated, super cushy budget I use in my long-term plan that goes out to age 100 and my more modest budget that I actually operate on.  My more modest budget’s spending is about 25% less than my long-term plan and is in line with my actual spending over the last decade.  This more modest budget allows me to do everything I want to do and I easily meet it.

Hopefully I’m looking at 40 healthy years in retirement but planning for 40 years is scary, particularly with health care changing each time I turn on the news.  Sticking with my more modest budget allows me to build up extra reserves just in case.

I could take my non-housing net worth, multiply it by 4% and increase that 4% by inflation each year to support my spending.  The Trinity Study tells me this works 96% of the time.  But I prefer to have the details all laid out in Excel.

My long-term plan allows me:

  • to increase expenses by inflation until I’m 65 and reduce the increases as I get older (because studies show we reduce our spending as we age).
  • to increase the value of my real estate by less than inflation.
  • to include irregular expenses like car purchases, home improvements and the like when I expect them.
  • to pull in proceeds from downsizing our home or selling our vacation home.
  • to vary my investment returns and inflation by year–this allows me to reduce returns after big market run ups like we are experiencing now.

And because I can see the calculations each year, I am comfortable that it is achievable.  I’ve been using this model since 2013 and it is working well for me.  It’s predecessors were less sophisticated but helped me keep my eye on the prize.

What did I miss?  Does anything seem way off?  I welcome your comments and suggestions.

Want to learn more?  Here’s the current chain of bloggers’ drawdown strategies:

photo credit–Ms. Liz taken from our back porch–feeling fortunate!

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Author: Ms. Liz

A CPA, I retired at 51 and I am helping people create their fantastic futures!

25 thoughts on “How I’ll Fund My Retirement”

  1. Ms. Liz, thanks for joining The Chain Gang! You’re officially in as “Link #14”! A well thought out plan, and laid out well in your post. You’re fortunate to have the large after-tax slice, I can relate to the “Roth not being available until late in my career”.

    It’ll be interesting to look back on this chain in a few years and see how things are turning out for all of the Chain Gang members. I look forward to following your journey!

    1. Fritz, thanks for starting the chain! This is such a critical but under-explored topic for early retirees. Writing this made me get more specific about my plan. I had a vague notion of when the market is up vs. when the market is down but this forced me to figure out the 10% rule and study the likely scenarios.

      I, too, look forward to seeing how this turns out for all of us!

  2. Great job Ms. Liz. Thanks for joining the chain gang. You have a solid plan in place. I too am looking at retiring in my early 50’s and am planning on a long retirement.

    1. Thanks Dave. Early 50’s seemed just right to me. I was able to accomplish my professional goals and build enough investments that I don’t have to worry about money. I’m just 13 months into retirement and am loving the flexibility and slower pace.

      It is definitely worth the sacrifice!

      Gotta go – off to play pickleball! 🙂

    1. Funny! I’m on the cusp so maybe I picked up on that! I’m a cup half full girl but, when it comes to my finances, I think a bit of healthy skepticism is smart.

  3. Great post. Like you, I am concentrating on getting as much of our investments that I can in tax-free accessible accounts. Even though I am now of an age to access all our retirement funds. I don’t want to. In the UK they have great tax advantages in that they can be passed on to our kids free of inheritance tax, which at 28% is well worth thinking about!

    1. Thanks Erith! Wow, what an amazing gift that would be to your children. We don’t (currently) run into estate tax until we reach 5.5 million in net worth so that is not a consideration for most of us. I like the flexibility I have with such a large percent in after tax accounts.

      Thanks for stopping by!

  4. Great article and glad to have found your site, Ms. Liz! Thanks for the specifics on drawing down your retirement money. This is a great topic and one that I’m glad more bloggers are writing about.

    1. Thanks Laurie! Writing this post forced me to get more specific about how I would handle market downturns. I’m glad got this party started!

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