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Our Retirement Withdrawal Strategy

So I have established I plan to retire at 55. But what is my retirement withdrawal strategy? How will I get my money out and how does that tie back to my investment strategies?

This whole post originated per a suggestion from Mr. Need2Save, credit where credit is due. But In a way he gave me a great segue from my post about my plan to retire at 55. If you recall from that post I indicated we chose 55 partially so I would have room to execute our retirement withdrawal strategy.

For my frequent readers, you already realize I heavily favor tax advantaged accounts. This means my investments are overweight in 401Ks and Roth IRAs. Now the Roth IRAs are obviously post tax, but the pretax 401ks present the question of how do I withdrawal them without giving up a significant portion of my nest egg to that tax man? Also how do I plan on breaking down my retirement withdrawal strategy from 55 on?

Well, first we have to separate my assets into buckets, as there really are multiple plans here.

Roth Retirement Withdrawal Strategy

First are our Roth IRAs. By age 55 our contributions, including a roll over of an old 401k during the financial crisis, should equal 3.5 times expense. In theory we could touch this money at any point tax free as long as it was contributions only. I do not expect to touch this money until sometime after 65 since it will be earning away and future taxes need not apply. It is available as a contingency if needed but I want to keep my money in Tax advantaged accounts as long as possible.

Taxable Accounts Retirement Withdrawal Strategy

Add to these any taxable accounts. Currently our taxable accounts, not including emergencies are about 2x expenses. But, I expect once we pay off our house in 4 years at least some of the payments will be diverted to the taxable account. I’d thus assume at least 5 x expenses in taxable at retirement. This is the money we will start utilizing at 55, beginning with the taxable accounts and only touching the other money sometime in our early 60s.

401k Retirement Withdrawal Strategy

The third bucket are our 401Ks. This is the true reason why we want to retire early. We already have 9x expenses in 401Ks. At present trajectory this number will be nearly forty times our expenses if we make it to an age 55 retirement and the market does well. First if laws do not change, due to 72T we can withdrawal this money at age 55 penalty free if we stop working on or after the year I turn 55. Neat huh?

So working until 55 has another advantage. In theory we could withdrawal the money from our tax advantaged accounts at our planned retirement with no penalty. This will help as we progress forward in paying our bills after taxable accounts run dry. It will also help our overall retirement withdrawal strategy which is all about reducing the impact of Required Minimum Distributions, or RMD.

What are RMD you ask?

Well the government wants you to spend the money you saved in a 401k, not pass it on. As such they force you to withdrawal an amount starting at age 70 1/2 designed to have the funds deplete by the end of your life expectancy. The problem of course is if you wait until 70 to start this process and you’ve been saving diligently the withdrawals can be quite large. Since you pay taxes on the funds at withdrawal this can mean jumping tax brackets, even potentially beyond the ones you were in during your earning years. Needless to say you do not want this to happen to you.

So what are we doing to reduce our RMD exposure?

The next part really depends on if laws and tax brackets stay the same. If they change all bets could be off. Our current plan is to use a mix of normal withdrawals and Roth conversions each year to attempt to stay in the second lowest tax bracket. Currently this would mean converting and withdrawing less than 76K a year after deductions. This would be significantly less than our current tax bracket while allowing us to still make some sort of headway on our 401K balances. The first bracket at the 10% married rate ends at 19K and is just too low to have any sort of meaningful impact before RMD’s kick in.

Why Roth Conversions and Not Just Withdrawals

We plan on utilizing Roth Conversions and withdrawals simply because we do not necessarily need the money we convert for some time. The longer that money has non taxable earnings the better off we will be. We would leave the money in a 401K if the threat of RMD did not loom. But since it does we will gladly trade one tax advantaged account for another.

Roth Conversions and the 5 Year Rule

A note to others considering this tact, be aware that a Roth conversion cannot be withdrawn until 5 years after the money is converted. This ruling does not concern us since we do not plan on utilizing the 401K money (either converted to a Roth or in the 401K) until well beyond five years.

Pension Retirement Withdrawal Strategy

The final bucket of funds are our pensions. We do not have large pensions, and they have already stopped accruing benefits beyond interest. However, I would still estimate combined they are worth about 80 percent of 1 years expenses. Currently they accrue interest at around 5%. At that rate it is not worth the effort to convert. Should the market significantly change or work incentivize leaving the pension then we may take the lump sum before 65.

Pensions After 65

At 65 they convert to an annuity and the payout drops to around 3%. At that point I plan on taking the lump sum and investing, subject to market conditions. 3% is simply too low of a return and I estimated I would have to take payments for 30 years to break even with the lump sum at that point. The pensions are a big question mark in our retirement withdrawal strategy honestly. As with social security a lot may change beyond our control here before 2036.

So there you have it, our retirement withdrawal strategy. Of course, even 55 is 19 years in the future, so we are prepared for our plan to change several times over between now in then.
What is your retirement withdrawal strategy?

Chain Gang

I gather there was a Chain sometime back on this topic.  While I missed it the first go around I’m certainly up for calling it out here:

Anchor: Physician On Fire: Our Drawdown Plan in Early Retirement
Link 1: The Retirement Manifesto: Our Retirement Investment Drawdown Strategy
Link 2: OthalaFehu: Retirement Master Plan
Link 3: Freedom Is Groovy: The Groovy Drawdown Strategy
Link 4: The Green Swan: The Nastiest, Hardest Problem In Finance: Decumulation
Link 5: My Curiosity Lab: My Retirement Drawdown Plan
Link 6: Cracking Retirement: Our Drawdown Strategy
Link 7: RetireBy40: Our Unusual Early Retirement Withdrawal Strategy
Link 8: Early Retirement Now: The ERN Family Early Retirement Captial Preservation Plan
Link 9: 39 Months: Mr. 39 Months Drawdown Plan
Link 10: 7 Circles: Drawdown Strategy – Joining The Chain Gang
Link 11: Retirement Starts Today: What’s Your Retirement Withdrawal Strategy?
Link 13: Dad Dollars Debt: DDD Drawdown Plan – Part 1: Living With A Pension
Link 15: Atypical Life: Our Retirement Drawdown Strategy
Link 16: New Retirement: 5 Steps For Defining Your Retirement Drawdown Strategy



  1. Mr 39 months
    Mr 39 months September 25, 2017

    Good article. Very similar to the blog chain in the fire community 2 mon the ago.

    My plan is similar – draw down taxable, thenergy 401ks/irascible, and finally our Roths . Social Security will be a bonus.

    Mr. 39 months

    • FullTimeFinance
      FullTimeFinance September 25, 2017

      I’d love to see a link to that blog chain if you have it.

  2. Chris
    Chris September 25, 2017

    Sounds like this may be series of posts ?
    If one assumes they don’t have enough $$$ to max out pretax and roth iras (not far-fetched if you have spouse), then have you ever considered a number in pre-tax 401K’s that would make you switch your strategy to roth ira contributions ?

    So many variables I have a hard time deciding. Leaning towards just splitting it in the years right before retirement. Up until now nearly everything has be pre-tax 401k’s.

    • FullTimeFinance
      FullTimeFinance September 25, 2017

      It’s slowly becoming one it seems.

      What to do when you can’t max both seems like an interesting topic for a future post. We’re not currently in a position where we have to choose but I do strongly believe you need a mix and I have given it some thought. Look for something in next week or two.

      • Chris
        Chris September 26, 2017

        Food for thought. Even if you have the ability to max both, I have to think there becomes a magic number or magic projected number where you wouldn’t want to much in pre-401k. If someone had 1.5 million today but wasn’t going to draw on those funds for 15 years they might not continue to max fund. I wish I had that problem, but I don’t yet.

        • FullTimeFinance
          FullTimeFinance September 26, 2017

          I’ve incorporated that thought into next weeks post.

  3. MyMoneyDesign
    MyMoneyDesign September 25, 2017

    A ton of gold here! Especially with the 72t / SEPP and Roth Ladder. I plan to use very similar strategies to make my withdrawals when I retire at 46 (I can send you link later if you want).

    Don’t forget: If your 401k plan allows for it, you can start making withdrawals penalty-free the year you turn 55 or after.

    • FullTimeFinance
      FullTimeFinance September 26, 2017

      Aways a good idea to leverage penalty free withdrawals in addition to conversions.

  4. SMM
    SMM September 28, 2017

    I like the mixing of withdrawals to reduce the tax liability the most. Congrats on a solid strategy! I have a while to do so haven’t given this topic much thought. At the moment, I’m designing a plan to contribute the max to my 401k.

    • FullTimeFinance
      FullTimeFinance September 28, 2017

      A lot can change between now and when you need it. I liked the exercise now mainly for how it informs me on what contributions and investment strategy to do today to ease tomorrow.

  5. Mr. Need2Save
    Mr. Need2Save September 29, 2017

    Thanks for so promptly addressing my post suggestion!

    We plan on retiring around age 51 (just 6 short years for us) and our withdrawal strategy is similar. One major difference is that we don’t have any Roth IRA accounts. Somehow we missed out on that and now earn too much to contribute directly to a Roth. We do plan on doing a ‘Roth IRA Conversion Ladder’ once we stop working.

    Looking forward to more related posts

    • FullTimeFinance
      FullTimeFinance September 30, 2017

      Thanks for the idea!

  6. OthalaFehu
    OthalaFehu October 2, 2017

    here is a link to the chain gang for this topic, never to late to submit!

    • FullTimeFinance
      FullTimeFinance October 2, 2017

      Thanks. I’ll edit and add into the post.

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