Withdrawals In Year 1 Of Early Retirement

As I mentioned in our previous post, I officially resigned from my job on 4/1/2021.  Knowing that this day was coming meant that at some point this year, we would need to start living off a % of our investments (roughly 3.5%).  

To be honest, it was mentally challenging to make the first withdrawal from our investment accounts.  Before we get to that, I want to get more specific on the type of accounts we hold and how we intend to use them going forward. 

New pathways in Granada, Spain, and Year 1 Withdrawals in action.

Accounts

Vanguard Taxable Account

Fidelity 401k

Fidelity Traditional IRA

Fidelity Roth IRA

Vanguard Taxable Account

100% of our withdrawals will come from this account for the first 5 years of retirement.  The reason for that is because we are under 59.5 years old, and this is currently the only account we can touch without being charged a 10% early withdrawal penalty from our traditional retirement accounts listed above (401k and IRAs).  

This account will continue to be invested 100% in VTSAX (Vanguard Total Stock Market Index Fund).  The reason for this allocation is because if we ever choose to hold bonds, it is much more advantageous to hold them in the traditional retirement accounts for tax purposes. 

Fidelity 401k

This is where our traditional retirement funds are currently sitting.  As mentioned above, I retired (can you call it that when you’re only 40?) from my job on 4/1/2021.  The goal with this account is to get it rolled over into my Fidelity Traditional IRA as soon as possible.  That said, I can’t roll it over until my former employer changes my status in the Fidelity system.  I am told this takes 1 - 2 pay cycles.  At some point in April I will be rolling this account into my Fidelity Traditional IRA. 

My original plan for this account was to roll it over to my Vanguard Traditional IRA, however, through speaking with Fidelity, I discovered that it’s  not possible for me to rollover the funds to Vanguard electronically.  Rather, I would need to have Fidelity send me a check made out to Vanguard, and then I would mail the check to Vanguard.  Given the recent issues we have had with USPS and the fact that we left the country on 4/11/2021, it made more sense to leave the funds with Fidelity and simply roll them over into a Fidelity Traditional IRA.  

This account is currently 100% invested in FXAIX (Fidelity S&P 500 Index Fund). 

Fidelity Traditional IRA

This is where the 401k funds will end up.  I’ve already walked through the rollover process with Fidelity, and when you are rolling from one Fidelity account to the next it is very straight forward.  I have the option to do it myself or to have a Fidelity representative do it for me.  

Once the funds have been rolled into my Traditional IRA, I will then need to turn my attention to setting up my Roth IRA Conversion Ladder.  We have discussed how a Roth IRA Conversion Ladder works here and here.

Conversion Ladder Refresh

Basically to set up a Roth IRA Conversion Ladder, you simply convert shares from your Traditional IRA to your Roth IRA.  The reason we are doing this is because after we have built up a 5 year ladder, we can then withdrawal the funds penalty free.  This is necessary for us to do because we aren’t yet 59.5 years old. 

This account will be made up of FXAIX (S&P 500 Fund), and IF I decide to allocate anything to bonds, this is the account we will hold the bonds in.  The bond fund we will use is FXNAX (Fidelity Total Bond Market Index Fund). 

Fidelity Roth IRA

This is where the conversion from the Traditional IRA ends up.  We won’t touch this account until after our 5 year conversion ladder has been set up.  For example, we are going to do a conversion in 2021, and in 2026 we will be able to pull these funds penalty free.  If we convert some in 2022, we can pull that penalty free in 2027, and so on. 

This account will be invested in FXAIX (S&P 500 Index Fund).

Now that we have gone over the accounts we will use in early retirement (ER), let’s take a look at an example of how the withdrawal for year 1 looks.  

To make the math easy, lets make the following assumptions (these are not our exact numbers):

Total Investments = $1,000,000

Investments in Taxable Account = $500,000

Investments in Traditional Account = $500,000

Withdrawal Rate = 4%

Total Withdrawal = $40,000

Year 1 Taxable Account Withdrawal = $40,000

Year 1 Roth IRA Conversion = $20,000 (Can’t touch until year 6.)

You can see that the entire $40,000 comes from the Taxable Account in year 1 while the $20,000 from the IRA conversion is being set up.  The withdrawals will look like this in years 1 - 5, and then starting in year 6, the withdrawals will look like this:

Year 6 Taxable Account Withdrawal = $20,000

Year 6 Roth IRA Conversion (originally converted in 2021) = $20,000

Keeping with the above assumptions, the next step is to determine how you want to manage the $40,000.  For example, I am keeping the funds that we sold in the taxable account that they have always been in; however, rather than be invested, they are just sitting in a money market account.  

From here you can handle it the way that makes the most sense to you.  I intend to “pay” myself every month with our funds by simply transferring the same amount once per month from the taxable account to our regular checking account.  Breaking it down by month will help me stay on budget from month to month and will make it so we don’t run out of funds towards the end of the year.  That’s it!

That is how our withdrawals will be invested and managed in year 1.  How do you manage your funds in ER?  Or Regular Retirement?  Or life in general?

If you need assistance with figuring out your funds, get in touch with me.

-Erik