By Dr. Erik Hofmeister, WCI ColumnistMy wife and I are retiring in 2025 at the ages of 42 and 47, respectively. I’ve had a 25-year career as an academic veterinary anesthesiologist, and my wife has had a variety of academic jobs as a pharmacist and pharmacologist. We live simply, and we have invested simply and amassed a reasonable net worth ($2.5 million). Now, we need to decide how to draw it down in an intentional way to minimize the risk of behavioral biases. We have to create our Retirement Drawdown Statement (RDS).
In your working years, you should be earning, saving, and investing those savings wisely. An Investor Policy Statement (IPS), such as the one you get after completing the WCI Fire Your Financial Advisor course, is an essential step toward financial success. It helps guide your decision-making in an intentional way and minimizes the risk of behavioral biases (e.g. panic-selling when the market crashes). Once you leave full-time employment (i.e. retire), you will no longer be accumulating assets—you will be selling them to fund your lifestyle.
How do you do that?
Like the IPS, the RDS has sections that you’ll need to make decisions about. Since personal finances are personal, each RDS will be unique. The RDS was a much more difficult document for us to create because there seems to be more uncertainty and options compared with our fairly simple IPS.
For example, our contributions to our investments are laid out like so: direct maximum possible amount to Backdoor Roth IRA and HSA each year, direct maximum amount to Roth 457 and 403(b) for each of us, the remainder of savings invested in taxable account. Our stock investment allocation is also simple: 65% US index fund (VTSAX), 30% international index fund (VFWAX), and 5% REIT (VGSLX).
The sections I think are important in an RDS are outlined below, along with our choices.
Spending in Retirement
How much do you expect to spend each month or year in retirement? Hopefully, this is based on tracking your spending for several years leading up to retirement. If you don’t know how much you’re spending, you’re really not ready to retire. This is an essential piece of information you must figure out, because almost everything else is based on it. Your spending in retirement may change. The “spending smile” has been used to describe retiree spending—people tend to spend more in early retirement as they are doing active things (the go-go years), and then spending decreases as their activity decreases (the slow-go years) before it increases again as they approach the end of life due to medical or long-term care expenses (the no-go years).
You may want to segment your spending into “essential” and “discretionary.” In the event of a severe market downturn, you may make adjustments to your spending. Knowing what can be cut is helpful to know a priori. Don’t forget to include taxes in your spending number. Your taxes might be $0, but if you are drawing from tax-deferred accounts, pensions, or real estate, you will generate earned income which will be subject to taxation.
Our historical spending for many years was about $60,000 per year (taxes and savings not included; this was only the amount that hit our credit cards plus rent). Since we hit FI two years ago and loosened the purse strings, it’s ticked up to $70,000 for the past couple of years. We are budgeting for $80,000 a year with less than $5,000 of that being for taxes. This represents an approximately 3.5% withdrawal rate (approximate because valuing a pension and our real estate is fuzzy). We consider $30,000 of that “essential” spending, as that was our “peak pandemic” spending (i.e. sitting at home, not much to do, no travel). We were a little bored, but ultimately spending time together at home was actually enjoyable, so we know we could have a perfectly happy life spending that amount. The $50,000 on top of the “essential” spending will be spent on flights to visit friends and family, hosting events (like cabin retreats for our friends), and visiting more breweries on driving adventures.
Spending Changes
How will you manage if there is a conflict between your planned spending and your actual expenditures? What if you have “lumpy” expenses, like a new car or a roof replacement? Some people create little cash sub-accounts for these kinds of expenses, consider them separate from their overall invested assets, and add to them on a regular basis. Some people assume the lumpiness in their yearly spending predictions. Maybe if you have an unexpected expense, you dial down discretionary spending for the remainder of the year. If you notice your actual expenses exceeding your planned expenses, it’s time to go back to Budgeting 101! Will you adjust your spending for inflation? Most calculations assume you adjust the amount upward each year, pegged to your starting year’s spending.
We include the lumpiness in our spending estimate. For example, I amortized our recent Chevy Bolt purchase over the 15 years of our previous car’s lifespan and added that to our yearly spending. We have a separate account for our rental house, so anything that the property needs will come out of that business account. If our own house has an unexpected repair need, we can reduce discretionary spending, or I can do a locum or two to make up the difference. We’re not sure what our personal rate of inflation is, so we will track that and adjust accordingly as we go—but we are assuming a 3% per year inflation adjustment.
More information here:
Fear of the Decumulation Stage in Retirement
A Framework for Thinking About Retirement Income
Income in Retirement
Now that you’ve determined how much you want to spend, you need to detail where the money will come from. This is going to be highly variable. Some people may have a 100% real estate portfolio, and they can float everything on the back of their rental income. Some people may have a pension or SPIAs that ensures money is coming in automatically and regularly. Some people may be pure dividend investors, and the dividends will support their budget. I expect many people will have some blend of stocks and bonds that they will collect dividends from and then sell some to make up the difference.
When will you sell your investments to generate your income? Yearly? Quarterly? Monthly? You should also specify here from which accounts the money will come. Your situation will be very different if most of your money is in tax-deferred accounts as opposed to taxable accounts.
Our plan is as follows. We need $6,667 each month, and we will do monthly withdrawals.
- Rental income from a single-family home ($1,000 per month after expenses).
- Dividends from our after-tax investments ($1,000 per month).
- Review market performance since retiring. If stocks are above the starting value, sell from the most increased low-basis shares to get $4,667. If not, move the amount from our money market fund. In years where we have miscellaneous income (e.g. locums), add 85% of that money to our checking account to reduce future months’ drawdown amounts, and put the remaining 15% aside for taxes. We plan to first draw down our taxable account and do Roth conversions from our 457. Then, we'll tap our 457 money, then our 403(b) money after we’re at least 55, and then our Roth accounts. Our taxable account should sustain us for about 12 years, giving our tax-deferred accounts time to grow and support our spending for the rest of our lives.
Ongoing Evaluation of Your Financial Situation
How often will you evaluate your financial situation? Monthly, quarterly, or yearly? You need to have a plan for checking to make sure you are on track. Will you use modeling software (e.g. cFIREsim, NewRetirement) to recalculate as you go? Will you compare investment valuations to the value at your date of retirement, the past year’s performance, a rolling five-year average, or something else? How often will you do a deep dive into expenses and income? If you are going to outsource some of these activities to a financial advisor, how often will you meet with them and what will you discuss?
Having this all written down will help make sure you stick to it. What are you going to do if your investments are down 20%, 50%, or 90%? For one year? Five years? Ten years?
We have a monthly budget meeting in place already, where we evaluate expenses for the prior month. We’ll add income evaluation to that meeting. Once yearly we do a deep dive into last year’s finances, and we separate expenses according to category and compare them with previous years. I will recalculate using model software during that yearly evaluation.
We’re going to use the asset value at the time of retirement for future comparisons. We do not have a plan to use a financial advisor. If the stock values fall >10% below baseline for six-plus months, use points instead of cash for travel and reduce expenses to $70,000 or less. If the stock values are below baseline for two years, we'll adjust spending down to $60,000 or less and sell our TIPS ladder instead of stocks to generate income. When the market declines, we want to avoid selling stocks, because, when the market recovers, you want as much stock exposure as possible to benefit from the rebound. If the stock values are down below baseline for five-plus years, we'll adjust spending to be rental income + dividends + 4% of stock values. We have no intention of returning to full-time work.
Big ERN has done good research indicating that, when people plan to go back to work if the market drops, either it would require working for a long time OR it wouldn’t have been necessary to do so. If the market drops that much for that long, I suspect work will be hard to come by anyway.
More information here:
Some Sobering (and Scary) Statistics on People’s Retirement Preparedness
Health Insurance During Retirement
If you are an early retiree, you will need to figure out health insurance before Medicare kicks in at age 65. Even if you have Medicare, you may need to budget for Medicare Part B, Part D, and Medicare Advantage Plans. If you are a business owner, you have handled this yourself for years. For those of us retiring before 65 who have had health insurance covered by our employer for our career, we need to decide how to buy it.
You can research how much insurance will cost through healthcare.gov, and you'll need to add this to your expenses. There are also options such as health-sharing ministries which may be good for some people. We are planning to buy our coverage on the marketplace, potentially with subsidies if we keep our income low enough. Our current high deductible health plan through work costs us $100 each, and our employer kicks in $428. We have budgeted $1,000 per month total for health insurance, although the Inflation Reduction Act effect on ACA subsidies will reduce that to about $500 for 2025.
Roth Conversions, Tax-Gain Harvesting, and ACA Subsidies
There are opportunities for an early retiree who is not claiming a pension or Social Security to take advantage of low-income tax years. Again, this depends on your personal financial situation. If you have a lot of money in tax-deferred accounts (e.g. a 401(k)), you might want to do some partial Roth conversions to get that money out at a 22% tax rate to save it from an even higher rate in the future.
For your taxable account, given that there is a capital gains tax rate of 0%, you might be able to sell low-basis shares and buy those same investments, resetting the basis on which future taxes will be calculated and paying no taxes on the deal. Finally, if your income is low enough, you may benefit from Affordable Care Act subsidies for your health insurance.
Unfortunately, all three of these interplay in a complex way which makes the decision challenging at best. If you do partial Roth conversions or tax-gain harvesting, that increases your income for the ACA subsidies. Ultimately, you will need to run the numbers for your own situation. We haven’t figured out this piece of the puzzle yet, but as soon as tax accounting software for 2025 opens up, I will begin running scenarios to figure out what works best. I have an idea to do an every-other-year strategy that may get the best of all worlds. I'll share that in a future column.
Social Security Strategy
How do you intend to claim Social Security? Are you even including it in your calculations? Will you claim it as soon as you are eligible, take it at full retirement age, or delay as long as possible? If you are married, who will claim it first? Have you calculated the impact on your taxes or ACA subsidy? You could have a marginal tax rate of 33% on less than $50,000 income!
We have not included Social Security in our calculations because 1) we have well below 35 years of earnings, so our primary insurance amount will be low; 2) it’s over 20 years away and a lot of policy changes can happen before then. We will need to revisit this as we get closer to claiming age, but it seems like common advice is to have the lower-earning spouse claim as soon as they can (62 for my wife) and the higher-earning spouse claim as late as possible (70 for me). Maybe one of us will be sick, which would encourage a younger claiming age. A lot can happen in 20 years.
Competency
We do not have children, so I think about this one a lot. Who is going to help us manage our finances as we age? What if I die or become unable to crunch the numbers—who will help my wife handle it? How will we even know that we need help? There is a lot to unpack here, and honestly, we have not yet written it out. Hopefully, it is many years away, but we should start planning now. I have a vague idea to reach out to our younger friends or the children of our friends. Hopefully, in another 20-30 years, it will become clear which of the next generation is responsible and can be trusted.
More information here:
A Pre-Retirement Financial Checklist
The Silliness of the Safe Withdrawal Rate Movement
Investor Policy Statement Changes
Do you need to change your IPS now that you are retiring? Do you need to create a bond buffer or tent? How will you change your equity exposure over time (a rising equity glide path)? When and how will you rebalance? A lot can stay the same, but you need to consider some changes here.
We are building a TIPS ladder for years 3-5 of retirement in our 457 account in the event of a decrease in our equities in that time window. If stocks do well, we might continue to roll out the TIPS ladder (e.g. in year 3, sell stocks for our lifestyle and use the bond money to buy another TIPS maturing in year 6 of retirement). Otherwise, we’re keeping with our same boring portfolio.
Modifications
How and when will you decide to make modifications to your RDS? I suggest having a three-month waiting period between wanting to make a change and actually implementing it. This will give you time to do more research and make sure that the decision you’re making isn’t an impetuous one. If we decide we want to make a change to our RDS, we will pencil it in and then revisit it in three months to decide if we will incorporate that change.
There are other elements that you may want to add to your RDS, but I think the focus should be on your spending and income. Estate planning is essential, but hopefully, you already have that taken care of before you retire. Charitable giving should already be in your IPS. Required Minimum Distributions (RMDs) from tax-deferred accounts will need to be dealt with, but those are specified by the government so you just need to do them—there's very little behavioral finance interference potential there.
Ultimately, the RDS is an absolutely essential document you need to have before you retire. Start thinking about yours today!
What do you think? Have you created a Retirement Drawdown Statement? What other aspects of retirement do you need to think about before you get there?
What’s your retirement asset allocation, and did your AA change as you approached your FI number? If you did, was it gradual or did you do it all at once?
Great question GK. It’s a little complicated. We have two single-family home rentals, a pension, and our investments. Our investments were 65% US-stocks, 35% international stocks. Over the past two years we have shifted to building a bond tent, although right now we have that sitting in our money market so it’s more of a cash tent. https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/
I notice one of your strategies if you have a lump sum large expense like new roof was to just do a locum or two…..meaning work again. That means (for a human medical physician) then keeping up an active license, board certification, DEA licensure, CME etc is on the order of several thousand dollars per year to maintain.
That’s a good point Dr. Miller! For the locums I do, they cover licensure fees. I would have to maintain my boards status etc., though those can be written off as business expenses. And “work again” is all relative. Doing locums you don’t have committee work, figuring out workflow processes, and dozens of other little things. I actually view locums that I do right now (still working full time) as paid vacations. 🙂 My vision of retirement isn’t doing _nothing_. It’s just doing a lot more of what I want to do.
I agree with you that going back to work as any type of a doc is pretty time limited. Yes, it works fine in year one and is maybe still possible in years 2 and 3 but after that if you’re going back to work, that work probably doesn’t look like it did before.
Thanks Erik for a great discussion on the “how,” but could you please talk a little on your particular “why,” perhaps in a separate post? I’m thinking in particular of Emerson’s quote that “The purpose of life is not to be happy. It is to be useful, to be honorable, to be compassionate, to have it make some difference that you have lived and lived well.”
Purpose-Driven, that is a _great_ question, and I do have another post loaded up about that. Leaving a $250k/year salary is not easy!
thanks so much, this is very informative. And enjoy your early retirement!
Margaret, thanks for the comment and glad it was helpful!
I enjoyed your practical thoughts and strategy on the “How” of early retirement. I have an IPS but not an RDS but will develop one when closer to retirement.
Interesting article, thanks for contributing. It’s nice to hear different points of view, I would never consider retiring in the middle of my prime earning years, and certainly not in my 40s with 2.5m net worth and decades from Medicare. Working just a few more years would make the difference between an austere life and a comfortable one. Also statistics highly suggest neither one of you will actually stay retired more than a year at that young age, and your second career will likely set you back financially compared to your primary occupation. Good luck.
For this guy and most early-retirers who say they’ll use the ACA for healthcare I always think how these plans can be blown up in an instant by a president who wants to kill it
Thanks for the well-wishes! It’s a complex, personal decision for everyone for sure.
“Also statistics highly suggest neither one of you will actually stay retired more than a year at that young age, and your second career will likely set you back financially compared to your primary occupation.”
Can you share where you came across these statistics? Your second point would seem less relevant to a physician retiring early, particularly one who continues holding a license and remains board certified.
Thank you for sharing.
I see very few articles showing the DIY way to draw down investments after retirement.
Most articles tell you to talk to your financial advisor.
This is not rocket science, so just as you can do passive investing during your earning years, there is a definite method to passive draw down during retirement.
To pay for a financial advisor for advice unless it is a one time fee and not assets under management (AUM) is not worth it unless you are totally clueless and not interested to find out.
Thank you again Erik and best wishes on your retirement
Thanks Joe! Yes I agree there isn’t a lot out there about writing your RDS. One inspiration for me wanting to share.
Dr. Dahle had an earlier punch list of how to spend in retirement- a most important step for us being change from reinvest in our mutual funds to put those dividends in the settlement fund or Money Market type account for us to access for spending. Can’t find where he mentions that but something to keep in mind while getting knowledge from https://www.whitecoatinvestor.com/how-to-spend-in-retirement/ https://www.whitecoatinvestor.com/how-to-access-your-retirement-money-when-retiring-early/ https://www.whitecoatinvestor.com/most-important-factor-retirement-withdrawal/ and other posts
Erik-great contribution to the content. We need more draw down posts like this.
You mentioned getting your 403b money by the time you are “at least 55.” I assume you are talking about the rule of 55 and I don’t think this can apply to you but correct me if i am wrong. In order for this to work, you have to quit your job in the calendar year you turn 55. If you quit in your 40s you can’t take advantage of this special rule and must wait until you are 59.5
Hello JBME, thank you for the correction. You are, of course, correct. The rule is you have to be working, THEN turn 55, THEN stop working. I don’t know why the IRS makes a distinction that and working, then stopping working, then turn 55, but, as Dr. Dahle says, “You can’t make this stuff up.” Fortunately, for us it isn’t a problem given our significant 457 investments, which we CAN access as soon as we separate from employment. But for anyone else, this is an important point!
appreciate the response and you laid out why a 457 is so helpful. But, your sequence is wrong. I specifically said you have to do it in the calendar year you turn 55. So you DON’T have to wait until you are 55. If you are born in December and will turn 55 in a couple of months, you could have quit in January of this year when you were 54 and been able to legitimately use your 403b money on the rule of 55.
But I think my response just will reiterate for you that “you can’t make this stuff up.” But that is the rule-the year you turn 55, not wait until you are 55
I’m also curious about the “why” of retiring in your 40s. I’m that age and have no desire to retire yet. I am just hitting my peak earning. Why not work part time and keep earning? You can travel and not stress re: money.
Hello DRK, great question. I have a post written about the decision which will see light here eventually I hope. In the meantime, check out this article by Dr. Dahle: https://www.whitecoatinvestor.com/will-more-money-make-me-happier/
Everyone worries excessively about money they’ll probably never spend. Good for you. Even with the health insurance, it’s mostly a waste of money unless you get a fairly cheap plan. People aren’t good at risk assessment, and fear based decisions also lose a lot of money.
A way to get your money further is also live out of the country for a while. While that’s not for everyone, if you are a single man you should DEFINITELY do it.
Dynamite Boom, 100% agree that people are bad at risk assessment. I teach statistics and am the one everyone in the department goes to for help with the stats for their projects, so I am a big fan of looking at the numbers. Of course, if you get cancer, the probability for you is 100%, but I don’t think that’s the best way to look at it. I also love learning about behavioral finance and embrace a lot of the lessons learned there. Dollar cost averaging vs. lump sum? Statistically, lump sum is better so, when we sold our primary residence, we put it all in the market. SUV vs. sedan for “safety”? Statistically, you get an extra 1.5 months of life from the SUV (https://www.mrmoneymustache.com/2012/06/07/safety-is-an-expensive-illusion/). But how much longer did you have to work to make the money to pay for that SUV? Everyone thinks cars are more expensive now, but they’ve actually experienced _deflation_ in some ways. Our Bolt, even without the rebate, was $3k less expensive than the Honda Civic Hybrid we bought in 2008 AND had way more technology. People just want to buy bigger cars. If we used more science than fear, I think the world would be a better place. 🙂
Erik, Dominating article man! It seems like you’re using a guard rails type RDS, no? Are the numbers that you are using for your guard rails based on Guyton-Klinger or did you just make up something reasonable? is that spend less down to $60k if your stocks are down for two years or more an amount that will be adjusted for inflation? are you using this guard rail strategy because you have no kids and have no legacy plans? do you believe the guard rails RDS is the best way to maximize every dollar for happiness and fulfill Bill Perkins’ “die with zero?”
Hello Rikki, thank you so much for the support! It’s a highly personalized approach informed by guardrails, CAPE-based withdrawal, and variable percentage withdrawal, but not as formalized. You’ll notice they’re only downside guardrails- I don’t have any formal plans for increasing, but that’s an easier problem to solve than if things go poorly. The reason why I’m not using the Guyton-Klinger or other guardrails is because the drawdowns can be quite steep and often unnecessary (https://www.kitces.com/blog/guyton-klinger-guardrails-retirement-income-rules-risk-based/) and Big ERN shows where you might have 10+ years of a 50% reduction in your spending using them (https://earlyretirementnow.com/2017/02/08/the-ultimate-guide-to-safe-withdrawal-rates-part-9-guyton-klinger/). The $60k is not adjusted for inflation- unless it goes in the double digits, for a short span of time, inflation shouldn’t have too much impact.
You are correct, we are using this approach because we have no legacy plans. I think our plan may be overly conservative, but I like the philosophy of having multiple backups in case of threat of failure. I am a big fan of Die With Zero, but of course hitting that is challenging. 🙂 I do think an adjustable strategy is prudent for early retirees with a long projected joint lifespan. Traditional age retirees or those without longevity concerns may be better off with a flat % withdrawal. I think it just depends on what you want from retirement. We mostly want TIME, rather than spending money, so are content with decreases in our spending, whereas other people may want to do more traveling etc.
It’s important to point out for those who are unaware that the book Die With Zero mostly isn’t about the financial concept of having that last check bounce.
You refer a couple of times to an estimated tax rate of 0%? or a “given that there is a capital gains tax rate of 0%”——that is simply not reality.
Every time you take funds out of your investments (pretty much unless they were a non taxed municipal bond), you will have tax
and often at a much higher rate than when you did your initial planning a few years ago.
The whole intent of investment is to keep up with inflation for retirement,
and the rates of inflation (no matter what the news says)is very high right now
and is impacting everything but especially the basics, from utility costs to groceries.
The lump sums such as replacing a roof (we just got a surprise on that as insurance abruptly decided to cancel all homeowners policies in our state on homes that had wood roofs, even in excellent condition….)
There are always surprises, so a significant savings and investment buffer is indicated.
Not true. The 0% capital gains bracket is up to $94,050 in 2024. So if you have no other taxable income, you can realize $94K in gains and NOT pay any taxes. Since not all of a taxable investment is gains, you might be able to spend $150,000 or even $300,000 from your taxable account without paying any tax at all. Even if you had some sort of taxable income (rents, IRA withdrawal, pension, etc) that filled up some of that $94K, you would still be able to access the rest. Roth accounts can also be accessed tax free, as can 529s and HSAs for certain purposes. And you can borrow money against investments, your home, or life insurance, also tax free (although not interest free).
Even when accessing tax-deferred accounts, most retirees pull money out at lower marginal tax rates than they had when they put money in. You have to really be quite a super saver for that to not be the case as a high earner. My marginal tax rate right now is close to 45%. So even pulling money out at 30% would be quite a deal.
Note that state income taxes can be significantly different from federal income taxes. For example, in my state capital gains are treated just like any other income.
No doubt you’ve thought this through and done your research. However, my biggest concern would be the healthcare budgeting. $1,000 a month for a couple seems low, but let’s say that’s totally accurate. Typically those marketplace plans come with a substantial deductible. Is that part of your calculations?
True, you can always pull the trigger on locums but what if you are the one with medical needs or disability? Just seems risky, but I wish you the best.
Hello ENT Doc, you are correct that the $1000 is only the premium, not including actual out-of-pocket costs. However, included in our $80k budget ARE those out-of-pocket costs, which have averaged $3100/year for the past 4 years for us. I think, as medical practitioners, we have a skewed perspective of the risk. Whenever someone tells me they’re getting a dachshund, I tell them, “Sure, put aside $10k now for their eventual hemilaminectomy.” MOST dachshunds don’t ever need spinal surgery, but something like 90% of the ones I see are there for spinal surgery.
Don’t get a medicare disadvantage plan. Budget for medicare with an actual supplement. It will cover you for medical care you need. Disadvantage plans are crap. If an insurance plan has a commercial on TV or someone selling it to you – run away! It’s a product meant to be sold .
I care for older people who need eye surgery and expensive medication injected into their eyes. Disadvantage plans don’t pay for anything and require Prior auths and maddening step therapy.
I’m budgeting for the good insurance.