{"id":529,"date":"2021-01-11T12:00:00","date_gmt":"2021-01-11T12:00:00","guid":{"rendered":"https:\/\/moneywithkatie.com\/what-actually-happens-when-you-retire-early\/"},"modified":"2025-09-05T19:38:41","modified_gmt":"2025-09-05T19:38:41","slug":"what-actually-happens-when-you-retire-early","status":"publish","type":"post","link":"https:\/\/moneywithkatie.com\/what-actually-happens-when-you-retire-early\/","title":{"rendered":"What Actually Happens When You Retire Early?"},"content":{"rendered":"<div style=\"width: 2510px\" class=\"wp-caption alignnone\"><img decoding=\"async\" src=\"https:\/\/moneywithkatie.com\/wp-content\/uploads\/2021\/01\/image-asset-5.webp\" alt=\"  My forever weekend plans post-working.  \"\/><p class=\"wp-caption-text\">My forever weekend plans post-working.<\/p><\/div>\n<div class=\"sqs-html-content\" data-sqsp-text-block-content>\n<p class=\"\" style=\"white-space:pre-wrap;\">A lot of the time when I cover fairly complex topics on this blog, I\u2019m doing it for myself just as much as I\u2019m doing it for the kind people who are gracious enough to spend their time on this site. <\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">Early retirement \u2013&nbsp;and the logistics therein \u2013&nbsp;is one of the topics about which I\u2019m currently a little bit fanatical.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">The pre-early retirement phases are pretty obvious to me: Max out tax-advantaged accounts, dump as much as possible into taxable accounts afterward, and spend as little as comfortably possible so you can retire before you\u2019re 40.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">The post-early retirement process eluded me a little bit. A few of the questions that I had:<\/p>\n<ul data-rte-list=\"default\">\n<li>\n<p class=\"\" style=\"white-space:pre-wrap;\">If I\u2019m retiring at 40, how am I going to touch the money in a 401(k) or IRA (accounts that are designed to be used when you\u2019re pushing 60, not rounding home at 39)?<\/p>\n<\/li>\n<li>\n<p class=\"\" style=\"white-space:pre-wrap;\">Even if I save a total of $1M across a bunch of different accounts, how do I know the order to use each one? Will this math still work if I\u2019m spending a little from one account and a little from another, and the money isn\u2019t all in the same account?<\/p>\n<\/li>\n<li>\n<p class=\"\" style=\"white-space:pre-wrap;\">How do I fold in the fact that I\u2019ll probably still work and make <em>some<\/em> money, in some degree? <\/p>\n<\/li>\n<li>\n<p class=\"\" style=\"white-space:pre-wrap;\">What about healthcare? That\u2019s expensive, and it\u2019s not currently an expense of mine. <em>(Spoiler alert: This is still a question.)<\/em><\/p>\n<\/li>\n<\/ul>\n<p class=\"\" style=\"white-space:pre-wrap;\">Nothing felt too pressing, as I\u2019m still very much in the \u201cshovel as much as possible into investment accounts\u201d phase, but there was a sense of, \u201cWhat if I\u2019m making some small mistake in my strategy right now and it derails my plans?\u201d looming right under the surface.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">Today, I want to flesh this out \u2013 for me, and for you \u2013&nbsp;so we can see (together!) what this looks like in practice. <\/p>\n<h4 style=\"white-space:pre-wrap;\">Pre-research<\/h4>\n<p class=\"\" style=\"white-space:pre-wrap;\">Some of my questions (as noted above) were answered through reading Financial Freedom by Grant Sabatier and listening to a few  episodes of ChooseFI (specifically episode 43, on drawdown strategy). All that to say \u2013 \u201cFIentists\u201d smarter than me informed this strategy, so rest assured I didn\u2019t pull it out of my ass, and the fact that I\u2019m still about 10 years away means this strategy will probably change as tax law, my lifestyle, and other factors change, too. <\/p>\n<h4 style=\"white-space:pre-wrap;\">Cruising into early retirement<\/h4>\n<p class=\"\" style=\"white-space:pre-wrap;\">I\u2019m not sure when, exactly, I\u2019ll hit FI \u2013&nbsp;my income situation is really bizarre right now, and I don\u2019t think all my streams of income are ultimately sustainable beyond a few months (they very well may be, but I don\u2019t want to count on it). <\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">For the purposes of this exercise, I\u2019m going to use a projection calculator that uses a high monthly contribution average for each of my major accounts to determine at what point I\u2019ll have enough in my accounts to retire (to make it nice and round, let\u2019s say $1M is my number \u2013 this would enable me to withdraw $40,000 per year for living expenses).<\/p>\n<\/div>\n<div style=\"width: 1536px\" class=\"wp-caption alignnone\"><img decoding=\"async\" src=\"https:\/\/moneywithkatie.com\/wp-content\/uploads\/2021\/01\/ScreenShot2021-01-10at34657PM.webp\" alt=\"  This is the projections tool that\u2019s built into the   Wealth Planner  , so it will make these projections for you based on your numbers, too!   \"\/><p class=\"wp-caption-text\">This is the projections tool that\u2019s built into the   Wealth Planner  , so it will make these projections for you based on your numbers, too!<\/p><\/div>\n<div class=\"sqs-html-content\" data-sqsp-text-block-content>\n<p class=\"\" style=\"white-space:pre-wrap;\">If I can max out my Traditional 401(k) (and get the full employer match), max out my Roth IRA, and contribute the leftover investable money each month into an individual brokerage account\u2026 I should be set within 7 years (assuming an average return of 6% in the markets) to retire with $1M at age 33.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">Of course, this is assuming I don\u2019t get fired from all my jobs, break my legs, or become increasingly more incompetent (no promises). Remember the part where I said this is projected out based on my current higher streams of income continuing? They are all \u2013&nbsp;by their very nature \u2013 temporary, so I can almost guarantee you they won\u2019t.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">Don\u2019t focus on the contribution timeline. This is really just an exercise in, \u201cHow much can I motivate myself to find OTHER streams of income when my current engagements end?\u201d <\/p>\n<p class=\"sqsrte-large\" style=\"white-space:pre-wrap;\">The important part of this article is not how quickly we can reach early retirement, but what happens once we get there.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">For the sake of this exercise, let\u2019s plow forward knowing that my timeline is likely longer than 7 years and probably closer to 10 or 12.<\/p>\n<h4 style=\"white-space:pre-wrap;\">Where would this put me, theoretically?<\/h4>\n<p class=\"\" style=\"white-space:pre-wrap;\">I\u2019d have $238,000 in my 401(k), $72,000 in my Roth IRA, $736,000 in a taxable account, and $18,000 in my emergency fund. Because we\u2019re being conservative in these estimations (which just feels safer to me), I\u2019m not including the investment accounts I have to which I\u2019m not actively contributing anything (about $15,000 in a profit-sharing account and $3,000 in a Robinhood account). <\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">Because simplicity makes this entire process easier (rather than having 15 different investment accounts scattered throughout the financial world), I\u2019m trying to focus my attention on the heavy hitter, major accounts. I\u2019ll probably, at some point, do the legwork to combine certain accounts, but for now I don\u2019t want to create any more taxable events than I need to.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">A few things to note right away about the \u201cbest practices\u201d of early retirement\u2026<\/p>\n<ul data-rte-list=\"default\">\n<li>\n<p class=\"\" style=\"white-space:pre-wrap;\">When I start to get close to retirement, I\u2019ll probably increase my 6-month emergency fund to <strong>12 months of emergency fund<\/strong>. This bucket of cash will be my safety net in the first 1-3 years of early retirement to make sure I don\u2019t need to tap into the principal balances in any of my investment accounts. Because I\u2019m retiring early, I\u2019m relying on my investment accounts to keep growing indefinitely, which can create some precarious math in \u201cdown\u201d markets \u2013&nbsp;if you have a few bad years in the beginning and withdraw too much, it can derail this whole shindig. The takeaway? Very important to have enough cash on hand for the first 5 years. If you can get through the first 5 years with all your principal balances intact, you\u2019re almost certain to have enough money forever and still some to pass down to your kids, charities, rescues for tabby cats with spunky personalities\u2026 not to name any names, though!<\/p>\n<\/li>\n<li>\n<p class=\"\" style=\"white-space:pre-wrap;\">See my Emergency Fund up there? That pretty little $17,000? The tough part is, that\u2019s actually invested, too \u2013&nbsp;in early retirement, investment accounts like the Betterment Safety Net (85% bonds, 15% stocks) help your \u201ccash\u201d grow more quickly than if it were just sitting in a savings account (you may have even noticed that the account grew by about $3,000 over the 10-year period despite no additional contributions), though I did a sweeping 6% return across all accounts and that\u2019s probably a bit high for Safety Net. The tough part? It\u2019s invested, which means when you \u201ccash it out\u201d (in other words, sell your positions and take the cash-money), you\u2019ll be taxed on it (I\u2019ve got an exhaustive \u2013 and I\u2019m talking Masters level, graduate studies course vibe \u2013&nbsp;post coming on Safety Net in a couple weeks, so stay tuned).  <\/p>\n<\/li>\n<\/ul>\n<blockquote>\n<p class=\"\" style=\"white-space:pre-wrap;\"><strong>Loophole alert! <\/strong>In 2020, the long-term capital gains tax for amounts under $40,000 is 0%. That\u2019s right \u2013&nbsp;as long as you\u2019re selling and withdrawing money from an investment account in which you\u2019ve held all the stocks (read: index funds) for longer than a year, you pay no taxes on the first $40,000 of capital gains if you have no other earned income.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">In other words, when your earned income drops to $0 in early retirement, the first $40,000 you withdraw from your taxable account faces a big ole\u2019 goose egg tax rate). If you\u2019re married and file jointly, that number increases to around $80,000 \u2013 which means you can sell off $80,000 worth of gains in your taxable accounts and pay 0% in taxes.<\/p>\n<\/blockquote>\n<h4 style=\"white-space:pre-wrap;\">So what does this tell me?<\/h4>\n<p class=\"\" style=\"white-space:pre-wrap;\">This tells me that I need to pivot on my current strategy a little bit, and as I get closer to early retirement, start contributing more to that emergency fund \u201cSafety Net\u201d account so that, by the time I retire, it\u2019s got about $30,000 in it (instead of $18,000), which is a comfortable 12-month runway in case shit hits the fan. And because it\u2019s under the $40,000 limit for #singles, I won\u2019t pay any taxes on the sale + withdrawal of the capital gains and dividends.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">The interest produced from bonds in the account is taxed a little bit differently; interest is taxed as <em>earned<\/em> income, rather than capital gains \u2013&nbsp;but if I have no other earned income, I\u2019m pretty sure that would put my interest withdrawals <em>under<\/em> the standard deduction amount, and therefore be tax-free as well. <\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">The intention is that you\u2019ll avoid using any of the principal (the amount that you contributed, and the amount you need to keep growing) in the first 5 years, and have enough in accounts like Safety Net to cover your ass if the market drops 30% and takes awhile to recover. You never want to be in a position (in the first couple years, at least) where you\u2019re selling your equities at a <em>loss<\/em>, because that means you\u2019re \u201crealizing the loss,\u201d or locking it in. If it drops and you hold on to it, it can go back up again. If you sell it to use the money, well\u2026 you\u2019ve actually lost money.<\/p>\n<h4 style=\"white-space:pre-wrap;\">Let\u2019s check in really quickly<\/h4>\n<p class=\"\" style=\"white-space:pre-wrap;\">What we\u2019ve learned so far:<\/p>\n<ul data-rte-list=\"default\">\n<li>\n<p class=\"\" style=\"white-space:pre-wrap;\">I can retire in 7 years based on the average monthly contributions I worked with (and praying for a 6% average return), with a little over $1M \u2013&nbsp;which would give me the ability to use $40,000 of gains per year, tax-free<\/p>\n<\/li>\n<li>\n<p class=\"\" style=\"white-space:pre-wrap;\">I need to make sure I start adding money to that emergency fund as early retirement gets closer so that account has $30,000 in it before I leave the workforce<\/p>\n<\/li>\n<li>\n<p class=\"\" style=\"white-space:pre-wrap;\">If I decide to cash out and use that emergency fund in year 1 of early retirement, I won\u2019t pay taxes on the sale of the capital gains, because it\u2019s under the $40,000 limit for long-term capital gains taxation when you have no other earned income \u2013&nbsp;and the interest taxes should be covered by the standard deduction<\/p>\n<\/li>\n<\/ul>\n<h4 style=\"white-space:pre-wrap;\">What about other income?<\/h4>\n<p class=\"\" style=\"white-space:pre-wrap;\">Remember how I said I\u2019ll probably still work in some capacity? I\u2019m fairly confident that I\u2019ll be able to generate at least $1,000 per month in other part-time work (teaching fitness, blogging, etc.) \u2013&nbsp;work that I\u2019d consider a \u201chobby,\u201d especially since I won\u2019t be working full-time anymore. <\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">That decreases the amount of money I\u2019ll have to use in retirement by $12,000 per year, give or take, which is a big help \u2013&nbsp;after all, if my planned \u201csafe withdrawal\u201d rate is $40,000 per year from my investment accounts (thanks to the $1M of interest-generating money invested), my side hustle income would knock down my withdrawal rate to $28,000 ($40,000 minus $12,000). <\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">That gives me a lot more wiggle room in retirement \u2013&nbsp;after all, if you consider that you calculate your FI number by multiplying your annual expenses by 25 ($40,000 x 25 = $1M), $28,000 x 25 = $700,000. I\u2019ve got about $300,000 of buffer in my number if I can generate $1,000 in monthly income. <\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">I don\u2019t know about you, but that makes me feel a whole hell of a lot better about my plan \u2013&nbsp;if I only \u201cneed\u201d $700,000 and have $1M, I\u2019ll feel less stressed about market swings. This is all made possible by maintaining a little side hustle income, which will probably feel easy-peasy with no full-time job.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">The only thing to note here is that having <em>any<\/em> earned income will eat up the standard deduction (in this case, $12,000 per year accounts for almost all of it), so when I think about this strategy, I think about it as providing a buffer so I can withdraw less over all \u2013&nbsp;not that I\u2019d add a hypothetical $12,000\/year side hustle profit to the $40,000 I\u2019m withdrawing and live a little large. I\u2019d only withdraw $28,000, to stay under the 0% mark of a $40,000-per-year \u201cincome.\u201d<\/p>\n<h4 style=\"white-space:pre-wrap;\">Which account do you start using first?<\/h4>\n<p class=\"\" style=\"white-space:pre-wrap;\">The important logistical tidbit I learned reading Financial Freedom is that you don\u2019t actually want to touch those investments in year 1, if you can help it \u2013&nbsp;you want to give them a full year of generating interest before you start using the account. It makes sense \u2013&nbsp;if $1M is the principal I need to generate enough interest to live on, then I don\u2019t want to withdraw $40,000 in year 1 (I mean, you certainly <em>can<\/em>; the math still works out). The more conservative route makes me feel a little more comfortable, though.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">More or less, in year 1, you want to live off side hustle income and that emergency fund cash (in my hypothetical case, it\u2019d be the $1,000 per month and the $30,000 saved up in the Safety Net). <\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">After you\u2019ve given your investments 6 months to a year to generate some more interest, the first account you\u2019ll start to use is your taxable investing account (in other words, the account called \u201cGeneral Investing\u201d in the table above). Because this money <em>isn\u2019t<\/em> growing tax-free or tax-deferred like the 401(k) and IRA, it\u2019s technically the \u201cleast\u201d valuable, from a tax perspective. Your dividends are getting taxed every year, unlike the dividends in your other retirement accounts (see why retirement accounts rock? They\u2019re SEXY TAX SHELTERS!). <\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">You\u2019ll want to use this first. The other advantage to using this first? No penalties!<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">Based on our numbers in the chart, there will be about $736,637 in this account (and remember, that\u2019s a high, high estimate, so use this as an intellectual exercise and not a, \u201cKatie\u2019s a rich bitch,\u201d exercise, because I\u2019m essentially projecting my two best months ever onto the next 7 years as if it\u2019s indefinitely sustainable).<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">Using the <a href=\"\/personal-finance-wealth-planner-tool\/wealth-planners\" target=\"_blank\">Financial Independence tool on my site<\/a>, I plugged in what a $28,000 withdrawal rate from this $739,000 General Investing account would do over time (in other words, how long can I live off this one account before it runs out?). I was surprised by what I saw.<\/p>\n<\/div>\n<div style=\"width: 802px\" class=\"wp-caption alignnone\"><img decoding=\"async\" src=\"https:\/\/moneywithkatie.com\/wp-content\/uploads\/2021\/01\/ScreenShot2021-01-10at41259PM.webp\" alt=\"  You\u2019ll notice if I withdraw $29,465 per year from this investment account worth $736,000, it\u2019ll spit out $2,455\/mo. Adding that to my $1,000 predicted side hustle income, I\u2019d be able to spend about $3,455\/mo.  \"\/><p class=\"wp-caption-text\">You\u2019ll notice if I withdraw $29,465 per year from this investment account worth $736,000, it\u2019ll spit out $2,455\/mo. Adding that to my $1,000 predicted side hustle income, I\u2019d be able to spend about $3,455\/mo.<\/p><\/div>\n<div class=\"sqs-html-content\" data-sqsp-text-block-content>\n<p class=\"\" style=\"white-space:pre-wrap;\">The cool thing about the Financial Independence tool is that it\u2019ll tell you when your money will run out. While it was designed to show you that your TOTAL \u201cFI\u201d number is enough to compound over time and still give you millions in retirement despite using some of your investment income, it\u2019s also useful for showing you when smaller accounts will run out. <\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">I was SHOCKED by how long this account will last me. Check out the below, where you\u2019ll see that I could withdraw $28,000\/year from this account and \u2013&nbsp;if the markets constantly return 7% \u2013&nbsp;<em>the account would never run out. <\/em>In fact, not only would it not run out, but it would grow to $3.9M after withdrawing $29,000 per year for 38 years.<\/p>\n<\/div>\n<div style=\"width: 904px\" class=\"wp-caption alignnone\"><img decoding=\"async\" src=\"https:\/\/moneywithkatie.com\/wp-content\/uploads\/2021\/01\/ScreenShot2021-01-10at44007PM.webp\" alt=\"  See how the total account balance goes up over time despite using $29,000 per year?  \"\/><p class=\"wp-caption-text\">See how the total account balance goes up over time despite using $29,000 per year?<\/p><\/div>\n<div class=\"sqs-html-content\" data-sqsp-text-block-content>\n<h4 style=\"white-space:pre-wrap;\">What if you did, hypothetically, withdraw the full $40,000 each year from the General Investing (taxable) account?<\/h4>\n<p class=\"\" style=\"white-space:pre-wrap;\">So let\u2019s say you break both your legs and the internet gets canceled. No more fitness instruction or blogging for you, KG.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">If I were to withdraw my full $40,000 from the General Investing account, I\u2019d get 23 years of longevity out of this account. And since I\u2019d keep my withdrawals under the $40,001 mark, it would all be tax-free (no long term capital gains taxes, remember?). <\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">\u2026it still doesn\u2019t run out. After 38 years, withdrawing $40,000 per year, it becomes $2.1M.<\/p>\n<\/div>\n<div style=\"width: 924px\" class=\"wp-caption alignnone\"><img decoding=\"async\" src=\"https:\/\/moneywithkatie.com\/wp-content\/uploads\/2021\/01\/ScreenShot2021-01-10at44128PM.webp\" alt=\"  Notice how using $40,000 every year slowly depletes the account, but the interest always kicks in to save the day.  \"\/><p class=\"wp-caption-text\">Notice how using $40,000 every year slowly depletes the account, but the interest always kicks in to save the day.<\/p><\/div>\n<div class=\"sqs-html-content\" data-sqsp-text-block-content>\n<p class=\"\" style=\"white-space:pre-wrap;\">But this is in the best case scenario that the 7% return is a strong average, and we all know that some years you\u2019ll see 15% <em>dips<\/em>, not gains. While I\u2019m thrilled with the fact that it appears one account alone will be enough thanks to a low-consumption lifestyle and the 8th wonder of the world, compound interest, I want to enact the rest of the plan to finish fleshing this out.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">Because not only could a few bad years derail the goodness of this one\u2019s longevity, but it\u2019s also likely that it won\u2019t be worth anywhere near $700,000 by the time I use it (thanks to the aforementioned \u201cunsustainable income\u201d supernova I noted above). <\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">Let\u2019s say that General Investing account has a few bad years and it runs out when I\u2019m 45 or 50 (which is probably more realistic; the math shown here is basically the best case scenario). <\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">What would I do next?<\/p>\n<h4 style=\"white-space:pre-wrap;\">Next, you want to use your \u201cTraditional,\u201d pre-tax retirement accounts<\/h4>\n<p class=\"\" style=\"white-space:pre-wrap;\">In my case, that would be the 401(k) with $238,000 at the time of retirement.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">In order to use this money before I turn 59.5, I\u2019d have to do something called a <a href=\"https:\/\/www.moneywithkatie.com\/blog\/how-to-use-your-401k-in-early-retirement-without-a-10-penalty\" target=\"_blank\">Roth IRA conversion ladder, which I explain in greater detail here<\/a>. <\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">While it\u2019s definitely worth understanding how this works, the main things to know about this are:<\/p>\n<ul data-rte-list=\"default\">\n<li>\n<p class=\"\" style=\"white-space:pre-wrap;\">It exploits a tax loophole (that we\u2019re hoping will still be around later in life) where you can convert your 401(k) to an IRA, and then do a Roth conversion to pay the taxes on the money. After 5 years, you can use that money penalty-free. If you keep your conversions under the standard deduction amount and have no other earned income, your conversions will be (another loophole!) tax-free.<\/p>\n<\/li>\n<li>\n<p class=\"\" style=\"white-space:pre-wrap;\">You <em>do<\/em> have to pay taxes during the Roth conversion phase as though it\u2019s income if you convert more than that, so you\u2019ll want to plan for paying (let\u2019s say, for rough estimates) 20% of the total conversion amount in taxes with <em>other<\/em> money. That is, money that didn\u2019t come from the conversion itself.<\/p>\n<\/li>\n<\/ul>\n<p class=\"\" style=\"white-space:pre-wrap;\">Since $40,000 is the withdrawal amount, <strong>five years before my General Investing account is set to run out<\/strong>, I\u2019d want to begin the Roth IRA conversion ladder: That way, when the money runs out of General Investing (which I should have a better sense for as it gets closer and we know how the #MarketMovez affect its lifetime), I\u2019ll be on the tail-end of my 5-year waiting period to use my first 401(k) chunk of converted money. <\/p>\n<blockquote>\n<p class=\"\" style=\"white-space:pre-wrap;\">Another #tidbit worth mentioning here is that I could always draw down these accounts in parallel to exploit the standard deduction loophole described above indefinitely. In other words, I could swear off the side hustle plan and convert $12,550 chunks (the standard deduction) of the Traditional 401(k) right away, then after 5 years begin supplementing the taxable income withdrawals with the 401(k) converted chunks.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">That would be: $12,550 from the 401(k), converted to a Roth IRA and available after 5 years, + $27,450 from the taxable, General Investing account, for a total of $40,000 per year tax-free income from my accounts (again, it\u2019s tax free because it\u2019s &lt;$40,000, the current upper limit for the 0% tax bracket on capital gains).<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">The other, OTHER thing worth noting here is that I\u2019m assuming the \u201csingle filing\u201d tax numbers; if you\u2019re married, that number doubles \u2013 you can withdraw $80,000 tax-free. <strong>single tear glides down cheek<\/strong><\/p>\n<\/blockquote>\n<h4 style=\"white-space:pre-wrap;\">Let\u2019s pause here and review<\/h4>\n<p class=\"\" style=\"white-space:pre-wrap;\">I retired at 33 with $1M. <\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">I continued to generate $1,000 per month in side hustle income, but let\u2019s say (for the sake of being conservative, remember?!) that I used $40,000 per year of my $736,000 taxable investment account called \u201cGeneral Investing.\u201d In this scenario, it\u2019s projected to last forever, but for the sake of the Coronaviruses of history, let\u2019s say it doesn\u2019t.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">At some point, I\u2019d take $12,550 of my 401(k), convert it to an IRA, and then perform a Roth conversion (more realistically, the standard deduction will be higher 7 years from now, but I\u2019m using present-day, 2021 numbers).<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">For the sake of this example, it may be worthwhile to pick a timeframe for beginning the conversion ladder. Let\u2019s say we choose age 45, or 19 years from now, so that the first chunk of converted funds are available at age 50. <\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">That means we\u2019d begin our conversion ladder in year 2040, and according to our table above, that would mean we\u2019d have a little over $900,000 in the General Investing account by then, despite using it unabashedly for the last 19 years.<\/p>\n<h4 style=\"white-space:pre-wrap;\">Using that approach, how long would the 401(k) last?<\/h4>\n<p class=\"\" style=\"white-space:pre-wrap;\">One amazing thing to remember: You know how we were just slowly drawing down our $730,000 General Investing account for the hypothetical period of 19 years? <\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">For those near-20 years, all the other accounts (untouched) were <em>growing in the background and continuing to compound.<\/em><\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">Say it with me: Ho. Lee. Shit.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">Let\u2019s see what would\u2019ve happened to those accounts, gone untouched, for that 20-year timespan (with no additional contributions!). Wealth Planner projections, whaddya got for me?<\/p>\n<\/div>\n<div style=\"width: 1536px\" class=\"wp-caption alignnone\"><img decoding=\"async\" src=\"https:\/\/moneywithkatie.com\/wp-content\/uploads\/2021\/01\/ScreenShot2021-01-10at45510PM.webp\" alt=\"  Holy shit \u2013&nbsp;over the 20 years that these accounts were just hanging out untouched, the 401(k) grew to $764,000 on its own and the IRA grew to $233,254.  \"\/><p class=\"wp-caption-text\">Holy shit \u2013&nbsp;over the 20 years that these accounts were just hanging out untouched, the 401(k) grew to $764,000 on its own and the IRA grew to $233,254.<\/p><\/div>\n<div class=\"sqs-html-content\" data-sqsp-text-block-content>\n<p class=\"\" style=\"white-space:pre-wrap;\">I\u2019m going to be honest, at this point, I don\u2019t even feel compelled to figure out \u201chow long it would last\u201d because the more appropriate question is, \u201cHow many millions will you leave to your heirs?\u201d <\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">All you need to know is, you\u2019ll draw from the 401(k) until it\u2019s gone and then the Roth IRA last, because the Roth money grows fastest. While there are a few strategies on the table here, I\u2019m tempted to say totally draining the taxable account first probably makes the most sense before moving to these tax-advantaged accounts.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">Roth IRAs are a great gift to your heirs, by the way, because of some other funky tax law \u2013&nbsp;I think it\u2019s because the taxes are already paid, but rules around passing down money are not my current fort\u00e9 (yet) because the idea of procreating at 26 makes me want to obtain a Xanax prescription. <\/p>\n<h4 style=\"white-space:pre-wrap;\">My major takeaways after running through this exercise<\/h4>\n<p class=\"\" style=\"white-space:pre-wrap;\">I have to say, I\u2019m a little surprised at how well this plan worked out. I was skeptical (nervous, even) that when I sat down to flesh out the details, I\u2019d find that my plan was screwed.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">Of course, there are some other assumptions happening in the background as well, beyond a consistent 6% return \u2013&nbsp;that I\u2019ll always get an employer match, that my expenses won\u2019t increase beyond $3,333 ($4,333 if you include the presumed side hustle income) per month, etc., and that there won\u2019t be any catastrophic, world-as-we-know-it-ending event that permanently derails the stock market forever (but honestly, if that happens, I\u2019ll have bigger problems than my early retirement dreams going down the tubes).<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">We also ignored the impact of taxes on dividends year-over-year in the taxable account, which would\u2019ve accelerated that draw-down.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">But even then \u2013&nbsp;with all these things taken into consideration \u2013&nbsp;this plan worked out to where it looks as though I\u2019d have millions LEFT OVER after I bite the dust, which makes me feel pretty confident that a few of these things could go awry and I\u2019d still have more than enough to last me. <\/p>\n<h4 style=\"white-space:pre-wrap;\">In summary, when preparing for early retirement<\/h4>\n<ul data-rte-list=\"default\">\n<li>\n<p class=\"\" style=\"white-space:pre-wrap;\">Save 12 months of expenses as an emergency fund before you retire (rather than just 6) so you\u2019ve got a cushion from bad market returns.<\/p>\n<\/li>\n<li>\n<p class=\"\" style=\"white-space:pre-wrap;\">Use the taxable account first, and supplement with side hustle income if you can or feel like it (if you\u2019re able to work hard enough to <em>earn enough <\/em>to retire at age 33, you\u2019re probably not going to be able to prevent yourself from earning a little).<\/p>\n<\/li>\n<li>\n<p class=\"\" style=\"white-space:pre-wrap;\">Use the Traditional retirement accounts next, using the Roth IRA conversion ladder to bridge the gap between your age when the taxable account runs out and age 59.5 (depending on how much you save in the taxable account and how much you actually withdraw every year, this could be a pretty small window).<\/p>\n<\/li>\n<li>\n<p class=\"\" style=\"white-space:pre-wrap;\">Use the Roth accounts last, as they grow the fastest (growing tax-free and coming out tax-free).<\/p>\n<\/li>\n<\/ul>\n<h4 style=\"white-space:pre-wrap;\">Things that I\u2019m still unsure about<\/h4>\n<ul data-rte-list=\"default\">\n<li>\n<p class=\"\" style=\"white-space:pre-wrap;\">How much do I need to factor in for monthly healthcare costs, especially as I age? How will that increase my number?<\/p>\n<\/li>\n<li>\n<p class=\"\" style=\"white-space:pre-wrap;\">How will I plan for the taxes I\u2019ll need to pay as I convert my Traditional retirement money to post-tax money if I end up going above the standard deduction? Is there a really efficient way to do this other than, \u201cI\u2019m sure there will be some leftover every year,\u201d?<\/p>\n<\/li>\n<\/ul>\n<p class=\"\" style=\"white-space:pre-wrap;\">With more sophisticated calculators, I could probably account for some of these things. But for now, I\u2019m feeling A-okay about this plan.<\/p>\n<p class=\"\" style=\"white-space:pre-wrap;\">And if you use the tools screenshotted (screenshat?) above, you can more or less project out your own path, too. <\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>A lot of the time when I cover fairly complex topics on this blog, I\u2019m doing it for myself just as much as I\u2019m doing it for the kind people who are gracious enough to spend their time on this site. Early retirement \u2013&nbsp;and the logistics therein \u2013&nbsp;is one of the topics about which I\u2019m [&hellip;]<\/p>\n","protected":false},"author":178814,"featured_media":2407,"comment_status":"closed","ping_status":"open","sticky":false,"template":"si-template-single-post-401-k-s-and-iras.php","format":"standard","meta":{"footnotes":""},"categories":[37],"tags":[47,40],"class_list":["post-529","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financial-independence","tag-401ks-and-iras","tag-income"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.8 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>What Actually Happens When You Retire Early? - Money with Katie<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/moneywithkatie.com\/what-actually-happens-when-you-retire-early\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What Actually Happens When You Retire Early? - Money with Katie\" \/>\n<meta property=\"og:description\" content=\"A lot of the time when I cover fairly complex topics on this blog, I\u2019m doing it for myself just as much as I\u2019m doing it for the kind people who are gracious enough to spend their time on this site. 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