It’s been just over four years since I handed in my notice to the MegaCorp where I spent my entire professional career. April 19th, 2023 will mark four years since I took that last ride down the elevator and out of the parking garage. I decided to ask Twitter what people wanted me to write about reflecting back on four years of freedom.
I received so many good questions, I decided to answer some of them individually instead of trying to cover them all in one “wrap up” post that could sit in my drafts for years. The next question comes from Big Island Goats, who asks:
What is our drawdown strategy and how have things changed along the way.
This is a great question, there’s so much content around a Safe Withdrawal Rate and theoretical discussion about withdrawing assets, but a practical discussion about how we’re withdrawing assets and what’s changed over the four years is a great question!
I think this is best answered by what went as expected and what was unexpected.
Morning Wave Check = Morning Commute
The initial phase of our early retirement is funded by distributions from a 409a, non-qualified deferred compensation plan. These were salary deferrals I made while working that are paid out monthly over fifteen years. I keep these funds invested in a limited number of mutual fund options and get a monthly distribution.
These payments are supplemented by distributions from our regular brokerage account. Each month I have the deferred compensation payment go into the brokerage account then I make a transfer of our monthly budget amount into the checking account, just like a paycheck.
Long term the plan is / was to complete Roth IRA conversions and slowly build a significant balance in contributions to a Roth IRA we can withdraw as a bridge until we reach 59.5 and all of our retirement accounts become traditionally accessible.
Part 1: What worked?
Deferred comp plan is working as expected. Since this account distributes monthly, I’ve kept most of our bond allocation here. I’ve also gotten lucky twice on this account, shifting some bonds into equities when everyone seemed to think the sky was falling. The plan did change providers a year in and I lost the ability to adjust tax withholdings, so I now have 22% come out of this check before I get it.
The regular brokerage account is working as expected as well. We deposited the proceeds from the sale of our house in Texas into the account, rented for 3.5 years, and purchased a new house recently out of this account. Our total monthly budget was higher when rent was included and now it’s lower with a free and clear house.
Part 2: What is different?
Roth IRA Conversions: Instead of working on Roth IRA contributions in 2020 and 2021, we elected to take a disaster distribution moving money directly from a pre-tax IRA into a brokerage account. It looked like a one time opportunity to get access to funds that could be used immediately while spreading the tax hit over three years. This turned out to be an important move as the cost of housing inflated rapidly due to the government’s stimulus / deficit spending and mortgage rates being subsidized down to 3% for nearly two years.
Income Post FI: I’ll split the income components into two parts, the easy income that finds its way to a financially independent person and also active work.
Part 1: Easy Income. ~ $10,000/year. I’ve found that picking up $10,000 in income or so a year for a married couple is pretty easy. We will sign up for a couple checking / savings account bonuses per year, sign up for a few reward credit cards, and have some random project work find its way to us. I set up a corporation for the small freelance requests I had coming in and that opened an entirely new and more lucrative world of signup bonuses, as business checking / credit card accounts are more attractive and less restrictive than personal card bonuses. It’s also useful to know a group of people who do this and trade referrals around, since at least two issuers pay a second signup bonus to a referring party. For us it’s as simple as managing a spreadsheet and cycling through providers. (Feel free to drop me a comment below or email me as I’m happy to discuss further.) It’s easy enough to do in the morning when I’m going to be drinking coffee and pecking away at a computer anyways. There are a few others who do this more than I do; check out Root of Good and Trip of a Lifestyle.
The freelance jobs that have gone into this “easy” income bucket were a former client asking me to advise him on a refinance, a landmark restaurant doing a limited sale, reviewing some real estate syndications, and acting as an advisor on two small business boards of directors. The short run of Instacart to access the beach islands goes into this income bucket. All of these have mostly been low pressure / low responsibility assignments resulting in a few thousand dollars a year. There’s the added benefit of the first $8500 of self employment income being tax free, since health insurance premiums are tax deductible against business / sole proprietorship income.
My advice to early retirees is since you have knowledge based skills and connections that got you to financial independence and have capacity, it’s likely someone will approach you with something that is interesting, can be completed on your own terms, and you might just say yes.
Part 2: Active Work / Roth IRA Conversions:
In 2022 I ventured into a relationship that is resulting in some larger payments. I found an independent debt brokerage that provides me with the infrastructure, support, and leads (if necessary) and I can do remote, transaction by transaction work on the borrower side of my old profession. If I decide to take on a project, it’s 60-90 days of 5-10 hours worth of work that’s mostly remote and on my time. It also gives me a reason to catch up with people I knew throughout my sixteen years of working.
So far we’ve had a few successful transactions, but I am careful not to turn this into a repeat of having a job. The income can be lucrative, but I have limited interest in exchanging time for money I don’t really need. The key has been to not take on much, delegate what I don’t like, and make sure I don’t have overlapping projects in order to keep this enjoyable. I think us FIREy folks would refer to this RE stage as recreational employment. I still have control of my time and can be surfing at 1pm on a Tuesday, so I’ll take it.
This hasn’t changed our withdrawal strategy, but it has allowed us to accelerate some Roth IRA conversions starting in 2022. Essentially all the net cash flow from this source is funding taxes on conversions. I think taxes are more likely to go up in the future than down or everything will inflate further, so I’ll prepay a future tax expense with it instead of changing much about our plan. So far we’ve survived two bear markets and raging inflation in our four years of FIRE and advancing the conversions now reduces our tax liability in the future.
The last part of this answer would be how little time I spend thinking about withdrawal rates and investment strategies. I used to run spreadsheets and simulations all the time while working. There was always new money to invest, new content about the subject to devour, and the element of *do I quit or don’t I quit the job* risk hanging out there.
Now we’re almost always below the 4% annual withdrawal rate and I’ll tweak the portfolio some. Maybe I have a bit more in bonds than stocks, maybe I’ll lean more towards a dividend or small cap value index if the valuations look substantially higher than historical averages on the index. I still have a few individual stock positions but over time those are trending more into funds and any new individual stocks are invested in at “hobby size”. Since retiring, our portfolio is up around 20%, which seems about in line with inflation even with struggles in the market recently. The portfolio has one goal at this point, fund our lifestyle for the next forty years without having to return to full time work. If it achieves that goal, it will be successful.