Our Accumulation and Withdrawal Strategy

(I’m off to the annual FinCon conference in New Orleans this week. I’ve gotten quite a bit to do, so this is going to be a little short.)

A couple of weeks ago, Joe from Retire By 40 linked to his withdrawal strategy in a recent article. I had been reading his site for years, but I hadn’t seen this particular article. Yesterday, he updated his accumulation and withdrawal article with all the new information over the last several years.

In the article, he shows two basic graphs of accumulation and withdrawal. There’s little point in reinventing the wheel. It’s a basic generic representation of how people grow their money exponentially until they retire. Hopefully, Joe won’t mind too much if I borrow them. The first graph is a typical age-65 retirement:

The second one is an “Extreme Early Retire by 40”, but continue earning with side hustles:

In this graph, Joe explains that he’s in a “holdfast phase.” This phase relies more on being frugal and side hustles. That’s kind of what I’ve done since around age 32 when I stopped being a software engineer. I prefer to say that I simply switched to being self-employed, but some people say they are retired. In any case, I have probably earned an average of $50,000 a year during this phase. I do a lot of the kid and house stuff, along with the grocery shopping. Joe and I both have wives who work full-time, so it’s not too hard to understand why the income still goes up in this “holdfast phase.”

I had been anticipating the full retirement phase to start any year, but my wife got promoted last year and wants to continue on to maximize her military pension. It doesn’t make sense to try to touch any of the retirement accounts due to penalties and high taxes. We don’t need them, so they continue to compound in the stock market.

Joe planned his withdrawal strategy in five-year slices starting at age 55. It’s a good year because withdrawals can be made from a 401k. My wife would also be to take withdrawals from her TSP.

Our Accumulation and Decumulation Strategy

Phew, that’s a lot of detail about Joe’s plan. It’s worth covering, though, because it’s very similar to our plan. It’s great to be able to have someone a few years older than me to blaze the trail.

Let’s start at age 50:

• Age 50-55
  My wife retires and takes income from her pension. I estimate that it might be worth $65,000 after paying for taxes, insurance, and her great access to military health care. I might be overestimating a little, but it’s a good amount. This will continue for life.

  I will continue to board dogs and blog. I may make some small websites for local businesses. I will continue these for as long as it makes sense.

  We may be in a lower tax bracket, so this is a time when we might convert some IRAs to Roth IRAs.

• Age 55-60
  The kids head off to college. We’ll use her GI Bill, 529 savings, and try to “hack” some college credits through dual enrollment.

  My wife can withdraw from her TSP at age 55. We may want to dip heavily into these and travel since it’s just the two of us.

• Age 60-65
  We can withdraw from more accounts at age 59.5, which we might as well round up to 60.

  It’s still a good time to travel.

• Age 65-70
  We’ll take whatever we can from Social Security. We may delay until depending on how we feel about our health.

  Still more travel?

• Age 70-80
  We’ll definitely need to take Social Security now. We may also have to take RMDs.

  I don’t know how active we’ll be at this age. Maybe at this point, our travel consists more of relaxing cruises.

• Age 80+
  Like Joe, I don’t know what the future brings in terms of health.

The big difference with our decumulation strategy is the pension. With that headstart each year, we shouldn’t need to withdraw anything for our basic needs. This assumes that the kids are taking care of themselves. We’ll have the mortgages paid off in just a few years.

Unlike the graphs above, where the money gets down to zero, we might find that our money just continues to grow, and the graph keeps going up.

When I look at the time slices above, it seems… short. All the action seems to take place in the 50-70 range. We’d want to do the bulk of our decumulation during that time.

You may notice that I put a lot of travel in the plans above, but I don’t like traveling. If you think about airplane and coach class traveling, they are designed to be terrible to make you pay more to upgrade. We’d be able to do that, but will I see the value in paying several hundred more dollars over the span of 6-8 hours on a plane? Maybe, but it feels like I’d find more impactful things to do with that money.

I’ve had a frugal mindset for so long that it’s difficult to switch modes into decumulating so much. I’m so used to maximizing the value of each dollar. Will I be able to continue to maximize each dollar?