Okay, I am not really at the stage where I am liquidating my investments yet, but my parents soon will be. I have also been hanging around the Early Retirement forums quite a bit so I have been thinking about this since I do want to retire early. When you retire, how do you handle liquidating your retirement funds for everyday expenses?
From what I have read, it seems that these early retirees take the following strategies.
1. Let the nest egg grow as long as possible - Most people advocate letting the investments grow as long as possible and spending other income such as pensions, Social Security, or side income.
2. Keep a cash equivalent reserve of 3 to 6 years - Some early retirees say that they have a big cash fund that could last them for a few years. When they use it up, they sell enough investments to last them for another few years and let the rest grow.
3. Withdraw 4% or less of the entire portfolio per year - The 4% withdrawal rule has been discussed extensively all over the forums. Basically the idea is that 4% is a safe withdrawal rate that gives you the greatest chance of your portfolio lasting for your retirement. It is called a “safe” withdrawal rate based on simulations of portfolio withdrawals during different periods of the stock market. A tool the early retirees love is FIRECalc.
4. Be aware of taxes - One suggestion I read is that in years where you expect to spend a lot you should liquidate the tax-free accounts like Roths, but in the years where you don’t spend a lot you should liquidate the taxable accounts because your tax rate would be lower.
There are also many discussions of annuities but most people seem dismissive of these because annuities cost quite a bit. I think for me I would have a hard time switching from a saving mindset to a spending mindset. I would probably worry if I were spending more than my income, but being retired wouldn’t really prevent me from incoming generating activities like blogging so maybe it won’t be so bad. Anyway, one day I will get there, but for now I just like reading other people’s stories.
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1 comment so far ↓
These are great list of suggestions. I think I am going to check out early retirement forums. It seems like a good source of information.
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