BiggerPockets Money Podcast - The Ultimate Guide to Early Retirement Drawdown (2026)

Episode Date: December 9, 2025

Building a $2.5 million portfolio is hard. Spending it without running out? That's even harder. Welcome to the 700th episode of the BiggerPockets Money Podcast! To mark this milestone, hosts Mindy Jensen and Scott Trench are tackling one of the most critical—and most overlooked—aspects of financial independence: decumulation. Most people obsess over building wealth but stumble when it's time to actually spend it. The withdrawal strategy you choose can mean the difference between a comfortable 40-year retirement and running out of money at the worst possible time. In this episode, we cover: Sequential vs. blended vs. cyclical withdrawal strategies—which is right for you? How to create a tax-efficient drawdown plan that could save you hundreds of thousands The role of Roth accounts, traditional IRAs, and taxable brokerage accounts in your withdrawal strategy When to do Roth conversions and how to time them for maximum benefit Healthcare planning in early retirement and how it affects your withdrawal strategy Estate planning considerations and maximizing what you leave behind Real-world scenarios: what withdrawal strategies look like in practice The biggest mistakes retirees make in the decumulation phase Whether you're just starting your FI journey or you're ready to retire next year, this comprehensive guide will help you spend your money strategically, minimize taxes, and make your nest egg last. Learn more about your ad choices. Visit megaphone.fm/adchoices

Building a $2.5 million portfolio is hard. Spending it without running out is even harder. Decumulation strategies determine if your retirement succeeds or fails. Here's the ultimate guide to decumulation. Hello and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen and with me as always is my nothing is certain co-hosts Scott Trench. Nothing is certain except for death and taxes, right? But I think that for the fire community, only death may be certain. We might be able to totally avoid taxes or for the most part, avoid them with the right decumulation approach. I am super excited to be here on the 700th episode of Bigger Pockets Money. Wow.

What has that been like eight years, Mindy, nine years? Almost nine. Crazy. What a privilege and a joy it is to get to do this. This is like this is the ultimate possible way to work, have a semi-retired podcast hosting light, whatever. I'm just so grateful to you, Mindy, to Blake, our producer, to everybody who listens to this show. Thank you, thank you, thank you for just enabling me to do what I love.

Well, you're welcome, Scott, and right back at you. I am so thankful as well to be able to do this with you twice a week, every week for the last almost nine years. This has been a lot of fun. Before we get into today's episode, we wanted to discuss some feedback we got on last week's content. We love getting feedback from our listeners, and we always want to make sure that the information we are sharing with you is accurate and up to date. and treats everybody fairly. So please continue to let us know if anything we share is incorrect,

or you feel does not represent the reality of a situation the way it ought to be. That said, we want to make two shoutouts today. First, we discussed that the HSA is the worst account to inherit, which we still agree with, but what we want to acknowledge is some nuance that a user was kind enough to remind us about, which is that both spouses and non-spouses

can inherit that account. Non-spouses can use the deceased's HSA to fund tax-free any medical expenses that occurred before death, provided those bills are paid within one year of the account owner's passing, using the receipts and, of course, all the other documentation to offset the otherwise taxable inheritance. So that's a really key benefit. It's a real reason to leave something behind potentially in that HSA at end of life for that potential benefit. And then spouses, of course, get even better treatment inheriting the HSA as their own. but for other errors, that 12-month receipt deadline is crucial.

So we kind of take it for granted that most of the assets passed to the spouse pretty well. That's not always the case, and so we should call that out. And this was great feedback from the listener. So thank you so much for providing that. And then second, I think we might have inadvertently misrepresented or not quite accurately discussed Cody Garrett and Sean Mullaney's stance on blended retirement approaches on their podcast. They and our recent guest, Mark Bakewell, are in very close align. both, of course, agree that you ought to use up at the minimum, the full standard deduction

and 0% long-term capital gains, tax brackets. And the differences in the approach are very minimal between those two things. There's not a lot of disagreement here. And all three of those individuals, Mark, Cody, and Sean, are people we, Mindy and I, regard as some of the best and brightest minds in the tax planning space for early retirees. So thank you to all of them. And we apologize for any confusion that may have misconstrued. their beliefs and their views on best practices.

We know Cody and Sean have a great approach there. That's why we had them on twice and hope to have them on many more times in the future to talk about these subjects. So thank you, Cody and Sean. And thank you to the listener who pointed out that we may have misrepresented their views on how they feel about the blended approach to withdrawals in early retirement. All right. Now, let's get back into the ultimate guide to retirement drawdown.

Let's jump into talking about accumulations, Scott. We have spent so many episodes about 689 talking about how to build up your portfolio. Now we're going to start talking about withdrawing. It's not as easy as just selling a stock. That's right, although it does start with that. And I want to point out that a huge percentage, some 80% of Bigger Pockets money listeners, have never sold a stock to fund consumption. So this episode is presuming that you are either going to get past that

or are already past that and are willing to do that. So that is a mental hurdle that you will have to get over. If you want to accumulate, you'll have to be comfortable selling a stock. So with that, should we go ahead and get into it and talk about this presentation we put together? We should. And Scott, obviously, to celebrate, you have created a PowerPoint presentation because that is your jam. I think we have created a PowerPoint presentation. And by the way, all of these PowerPoint presentations and resources will be uploaded to

BiggerPocketsMoney.com slash resources. If you want to look at this or any of the other presentations or files that we talk about in the show, they're all free here. You don't have to give us your email or anything. You just can download them right to your computer or open them on Google Drive if you prefer Google Drive for accessing those files. So biggerpocketsmoney.com slash resources. All right, let's go ahead and get into it. Today's episode is called the ultimate guide to decumulation in 26. We're going to talk about the differences between accumulation and decumulation.

And first, we're going to present the goals here. So there are two goals that we're taking for granted. in the context of a decumulation strategy discussion, right? The first goal is don't run out of money in retirement. Almost everything we do around the 4% roll, withdrawal rates, diversification, you know, tax planning, all that kind of stuff. It all boils down to not running out of money in retirement. We don't want to run out.

That's a huge fear that we have. It's a very real risk for the fire community. If you're going to take yourself out of work in your 30s, 40s or 50s, and lose that potential for the maximum earnings potential that you could have. Otherwise, you really got to be. certain about this goal. So we're going to spend a lot of time thinking about how do we make sure we don't run out of money in retirement. If that goal is achieved, or if we're very confident that goal is going to be achieved, then we also have a secondary consideration here, which is

maximizing after-tax estate value. So in the event that we can safely hit our goals, I think we'd rather pass on $10 million to our heirs or have the option to give away $10 million while we're alive or the inflation adjust to equivalence of that, or distribute that to charity or give that to our errors earlier, whatever it is, versus two million. When that option presents itself, we're going to take that if it has a minimal or negligible or no impact on our likelihood of not running out of money in retirement. So sound good, Mindy? Is that you agree with that? I completely agree with that. I would much rather leave $10 million, although I might want to to spend a little bit more during my living years. That's fair, yes. So we take it for granted that

There's a, we don't run on in retirement. We may want to maximize spending, but I presume that a lot of people are going to be well within the bands of spending. They're going to be very, very sure, very confident in their portfolio allocations. And if they're able to achieve that, then yes, all else equal they're going to want to maximize their state value or the amount they can give. Yep, absolutely. So let's talk about diversification in the context of a decumulation portfolio, right? Diversification in a general sense is going to reduce our long-term. returns, right? We know that one of the best passive ways to build wealth is to invest in an all-stock passively managed index fund over a very long time horizon that should yield 8 to 11 percent nominal

returns and probably 6, 7 percent real returns over a very long period of time. However, once we begin decumulating from a portfolio, if we're anywhere close to traditional retirement rules of thumb, like the 4 percent rule, we can't do that with a decumulation portfolio because we run into a problem called sequence of returns risk, right? If the stock market goes down dramatically and we're trying to, you know, if we have a $2.5 million portfolio and it goes down 50% as has happened in historical periods to $1.25 million, for example, we would not be able to sustain our spending. We'd have to pull back or disrupt our lifestyle. And that's the whole point of what we're trying to do. We're trying to prevent that disruption to our lifestyle when we think about retirement planning. So

diversification and putting our money into uncorrelated. or even better negatively correlated assets so that we can withdraw from our portfolio over a long period of time much more safely or a much higher withdrawal rates is critical in this phase. So in an accumulation phase, our portfolio might look like 100% stock portfolios

or highly levered real estate portfolios, private businesses, or maybe speculative investments. But in our decumulation phase, we want to have a diversified portfolio with uncorrelated assets. And an answer to that, maybe not the answer or a specific answer, but an answer to that could be the one we went over with Frank Vasquez, the golden ratio portfolio,

which you have set up. Mind, do you want to tell us about that? Yeah, the golden ratio portfolio is 42% stocks, which is 21% growth and 21% value stocks, 26% bonds, which is split in half, 13% intermediate and 13% long-term bonds, 16% alternatives. I chose gold, which is Frank's favorite, and frankly, that is the best performance. stock, best performing holding that I have in my Frank Vasquez portfolio. 10% is in managed futures, which is looking towards trends, and 6% is in international stocks again split 50, 50, 3% growth, and 3% value. I have created a portfolio in July from which I have been pulling out the equivalent

of 5% over the year, but I did it per month, which is $42 a month out of my $10,000 portfolio, And I am up almost $1,000 after having withdrawn for five months. So I think Frank is on to something with his golden ratio portfolio. But the 4% rule was written with a 60% stock's 40% bond portfolio in mind. So going back to your comments, Scott, this 100% stock portfolio that so many people in the fire community seem to have isn't what the 4% rule was based on. So you really need to be paying attention to what your portfolio is made up of when you get to the decumulation phase. I think that there's many good examples of a decumulation portfolio.

This is the one that Mindy is testing right now with her personal funds. I am doing the same personally here. And I think that is a tip we would have for people is, let's say that you're approaching your fire number. Let's say it's $2.5 million, which is the midpoint for Bigger Pockets money listeners, right? is this $2.5 million number that supports about $100,000 in annualized spending at a 4% withdrawal rate. Let's say most of that is in stocks right now, and you're thinking about building toward a decumulation portfolio, but you're not there yet. Just take 10,000 bucks, something small relative to your position, and build this portfolio or build a portfolio that it will be,

whatever your decumulation portfolio might look like, and start withdrawing from it. Just that $40 a month to build that habit, I think it'll make a big difference when it comes time to really seriously consider firing and leaving work. Absolutely, Scott. I had never sold a stock before to fund consumption. I had sold some stuff and then bought other things. And it is a little bit different to go in and just hit sell. We have to take a quick ad break. So while we're away, we would love it if you would hop on over to our YouTube channel, which can be found at YouTube.com slash bigger pockets money. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks,

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are provided by lead bank member FDIC. Don't put this one off. Join thousands of small business owners who have streamlined their finances with Found. Audible has been a core part of my routine for more than a decade. I started listening to years ago to make better use of drive time and workouts, and it stuck. At this point, I've logged over 229 audiobook completions on Audible alone, and I still regularly re-listen to the highest impact titles. Lately, I've been listening to Bigger Leaner Stronger for Fitness, the Anxious Generation for Parenting Perspective, and several Arthur Brooks' audiobooks that have been excellent for mental well-being. What makes Audible so powerful is its breadth. Beyond audiobooks, you also get Audible Originals,

podcasts and a massive back catalog across business, health, parenting, and more, all accessible in one app. If you're looking to turn everyday moments into real progress, Audible has been indispensable for me over over 10 years. Kickstart your well-being journey with your first audiobook free when you sign up for a free 30-day trial at audible.com slash BP money. Welcome back to the show. Let's talk about tax treatment here of these accounts, because that's going to make a big difference in terms of how we think about withdrawing from these accounts and it has to overlap with portfolio strategy, right? I think everybody's favorite account is the Roth account. This money goes in post-tax, grows tax-free, and can be withdrawn tax-free

after age 59 and a half. All gains, all income in the Roth account can be withdrawn tax-free. This is also the best account to inherit to pass on to your errors because they can distribute all of the contributions and gains tax-free, and they have 10 years to liquidate that account. The next account is going to be your after-tax brokerage account. In a brokerage account, the basis, let's say you put $100,000 into buy stocks and it grows to $200,000. Your gain is $100,000, the difference between $200,000 and $100,000. And any income that comes out of is going to be what's called a qualified dividend, or typically is going to be a qualified dividend depending on what you invest in. This is also a highly tax favorable account for an early retiree because the marginal capital gains and qualified dividend rate is zero, up to about $98,000.

for a married couple and it differs based on your filing status. This is also a very favorable type of account to pass on to heirs because your errors will receive the account balances at a stepped up basis. And so up to very high limits, like $13 million, these accounts can be passed on tax-free to errors if they choose to then liquidate them. Of course, the gains from there, once they inherit them, will be taxed. The next account is going to be our tax-deferred accounts. These are going to be your 401k, your solo 401k, these pre-tax retirement accounts, there's equivalence for military, for teachers, for government workers, all sorts of things like that. But these accounts are going to be tax deferred, so you're not going to pay taxes today when you

contribute to these accounts and the amounts that you contribute. But when they're withdrawn, are going to be taxed at ordinary income rates. These are unfavorable accounts, relatively speaking, to inherit, to pass on to your errors because your errors are going to have to liquidate these accounts and all liquidations are going to be taxed at ordinary income rates and they have to liquidate them within 10 years. Those are often going to overlap with higher income years for your errors in many cases as well. The HSA is the last account here and this is perhaps the most unfavorable account to inherit because all of the proceeds are going to be taxed immediately as ordinary income by your errors when they receive the account. It is however a very tax

account for you because money goes in pre-tax, grows tax-free or tax-deferred, and can be used or withdrawn for qualified medical expenses without any taxes on gains or income or any of those sorts of things. So we want to be strategic with this account. We want to use this account during our lifetime. And ideally, if possible, not pass this one onto our errors if we can use those proceeds for expenses while we're alive. How am I doing so far, Mindy? You're doing great, Scott. And I just want to point out that even though the HSA is not... the best type of account to inherit, your heirs are still getting a big pile of money. Yeah, they'll have to pay taxes on it, but it was essentially like, here's some money.

It's not a bad account to inherit. There's just better ways to spend your money. Ooh, foreshadowing, Scott. Absolutely agree. But we're a fire community. This is bigger pockets money. We're not trying to say like everything is all good. We're trying to optimize here.

Let's optimize the situation because we're financial nerves. You'll listen to the 700th episode of Bigger Pockets of Money after nine years. Many of you have listened to all or most of the episodes. Wow. Thank you. We're going to optimize here. That's what we're here for. Let's optimize. So to reframe what we've talked about, right?

During our accumulation phase, phase one of our journey to early financial freedom, it's fairly simple. We're going to invest in concentrated positions in high growth asset classes. And we're going to invest for it with a long-term outlook. That could look like 100% stock portfolio, maybe a cash reserve, maybe a house hacker, if you rental properties. but we're keeping it simple and we're investing aggressively. When we get to retirement, we now need to consider several things. One is, where is my money?

Where's my asset location? Is it in 401Ks? Is it in Roths? Is it in after-tax broker's accounts? Is it in HSAs? And two, what is my diversification looking like? Do I have a portfolio that actually is supported or actually has uncorrelated assets that can support these higher withdrawal rates throughout a long duration early retirement?

If you retire at 45 and you plan to live to 95, because why wouldn't you? That's a 50-year retirement. We need to be planning for very long sequences of withdrawals here. We have to have lots of safety margin in order to make sure that that lasts. So minimizing taxes is a huge part of this journey. During the accumulation phase, phase one, we often will invest in a tax-advantaged order of operations. We've talked about this before, so we'll run through it quickly. Mindy, do you want to give us this one? Yes. Okay, so the investment order of operations that we at Bigger Pockets money follow is to first build a $1,000 cash buffer, then pay off any bad debt you have. Take your 401k match if your

company offers it. Take any other free money like the employee stock purchase plan. Then we want you to build and maintain a six-month emergency fund. After all of those have been done, we want you to start maxing out your HSA. With any funds left over, we want you to max out your 401k and then max out your Roth IRA. Those two can be flipped if you choose so you would instead max out your Roth IRA before maxing out your 401k. And then after that, we're looking at after tax contributions for any, quote, unquote, leftover money. Now, this is the accumulation phase order of operations. The decumulation phase, which is the opposite of accumulation, is not the opposite of this strategy. Scott, let's look at decumulation. This is really the heart of what we're trying to get to today.

The challenge here is I can't give you one order of operations for withdrawal. So we're going to present all three retirement drawdown strategies that we've kind of seriously explored here at Bigger Pockets Money. There are plenty more. But these are the three that we're going to explore. And we're going to kind of walk through the pros and cons of each of these. So the first one is going to be sequential drawdown. Mindy, do you want to give us the overview of? this particular strategy? Number one, we are pulling from our after-tax portfolio. After that,

they want you to do the pre-tax 401k withdrawals. If needed early, earlier than 59 and a half, you can do a 72T to access that money. If it's not needed in the early years, maybe a Roth conversion ladder. If you've got a little bit of space between your income cap, you might want to start doing a Roth conversion ladder. So you're taking money from your 401k. converting it to a Roth IRA, paying taxes on that money, that's a taxable event. And then after a Roth IRA has been opened for five years or you are age 59 and a half, you can access the contributions to the Roth IRA. If you're a traditional retirement age, you simply withdraw from your 401K plan.

After that, they recommend withdrawing from your Roth IRA and then finally your HSA reimbursements. So the HSAs is where your qualified medical. expenses can come out of. If you are part of the fire community, you've probably already heard us recommend that you cash flow any health expenses that you can and save the receipts so you can withdraw from the HSA later. Remember, you're not paying taxes going into the HSA. You're not paying taxes on anything that grows and you're not paying taxes when you withdraw as long as it's a qualified medical expense. So the advantage here is for many years of early retirement, you can be in a 0% income tax bracket with this approach, and you're not having to really declare much

in the way of ordinary income at all, if done correctly here. And I think that the challenge with that is that if you are one of these people who has a large 401k balance, for example, and that's the bulk of your wealth, then you risk having this concept of a tax bomb hit. You know, if you're going to do that, then this concept of required minimum distributions could hit at age 73. So let's say that you're 45 years old and you're going to fire, right? So life is good. You're in position to fire here. And you've got a million four in your 401k. You've contributed for, you know, 15, 20 years and compounded and taken the match and, you know, max it out between you and your spouse. And it's, it's compounded to a nice number. Most of your wealth is in that location. If you were to do this

strategy, you could end up at age 73 with $5 million in that 401k or your tax deferred accounts. And you're going to then be forced to withdraw from those accounts at a pretty high rate. That could be as much as, you know, three, $400,000 a year. And at that point in time, tax rates could be higher. Now, some would argue that this is a great problem, but it is a real problem. And if you're thinking about, you know, how you're thinking about it from an estate planning perspective, if you pass that account to your heirs, they're going to pay ordinary income on that inherited account. And so for some people who are safely in that camp of, you know,

I'm easily going to hit my financial independence number, they may want to do a different approach that has them paying some more taxes today to avoid that tax bomb later. They may pay a much, much, much, much, much less in lifetime taxes if they think about another order of operations here. So, Mindy, do you want to explain what an example of sequential, drawdown looks like in practice? Scott, in this slide, we are seeing gross income of $64,000, and that is coming entirely from our first bucket, which is our after-tax portfolio. So we are taking the standard deduction of $15,750. This is for a single person. And the taxable income is $48,250. The reason that we are paying $0 in taxes in this first year is because the long-term capital gains tax rate of 0% goes up to $48,350 for a single person.

In year two, on the right hand side of this slide, we are again withdrawing $64,000. We have depleted our after-tax brokerage account in year one. So going into year two, we're pulling that from our 401K. That is a tax advantage to count as a traditional 401k. So again, we've got the standard deduction of $15,750, giving us a taxable income of $48,250, which is now subjected to the 10% and 12% tax brackets. For a single person, the 10% tax bracket goes up to $11,925. So we're paying just over $1,000 in tax there. Then the remainder of the income, the $36,300.

$5.25 is taxed at 12%. So we're paying about $4,300 in taxes there. That gives us a grand total of $5,500 that we're paying in taxes in year two with the sequential drawdown. So we've first withdrawn all of our taxable brokerage account, and now we're moving into the 401k. You have another option for us, though, Scott. If the sequential drawdown is, again, withdrawal from the taxable brokerage accounts, the after, you know, these are non-retirement accounts first, The next option is going to be to do a blended approach where we're going to do a little bit of drawdown from our tax deferred accounts like the 401k, and then we're going to use up the capital gains, the qualified dividends from our after-tax brokerage account up to the 0% or the next

low marginal tax bracket from a federal standpoint, right? So the advantage of this approach is that we're able to begin doing at least a little bit of withdrawal from our 401k without much of a tax contract. So one example of this is to withdraw up to the standard deduction, right? You know, the two commandments that Mark Bakewell, our enrolled agent, who is a champion of this approach, has, when it comes to tax planning and early retirement, is one, never waste the standard deduction, and two, never waste the 0% marginal tax bracket on capital gains and qualified dividends. And so this approach is designed to maximize that. So let's say you're married filing jointly, you would withdraw $31,500 for, you would withdraw $31,500 for, you from your pre-tax R401K, that would then offset your standard deduction by that amount.

And from there, you would harvest your long-term capital gains, and you could recoup basis as well in your after-tax account, and up to the 0% federal marginal tax rate for long-term capital gains in qualified dividends, which is $96,700, a really high amount. This is a great way to generate $100,000-plus,000 in spendable liquidity without paying any federal taxes. You may pay some taxes in your states, Colorado, for example, does have a tax rate on long-term capital gains and qualified dividends of that 4.5%.

Okay, after we deplete the after-tax account or the pre-tax accounts, then we would use our Roth IRAs. And of course, we're using the HSA reimbursement approach in all of these approaches an intelligent way, right? As a reminder for HSA best practices, everybody listening to this, if you have an HSA, you should be contributing to that or maxing that out as one of the top items in your order of operations. if you're healthy and can qualify for one of these plans, they're not spending that on medical expenses. You should be keeping a shoebox of receipts, say digital shoebox.

I have a folder and drive where every time I get a medical receipt, I post it in there. And you let this HSA account ride and grow, and you can reimburse yourself from your HSA as long as you have those receipts at really any point in the future. So that's how we're going to tap into the HSA accounts. And it's a really good time to use those. For example, if you want to keep your income lower in one year

to do a Roth conversion or some of these other advanced tax, or you want to spend more, you have an emergency expense, that's a really great time to then tap into the HSA and get those distributions tax-free from the HSA in there. So we're going to use that on a strategic basis in all of these areas. Let's go and look at what that actually looks like. First, let's look at the tax rates. So this is for a single taxpayer. The 2025 tax brackets are 10% goes up from zero to $11,925. 12% is from $11,926 to $48,475. So almost $50,000, you are paying only 12% tax.

22% tax goes from the 48,476, all the way up to $103,350. And I'm going to stop there because people can look this up if they are above that, but also for the purposes of our next slide, we're not really going to go above there. And the capital gains tax rates, the long-term capital gains tax rates for a single filer, is 0% all the way up to $48,350. So you can realize gains, after you've held it for more than a year, realize gains up to, and that's just the gains, Scott. I don't think we've talked about that yet.

Let's say you bought a stock for $50 and it increased to $75. So you have $25 in gains. That you'll pay $0 in taxes on. up to $48,350. But if you sell that $75 stock, you get all $75, you're just paying taxes on the $25, on the gate, which I just, I think taxes is kind of fascinating. You can really generate a ton of liquidity as an early retiree without paying much in the way of taxes in most of these cases.

And as long as you're aware of these income brackets and thinking, hmm, the 10 and the 12%, you know, paying no tax, realizing all of my income up to 0% is a no-brainer. Right? Let's say I had a hundred. Let's say that, like, let's use your example, right? I bought a $50,000 stock and it's not worth $75,000, right? And that year, I just live off my savings. There's no reason. In fact, it's a mistake not to realize that gain up to that $25,000 if you're married filing jointly, for example, at a zero percent effective tax rate when you take the standard deduction. You're not going to pay any taxes up to this $48,300, a mark on capital gains if you're single. Why wouldn't you do that? this is a core component of retirement planning in early retirement is making sure that you do actually realize all that income because guess what? Now that stock, you could sell it and then after a reasonable period of time or if you want to transfer it into another asset class or rebalance your portfolio immediately, you can just put it back in the market and now the gains on that $75,000 are going to be taxed, not gains from the $50,000 basis. So don't waste

these in-year deductions. And you might even consider going up to these low lower tax brackets like the 10 or 12% range because they're very, very low in historical context and can be very helpful to you as you plan out longer term retirements with what is presumably a multimillion dollar portfolio. Okay, Scott, let's look at how this works with the blended drawdown. Year one, we are still taking that same 64,000 that we did before, but this time we're doing it 50-50 after tax and pre-tax. So we have $15,750 of the same standard deduction.

for the same taxable income of $48,250. This is, because we split at 50-50, we've got $32,000 in the long-term capital gains, which is hitting at 0%, because that's less than the $48,000 in change that is the limit for the 0% capital gains, long-term tax rate in the single taxpayer. And $32,000 of regular income

minus the $15,000 for the standard deduction gives us $11,925 tax at the 10% rate for $1,100 in taxes, and $4,325 remaining tax at the $12 for $500 in taxes. Total tax amount this year is $1,712. In year two, we are doing the same blended 50-50 after-tax and pre-tax income, same standard deduction, same taxable income, same tax bill, assuming, of course, all numbers are equal, which they never are, but assuming all the numbers are equal for the same amount of taxes at $1,700. So over the course of two years, you are paying $3,423. Whereas with the sequential drawdown, you are paying $5,552 or $2,000 in tax savings simply by doing this blend.

strategy. And of course, this assumes that you have an after tax portfolio to withdraw from, and you don't have other strategies. And we have to caution against just giving a blanket statement, oh, everybody should do this. Your tax position and your portfolio is specific to you. So this might not be the best strategy. But for our fictitious person here, this is a better strategy. They're paying $2,000 less than taxes. It's all subject to your personal situation. We're going to talk about that later and how, you know, what we're working on to attempt to solve for that. But I think that the school of thought here is if you go with the sequential drawdown, where I'm going to sell or I'm going to realize the gains or use the positions in my aftertax

brokerage account, you probably have a great shot at paying little or no taxes for the near-term future until that account is depleted. And then you're going to realize ordinary income from your tax deferred accounts. And I think the school of thought that supports that is either, I'm going to pay less taxes now, and I'm going to have more wealth sheltered from taxes. So if things go poorly, I'm even more secure in my financial position. And if I have a huge pile of money that I got and I'm forced to withdraw at age 73, that's a good problem. And there's nothing wrong with that school of thought. That's a great way to go about it. That's why presenting these as options. This school of thought is the 10 and 12% income tax brackets are so low right now that I don't mind

realizing a little bit of income here in 2020. You know, I'm fine with, I can also, I'm going to realize a little bit of income and begin defraining my tax deferred account up to the standard deduction. But I'm also fine with realizing a little bit of income on top of that and paying taxes because my effective tax rate on $48,000 in income is going to be what, like three or four or five percent across my total portfolio. And I'm fine to pay that because of the advantages of at least beginning to dip into that tax deferred account and not having it grow.

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slash money-free. All right. Thanks for sticking with us. The third approach, you know, the third philosophy, the third option for retirement, you know, drawdown is going to be this concept about of RMD suppression. So this is something that I worry about personally and maybe other people do too. But, you know, I look at the tax rate here. under the Trump administration in 2025 as one of the most favorable in United States history from an income tax protect, at least in the last 100 years or so. In 1945, the top tax bracket

was 91% on the next marginal dollar over $400,000, right? And adjusted for inflation, that's well over a million today. Just a few years ago, just a few decades ago, that marginal tax bracket was 39.6% on the top dollar. And if I'm a 45-year-old early retiree who has any interest at all in business, has any interest, you know, may earn a little bit of dollars here and there, you know, maybe it has some real estate or some extra security blankets in their position, there's a very real chance that this million or million and a half in my 401k could swell to four or five or six million dollars if I go with the sequential drawdown approach and don't touch it for a very long period of time, or even if I go with the blended approach here by the

time I retire. And that's going to result in this RMD issue, right, where I'm going to have to realize several hundred thousand dollars in inflation adjusted income every year until I die. And then I'm also going to pass along a large 401k to my heirs. So if I'm in this bucket of somebody who's very secure in their overall plan, feels like it's going to be, there's a very good chance that they become very wealthy by the time that they die and hit traditional retirement age, even as an early retiree, there's a case to be made for beginning to withdraw from that 401k relatively early and maybe up to the top of like that 12% marginal income tax bracket, or maybe even higher, depending on how aggressive your assumptions

are for later in life. So the approach looks like this. You're going to withdraw from the 401k or your tax-deferred retirement account until it is depleted. Then you're going to withdraw from your brokerage account, and then you're off. Let's say that your spending is $50,000 a year. You may decide that you actually want to spend much more than that, maybe up to the 10 or 12% marginal tax bracket for a married filing jointly couple, for example. if you're married filing jointly, and realize all of that income every year, pay taxes on it,

and then just put the excess into your after-tax brokerage account or do a Roth conversion with those amounts. After we've depleted the 401k or the tax deferred account, then we're gonna use our after-tax account, or brokerage account, and then we're gonna do our Roth IRA withdrawal. And of course, whenever we need the extra funds or have the opportunity or having a medical expense

that comes up, we're gonna be reimbursing ourselves from our HSA. So that's this approach. And again, the idea here is that if, you're way past your goal for fire and you're feeling very very comfortable with that this approach will reduce ordinary income later in life potentially greatly reducing your total lifetime tax as paid and potentially greatly increasing the tax favorability of your estate to your errors later in life it's also a little bit of insurance against this fear that i have maybe you have as well

that tax brackets may go up over time especially for higher income or who are forced to realize large amounts of income, like in the context of RMDs. So what are your thoughts about RMD suppression one here, Mindy? I really love this RMD suppression option personally and also for other people who are in a similar situation. If you have been a member of the fire community for a while, you have seen a really favorable stock market. We've been investing for quite some time.

But even if you started investing 10 years ago, 2015, 2013, you've got some big gains. It's very plausible that you will continue to have these big gains in your pre-tax accounts, which will cause you to be subjected to these RMDs when you turn 73 if you were born in 1951. If you were born in 1960 or after, you aren't paying RMDs until age 75. However, there is no specific pre-tax balance that triggers RMDs. Instead, RMDs are triggered by age. So if you have anything in your 401k, then you are going to be required to take distributions starting at age 73 or more likely age 75 if you are listening to this show born after 1960. The more you can take out, the less you have to actually take out when you're forced to.

And I would rather take money out on my own terms, not because the government is telling me you have to do this. I think there's a very real place for RMD suppression in the fire community for those who are particularly secure or have some interest in continuing to work, right? Perhaps a semi-retired podcast co-host, for example, might lean towards this approach if they have a very large 401k or tax-deferred balance, right? So again, we have these three options for retirement drawdown. And I was trying to think about which one is best. and it's really hard. It's really difficult. And the answer is, as always, and as it so frustratingly often is, in personal finance, it depends. So where should you invest in your decumulation portfolio? And I think the themes that we've uncovered here are your Roth and your HSA should contain your aggressive positions. In a 6040 stock bond portfolio, that means the stock portion. The tax deferred accounts, like the 401k, should have the more conservative positions. That would be at bonds in a 6040 stock bond.

portfolio. The after-tax position should have the more balanced positions, and most people are not going to be able to neatly match this in all of these, like the example that I used. They had to get to that target allocation by putting everything in the tax deferred and Roth and HSA in the aggressive position, and then using the 401k to balance the remaining portion of the position. The next tip we're going to have here is trial run, a test fund. You know, consider doing what Mindy's doing, what I'm doing, and putting aside $10,000 into a test. fund that you will actually begin to use to spend. And just, you know, if it's 10,000 bucks and you spend 40 bucks a month, 41, 67 or whatever it is, that's one 12th of 5% of the portfolio

of portfolio distributions. You know, just use that to buy yourself pizza or whatever. And just get in the habit of doing that. It's not meaningful to your overall fire journey if you're getting close to the unstable state of your fire, but it may be very meaningful to the mental comfort you have with actually beginning to draw down a portfolio and begin to reap the rewards of financial independence that we always talk about here at Bigger Pockets Money. Next, remember that early retirees in general pay low taxes, at least today, right? You're probably not going to have large, realized, taxable income until you reach retirement age. And even in you reach retirement age, you're only going to see that higher taxable income

when you start withdrawing heavily from your tax deferred accounts, either voluntarily or via RMDs and or as Social Security begins to come into play. And you should be careful about your Social Security assumptions. that can be difficult for an early retiree. The next tip is the paid off home mortgage is very helpful for all of this because if you don't have a mortgage, you can realize less income and use more of those 0% or 10 or 12% those very low marginal tax brackets to realize income,

like with the Roth conversion and those types of things. And it also greatly reduces your risk, of course, for your portfolio. The sequence of returns risk is a widespread fear. The 4% rule and variations account for this, but it's popular to hold a cash position like I have modeled into that calculator to offset that risk, which can be you can spend down in those particularly challenging years if you get unlucky in those first few years after you retire end up being bad in the market. So that can really reduce sequence of returns risk, as can the ability to be flexible from a spending perspective, as can the willingness to put in place an income stream for a few years if things get to be. really bad. All of those things can reduce your risk and increase the probability of your portfolio surviving through that Monte Carlo simulation. We run there. Two advanced mechanics that you'll need to be aware of if you want to pursue this are the 72T or the substantially equal periodic payments rule

and the Roth conversion ladder. I have just monologued for a minute on the last slide. Mindy, do you want to talk through these ones? The 72T. This is how you access retirement funds without paying the 10% penalty if you're taking them before your age 59 and a half. This is the tax deferred accounts. So your traditional 401k, your traditional IRA, it allows you to withdraw these funds, like I said, without paying that 10% penalty. I don't want to pay a 10% penalty. It is still a taxable event. You will still be paying taxes on this money unless you're doing it in these 0% income tax brackets, which we just talked about. There are three different ways to detourable. determine the amount that you are getting from your 72T, and John Bowen from Equity Trust ran

through the mechanics of how to perform a 72T back on episode 649, and that is absolutely worth a big listen if you are thinking about doing a 72T. Just to kind of rehash something Mindy said there, the 72T rule scares, I think, is scary to me, a little bit scary to me, because it kind of requires you to keep withdrawing from that account, even if it no longer, maybe makes as much sense later on in your journey. And we've unpacked a tool here, or a very simple technique where let's say you have this $1.4 million 401 balance that we used in the example from earlier. You don't have to start withdrawing one, two, or several percentage points of that $1.4 million portfolio. You could roll over $100,000 from that $1.4

million dollar 401k into a new account and begin a 72 to your substantially equal periodic payment plan on that hundred thousand dollars and then you can layer that in now you can't stop on once they begin in some of these and the model i the calculator it takes that into account um in there so there is there is a once you set up you're you have to keep going but you can fairly tightly control this and layer it in to get comfortable with the tool of the 72t it's not as nice as being able to just withdraw whenever you want. But for the time leading up to traditional retirement age, it's an easy way or a relatively accessible way to begin accessing these funds. There just are some gotchas and some workarounds to those gotchas.

Yeah, Scott, thank you for reminding me of that. I am 53 and I only have six years until I have to stop taking withdrawals from my 72T. You have to take withdrawals for at least five years or until you turn 59 and a half, whichever is later. So Scott being 35 is going to have to take 72T withdrawals for a whole lot longer than I would if we both started them this year. Yeah. So for me, I would almost certainly not, if I was going to do this, and I had a low income tax year, not do a 72T rule. I would do a Roth conversion ladder. If I had a year where I had low income and had this opportunity, I personally would roll them over. But someone, perhaps, like more like Mindy, who's closer to traditional retirement age, the 72T rule, the risk of

overshooting it and having more than you want is not that large over a five, six year period. Exactly. Yeah. And I forgot about that, Scott, because I'm only thinking about myself. How rude. Scott, this was super fun to sit here and talk to you about different ways to decumulate. And just like it has been super fun to talk to you for the last 700 episodes, I so appreciate your mind and the way it works, because I never would have made that calculator myself. And I'm so thankful you are my partner. I'm so thankful to you, Mindy. Thank you so much for being my partner across nine years and 700 episodes of Burger Pockets

Money. It is so fun. You do such a great job of grounding me. You're such a knowledgeable, a master of all things, personal finance. I'm so appreciative of you. And I just have a lot of fun with this. So it has been an absolute blast. And I think that this world of decumulation, you know, I think it's, this is all that we've

learned. sure there are people out there that are more masterful or more more, more, I've mastered this subject, have our masters of this subject. But this is what we've learned so far. And I think a lot of its relatively new thinking for the early retiree. I don't think this is, this is a lot of the, all of these concepts I think are going to evolve and be challenged and, and, and be, you know, explored by folks who are really masters in very specific circumstances. And so if you have situations or areas where what we said today, you know, needs to be adjusted or needs to be thought through, please send us that feedback, Scott at biggerpocketsmoney.com and Mindy at biggerpocketsmoney.com.

And like I said, I think there's going to be a lot of it's, it depends work here, permutations of these plans and opportunism where some years you're going to have very low income and a certain opportunity is going to present itself. Some years may have very high income and you need to do other creative things to lower that income or plan for additional expenses that come with it. And so I think it's just going to be a fun challenge to really unpack this over time across actual lived experiences and realities rather than the fictional personas and hypothetical cases we invented today. Yeah, I think this is going to be a lot of fun. And like you said, Scott, we would love to hear from you.

If you think we made a mistake or if you'd like to see something different, please don't hesitate to reach out. All right, Scott, should we get out of here? Let's do it. That wraps up this 700th episode of the Bigger Puckets Money podcast. Thank you so much for listening. He is Scott Trench. I am Minnie Jensen saying, cheers, dears.