The Early Retirement Withdrawal Checklist

In Episode 152 of my podcast, I alluded to a “early retirement withdrawal checklist.” Here it is in written form.

We’ll divide the list into two parts:

1. The bare-bones, simple ideas that probably feel like common sense to most people.
2. The more complex strategies that many of you might have probably heard of – or not. Or you’ve heard of them, but can’t explain them. You might not know the details of this second tier.

Tier 1 – The Basics of Early Retirement Withdrawals

This first tier is so basic that you could explain it to someone who knows nothing about personal finance, and they would understand everything on this list.

Cash Accounts

First things first, start spending extra cash. If you have one or two years’ expenses in cash, that’s a very common thing to live off of in early retirement.

Taxable Brokerage Withdrawals

Sell some shares, pay some long-term capital gains on the gains portion of it, live off the proceeds.

Your taxable brokerage account is time-flexible. It’s not tied to any specific withdrawal ages.

Dividends and Interest

Your taxable accounts create an income stream through interest and dividends.

Rather than reinvesting those dollars, you should live off them. These are likely the first dollars that come out of your brokerage account. 

Side Income / Part-Time Work

“That’s not retirement!! You’re still working!!”

I get it. Some folks see a “part-time retirement job” as an oxymoron.

But others think about “barista FIRE” or “coast FIRE” as reasonable retirement scenarios. These scenarios often involve an employment income stream and the simultaneous time-flexibility of retirement.

A little bit of income can go a long way in early retirement.

Rental Real Estate (and Other “Passive” Business Income)

Do you own assets or business(es) that let you “step back” from day-to-day management while still collecting revenue?

If so, that’s a great way of funding your early retirement years.

Tier 2 – More Complex Ideas

Tier 1 seems like common sense.

Most people – whether they care about personal finance or not – understand how to live off cash, flexible investments, real estate assets, etc.

But now we get to the “fun” part. The weird, nuanced, corner case, esoteric ideas that simply aren’t common sense.

These are the types of strategies that even many financial advisors and accountants aren’t entirely familiar with.

Roth IRA Contribution Withdrawals

This applies to contributions. Not earnings. That distinction is vital.

Your Roth IRA contributions (not earnings!) can be withdrawn at any time, tax-free and penalty-free. I could do it right now at age 36. I could empty my entire Roth IRA of the contributions (not the earnings!), tax-free and penalty-free.

People often use this in early retirement. 

Roth IRA Conversion Ladder

In concert with Roth IRA contribution withdrawals comes the Roth conversion ladder.

When you convert dollars from your Traditional accounts (Traditional IRA, for example) into a Roth IRA, it starts a five-year clock. After those five years, you can withdraw the converted amount from your Roth IRA penalty-free.

In other words, for those first five years, that conversion isn’t treated quite the same as a contribution. Remember, you can withdraw contributions at any time. But for conversions, there’s a 5-year “seasoning” period. This only applies to when the account owner is younger than 59.5!

A Roth conversion ladder involves a series of conversions, year over year, where you’re looking five years into the future and saying, “That’s when I’m going to withdraw this year’s converted dollars.”

You pay taxes on the conversions, but no early withdrawal penalties.

Substantially Equal Periodic Payments (SEPP) – or, Rule 72(t)

Next are substantially equal periodic payments (SEPP), otherwise known as Rule 72(t).

This allows you to withdraw money from your Traditional IRA or 401 (k) penalty-free. You still have to pay taxes, but the withdrawals are penalty-free.

SEPP / 72(t) requires you to follow an IRS-calculated withdrawal schedule for at least five years or until age 59.5, whichever is longer. So if you’re 45 years old, you’d be committing to a 14+ year withdrawal schedule. If you’re 57, you’d commit to a 5 year withdrawal schedule.

You follow these IRS calculations year over year to determine how much you must withdraw. Once you commit, you have to follow through. Otherwise, the IRS can count the entire process as early withdrawals subject to penalty. Once you commit, you’ve got to follow through.

This might sound a little scary. One strategy that works well is to intentionally set aside only a small portion of your overall IRA assets in a second, third, etc. IRA account. You’d then use the SEPP/72(t) on that smaller sub-account. That way, you’re only “locking” yourself into the periodic payments using a fraction of your IRA assets. 

The Rule of 55

The Rule of 55 states that if you leave a job in the year you turn 55 or after you’re already 55, you can withdraw assets from that employer’s 401(k) or 403(b) penalty-free.

Again, you still have to pay the income taxes. You can’t get out of the taxes, but you don’t have to pay the 10% early penalty.

The nuance or “gotcha” here involves rolling over your 401(k) to an IRA. If you roll over your 401(k) into an IRA, you sacrifice the ability to use the Rule of 55. To use the Rule of 55, the assets must stay in the employer 401(k) or 403(b).

457 Accounts

If you have a 457 plan, which is usually a governmental type of retirement plan, there’s no age limit on withdrawals from that plan.

Once you leave your job, you can access those funds penalty-free. 

HSA Reimbursement / “PUQME”

This is one of my favorites. The simple process is:

• You save money in an HSA account throughout your life.
• You pay medical expenses out of pocket along the way.
• You save the receipts.
• Then, in early retirement, you reimburse your saved receipts using the HSA dollars.

This occurs 100% tax-free, which is fantastic, meaning that you can use your tax space for other purposes in early retirement.

You might have heard this called, “PUQME” – previously unreimbursed qualified medical expenses. This is a great arrow to have in your early retirement quiver.

Deferred Compensation Plans

Some employers allow higher earners to defer their salary or bonuses to a specific future payout date. If you have access to one of these deferred comp plans, it is a great way to bridge your early retirement years by moving income away from your highest-earning/highest-tax years.

Loans (!)

These next two might raise a few eyebrows. It’s a home equity line of credit (HELOC) or a securities-backed line of credit, or essentially a margin loan.

The idea is that you borrow against your house or your taxable portfolio to establish a line of credit.

Very specifically here, these are optional lines of credit. You don’t have to use them. You’re just setting them up. It’s different than a full-on loan where you are absolutely borrowing the money. You might never use the line of credit, but it’s a good thing to establish as an optional bridge that can give you temporary liquidity. 

Ask Mom and Dad (…seriously)

The last one on my list is a little niche and nuanced and I don’t know how realistic it is.

It starts with the main concept of the book Die With Zero. Part of that book involves giving more money to your kids sooner in their lives and sooner in your life too, simply because they get to use it earlier and they get more benefit out of it than if you just hoard that money until your death.

Well – what if your elders have adopted that strategy?

You could talk to them about some sort of family loan, intra-family financing, or outright inheritance and gift timing as part of your FIRE strategy.

Now – it might get awkward?

“Hey Dad, I have enough money to retire at age 48, but I’m wondering if you could just give me a couple hundred thousand dollars right now so I can retire even earlier?!”

Yeah, I don’t know how that would fly, but you know your family members better than I do.

Possibly more feasible is:0

“Hey Mom and Dad, you’ve pulled me aside to tell me that when you pass away you’re going to bequeath to me 50% of your $3 million estate. I’m wondering if instead you could float me $200,000 today because that’s going to get me to my FI number.”

That seems reasonable to me. You know your family better than I do, but I certainly know some stories from conversations I’ve had where that type of conversation has been part of someone’s early retirement funding plan.

I hope this list helps!

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