How to Spend Your $2.5M Retirement Portfolio Without Running Out of Money

What is discussed, and when

1. 0:00 – 5:00: Bigger Pockets Money, Cody Garrett, Mark Bakewell, Mindy Jensen
2. 5:00 – 10:00: Frank Vasquez
3. 10:00 – 15:00: Bigger Pockets Money
4. 15:00 – 20:00: Bigger Pockets Money
5. 20:00 – 25:00: Mark Bakewell
6. 35:00 – 40:00: Bigger Pockets Money
7. 40:00 – 45:00: Bigger Pockets Money
8. 45:00 – 46:08: Bigger Pockets Money, Scott Trench

Notable quotes from "How to Spend Your $2.5M Retirement Portfolio Without Running Out of Money"

• Hello, hello, 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-host, Scott Trench.

  about Bigger Pockets Money · at 0:17

• They and our recent guest Mark Bakewell are in very close alignment. Both of course agree that you ought to use up at the minimum the full standard deduction and 0% long-term capital gains tax.

  about Mark Bakewell · at 2:58

• 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. Mindy you want to tell us about that?

  about Frank Vasquez · at 8:55

Who and what is mentioned in this episode?

People

• Mindy Judson — Person · 3 mentions
• Scott Trench — Person · 2 mentions · first at 0:23
  Bigger Pockets Money podcast. My name is Mindy Jensen, and with me as always is my Nothing is Certain co-host, Scott Trench.
• Mark Bakewell — Person · 2 mentions · first at 2:58
• Frank Vasquez — Person · 2 mentions · first at 8:59
• Mindy Jensen — Person · 1 mention · first at 0:20
  Hello, hello, 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-host, Scott Trench.
• Cody Garrett — Person · 1 mention · first at 2:50
  And then second, I think we might have inadvertently misrepresented or not quite accurately discussed Cody Garrett and Shawn Melany's stance on blended retirement approaches on their podcast.
• Shawn Melany — Person · 1 mention · first at 2:52
  Inadvertently misrepresented or not quite accurately discussed Cody Garrett and Shawn Melany's stance on blended retirement approaches on their podcast.

Companies & orgs

• Bigger Pockets Money — Company · 10 mentions · first at 0:18

Concepts & topics

• HSA — Concept · 4 mentions

Full transcript with timestamps

0:00 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 deumulation. Hello, hello, 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-host, Scott Trench.

0:26 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 demulation approach. I am super excited to be here on the 700th episode of Bigger Pockets Money that Wow, what has it been like 8 years Mindy? 9 years.

0:48 Almost, nine. Crazy., Um, what, a, privilege, and, a, joy, it is to get to do this. like 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.

1:10 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 wanted to make two shout outs 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

2:02 account. Non-spouses can use the deceased 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. There's a real reason to leave something behind potentially in that HSA at end of life for that that potential benefit. And then spouses of course get even better treatment inheriting the HSA as their own. But for other heirs that 12-month receipt deadline is crucial. So we we kind of take it for granted that most of the assets pass to the spouse pretty well. That's not always the case and so we should call it out and this was great feedback from a listener. So thank you so much for providing that.

2:45 And then second, I think we might have inadvertently misrepresented or not quite accurately discussed Cody Garrett and Shawn Melany's stance on blended retirement approaches on their podcast. They and our recent guest Mark Bakewell are in very close alignment. 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 Shawn, 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 um that may have misconstrued their beliefs and their views on best practices. Uh we know Cody and Sean have had a great approach there. That's why

3:38 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 uh the listener who pointed out that we may have uh misrepresented their views on how they feel about the blended approach to withdrawals and early retirement. All right, now let's get back into the ultimate guide to retirement draw down. Let's jump into talking about accumulation. Scott, we have spent so many episodes about uh 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.

4:14 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 uh that is a mental hurdle that you will have to get over if you want to accumulate. You'll have to be comfortable selling the stock. So with that, should we go ahead and get into it and talk about this presentation we put together?

4:40 We, should., And, Scott,, obviously, to celebrate, you have created a PowerPoint presentation because that is your jam.

4:48 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/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 in Google Drive if you prefer Google Drive for accessing those files. So biggerpocketsmoney.com/resources.

5:14 All right, let's go ahead and get into it. Today's episode is called the ultimate guide to deumulation in 2026. We're going to talk about the differences between accumulation and deumulation. And first we're going to present the goals here. Right? So there are two goals that we're taking for granted in the context of a deumulation strategy discussion. Right? The first goal is don't run out of money in retirement. Almost everything we do around the 4% rule, 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.

5:48 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 cons 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 adjusted equivalents of that. Um, or distribute that to charity or give that to our heirs or early or whatever it is versus 2 million. When that option presents

6:38 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 it you agree with that?

6:47 I, completely, agree, with, that., I, would much rather leave $10 million, although I might want to just spend a little bit more during my living years.

6:54 That's, fair., Yes., So,, we, we, take, it, for granted that there's a we don't run out of money in retirement. We may want to maximize spending, but I I 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.

7:15 Yep., Absolutely. So,, let's, talk, about, diversification in the context of a deumulation 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% nominal returns and probably 6 7% real returns over a very long period of time. However, once we begin deumulating from a portfolio, if we're anywhere close to traditional retirement rules of thumb, like the 4% rule, we can't do that with a deumulation 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 25 million for example

8:11 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 um uh retirement planning. So diversification and putting our 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 much higher withdrawal rates um 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 deaccumulation 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

8:59 Frank Vasquez, the golden ratio portfolio, which you have set up. Mindy you want to tell us about that?

9:04 Uh,, 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 performing stock uh 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% stocks, 40% bond portfolio in mind. So, going back to your comments, Scott, this 100% stock

10:18 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 de accumulation phase.

10:31 I, think, that, there's, many, good, examples of a deumulation 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 you're thinking about building toward a deumulation 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 deumulation portfolio might look like and start withdrawing from it. Just that 40 bucks a month to build that habit, I think will make a

11:20 big difference when it comes time to really seriously consider firing and and leaving work.

11:24 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.

11:35 Let's, talk, about, tax, treatment, here, of these accounts because that's going to make a big difference in terms of how we 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. Um, this money goes in post tax, grows taxree, and can be withdrawn taxree after age 59 and a half. All gains, all income uh in the Roth account can be withdrawn taxree. This is also the best account to inherit to pass on to your heirs because they can distribute all of the 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

12:25 of, it, is, going to, be, a, 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 what $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 heirs will receive the the account balances at a stepped up basis. Um, and so up to very high limits like $13 million, these accounts can be passed on taxree to heirs if they choose to then liquidate them. Of course, the gains from there once they inherit them will be taxed.

13:04 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 equivalents for military, for teachers, for government workers, uh 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 heirs because your heirs 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 heirs in many cases as well. The HSA is the last account here. And this is perhaps the

13:51 most unfavorable account to inherit because all of the the the proceeds are going to be taxed immediately as ordinary income by your heirs when they receive the account. Um, it is however a very taxefficient 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 heirs if we can use those proceeds for expenses while we're alive. How am I doing so far, Mindy?

14:30 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. Oo foreshadowing Scott.

14:53 Completely, agree., Yep., But, we're, a, fire community. We're This is 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 this situation. Um because we're financial nerds. You're listening to the 700th episode of Bigger Pockets of Money after 9 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.

15:14 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, with, a long-term outlook. That could look like a 100% stock portfolio, maybe a cash reserve, maybe a house hack or a few 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?

15:43 Is it in 401ks? Is it in Roths? Is it in after tax brokerage 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? Right? 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?

16:27 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.

17:21 The deumulation phase, which is the opposite of accumulation, is not the opposite of this strategy. Scott, let's look at deumulation.

17:30 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 draw down. Mindy, do you want to give us the overview of this particular strategy? Number one, we are pulling from our after tax portfolio.

18:05 After that, they want you to do the pre-tax 401k withdrawals. If needed early, earlier than 59 12, 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 5 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 a part of the fire community, you've probably already heard us recommend that

19:05 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 if you're going to do that, then this 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

20:02 life is good. you're you're you're in position to fire here and you've got a million4 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 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 bucks in that 401k um or your tax deferred accounts and you're going to then be forced to withdraw from those accounts at a pretty high rate.

20:35 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. Um and if you're thinking about, you know how you're think about it from estate as an estate planning perspective, if you pass that account to your heirs, they're going to pay uh ordinary income on that inherited account. And so for some people who are safely in that camp of you know, I'm 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 odor of operations here. So Mindy, do you want to explain what an example of sequential draw down looks like in practice?

21:20 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 1. So going into year two, we're pulling that from our 401k. That is a tax advantaged account. It's 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.

22:34 So, we're paying just over $1,000 in tax there. Then, the remainder of the income, the $36,325 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 draw down. 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.

23:04 If, the, sequential, draw, down, is, again withdraw 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 draw down from our tax deferred accounts like the 401k. And then we're going to use up the 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 for for of 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 consequence. So one example of this is to withdraw up to the standard deduction., Right?, you, know,, the, the the two commandments that Mark Bakewell, our enrolled agent, who's a champion of this approach, has um when it comes to tax planning in early retirement is one

23:55 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 from your pre-tax or 401k. 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 up to the 0% federal marginal tax rate for long-term capital gains and qualified dividends, which is $96,700.

24:30 A a really high amount. This is a great way, to, generate, a hundred, plus, thousand 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 about 4 and a.5%. Okay. After we deplete the after tax account or the pre-tax accounts, then we would use our Roth IAS and of course we're using the HSA reimbursement approach um and in all of these approaches um in 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, I'm not spending that on medical expenses. You should be keeping a shoe box of receipts, a digital shoe box. I have a folder in Drive where every time

25:20 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 tactics 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 um in there. So we're going to use that um on a on a strategic basis in all all of these areas. Let's go and look at what that actually looks like. First, let's look at the uh tax rates. So, this is for a single taxpayer. The 2025 tax brackets are 10% goes up from 0 to $11,925.

26:08 12% is from 11,926 to 48475. So, almost $50,000. You are paying only 12% tax. 22% tax goes from the 48476 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. The 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.

27:04 But if you sell that $75 stock, you get all $75. you're just paying taxes on the 25 on the gate, which I I just I think taxes is kind of fascinating.

27:15 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 as long as you're aware of these income brackets and thinking hm, the 10 and the 12%, you know, paying paying no tax, realizing all of my income up to 0% is a no-brainer, right? What like let's say I had 100, let's say that like let's use your example, right? I I I bought a $50,000 stock and it's now worth $75,000, right? And that year I just I just live off my savings. There's no reason you in fact it's a mistake not to realize that gain up to that $25,000 bucks if you're married filing, jointly,, for example,, at, a, 0% effective tax rate when you take the standard deduction. You're not going to pay any taxes up to this $48,350 mark on capital gains if you're single.

28:00 Why wouldn't you do that? Like this is a a core component of of retirement planning. um 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 a peri 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 not gains from 50 to the $50,000 basis. So don't waste these in-ear deductions. And you might even consider going up to these lower tax brackets like the 10 or 12% range because they're very very low in a historical context and can be very helpful to you as you uh uh plan out longerterm retirements with what is presumably a multi-million dollar portfolio.

28:44 Okay,, Scott,, let's, look, at, how, this works with the blended draw down. Year 1, 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 it 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 and 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.

29:49 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 2 years, you are paying $3,423. Whereas with the sequential draw down you were paying $5,552 or $2,000 in tax savings simply by doing this blended 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.

30:41 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 in taxes.

30:53 It's, all, subject, to, your, personal situation., We're, going to, talk, about that later and how how you know what we're working on to to attempt to solve for that. But I think that the school of thought here is if you go with the sequential draw down where I'm going to sell or I'm going to realize the gains or or use the positions in my after tax 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 I'm going to pay less taxes, now, and, I'm, going to, have, a, uh 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 that I'm forced to withdraw at age 73, that's a

31:40 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 I'm fine with I I can also I'm going to realize a little bit of income and begin deferring my 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 3 or four or 5% across my my total portfolio.

32:15 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 uh and creating that that huge tax bomb later. The third approach you know, the third philosophy, the third option for retirement, you know draw down 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 protector, 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? adjusted for inflation, that's that's well over a million today. Just a few years ago, just a few a few decades ago, that that marginal tax bracket was 39.6% on the top dollar. And if I'm a

33:03 45year-old early retiree who has any interest at all in business, has any you know, may earn a little bit of dollars here and there, you know, maybe has some some real estate or some extra 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 $6 million if I go with the sequential draw down 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 I'm going to have to realize several hundred,000 in inflationadjusted income every year until I die and then I'm also going to pass along a 401 large 401k to my heirs.

33:46 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 ve very wealthy by the time that they die and hit traditional retirement age even as an earlier 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 your Roth. 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 uh the 10 or 12% marginal tax bracket for a married filing jointly couple, for

34:34 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, going to use our after tax account or brokerage account. Then we're going to do our Roth IRA withdrawal. And of course, whenever we need the extra funds or have the opportunity or have a medical expense that comes up, we're going to 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 taxes paid and potentially greatly increasing the tax favorability of your estate to your

35:23 heirs 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 earners 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?

35:42 I, really, love, this, RMD, suppression option uh 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 if 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.

36:27 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 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.

37:21 Right? So again, we have these three options for retirement draw down. 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 deumulation portfolio? And I think the themes that we've uncovered here are your Roth and your HSA should contain your aggressive positions in a 60/40 stock bond portfolio. That means the stock portion. The tax deferred accounts like the 401k should have the more conservative positions. That would be bonds in a 60/40 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 b get to that target allocation by putting everything in the tax deferred and Roth and HSA in

38:15 the aggressive position and then using the 401k to balance the remaining port portion of the position. The next tip we're going to have here is um trial run a test fund. You know, consider doing what Mindy's doing, what I'm doing, and putting aside 10,000 bucks 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, 4167 or whatever it is, that's one 12th of 5% of the portfolio of the distributions, you know, just just use that to buy yourself pizza or whatever.

38:46 And 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 end 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 when 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 andor as social security begins to come into play and you should be careful about your social security assumptions. Um that can be difficult for an early retiree. The next tip is

39:32 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. Yeah. And it also greatly reduces your risk of course for your portfolio. 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 um end up being being um bad in the market. So that 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

40:25 years if things get really bad. All of those things can reduce your risk and increase the probability of your portfolio surviving through that Monte Carlo simulation we 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've just monologued for a minute on the last slide. Mindy do you want to talk through these ones?

40:48 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 these funds, like I said, without paying that 10% penalty. I don't want to pay a 10% penalty. You 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 determine the amount that you are getting from your 72T. and John Bowens 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 it

41:49 kind of requires you to keep withdrawing from that account even if it no longer maybe makes as much sense later later on in your journey. And we've unpacked a tool here where or a very simple technique where let's say you have this $1.4 million uh 401k 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 a hundred grand from that $ 1.4 million 401k into a new account and begin a 72t or substantially equal periodic payment plan on that $100,000.

42:27 And then you can layer that in. Now, you can't stop them once they begin in some of these. And the model I the the calculator I did it takes that into account. um in there. So there is there is a once you set up you're 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. Um there just are some gotchas and some workarounds to those gotchas.

42:59 Yeah,, Scott,, thank, you, for, reminding, me of that. I am 53 and I only have 6 years until I have to stop taking withdrawals from my 72T. You have to take withdrawals for at least 5 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.

43:26 Yeah., So,, so, for, me,, I, would, almost certainly not, if I was going to do this, um, and I had a low income tax year, not do a 72T roll, I would do a Roth conversion ladder, right? If 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 and having more than you want is not that large over a five to six year period.

43:54 Exactly., Yeah., And, I, forgot, about, that, Scott, cuz I'm only thinking about myself. How rude. Scott, this was super fun to sit here and talk to you about different ways to deumulate. Uh, 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 cuz I never would have made that calculator myself. And I'm so thankful you are my partner.

44:18 I'm, so, thankful, to, you,, Mindy., Thank, you so much for being my partner across nine years and 700 episodes of Bigger 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 and I just have a lot of fun with this. So, it has been an absolute blast and um I I think that this world of deumulation, you know, I I think it's this is all that we've learned. I'm sure there are people out there that are more masterful or more more have mastered this subject have are masters of this subject. Um, but this is what we've learned so far. And I think a lot of it's 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

45:06 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. Um, and like I said, I think it's there's going to be a lot of it's it depends work here, permutations of these plans and um, opportunism where some years you're going to, have, very, low, income, and, a certain opportunity is going to present itself. Some years you 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

45:48 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?

45:55 Let's, do, it. That, wraps, up, this, 700th, episode, of, the Bigger Pockets Money podcast. Thank you so much for listening. He is Scott Trench. I am Minnie Judson saying cheers dears.

Questions about this episode

What is discussed in "How to Spend Your $2.5M Retirement Portfolio Without Running Out of Money"?

In order: 0:00 Bigger Pockets Money, Cody Garrett, Mark Bakewell, Mindy Jensen; 5:00 Frank Vasquez; 10:00 Bigger Pockets Money; 15:00 Bigger Pockets Money; 20:00 Mark Bakewell; 35:00 Bigger Pockets Money; 40:00 Bigger Pockets Money; 45:00 Bigger Pockets Money, Scott Trench.

What is mentioned in this BiggerPockets Money episode?

9 people, works and ideas are mentioned, including Bigger Pockets Money, HSA, Mindy Judson, Scott Trench, Mark Bakewell, Frank Vasquez. Each one on this page links to its own page with every episode that mentions it.

How long is "How to Spend Your $2.5M Retirement Portfolio Without Running Out of Money"?

The episode runs 46 min; the transcript is about 8,730 words in 75 timestamped sections.

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