Stocks — Part XXVI: Pulling the 4%

Money working cartoon

Courtesy of Fritz Cartoons

At some point, if you have been following the Simple Path to Wealth described in these posts, you will be able to choose to have your assets pay the bills rather than your labor.

How quickly you reach this point will have much to do with your saving rate and how much cash flow you require. In any event, your assets will have reached the point where by providing ~4% they can cover all your financial needs. Or said another way, your assets now equal 25-times your annual spending.

Having left your employment, you will have rolled any employer based retirement plans, such as a 401k, into your IRA, and the investments themselves, will be split between stocks and bonds held in the allocation that best matches your personal risk profile. Ideally, these will be in Vanguard’s low-cost index funds: VTSAX for the stocks and VBTLX for the bonds.

As we discussed in The 401k, 403(b), IRA and Roth Buckets post, these two funds will be in your tax-advantaged and ordinary (taxable) buckets. By this time you will have pared these down to just three: IRA, Roth IRA and taxable. My suggestion — and personal portfolio — is to hold them as follows:

  • VBTLX in the IRA, as it is tax-inefficient.
  • VTSAX in the Roth IRA, because this is the last money I would spend and the money most likely to be left to my heirs. Roths are an attractive asset leave upon your death and, since this is my most long-term money, the growth prospects of VTSAX make it the preferred investment here.
  • VTSAX also goes into the taxable account as of the two funds, it is the more tax-efficient.
  • VTSAX is also held in our regular IRAs, as even it can benefit from tax-deferral.

As you can see, if you are single, you will actually have four fund accounts. VBTLX in your IRA and VTSAX held in all three places: Roth, IRA and taxable. If you are married, your allocation might look something like ours.

I hold:

  • VTSAX in my Roth and in my regular IRA.
  • Our entire bond allocation in VBTLX in my regular IRA.

My wife holds: VTSAX in her Roth and in her regular IRA.

Jointly we hold: VTSAX in our taxable account and minimal cash for spending needs in our savings and checking accounts.

So together we have two Roths, two IRAs and one taxable account. Across these we have one investment in VBTLX and five in VTSAX. Our allocation is 75/25, VTSAX/VBTLX.

It is also very possible that, even if you’ve embraced this Simple Path, you still have other investments. If these are in your tax-advantaged accounts you’ve likely rolled them tax-free into Vanguard. But if they are in taxable accounts, the prospect of a hefty capital gains tax might have persuaded you to hold on to them. When I retired, we also had some of these “cats and dogs”, mostly in the form of individual stocks I had yet to break the habit of playing with.

At this point the discussion risks becoming a bit complex. There is almost an endless array of ways you might withdraw the ~4% you’ll be spending from your investments. So, let’s start with the mechanics of how this works and then I’ll share with you some guiding principles and exactly what we are doing and why. From there you should have the tools you need to form your own strategies.


If you hold your assets with Vanguard, or any similar firm, the mechanics of withdrawing your money could not be easier. With a phone call or a few clicks online, you can instruct them to:

  • Transfer a set amount of money from any of your investments on whatever schedule you chose: Weekly, monthly, quarterly or annually.
  • Transfer any capital gains distributions and/or dividends and interest as they are paid.
  • You can log on their website and transfer money with a few clicks anytime.
  • Or any combination of these.

This money can be transferred to your checking account or anywhere else you choose. A phone call to Vanguard, and most any other firm, will get you friendly and helpful assistance in walking though it all the first time.


Next, let’s look at some of the guiding principles behind the approach we use and which I am about to share.

First, notice that in constructing our 75/25 allocation, we look at all of our funds combined, regardless of where they are held.

Second, we have all dividends, interest and capital gains distributions re-invested. I am not captivated by the idea of “living only off the income” as many are. Rather, I look toward drawing the ~4% the research has shown a portfolio like mine can support.

Third, I want to let my tax-advantaged investments grow tax-deferred as long as possible.

Fourth, as I am within ten years of age 70 1/2, I want to move as much as I can from our regular IRAs to our Roths, consistent with remaining in the 15% tax bracket. This strategy is described in detail in the post on RMDs (required minimum distributions). 

Fifth, once we hit age 70 1/2 and are faced with RMDs, these withdrawals will replace those we had been taking from our taxable account.

Pulling the 4% in action

1. First we think about the non-investment income we still have coming in. Even once you are “retired,” if you are actively engaged in life you might well also be actively engaged in things that create some cash flow. We are no longer in a savings mode, but this earned money is what gets spent first. And to the extent it does, it allows us to draw less from our investments and in turn allows them still more time to grow.


2. Remember those “cats & dogs” I had left over in our taxable accounts? Upon entering retirement, those were the first assets we spent down. We started with the ugliest ones first. While you may or may not chose to follow the rest of our plan, if you have such remnants left in your own portfolio, I strongly suggest this is how you off-load them. Do it slowly, as needed, to minimize the capital gains taxes. Of course, if you have a capital loss in any of them, you can dump them immediately. You can then also sell some of your winners, using this capital loss to offset those gains. Any tax loss you can’t use, you can carry forward for use in future years. You can also use up to $3000 per year of these loses to offset your earned income.

3. Once those were exhausted, we shifted to drawing on our taxable VTSAX account. We will continue to draw on this account until we reach 70 1/2 and those pesky RMDs.

4. Since the taxable VTSAX account is only a part of our total, the amounts we now withdraw each year far exceed 4% of the amount in it. The key is to look at the withdrawals not in terms of the percent they represent of this one account, but rather in the context of the whole portfolio.

5. We could set up regular transfers from the taxable VTSAX as described above, but we haven’t. Instead my wife (who handles all our day-to-day finances) simply logs on to Vanguard and transfers whatever she needs whenever she notices the checking account getting low.

6. This withdrawal approach may seem a bit haphazard, and I guess it is. But as explained in this post, we don’t feel the need to obsess over staying precisely within the 4% rule.

7. Instead, we keep a simple spreadsheet and login our expenses by category as they occur. This allows us to see where the money is going and to think about where we might cut should the market plunge and the need arise.

8. Each year I calculate what income we have and, consistent with remaining in the 15% tax bracket, I shift as much as I can from our regular IRAs to our Roths. This is in preparation for the RMDs coming at age 70 1/2. When that time comes, I want our regular IRA balances to be as low as possible. This is the calculator tool I use.

9. Once we reach age 70 1/2, we will stop withdrawing from our taxable account and let it alone again to grow once more. Instead, we will start living on the RMDs that now must be pulled from our IRAs under the threat of a 50% penalty.

10. While I’m fairly certain the money in our taxable account will last until we reach 70 1/2, if it were to run out we’d simply begin drawing money from our IRAs ahead of the RMDs. In essence, this would be the money I had been shifting into the Roths. And, again, I’d strive to keep what we withdrew consistent with staying in the 15% tax bracket.

11. Despite my efforts to lower the amounts in our regular IRAs, the RMDs, once we are both forced to take them, will likely exceed our spending needs. At this point we will reinvest the excess in VTSAX in our taxable account.

There you have it. While you could, you don’t have to follow this exactly. You are free to adapt what works best for your situation and temperament.

For instance, if the idea of touching your principle goes against your grain and you want to spend only what your investments earn, you can instruct your investment firm to:

  • Transfer all your dividends, interest and capital gain distributions into your checking account as they are paid.
  • Since all these together will likely total less than that ~4% level, should the need arise, you could occasionally log on and simply transfer some more money by instructing that a few shares be sold.
  • Or have your dividends, interest and capital gains transferred as they are paid and schedule transfers from your taxable account on a regular basis to bring the total up to ~4%.

For example, if you had $1,000,000 in your portfolio allocated 75/25 stocks and bonds:

  • At 4% your withdrawals equal $40,000
  • Your $750,000 in VTSAX earns ~2% dividend, or $15,000
  • Your $250,000 in VBTLX earns ~3% interest, or $7,500
  • That totals $22,500 and if that’s all you need, you’re done.
  • But if you want the full $40,000, the remaining $17,500 you’d withdraw from your taxable account. Taken monthly it would be ~$1498.

This seems overly cumbersome to me and I present it only to illustrate how someone focused on living on only their investment income might approach things.

Here’s what I would Not do


I would not set up a 4% annual withdrawal plan and forget about it.

As we saw in this post, the Trinity Study set out to determine how much of a portfolio one could spend over decades and still have it survive. Adjusting each year for inflation, withdrawals of 4% annually were found to have a 96% success rate. This became the 4% Rule designed to survive the vast majority of stock downturns so you wouldn’t have to worry about market fluctuations in your retirement.

It made for a great academic study and it is heartening that in all but a couple of cases the portfolios survived just fine for 30 years. In fact, most of the time they grew enormously even with the withdrawals taking place. Setting aside that in a couple of the scenarios this approach would leave you penniless, in the vast majority of cases it produced vast fortunes. Assuming you neither want to be penniless or miss out on enjoying the extra bounty your assets will likely create, you’ll want to pay attention as the years roll by.

This is why I think it is nuts to just set up a 4% withdrawal schedule and let it run regardless of what happens in the real world. If markets plunge and cut my portfolio in half, you can bet I’ll be adjusting my spending. If I was working and got a 50% salary cut I would, of course, do the same. So would you.

By the same token, in good times, I might choose to spend a bit more than 4% knowing the market is climbing and that provides a strong wind at my back. Either way, once a year I’ll reassess. The ideal time is when we are adjusting our asset allocation to stay on track. For us, that’s on my wife’s birthday or whenever the market has had a 20%+ move, up or down.

True financial security, and enjoying the full potential of your wealth, can only be found in this flexibility. As the winds change, so will my withdrawals. I suggest the same for you.


Addendum 1: For a detailed look at how one early-retired couple in their 30s traveling internationally with a soon-to-be-born baby does it: Cash Flow Management in Early Retirement

Addendum 2: What is your retirement number — The 4% Rule, an extraordinarily good post on the subject from Go Curry Cracker.

Addendum 3: My other Stock Series post on the subject: The 4% Rule, withdrawal rates and how much can I spend anyway?

Addendum 4:  Vanguard Retirement Nest Egg Calculator

Addendum 5: Also excellent, and laugh-out-loud funny, is this one by Mr. 1500: Why the 4% Rule Won’t Steal Your Spouse

Addendum 6: Safe Withdrawal Rate for Early Retirees another first class post from the Mad Fientist and a close look at how critical real returns during the first decade of retirement are.

Addendum 7:  The Mad Fientist interviews Michael Kitces, who is one of the great researchers on the 4% rule and retirement strategy.

Addendum 8: Bigger Pockets — Early Retirement: Asset Allocation and Safe Withdrawal Rates with Michael Kitces


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Important Resources

  • Talent Stacker is a resource that I learned about through my work with Jonathan and Brad at ChooseFI, and first heard about Salesforce as a career option in an episode where they featured Bradley Rice on the Podcast. In that episode, Bradley shared how he reached FI quickly thanks to his huge paychecks and discipline in keeping his expenses low. Jonathan teamed up with Bradley to build Talent Stacker, and they have helped more than 1,000 students from all walks of life complete the program and land jobs like clockwork, earning double or even triple their old salaries using a Salesforce certification to break into a no-code tech career.
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  • Betterment is my recommendation for hands-off investors who prefer a DIFM (Do It For Me) approach. It is also a great tool for reaching short-term savings goals. Here is my Betterment Review
  • NewRetirement offers cool tools to help guide you in answering the question: Do I have enough money to retire? And getting started is free. Sign up and you will be offered two paths into their retirement planner. I was also on their podcast and you can check that out here:Video version, Podcast version.
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  1. Mark says

    Your last two posts have been very timely for me. I find myself in almost your exact situation, although my asset allocation and the funds in my taxable account are a bit different. Just turned 60 and now it’s a balancing act and a horse race to keep my taxable income low and convert as much money as I can from a taxable Ira to a Roth . I have quite a bit of stock in a taxable account that I am trying to get into indexed mutual funds, but have to be mindful of taxes. The HSA article is also quite timely, as I plan to start one this year after open enrollment on the health exchange. This is also another reason to keep taxable income low so I can get as large a subsidy as possible. So for me it really is a balancing act and a horse race. Thank you so much for these two articles!

  2. SavvyFinancialLatina says

    Great article. It is extremely informative. Since I’m young, I’m focusing more on building those assets, but it’s important to keep in mind the finish line….hopefully, I’ll eventually get there.

  3. Kenneth says

    Jim, I’m 64 1/2, and will be retiring at end of 2015. I’m currently in VTINX, which is the Vanguard Target Retirement fund. 30/70 stocks/bonds, 75/25 US/Foreign. Perfect for me. I’ll have about $325,000 when I retire, and a $250,000 paid for home. My 4 percent draws will be the smaller part of my income, social security and a small pension being the larger part of my income. After Utilities, Taxes, Healthcare and normal living expenses, we will be saving about $2,400/mo all in. I’m just more comfortable with a larger bond percentage, such as VTINX (or VTXVX which is currently 51/49 stocks bonds). With VTINX, if we have a 50 percent downdraft, I should be down no more than 15 to 20 percent, I can stomach that, and it would allow me to go to an 80/20 stocks/bonds allocation for the duration. I also can pass up a year or so of 4% withdrawals if we are going down hard.

    • jlcollinsnh says

      Hi Kenneth…

      It sounds like you’ve crafted a plan that perfectly suits your needs and temperament. Well done!

      The irony is, looking at it from a strictly financial perspective, in doing so you have also positioned yourself to handle the greater volatility and reward holding more stocks would offer. Your paid off house, pension and SS are all very conservative investments that could, if you so chose, allow you to hold fewer bonds and more stocks. Your ability to suspend taking the 4% for awhile does as well.

      This is not to say you must, or even should, change what you are doing. It is far more important to know yourself and where your comfort level lies, as you have done.

      Carry on!

  4. Jon S. says

    Great Uncle Jim:

    I almost feel guilty not paying you for the ongoing “priceless” information. In fact, send me a check for 2k and I’ll gladly send you one for 5k right away. 🙂 In all seriousness, because this is serious business, I really appreciate your posts. This one will require if not demand a re-read. I’m roughly 20 years behind you in this journey ( or path as you call it ) and have executed many of your strategies. Perhaps the most important “tip” you’ve given is that you wish you hadn’t worried as/so much about this stuff along the way. I’m trying to remember this as I begin to wring my hands if not clench my cheeks at every ripple. Thanks for all you do, good Sir!

    • jlcollinsnh says

      Hi Jon…

      As soon as I receive and cash that 5k check I’ll be sure to put sending your 2k check in my “to do” pile… 😉

      As for the worry business, that really is a key point. Once we get just a few basics in place, the financial future tends to unfold nicely:

      Living below our means
      Investing the surplus in index funds
      Understanding that market corrections and collapses are perfectly normal, part of the process and to be ignored.
      Avoiding debt
      Avoiding financially irresponsible people

      Rather than worry, focus on being flexible should the need ever arise.

  5. Chris says

    Jim – very good overview of the 4% SWR. What I’m most excited about being newly-minted as FI is that I shouldn’t have to pay any taxes when I begin to withdraw from my taxable accounts.

    How? Well, I just don’t spend much money on a yearly basis. Because of that my total taxable income – which might only include long-term capital gains and qualified dividends – should always be less than the top of the 15% rate bracket ($36,900 in 2014), and that bracket pays nothing on capital gains and dividends.

    It’s a beautiful thing!

  6. Nomadic Mt Biker says

    Another great article. I am in the accumulation phase so I haven’t had to do this, but I have always assumed that if I need to sell a few shares from my taxable account in order to fund living expenses, that it is best to sell shares that are long-term but have the least capital gain i.e., shares that are just over a year old, if the market has been climbing. Is that how you would do it?

  7. FloridaStache says

    Awesome post- solidified my emerging understanding of this topic. I will definitely be re-visiting this in 10 years or so when it is time…

  8. ElephantEater says


    We just wanted to pick your brain on how you are choosing to use the 4% rule, while not following the assumptions fully. In the original study that the 4% rule was based on, asset allocations were roughly 50% stock/50% bond.

    MMM writes of using 100% stocks for higher returns while citing the 4% rule. In his case however, he seems to be living off of other income and not drawing on the assets anyway so this seems to make sense as he is not actually following the 4% rule and so can afford the increased volatility.

    In your case you do seem to be following (with some flexibility) the 4% rule. Are you concerned that your more stock heavy allocation would have increased volatility that would make your portfolio more likely to fail given current high market valuations? Likewise, do you feel more comfortable taking on that risk given current low bond interest yields? Do you have specific strategies for how you will adjust and how you will assess if you are “on track”.

    We have learned immensely from your blog. We appreciate you letting us play armchair quarterback with your personal strategies as we approach FI and develop our own strategies for ER.


    • jlcollinsnh says

      Hi EE…

      Actually if you look at the Trinity Study, where this 4% idea originated, you’ll see they ran lots of various scenarios with different allocations. My choice of 75/25 stock/bonds is one of the most successful. 100% stocks also worked very well and both provided better results than 50/50.

      The truth is the only way portfolios can last for decades is if they are powered by the growth potential of stocks. Over weight them too heavily with bonds and they begin to fail.

      For more:

      In that post you’ll also find a link to the Trinity Study itself. Well worth a look.

  9. Blacorc says

    I have searched the web for this a few times and never found a good answer. Perhaps you will know. Right now I am putting ALL investments in tax-deferred accounts to lower my tax bill. I would love to be in a position where we have maxed out those contributions and begin contributing to a taxable account, but I don’t see us making that much money anytime soon. So that being said, if/when my net worth gets to the 25X annual expenses, the vast majority will be in tax-deferred accounts. So the predicament comes in hopefully retiring before 59.5. The SOSEPP seems like a promising strategy, but being locked in to take out doesn’t seem attractive.

    So here’s my question that I cannot find an answer to: Can dividends/capital gain distributions on assets held in tax-deferred accounts be paid OUTSIDE of those accounts i.e. could I divert the dividends paid by my IRA to my checking account???

    • jlcollinsnh says

      Hi Blacore…

      Yes you can have your dividends and capital gains distributions sent directly to your checking account. But there are some things to consider:

      –You will owe tax on them once they leave your tax advantaged account.
      –If you are under 59.5 they will also be subject to penalty.
      –They will be taxed as ordinary income at your marginal tax rate. (dividends and capital gains distributions from a taxable account receive favorable tax treatment.)

      For some other strategies:

          • Blacorc says

            Yeah I’ve read that but SOSEPP’s scare me.

            Your piece on “Why your house is a terrible investment” was very enlightening, and I would say is an internet finance classic! However, my mind keeps going back to having a paid off house as a a huge means to getting one’s expenses (in terms of monthly cash flow) low enough to do the fun Roth IRA ladders. Do you have any thoughts on that, or have you already written about them in another post that I’m missing? Don’t want you to have to type it all out twice! 😉

          • jlcollinsnh says

            That article has generated both the most love and the most hate of any I’ve written. In fact, I just came from a Canadian thread where someone linked to it. The general consensus there seems to be I’m a moron. 🙂

            Clearly, houses have many downsides and they are not the slam-dunk investment the housing industry would like you to believe. But that doesn’t mean you should never buy one. Sometimes, when you running the numbers, they are actually the better financial choice. Other times the emotional benefits might be worth the extra expense. While I don’t own one now, I have owed them for 28 years.

            For a more complete view of my thoughts on housing:


            Once you understand the financial ramifications of buying, you can make your own choice.

            Good luck!

  10. Mr. Maroon says

    Another timely article as Mrs. Maroon and I are currently stymied on the best distribution based on our expected post-retirement withdrawal behavior. I currently hold 401(k) (which will be rolled into an IRA once the opportunity arises) and IRA. She currently holds IRA and Roth IRA. Together we hold a taxable account through Betterment. We are also investing in Betterment accounts for each child and a 529 College Savings Plan.

    We plan to retire in Summer 2020 at ages 40 (me) and 37 (her).

    The lingering question in our minds is how to distribute contributions amongst our investments as we hoard our money and save for the future. Generally, the oft-advised rule is to frontload the tax-deferred accounts to maximize earning potential of those monies (while saving some serious income taxes by reducing taxable income) and put the rest in taxable accounts.

    The difficulty I run into is ensuring I have enough money in a taxable account to provide for approximately twenty years worth of retirement before I can begin to pull from the tax-deferred accounts (without utilizing the awesome, but still a bit confusing to me, technique from Mad Fientist). I am a conspiracy theorist when it comes to taxes as documented in my comment on your RMD article, so heavily investing in a taxable account while leaving the tax-deferred accounts a little lean doesn’t give me a huge cause for concern. I fully realize that there are no tax benefits now, which hurts my current pocketbook, and that focusing on taxable accounts reduces my potential growth from investing tax-deferred dollars. It’s not optimized investing, but as long as I’ve got an adequate nest-egg that I can access, I believe the point herein that it doesn’t matter where the money is stored holds true.

    Two questions:

    1) Am I being totally naive by believing that a taxable account is preferred over a tax-deferred account for an early retiree less than 59 1/2 years of age (again, without Mad Fientist magic) and equally as good as a tax-deferred IRA once I reach 59 1/2 years of age (including negating those pesky RMDs)?

    2) Has anyone devised a rule of thumb to optimize contributions such that I have an adequate percentage of my investments in a taxable account for pre-59 1/2 spending while maximizing my tax-deferred growth potential for post-59 1/2 spending?

    ***Mrs. Maroon and I are slowly making our way through all of your articles. We’re just a couple of engineers, so the numbers often make sense, but the financial concepts are often lost on us. Thanks for all that you do here!!!

    ~Mr. Maroon

    • jlcollinsnh says

      Welcome Mr. Maroon…

      1. While a taxable account will be preferred once you start withdrawing, a tax-advantaged account creates more wealth during the decades. So the tax advantaged account is my recommendation.

      This should especially appeal to you as a self described “conspiracy theorist when it comes to taxes” as you get the benefit (tax deduction) upfront. This as opposed to a Roth where you get the benefit most with the tax free withdrawals years from now.

      2. I’m not aware of any such rule of thumb. However to retire at ages 40/37 as you guys are planning requires a fairly aggressive savings rate. My guess is after you have fully funded your tax advantaged accounts you will still have money to invest and that money, by default, will go into your taxable accounts and it will be readily accessible anytime.

      At least that’s how it worked out for us. 🙂

      • bluetron says

        Mr. Maroon-
        I also have been thinking about this problem of essentially having the bulk of your savings in Roth IRAs and IRAs when you retire well before 59.5.

        I think one way to alleviate this, or at least get some cash to live on in those first years, is that you can take the Roth contributions out without taxes or penalties at any time. So basically when you retire you would need to have 5 years worth of living expenses in a combination of taxable accounts and original Roth contributions. Then after 5 years, you can start taking out the money you have converted from IRAs to Roths.

        Does this sound right, Jim?

        • jlcollinsnh says


          The only caution is that you cannot withdraw the earnings of those contributions before 59.5 without taxes and penalties.

      • Prob8 says

        Mr. Maroon – My guess is that you are or will be high income earners in addition to aggressive savers. If that’s true, make sure you are aware of the income limits on contributing to your Roth IRA’s. See here:,-Employee/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-for-2014.

        In some cases, there may be issues with claiming a deduction on contributions to traditional IRA’s too. See here:,-Employee/2014–IRA-Contribution-and-Deduction-Limits—Effect-of-Modified-AGI-on-Deductible-Contributions-If-You-ARE-Covered-by-a-Retirement-Plan-at-Work.

        • Wisdom Junkie says

          If you’re over the income limit to contribute to a Roth and also exceed the income limit to get any immediate tax benefit from a traditional IRA, there is still an answer:

          Backdoor Roth IRA.

          Allows high earners to funnel money into a Roth with a simple two step process. There are some nuances though…you have to make sure you don’t have any existing traditional or rollover IRA’s or you’ll trigger a tax bill on the conversion. In our high income HH, we fund Ms. Wisdom Junkie’s Traditional IRA and then convert it to her Roth with a $0 gain a few weeks later. Unfortunately (and I use that term loosely), Mr. Wisdom Junkie has a sizable Rollover IRA from a previous 401(k) that makes this strategy unrealistic for him since he refuses to pay 35% for the privilege of the Roth conversion.

  11. Mike says

    Jim, just want to add a big “Thank you”. With all your other articles related, this is the finishing bow on the package. Very simple and clear.

  12. EA_Mann says

    How much can you roll into your Roth IRA each year? Does the 5500$ limit apply for rollovers, or is that limit only for earned income?

  13. EA_Mann says

    If it’s not too much trouble to answer: why exactly is the vanguard bond fund tax inefficient compared to the regular stock fund?

    vtsax you’d only have to pay taxes on dividends until you sell, but I’m less clear on the tax implications of bonds.

    Thanks for your help – these are great!

    • jlcollinsnh says

      Good question, EA!

      First, tax efficiency comes into play when considering investments held in taxable accounts.

      Bonds and bond funds pay interest, and indeed this payment of interest is what makes them attractive to investors. So all other things being equal, higher interest payments are better.

      However, that interest is taxable as ordinary income.

      The exceptions to this are Municipal Bonds which are tax-free but which also pay a lower interest rate.

      For more on bonds:

      Stocks pay dividends and stock funds sometimes have annual capital gains distributions. Both can have capital gains or losses when you sell. All of these are taxed at lower rates than the ordinary income rates used for bonds. So that’s part of the tax efficiency.

      With VTSAX you get a bit more efficiency in that many of it’s holdings invest their profits for growth rather than paying dividends. This shifts the earnings of the fund into long-term capital gains rather than dividends that have tax due each year. VTSAX pays about ~2% in dividends as opposed to a fund focused on dividend paying companies that might pay ~4%.

      VTSAX also very rarely generates taxable capital gains distributions. The reason is that, unlike actively managed funds, index funds don’t engage in the trading that incur these.

      Hope this helps.

      • EA_Mann says

        J – thanks so much for the quick response. This makes a lot of sense. However, one last thing is bothering me: If bonds purport to provide a stream of value that is taxable both at the capital gains and income levels, wouldn’t it be best to put it in your Roth IRA? Once there, wouldn’t it grow forever tax free?

        I certainly could be missing something here – maybe the benefit of keeping your highest performing (read: vtsax) in your roth is better because of its long time horizon, and that benefit cancels out the tax benefits of putting bonds in there

  14. KS says

    Hi Jim,

    Some of us have “post tax ira” contributions, and the tax treatment of those for withdrawal is not really clear.

    In my case, I was never eligible for Roth or for pretax ira, but for 30 years, I have been putting maximum allowed into post tax ira. Would your withdrawal strategy change if u had a substantial (1m) amount there?


    • jlcollinsnh says

      Hi KS…

      Not really. I’d still want to keep that money earning tax sheltered as long as possible.

      The good news is, that while you missed out on the IRA tax deductions along the way, now the only part of your IRA that is taxable on withdrawal is the earnings. Your contributions, having already been taxed before you made them, now come out tax-free as you make them.

      So the tax implications of accessing your money are less than for those of us with deductible IRAs.

      Make sense?

      • KS says

        Just a follow up. So when your initial contributions to an ira are post-tax, are the gains and dividends then treated as ordinary income or as long term CG & dividends?


        • jlcollinsnh says

          Unfortunately, all taxable money withdrawn from a tax-advantaged account like an IRA is taxed as ordinary income. In effect, dividends and capital gains lose their tax-preferred status.

  15. Mrs. SSC says

    Amazing post! Sometimes I think we spend so much time trying to get to the early retirement goal, that we don’t focus enough on the plan afterwards. I’m a few years away, but I’ve recently starting putting a lot of thought in what will be the best and most efficient was to take the money when the time comes. This post has some great advice! Thanks!

    • jlcollinsnh says

      Thanks Mrs. SSC…

      It is an interesting shift of gears as, after all the years of building wealth, we are one day faced with how to actually begin spending it.

      It was readers asking about this over the last couple of years that prompted this post. 🙂

  16. Femme Frugality says

    This is the best 4% rule post I’ve read. I’ve always been wary of the advice as it seemed like there would be occasions it wouldn’t make sense, and averages don’t apply to every circumstance in life. Such great advice… Answers all of my concerns.

  17. Shilpan says


    As usual, I enjoy your wisdom. I recently read somewhere on Vanguard site where they suggested withdrawing 2.5% in a declining markets and 5% when markets have risen.

    What withdrawal rate you suggest for someone retiring in his 50’s vs someone in later years?


    • jlcollinsnh says

      Hi Shilpan…

      Always nice to hear from you. Hope you’ll be blogging again soon?

      As to your question, I think my advice would be the same for any age and the same with which I ending this post.

      Basically, pull around 4%, pay attention and adjust as needed to the market conditions.

      • Shilpan says


        Yeah.. I really wanted to get back to write soon but the consulting business has been growing and I am finding it increasingly difficult to spare time.

        With that said, I may start writing one post per month. I think that’s doable.

        Hope that you are back to enjoy the great fall weather in your neck of the wood..

  18. Andrew says

    Hi Jim –

    I continue to love reading the stock series, I’ve learned far more here about investing than I have from any other materials I’ve read, combined.

    At age 25, married, and my first born on the way, I tend to get overwhelmed by all the logistics about getting my money out, considering I’ve hardly started investing.

    I want to put off learning more about the end game so I enjoy the ride of investing more, but I’m afraid that someday this site is going to up and gone, because anything can happen with the internet, or life for that matter, haha.

    Can you put my mind at ease and tell just to keep it simple, stupid?

    P.S. — When’s that book coming out so I have all this stuff physically in my hand? 🙂

    Thanks for all you do, Jim. I can see by the comments that you’ve made quite the impact on many lives.

    • jlcollinsnh says

      Wow, Andrew…

      That’s high praise indeed. Thank you!

      For what it is worth, I intend for this blog to be up for a long, long time. Long after I stop actively adding new material in fact.

      Plus, if all goes well, my book will be out come November.

      Meanwhile, here are the key points:

      –Avoid debt
      –Live on less than you earn
      –invest the difference
      –invest in low-cost index funds that reflect the overall market: VTSAX or VFINX
      –add bonds using VBTLX to the extent you want/need to smooth the ride and are willing to sacrifice performance.
      –expect, and ignore, financial panics and market plunges. These are normal.

      Jot these points down if you like and put them on your bathroom mirror.

      At the bottom add: K.I.S.S. 🙂

      Then relax. Get these few things right and worry is a waste of time. Wish someone had told me that when I was 25. 😉

  19. Dave says

    Minor correction:
    “10. While I’m fairly certain the money in our taxable IRA will last until we reach 70 1/2, if it were to run out we’d simply begin drawing money from our IRAs ahead of the RMDs.”

    I think you mean “the money in our taxable account”, which is not an IRA.

    • jlcollinsnh says

      Not naive at all, G-dog.

      In a word: Control

      With your own IRA you have complete control over what investment company(s) you deal with and what investments you choose. With 401k type plans you are stuck with the company and investment options your employer chooses. Unfortunately, these options are too often high-fee, actively managed garbage:

      This is not always the case and the plans do seem to be improving. Some plans now offer Vanguard index funds and since they are the institutional shares versions the expense ratios are exceptionally low.

      The TPS funds offered to government employees are likewise excellent low-cost index fund options.

      If you are lucky enough to have either of those two you can and should let your money stay there.

      For more:

      Make sense?

      • G-dog says

        Oh – I LOVE control. We used to have the company 401k at vanguard, they’ve moved it to Merrill Lynch (BoA). I should have educated myself on the 401k many years ago – now trying to make up for lost time, and so now not so happy with the move to Merrill for rational (vs. irrational) reasons.
        I suppose your (former) employer can move your 401k at any time, including post -retirement….

  20. CMWoods says

    Yes. Employers can elect to change which company administers their retirement plan and also what offerings are in the plan. Whenever they change companies, retired/former employees will get a notice about the move well in advance (they can rollover to an IRA at any time). Changes in offerings usually come with a mapping from the existing offferings to new offerings.

  21. CMWoods says

    Where would you slot in any HSA accounts (discussed in previous post)?

    If you paid medical out of pocket then the account is tax free like a ROTH and should be tapped after taxables IRAs but before any ROTH (because unlike ROTH the HSA becomes regular income to heirs), right?

    What if your HSA greatly exceeds you medical expenses though? Just keep drawing to pay medical insurance until depleted? Or cash it out as soon as it is able to be done without any penalty and roll into ROTH?

    • jlcollinsnh says

      I’d be inclined to use the HSA for medical expenses in retirement, even if it seemed to exceed what I might likely need.

      Medical care in the US is extremely expensive and it is one of the few expenses likely to increase as we age.

      Only by using it this way does it come out tax-free. Once you reach age 65 you can withdraw it without penalty but, if used for other than medical expenses, it will be taxed as ordinary income. So if you cashed it out to roll into a Roth, that would be a taxable event.

  22. EA_Mann says

    In the event that you expect to not spend all of your money and bequeath some of your investments, wouldn’t it make sense to hold onto the ‘cats and dogs’ until the very end? If I understand it right, if you give these away in your will the cost basis will ‘step-up’, essentially eliminating a large part of the tax burden for whomever you’re leaving your investments to. Is my logic missing anything?

    Granted, this assumes that a) you expect to have money left over and b) you want to give it to friends and family vice a charity donation.

    Anyways, thanks for writing a post that I’m still thinking about and going back to.

    • jlcollinsnh says

      Hi EA…

      Your logic is sound, but it assumes the cats and dogs are investments worth holding.

      Since I believe that VTSAX and VBTLX are the best places to invest my money it made sense to off-load the rest of the stuff first.

      When the time comes, I do expect to have money left over and it will be in those to funds and it will go to my heirs and charity.

      Make sense?

  23. Dave M says

    Hi Jim — Another great post! My wife & I have a similar situation as yours… Together we have two Roths, two IRAs and one taxable account (all at Schwab, which I realize you probably don’t approve of). 🙂

    Anyway, with me in my mid-40’s and her almost 50, we have a 80% stock/20% bond allocation. However, I do the 80/20 allocation in EACH account. Do you agree with such an approach, or is it more advantageous to have the full bond allocation in one account or another?

    BTW, I do currently have bonds in my taxable account at Betterment, but I’m considering changing that to a 100% stock allocation since my bonds are already covered in the tax-advantaged accounts where they belong. Maybe I’ll do 90% stock/10% bonds for starters. Baby steps, baby steps… 🙂

    • jlcollinsnh says

      Hi Dave…

      Doing the allocation separately in each account is fine as long as the end result equals the overall allocation you want.

      And, as you indicated, you want your bonds in your tax-advantaged accounts.

  24. Michael F. says

    Question re: selling assets in your taxable account: Vanguard’s standard cost basis is FIFO, which allows one to avoid short-term capital gains (assuming the assets have been held for a year). My understanding is that FIFO is indeed the best choice, but is there any reason to do “average cost” basis instead of FIFO?

    Vanguard, in explaining both “average cost” and FIFO, says “may be less tax-efficient” about both in the list of pros and cons. That’s not very helpful…. (

    Does anyone have thoughts on this? And thank you for a very helpful post!

  25. Jenna F. says

    Hi Jim,

    Just came across your blog yesterday and have been glued to my computer ever since. Thanks for putting forth such a feast of information!

    My husband and I are in our early twenties and are just setting out in retirement planning. We are both self employed and we will have maxed out our Roth IRAs for this past year, but after reading so much I’m thinking having both Roth and Traditional would be the best way to go. I’m so excited to start saving as much as possible from here on out and plan for an early retirement, but my question to you would be:

    If maxing out all four IRAs in one year isn’t possible, then what should have priority? The traditional IRAs? Is having a taxable account for additional investments, as you and your wife do, something we should set up in addition to the IRAs to spread out all savings, or only if we have left over savings after maxing out the IRAs?

    I’ll definitely be looking into Vanguard, thanks to you, but I was wondering if you had an opinion on I had a friend recommend it and it seems to have an advantage over typical Mutual Fund investing as far as lower fees is concerned, similar to Vanguard.

    Again, thanks for all your wisdom! It feels very daunting setting out into this new world, but after reading your blog, I am encouraged that simplicity and success can go hand in hand. I’ll definitely be reading and re-reading for many days to come!

    • jlcollinsnh says

      Welcome Jenna…

      Glad you found your way here! Great you guys are getting started at an early age.

      Basically I order the various “buckets” like so:

      1. 401k/403b up to the full match, if any.
      2. Deductible IRAs
      3. 401k/403b up to full limits
      4. Roth IRA
      5. Taxable accounts

      Of course this all depends on your tax bracket and eligibility for the various programs. You’ll find more here:

      And here’s my take on Betterment:

      Good luck!

      • Jenna F. says

        Thanks so much for your advice! I had some follow-up questions:

        Is there a reason why you and your wife have both a Traditional and Roth each? As opposed to you having one kind and her the other? Is this something you’ve had from the beginning, or did you start with just one each and then add the other kind later?

        We have a financial advisor who has been helping us get everything set up, and she thought it would be less efficient to each have two IRAs, since we would just be splitting the $5,500 between the two.

        On a different note, she is also recommending Unit Investment Trusts from First Trust as something we should invest our IRA $ into. I’m not overly trusting of anything financial advisors recommend, so I thought I’d see if you have an opinion on Unit Investment Trusts before proceeding. I like that they seem more transparent than mutual funds and are sifted for strong, consistent companies to buy stock in, but some returns seem too good to be true and overall, I’m not convinced yet.

        Again, thanks for all you do!

      • jlcollinsnh says

        My pleasure, Jenna.

        My wife and I each have IRAs and Roths because we’ve both always maxed out our opportunities to invest in each. A large part of our IRAs came from 401k plans we rolled over once we left the various jobs that sponsored them.

        Remember, you can each fund your Roths up to $5500 for a total of $11,000. If you haven’t done so for 2014, you still have up until April 15, 2015 to do so.

        OK, Unit Investment Trusts. Basically, these are actively managed funds that buy and hold a portfolio for a specified period of time. Could be one year. Could be 25 years. Or anything in between. During this time, they make no changes to the portfolio.

        Being actively managed, they tend to have high expense ratios and the ones offered by First Trust are also “load” funds, meaning they charge you a sales commission for the privilege of taking your money.

        My guess is that’s why your advisor likes them.

        From my perspective they are gimmicks and overly expensive ones at that. Let’s explore why by looking at how you describe them, which I’m guessing comes from their sales pitch or that of your advisor.

        1. ” they seem more transparent than mutual funds” Nonsense. All mutual funds are transparent in that the SEC requires that they disclose their holdings. You can find this info on-line for any fund. Here, for example, it is for VTSAX:

        2. “are sifted for strong, consistent companies to buy stock in” This is the claim for every actively managed fund. First of all, if you buy that active management has value, why would you lock in a portfolio for an extended period of time? Part of that value would surely be in spotting companies that are beginning to falter and replacing them.

        But, of course, active management has been repeatedly shown not to work. At various points on this blog I suggest only about 20% of active managers out-perform the index. That’s being generous:

        Vanguard has done research on this suggesting 18% looking at a 15-year time frame:

        For an even longer period – 1976-2006, 30 years — suggests less than 1% out perform:

        So with UITs you take a active management approach research has repeatedly discredited and layer on a restriction that makes success even less likely.

        3. “some returns seem too good to be true” One thing investment companies are masters at doing is cherry-picking results to give the impression of great performance. They are indeed too good to be true.

        Hope this helps!

        • Jenna F. says

          Hi Jim,

          I want to move both my husband’s and my Roth money into VTSAX as soon as possible, but since this was our first year funding our Roths, we don’t meet the $10k minimum yet. Should that money be invested in something else until it grows to $10k (hopefully by this November), or is it not a long enough period for it to be worth it?

          My husband now has a job with a 403b, so we will also be funding that fully, and then some. I am thinking of going 100% into the index fund it offers, since I noticed you don’t think that this is redundant at all when others have asked…

          One thing I keep hearing is that we should use our Roth savings when buying our first home. However, I feel like I’d rather leave that money to grow as untouched as possible! Is there a better strategy for saving for a house down payment?

          Thanks, again, for sharing your time and gifts with us. It’s much appreciated!

          • Mark says

            Check with Vanguard the $10000 minimum is for Admiral shares. Investor shares is $3000 minimum.

        • jlcollinsnh says

          Hi Jenna

          You can start with the ‘investor shares” version of VTSAX:
          Once you hit 10K it converts to VTSAX and I believe Vanguard does this automatically.

          If your husband’s 403b offers a low cost index fund that tracks either the total stock market or the S&P 500, that would be my choice.

          The reason some suggest using Roths to save for a down payment is because you can withdraw your contributions (but not the earnings) tax and penalty free anytime. So you avoid taxes on the earnings while saving.

          My suggestion would be to fully fund your Roths AND save outside them for the down payment. If you need the Roth money, it’s there. But, as you note, if you can leave it alone all the better.

          • Matt Mecham says

            Hi Jim,

            The 401k offered by my school district has an index fund with a total expense ratio of .19% (not the worst I’ve seen, nor the best); however, it uses the Russell1000 index as opposed to the S&P500. Is that a bad thing, or just a different thing?

            Not to get too mushy, but you and your cohorts (MMM, MF, etc) have turned my life around. I thank you for that!

          • jlcollinsnh says

            Just a different thing:

            the 1000 largest US companies vs. the 500 largest.

            “…but you and your cohorts (MMM, MF, etc) have turned my life around.”
            But mostly me, right? 😉 🙂

  26. Mark says

    I agree with Jim on this. Hard as it is to believe the humble index fund that holds the entire US stock market beats almost all actively managed mutual funds over time. I’m talking Vanguard here! Also beware of Finanical Advisors advice, the only one I would consider is one that works for a flat fee, if they work on commission steer clear! It is a bit scary when you first start to invest but in reality it can be very simple. Invest in low fee index funds, be diversified and stick to as asset allocation that’s right for your situation. Simplicity wins. May I also suggest reading The Little Book of Common Sense Investing by John Bogle the founder of Vanguard. This book is a great start for anyone getting into investing.

    • Jenna F. says

      Hi Mark,
      I took your advice and read The Little Book of Common Sense Investing. Very helpful and informative, thank-you! 🙂 Any other recommended reads for newbie investors?

      • Mark says

        Hi Jenna,
        Glad you found the book helpful. Another book I like is Your Money or Your Life by Vicki Robin and Joe Dominguez. Joes investing advice is a bit conservative for me, for investing I still like the Bogle book, but how you look at money and it relationship to the time put in to earn it and consumerism( keeping up with the Jones) is insightful and quite different from anything else I’ve seen. One last book I like is Eric Tysons Personal Finance For Dummies. He runs through some of the more conventional ways to keep on track and cut your expenses. Good luck, hope this helps.

  27. Bonnie says

    I’m not clear on this statement about Roth

    “8. Each year I calculate what income we have and, consistent with remaining in the 15% tax bracket, I shift as much as I can from our regular IRAs to our Roths. This is in preparation for the RMDs coming at age 70 1/2. When that time comes, I want our regular IRA balances to be as low as possible.”

    Are you saying you convert money in your regular IRAs to a Roth and that the amount you convert is limited to the 15% income bracket?

    • jlcollinsnh says

      Hi Bonnie…


      It is a matter of figuring out, with our deductions, at what income level we’d exceed the 15% bracket and move into the 25% bracket.

      Once I know that, I look at our total income for the year. The difference between the two is what I can convert from our regular IRAs to our Roths while only paying 15% tax. I figure it isn’t worth it if I have to pay 25%.

      I discuss this in greater detail here:

      • Bonnie says

        Thanks! Can you convert IRA to Roth IRA and contribute to a Roth IRA? Does the money you convert count as income for being able to contribute to a Roth IRA? Sorry to be a pest

      • jlcollinsnh says

        Not a pest at all, Bonnie! 🙂

        Yep. You can convert as much as you want anytime, you just have to pay the taxes.

        And you can still make your annual contributions as long as you have earned income. In fact, as my wife is still working, we do exactly that.

  28. Jeff says

    Hi Jim,
    Another great article/analysis. The thing that stood out for me is the scenario of your portfolio going down 50% circa 2008 for me (when this DID happen). Luckily, I invested heavily during that time, but I was also employed and had cash on hand to invest – this changes with FI and early retirement (I just turned 40 and hoping for FI in 5 years or less). I’m a fan of another idea that you’ve mentioned before (risk mitigation?) which is keeping cash on hand to let your portfolio recover in the event of a major correction or (gulp) crash . .I’m curious how you would work that strategy into this analysis? – i.e. how much money would you consider keeping on hand (50K/100K?), I say that knowing that keeping a large chunk of cash isn’t ideal because of inflation, etc. So, what about keeping cash on hand but balancing this by being more aggressive -say 100% in VTSAX which is still HIGHLY diversified. One idea I have is to keep cash on hand and dollar cost average each month so you are consistently investing, but if things start to turn south, you can adapt/adjust the cash contributions until your portfolio recovers. As I’m less risk averse, and still relatively young (just turned 40), I would consider vesting 100% in VTSAX, but keep some cash on hand to weather the storm and maybe even be able to take advantage of a major downturn like we saw in 2008 with any extra cash on hand. Or maybe I’m just adverse to bonds because I’ve only ever invested in stocks 😉 Curious what you think.

    • jlcollinsnh says

      Hi Jeff…

      I think you are referring to what I called “The Wealth Building with Cash Insurance Portfolio” at the end of this post:

      There is some discussion of it in the comments there.

      The challenge with it for me has always been how to rebuild after a crash if you are retired and without earned income cash flow.

      The market drops and instead of selling your stocks to meet your needs you draw down your cash. Suppose the cash lasts until the stocks bottom. It has worked as planned.

      The good news is your stocks begin to rise as you again call on them to support you.

      But you also have to draw from them to rebuild your cash for the next crash.

      That’s asking a lot from a portfolio.

  29. Eric says

    Hi Jim,

    I want to thank you so much for putting such great information together concisely and making it available to everyone. The financial world can seem a bit overwhelming at times. My question refers to what you’re calling a “taxable account.” What type of account is this and is your account at Vanguard or Betterment?

  30. Markola says

    Hola Jim, My mother might be selling her house and finally retiring soon at 75, and I am helping her think through investing the proceeds and then withdrawing them sustainably. As you point out above, there are a LOT of well-reasoned withdrawal strategies out there. I like how you keep things simple and would like your opinion on one twist of your strategy:

    A university I worked for had an appealing way to help smooth out and make more predictable its spending for scholarships and fellowships due to volatile year-to-year returns in its endowment portfolio. Its spending policy was 4% of the five year trailing average of the endowment. That way, spending was averaged and more predictable, and a kid could know her scholarship income wouldn’t possibly be cut suddenly by a third or more in a down market year. This strategy makes sense to me for retirees, too. I’d think it would let people stay fully invested without large cash reserves, reduce volatility, and help people plan better. Still, I haven’t found any writer to incorporate it in retirement account withdrawal models. Any reactions to the idea? Thanks!

    • jlcollinsnh says

      Hola Markola!

      Interesting approach and, like you, I’ve not seen it discussed in the context of withdrawals in retirement. Mostly likely because it is more complex than the alternatives.

      The Trinity Study, and the 4% rule that grew out of it, both came from the search for parameters that would allow saying: Just do this and it will work reliably over time.

      4% almost got us there, working ~96% of the time. Lower percentages go us even closer, with some predicting 100%.

      But even then, as the future might be different, one couldn’t be SURE.

      So variations were created, including mine: Take a percent that feels comfortable in the 3-5% range and be flexible, adjusting up or down depending on how the market does. The allows you to both avoid running out and offers the chance to spend more if things go better than expected. And it is simple.

      In a sense, taking 4% of the five year trailing average of the portfolio would be a variation of this, but with more math.

      The university likely uses quarterly data. So to replicate it you’d need 20 quarters (4 quarters times 5 years) of trailing portfolio data, starting with the most recent quarter and working backwards. And then you’d update as time went on.

      I’d have to think about and explore this more to endorse it. For instance, a university endowment has the advantage of new donations flowing in.

      If you decide to implement it, be sure to report back!

  31. Markola says

    Thank you for your very thoughtful and speedy reply. I couldn’t, in good conscience, encourage my mother to do anything that isn’t tested, but the strategy makes intuitive sense to me and so I wanted to pose it to you. I hadn’t thought of quarterly returns data, and you’re right that new donations constantly replenish a university endowment. I’ve been wading into this wonky topic some lately and other problems I see with my own hypothesis are: the sequence of returns issue could be either beneficial or disasterous depending on whether the first few years of retirement happened during a low or high period of market returns; also, most people can’t wait five years after stopping savings contributions to gather data, then start their spending. A 150 year old university can do that, but not my dear 75 year old mother. Thanks for helping me answer my own question, Jim! She’ll probably spend Social Security, dividends from her Wellesley fund that she’s had for a long time, plus a tiny bit more if the market is up, and be fine.

    • Mark says

      I saw your post and thought you may want to checkout Vanguards Managed Payout Fund. Right now on the Vanguard website they have a video that explains its goals.. I don’t think I would put all my money into it but it maybe a way to get cash to supplement social security and still have some upside in the stock portion of the fund. Anyway it may be worth a look.

  32. Dan Meyers says

    Great article Jim… I’ve visited previously from MMM and now I’m stuck in the web of FI bloggers who all link to each other – I love it!

  33. J says

    So I’m still confused. I totally get doing Roth conversions before SS starts while staying in the 15% tax bracket. If someone has ~400k in a 401k, why not use part of it for Roth conversions and part of it to live on thus “saving” your taxable accounts to use with SS income?

    • jlcollinsnh says

      Because in the Roth it grows tax free and withdrawals are tax free.

      In your taxable account you pay tax on dividends and capital gain distributions each year and capital gains taxes on any gains when you sell shares.

  34. Jason says

    Thank you very much for the investment information you provided it is very simplified for someone like me with not much financial wisdom. Im kinda new to this 4% rule and this maybe a Stupid question. So if I retire with $2 million and withdraw $80,000 or 4% the first year and then next year my net worth changes to $1.8 million do i withdraw 4% of $1.8 million or the original $80,000? Also do I include the equity in my home for my 4% or do I only include investments that I can cash out of ?

    • jlcollinsnh says

      Hi Jason…

      You might want to give this post another read.

      The Trinity study looked at two scenarios:

      –Withdrawals adjusted for inflation each year
      –Withdrawals not adjusted for inflation each year

      In both cases the withdrawals were fixed as a percent of the starting amount. So in your example, yes the second year would still be 80k, either inflation adjusted or not.

      But that’s the study. If I saw my net worth dropping I would reduce my spending just as I would if I had gotten a pay cut at work.

      In projecting your own withdrawals, I would not include any home equity. However, a paid off home would reduce your living costs.

  35. Mr. Enchumbao says

    Very informative and timely. My wife and I are retiring early, about 2-3 years from now. She’ll be in her early 30s and I’ll be in my early 40s. I just hit me that a few years from now we won’t be in saving mode! Thanks for such a great article.

  36. Craig says

    Greetings!! Just love reading all this great info. You said above, “Each year I calculate what income we have and, consistent with remaining in the 15% tax bracket, I shift as much as I can from our regular IRAs to our Roths.” My question is this.. We too are currently in the 15% bracket and will be retiring in 1.5 years at age 55. So how do we determine how much we can roll into our Roth from our traditional? And then is that amount rolled over taxed at the 15%? Many thanks

  37. Helmet says

    Thanks for the great information you provide in your blog. I have a couple questions.

    Assuming you are initially only drawing funds from a taxable account, and assuming the taxable account only has VTSAX (no bond funds, because bond funds are in tax advantaged accounts). Does this impact how you rebalance to get back to your target asset allocation? Do you still only rebalance once a year, or based on some percentage that your allocation drifts from your target, or do you re-balance more frequently to address the impact that withdrawing entirely from your stock funds has on your asset allocation?

    Also, if the stock market took a big hit would you continue to only withdraw from your stock funds, at presumably a lower withdrawal rate, or would you withdraw from bond funds in that scenario assuming they were not negatively impacted to the same degree. If you would withdraw at least a portion from your bond funds, how would you accomplish that based on the placement of your bond funds in your tax-advantaged accounts.


    • jlcollinsnh says

      Hi Helmet…

      Drawing down my VTSAX fund can/does alter the allocation, but usually in very small amounts and less than market fluctuations.

      But ultimately, I don’t care what has caused the allocation to shift, only that it has.

      I rebalance annually, unless the market has a major move that significantly alters my allocation.

      Sometimes I’ll rebalance on smaller moves if I happen to notice them, but that’s not something I worry about. Here’s more:

      If the market took a big hit, I’d draw first on any cash reserves I happen to have on hand and then return to VTSAX in my taxable account. At the same time I’d be selling bonds to rebalance, so that’s how they’d come into play.

      Make sense?

  38. Chris says

    Great website! I attempted to read through all of the comments to see if this was answered but to no avail.

    *Taxable account only*

    If you reinvest your dividends instead of transferring them directly into your checking or money market than are you not in essence double taxing yourself if you need to spend that money? Because those dividends are taxable you are in affect lowering the amount of long-term capital gains that you can sell and still be within say the 15% tax bracket and pay 0%.

    $10,000 in dividends reinvested (taxable)
    $37,650-$10,000=$27,650 gains that I can sell and live off without paying tax instead of the full $37,650.

    Thanks for your take on this!

    • jlcollinsnh says

      Hi Chris…

      I hope I am understanding your question correctly and this will help:

      With a taxable account, any dividends paid are subject to tax in the year they are paid regardless of whether you reinvest them or take them in cash.

      Make sense?

  39. NA says

    Jim (or someone else), can you please explain this?…

    My wife holds: VTSAX in her Roth and in her regular IRA.

    The same VTSAX is in both or are these entirely separate VTSAXs? I was under the impression all of the wealth building $ is in the same VTSAX index fund.


    • jlcollinsnh says

      It is the same VTSAX index fund in both places in the sense tthat it holds exactly the same investmetn. But in each place it is different in that you hold a specific number of shares in it in that “bucket”

      Just like if you and I both own VTSAX. We both own the same thing, but you own your shares and I own mine.

      • Eman says

        I’m confused by this as well (just got your book). Understand that it holds the same investments, but one VTSAX index fund is split into different buckets or is it one VTSAX fund per bucket?

        When you set it up at Vanguard what do you tell them first? The specific IRA (bucket) you want then the VTSAX that goes into it? Or a VTSAX and tell them you want it in say, a Roth IRA and regular deductible IRA at once?

        • Mark says

          Let me try to explain. Let’s take a hypothetical example, say you are 28 years old you’ve read Jims blogs and decided you are only interested at this time of your life in investing in VTSAX., you have a good job your employer offers a 401k plan that uses Vanguard funds so you max out your contribution to the 401k in VTSAX, fortunately for you your employer also offers an HSA account that offers Vanguard funds so you max out the HSA with VTSAX as well, but you are making a great salary and you still have money to invest so you open a Roth IRA directly with Vanguard and max that out as well with an investment in VTSAX. You get word that a rich relative died and left you $10000 dollars so you call Vanguard again and open a taxable account and put the money inVTSAX again. All your investments are in VTSAX but you have in reality 4 separate accounts all invested in VTSAX the only difference in the investments are how they are treated tax wise.

      • jlcollinsnh says

        Hi Eman,

        I’m afraid I am at a loss as to how to explain this more clearly than I have.

        Perhaps you are over-thinking it?

        When you call Vanguard, just tell them what type IRA you have, Roth or Traditional or both, and that you want invest in VTSAX in it/them.

        They handle these requests and questions all the time and may very well be able to be clearer than I.

        • NA says

          Thanks for the explanations Mark and Jim! Appreciate you taking the time.

          I actually got it. What was confusing me was the order.. VTSAX being mentioned first. It makes more sense to me to think bucket first, then fund that goes into it instead of the other way around.

          I couldn’t decide if a Roth or regular/traditional IRA would be better. Decided the trad IRA makes more sense as that extra unpaid tax money has decades to grow. Hopefully that was the right call, even if there isn’t necessarily a clear wrong one. Opened a trad IRA for $5,500 with VTSMX, which will convert to VTSAX when it reaches the minimum $10,000 required.

          When choosing a traditional IRA there is no mention of whether it is deductible or not. When I spoke to someone at Vanguard they said they don’t offer the non-deductible IRA.

          I should also mention something that I haven’t yet seen mentioned here… I have an inherited IRA. My initial plan was to move that over to Vanguard, use that as my base and add to that, but found out that isn’t possible. I was hoping that would be a way to start with a larger sum than just the small $5,500, but adding to such an IRA isn’t allowed.

          Now the question is what to do with the rest of the $ I want to invest. Perhaps a regular taxable VTSAX account where I don’t have to worry about minimums/maximums.

          Thanks again for the help guys. I’ve really learned a lot being here.

  40. Kevin says

    If we are to max out our tax deferred accounts, where is there space to begin funding that taxable account that’s used to fuel us until we get to the RMDs?

    I seem to be at a tipping point here with my portfolio. I am 42. If I stop contributing to my tax deferred account now and let it sit for 18 years, I will have enough at age 60 to fund my next 30 years. (or so says the compounding interest at 5% year)

    My question now is: When do I have enough to cut the cord and retire? Do I simply stop funding the tax deferred accounts now and put everything into a taxable account that will fund me until I get to RMD age? It seems risky.

  41. Casey Clarke says

    Hi JLCollins and community!

    My wife and I (27yo) are committed to achieving savings that will allow us to live on the 4% withdrawal rule and retire early. Over the last few years however, much of our efforts have gone into funding our 401k and Roth IRA accounts. We’ve built up a great initial amount, but we can’t access it for 30+ years!

    My request for advice is: With 30+ years for our retirement accounts to grow, at what value should we be comfortable not prioritizing retirement accounts and begin prioritizing the accounts we hope to retire early on?

    If anybody wants to weigh in, I’d be happy to correspond directly and give more specific #s on retirement and savings.


  42. Frank Mac says

    Hi Jim, thank you so much for an incredible series of posts. As a European reader approaching retirement, I will be following your advice closely and taking local tax advice.
    You mentioned that your wife keeps a simple spending spreadsheet to help decide what to draw down. Is this something you can share or is there one you recommend?
    Thanks again!

    • jlcollinsnh says

      Hi Frank…

      Glad you fine them helpful! If you haven’t already, check out:

      As for the spreadsheet, there really is little to share as it is so simple.

      Across the top are the years, current one first.

      Down the vertical, the expense categories. Things like:

      Car (I keep a separate, detailed spread sheet on this and transfer the total here)
      Travel (Same as with the car)

      Whatever you spend money on. Once you’ve been doing it a while you can easily see where your money is going and how that changes year-over-year

      Very simple. 🙂

  43. papajackru says

    Hi Jim,

    Thank you so much for this valuable blog. I am thoroughly enjoying the wisdom you are sharing and applying many principles!!

    This question is regarding taxable account’s asset allocation considering we have 6 years before the taxable account becomes our source of retirement income. We plan to retire with $1M in taxable account in 6 years. Currently we have $500K in cash which was until recently expected to be used for house purchase. We decided against the house ownership. The dilemma is how to allocate readily available $500K now and where to invest upcoming $500K in the next 6 years. If we put all in the stock index fund, I am afraid we would take to much risk considering our 6 years time frame and not reach the goal. I am considering doing 50/50 VTSAX/VBTLX to limit the risk associated with only having 6 years but don’t like the idea of paying taxes on the VBTLX. Would you recommend to follow 50/50 approach and just accept paying taxes on the bond portion or there are other ways to minimize our taxes in the taxable account?

    thank you


    • jlcollinsnh says

      Thanks papa…

      I appreciate the kind words.

      First, don’t let the tax tail wag the investment dog. With interest rates so low, VBTLX is paying only ~2.45% interest these days and that’s what you’ll pay tax on. If holding bonds makes investment sense, I’d hold bonds.

      If you are in a very high tax bracket, you could look at tax-exempt munis.

      Regarding your allocation and when/how to implement it, this really depends on your personal risk and volatility tolerance. The more you hold in stocks, the greater the volatility and the greater the chance for better gains over time. Adding bonds smooths the ride and tends to reduce the returns.

      The is not right or wrong answer, just what meets your goals and temperament best. But whichever you choose, be sure you will stay the course when things get tough. If you panic and sell when the market drops all my advice is worthless.

      For more:

      Good luck!

  44. Mark says

    Hi Jim,

    I was wondering if you could help clarify your cash on hand.

    In this blog post, you indicate “minimal cash for spending” and “Our allocation is 75/25, VTSAX/VBTLX”.

    In your book, “The Simple Path to Wealth”, you indicate your allocation as 75/20/5 VTSAX/VBTLX/cash at Kindle location 1324.
    Chapter 13 – Portfolio ideas to build and keep your wealth
    Section – The Wealth Preservation Portfolio

    5% cash sounds like more than minimal spending as that would be more than a years worth of spending, assuming 4% withdrawal rate, and large enough to include in the allocation breakdown.


    • jlcollinsnh says

      Hi Mark…

      Depending on your net worth, 5% could be too little or way too much cash on hand to cover your spending needs.

      75/20/5 — VTSAX/VBTLX/cash is a good guideline, I think. But these days we are basically 75/25 with minimal cash on hand to pay the bills.

  45. Nicholas says

    Hi Jim, first of all I want to say thank you for everything you are doing. Your ability to write about personal finance knowledgeably yet entertaining is what keeps me coming back here!

    Quick question regarding converting Regular IRA dollars to a Roth IRA. I understand that the taxes are due when that transfer occurs depending on your tax bracket. What I am not clear on though is where that money should come from to pay the taxes? For example if I converted $100,000 from a traditional IRA to a roth IRA in a 25% tax bracket I would owe $25,000 in taxes. If I took the $25,000 from the $100,000 that only leaves me with $75,000 in the Roth. However if I took the $25,000 from cash savings to pay the taxes, it would allow me to let the full $100,000 grow tax free. Which in the long run mathematically it makes more sense to lose $25,000 from short term savings or even a regular taxable brokerage account then to lose it from a tax deferred account. Please let me know what you think. Thanks again!


    • jlcollinsnh says

      Your thinking is spot on Nick.

      Whenever possible, pay the tax with outside funds and keep the balance intact.

  46. Frank says

    Hello Jim, love your book and recommend it to everyone i can. I have a question, My father has 3 taxable accounts for me and my siblings. Now what if any bonds would you recommend for a taxable account?We live in NY, so would you use municiple bonds for that state, or tax exempt bonds? The accounts are there for use when he passes. Most of the account will be in VTSAX, but thinking putting 10% in bonds. Thanks for your time, and keep up the good work!


    • jlcollinsnh says

      Hi Frank…

      Where possible, I’d hold bonds in a tax advantaged account and the fund I use is VBTLX.

      If you have to hold them in a taxable account your tax bracket will decide whether Munis or VBTLX make sense.

      • Frank says

        Thanks for getting back to me Jim! Jim would there be some other type of account my father could open for this purpose? He was in an annuity that was charging very high fees so he got out of it. Now he has the money sitting in the back waiting to do something with it. The people are Vanguard said he could open three taxable accounts that why the beneficiaries could access it right away if needed. That’s the reason I was thinking that type of tax at angel bond where he wouldn’t get killed on claiming all the interest. Or I guess he could put it in 100%vtsax, instead holding any in bonds. What are your thought on if?


  47. RandyF says

    Hi Jim.

    I’m recently retired and have similar tax issue since most of my retirement money is in 401k before tax accounts. I’m planning to do as you suggest and keep under the 12% (previously 15%) tax bracket and move as quickly as I can to Roth or after tax accounts. I have a different solution to address the non-tax issues of withdrawing income that attempts to compensate for sequence of returns and market volatility. I’d like to describe my reasoning to you. I haven’t seen it approached exactly like this and you may find it interesting.

    My situation is that I am older than my wife and she will continue to work about 3 days a week but with a flexible schedule so we can take long vacations and travel as we’ve always wanted to do. She will retire about the time I turn 70 and start taking social security. Our house is paid for and our expenses are low so we can survive on her part time income and then our social security but that leaves little money for the fun stuff. This means we can afford to be very flexible with our savings.

    Because of our situation I started out thinking we would stay all in equities and draw a fixed percentage of the equities. Income could fluctuate widely and we would be OK since our base expenses are covered. Sequence of returns still matters since a crash early in this plan would reduce all future investment income, but we would never run out of money in theory.

    To address widely fluctuating income I added bonds, which are technically part of my portfolio but I treat them strictly as a buffer. This is similar to the bucket/time horizon strategy but in my case a buffer is closer to the data structure I’m familiar with from computers in that income from equities flow into the buffer and a fixed percentage of the buffer is then withdrawn on a monthly basis. For instance I’m choosing a 3 year buffer so every month I withdraw 1/36th of the buffer to spend. I take .5% (works out to 6% annually) of equities each month, put it in the buffer (bonds) and then take 1/36th of the buffer to spend. When the market is good the bonds increase and so there is a good buffer when the market takes a dive. Risk tolerance is as simple as adjusting the buffer size to cover 5, 7, or 10 years.

    My next improvement is to find a way to better accommodate market volatility. I want to withdraw a smaller percentage when markets drop and a larger percentage when markets are good. That means I need to track the equity balance so there is a reference. I played with the idea of starting with an aggressive withdrawal percentage that was reduced the further from the high equity balance it became. For instance if equities reached 1,000,000 that would become my new high and I would withdraw using my highest (say 8% annually) rate. If my equities balance dropped down to 750,000 I’d only be drawing 4% and if they dropped to 500,000 I would withdraw nothing. What I finally settled on was keeping track of my starting equity balance, adjusting it for inflation (similar to the 4% adjusted fixed amount), and adjust withdrawal percentages higher or lower depending on if the equity balance is higher or lower than my target. The actual balance floats above or dives under the target but is gradually adjusted to hit that target. Since it’s feeding the buffer and it’s the buffer that determines my monthly income the income into my bank account is smoothed out.

    One advantage of this is that I don’t attempt to use asset allocation to achieve a desirable portfolio performance. I treat each equity class separately, each with it’s own target balance. If I only had total US stocks fund I have only one target balance. If I were to add some international stock or emerging markets they would each have their own target. I withdraw from each based on their target balance and thereby keep things pretty much in balance without ever selling one asset class at a disadvantage just to rebalance a different asset class.

    Hopefully you were able to follow my description. I work better with spreadsheets than words. I’d be happy to share a spreadsheet that models my ideas if you would like to play with it.

  48. mars says

    Hi Jim,

    Thank you for the article! I have a question about the taxable and IRA split details.

    Using your example of $1,000,000 with 75/25 stocks and bonds and add one assumption: the portfolio has $250k in IRA and $750k in taxable account for an early retiree.

    How would you recommend the holdings of VTSAX and VBTLX in taxable and IRA accounts?

    I think in this case we cannot hold all VBTLX in the IRA account (to take tax advantage) since when market goes down we depend on VBTLX, which we don’t have access to unless hold in taxable account. Not sure if I miss anything, I’m a beginner but read almost all the stock series articles. Thank you again for the article!

      • mars says

        Hi Jim,

        Thanks for the reply. My question is about if one does not hold bonds in a taxable account – what is the recommended ‘pulling the 4%’ strategy when stock market declines?

        Consider a $1,000,000 portfolio that is 75/25 stocks/bonds for an early retiree. Hold VBTLX in IRA to take tax advantage.

        Taxable: VTSAX $750,000
        IRA: VBTLX $250,000

        Say market declines, my understanding is VTSAX will pay much less dividends, say instead of $15,000 (2%) it pays dividends $10,000. Assume during that time one can spend just 3% instead of 4%, that is $30,000. So there is still a need of $20,000.

        VTSAX pays dividends in taxable account but the dividends from VBTLX is untouchable since it is in IRA. I assume we don’t want to sell VTSAX in this case when stock market declines significantly.

        My question is what should one do to get the remaining $20,000 for living expense.

        One idea I have is when stock market declines I assume VBTLX in IRA will pay more interests, one can sell some VBTLX and buy VTSAX in the IRA account. The VTSAX shares one buys in the IRA account is the replacement of VTSAX one sells from the taxable account for $20,000. So one does not lose too many shares of VTSAX.

        Hope I make myself clearer this time. Thanks again!

  49. Jeremy Amaismeier says

    Hi, Jim. Long-time reader, first-time commenter. I’m also a big fan of listening to you in interviews. Thanks for linking to them when you do new ones. 🙂

    I finished reading your book out loud with my wife, which led me to come back and re-read this article and the one about dollar-cost-averaging. You say here related to withdrawing your money, “Transfer a set amount of money from any of your investments on whatever schedule you chose: Weekly, monthly, quarterly or annually.”

    It sounds like you’re not really particular about the frequency. But as I’ve been ruminating on it, it seems like if the market is more likely to rise than to drop in a given year, spreading out your withdrawals would generally leave you with more money since the invested shares have more time in the market to grow.

    Would using DCA for your withdrawals generally lead to better results than withdrawing a lump sum?

    Thanks again for sharing your wisdom and being so generous with your time interacting with your readers in the comments.

    • jlcollinsnh says

      Interesting point, Jeremy.

      DCA out of the market should lead to better results for the same reason it doesn’t going in. 😉

  50. Stephen says

    Hey Jim,

    When withdrawing the 4% in early retirement, is that just from non-investment accounts? If you max out retirement accounts its much harder to get to an amount in non retirement accounts where you can live off that amount. e.g. – $1 million in only non retirement accounts where you are able to take out the 4%.

    Second, what about dividends? As you get dividends off your 401k is it required that it’s reinvested? Can you use that as income before retirement?



    • jlcollinsnh says

      The 4% guideline is based on your total assets.

      If you are under 59.5, you might very well first draw the money from your taxable accounts and then shift to your tax-advantaged accounts when you hit that age. If you need to access them before, you can use one of the strategies discussed on this blog. The Mad Fientist also has some great work on this.

      Typically dividends earned in a 401K are reinvested as taking them would be a taxable event and subject to penalty if you are under 59.5.

      • Stephen says

        Thanks that makes sense! So as an example with $100k in taxable and $100k in tax advantaged you would simply take $8k from the taxable instead of $4k from each.

        I am 30. Which specific articles do you recommend for the strategy of taking withdrawals when under retirement age?

        Also thank you so much for your writing. Your book has helped give my wife and I the push and confidence to work on our finances more. We’ve consolidated retirement accounts, put them into VTSAX, and are saving at an even higher rate and putting it into a non-retirement investment account with Vanguard. Thank you so much!

  51. DH says

    What if run into a situation where your Dividends/Capital Gains Distributions exceed your 4% safe withdrawal rate. For instance a $1 million portfolio and $120,000 in Dividends/Capital Gains Distributions instead of $80,000 of principal drawdown. If you have plenty in taxable/Roth Basis to tide you over while your Roth Converions season for five tax years (not the same as five calendar years) couldn’t you spend that? In a money fungible sort way you don’t touch the initial principal of your overall assets. Wrong? Right? Please let me know.

    • jlcollinsnh says

      Not sure I entirely follow you here, DH.

      If you have “$1 million portfolio and $120,000 in Dividends/Capital Gains Distributions” you are not following my Simple Path. VTSAX almost never has capital gains distributions and the dividend is a bit less than 2%. To generate 120k in CGD and dividends you are very likely in high cost actively managed (what causes those CDGs) funds.

      Further, an “$80,000 of principal drawdown” on a 1M portfolio is 8%, not 4%.

      • DH says

        Sorry I meant $40,000 from $1,000,000. The main question is can you just live off Dividends/Capital Gains Distributions, and by doing so, not drawdown principal?

  52. JC Webber III says

    I’m surprised to learn that you ‘DRIP’ all your dividends, even in your taxable account, despite the fact that you are drawing on your taxable account to fund your life-style. Those dividends are a taxable event, even if you DRIP them. When you pull more funds out of your taxable account you’ll be drawing on those dividends as well, and paying taxes on them again. I DRIP all my tax sheltered accounts, but I have Vanguard deposit all my taxable account dispersions (dividends, interest, cap gains) into my Vanguard money market account (VMMXX) and move those funds to my checking account monthly to help fund my monthly expenses.

  53. Lindsay says

    Just read your book and super excited to put your plan to work for us. I have a few questions that have come up and not sure how to find the answers so hoping this might help even though this post is older.

    My husband would like to retire at around age 50. We are 35 right now. How would it work to live off our 401k’s if we are not yet old enough to start withdrawing?

    Our oldest son is 17, almost 18. He struggled in school and we have only had him do some volunteering and let him participate in sports as working on top of that would be too much for him unfortunately. Now that he has graduated and is just starting work and college classes, would it be beneficial to open up a Roth IRA for kids or wait until he’s 18 and can open his own Roth IRA? I’m not sure how this works out with taxes as well… Is his income part of our taxes at a higher rate? Do we claim him as a dependent if he still lives with us or is there a way for him to be independent and make the Roth IRA a good deal for him at this time in his life? Hope this question makes sense 🙂

    Last question for now is when I logged on to Fidelity to check what our 401k’s are in and hopefully switch them over from managed accounts, I can not see how to change them. It shows me a balance of where our money is and that it is with Vanguard, but that is it. I am planning on calling Fidelity and asking these questions, but not sure if I would get the same advice as on this website. My 401k has been changed to a rollover IRA after becoming self-employed six years ago. Where/how can I add more than $6,000 to my retirement?
    Thank you for any insight!

    • jlcollinsnh says

      Hi Lindsay,

      Thanks for your comment!

      Mr. Collins is currently traveling and unable to respond just now.

      We find for most questions, he has already covered the topic. Using the Search button might very well provide your answer. If not, please post your question again after October 15, 2019.

  54. BCR says

    I may have missed it, and I could be wrong, but I believe that sequence risk, which is only really relevant in the first 10 years of beginning your withdrawals, pertains to the amounts withdrawn, not the whole portfolio. If there are no withdrawals there are no actual losses or risk. If true, I had some thoughts to share.

    Assuming you have or will have saved enough to retire based upon your chosen withdrawal model, here’s an allocation and withdrawal approach to consider to minimize sequence risk.
    If you use only your bond/cash funds to withdraw from, your sequence risk is mitigated since the bond value rarely goes down. You can then set your minimum allocation to bonds as equal to the total planned withdrawals for the first 10 years, allocate the rest to stocks if you like, and you will have little to no sequence risk to concern you.

    One thing to realize is that if you follow this approach strictly you will have a 100% stock allocation in ten years. If that is not comfortable you’d want to adjust your retirement-date bond allocation upward accordingly.

  55. Pete Bracken says

    I know Jim isn’t answering questions right now, but thought I’d put this out there to see if anyone else has any thoughts.

    My question is regarding the order in which to “pull the 4%”. Jim’s guidance is to pull first from taxable accounts, then from IRA’s (beginning when RMD’s start or before if the taxable account is depleted), then Roth IRA’s. The reason is to allow tax deferred growth in the IRA’s as long as possible.

    My situation:
    Age 60
    Taxable account: $450K
    IRA’s: $1.6M
    Roth IRA’s: $580K
    Cash $140K

    Following Jim’s guidance, I’ve been pulling from my taxable account (about $27K per year). This, along with my modest pension supports our lifestyle. I’ve also been converting a portion of funds in my IRA to my Roth IRA every year (while staying within the 12% tax bracket). I’m 12 years away from RMD’s, and I don’t expect my taxable account to be depleted before then. I worry about the tax burden I’m creating for my heirs as the value of my IRA continues to grow significantly (despite my conversions), especially now that they will have to withdraw the funds within 10 years.

    My question is this: Would it be better to stop withdrawals from my taxable account and begin equivalent withdrawals from my IRA instead (while still continuing to do conversions, as I have been)? I ask this because I understand that when inheriting the taxable account, my heirs will get the benefit of a step up in basis – so, they will have no tax burden in inheriting this account. Under this scenario, the taxable account will continue to grow, and I will be drawing down the IRA at a faster rate, thereby reducing the IRA tax burden on my heirs.

    Thank you.

    • Mark says

      My advice would be to check with an advisor if you have an account with Vanguard or something similar they may be able to set up some kind of Trust. The sequence of withdraws Jim outlined was before these new IRA rules.

    • jlcollinsnh says

      Hi Pete…

      You are right, I rarely have time to answer questions these days but I do read them all. I enjoy responding, especially when someone is as well versed as you before asking.

      You are thinking correctly and there is no easy answer. It is a balance against your current tax bracket and that of your kids (and yours) in the future, which of course requires guess work.

      My sense is that tax rates are especially low just now, and the national debt is exploding. There is a good chance rates will be higher for your children when the time comes.

      12% is very low and I would convert as much as possible at that rate into your Roth, maybe even at higher rates depending on your own view and feelings. Right now, the Roth is the best place to hold money and to pass it on. But, of course, the politicians can always change the game.

      Passing on taxable fund assets is also good for the reason you stated, the step up. But this, too, is tax law that could change.

      If the Dems come to power this fall, they will almost certainly undo Trump’s tax cuts of a few years ago. But I haven’t heard of any plans to change the laws around Roths or step-ups for now.

      Hope this helps. We are wrestling with the same issue. 🙂

      • Li says

        Hi Jim,

        I’m new here and still on the road to FI. I remember you said to rebalance your 75/25 in a down market and use cash so you don’t sell at a loss. How much cash do you set aside, 6 months, 1 year, 2 year or more? Also if i have enough cash set aside for 2 or more years for my annual needs after FI then would it be better to keep all my portfolio in stock? When the market goes down, i’ll use cash and convert my IRA to Roth. And when the market goes back up again i’ll pull what i need and slowly replenish my emergency fund.

        Thank you

  56. symara says

    Im a new investor and don’t really know how it all works. Im 33. No debt and I have a VTSAX that currently has about 20,000 dollars, but I have not withdrawn money for fear of not doing it correctly. And my hope is to make myself somewhat understandable with what I’m about to ask. Do you recommend pulling the 4% once a year or assessing what you have every quarter and dividing that amount by 4 ? or pulling monthly ? so if your stocks are constantly fluctuating than what is the safest way to pull money. lets say you want to take your 4 % out every Jan 1st. Today is Jan 1st. Today I have 100,000 in my account. So am I pulling 4% of 100,000 or 4% of the average value of my stocks for the whole year ?. Because next month, maybe I only have 90,000 in my account, or 80,0000. so then that 4% is not actually 4 %. Does that 4% take into account that your stocks are going to be going up and down all year ?

  57. Jeff says

    Wonderful book! I’ve been working the Simple path to wealth now for 7 years, and can’t thank you enough for the clarity, and money saved :). Question for you regarding VBTLX in the IRA. If you were lucky enough to be able to move all of the money from your Traditiona IRA into a Roth, where would you suggest that you hold VBTLX? Options would be in your taxable account (but VBTLX isn’t tax efficient), or in the Roth (where you say you are being aggressive with your investment in VTSAX). Thoughts?

  58. Dean says

    “Having left your employment, you will have rolled any employer based retirement plans, such as a 401k, into your IRA,” … well, no I won’t, for two reasons. First, I’m retired early, under age 59 1/2, so if I roll my employer’s retirement funds into an IRA, I’d pay a 10% tax penalty if I withdraw them from my IRA. The second reason is that I have a 403(b), and my retiree health benefits from my employer are tied to receiving a distribution from that account. If I rolled my employer based retirement plan into an IRA, I would lose my health insurance coverage.

  59. Tony W says

    This is great as far as it goes.

    I would offer that people about to enter early retirement assure that they have sufficient taxable account funds to get to age 59 1/2, and that they think about the tax implications of withdrawing those funds from the taxable account.

    This is particularly important for people in the United States who are counting on the ACA for health care.

    Due to subsidies being income based (rather than asset-based), managing one’s taxable income carefully can make healthcare downright affordable.

    At some point the United States might form a national health care system, or simply remove the age requirement for Medicare – but until then, this has to be a consideration for early retirees.

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