When I started thinking about early retirement 2 years ago, I had a pretty clear idea about the way to get there. Assess my annual expenses, accumulate about 25 times that number, retire, and take out 4% of my portfolio the first year.
But the more I think about it and the more I am getting confused because by the time I retire (hopefully at age 50 or before; I am currently 33), there is a good probability that about 1/2 my portfolio will be in taxable accounts and about 1/2 will be tax-deferred accounts if I don't make any changes to the way I currently invest my money. Right now I would need an annual income of 60K in retirement which would require a nest egg of 1.5M (in 2007 $). I have thought of 3 options:
1) I don't change anything. Let's imagine that I have 700K in taxable accounts and 800K in tax-deferred accounts when I get ready to retire. The 700K in taxable accounts alone can only provide about 28K a year at 4%. For me to be able to get an income of 60K at age 50, it means that I would have to withdraw about 8.6% from my taxable accounts the first year. Eventhough, it would still represent only 4% of my total portfolio, it makes me cringe because I am worried that I could run out of money in my taxable accounts before reaching 59.5 at which time I could start digging in my tax-deferred accounts.
2) I start shifting more savings towards taxable accounts so that by the time I reach 50 I have a higher percentage of my portfolio in taxable accounts. The problem with that approach is that my current tax bill would go up and that it will take longer to reach the 1.5M mark, but when I do I will have more money in taxable accounts and would be able to withdraw a safer percentage (maybe 5-6%) of my taxable portfolio until I can start accessing money in my tax-deferred accounts.
3) The 3rd option is to build a sustainable portfolio in my taxable accounts, meaning a portfolio of 1.5M that could generate every year the 60K needed for my annual expenses (at 4% SWR). That way for the 10 years prior to age 60 I would not deplete my taxable portfolio and when I turn 59.5 I could continue living off of my taxable portfolio and I would have the tax-deferred accounts as cushion. That's the scenario I would prefer because it offers a lot of security, but at the same time I will require me to probably save about 35 times my annual expenses before I can pull the trigger and retire. Again, it will postpone my retirement date by a few years and will increase my current tax bill as I may have to cut contributuons to tax-deferred accounts to achieve that plan.
All these options are doable financially, but which one do you think is best? Or do you think I am overthinking the all thing? Becoming FI ASAP is my top priority, early retirement is too but not as the expense of financial security down the road.
But the more I think about it and the more I am getting confused because by the time I retire (hopefully at age 50 or before; I am currently 33), there is a good probability that about 1/2 my portfolio will be in taxable accounts and about 1/2 will be tax-deferred accounts if I don't make any changes to the way I currently invest my money. Right now I would need an annual income of 60K in retirement which would require a nest egg of 1.5M (in 2007 $). I have thought of 3 options:
1) I don't change anything. Let's imagine that I have 700K in taxable accounts and 800K in tax-deferred accounts when I get ready to retire. The 700K in taxable accounts alone can only provide about 28K a year at 4%. For me to be able to get an income of 60K at age 50, it means that I would have to withdraw about 8.6% from my taxable accounts the first year. Eventhough, it would still represent only 4% of my total portfolio, it makes me cringe because I am worried that I could run out of money in my taxable accounts before reaching 59.5 at which time I could start digging in my tax-deferred accounts.
2) I start shifting more savings towards taxable accounts so that by the time I reach 50 I have a higher percentage of my portfolio in taxable accounts. The problem with that approach is that my current tax bill would go up and that it will take longer to reach the 1.5M mark, but when I do I will have more money in taxable accounts and would be able to withdraw a safer percentage (maybe 5-6%) of my taxable portfolio until I can start accessing money in my tax-deferred accounts.
3) The 3rd option is to build a sustainable portfolio in my taxable accounts, meaning a portfolio of 1.5M that could generate every year the 60K needed for my annual expenses (at 4% SWR). That way for the 10 years prior to age 60 I would not deplete my taxable portfolio and when I turn 59.5 I could continue living off of my taxable portfolio and I would have the tax-deferred accounts as cushion. That's the scenario I would prefer because it offers a lot of security, but at the same time I will require me to probably save about 35 times my annual expenses before I can pull the trigger and retire. Again, it will postpone my retirement date by a few years and will increase my current tax bill as I may have to cut contributuons to tax-deferred accounts to achieve that plan.
All these options are doable financially, but which one do you think is best? Or do you think I am overthinking the all thing? Becoming FI ASAP is my top priority, early retirement is too but not as the expense of financial security down the road.