Planning for Succcess: Drawdown versus Wealth Preservation in Early Retirement

“Stop your messing around, better think of your future” is a line from the classic Ska anthem  “A Message to you Rudy“, by The Specials. It’s a fine song from a cool band from a marvelous period of music.

We can’t help thinking that they were not planning for an early retirement when they penned these catchy lyrics.

Saying that, it was catchy enough to attract the attention of Fidelity Investments who used it as a backing song to their advertisement on “Retirement Score”. Is retirement a sport? – with a half-time, trophy presentation at the end of it all and colored confetti raining from the sky with Vuvuzelas blasting your aging ear-drums. Really? Don’t you just love those adverts on financial planning that have absolutely no grounding in reality? Sorry, we digress.

Speaking of retirement and our future, we are here today to share our drawdown plan in early retirement. Many thanks to the good people who have gone before us by writing about this critical topic.  We are excited to be part of a little initiative spear-headed by Physician on Fire and Fritz at The Retirement Manifesto to share our respective drawdown strategies through a series of chain-linked posts from members of the FIRE community.

If you’d like to join the chain with a post of your own, simply backlink to the articles already posted in this series, tweet your post using #DrawdownStrategy, and tag any blogger who is already in the chain.

Right, onto business…

We have spent 20+ years saving, investing and that’s just a piece of the overall story. The first 13 miles of the marathon. See, we told you retirement is really just a sport!

Upon retiring, how will we use our stash wisely when we no longer have a biweekly paycheck and year-end bonus? Which investment vehicles will be tapped first? Where could additional income come from? ROTH conversion or not? How will SS factor into it all? These, and many more questions, plague the minds of the soon-to-be retiree. And it’s not easy coming up with answers. In fact, there is no one size that fits all – every retiree’s personal situation, risk tolerance, portfolio size, spending needs, and desire to leave a legacy fund or not are totally different. Unlike the 2-tone band The Specials, retirement drawdown strategies are rarely black or white. We hope to provide some value to the community by sharing what we plan to do.

Before we get started, please allow us to provide some background on our personal situation at our retirement date on July 3, 2018.

  • Mrs. PIE (age 44); Mr. PIE (age 51). We still feel young enough to call it early retirement
  • Two small PIE’s (ages 11 and 9). The teenage and further education years await
  • College funds are separate and not factored into the plan
  • Own home with no mortgage
  • Retiring to the Granite State (NH), a reasonably friendly state from an overall tax perspective
  • Conservative minded couple – Morgan Housel, at the Collaborative Fund, captured the mind-set beautifully in his recent post on “The Seduction of Pessimism” when he wrote ” Expecting things to be bad is the best way to be pleasantly surprised when they’re not. Which is something to be optimistic about.” Please go over to his blog and read this brilliant article. The positive outlook on pessimism spoke to us for sure.
  • Desire to leave a legacy fund, to be distributed to our kids, extended family and various charities
  • In reality, we aim to preserve a sizeable chunk of our wealth in the drawdown phase. Our planned SWR is 2.5%

Here is a snapshot of what our FIRE portfolio will look like in the summer of 2018:

Our portfolio will basically be 75/20/5 in terms of equities/bonds/cash. In the interest of full disclosure, we hold much less in cash right now while we are in fairly stable jobs. We factor REIT’s into the equities portion while understanding they are strictly an asset class of their own. In the equities bucket, US : International is ~3:1. We still firmly believe in the US economy yet anticipate decent returns (and of course increased volatility that come with it) with international equities over the next decade.

The purpose of this post is not to get into the endless debate on asset allocation. This allocation matches our level of risk tolerance and “our enough”.  We aim to preserve what we already have rather than risk much to grow it. What every retiree has to be able to do is sleep very well. After all, work life (late nights/early morning starts and the mind games of meeting deadlines) has trained our bodies to sleep quite badly – a bad habit we intend to quickly shed in retirement.

As you can see, we like love Vanguard. We currently also have a brokerage account open at Fidelity, where we recently shuffled funds from Vanguard to take advantage of an AA air-miles offer. These funds will be transferred back to Vanguard later this year, per the offer rules, with no tax implications. If another air-miles offer appears, we will do exactly  the same again.

OK, there is the baseline. What are we going to do in terms of the drawdown strategy? Let’s walk you through the following income sources in more detail. The schematic captures which sources / accounts we will be drawing from first:

1. Pension

Whaaat? You didn’t mention that in the XLS snap-shot! Mr. PIE has a pension with his current employer.  We are fortunate to have this. Guess it is one of the perks of many years working for a big pharmaceutical company with an overall very solid total compensation package.

Mr. PIE has options to take the pension as follows:

(a) Lump sum when he retires. Eh, no thanks, due to massive tax implications

(b) Roll it over into an IRA and let the markets dictate what to withdraw in terms of a percentage

(c) An annuity of our choosing. Mr. PIE will take it as a 100% joint and survivor annuity, starting at age 51 and paid until he passes.  When Mr. PIE passes, the annuity will continue to get paid in full to Mrs. PIE. Based on our respective ages, it is likely that Mrs. PIE will live longer, hence our choice of annuity. We should note that the annuity is not inflation adjusted.

We have thought through the pros/cons of each option and keep circling back to the annuity. If there are readers who have navigated a pension decision like this recently, how did you make your decision?

The income will amount to 25% of our total annual expenses. This type of more stable income has been characterized by others as an “income floor”.  It will cover basic shelter, food,  utilities and some of the monthly healthcare premium for our family of four. We have no intention of EVER going back to work (barring some utterly catastrophic market meltdown) and see this as a critical back-stop in terms of our overall drawdown strategy.

2. Dividends from the Post-tax Account

The amount in our post-tax (+ cash) accounts is very similar to the total in our tax-deferred accounts. The dividends from our various funds in the post-tax account will be diverted straight to our primary checking account.  Ignoring dividends and factoring in our “income floor” pension, we have ~20 years of living expenses in post-tax accounts.

3. Selling Assets from the Post-Tax Account

To meet the differential between annual expenses and that provided by (pension + dividends), we will sell assets. Now here is the really tricky part – which asset class to sell?  We posted before on some of the fine work on withdrawal strategies done by Darrow over at Can I Retire Yet. In our own post on this topic, the comments section contained some fantastic dialogue from Big ERN and FinanciaLibre (Where did you go to, FL? We miss you! If you are reading this, please send us a private note to let us know how you and family are doing) on CAPE, CAEY, EBITDA/EV data as factors to play into the decision to either sell equities or bonds. It’s not straightforward, just go read the comments. We have equity (VTSAX, VTIAX), and bond (VBTLX) funds as options to sell assets from.

The practical steps will be to use the pension, post-tax account dividends and cash in our checking account to live off and then back-fill the checking account by selling assets on a quarterly basis. We will rebalance anually to meet our desired target allocation. Our checking account will hold at least 2 years of living expenses at all times.

4. Deferred Compensation Plan

We have a small amount of money in a plan made available to Mr. PIE whereby some salary can be deferred pre-tax and then distributed (quarterly or annually) over a defined time period (5 or 10 years) after retirement.  Tax will be paid according  to the bracket we hit in that particular year of distribution.

5. Mr. PIE UK Savings plan

Mr. PIE worked for a few years in the UK after completing his Ph.D. The small amount of money he had saved during that period (when he was not spending it in bars such as this one below) have compounded magically over the last two decades. It’s a beautiful thing, compound interest. Drinking in an awesome cave bar is one darn good reason for not saving more in the early part of a career. Well, not really, but it was one helluva fun time for the much younger Mr. and Mrs. PIE.

Ye Olde Trip to Jerusalem (one of the oldest pubs in England)

Bar inside “Ye Olde Trip”

The investments in that account sit overseas and are a mix of global equity funds offered by Zurich. At 0.39%, they are the largest fees in our portfolio. But it’s all relative to the massive total fees charged by many brokerages / advisors (upwards of 1-2%).

Mr. PIE is able to access the money as early as age 55, without any early withdrawal penalty, if he chooses. Thanks to the “Digest of Double Taxation Treaties“, he will get full relief from paying UK taxes  – thank you very much HMRC and Uncle Sam for agreeing on something! He will pay tax based on a much lower tax bracket in the US. No doubt it will be lots of filling out of forms, but then again, Mr. PIE will have plenty time on his hands to do that sort of stuff. He may very well take a trip back to the Olde Trip and raise a pint or two with Mrs. PIE in celebration of those good olde times.

6. Tax-Deferred Accounts and Roth Conversions

It should come as no surprise to the readers that we will roll over our respective 401K’s into each of our traditional IRA’s at Vanguard. We will disperse the proceeds across the various funds described in the XL table above. “But you won’t be able to access these accounts until age 59.5, Mr. PIE and for Mrs. PIE, six years later”, you say.

 Ah, we will touch them but we won’t spend ’em. From 2019 onwards, we will do a ROTH conversion from each IRA, transferring as much as we can to stay within the 15% income tax bracket for married filing jointly. In 2017, that is $75, 900. With standard deduction ($12,700) and exemptions ($16,200) for married filing jointly with two kids, we have some room to play this game. Dr. PIE very much likes the approach of Dr. Benson, the BITA’s and their tax avoidance shenanigans. Note that we won’t do any conversion at the end of 2018 – our taxes will already be high enough in that year without adding more on to the pile.

Aside from the tax efficiency, we have another critical reason to adopt this strategy – Required Minimum Distributions (RMD’s). Otherwise known as Reapers of Mass Destruction. That’s what they will do to your taxes if you are not careful.  Vanguard has a very simple calculator that allows you to see the impact of RMD’s – the minimum amount of money you must withdraw from your IRA after age 70.5, otherwise the IRS will stiff you with severe penalties. Plugging in some hypothetical numbers into the tool (50 yr old; $600K inside an individual IRA; Modest expected annual rate of return = 4%) provides RMD for his/her age 70.5.

As you can see, those minimum withdrawals ratchet up quite a bit and peak out near $90,000 per year! Now these input numbers are all hypothetical but you can see why a middle-aged couple, each with sizeable 401K’s,  may wish to consider a ROTH conversion strategy. Mrs. PIE has 25 years (70-45) to do her conversion and Mr. PIE 19 years. We intend to convert as much as possible for as long as the rules allow us. And the really important part of the ROTH conversion – do not go near those converted assets until you absolutely need to.

We understand that there are differing opinions on this strategy but if you have a large 401K account(s), why would you not do a ROTH conversion strategy? We are struggling to see any major disadvantages for us by doing ROTH conversions. Thoughts?

7. Health Savings Account

We have an HSA account with a credit union through Mrs. PIE’s employer. We will stop contributing to that in July 2018 but keep it open. Healthcare coverage at retirement will be based on a high deductible health plan (HDHP) with HSA from Mr. PIE’s former employer. If Mr. PIE doesn’t enrol in any plan at date of retirement, there is no chance to do so in the future. Given the massive uncertainty around healthcare right now, we will enrol in the plan and watch the landscape closely in case something more attractive materializes with the current administration. In which case we would drop coverage from my former employer and find it elsewhere. We may well be watching closely for a while.

A component of the plan is that his former employer will contribute $1,000 per year into the HSA. The new HSA will likely be through HSABank and we will be able to choose from a large variety of funds (e.g. low cost ETF’s such as VTI, VXUS) through the TD Ameritrade platform. We will only access the HSA accounts when necessary, otherwise let them continue to grow tax free. These accounts will hopefully be the last accounts we touch.

8. Social Security Income

Both Mr. and Mrs. PIE will have contributed to SS for just shy of 20 years by the time we retire next year. How much impact will SS have on our drawdown plan? If we assume that Mr. and Mrs. PIE will each take SS at in our late 60’s to maximize the benefit, the projected future total annual benefit amounts to ~2.5% of our current investment portfolio. Again, the fine work from ERN tells us the impact that benefit may have on our withdrawal rate. The handy-dandy table near the end of his post captures it all succintly and is reproduced here in full with his permission.

Although we won’t have a 100% equities portfolio (that level of risk tolerance is not for us), the table highlights the impact our projected SS income could have on the drawdown plan. This income is yet another reason to execute the ROTH conversion strategy from our IRA’s – see above.

How are you trying to estimate the contribution of SS to your drawdown plans?

9. Other Income

We have absolutely zero (nada, zilch) plans to seek out work to provide additional sources of income. We intend to fully embrace free time to do so many other things than work. Yet if dramatic circumstances dictate that we HAVE to find some sort of work, the type of work we could do are as follows:

  • Mrs. PIE – teaching chemistry / life sciences to school kids (she is already doing this by volunteering time at local middle schools)
  • Mr. PIE – technical & strategy consulting in the Business Development arena for biotech / pharmaceutical companies

Mrs. PIE will continue to volunteer in her passion for teaching when she retires. This should stand her in good stead if it ever needs to become a bit more permanent e.g. as a teaching assistant.

Mr. PIE would consider periodic consulting type work on a case-by-case basis and could do much of that work remotely.

What else is lurking in the drawdown/preservation plan?

Nothing, except college costs. Times two.  Times four years. We have been investing in two 529 plans on a monthly basis for 8-10 years for the boys. For some periods during that time, very heavily. These funds are separate from our drawdown strategy and do not factor into our safe withdrawal rate as they are ear-marked for a specific purpose over a fixed period. We will stop contributing to these Vanguard plans in July, 2018 and let the market winds propel them onward. If we do need to provide additional support in the future, we should be able to do so up to a point. And that support is certainly not $75,000 per year private college support! College costs don’t have to be crazy high if you are smart about it. Applying some of the mind-set that we bring to bear on travel hacking will serve us and our children well. We will also benefit from lots of free time to help with the research on scholarship strategies.

Wrap Up

OK, it’s been a long one….

This is our plan. Some of it may be a component of your plan. None of it may be relevant for your situation. The totality of our plan is unique to us. In essence, it is a personal strategy. But being a personal strategy doesn’t stop us from sharing it with you. We really hope that it offers something tangible to the community and perhaps provides some ideas to help map out your own strategy.

Please let us know what you think in the comments below. For us, discussion and feedback is the best part of blogging. Mr. PIE is busy looking for potential business partners in San Diego this week at BIO and will endeavor to reply to your comments as soon as he can.


  1. Congrats on being “Link #3” in the #DrawdownStrategy series. Fascinating read, we have a LOT in common and follow many of the same blogs. (I, too, wonder what happened to FinancialLibre, he was excellent! And, BIG ERN has the best Safe Withdrawal Rate series I’ve ever seen).

    Strong post, strong plan. Perhaps the strongest link in the chain to date. BTW, I’m thinking of turning all of these posts in The Chain into an e-book, and donating all proceeds to charity. You in?

    Thanks for sharing your plan. Solid, and will be interesting to watch you implement it in July 2018 (I FIRE in June 2018, so we’ll go through it together!)

    1. Thanks for the kind words Fritz. Appreciate it.

      It was funny reading yours and having ours ready to go. We do have many strategies in common and each of us coming to the same ideas independently has to be good right?

      Of course this is our plan right now and some things may change it. But, as always, be flexible and don’t be afraid to tweak it if data suggests a change is necessary. Yet it’s a fine balance with not doing too much “tinkering”. We think that we are close with this plan but always open to better ideas.

  2. Love it! we have about a decade to go but following a very similar strategy (inclusive of the annuity conversion for my own pension – I love the idea of a portion of the money to be exactly what i know it will be. Also thinking of not doing it adjusted inflated and also pass on to significant other at death). I too do not see the drawback of the Roth ladder assuming tax situaiton remains the same – but I know others don’t see it that way.

    May I ask – how much are you hoping to end up for each child for 529s? we front-loaded 25k each by the time they were 6 and 8 respectively and thinking of not adding anymore, but I keep going back and forth.

    Our SWR will be 3% but also are assuming a return of 5.5% exclusive of a 3% inflation rate (so real return of 2.5% I guess) and sticking within the same expenses we have today (swapping child, car and mortgage expenses for healthcare and perhaps other things that we may have not considered like further help with education, wedding help for kids, whatever). We are just assuming no SS at all, and will also always plan on having 2 years of cash as buffer and live a nomadic life so we can kind of have flexibility on cost of living and the such.

    So fun to see someone ready to pull the trigger and learn from it!! We just crossed a big milestone for us ($500k) and it is totally amazing to start seeing that money work for you almost as hard if not harder than yourself!

    The only other thing that I have been thinking about lately is what to do about things like a car replacement cost, etc. Sure we want to travel so we may not need one but if we stay put somewhere, should we also consider a replacement fund outside of our savings/investments for such one off kind of costs. We will think through this as we get a little closer….

    1. Thanks for the very thoughtful comment. That decade will fly be so stick at it!

      I’ll take each of your points in turn with some additional thoughts:

      1. Pension “income floor” is a way of locking in some certainty. Without that regular paycheck, the psychology of only digging into investments would be hard for us. Of course, we know that we are lucky to have it. Didn’t realize how rare a pension is these days.
      2. ROTH. I think some folks may see a conversion as trying to access “later money” much earlier. That is certainly a bad idea. ROTH convert, be disciplined and leave it alone for as long as possible.
      3. College costs. We hope to have enough to cover a decent quality in our out of state public school for each kid. Could supplement with another $10-15K per year per child if we need to.
      4. Aiming for a low SWR is smart thinking. Fully agree. No point cutting it fine and depleting too soon. That would be an unmitgated disaster.
      5. For big ticket expense items like major house repair, car(s), we have line items in our expense plan to cover those and amortize the costs over a fixed period. For 10-12 years, may not need a new roof. Then, boom, you need $15,000 to replace the darn thing. Likewise for cars, we aim to have two cars as will retire to a location that requires it for our lifestyle. They will be used cars (1-3yrs old) and we don’t plan to change them out for 6 years or more.

      Stick at your plan, it sounds like you are well ahead of where we were in terms of thinking and strategizing. Best of luck!

      1. For college I would put 2K per year into a UGTM for 10 years and let it ride, over and above what ever else you do. I put it in vanguard funds but wish I had chosen BRK.B GOOG and QQQ. The point of this money is to pay “other expenses” like a car or summer abroad or a computer and a camera, trips air fare etc. I did this and it was very successful in funding my kids lives. For college you only need to fund 40-50 months not 40 years so the psychology is much different. I didn’t tell them about the money, I just use it for their benefit and once college is over the excess is theirs to start their lives.

        1. Thanks for another helpful comment Gasem.

          We have put a cap on how much we are putting into 529 plans with Vanguard. When we FIRE, we will stop contributing and the stash will ride the market wave for another 10 years and we will see where we land. Any additional costs, we can cover from our taxable account. We certainly don’t intend to be funding the $45-65k per year numbers being banded around!!

  3. Awesome plan! Congrats on adding to the series! And thanks for the shout out to the SWR research!
    I like the idea of considering this a capital preservation plan, rather than drawdown. Sorry, Fritz!!! 🙂 That’s because with a 2.5% SWR and 75% equities there should be only occasional short-term drawdowns but mostly long-term growth. Best of luck!

    1. Thanks ERN. We have been influenced by much of your thinking on bonds – yes, we actually moved from those high 60:40 ratios in the whole portfolio to a ratio that we think is much more sensible now for the conservative PIE’s And if there are those years where we wish to splurge a bit more such as adding more $’s to college costs or another international trip, we have wiggle room to do so and go to the dizzying heights of 3.25% SWR….

      All the best,

  4. Well done, Mr Pie! Strategy looks great and as always it’s great reading your content.

    Reading a few of these now and I truly appreciate how all our circumstances are slightly different.

    Look for my drawdown strategy to hit tomorrow!

    1. Thanks GS. The beauty of the chain concept is to see how others are planning and we learn from each other. Don’t be surprised if your plan evolves over time based on age, proximity to retirement and other unknowns.

      I’ll be sure to check out the post tomorrow!


      1. I expect it will evolve as life and circumstances change. The beauty of building a flexible plan and updating it regularly is that it can withstand the test of time. Thanks!

    1. I love that phrase “other side of the rainbow”. Since we don’t invest in commodities like gold, there won’t be a pot of gold waiting for us!

      Keep cranking away at that debt pile. When that goes, you are off to the races.

  5. Great plan! You’ve got much more going on than us but we share several key things — the willingness to remain flexible, no intentions of returning to work, and keeping the withdrawal rate low.

    I’m glad this topic spoke to you — it’s always a pleasure to read your words.

    1. Great to hear from you Mrs. G! The thought of anything close to 4% SWR, espoused in the blogosphere, sends shudders down our spine. In this environment, I would advise anyone thinking of that SWR to carefully rethink their timing of FIRE.

      As for work – NO MORE. With so many choices of things to keep us entertained, so much to explore in this great country and beyond and just the time to relax, reflect, recuperate, re-energize and any other word beginning with R, we will be all set.

      Glad you continue to enjoy our ramblings as this post went on a bit long, we know. We promise the next post will be much shorter!

    1. From one Dr. C to another Dr. C, well done. (I did a Ph.D and my surname starts with “C”)

      Pensions in corporate America are getting more rare. We are lucky but 20+ years loyalty to a company does have some benefits. What is generally required for them to have any value is multiple years worked at the same institution.

      The e-book idea is great and should be fun seeing how many posts it will finally have. Learn something from everyone.

  6. I, too, miss FL…

    I like how many trenches you’ve given yourselves. So many different avenues of support. I’m not yet at the place where I need to worry about draw-downs, but it sounds like you’ve managed the complexity well.

    With parents as smart as they have, I assume your kids are smart and hard-working enough to get some scholarships as well.

    1. Hi ZJ,

      It is complex and putting it down in writing has helped a lot.

      Oh, you are making us blush with those kind words !! We hope our kids will have enough smarts to do what they want and find support from scholarships to help. Let’s see. Need to navigate those teenage years first……yikes!!

  7. Dang, it’s like one big link party like the good old days! 🙂

    I’ve admittedly not done any of this because I have a plan of never touching principal until I die! My goal is to just keep on trying to make more than I spend, and slowly increase my spending to coincide with inflation. Didn’t realize with this plan, I don’t have to make a investment drawdown strategy plan.

    What is the X factor that might change your drawdown plan strategy?



    1. Hi Sam,

      Grab a cold one, climb into the hammock and join the party! Yeeeehaww!

      I think you should join the chain gang and write up your plan. I know we would all learn something from your perspective, as always. Go on, do it!

      The X-factor? I think the base of the plan would stay the same no matter what. The usual thing we can control is spending and so in the event of a significant market correction (we define as >25%), we have a clear plan to cut any fluff from our spend. I think writing down that plan (we have done that) and stating what could be cut / must be cut is an important thing to do. If we are still young enough, we would up our game to side-hustle more. If markets continue on their northward trajectory and SS remains fully funded, we will be hit with a tax problem after age 70.5 – but first world problem for sure, no complaints here at all.

      Thanks for stopping by


      Mr. PIE.

    2. Sam, thanks for commenting on some of our blogs in the “link party”! You KNOW we’d all love to have you join the party with a post of your own on the topic, especially since you’re in the enviable position of not having to have a drawdown strategy! Come on in, join the party!! We’d be honored to have you as the guest of honor!

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