One of the challenges to early retirement is figuring out how to develop a reliable long-term income strategy. After decades of clocking-in and receiving regular paychecks for our efforts, retirement brings a totally different way of living both mentally and financially. This was something I worried about before retiring. As I approach my 10 year FIRE anniversary I thought I would share how I’ve managed income during early retirement. I’ve found that it isn’t rocket science even without having a million dollar plus retirement portfolio. It takes having the discipline to stick to an informed and verified plan. A plan that is monitored during retirement and allows for flexibility to adjust as required when conditions or projections change.

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The Way I Managed Income During Early Retirement 

Basic principle: Income during retirement must be greater than or equal to (>) lifestyle budget

There was no extreme early retirement strategy. We chose smart frugal living to save money and lived our retirement lifestyle for many years before we retired. We understood what and how we liked to live. A big part of our strategy was developing a split budget based on our different incomes. We then saved enough to support our individual budgets in retirement. This gave us a solid understanding of what it cost to both sustain and enjoy our chosen lifestyle. With that in mind we based our early retirement funding needs on that budget. 

Early retirement income sources: Where our income comes from now and later

When we retired almost all of our retirement savings were in 401K, IRA, and Roth IRA accounts. We then rolled our 401K account funds into IRAs. In my case I was age 51 and my wife retired a few years later at the age of 58. We also had some cash in savings accounts. Our income during early retirement would come from our IRAs and the cash savings. Later we will have Social Security to also provide retirement income and lower our savings withdrawal rate. 

Withdrawal plan: Establishing a sustainable withdrawal rate

We knew what we needed to receive in income during early retirement since our budget was well known. Instead of settling on the often touted 4% withdrawal rate plus inflation each year we used our required budget amount. Then calculating its probable sustainability in retirement calculators (FIREcalc) using our portfolio amount and estimated future earned Social Security income.

My initial withdrawal rate was about 4.6% and my wife’s initially 6% of her holdings. Hers would only be that higher rate for 4 years. Then her withdrawal rate will drop to 3% once her social security payments begin. My withdrawal rate has dropped over the years. It will also decrease to an estimated 2% range once we’re eligible for Medicare and when I begin Social Security at full retirement age. This along with historical investment cycles was considered in the calculation when using the retirement calculator resulting in 100% success. Basically we accept having a higher withdrawal rate early in retirement for a short period of time with lower withdrawal rates later once our earned Social Security and Medicare is available.      

Retire early and often: Where any earned money during retirement goes

I had always considered pursuing opportunities of interest and passions in early retirement. My retirement lifestyle was funded by my IRA so anything earned was extra money. Any earnings from my retirement gigs and a short encore career were saved in new 401K accounts, used to pay off our small mortgage, and put into a savings account as cash. 

Portfolio income distribution: It’s a bucket thing

We use a portfolio bucket strategy to provide income during early retirement. Within our retirement funding IRA is a cash bucket that we receive our monthly direct deposit distributions from. As with our budget, we keep separate bank/credit union checking and savings accounts where our individual IRA monthly distribution goes.

Our portfolio is diversified with various stock and bond funds. All interest and dividends are directed to the cash buckets. Selected assets are occasionally sold to maintain our desired cash bucket amount. When I was working through my bucket list of paying opportunities my portfolio’s cash bucket was 6 to 8 months of my income distributions. Now that I have worked through my list and I’m no longer actively pursuing paid adventures my IRA cash bucket strategy is to have closer to 2 years cash, as is my wife’s.

Unspent monthly distributed money that we receive is saved in our bank savings accounts to be used as needed when monthly expenses exceed our distribution amount. Such as in months when annual property taxes or bi-annual auto insurance are due and our travel months. I also keep nearly 2 years cash in savings and CDs. If/when I take on a new paid adventure then cash/bucket adjustments can be made. 

Getting income during early retirement without penalty: Pre age 59 ½ access to retirement accounts  

Most of my savings was in tax deferred retirement accounts. My early retirement strategy relied on the SEPP 72t (Substantially Equal Periodic Payment) rule to get penalty free distributions before age 59 ½. I took a chunk of my portfolio to set up an IRA and locked into a SEPP 72t at the age of 51. It provided a fixed monthly distribution until I reached the age of 59 ½. I used these distributions to fund early retirement and paid income taxes based on my income tax rate for the year.

When I worked in paying opportunities I routed those employment earnings back into savings and mortgage elimination. My wife stayed working until age 58 to reach her 20 year service anniversary which gave her some retirement benefits. She saved 2 years of retirement funding in her savings account and didn’t need to begin IRA withdrawals until age 60 when the early withdrawal penalty would no longer apply.

Managing Taxes: Starving the Tax Monster

I purposely try to under-withhold taxes within the underpayment thresholds to avoid penalty. I never want to get a tax refund. Even though a savings account pays little interest it is still better than an interest free loan to the government. Not to mention delayed refund potential due to all the tax filing fraud that seems prevalent. When I work in paid opportunities it does raise my tax rate. I would set my W4 to withhold taxes at the single rate with 0 allowances to withhold the maximum. My portfolio distributions has a tax withholding of 10%. Even with that, when I worked in retirement I still owed money at tax filing time.

Without paid work our real tax owed is 5% to 6% of total retirement income. Our IRA financial planner’s system only supports 10% + withholding for federal taxes. So I suspend tax withholding on our IRA distributions from January through June and then have them apply the 10% withholding rate until year end. This works out where we owe a very small amount at tax filing time. We have no State tax withheld from our retirement income but fortunately our low taxable income means only paying at most a couple of hundred dollars a year. 

Social Security Income: We earned Social Security by paying into it and plan on getting it

Social Security seemed so far off when I first retired almost a decade ago. Now it is knocking on our door. Aside from all the strategies to maximize Social Security, when to apply and receive benefits is a very personal thing. We have run the numbers through every scenario on retirement and Social Security calculators. Based on our lifetime income differences and thus the resulting benefit amounts between my wife and I, our plan is she begins her benefit at age 62 and I wait until Full Retirement Age (FRA) 66.7. That time is still years away and I can decide then whether to wait until age 70. It will all depend on whether we need it due to market and portfolio conditions or any changes to Social Security that may come. 

That’s it in a nutshell. As you can see there’s nothing complicated.