The Four Fundamentals of Retirement Drawdown

We've talked about the investment order of operations here on bigger pockets money in order to minimize taxes during the accumulation phase. But just as important for those pursuing early or traditional retirement is how we withdraw or de-cumulate from our portfolios. Sean Malaney, the five-tax guy, and Cody Garrett, CFP from Measure Twice Financial Planners, have pioneered the withdrawal order of operations, and we are very excited to share this with you today. [Music] Hello, hello, hello, and welcome to the bigger pockets money podcast. My name is Mindy Jensen, and with me as always, is my not yet drawing down co-host, Scott Trech. That's right Mindy. I'm accumulating both a portfolio of financial assets and a portfolio of introduction funds. All right, we are so excited to be joined today by Sean Malaney and Cody Garrett on the podcast. We have had them several times here at bigger pockets money, and they were most recently here on our last episode to talk about taxes and early retirement, and how your effective tax rate will almost assuredly be lower after you leave your job. Today, we're going to cover the mechanics of how that actually works, and a order of operations about how to minimize those taxes in early retirement. Sean and Cody, welcome back to bigger pockets money. Thanks so much for having us back. We're going to be back. All right, Sean, can you please, without further ado, tell us what these four fundamentals of retirement drawdown are? Yes, Scott, and I'm going to give you just a little ado if you don't mind. All of us come into retirement, regardless of when it is, with different portfolios, different backgrounds, different investments, different mixes of taxable, Roth traditional. But what we do is we sort of break it down if we could just anchor us for simple fundamentals for retirement drawdown, and then we can do the tangents, but in my case, and all that sort of stuff, we want to start off with like an anchor with a framework. And so in a theoretical, ideal world, we would draw down with the following four rules, and that's it. One, we spend our taxable accounts first in retirement, our first spend assets are our taxable accounts. Then when those taxable accounts are depleted, we then start spending down our traditional retirement accounts. That's the old traditional 401K traditional IRAs, that sort of account. Generally speaking, we delay so security until age 70. Now there are variations of permutations on that, but we're generally talking about single people, the higher earning spouse, very financially successful. There are several benefits of delaying so security until age 70, particularly from a tax playing perspective. And then our fourth rule of drawdown is we use our tax-free pools, like our HSAs and our Roths strategically. So what I mean by that is we use them to help manage for premium tax credit if we're early retired and on ACA medical plan. We use them maybe to fund a car purchase or other major purchase in retirement, or maybe we use them to help avoid creeping into the next tax bracket. So in a theoretical, ideal world, those are our four drawdown fundamentals. And then we can think about, well, wait a minute, in my case, I've got this, I've got that, we could start doing little tangents off those. Awesome. Can we, let's boil this down to something into that next layer of practicality here, right? Like this is not true in all circumstances in every situation or whatever, but it's the fundamental pillars of drawdown here. How does that translate to the lived reality that most people go through when they retire? The way Cody and I approach it is we think of retirement in five general phases. First phase is our retirement date to the depletion of our taxable counts. The second phase is what we refer to as the golden years. These are generally our birthday years for 66, 67, 68, and 69. Then it's age 70 to the beginning of RMDs. So that's going to be for those born in 1960 and later a five year period. Then we have our beginning of RMDs and if we're born in the year 1960 or later, that's age 75. And then we have our widow and widower years. For those singles out there, just combine phases four and five and you have a four phase retirement, so have a five phase retirement. I have a question though. Why am I focusing on taxable accounts first? Great question, Mindy. There's several reasons for this. First is what we talked about in the previous episode, low capital gains and basis recovery. A great way to keep our income low in the first part of early retirement is to live off capital gains. We live off 150,000 from our portfolio, but we only trigger 100,000 of income or 50,000 of income because of basis recovery and its tax favored. Two other advantages of that. One is sequence of return risk. That's a whole other series of podcasts. But one thing that amps up sequence of return risk is expense in the early party retirement. A great way to limit or just eliminate income tax expense, at least federally, is to live off capital gains. That's a really good time from a sequence of return risk perspective to have very low tax expense. Because if we can keep our expenses lower in the first part of retirement and mitigate our sequence of return risks, so that's helpful. The second thing is something we talked about in the first episode, dividends. Yes, we live in a low yield world, but one, they still do pay dividends. One percent, two percent, three percent depends on your fund. And two, it's not guaranteed we're going to keep living in a low yield world. One way to tax those dividends, and we talk about this in the book. Well, we could do maybe we're 60 years old, we start retirement. We say, oh, we have this taxable portfolio, but I'm worried about RMD. So what I'm going to do is I'm going to live first off the traditional IRA to reduce the future RMDs. What's a valid playing tactic? But it comes with a drawback that one percent, two percent, three percent dividend from your taxable portfolio, you just found a way to tax that. If you just lived off capital gains instead, the odds are now, yeah, if you're living off 400,000, you're probably going to pay tax on it anyway. But for many early retires, the way to avoid dividend tax at the beginning of retirement is to live off the taxable accounts first. And then the last reason is a more general reason, credit or protection. So traditional IRAs, traditional 401ks, Roth IRAs, Roth 401ks have varying degrees of generally speaking pretty strong credit or protections, taxable accounts don't. So, you know, if everything else was equal from a tax perspective, we'd still rather draw down our taxable accounts first, because those are the least protected, basically generally speaking, not protected assets. Why spend down a credit or protected asset when you could spend down a non-credit or protected asset? Now, look, folks should be thinking about personal liability and umbrella insurance, you know, tax or asset locations, not the only consideration here, but why not belt and suspenders it at least a little bit. So yeah, I'm very fond of spending down those taxable accounts first. That was a great answer. Thank you. We are going to take a quick ad break, but more from Cody and Sean, when we're back right after this. When spring hits, some people suddenly just want to declutter the garage, clean out the closets, and get everything all organized. Whether or not that hits you, Monarch will do your financial spring cleaning for you. 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All right, thanks for sticking with us. We're back. So we get that we are going to spend down the taxable accounts first. What else should we think we'd be thinking about in phase one of retirement? So the big one for many early retirees is the so-called premium tax credit. On an ACA medical insurance plan, it costs thousands of dollars, but that cost could be significantly reduced based on the premium tax credit. Now, the premium tax credit is income limited. So that means that if you get above a certain income, you get very little or no premium tax credit. So you have every incentive to the extent you can use planning to do this to keep your income low. How do we do that? There are different levers you could pull in this regard. One is this asset location thing we talked about last time. Let's keep our taxable bonds in our traditional retirement accounts, not in our taxable accounts. Something Cody loves to talk about, specific identification. This is where we go into our taxable accounts and we look up the lots in each holding or the holding. And they slice and dice it based on every time you purchased or dividend reinvested in that investment, you can have higher basis slots, lower basis slots. You can essentially elect to sell the higher basis slots and reduce gains and reduce income that way. One thing I think that's worth considering is turning off dividend reinvestment. So you go by a mutual fund at Vanguard Fidelity Schwab during your accumulation years, you generally elect to reinvest the dividends. It's a great little trick to help keep building up your portfolio at least a little bit. Well, why not in early retirement turn off that dividend reinvestment so the check comes home to you so that you then use that check to fund some of your living expenses and you have to trip fewer capital gains. Both these two are somewhat marginal plays, they're timing plays, but on the margins they can matter. And then the other thing to consider is an HSA contribution starting in 2026. If you're on a bronze plan, you'll automatically be able to contribute to a deductible health savings account, you can be retired to deduct the contribution that lowers income that might help increase the premium tax credit. And then just the last thing to think about is Roth conversions. And I think we need to be measured and conservative and Cody, I'm curious your perspective on this. But one thing I think about is too often when we think about folks out there, think about retirement, they sort of perceive this quote unquote need to do Roth conversions. I think need is too strong of a word. And I think in early retirement, Roth conversions can have two drawbacks. One is it can increase your federal and state income tax. And two, it can reduce or eliminate your premium tax credit, which argues for maybe being very conservative and very strategic about Roth conversions. But Cody, what do you think about that? Yeah, so I think, you know, first of all, this need for Roth conversions. I think that comes from the excitement of this word Roth because everybody wants tax for your money. And you start hearing it's Roth now or never. So you better either contribute to Roth retirement accounts or you better convert to Roth. So the first part is stepping back and saying, well, I do it now later or never. Also just understanding that this is kind of fun that most people pushing Roth, it's really this fear of being crushed by taxes and retirement. And a big part of our book is actually showing over 120 step-by-step calculation examples to show that's not actually the case. You're not going to get crushed. And I will say in terms of Roth conversions, yes, Roth conversions might be able to reduce your lifetime tax liability. But I have never seen Roth conversions make or break a retirement. I've never seen somebody be able to have a successful retirement because they did Roth conversions or contributed to Roth versus those, you know, those who did and those who didn't. So I would say, first of all, you don't need Roth conversions. But in phase one, something that's really important, even though we don't necessarily need Roth conversions. We also don't want to waste the standard deduction, right? So the standard deduction, you know, actually got increased a little bit with this new tax law changes in 2025. You know, but one example, a married couple in 2025 under age 65, they have a standard deduction of $31,500. Another way to think about that is your first $31,500 of income is federally income tax free. We would want to take advantage of that 0% tax rate. And we want to take advantage of that standard deduction with what income would be the least favorable, which is your ordinary income in the phase one of retirement. Again, what's most important is being able to maintain your desire lifestyle. So that means, you know, hey, take the money out of your checking account, your savings account, maybe sell some securities, you know, in your taxable brokerage account. Once you've maintained your desired lifestyle in that year, then you can say, Hey, I'm going to calculate how much income did I just create with creating the income source, the cash flow I need for my life. And you might end up saying, wow, like, you know, buy strategically taking money from these accounts. First, I actually only have income of $5,000. And my standard deduction married filing jointly is $3,500. I actually have some space in that standard deduction at 0%. How can I fill that up? Right? And the best way to fill that up was with ordinary income. And better yet, converting that money from traditional to Roth, you don't need that money to live because you already got that money from your checking savings taxable brokerage account. So I'm going to take advantage of quote unquote taxable income that's actually being taxed 0%. By again, you know, instead of contributing to Roth 401K at work, I actually have the opportunity now in retirement to take my what were traditional 401K contributions and earnings. I'm going to convert a little bit of that over to Roth IRA completely tax free again up through the standard deduction, but also Sean, you can kind of carry with this that yes, there's the take advantage of the standard deduction. But we also have to consider is there kind of like a phantom tax or like a tax torpedo that even though I'm being taxed at 0%, how is that additional income affecting my premium tax credit, which is another way saying by paying 0% on Roth conversions, am I actually paying quote unquote tax by getting less of a discount on my health insurance? Yeah, Cody and those three considerations. One, if you have zero income, then you might want to do a Roth conversion to just get to the level needed to turn on the premium tax credit. Generally speaking, you got to look up your state Medicaid income eligibility. It's usually 138% of federal poverty level, not always though. Look at your own states rules. But if your income is just so, so low, you may need to do a Roth conversion to qualify. Then once you do qualify based on income, then you're looking at a diminution in the premium tax credit. And this is very much varies usually for planning purposes. I think 9.5 to 15% roughly speaking. So every dollar of Roth conversion reduces, you know, 10 cents on the dollar, 15 cents on the dollar, the premium tax credit. So that's like a backdoor 10% or 15% 12% whatever tax. The third thing is this 400% of federal poverty level cliff in 2026. All the premium tax credit goes away. If your income is over 400% of the federal poverty level, if I am recalling correctly for a household of two. Or a retired married couple, no dependence. I think that would be about 84,600 of income. So that is something to think about. Oh boy, I want to keep my income low to avoid that cliff and going from a few thousand of premium tax credit to zero. And that's part of the reason that the golden years are the golden years. So going to our 66 through 69th birthday years, the premium tax credit has just fallen off the table. It's not a plan consideration anymore. We also don't have the RMDs. We don't, so security we can delay. So now the world is our oyster from a tax planning perspective. And to our thinking, there's sort of two paths during the golden years. The first path is the retiree still living off taxable accounts. So this is somebody who didn't diminish their taxable accounts prior to getting on Medicare at age 65. So what this person could do is what we refer to as tailored taxable Roth conversions, TTRCs. And what this is doing is we're doing a Roth conversion up to the level of the available deduction, which is going to be a combination of the standard deduction or itemized deduction. And generally speaking, the senior deduction, that's a new development in 2025 from the one big beautiful bill, pass in July. Okay. What we could do is we could add up our interest income or not qualified dividends and say, oh, well, that's $3,000. Well, what's my available standard or itemized deduction plus the senior deduction for many retired married couples in 2025? The total is 46,700. So we would consider a Roth conversion that subtracted the deduction from the other ordinary income, my little example, $3,000. And quick math on a podcast, $43,700 Roth conversion. And that would go against the available deductions. The other parameter though is we want to leave our total taxable income no greater than the top of the 0% long term capital gains tax bracket. So a limiter on that $43,700 Roth conversion I proposed would be, okay, let's just run that through total taxable income just to make sure all our dividends and capital gains still go off at the 0% rate. That's why we called it a tailored taxable Roth conversion. What we're doing there is we're measuring twice as Cody says so that we can essentially pay zero federal income tax on our Roth conversion. We don't push any cap gain income from 0 to 15%. Yeah, maybe we pay a little state income tax, but that's no big deal. and that's a pretty advantageous path. This is a path again, only if we're in our mid to late 60s and we still are living off taxable accounts. - And I'll add a note here that this idea, some people say, "Well, if I am married, my spouse isn't the exact age as me." Right, so Sean, maybe I'll ask you this question. So let's say that spouses are like 10 years apart. Like how might you think about kind of, these spouses being in different phases simultaneously? - Yeah, I think then you've got to balance it. So you've got to balance a premium tax credit with this potential opportunity. And it may be that, hey, that retired spouse has retiree health care from an old employer. That exists. Maybe they worked for a state government or just a legacy corporation that happens to have a retiree health benefit or maybe they're on a bronze plan and it's not all that expensive and you prioritize the Roth conversion. Now it's just a, it becomes a balancing act. I will say that and there's no, you know, again, that's probably the reason why we have the four fundamental rules and then we sort of could go on these tangents and the absolutely sometimes, you're just gonna have to think about your own circumstances. - I will say too, like there's a lot of concern about the cost of health care, especially people go, oh my gosh, like now they're putting in this new, they're bringing back the cliff, the 400% federal poverty level. And they're thinking, "I'm not gonna get a premium tax credit and retirement. I cannot retire." But I wanna just let you know here that, you know, looking at, you know, real numbers the other day, kind of, you know, for a single taxpayer and early retirement on the ACA, if they didn't receive any premium tax credit, right? Meaning their incomes over 400% the federal poverty level, you know, starting 2026. Like they might be paying five or $6,000 a year for a bronze or silver plant. Again, you know, it's really, you have to be thoughtful about like which, you know, if you have any medications or chronic health conditions, thankfully, you don't need evidence of insurability for those ACA plans, but just keep in mind that, you know, $5,000, $6,000 a year expense for health care, most likely won't derail you. Assume you already have sufficiency to retire early to begin with. - This is amazing how much thought you guys have put into this and how detailed these assumptions and analysis are, how it's not just the tax brackets and federal and state level, but also the premiums for health insurance that you're optimizing for here. It's just, it's just a fantastic analysis. I have so little to add here, so, yeah, thank you. - Yeah, well, thanks Scott. You know, the other thing is we could think about is, many early retirees are going to run out of taxable accounts by the time they're age 66, and that's okay. So, what happens then? Well, all right, we gotta live off these traditional retirement accounts. For the most part, maybe we have some rots, we could talk about that, but we now mostly have to live off these traditional retirement accounts, and oh no, isn't that taxable? Isn't that a bad outcome? Well, to my mind, it may not be that bad of an outcome because of what we refer to as the so-called hidden Roth IRA. So, what this does is it says, well, okay, you're in your mid to late '60s. You're not collecting so security yet. Yeah, maybe you have $2,000 of interest income, but you don't have taxable brokerage accounts, so there's no dividends, no non-qualified dividends. The only ordinary income is the $2,000 of interest income. Well, that means the comment, essentially when you take out from that traditional IRA, the combination of the standard deduction or if you're itemizing, plus the senior deduction, is essentially a hidden Roth IRA. It's reduced by ordinary income, so that $2,000 of interest, my example. But essentially, you're taking money from a retirement account, traditional IRA. It could be over $40,000 if you're married couple, you're both 65 or older. 40,000 plus could come out at a 0% tax rate. Well, wait a minute, I'm paying zero federal income tax on a retirement account distribution. Isn't that a Roth IRA? No, it's a hidden Roth IRA because it came from a traditional retirement account. Now, some might say, well, that's only because of the standard deduction. Well, I say, okay, well, the alternative was to only do Roth contributions, right? At least a theoretical alternative when you were working was to only do Roths. Well, okay, you only do Roths, so at 66 you only have Roth accounts. Well, that means you're wasting years of standard deductions and senior deductions. You could have taken a tax deduction, you're working years, and then bailed the money out at the 0% rate because of the standard deduction and senior deduction. The other thing I'll just mention is, well, okay, you may need money beyond the hidden Roth IRA. Okay, it's tax at 10%, 12%. You know, we don't like paying tax, but it's not all that onerous to have a good chunk tax at 10% or 12%. - That's how you're 401K people for the people in the back. That's what you're saying here. First. - Yeah, and I wanna add there that, you know, in this example of somebody kind of in their, you know, their late 60s before social security, if they only took distributions, like they only have ordinary income from, you know, taking money out of a traditional retirement account. Again, after 65, that person, if they distribute $100,000 from that traditional IRA, they're paying about $7,300 in federal income tax. Right, so again, about a 7.3 effective tax rate. And you consider like, what is that tax rate? That effective tax rate of 7% on, you know, $100,000 in retirement of all ordinary income, versus what tax rate might they had excluded or deducted when making that traditional 401K 403B contribution. Right, again, a lot of the listeners who are still on the path to early retirement, we might be in the 22, 24, 32, and, you know, higher brackets when we're excluding deducting these contributions. And we just talked about somebody in retirement, you know, taking $100,000 out. Again, that's not a small amount of money for a lot of our listeners, you know, distributing $100,000 or converting $100,000 and paying an effective tax rate of a little over 7%. You know, in the book, we call that, you know, the, so and so, beat the IRS, right? We're trying to just pay the least amount we legally owe, not just in a single year, but throughout our working years and our retirement years. - You guys are very precise in the amounts that we're talking about here, how to not trigger, you know, as little income tax as possible. But I think the goal is, again, not, you said it earlier as well, not to pay the least amount of taxes, it's to live, to lifestyle that you want, while paying the least amount of taxes here as well. So, you know, I go back to basic personal finance strategy here. This is where, you know, an advantage, like a paid off home comes into play, right? When your home is paid off, you don't have to realize the income from these other sources to pay the mortgage, for example, paid off cars, those types of things need to be set up here. But let's say that, I know, I think there's another component here of spending the taxable accounts first as great tax advice as we've learned here. And then the 401k of the pre-tax accounts next. How do I bleed into those? Like, when, do I just spend, I literally spend down the taxable account all the way to zero in a certain situation before taking my first distribution from the pre-tax accounts? Or is there any like hybridization of this that goes on at all? - Scott, in a world without the premium tax credit, it is a 100%, 100% analysis. Spend down the taxable accounts to zero and then start traditional IRA distribution, traditional 401k distributions. And then spend them down to zero and then do the Roth. I would argue there, for most Americans, you're probably not gonna get down to zero. But there's an argument for that, although I would say at some point, maybe you would want to take some Roths to avoid, say, the 12% of the 22% bracket. I would say be much less doctrinaire on spending all the traditionals before the Roth, but there is at least some component of that. But I will say this premium tax credit comes into the picture. So in the book, we have an example of someone who, they're 58 when they retire. It's a married couple, I believe. And they have three years worth of taxable accounts. And so what we say there is, oh, you know what they might want to do to help optimize for premium tax credit, they may want a blended strategy. So they would take some amount of income from the traditional retirement account, starting at 58, like a 72T or rule of 55. And they would do some taxable account distributions so that over the seven year premium tax credit window, they sort of moderate their income versus, oh, in the first three years, we have very low income 'cause we spend down the taxable accounts. But in these last four years, we have very high income 'cause it's all the traditional retirement accounts and we lose out on premium tax credit. So there is some hybridization when we sort of layer on the premium tax credit. Now, like I said, there are some people who have former employer, healthcare, and this is just an academic issue. For them, I tend to come be a little extreme on this one. I mean, you gotta do you, but I tend to say, yes, spend down those taxable accounts first and then go to the traditional retirement accounts. Do you think in practice, it means that people will just never spend their Roth IRAs in many or most cases? It's an interesting question, Scott. I think there's a bias towards Roth and so many financial planners love Roths and there's nothing wrong with that. But I do think we're getting to a point where we need to start thinking about spending these things down so it's not just for the next generation. It's great to leave somebody in the next generation. You gotta do you in terms of your family dynamics and what you wanna leave to the next generation. But I think we do need to start being a little more intentional around, wait a minute, we do have these Roth balances and maybe we're buying a new refrigerator or a new car this year or we're placing the roof or we're just trying to manage for premium tax credit. I think one of the little subtle messages in the book is maybe we should be thinking about doing Roth distributions earlier in retirement rather than later because of the premium tax credit. Essentially, when we do tax planning in the first part of retirement, if we're on an ACA medical insurance plan, we're essentially subject to two taxes. Later in retirement, we're only subject to one tax because we're not no longer on this premium tax credit issue. So maybe what we do is in the early part of the retirement, we reduce our income more [BLANK_AUDIO] you know, spending less from traditional even taxable, do some Roth tax-free, optimize premium tax credit, and then keep going after getting on Medicare at 65. And I've got a little visualization here. This is kind of a real kind of example, right? So let's say at a very couple of 55, they retire early, they go into ACA, they're controlling for the premium tax credits, but let's assume that even at their age, they have kids on their health insurance as well. So they've got dependents, their total cost to healthcare might be $15,000, $20,000 a year. And they really want to go on a Viking cruise. Like that was one of their first thing, they're like, we want to do that traditional retirement thing. As soon as we retire, I'm taking them, and they're significant others, if they, we're gonna go all on a Viking cruise, this is gonna be a massive trip. But guess what? If we pay all of that from, you know, spending down taxable brokerage, selling things, maybe even taking money out of traditional retirement accounts, maybe we've just completely blown that opportunity to get $20,000 of healthcare free. So they might take money out of their HSA. Sean calls this the previously unreinversed, qualified medical expenses. He calls this the Puck Me, P-U-K-P-U-Q-M-E. Just in case you need it more. But taking those tax free reimbursons from the HSA or taking money out of the Roth IRA, even for the early retiree, what's cool about that is again, assuming they can take it out tax free, maybe they're just taking their contributions back from the Roth IRA, not diving into the earnings portion. Like what's cool is they might get free healthcare in retirement as millionaires going on a Viking cruise with their family. Some people might say this is morally wrong to take advantage of that, right? Being a millionaire, getting free healthcare. But you know, Sean and I more take that just kind of play within the game we've been given. Again, don't pay more tax, you know, don't tip the IRS if it's not necessary. - I'm 35 here and I'm very well off, have been very fortunate in those types of things. And I personally will not take the subsidy or I will not plan my financials to take the subsidy there. But more than that, I will not plan on it being there for me in 15 years because I do not think that the electorate wants a multi-millionaire early retiree to be the recipient of that. That is not the intent of the tax code or the Affordable Care Act. Does that basic assumption of a change in the political dynamic for the ACA Act begin to impact any of the quick key assumptions in your presentation here? So Scott, really good point that early retirees have sort of backdoored into pretty significant benefits on the medical insurance side. A few thoughts on that though. One, it's going to be somewhat difficult to take away the benefits from the early retiree without hitting the self-employed. And I think we're moving into a world where there's gonna be more and more and more self-employment. And so you're gonna have more and more self-employed folks on ACA plans and how do you balance taking away the benefit from an early retiree versus taking away the benefit from a self-employed person. The other thing I will say is all we're talking about here is how much do you pay for your medical insurance, which people sort of treat as a tax. It behaves like a tax, but it's technically not a tax. It's just another expense you have in your life, right? You have your rent expense or your mortgage interest expense, you have your grocery expense, you have your health insurance expense, and a political decision was made 15 years ago to run that for many Americans through the internal revenue code. So that means it behaves like a tax, but it's not a tax. I absolutely think there could be changes in this regard. What those are, I have no idea. And yes, this is definitely one of those where you can't just set it and forget it. And yeah, especially, Scott, if I was as young as you are, I would not just say, oh, well, the rules of 2026 are just gonna be the rules when I early retire. I don't think that's a good assumption. Where they're gonna go is definitely speculative. I will say that as if you're looking for this kind of thing, the health insurance, even if you don't qualify for these subsidies and you're all looking for them, it's like a thousand bucks a month for a family of four. And the health share programs are really growing. And that risk profile that I think people associate with those is going to flip over the next couple of years as well. I mean, that's like 500 bucks for a family of four. These considerations can make a big difference if you're a multi-millionaire early retiree because you can self-insure to it and extend and get the catastrophic protection with these types of programs here. Did you say health insurance is a thousand dollars a month for a family of four with no subsidies? Scott. That's right. Mine is $1800 with no subsidies. I got a significant plan at that level when I went shopping. So and that's a high deductible plan, but it's for the four of us and that was a month. I think it was a good insurance too. So that's, you know, there's another one that's slightly cheaper, like a five or eight dollars and a cheaper with Kaiser, but it's even better. I want to know where you're shopping because that's not what I found. Although I did, I did have a specific doctor that I needed to have covered. So maybe that's it. Maybe she wasn't covered on your plan. And one important piece moving into 2026 that, you know, even without a premium tax credit, a lot of people have effectively cheaper options for health insurance, especially we talk about starting in 2026. All bronze plans through the ACA will be high deductible health plans for HSA contributions, not only the ability to contribute to an HSA with a cheaper plan, but also keep in mind that HSA contributions are adjustments to income that lower your income for eligibility for that premium tax credit. So there's kind of like a roundabout way, at least in 2026 forward. And again, I don't know if health insurance will always have cheaper options, but there are some kind of pros and cons of how we're moving forward with the health insurance marketplace. All right. We're going to withdraw for one final ad break, and then we'll be right back after this. When the change in season hits, some people suddenly just want to declutter the garage, clean out the closets, and get everything all organized. And that's great. If that's you, or if it's not you, either way, let Monarch do the financial spring cleaning this year for you. Another feature I love about Monarch is the weekly AI recap. 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They don't just help you form your business, they give you all the free tools you need after you form, like operating agreements, meeting minutes, and thousands of guides that explains all the ins and outs of earning a business. P-I-N-E. Please note that returns are not guaranteed and may vary based on fine performance. Let's jump back in. I think that the direct primary care, coupled with the health share thing is going to continue to be a trend, even though many people are uncomfortable with it right now. And I think it's going to be first adopted by the early retirement community modes in there, especially those who don't qualify for these subsidies. But anyways, it's a key, I think it's worth this tangent here because so much of the thesis in this deck is centered around not just tax planning, but also minimizing the income back that could disqualify you or diminish the subsidies you're getting for health care. That is absolutely a fair point. And yeah, your mileage might vary based on one actual cost as Scott and Mindy, these costs can vary and two, maybe ever-tirey health care. That's a-- there's just different permutations accommodations here. And I think going back to the phases of retirement, one of the big themes of our book, of our planning approach that we favor is keep your ordinary income low as best as possible. And delaying Social Security just helps do that. And if you're otherwise affluent, why not do that to keep the planning window open whatever your plan is going to be? If we move to our age 70. So age 70 is important because there is absolutely no ability to keep delaying Social Security at that point. You got to take it or you're just leaving free money off the table. So you're going to take that money. That's going to create taxable income. That fills up the-- the standard deduction, the 10% and your planning opportunities become somewhat more limited. However, we're not subject to RMDs, so that's helpful. This could be a time to use some strategic Roth distributions. Hey, you know, the last $10,000 of distributions this year are going to bump me into the 22% bracket. All right, forget that. I'll take that last $10,000 for my Roth IRA. And the big one that I'm very fond of for retirees is qualified charitable distributions. This is where when you're donating your charity, you don't really check to the charity. You go online to your IRA portal and you say, "Hey, IRA custodian, send this 500 a month or this $1,000 contribution or whatever it is directly from my traditional IRA to this charity." That is a taxable amount that is excluded from taxable income. And oh, by the way, you're probably taking the standard deduction as well. So you're getting a high standard deduction plus a charitable deduction. Look, it really only works for those who are otherwise chariomely inclined. But many retirees are chariomely inclined. So at 70 and a half, you start doing QCDs, qualified charitable distributions, instead of writing checks to charities. And you're now hiving down your traditional retirement account, a balance in a tax-free way. And oh, by the way, that's going to reduce the future RMDs, the required minimum distributions. We'll talk about in a minute because you've taken that money out of your traditional IRA. So very helpful in that regard. The party doesn't go on forever. So what I mean by that is eventually, you have to take required minimum distributions out of your traditional IRA, your traditional 401k. Now, for those in the audience born in the year 1960 or later, the Secure 2.0 Act says, "All right, you get to start those RMDs at 875." That's really interesting because that means that RMDs last for a rather narrow slice of your life. Go on so security or ssa.gov. The actual aerial tables are very interesting when we're thinking about 75 year olds and how much longer they have to live. It's not as long as you might think sadly. And so these RMDs may not be as big of an issue as you might be originally worried about. The other thing to think about is there are plenty of ways to mitigate the negative effects of RMDs, right? Because who wants to be subject to a rule? Who wants to be required to take an amount out of your traditional 401k or IRA? But you do. Well, okay, what are those tactics that we can employ to reduce the harmful impact to the extent they're harmful of RMDs? And we have a list of seven here Roth conversions in various phases of retirement, particularly in the golden years, that reduces the traditional IRA balance. QCDs like we just talked about, asset locations. So we've talked about, oh, we like having our taxable bonds in a 401k because that interest income is hidden away from our tax return. We like that. Well, a secondary benefit is from an expected return perspective. And look, we're not giving investment advice. But if we want our portfolio to have some stocks and some bonds, okay, we generally expect returns on bonds to be more modest than returns on stocks. Your mileage may vary, but that's our expectation generally speaking. So why not have the lower growth assets in the traditional retirement accounts? If we're going to have somewhat lower growth somewhere in our portfolio, a traditional retirement accounts are really cool place to have that because our RMD is computed as a percentage of the account balance. If we use asset location, putting our bonds in our traditional retirement accounts to help mitigate the size of those things, boy, that's helpful from an RMD perspective, as well as keeping current year interest income off the tax return. One thing that helps reduce RMDs is living off our retirement accounts before age 75. Most early retirees are before age 75 going to need to access their traditional retirement accounts for living expenses. Well, guess what? That means your NFL Sunday ticket subscription helps reduce your future RMDs. So enjoy watching football and enjoy a slightly lower RMD in the future and less tax. So that's good. RMDs themselves, RMDs are a self correcting problem to at least a small degree. So every year's RMD comes out. Well, that means that that balance isn't there for next year to be taxed under the RMD rules again. Number six is something I already alluded to life expectancy. People worry about RMDs and it's like, wait a minute, how long do you think you're going to live? When you start these things at age 75, how long do you think this is going on? Now look, I hope it goes on for a long time. I hope this is a good problem to have for a long time, but we just don't know. And then in the early retiree community, there's a seventh mitigator, which is the early withdrawal strategies. So people worry about RMDs, but then they're on a 72T payment plan. And I'm sort of like, well, wait a minute, you're taking money out of this traditional retirement account in your mid fifties. So 20 years before RMDs start and you're worried about this, you're already reducing this problem 20 years in advance. You got a 20 year head start on the IRS. So if you're using the rule of 55 or a governmental 457B or a 72T payment plan, well, by definition, that means you are getting ahead of the game when it comes to RMDs, you probably don't have to be all that worried about RMDs because you're already ahead of the game. So yeah, I mean, I think, you know, RMDs and Cody, I'm interested in your thoughts on this. RMDs sort of have this wrap as being this bad thing. And boy, they're going to hurt your retirement, but you know, in our analysis, we find they're generally not all that detrimental. And if they're detrimental, it also has the happy accident of, oh, you're really rich. And you have some tax inefficiencies. So, you know, Cody, what are your thoughts on RMDs? I have work with clients. They're in their 90s. Their RMDs are $400,000 a year. You're like, oh my gosh, that's so much taxable income. Be think, well, wait a minute, how much money does this family have? If that's just a portion of their IRA, how much do they have in their IRA? Right. And also just keep in mind, you know, if filling up those, even if somebody with $400,000 of ordinary income, they still get to fill those lower brackets, you know, 0% standard deduction, the 10, the 12, right? So we actually have examples of even, you know, a late traditional retiree or even a surviving spouse, the surviving widow, they call this the widow's tax trap. You know, the we've got traps all over the place and retirement planning. But what's fascinating is, first of all, you know, moving to phase five, the surviving spouse, you think it and typically in terms of their age, if they're already taking RMDs, their pre-deceased spouse was taking RMDs, like how many more years, even if they're like subject to this tax trap or this tax penalty, how many more years do they have to be subject to that penalty? Maybe just a few years, maybe you know, five, 10 years, women actuarly live longer than men for a variety of reasons that we, you know, we don't know all those cases, but just keep in mind that even if something is a penalty, by the way, we've put the word penalty, this little sidebar, we say the word penalty in a lot of cases, you know, the early withdrawal penalty, the IRS calls it the additional tax. So sometimes we kind of create this language to make this stuff sound way more intense than it is, but even with these so-called penalties, we've seen surviving spouses, widow, widowers still have very low effect of tax rates. They have, again, it's a good problem to have as we call it, they have sufficiency, they can still maintain their desired lifestyle and yes, pay a little taxes along the way. And also, when their errors inherit this money, they might have another 10 years to distribute those traditional retirement accounts. So, you know, we're really focused on the lifetime tax liability, including going into the next generation, your financial family tree, as we say. But just I think we can kind of close here on the phases that in each of these phases, fear isn't the driver of our decisions, right? It's optimized tax planning, really focusing on the quantitative optimization of tactics and strategies, while maintaining your desired lifestyle, having those memorable experiences with your family while you're alive, rather than just leaving this big hunk of, they always say that unrealized capital gains can also mean unrealized experiences in life, right? So, if you're holding onto these things forever, you know, what are you saying no to by saying yes to deferring as long as possible your taxes? And that leads us to the widow or widow or phase of retirement, sometimes pejoratively called the widow's tax trap. And it's absolutely true that the death of the first spouse is going to increase effective tax rates in almost all cases. What happens is the income drops, but not by 50 percent, but what generally happens is now you're subject to the single tax brackets, the single standard reduction, and what not. So, the odds are that effective rates are going to increase at the first spouse's death, but just how bad is it? So, we have a bit of an extreme example, a picture, a $200,000 RMD in 2025 dollars in the widow's tax trap. And how much of that RMD is going to be subject to a federal income tax bracket over 24 percent? And our quick and dirty math on this says very roughly speaking, approximately 32,000 of that 200,000 is going to be in the 32 percent bracket. So, that means that even for a $200,000 RMD, which most Americans will never hit, right? It's just an amount, we'll talk about the size of the IRA that generated that. Even in that extreme case, most of the RMD comes out and is taxed federally at 24 percent or less. So, even in this really extreme case, basically what happens is your $200,000 RMD suffers a tax inefficiency for 16 percent of it. Not nothing, but certainly not something to fear. And you'd say, well, wait a minute, how do I have a $200,000 RMD? Well, roughly speaking, you could have a $200,000 RMD if it was a little bit more than a $4 million traditional IRA of an 80-year-old. So how many people are going to have $4 million traditional IRAs? Will it happen? Absolutely. Is it a common outcome? No. And you know, the other thing I think I just add here is it's actually not a really bad place for it to happen because picture this 80-year-old widow. What's she doing with that $200,000? Right? Her lived experience is just fine, even though she has a bit of a tax inefficiency. It's actually a pretty good place to have a bit of a tax hike because you're not married with three young kids at home and you're not at the beginning of retirement where your finances are more perilous. She pays a little higher taxes as an 80-year-old widow who's probably not living that large anyway. She's going to do just fine with her $200,000 RMD plus Social Security and probably some other assets. And the other thing too is even that inefficiency can be overcome. It might just be that this woman, this widow in our example, is chariobling inclined. She could do a $32,000 QCD and now not a penny of her $200,000 RMD would suffer negative tax rate arbitrage. It would all go out at $0.24 cents on the dollar or less. Now yeah, she'd have some, they call it Irma. It's a small surcharge on Medicare. It's not that there's no ancillary or bad consequences, but it's certainly not something to be feared as I think the theme that Cody and I keep coming back to. And generally speaking, it tends to be that the widow's tax trap is a little overstated and oh by the way, two other things on the widow's tax trap. One, all those mitigation tactics we talked about on RMD's, asset location, QCD's, Roth conversions, you know, on and on and on. Those reduce the widow's tax trap and the other thing about the widow's tax trap in order for it to be a very relevant consideration, you need distance between the spouse's deaths, which is very possible, but it's also possible there's not that much distance. If one spouse dies in 2040 and the other spouse dies in 2041, the widow's tax trap is just not a big consideration in their financial life. So that's just something to keep in mind. So Mindy, we've said a lot. Have we blown your mind away and you don't even want to retire now. You're just going to keep on working or are you now looking forward a little bit more to retirement? First of all, we should never let the tax tail wag the dog. So I am going to continue doing what I'm doing. And when I have to pay a lot of taxes, it's because I have a lot of money. They're not taxing me at 86% and I'm just left over with almost nothing. They're taxing me on a large portfolio. So I think that more taxes you have to pay the better off you are. And that's, I don't think that I know that. That's how it works. It's percentage of what you've got. So no, I'm not going to discontinue my investments. I'm still investing right now in, you know, now it's like, we've hit our fine number and then we have a little bit more than we need. So now it's like, it's a game. How big can I grow that? One of the subtle themes of our book is assets tend to become income very efficiently. And Scott raised this previously, you know, they tend to in tax investments, whether it's traditional retirement accounts, taxable accounts, Roth accounts relatively lately. And look, we can politically agree or disagree with that. But it is what it is. Right. You know, retirement as Cody's talked about effective tax rate, it may be that a lot of folks listening to this today gets retirement. They're like, wow, basically retirement can be the best tax cut of your life. Hey, you leave the workforce and you're now living on investments, whether it's traditional retirement accounts, taxable Roth, and it turns out you tend to be relatively lately taxed. And Mindy, you made a great point. The exception of that rule is for the very financially successful. And too often the tax discussion in the personal finance realm focuses on one or two of the trees and misses the forest. If you're going to have tax inefficiencies and retirement, the odds are it's because you're a wildly successfully financially. Now that doesn't mean we don't do tax planning. We had seven mitigation steps. Now one of them was your own mortality. So that's not so much planning. But we had all these different planning things. We're all for planning. But we're also for planning done in the context of rational analysis, not in the context of fear and slogans. Well, and I think that this community really, really, really likes to DIY their financial planning. And I don't think that they should be DIYing their tax planning. And tax planning doesn't mean they're doing it every single year, especially after retirement. You can get a pretty holistic view of where you should be going and then check in with your tax planner. But I do want to encourage people who are listening to this who are like, wow, that really was a lot of information. Sean's been doing this for a minute. Cody's been doing this for a minute. So you take all of this information and you keep learning and you keep like, this is second nature to them. You need to have a conversation with somebody for whom this is second nature. So I do want to encourage people who are listening to meet with the tax planner and see the best way that they can meld their DIY ideas with actual tax reality. Yeah. I'll just quickly add there that the book's tax planning too and through early retirement is not necessarily meant to be read like, you know, front to back. Right. That would be a lot of information. It's 38 chapters, 350 pages of, you know, pretty much we took everything in our heads that's running around all day. We like, we packed, you know, we put it all on a little container for you in a book. But I'll say that the book also serves this as guideline of saying, hey, I'm in phase two. What was like, there was something they said about phase two. So you can just go to those chapters, right? So 38 chapters, all the tax, each tactic, even tax gain harvesting, tax loss harvesting, you know, sudden job loss. Each one of those has a small chapter. So just eat the elephant one by the time and don't feel like you have to know everything before you can retire early. And what's that book called again? It's called tax planning to and through early retirement. I just want to chime in here and say this has been a wealth of information and it's exhaustively researched. You can tell you guys are not just experts in the theory, but down to the very detailed tactical levels for the vast, what the vast majority of people are going to experience. I'd like to attempt now to see if I can regurgitate the key points that really people need to take away from this. So if we go into the fundamental components, because you know, Mindy, I agree with you, people shouldn't be doing their own tax planning necessarily. But you do need to have a grounding in this because most people are not, most experts in this CPA world are not as well versed as Sean and Cody, for example, in this and they can't put together a 20 year early retirement strategy. That's your job as the listener. Like if you're here in bigger pockets money, trying to retire early, you need to be well versed in that to know that core strategy here pretty well. And I think that if I boil down what I've learned from Sean and Cody in this week, right? And the discussions we've had. It's a couple of things. First, let's start with the order of operations, right? Forgetting all the details, all 11 order operations steps we have here. It's if you can, if you're a normal middle class or upper middle class, wage earning American max the 401k first versus the Roth, then you know, do the Roth afterwards if if you have my leftover, but take that HSA and put those pre-tax dollars shoved those dollars from taxes now. The second are these four themes that you said here. When you begin to transition to a retirement portfolio, for example, something like a risk parity portfolio, something that is not all stocks, 100% stock portfolio, something that is actually conducive to earlier retirement portfolio, spend the taxable accounts first, then go to your traditional accounts, delay your social security until 70 and then use your tax free pools like your HSA Roth, maybe other specialty accounts, to fund the remaining, be smart and strategic about that, like using, reimbursing yourself for medical expenses from the HSA at appropriate times. And then a third component that I want to add in here, you didn't explicitly state this until later on. And I think that when we take that as order of operations from the accumulation phase and we take these fundamentals of drawing down from a portfolio, that translates to this kind of investment or portfolio principle design theory where you want to hold the more aggressive positions in your Roth and HSA. The more conservative positions in your traditional or pre-tax accounts, let's say you're going to have a 60/40 stock bond portfolio, you'd want most of that stock exposure likely to be in the Roth and HSA positions, you'd want most of that bond exposure to be in the traditional account. And whatever that wiggle room is, that's not going to perfectly map in those two accounts, you're going to want to balance that with the remain in the aftertax brokerage accounts. I mean, you're going to harvest first. Do you guys agree with that? Is that a good way to tie in some of the theory that we, you know, the tax theory that we just went through into kind of practical principles people can follow? Scott, I generally like this approach that you're proposing. One thing I'll just quickly mention is we tend to really favor domestic equities in tax in the taxable accounts, but even, you know, some international equities in the taxable accounts going to be fine. It's all about limiting the ordinary income that the investments are kicking off on your tax return every year. And your general approach is about the best way folks can do that. And yeah, I think you're you're definitely barking up the right tree. Yeah. And I would say that most retirees, earlier otherwise, most of them can actually fit most or all of their bonds in their pretax retirement accounts, especially retirees who have significant traditional 401k, traditional IRA balances of their total asset allocation of stocks versus bonds. A lot of them can keep all of their bonds in their pretax accounts. And then that leaves them great room to, you know, to fill up their, their taxable brokerage with the domestic equities and then the Roth and HSA with kind of what's left. But again, I'm going to be back. I think this general framework is well put together Scott. - Awesome. Now, let's open a huge can of worms just getting on this, but I'll fill it out here and we can do it another time. If you're a real estate investor, of course, then what you do is you put everything into the pre-tax retirement accounts. You lend in a private lending capacity to someone. That asset is now a liquid. It's marked down. Your $100,000 loan is marked down to a $30,000 or $40,000 valuation. You convert it to your Roth at that point, paying taxes on the $30,000 or $40,000 conversion. And then when you're paid back the full $100,000 balance, that's settled in your Roth account. And that completely blows up your whole strategy. That one we'll talk about next time, right? - Yeah, and we actually have a chapter in the book. Chapter 29 is called Return on Hassel. What's not worth optimizing? (laughing) - That's awesome. - That is perfect. I am definitely looking to reduce my hassle even. And it's a privilege to be able to reduce your hassle, but I am definitely in that era of my retirement life is reducing my hassle. I'm trying to consolidate all of my accounts too, 'cause we've got all these little random accounts everywhere. Thanks, Carl, 'cause he's a former optimizer. He's, let's be honest, he's still an optimizer. - That was fantastic response, Cody. Sean, Cody, thank you so much for joining us. Twice this week, you're a wealth of knowledge. Definitely encourage people to go and check out the book, tax planning too, and through early retirement. Thank you for writing it, and thank you for sharing such a major portion of the knowledge that you've ported to that book here with bigger pockets money. - Cody Garrett, before we say goodbye, where can people find out more about you and where can people buy the book? - You're right, so let's start with the book. So you can go to Amazon, or really the best link for you is measuretwicemoney.com/book. Those will have the direct links to Amazon, if you wanna check out the paperback, or the Kindle eBook version. And Sean, where can people find you online? - Thanks so much Mindy. Folks can find me at my blog, Fytaxguy.com. - All right, that was another fantastic episode. Huge thanks to Sean and Cody for joining us. This wraps up this episode of the bigger pockets money podcast. He has got trench, I am Adi Jensen Singh. - When you're ready to start your business, Northwest registered agent helps you do more than just file paperwork. You get all the tools to build a real business identity from day one, a business address, a website, phone number, and operating agreement free guides and more at no extra cost. Northwest is your one stop business resource. Build a professional website, stay in good standing with on time annual filings, get simple explanations of corporate bylaws and more. With Northwest privacy comes standard. Your data is never sold, and all services are handled in-house under their privacy by default promise. They offer investors an 8% preferred return paid monthly in a 70-30 LP GP split of everything over 10% paid annually. Go to biggerpocketsmoney.com/pine-ne. - Goodbye, Magpie.