The Comfort of a Big Nest Egg… for Later

Something we get asked about semi-regularly is our two-tiered retirement plan, which has us living primarily off of our taxable investments for the first ~18 years, and then shifting to our tax-deferred investments (401ks) for all of our years after age 60, with some rental income sprinkled in here and there. Here’s the clearer breakdown:

OurNextLife.com // early retirement, financial independence -- our plan for income over our retirement years

What this chart doesn’t show is the huge difference in how much money we expect to have to spend in each phase. A lot depends on how our 401ks do between now and when Mr. ONL turns 60, but — worst case — we expect to have at least 50 percent more per year to spend once we hit 60. With returns more in line with historical averages, we should easily be able to double our annual spending once we hit 60.

The reason for this is that our 401ks have a lot more in them than our taxable accounts, and while we’re working fast and furiously to fill up the taxables, that head start that came from (mostly MR. ONL) maxing early and often is hard to beat.


A lot of people, when planning for early retirement, view their money as being all in one big pool. And with tools like the Roth conversion ladder, that’s a perfectly reasonable way to view it all. That approach lets you apply the 4 percent rule in a more straightforward way than our more complicated math allows, at least assuming you can get enough of your tax-advantaged dollars converted by the time you need them. And it lets you live at a more level standard of living over the long term, which could certainly be appealing.

But, despite all that, we don’t view our taxable and tax-deferred investments as one big pool of money. And the logical question is:

Why not?

We may have started the post with a chart and a graph, but we’re about to talk about emotions, y’all, along with some  financial reasons.

OurNextLife.com // The Comfort of a Big Nest Egg... for Later. Early retirement, financial independence, security, health care costs

Fact is: we find it super comforting to back-load our retirement. To save the biggest part of our nest egg for later. To know that we may need to scrimp in the early years, but we’ll be able to live more comfortably in the later years.

This for sure outs us as still having some inherent discomfort with the whole idea of early retirement, despite having done all of our homework, understanding the math, knowing the history of the stock markets, and all the rest. It still feels a little scary to us, and it’s possible it always will. But that’s not going to stop us from going through with it, because the bigger risk to us is that we spend our whole lives working, and we end up missing out on the chance to do the things we really want to do in life.

But here’s why we take comfort in reserving so much of our nest egg for our age 60+ years:

The financial reasons

On the financial front, our most important reason for thinking of our retirement savings in two distinct buckets, for two separate periods in our lives, has everything to do with health care. Both to maximize our health benefits in our earlier years, and to protect ourselves in our later years.

Health Insurance in our 40s and 50s

As Justin at Root of Good has covered expertly, subsidies under the Affordable Care Act are not on a sliding scale. The subsidy cliff is a very real thing, and there are scenarios in which earning literally $1 over a particular tier could end up costing you hundreds of additional dollars in health care costs. However, Medicare doesn’t have this same structure, and people with higher incomes aren’t penalized nearly so harshly. Since we plan to rely on Obamacare for health insurance during our pre-Medicare years, we want to keep our income as low as possible to max our subsidy, which we will achieve by living off of our taxable funds, supplemented by rental income, in the first phase.

Healthcare Over Time

Of course, we expect our taxable funds to carry us through age 60ish, while Medicare doesn’t kick in until 65. What about that five-year gap? We figure that by that point, almost 20 years into retirement, the index fund shares we sell will be largely capital gains, with a comparatively small cost basis (unlike our early years, when we could theoretically sell lots and lots of shares and still have only a small income, because most of the value is still our cost basis, or what we initially invested to buy the shares, with minimal capital gains to count as income). And therefore, we figure it will be unavoidable to register a higher income by then anyway, making our ACA subsidy minimal, and taking away the incentive to keep our income small. Plus we’ll be able to access our 401ks penalty-free by then, so it feels like the right time to go for it.

Anticipating higher health care costs in our 60s and beyond

I’m sure we have all heard plenty of heartbreaking tales of seniors going hungry because of high health care bills. While we will do everything possible in retirement to stay healthy and active (including getting lots more exercise than our work schedules allow currently!), odds are that we’ll need more medical care in our 60s and in the decades that follow. (And I hope there are a lot of those — I’m pretty set on making it to 100.) We don’t want to let money stand in the way of us getting the care we need, especially if it’s something costly like in-home care or even nursing home care. And we also don’t want to let stress about medical costs affect our health. That’s something a lot of seniors cope with. So having the larger pool of funds waiting for us at age 60 gives us enormous comfort on that front, too.

The emotional reasons

Is it weird to say that it just gives us a sense of peace to know that we have this big nest egg sitting there, growing and waiting for us? Because it absolutely does. We know that no matter how badly we screw things up in the first phase of our retirement, we won’t burn through all of our money. We’ll still be okay in the years when it’s tougher to earn an income. And if that makes it sound like we don’t trust ourselves to manage our money well in early retirement, that’s kinda true. After all, we’ve never done it before! It will be our first time being retirees, and we expect there to be a steep learning curve. Just check out the comments on this post for proof, from actual retirees.

We don’t actually expect to screw everything up, but we still think of our later-years nest egg as our safety net. And it’s sure a lot easier to walk out onto that tightrope if you know there’s a net somewhere down below you.

Beyond that, we think saving the biggest part for later also helps us with our pacing. If we know we’re living on a low-ish income forever, we might at some point get frustrated with that fact. We might get the urge to splurge (possibly the worst rhyme ever). We might just want to take a trip that we can’t afford. And that could breed all kinds of resentment, or even rattle our marriage. Instead, we love knowing that we only have to follow the low spending plan for less than two decades, and then we’ll have the reward of getting to up our standard of living, potentially by a lot. We don’t envision starting to buy a lot of stuff when we hit our 60s, but maybe we can stay at nicer hotels, fly first class once or twice, or just donate a whole lot more to charity. That will feel like a nice upgrade from the dirtbag-style travel we plan to do between now and then — staying in hostels and camping as much as possible.

Which camp are you in?

Do you think of your savings in one pool or two? Are you building anything into your plan to ensure that you’re covering higher health care costs in your later years? Are you structuring any parts of your plan for greater peace of mind, like us with the bigger nest egg for our later years? Share it all in the comments!

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96 replies »

  1. I don’t think there is anything wrong with keeping two different sets of money for different times. It really isn’t much different than how many of us live now. We have our everyday money that we earn to pay the bills and day to day life and then we have our savings for FI. Those are two different buckets as well and I don’t want to tap into my FI money for now and wouldn’t want to tap into my +60 money before that point, if I don’t need to.

    Love your approach and how much you guys have planned everything out. You can tell you are much closer to your goal then we are as our planning is still at the beginning stages. Great post as always!

    • That’s a good point, Thias! We DO already live with multiple “phases” of money. And yeah, I’m sure your plans will get more detailed as you get closer — mostly because it’s all a waiting game, and so over the years, you’ll probably do more projections and breakdowns just to make it feel like the time is passing faster. :-) Haha.

  2. It makes a lot of sense to make sure you are actually set for health care and bit more comfortable lifestyle when you reach traditional retirement age. I can’t say we’ve developed a two-tier plan yet, but you’ve given us some great stuff to think about!

    • And, I think you’ll appreciate this, but we really hope that market returns allow us to donate a TON after we hit 60. Our big goal is to let our money grow enough to do sizeable giving, but that’s a bit out of our control. Knowing we have our health care needs covered is top priority, of course, so we don’t become a burden to others. And if we take a few nice trips, great. But we are hopeful we can make a big contribution philanthropically, too. :-)

  3. Healthcare cost in retirement is tricky. Bottom line is that ACA is new, proven to be unprofitable, and will most likely go through changes. Whether or not a new president in office next year makes this change right away, ACA is not a stable market place. Means testing and income level payout will change. Subsidies will most likely go away in time. If it’s too good to be true, it likely isn’t true.

    • Totally agree with you! We’re budgeting more for health care in ER than we expect to need in the near term, just because so much can change. Asset testing is unlikely to happen for a bunch of reasons, but we wouldn’t be surprised if the current system goes away entirely. Then we’d probably buy a catastrophic policy, which you used to be able to buy, or even consider health care tourism for anything major.

  4. You have a bigger safety net under your safety net! The way you laid this out makes a lot of sense to me and being newer to the “retire early” world I took some mental notes on your healthcare views.

    We contribute a small amount to a taxable account every month, but not nearly enough to fund an early retirement. Better get to work I guess!

  5. While our FI number is the combined of the two, we are treating our different stashes similar to you guys. Right now about 66% of our stash is in 401k/IRA vehicles. We are hoping not to touch that pile until we are ~55 or so, which depending on growth might let us have a plusher lifestyle. Most of our focus the last year has been to try and save in the pre-60 stash, although we are still adding to the 401k bc of employer matching, but we don’t max it out anymore. Sometimes, I just think that so much can happen in 50-60 years, that I am just kidding myself with all my planning :)

    • That sounds exactly like us — much more in 401ks (I’m impressed you have IRAs — that means you saved young, before your incomes got big!), but much more focus on taxable investing now. And yeah, I know that feeling of wondering if we’re kidding ourselves. But I love how you guys have written about staying flexible. That’s our same idea, though I think I’ll always sleep better at night when we have multiple contingencies in place. :-)

  6. I look at it much like you do. My IPS calls for >50% of the nest egg to be available in early retirement, prior to age 59.5. Most of that will be in a taxable account, which is nearly 50% already, and some in a 457(b).

    Spending from dividends and selling taxable funds definitely helps to keep income low, and we want to keep our spending at a reasonable level while our boys are at home, which will be until I’m at least 54. I’ll have plenty of Roth money seasoned for >5 years, but I have no plans to access it.

    We’re aiming for an oversized nest egg as self insurance against rising health care costs, long-term care, lifestyle inflation later in life, etc… You never know what the future might bring!

    Great post!

    • I like how you put it — your nest egg is self insurance against health care, long-term care, and the rest. Can I borrow that? ;-) And your mix is similar to ours — I think by the end of our working time, we’ll be closer to 45/55 taxable/tax-deferred, just because we’re focusing SO much on taxable investing right now.

  7. It sounds like a good split. It will ingrain your frugal habits over the next 20 years. Then you can inflate your lifestyle where you see fit!

    As I’ve played around with the idea with separate pools, but my brain only considers it one pot of money. I mostly blame this on not having the right spreadsheets yet. It will also be interesting to see how money is saved going forward. I’m following the traditional saving waterfall, so I won’t have the imbalance of one of us maxing our 401k for years.

    • Yeah, I didn’t mention that part, but that’s definitely in my head as well — after years of living on a smallish sum, having more to play with will feel like luxury. Not like it would feel now, after only being focused savers for a few years.

      And definitely blame the spreadsheet. :-) I have SOOOO many, and I love them all. Sometimes I’ll think, “I want to see things broken out this way,” and I just make a new one. I know, I’m super awesome. :-) And even if you follow the traditional savings model, your 401k money will just have a lot longer to grow, so you might be surprised how much more it can grow, surpassing your other savings in time!

  8. Like Mrs. SSC said, we’re in the same boat as you guys. I have fingers crossed that when we get to that 55-60 range, we can have that much more of a cushion, not that we’d necessarily up our spending just because we can. A bigger cushion for me means breathing easier and being able to relax and not worry about it as much I guess.

    It was quite a paradigm shift when we reduced our 401k contributions because, even estimating real conservative growth, they’re already pretty good for what we are planning. Noone says – “yeah, I’m cutting back on 401k contributions.” Since we need to boost our pre-60 money, that is why our focus shifted. It’s still weird to think about sometimes though.

    • Oh, I know! It IS super weird to cut back on 401(k) contributions. Because who does that?!?! I’m glad to know that you guys have a similarly back-loaded plan, especially since you have a different level of risk tolerance built into your plan. That makes me feel like it must be a good idea. :-)

  9. I think you guys are putting a very good plan into place – there is nothing wrong with long-term thinking and going the extra mile to ensure your money lasts as long as possible. And keeping your income low enough in order to take advantage of healthcare subsidies is absolutely the right move. We will be doing that as well.

    Our plan is much more closely aligned with the simplicity involved with Roth IRA rollovers, though early in our retirement years we will be living entirely off of our savings and letting our investments continue to grow a bit. Then, we will begin drawing from our taxable investment accounts initially, and finally we’ll start taking principle out of our Roth IRA.

    So strictly speaking, I suppose we do have a situation that is similar to yours in that we’re focused on savings and taxable investments first. I think where you guys and us differ is we aren’t focused necessarily on backloading our retirement. We plan to take a more steady and consistent approach over the years instead – at least at this point. It has been said that people tend to spend less money the older they get, and the last thing that we want to do is leave money on the table. We want that money available now when we’re young and able to do the things that we want to do.

    And for us, that’s the primary motivator: maximizing our retirement when we are young, active and ready to explore. While we definitely want our money to last for the duration of our lives, we lean a little more toward the near-term rather than the longer-term. The way I look at it, we can’t depend on the future. 50 years from now the landscape in this country might look very, very different. We may not even recognize it.

    Of course, this is primarily all speculation for us at this point. We are taking our best guess at how all of this is going to work out, but we naturally won’t know until it happens. A couple years down the line we may find that it’s best to scrimp a little bit more in the near-term to let the stash grow a bit. Or, we might find opportunities that allow us to pull in a little bit of money that we hadn’t planned on, and that will automatically keep more of our investments in play for later in life. As usual, flexibility through this whole process is the key to success.

    Here is the great thing about all this – there isn’t a right or wrong way to do this. Regardless of the approach that we take, we’ll make it work. Just like you guys – you’re flexible and smart enough to follow through with any plan, and come hell or high water, you guys will be just fine. Better than fine. I honestly believe you’ll kick some serious financial ass after your lives of full-time work end, and the plan that you’ve laid out in this blog post sounds perfect for you guys.

    Maybe that’s just the optimist in me talking, but that optimist tends to be a fairly dependable soothsayer!

    • We’re okay with the idea that we might have too much money in our later years, because then we can give a ton to charity. That’s definitely on our list of goals, but the markets will dictate how much we can actually give. And yeah, I agree with you that we’re all just taking our best guess! Though I love your optimism! I’m definitely a “plan for the worst, expect the best” type of person, so I’m actually much more optimistic than I probably sound sometimes — but I also like to be prepared for catastrophe. Haha.

  10. I love this plan and I’m really impressed with how much work you’ve done to determine the specific details. With early retirement, you kind of have to think of your money being in different pools, based on when you can access it.

    My plan at this point is to use my brokerage account from 50-60, while doing Roth conversions up to my standard deduction/exemption. At 60 I’ll start pulling from my Roth and 401k in some combination to try to be as favorable tax-wise as possible, while keeping the ACA requirements in mind until Medicare at 65.

    Social Security is a bonus in my viewpoint, since we don’t really know what it’ll be like so far into the future. I expect it to exist in some form, but I don’t factor it into my retirement calculations. I’d rather prepare for retirement under the assumption that there will be no payout, to ensure I can afford to retire based only on my savings.

    I, too, am concerned about the costs as I age — mainly nursing home expenses. I don’t have kids that I could potentially move in with or count on for assistance, so I’m trying to determine just how much it’ll cost me when I reach that point. My grandparents lived in a nursing home for over 15 years (at varying levels of assistance), so I’m using that as my guideline. But they lived into their upper 90s so I guess that’s the trade off :)

    • Your plan sounds pretty specific, too! That’s great — I love how you’re thinking about it all. And we also don’t factor in Social Security. We think some form of it will exist, and hope to get some, but it’s not factored in at all. And, if our 401ks do really well, then we definitely won’t need it at all — and hopefully by then there will be provision for people to opt out to try to redistribute funds to those who really need it. But that’s a whole other topic. :-) We’re in the same boat with no kids, so thinking about long-term care is definitely important. We might buy the insurance at some point, but hope that we’ll be self-insured — that’s up to the markets, though! And yeah, given that we want to live to a ripe old age, we gotta plan for the very real possibility that we might need a long time in nursing homes, like your grandparents did!

  11. I’m always impressed with your comprehensive planning. Our plan is not nearly as structured, but also saves the 401K investments for our sixties. After we pay off debt (including the mortgage on our rental property) we will be able to semi-retire, doing freelance-type work. We will have much more freedom and only need to earn enough to cover low living expenses (with rental income). As with you, we will be relying on a big nest egg. The difference is having to continue part-time work instead of being able to rely on the short-term investments.

    • Thanks, Harmony! Even though I understand the appeal of full retirement, the reality is that most of us will still work after we retire early. So in the end, it’s not so different from your semi-retirement plan. You’ll still have tons more freedom than the vast majority of people. :-) And I’m sure it will give you tons of peace of mind that you have the nest egg waiting for your later years!

  12. First off, let me congratulate you on “urge to splurge.” BEST rhyme ever, you mean! Second, I’m constantly struggling with taxable and tax-deferred. I’ve read all the things about how Roth-401ks are a bad idea even if you’re solidly in the 15% tax bracket now. But they feel so good! So currently, we have half of our 401k money going into that. Maybe I’ll get wise and change it later, but I really like having so much money that’s tax free and accessible. So, in that case, I don’t really consider our accounts separately. But, as you know, I use your two-phased thinking to come up with the idea of letting a lump of money sit (like you are) until we’re 60 and then cover us until death. More than anything, it helps make the planning a lot more accessible throwing compounding more on our side. “If we can make it through the next 30 years, the money we already have could cover us for the rest!” Hope. :)

    • Haha — I specialize in terrible rhymes and cheesy alliteration. I just try not to unleash them too much here. :-) We’ve never seriously looked at Roths since we’ve been priced out of them ever since we got serious about saving, but I can for sure see the appeal! And I’m glad that you have a chunk that you plan to leave alone and let grow. That compounding is powerful stuff, as you know! So I bet that money that’s already there WILL cover you in your later years! :-)

  13. I remain extremely impressed with the level of planning you’ve put into mapping out each year and what it means for your cashflow sources, income targets, and ACA subsidies. I haven’t gone through quite the same year-by-year mapping, but I am hoping to leave most or all of my tax-deferred dollars untouched until 60+, living in the meantime on taxable, rental income, and side hustle income. Though most of my investments are in taxable accounts, the tax-deferred accounts have 30+ years to grow untouched, which should provide a decent safety net for traditional retirement age.

    • Thanks, Matt! :-) It sure seems like you have a pretty solid plan, especially considering your rockstar-level side hustles and your low-rent lifestyle. Des at Half Banked just had a stat up today that the worst returns in any 30-year period in the history of the markets is like 850%. Of course some of that gets eaten up by inflation, but yeah, if you’re not touching your tax-deferred cash for 30 years, I suspect you’ll be fine. :-)

  14. Love that you plan like this. We have a similar plan with loading taxable accounts to fund our first 15 years of retirement. We will also have some rental income and cash to make the plan more flexible. Meanwhile that 401k account will grow and leave us pretty comfortable later in life. We currently still max out the 401k accounts though! Our Roth conversion plan is more for expected (possible?)college expenses and tax avoidance. We are also maxing our HSA accounts to have a little cushion for the health expenses.

    • Haha — I can’t NOT plan like this. It’s a sickness. :-) Your plan sounds a lot like ours, and while I’m clearly biased, it sure sounds sensible! And as for maxing out 401ks, we go back and forth — we didn’t fully max last year, but we might this year… the tax benefits are just too good to pass up, even if those accounts are already fully funded! And that’s great you have access to an HSA — we don’t, so that’s not part of our plan at the moment. But it might be once we choose our own coverage!

  15. In this community your plan seems to be more on the conservative side, but there is nothing wrong with that at all. So many things can change. I bet MMM didn’t think he’d have a $400k+ income during FIRE. I’m still far away but as soon as my total nest egg is 25x my annual expenses… I’m calling it quits. I’m flexible enough and plan on SOME income (even if it’s very small) during FIRE, that I’ll be able to handle the blips. That alone might be conservative I guess in some peoples eyes. If I never have to tough 401k/IRA money until later in life, great, but I’m definitely open to doing so if need be :)

    • I’m pretty sure that money is the only area of our lives where we could be accused of being conservative — hahaha. But you’re totally right. We would never be comfortable planning on 9 percent returns, just as we aren’t comfortable with the idea of winging it in our later years. (And you’ll notice we don’t even count Social Security in our plans.) But I also totally see the merit in your approach, and wish we could get comfy with that approach — because then we could quit already! :-)

  16. I like your approach a lot. Yes it’s perhaps more conservative and you don’t need to do the conversation but if that works for you that’s all it matters. We all have different reasons wanting to achieve FI and different goals once we achieve FI. So it only makes sense that the approaches are different for each individual.

    • Thanks, Tawcan! Something we didn’t say in the post but that is definitely true is that it’s a unique situation to even be able to structure our retirement this way, because it means that we have more than we need. And we’re grateful for that! And we certainly HOPE to be able to share a lot of this, assuming the markets give us some tail wind, so that we can donate lots and lots once we hit 60+.

  17. For now, our savings is one big pot, mixed up of all types of accounts we have. It is a todofor me to adjust my spreadsheets to be able to see when the money becomes available. This way, we can do a similar exercise… Maybe in 2025, when FI is within sight.

    I do like the reasons you put forward. It is a fact that the first few years matter most. To me, that are also the years you probably can/will do the extra effort to live really below your means or to do travel to really cheap places. Or do side hustle here and there.

    I like the reasons and the plan. I just hope to remember by then…

  18. Frankly I have not spent a lot of time looking at where we will get our spending money in retirement – from taxable or tax deferred accounts. Right now, since I just turned 50, all of our money comes from taxable accounts. My goal would be to leave the tax-deferred savings as long as we can, and put off taking by pension and Social Security for as long as we can when we get to that point.

    We have planned our spending to be more frontloaded, then backloaded. That is, we have assumed that are spending in our 80s will be less than what we spend in our 50s and 60s.

    Our healthcare is relatively taken care of once we turn 55. I will be on employer retiree insurance and then Medicare. I agree with the Green Swan’s comments about the ACA. United health group – one of the largest insurers in the country – just pulled out of ACA for next year. They lost $800 million last year and forecast losing another $450 million this year. I have a good friend who works there, and says it has been an absolute disaster for them. I don’t think it will go away, but it will get much more expensive than it is today.

    • What a gift that is that you have retiree medical at 55! Health care is definitely the biggest wildcard of all in our ER planning (and, frankly, our “traditional” retirement planning, too!). It’s the biggest reason why we’ve padded everything, and why we’re trying so hard to leave the 401ks untouched. And on your spending, I definitely see the logic of the front and back loading — you want to enjoy your honeymoon phase, after all! :-)

  19. Agree with your fears and doubts, particularly with current high stock valuations and low interest rate environment that all the “experts” say will be short lived, but has been sticking around for about a decade already and with no immediate end in site. Don’t plan to follow your specific strategy 2 tier strategy, but do plan to try to limit our early year withdrawals to<4% and hopefully more like 0-2% while planning on incorporating small amounts of income to allow our entire stash (taxable and tax advantaged) to grow until we feel it gets "too big to fail" which I define as being able to support all normal living costs off of interest and dividends w/o selling off any shares.

    • Whoa — that’s awesome that “too big to fail” is potentially in reach for you guys! We are definitely nowhere near that in terms of just dividends on taxable accounts, but now you’re making me wonder if we could get close accounting for all of our investments — it would be an academic exercise, since we can’t get at those 401k dividends easily, but now I’m curious. :-) And yeah, the market overvaluation currently, and just scarring from past financial crises generally, is why we have so many contingencies in place!

      • We could not get close either with just taxable. I don’t really make a distinction between the two. We can simply take dividends from our tax advantaged accounts and buy back what we would have sold on the taxable side, so technically we would have to sell some shares but at the end of the day we would just be moving things around and the net result would be having the same number of shares we started with. More conservative than most in the FIRE community I know, but it will help us sleep at night.

  20. Yes, two buckets for us. We don’t see healthcare costs getting any better – we think the situation may only get worse. Like a number of others who have replied, we’d like our 401ks to grow as much as possible.

    I am also fortunate to have a pension which kicks in at age 55, four years after planned FI. Thus that makes the glide towards 59.5 a bit smoother. Hopefully. Saying all that none of us are in position to predict what may unfold – an extended bear market will make us all draw on flexibility, adaptability and to a large extent our resolve.

    Planning very far ahead is hard but not to say it’s not worthwhile.

    • Good to know you guys have two buckets, too. And we agree with you on health care costs — the nice thing is that we’ll have more options as retirees than we do now. If the ACA goes away, we can get on the type of catastrophic coverage that used to be available, and if we need something major, we can also do health care tourism to Costa Rica, Thailand, etc. But we definitely have extra padding in every phase of the budget to account for rising costs! And wow — a pension! That’s so wonderful — and so novel these days! How great for you — that must remove some of your anxiety about the market uncertainty!

      • Yes, the pension us something we are very grateful for and understand it is rathe unusual to have these days. But planners like we are and the contingency brain in us still looks for additional safety nets….e.g managing costs very carefully in the early years of FI. Data suggests those first 8-10 years of FI are critical and we hope for no significant headwinds of market storm during those years.

        A terrific post and so awesome that you guys give everybody a thoughtful response to their points and ideas! Great work.

      • You’re so smart to think that way! It’s the same for us — we don’t plan to take a level amount out of our account every year — we hope to have keep our living expenses minimal, and will have lots of airline and hotel points to use for travel for the first few years that will mean that we can still get out of the house, even on a small budget! And thanks for your note on comments — this is the best part! Just spouting off on my ideas isn’t all that satisfying, but all the conversations that come from it are why I keep writing. :-)

  21. My grasp of early retirement math is pretty minimal, but your two-tiered plan makes total sense to me on a conceptual level.

    I’m curious to know how your plan accounts for inflation between the time you retire and the time you turn 65. (I imagine that a dozen eggs will be much more expensive when you’re 64 than when you’re 41.) Have you built that in mathematically, based on the amount of inflation you expect to see? Just curious. We always hear about how the markets go up over time, but very little about how the cost of living goes up. I’ve always wondered how this issue is addressed in early retirement plans.

    • Uh oh, you asked one of my favorite questions! Which means I could talk your ear off (write your face off?). But I’ll try not to. Basically, we have 3 percent inflation annually built into all of our models. And you can account for it a few ways, either by using historical average return rates (most people will tell you that, over long periods, the markets return 9-11%) but then knowing that your spending power will be lower than it appears because those are future dollars, not today’s dollars. Or, you can do what we prefer, and chop 3 percentage points off of all of our models. So instead of projecting out what 6, 7, 8 and 9% would do for us, we do 3, 4, 5 and 6. That then puts all projections into today’s dollars (meaning the amounts should actually be higher, but $100 in a projection like this will buy you what $100 buys you today), which is easier for my brain to think about. You can apply the same principle to any sort of saving. And, as you’d probably guess, I don’t trust any amount unless that money will last us even with 3% returns (assuming 2-3% inflation, that means actual returns of 5-6%, which is well below average, but feels better for me — the only area in my life where I plan to be below average. Ha!).

      • Ah, subtraction! Why didn’t I think of that? :) I guess it’s not that complicated; I just don’t hear much about it in the pf world. Thanks for the explanation!

      • True. It isn’t something that people talk that much about. But with the longer, more technical PF books, they tend to address this. Good reminder for me though to make sure we spell this out better!

  22. The one thing you can count on is that everything you’ve projected is likely to change, and you can’t be too careful or have too much financial padding. I would hazard a guess that the medical insurance environment will be completely different in the next few decades, as will many of the tax laws as previous wage earners age out of the system and increase the demands on the entire infrastructure. I think your current financial philosophy provides the best hedge against the unknown, and at the end of the day that’s really all you can do. We’ve changed our financial planning as our reality has changed, and the best thing about a reliable income stream and substantial assets in retirement is the freedom it provides to do so. In the absence of a crystal ball, good planning and conservative spending are the best tools we have. There’s no way of accurately predicting the future with any certainty, so erring on the side of spending less when you could still easily rejoin the ranks of the employed makes great sense. I think you’ve got this!

    • Oh, thanks for saying that! I *hope* we’ve got this! :-) But as you’ve reminded us so many times, there’s still a lot we don’t know and can’t plan for. And health care costs are only getting more massive all the time. As long as the subsidies are there, we can control our income and keep it as low as we need it to be to qualify for them, but who knows what the next iteration of this will be.

  23. We definitely think of it as two pots of money, but because of our circumstances have gone at it differently than you. Anticipating military pensions, we’ve invested much more heavily in taxable accounts which probably currently outweigh our tax-advantaged accounts roughly 3-1. This will fund the early retirement gap years. At age 60+, we should have our pensions plus whatever is in retirement and taxable accounts and will hopefully we very comfortable financially.

    • I think given your situation, and given that you will have military pensions, which seems super dependable, your plan makes total sense for you guys.

  24. Multiple pools for my household. Right now, I’ve got parallel pools for mandatory and discretionary expenses.

    Hadn’t really thought of time-sequencing like you have. The idea of backloading the retirement funds will appeal greatly to my wife, I think, and ease the sting she feels when she thinks about no longer working. I need to fold that into our financial plan for FI/RE. /swipe :-)

  25. Great post! Though my wife and I have a few minor differences in our situation, I felt like I had written this entire post, because our planing and outlook are so similar.

  26. Hi,

    Great post and agree with your logic, that is how I’m planning on my early retirement. This type of plan is what helped me to pay off my debt and save for the future, a little in to everything. That’s what different buckets are for :)

    Enjoy the weekend!

    Northern CA

  27. Makes sense to me. I’m pretty conservative too. I’m ok with living a frugal but modest life during the years before retirement – better than working! And then when we can access our retirement (when hubby is 58) we can do more overseas trips etc. You can be agile and depending on the markets some years you can spend more of the markets are good.

  28. I guess I’m thinking from the other side of the coin. I’m going to try and front load my retirement arsenal. My wife and I both max out our 401ks and then contribute 3% after tax. I figure every dollar I put in now cuts my tax bill by 25%. In FIRE I should be in the 15% tax bracket on our best possible year. So even if I have to pull out of our retirement account I’ll pay 15% tax and a 10% penalty making it a wash. The 3% will be rolled into a Roth IRA upon departure of employment. I am also saving after tax but it won’t be enough to get me to 59 and a half. That is where the Roth conversion ladder comes in. I hope to emulate gocurrycracker and travel the world for a few years and convert large chunks over to the Roth while having just some kind of catastrophe insurance. When the ladder is set up we will return to the US and travel while still doing Roth conversions but just making sure to stay under the subsidy cliff. I have not really looked at the formula but I would like to get my tax advantaged accounts down to when RMDs kick in it will not create more taxes on our Social Security benefit. It’s pretty naive of me to think the tax code won’t change but this is the plan as of now and we plan to be out in 3 years. I enjoy your blog , my wife and I relate to a lot of your articles, keep up the good work.

    • For us, the bigger question is not whether the tax code will change, which it probably will, but what healthcare changes we will see in short order. There’s no doubt in our minds that healthcare is going to keep getting more expensive, especially in the later years. So as long as you’re accounting for that somehow, then you should be good. Thanks for your nice note about the blog. Glad you enjoy it!

  29. I certainly think of our money as different buckets to be tapped at different times. We have a sort of similar plan where we will be partially relying on our taxable accounts for the first 5 years in addition to our rental income and part time work. We will do a very small Roth conversion ladder but withdrawing way less than 4% so that it will continue to grow for years. I would rather have the comfort knowing we will have more money when we are older as we could be less able to go back to work if needed. Also, if we ever needed any time of long term care we are going to need a bigger bucket of money to cover those costs.

    • There is nothing wrong with the Roth conversion ladder, so long as you aren’t depleting your assets! It sounds like you guys have a great plan, with lots of protections built in for your later years.

  30. Hehe, your diagrams made me laugh because you 2 are SO organized. It’s a good thing!

    Our networth is very tiny compared to other FIRE folk, but it doesn’t bother us because we have this big (to us) pool that we’re not planning to touch until we’re older, and until then we will slow things down work-wise and live a semi-FIREd life of fun.

    The healthcare costs don’t bother us because we’re planning to be nomadic, so not resident in any country which means we can buy ourselves cheap health coverage. We mitigate health already costs by strengthening our immune systems through food and exercise, and will only use the ‘health’ care services for big emergencies (like if we broke a bone, or have terrible food poisoning). Any other service that is not an immediate emergency to our physical well-being, we are not interested in. That’s what gives us the biggest peace of mind for our later years. It may seem kind of fancy-free, but it is actually quite empowering to take our health into our own hands, rather than surrender ourselves to a doctor or institution do with us what they will.

    • We have pretty much the same philosophy on health, but the American rules (and lack of universal health coverage) force us to have to think about health care in big ways, even just for the “just in case” stuff. We definitely view health as something that’s in our hands, but we also want to know that we can get good care if we need it!

  31. Thank you so much for this blog. I only discovered you about a month and a half ago and I am reading from the beginning to the more recent. The comments from the blog community are also very informative, and inspiring. Your interaction with your commenters is truly amazing.

    I also see our retirement funds in two pots but our plans are mostly backwards from yours due to the way our taxable contributions are dealt with in Canada. We have small accounts that are not available until 59 1/2 but the bulk of our taxable investments are in RRSPs which do not have an age restriction. The plan is to spend the RRSPs before we are eligible for my work pension and any government pensions.

    This approach should keep our income relatively the same throughout our retirement.

    Thank you again for this blog I feel like I have finally found my tribe. (So. Much Mushy.)

    • Hi Angie! That’s incredible that you’re working your way through all the posts — sooooo many words! Hahaha. Let me know when you finish so I can give you your virtual medal. ;-) And that makes total sense that you’d have the inverse of our plan, given that you can actually count on your pensions in Canada, unlike here! (And given that you have free health care, so don’t have old age bankruptcy from health care expenses as a worry.) So glad you’ve found your tribe in the community! Let us know how we can help! :-)