Sh*t Just Got Real

The countdown to drawdown is over. My wife and I are *both* retired as of January 2025, and it's time to draw down on our savings.

When I retired, I didn’t have to worry about drawing down our portfolio to fund our lifestyle. My wife still had a successful consulting gig. We were still a W-2 family like so many others.

So I procrastinated.

But sh*t just got real. Her consulting business closes down at the end of the year and we actually have to spend down our savings.

As two unemployed fifty-somethings with two teenagers at home, we need income for 2025 and beyond. We can’t access our IRAs directly until 59 1/2, so we need to live off our taxable brokerage account while we do a Roth ladder.

So I thought I’d write a little bit about what happens next. How will we eat or pay our bills? How will we unlock our IRA money without early withdrawal penalties? It’s all a little scary, but here goes.

Step by step: Income in 2025 and our Roth Ladder

Step One: Reallocate dividends

The first thing we did was change how our dividends are distributed in our taxable account. We no longer reinvest them, but instead deposit them in our cash account. Our annual dividends should cover an estimated two months of living expenses in 2025. Thank you SCHD and high interest rates.

Step Two: Register to pay quarterly taxes

We’ve created an IRS account, so I guess we’re officially in the Matrix. Since we will be doing rollovers to our Roth IRA and living off of investments, we will need to pay estimated taxes throughout the year to avoid underpayment penalties.

Step Three: Draw our “paycheck” from our taxable investments

Ok, I’m caught with my pants down here a little bit. Our taxable account is about 60% in broad-based index funds and about 40% in money-market funds, CDs, and cash equivalents.

I spent a lot of time hemming and hawing the past few years about whether to fully de-risk our taxable account into CD ladders or something safe to cover five years of expenses during the Roth conversions. In the end, I did nothing.

Look at this lazy guy. What’s he thinking about? Definitely not thinking about CD ladders and stuff.

This creates a bit of micro-longevity risk to manage. The taxable portfolio needs to survive for 5 years, and rotating out of equities all at once now would create huge tax implications this year.

So I’m going to stay in equities.

But now the dilemma - how much to draw from equities, and how much from cash to fund our lifestyle each year?

• Pulling *only* from cash creates an increasingly risky taxable portfolio that’s even heavier in equities. What happens when we finally need to tap equities and the market is down 50%? (Narrator: they get Barista-FI jobs, that’s what).

• Pulling *only* from equities increases the amount of long-term capital gains that we incur. Long-term capital gains (for a single year) aren’t a tax problem (0% in our tax bracket), but they do impact our modified adjusted gross income (MAGI) for the ACA and any tax credits we may get.

If we are optimizing around ACA tax credits, then more capital gains equals a smaller rollover to our Roth IRA. A smaller rollover to our Roth IRA equals a smaller “paycheck” in five years.

We could just keep it simple and drawdown proportionally (60% of funds from equities, 40% from cash) to maintain the 60/40 split until we get to zero and hope for the best.

But I think our actual solution for 2025 only will be to:

• Sell a GREATER proportion of equities (maybe 75% from equities, 25% from cash) to meet our spending needs.

• Don’t reduce our Roth rollover amount, keep it the same size.

We may go over our MAGI target and sacrifice a little bit of our ACA tax credit, but in exchange we de-risk our taxable portfolio a bit more aggressively and preserve a big paycheck in five years from the Roth.

I have other reasons to go heavy selling equities in our first year.

1. The S&P and Dow are flirting with all time highs; Shiller CAPE is north of 35. Markets can and will go higher, but it feels like a good time to take some off the table.

2. I think there is a real possibility that new Executive, House, and Senate leadership roll back the expansion of tax credits to pre-Biden levels (250% of the federal poverty level from the current 400%) in 2026.

Stated differently - I think the tax credit cliff could come back, and we will need to be far more careful with our MAGI in ‘26 than in ‘25 - that means we need to use more cash.

Anyway, we do this madness all year. We transfer some dividends. We move some cash. We sell some index funds. And we pay estimated taxes all year on a quarterly basis.

Step Four: Do the Roth conversion

At the end of 2025, it will be time to add up the long-term capital gains and dividends realized throughout the year (making sure there are no surprises), and then do our planned Roth conversion.

Even though we are doing our Roth conversion in December, the 5-year waiting period starts at the beginning of the calendar year (January 1st, 2025). We wait until the end of year incase something crazy happens and we get unexpected income.

The Bottom Line

If we’re above our estimated MAGI, we’ll owe a little of the tax credits back. No big deal in 2025 (though in 2026, hitting that MAGI may be way more critical).

We finish 2025 with the first rung in our Roth ladder in place. That rollover will be tax and penalty free to withdraw as of January 1st, 2030.

Oh! I almost forgot. We already have Roth IRAs, and actually already have some rollover money in them from a few years ago. So we do have a bit of a “break glass” scenario where we can tap those earlier rollovers if our taxable account is exhausted too soon.

If you are doing a Roth ladder, and relying on your taxable investments, let me know how you are thinking about risk in those investments.

Cheers!