When you work for a living it is important to live within your means. Every budget and finance tool available will scream at you if spending exceeds income.

In retirement, it is also important to live within your means. But your means is no longer tied to income. In fact, there is zero relationship between income and spending when you are living off assets.

Big Spending, Little Income

When I shared our recent annual spending and 2022 tax return there was a common theme in the comments and emails.

Our spending is BIG. Our income is little.

Yet we still manage to make large contributions to retirement accounts and live well in “California” (presumably an expensive place to live.)

How does this all work?

Simply stated – we sell assets

Quick recap: In 2022 we had total income on our 1040 of about $60k. Spending was about $110k, and outgoing cashflow was closer to $160k.

A reasonable person could see that as an undesirable position to be in. But it isn’t really as dire as it first appears. Rather, it is perfectly normal and mathematically sound. It is also very tax advantageous.

Let’s explore that.

Spending Limit

We do need an upper limit for regular spending, and for many people this comes from the 4% rule.

Loosely it states that you can plan with a high degree of confidence to spend 4% of your initial portfolio value each year, and continue to keep that same standard of living for many decades (or more.)

Portfolio value. Not income.

In how many of those years will 4% be greater than income?

Hopefully all of them.

If the dividend rate on the SP500 is about 2% and the yield on 10-year treasuries is 4%, then a 60/40 portfolio would have income of less than 3%. A more stock heavy portfolio like we have might yield less than 2%.

The remainder of spendable cash would come from a variety of sources, including the sale of assets (selling stock.)

In our 2022 example, I needed to generate an extra $50,000 in cash to pay all expenses and about $100,000* in cash above to fulfill our cash flow obligations.

Finding $100,000 and other clarifications

Fortunately finding an extra $100k is not too difficult, and some of it short lived.

We started the year with over $18,000 in cash (~2 months’ spending.)

Throughout the year I sold exactly $66,320 worth of stock (realizing a loss of $9,762.)

I also took on new debt in the amount of $15,689 (for the new HVAC – monthly payment less than energy savings)

Boom, $100k.

Much of the stock sale existed as cash for only a brief moment. I moved those funds into 2 Roth accounts ($6,000 x 2) and my Roth 401k ($20,500.) I then purchased non-substantially identical investments within the Roths.

For clarity, only earned income can be contributed, but the cash has to come from somewhere and in this case it came from a stock sale. Also for clarity, moving money from account A to account B requires cash but is not an expense.

In addition to this non-expense, funds also flowed into mortgage (~$6k) and car loan principal (~$7,500.) These transactions result in no change to net worth and can be spent in the future (minus car depreciation.)

For more details/examples, see:
Legal Money Laundering
Double Your Roth Contributions (Without Working or Earning More)

Best Ways to Get Cash

I chose to sell stock for cash because it is easy and VERY tax friendly.

There are other options, with varying degrees of tax implications. The following is a short non-exhaustive list.

$ source / Taxable percentage

Cash – 0%
Debt – 0%
Roth contribution withdrawals – 0%
Qualified Roth withdrawals – 0% (after age 59.5)
Credit card rewards points – 0%
Municipal bond interest – 0% (but taxable under the ACA)

Social Security – 0% – 85%
Sale of assets (e.g. stock)
– short term gains – <100%
– long term gains – <100% (favorable tax treatment, e.g. 0% tax rate)
Business income – <100%

Interest – 100%
Qualified dividends – 100% (favorable tax treatment, e.g. 0% tax rate)
Ordinary Dividends – 100%
IRA / 401k withdrawals – 100%
W2 income – 100%

Taxable Income ≠ Income

If anybody ever asked me, “What was your total income in 2022?” I would just look at the 1040 from that year and see it was $60,534.

But that number already includes about $10,000 worth of deductions that are not actual expenses or are already factored in elsewhere. This is why business income is less than 100% taxable.

For example:

  • Business use of your home: $5,655 (actual expenses already included in mortgage, utilities, home maintenance, etc…. plus depreciation.)
  • Qualified Business Income deduction: $1,138 (free bonus deduction just because)
  • Realized capital loss: $3,000

The capital loss is an interesting deduction – After 15+ years of dividends and tripling in value, I sold this stock for a substantial profit but was able to realize a taxable loss after a decade of cap gain harvesting. (stock originally purchased in 2007 when the SP500 was around 1,500 (currently ~4,400.))

* Overall point – the amount of cash I needed to generate is about $10k less than it appears at first glance.


We spend a lot more than we earn. That is OK – There is no relationship between income and spending when living off of assets, just keep total expenses under 4%.

Selling assets is a normal and natural part of retirement. By prioritizing some $ sources over others, overall tax levels can be quite favorable.