As highlighted in our recent spending report, we spent a great deal of moola in 2023.
In fact, we spent at a level significantly higher than our income.
Which led many people to ask… how does that work? Where exactly does the money come from?
Where the Money Comes From
During the good old days when I was working 60-80 hours per week and trying to save for retirement, spending more than we earned would have been a real crisis. And rightfully so.
But nowadays that is just a normal everyday thing. What is “retirement” if not the period of life where you spend more than you earn?
So what does that look like in practice?
Cash Flow
At the beginning of each year I make a cash flow estimate for the coming year or three.
(See: Cash Flow Management in Early Retirement)
2023 was a bit special… we moved about $190,000 around between various accounts.
Direct expenses: $118,000 (from Reflections of 2023 – Life in the Burbs)
Equity increases: $15,000 (paydown of Mortgage and car loan)
Roth 401k/IRA contributions: $26,000
Monthly payments for 0% credit card debt: $12,000 (paying past expenses in the present)
Lump sum payoffs of 0% credit card debt: $18,000 (reduce balances to zero before 0% interest period expires)
We started the year with about $10,000 in cash in our brokerage account.
To this we added all direct income sources:
- Total direct income: $54,500
- blog revenue: $21,000
- dividends: $31,000
- interest: $2,500
Some of it came from borrowing (shifting current expenses into the future…)
(See: Sweet, Sweet, Debt)
We used 2 credit cards for many months that offered 18 months of 0% interest on purchases. I was also able to get a 24 month My Chase Plan with no fees or interest on a $5,000 property tax payment.
All of this is presently earning 5.x% in short-term treasuries (see: Playing the Interest Rate Spread for an Easy $2,000)
- 0% credit card debt: ~$25,000
This still leaves us a little short… about $100k short. How does that get sorted?
Via the sale of assets / stock
- Sold 505 shares of VTI at avg price of $216.22 = $109,190.71
This leaves us with a balance of about $10,000 which carries forward into 2024.
All numbers approximate and close enough
You really sold $110,000 worth of stock?!
I did, yeah.
A lot of it was just used to pay our bills. That’s what money is for.
Some of it was used for his/her Roth IRAs and my Roth solo-401k. (Because I had the earned income but not the liquid cash to contribute.)
If I sell $26,000 worth of stock, move that cash into Roth accounts, and then buy $26k worth of stock… I end up owning about the same number of shares just in a different place.
And some was sold to generate the cash necessary to pay off the credit card debt.
Credit card debt? What’s up with that?!
Back in June/July 2022, the stock market was down… shares of VTI were trading at $193+/-.
Rather than sell stock at such low prices, I paid a 3% fee to transfer some balances ($22,000 worth) from whatever cards we were spending money on those days. In exchange I got 18 months of 0% interest (so about 2% APY)
After 18 months of regular minimum payments, the remaining balance of ~$18,000 came due in December 2023 / January 2024.
I sold some VTI on Dec 7, 2023 at $227.83 and some on Dec 27 at $238.11, about 20% higher than a year and a half prior.
I haven’t done the complete math on this… but from a distance it looks like I get to keep an extra $5,000 for the effort.
But I did have to sell $18,000 worth of stock in December 2023 to pay for those Q2 2022 expenses.
And I might decide to sell some stock in late 2024 / early 2025 to pay off the 0% credit cards I loaded up in Q4 2023.
(Although I have the entire payoff amount sitting in short-term treasuries – the stock market is at all-time highs, so it is a different play this year.)
Wait, wait, wait… hold up… You really sold $110k worth of stock?
Yes.
When you live off an investment portfolio, selling stock is par for the course.
That is indeed where the money comes from.
However – worth noting – 2023 stock sales really cover a 3 years period.
(Another way to say this same thing – I am unlikely to sell very much (if any) stock in 2024. But if I don’t, I will have to sell in 2025.)
- ~$22,000 of 2022 expenses carried forward to 2023
- Actual 2023 expenses
- ~$25,000 of 2023 expenses that will be paid off in late 2024 (early 2025.)
- I can only have all of this sitting in short-term treasuries because I sold some stock
As long as we continue to pull less than 4% of the portfolio annually, this is sustainable.
And in fact the portfolio can/should continue to grow faster than withdrawals, as indeed it has.
See this net worth chart from the recent post GCC Asset Allocation 2024 showing an upward trend even as we sell stock to fund current expenses (although stock sales in the early years were light.)
net worth over time, often selling stock to fund current expenses (not inflation adjusted)
What about Taxes?
When selling stock in a taxable brokerage account we realize taxable capital gains (or losses.)
Thanks to extensive capital gain harvesting, for the time being these gains are negligible. Or… as is the case in 2023… thanks to cap loss harvesting we will actually report a $3,000 loss.
But over time this process of selling stock to fund daily life will become more expensive tax wise, as a greater percentage of each sale becomes a taxable gain.
See: Long Term Long-Term Capital Gains
Summary
Retirement… the years when you spend more than you earn.
Where does the money come from? The sale of stock.
That is normal, reasonable, tax-friendly, and sustainable.
Are you using a fund for your short term treasuries or buying individual treasuries directly?
individual
Have you every done an audit of your spending since you retired to see if, without any blog or other income, you still would have been able to spend exactly as you do? No shade, just curious how much having that additional income (even of just a 20 or 30K) has allowed flexibility you’d otherwise not have had. Obviously you guys are masters of flexibility and would have simply made less $ decisions so it’s not so much a question of “would you have failed” as much as how much has the additonal income augmented your lifestyle? A lot, medium, negligable or could have spent exactly the same with no notable impact, just had a little less in the market today. Thanks in advance!
He has a post which I think covers this nicely.
https://www.gocurrycracker.com/getting-lucky/
Thank you
I have, yeah. I think it is an important thing to think about in order to stay humble.
See this post: What if it all went to hell? (from 5 years ago.)
Our decision to inflate our lifestyle was more influenced by market growth than blog income, as I always assumed the latter would disappear when I got bored with it. But some of the growth was already baked into the plan (we intentionally started spending way below what was possible.) Using your scale… maybe somewhere between medium and negligible.
Thank you, just seeing your followup and reread that. V helpful. But astonished that your first Europe trip, which I read in real time when posted, was 8 years ago. Where has the time gone?!?!?
It’s crazy, right? I’ll be able to make catchup IRA contributions this year… turning 50
Your article Long Term Long-Term Capital Gains touches on a topic that crossed my mind recently that I haven’t seen covered that I can recall. Due to the force you mentioned, over time long term capital gains tax will increase. But the 4% rule ignores taxes and leaves it to the reader to determine how much tax is needed in their withdrawals. But with a variable ever increasing tax burden, what should the base withdrawal assume when you are trying to calculate your withdrawal money that you would plug into the 4% equation? Any chance you’ve already thought this through or are you ignoring it given other margins of safety you have built in including all the capital gains harvesting you do?
I don’t think this matters too much, at least relative to other tax challenges. But it is a factor.
Let’s say down the road that 80% of a stock sale is taxable instead of 20%. There is still a very wide 0% tax bracket for long-term capital gains and low overall rates.
Example: sell $100k of stock, with $80k realized long-term capital gain. With $45k of qualified dividend income, total federal tax = $0 (MFJ 2024)
Compare that to Traditional IRA withdrawals that are 100% taxable and taxed as ordinary income, plus required distributions. That I have modeled extensively and don’t see us paying more than a 12% marginal rate in the long term… unless we have another 25 years of 10%+ growth rates, and then I won’t really notice because I’ll be distracted by the decision of which mega-yacht to purchase.
I will probably start to transition away from selling stock in the taxable brokerage account and more to SEPP withdrawals from our Traditional IRAs in the next 4-5 years or so, and the remaining stock in our brokerage account will just be allowed to grow forever until our kids inherit it at 100% basis.
Wow, US tax rates are something else.
My capital gains tax rate is at an inclusion rate of 40% using marginal income tax rates of 45%, so a max of 18% at maximum . The max rate kicks in from $100k of taxable income, but the threshold to start paying capital gains tax is only $2k and has decreased in USD terms from $6.5k a decade ago due to currency depreciation.
The model for FIRE is really turbo-charged in a “low” tax residency, or if you focus on tax optimization as you guys have. Thanks for all the tips and seeing what’s possible.
The US is very kind to early retirees
Would love to read a post on your thoughts on how to work SEPP withdrawals into the mix….
I have this on my to do list.
My sides started hurting from laughter when I read the comment “too distracted deciding which mega-yacht to purchase”. Yes, tax optimization is important but if you have huge RMDs because of massive account balances, I’ll include that in the bucket of problems I could live with.
Overall, an excellent example of money management. I even like your thought process behind selling stocks due to their high valuations. Essentially rebalancing in reverse when compared to the accumulation phase. Although, it does ruin your street cred a bit on the 100% equity front :)
I’m often amazed that people don’t understand the de-accumulation phase where you sell assets to cover living expenses. That is part of the plan. I guess in their mind they would just spend the dividends, but that will most likely just lead to over accumulation. Meaning you worked way more than needed.
I think the dividend only adherents may actually under save. By focusing on income (at the expense of growth), 30 years down the road the portfolio is likely smaller than a total market strategy
A good point in that case. I was thinking more of a regular investment like a total market with some bonds. An 80/20 portfolio would lead to massive over accumulation as it would be paying roughly 2%.
Oh yeah, if doing 80/20 that would be massive over savings.
“paying roughly 2%”:
USA double taxes dividends so shareholders don’t want ’em.
Australia imputes company tax to shareholders (like wages income tax is imputed to workers) who consequentially seek dividends.
ASX:STW is oldest EFT in Aus. Based on largest 200 listed companies. Better example than theoretical ASX:SP200.
https://www.marketindex.com.au/asx/stw/advanced-chart
Indexed to 100:
Not adjusted for dividends;
2001/08/01 100.0
2024/03/01 207.8
3.29% / y CAGR
Adjusted for dividends;
2001/08/01 100.0
2024/03/01 563.7
7.96% / y CAGR
Dividends added:
= (1 + 7.96%) / (1 + 3.29%) – 1
= 4.52% / y CAGR
It is helpful to have you model selling stock as many of us are psychologically built to save and accumulate assets — while actually selling off (modest amounts of) stock in retirement is a new mental muscle to develop.
A pruned tree bears more fruit than one left to its wild nature :)
As long as we prune more slowly than the tree grows, all is well.
Great metaphor.
People actually ask that curiously where the money comes from? Do people think investments are just never to be sold, only looked at? Seems pretty straightforward to me. You sell your investments to pay for life.
It’s a pretty common question – a lot of people haven’t thought that far in advance, just focused on the accumulation.
Some of us are having difficulty finding information/advice on how/when to sell stocks for income once retired. Took years to figure out how to accumulate. Not finding much beginner information on the selling processes.
What questions do you have?
Do you share the value of your portfolio in the blog, or is this private info not shared?
This is an exercise left to the reader
BTW, when I try to set up a My Chase Plan, it serves up a bunch of annoying monthly fees. How did you manage to get that 5k locked in with NO fees?!
The no fee promotion seems to come up periodically.
I click on one of the Pay Over Time links that shows up each month when I am verifying the monthly payment. If I see the fee is zero I start to plan something useful.
Roger and thanks.
Hey Jeremy, how did you contribute $26k to IRAs when you only had $21k business/blog income? I thought you can only move actual work earned income to an IRA, or no? I recall you said in the past you had your blog business to allow you to make IRA contributions. All our income is investment diva and rent so I don’t do any IRA, but may need to in the future. Thanks!
https://www.gocurrycracker.com/double-your-roth-contributions/
Great article as always!
I see that you almost hold no bonds and I would like to hear your thoughts about it.
Bonds could have saved you from taking the credit card loan + withdraw option when stock market is down.
Plus, would like to hear your opinion on the dynamic stock/bond allocation model (AKA U Model) to reduce the Sequence of Return Risk?
My thoughts on no bonds: The Path to 100% Equities.
I’m not sure bonds would have changed anything for the better. During the period in question, bonds were perfectly correlated downward with equities (as interest rates rose) but did not benefit from the recovery. Had I held bonds our net worth would be overall lower.
phew!! 110K ? Imagine the net worth of this guy…assuming 4% rule, 3 million! Wow, Someday will I get there? hardly but still dreaming!
Imagine you have $3 million
It isn’t hard to do
Live lean and invest in the index
Time will do the work for you
Oh you may say that I’m a dreamer…