Want to Retire Really Early? Have a Plan for Harvesting Your Savings

As you may have noticed, the Financial Independence, Retire Early (FIRE) movement has started to get mainstream media coverage in the past few years.  In a nutshell, the movement proposes people use a dramatically high level of annual savings (50% or more of current income) and a very frugal lifestyle to reach a point where retirement savings are enough to fund all living expenses well before traditional retirement age.

I love the idea of aggressive savings for young workers, borrowing only to acquire appreciating assets, and paying off debts as quickly as possible.  Financial independence is an excellent goal, whether or not you actually retire from working at age 45, like some FIRE adherents.

However, just piling money into savings is not enough.  You must have a good plan for the types of savings vehicles you will use when harvesting income.  The first critical element is diversity.  Placing all your savings into qualified retirement plans [e.g., IRA, 401(k), 403(b) accounts] can put you in a bind if you retire at 50 and need to start drawing income.  This is due to the 10% IRS tax penalty on early retirement withdrawals (before age 59.5).

Withdrawing Roth IRA contributions only (not earnings) is one way to avoid the tax penalty, but then you’d be giving up long-term growth and compounding of returns, along with eventually tax-free distributions.  Ideally, you’d tap the Roth IRA account very last.  Using a Substantially Equal Periodic Payment (SEPP) arrangement can help you dodge the tax penalty, but those plans generally would apply to a limited amount of withdrawals.

For income source diversity, consider funding a taxable investment account that is easily accessed prior to age 59.5 with only capital gains tax liability on investment gains.  You’d give up the upfront tax deduction and deferral of taxes on dividends and capital gains that a 401(k) allows, but you’d gain flexibility, especially when you want to take a lump sum to pay off a mortgage or buy a car.  Also, in a taxable investment account, you can take advantage of municipal bond investments that pay tax-free dividends, possibly earning relatively good tax-equivalent yields.

A different way to diversify is to establish other passive income sources.  For example, you might use your extra savings to purchase real estate for rental income purposes.  This type of income is available without penalty before age 59.5 and continues after you reach the FIRE stage.  Keep in mind that real estate can be very capital intensive.  When the furnace of your rental property needs to be replaced in February, you will need to have extra savings available to make the repairs.  Putting all your extra savings into real property limits diversification and liquidity.

Go ahead and strive for financial independence and the sweet goal of early retirement, but remember to build a smart plan for harvesting from your savings.


Interest on municipal bonds is generally exempt from federal income tax, but may be subject to the federal alternative minimum tax, or state or local taxes. Profits and losses on federally tax-exempt bonds may be subject to capital gains tax treatment. Diversification does not ensure a profit or protect against a loss. Withdrawals from tax-deferred accounts may be subject to income taxes, and prior to age 59 ½ a 10% federal penalty tax may apply. Raymond James does not provide tax advice. Please discuss these matters with your tax professional.