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Choose from a great selection of digital coupons and use them up to five times in one transaction. Check our app for details. Ralph's, fresh for everyone. Joshua, I'm basically a millionaire and I'm 35 years old and I hate my job and I want to quit and I want to retire early.

And I can't figure out whether I can or not and everyone's giving me a different answer, including the financial advisors. Please help. Episode 55. Welcome, welcome, welcome. Happy Friday to you. Welcome to the Radical Personal Finance Podcast. My name is Joshua Sheets and I'm your host and today is Friday.

Friday, Friday, Friday, September the 5th, 2014. This is the show where we dispel financial myths and make everything clear. Or at least I hope we do. I think you're going to like today's show. Let's dig into early retirement. Is it possible to make everything clear with financial stuff and early retirement?

Maybe that's a little bit of a big goal, a little bit audacious. But hey, as many people say, we need big, hairy, audacious goals. And my big, hairy, audacious goal for today is to develop an amazing show for you to answer a very confused and sincere listener's question. This listener is named John and John sent me an email.

And he actually sent me several emails. We had a little bit of correspondence. And I'm going to read to you his email. And I want you to think about how you would encourage John if you were me, I guess. Or you encouraging John in some way. I've edited this slightly to combine a little bit of information and make it just a couple of things with some of the back and forth.

But this is basically the email. It is true to original content. I've just pulled together a couple of things and edited it slightly. Joshua, I'm a podcast listener with questions. First of all, I want to say thank you so much for all of the incredibly great content and your incredibly detailed podcasts.

I have recommended your show to all of my friends with financial independence goals. I listen to a ton of podcasts and I'm very disappointed it took me so long to find yours. I listen to as many podcasts of yours as I can with my limited time. I have an eight-month-old boy.

I am currently listening to the episode about lowering your financial goals. This one really caught my eye as I see it as my number one issue. I very well may be financially independent now. But my bigger than necessary goals could be the only thing keeping me at a job that I hate.

My wife and I have a net worth approaching a million dollars, including our average and paid-off house in Pittsburgh and our three older modest cars. We have $820,000 not including our house. We've accrued this from decent savings habits all of our lives and decent wages that increased in the last few years.

I make about $110,000 as a base salary with a bonus of about $10,000 per year. My wife makes about $95,000 or maybe $98,000, but she has taken a 20% pay cut in the past few months to have a four-day work week. However, a good portion of that money that we have, possibly up to two-thirds, is tied up in retirement accounts that would have a penalty if we began drawing out from them early.

I'm 35 now and I'm hoping that my wife and I can retire by 40 or before. I'm getting very mixed answers about whether this is possible depending on who I ask, including financial advisors. I think the big thing missing from those I speak to is that they think we want to early retire at 40 and then draw down from the savings we have until I'm dead at 80.

Instead, I'd like to instead live off of the interest. Using the 4% rule, which is just a rough estimate for a conservative portfolio return rate as I understand, we would need $1.5 million to have $60,000 of annual income, which is what my family currently spends each year, which includes child care.

I don't plan to sit on my butt in retirement. I already have multiple projects in the works that could bear fruit if I had time to dedicate to them, but I'd like to make sure our current lifestyle is covered first. Previously, I wanted a huge amount of money rolling in each year, similar to our current earnings of around $200,000, but we looked into it and we only spend about $60,000 with child care and we increase our net worth about $100,000 per year, or at least in the last few years as the markets have done well, we've done that.

So, do you think I can retire now, or at least by the age of 40? Is there anything else, or maybe a lot of other stuff, that I need to consider? Am I way off base with my thinking that this is possible? I'd like to say that my long commute and my job cost me a lot of money, as many people point out to me, but I really don't think it costs me a lot, because I don't wear suits and I'd probably drive around a lot even if I didn't have a long commute.

I only mention that because people often talk about how much less life costs without a job, but I don't see it in my case. "Thanks so much in advance for any advice you can give. I really trust your opinion and look forward to any thoughts you have. And again, thanks so much for the value you provide on the podcast.

John." So, I got this email and I got it on my phone and I had a minute to respond while I was standing in line somewhere, so I sent him back some quick questions to clarify a couple of points. I'm going to read those questions and his answers to you.

"First of all, John, do you track your expenses?" Yes, my wife and I use Mint. She is more fastidious about accurately assigning the expenses to proper categories than me. I do an okay job, but not perfect. My Mint account has some issues because things are not imported correctly, but overall, yes, we track expenses and 90% of them are tracked on my wife's Mint account.

"Oh, and one big item we wouldn't have to pay for if retired is daycare, which is another $14,000 in my pocket. So, our spending would be down below $50,000 per year if we didn't have that cost." I asked him, "Okay, if you do track your expenses, how accurately and how long?" He says, "That's within about $2,000 a year." They've been doing it for about three years and then doing financial summary statements on a regular basis since about 2012.

That's why he knows his net worth has gone up by $100,000. I asked him if he'd listened to my episode on cash flow statements. He hadn't heard it yet, so he went and listened to it later. That will come into play, as you'll see, in my answer to him.

I then asked him, "What do you imagine doing with your time if you were 'retired'?" Are you going to be sailing the Caribbean, building houses, teaching your child Mandarin Chinese, reading novels, building businesses? He says, "Well, I'm going to do a lot of podcast listening, both for entertainment purposes, hardcore history example, and for my own education, iTunes U.

I want to start a blog on a topic I've been interested in for a while. I need to learn to write better in the process. I'm going to continue a small import business that I've just begun with three other guys recently. I'm going to ramp up my activities to be a real estate investor.

Maybe on real estate. I know it's very profitable, but I'm not really that interested in it. I also may sharpen my old programming skills and try my hand at a few apps. I used to be a programmer, but now I have ideas of things I want to make to help me, even if they don't sell.

Vacations may increase, but with a kid, I don't mind just staying at home more and spending time with him. In short, continuing my learning, building businesses, I hope, and spending time with my wife and kid. I really like the idea of doing slow travel if we do increase our vacations.

There are so many nice things about slow travel, cheaper, and you get to understand the area you're visiting. I asked him if his wife wants to stop working too, and he said, "Well, she doesn't hate her job, but she has no passion for it either. She just doesn't complain as much as me." Really, though, yes, she will quit before me if possible, especially now that we have the kid.

She's already gone from about $95,000 of income to about $77,000 to work a four-day week. I asked him, "How are you investing your money? Do you have any investing skills?" "I'm blindly listening to a financial advisor that I have no respect for. So dumb. No, I don't have investing skills beyond listening to some personal finance and financial independence podcasts.

In addition to investing in a bunch of funds that I have with a financial advisor, $100,000 of the net worth is part of an LLC that I'm part of and runs in an apartment complex, which has seven buildings and an apartment complex in Memphis, Tennessee. I haven't seen any return yet as it is still in rehab and filling tenants.

I expect to get a minimum of $500 a month from that within a few years and maybe even $1,200 per month. Also, the principal $10,000 I put in will be paid back to me 100% in about three to four years." And he sent me a financial summary statement. Then the last thing here, and we're done with kind of his intro, is I said, "What skills have you gained from this job that you enjoy utilizing?

What other skills do you think you have or that you could develop with a little bit more focus and attention?" He says, "I work in transit, specifically on city metro systems to install large-scale signaling systems all over the world. Well, it used to be all over the world, but my current company is in U.S.

cities since they have a regional model. I've moved from a software engineer position to a leadership/people management-ish type role in the last three years. I'm great with people, apparently, and I've always been social, but I'm not sure if I'm really excelling at it. Like I said, I used to be a programmer and I hated it when I did it to work for another company, but now I wish I would have kept up and extended that skill set because it allows for a lot of location independence and programmers can find work in a multitude of ways.

Honestly, the best job I ever had was a bartender. I'm a night owl naturally, so I could supplement my family's income doing that if needed. Low stress is what I'm really looking for. I don't mind menial work. My head gets tired when I think too long about things I don't care about.

I've been doing that for 13 years in my current industry. So sad. Really, though, I'd love to learn and I'd love to do some kind of work online to build a business that brings some extra passive income into our lives. But with the little time I have now, I've spread myself a little too thin and I don't follow through on things when I get pressed for time.

Quick summary of his balance sheet. Has $75,000 in cash, $640,000 in retirement accounts, $100,000 in the real estate investment, $140,000 house, total add-ups $955,000 and no debt. So question, how would you advise John? What would you say to him? I think it's a fascinating question and I'm going to give you my answers.

But one of the things that I'm going to do, specifically as an answer to you, John, and also again for the audience, is I'm not going to specifically tell you, "Here's what you need to do." I can't do that. This is an entertainment radio show and I can't give you specific personal financial advice.

But I can talk you through how I would think it through, and that's the key that's lacking here. So I'm going to talk you through some specific feedback to some of the things that you wrote. And then I'm going to walk through--I made up five scenarios for you, right off the top of my head, of five ways that you can retire right now without a dime more in savings.

And you'll see as I walk through those five plans how I run the numbers, and you'll see how every bit of everything I've talked about on this show up till now works together. You'll see how investing skill and knowledge of tax law and business principles and the ability to run a financial calculator and goal setting, how all this stuff works together.

But before we get to that, a couple of comments. First of all, I would encourage you, John, you need to define very clearly what you want. And I know that's tough. And I don't think any of us--even those of us who think about it constantly-- I don't think any of us can really define extremely clearly exactly what we want.

Because it's changing and it's developing as time goes on. But the clearer you can be, the better it will be. Now, as an engineer, use an engineering metaphor. If you were given the instructions of, you know, here's the product. Let's say you're designing a transit system. We sort of kind of want a transit system that's somewhat effective and-- okay, I can't make a transit system metaphor work.

Let's use designing a product. We sort of kind of want to develop a product of some kind. It's going to be some kind of electronic doohickey. It's going to give people some information, but we're not quite sure what. Mr. Engineer, can you design that for me? What would be the answer?

No, right? Now, if I came to you as an engineer and I said, "Very specifically, I am trying to create a product that solves this specific problem. Here are the parameters for what I consider to be success and failure if this product is able to solve them. Here's my budget for the development of the product and my timeline.

Mr. Engineer, do you think that based upon this available information, you can solve this specific question and do it?" Well, under that, I mean, the answer may be yes, the answer may be no, but it's much more likely that the answer is going to be yes because you have a specific problem.

And this is one of the biggest keys in financial planning, that people generally often don't know what they want. They really don't know what they want. And this is not, again, this is not an insult. I mean, a lot of times I'm not sure what I think what I want.

But in just a minute, I'm going to get to the impact, the things that you said about financial advisors, and I'm going to explain to you that the primary thing that you need to talk about as a financial advisor is you need to give a specific, clear question. So you need to define very clearly what you want, and you'll see that throughout my response to your question.

And this is the same for all of us. All of us need to keep trying to clarify, clarify, clarify, clarify what we want in every area of life, and then we can figure out what the path is to get there. You've presented me, first off, with a false dichotomy.

And I want to point it out to you because I think it's very important to recognize it. Quote, "I very well may be financially independent now, but my bigger than necessary goals could be the only thing keeping me at a job that I hate." You don't necessarily have to keep working a job that you hate to hit your bigger than necessary goals.

Very simply, you could find or create a job that you love that will allow you to hit your bigger than necessary goals. And this is often the problem with financial planning. It's not one necessarily or the other. It's not--your only two choices are not, "I either keep working this soul-sucking job that I have for the next 30 years until I'm 65 years old, or I retire early right now." Now, I recognize that in an email communication with me, you can't say all of that.

And if I were to tell you that in person, you would say, "Yeah, I know that. I know that." But I just point it out because the biggest impediment to creative thinking is that we get locked into an either/or. We get locked into thinking, "There's only one way or two ways that I can solve my problem." And the reality, there's probably about 38 different paths that you could come up with.

You need to decide what's more important to you. Is it more important to you to be retired, or is it more important to you to find a job that you love? Is it more important to you to be retired now on a lower income, or is it more important to you to hit that higher income?

Now, the good news is that your choice, even as you said in your answers, is probably not fully retired. I can't think of a single early retiree that's fully retired, especially the ones that write about it online and talk about it online and do this stuff online. I can't think of it.

I can't think of them. I mean, you name me the financial blogger, or you name me the podcaster, it's hard to think of one that's completely retired. Now, do they exist? They probably do, but just recognize that most of them are not retired. So the dichotomy is not necessarily, "I have to do this job that I hate," or "I have to keep working." You asked me, you said, "Do you think I'd be able to retire now, or by 40 at least?" Quote, "I'm 35 now, and I was hoping my wife and I can retire by 40, or before." Well, my answer is it depends on what you mean by retire, and it depends on the numbers.

So to you, what does retirement mean? And why the age of 40? And this is why you're getting such mixed-up answers from financial advisors. Quote, "I'm getting very mixed answers about whether this is possible, depending on who I ask, including financial advisors. I think the big thing missing from those who I speak with is that they think we want to retire early at 40, and then draw down from the savings we have until I'm dead at 80.

Instead, I'd like to instead live off of the interest." So one quick point. You're probably not going to be dead at 80. You're probably going to be alive at 95. Now, is that statistically accurate? It's close to statistically accurate, but you're still pretty young, so where the expected lifespan is not quite that big.

But this is one of the problems with retirement planning. If I have to make a financial plan work until the age of 80, or if I have to make a financial plan work until the age of 95, there's a big difference in that. So financial advisors think about risk, and they think about return, and we crunch numbers.

Everything we do is about the data. To get a good answer to your question, you need good data. In many ways, a financial advisor functions like a computer program. The computer people say, "Garbage in, garbage out." The engineers, you need to know what you're working with. If you're designing a bridge, are you designing a bridge for a freeway, where it's going across a housing development and it's 100 feet in the air, or are you designing a little country single-lane bridge out in the middle of the woods where there's just going to be an occasional car maybe a couple times a day?

There's a very different engineering parameters based upon that. And so the same exact thing is applicable in the science of financial advice. One of the things that makes people really upset about financial advisors is that they're going to get different answers. If you go online, you go into forum threads, you'll find this often, and the forum comment will go something like this.

You know, I went in, and I got this call from a financial advisor, and I went in and met with the financial advisor, and they were just dumb, and they just tried to sell me mutual funds with high expenses and high fees. Now, is that possible? I think it is.

There are a lot of really crummy financial advisors. But from my experience--and this is just my experience. Anecdotal? Yeah, I can't prove it, but from my experience, the key thing is, what are you asking? And this is one of the things I'd encourage you, and it's also my public service announcement for people who are working with financial advisors.

Look at what you're asking. Many times, a client is all over the map with what they want, and then the client, especially if you're reading in personal finance people, finance threads, you're reading from people who, it seems in many ways, it's like a well-meaning bait game, like, "Oh, I'm going to go get the financial advisor." Everything about what the advisor is going to tell you is going to be the answer to your-- it's going to be based upon the input.

So, example, if you specifically came into my office and you said, "Joshua, can you guarantee me that if I stop working now with $1 million of investable assets that I can cover my lifestyle expenses of $60,000 per year for the rest of my life from the age of 35 for this unknown life expand, which is probably going to be about 60 years?" My answer is, "Not a chance." There's no chance in the world I would ever say yes to that.

If I were put in the situation of a financial advisor. Because when you're a financial advisor and we're talking with a financial advisor, the financial advisor takes their job very seriously and they have a limited number of tools to use. And when you say $60,000 per year, we put that into our financial planning software, and it says $60,000 per year, and what we hear you asking usually, because it's most people's case, is, "I want 100% certainty." So if I run a Monte Carlo analysis, and the Monte Carlo analysis indicates that we've got a 65% certainty that the plan will succeed, that's probably unacceptable.

So I need to be up in that 95% probability of success and not in the 65% probability of success. Now, here's what makes me different than some advisors. I don't hear your question like that. And I would encourage you that there are many advisors who won't hear your question like that.

So I hear your question as this. "Joshua, help me think through all of my goals and everything that I've got in my entire situation, and help me figure out a plan to achieve my goals." That's how I hear the question. And that's what I assume you're asking me. And this is the same whether you're an in-person client or not.

And I've gotten really good results working with clients because I think that way. But most people don't. So, specifically on the advisor thing, and then we'll go on, you need an advisor that's competent in the area that you're talking about. The term "financial advisor" is a very large term that doesn't really mean anything.

This is the problem. What is a financial advisor? A financial advisor could be a budget coach, someone to help you sit down and coach you to get out of debt. A financial advisor could be an entertainment personality, someone like me making an entertainment podcast. A financial advisor could be a mortgage consultant, helping you to get the best deal on your mortgage.

A financial advisor could be a portfolio manager, someone who you're going to charge with managing a portfolio of investments. A financial advisor could be a trust advisor or a trustee, a corporate trustee. A financial advisor could be an insurance agent. So you get the point. All of these are financial advisors.

And so you've got to be careful that you're working with an advisor that's competent in the area that you're asking them questions. If you need life insurance, a brand-new life insurance agent with any major company-- MetLife, ING, New York Life, Northwestern Mutual-- any good brand-new life insurance agent can competently sit down with you, help you to calculate and understand the amount of life insurance that you want, and explain to you your various policy options.

That financial advisor, however, can't craft a retirement plan that's going to allow you to retire at 35 and maintain money for the rest of your life. I can help you figure out that plan, but there's not a chance in the world that I'm competent enough to consult on a multibillion-dollar estate plan.

Warren Buffett--I am completely incompetent for Warren Buffett to give me a call and say, "Joshua, I heard your show on my phone. I was hoping you could sit down with me and help me plan out my estate." I mean, I could probably comment on it, but Berkshire Hathaway files a 25,000-page tax return.

I mean, the intricacies of what's in that are there. I can understand the big picture--he lays out the big picture-- but, man, I am completely incompetent to practice in that area. So there are a lot of really crummy financial advisors, just like there are doctors that don't listen to you.

You walk into their office, they just simply don't listen to you. They misdiagnose you, and they push a drug on you if they sell drugs. They push surgery on you if they cut you apart for a living. And then there are great doctors who do a wonderful job, and there are great financial advisors.

Here's the key--you need the knowledge to distinguish and choose. And I would recommend that you not start with scorn for a financial advisor, but rather start with saying, "I need to have knowledge. Teach me." And that's one of the keys. And then the service provider--the doctor, the financial advisor, the accountant, the attorney, the consultant-- that service provider needs to be incredibly honest.

So hopefully that helps a little bit on financial advisors. You've got to frame the question. That's the primary point that I wanted to make with those comments there is you need to frame the question specifically. I want to encourage you to do this. What is your shopping list? I did a show recently--I don't remember which episode-- but I talked about--oh, it was that episode.

Your plans--the one you referenced--that what is--your financial goals are too big. So my question is, what is your shopping list? You said, "Previously I wanted a huge amount of money rolling in each year, similar to our current earnings of around $200,000. But we looked into it, and we only spend about $60,000 with child care, and we increase our net worth by about $100,000 per year, at least in the past few years with the market doing well." You mentioned in some of your comments that I didn't read just a moment ago, you mentioned college for your son.

Do you need to shop for a private $100,000 tuition bill? I mean, I can show you--I'm doing a show soon, I promise. I've been threatening it soon, but I've got a lot of other stuff in front. I'll do a show on how to get an accredited college degree for $4,000 total.

It's available today. So if your shopping list of what you're going to provide for your son is a $4,000 degree versus a $100,000 degree, that's a big difference. Build your shopping list out and think very specifically and try to make time with your spouse and try to make time for what you want, what's on your shopping list.

You said, "I don't plan to sit on my butt in retirement. I already have multiple projects in the works that could bear fruit if I had the time to dedicate to them, but I'd like to make sure our current lifestyle is covered first." Your lifestyle is already covered. You've just been simply by your spouse working, and you have a lot of savings to cover your lifestyle for a period of time.

So in a moment, I'm going to lay out my five plans for you of how I would think through this, and I'm going to use that to illustrate a bunch of different points to you. But your lifestyle is already covered, so you need to spend some more time just making clear what lifestyle are we trying to cover, and does lifestyle include your spouse at home?

Well, now we've got a different situation. Or your spouse working. There's a bunch of different things that you can do. Three more comments, and we're going to plans. Number one, you need to know your cash flow statement, and you need to do it the way that I laid it out.

Because of the importance of some of the expenses that are currently being provided for you as part of your group expenses. The reason why I don't like Mint, except as a starting point for people to start from, and the reason why I say you need to create an actual, proper cash flow statement is because you need to account for your group expenses, your group benefits, and you need to account for your tax expenses.

And you need to lay out your cash flow statement the way that I talked about it. Here's why. Let's assume you are married and you have a son. Let's assume that you have, call it $400 a month, being deducted from your paycheck for your health insurance plan. But the chances are that if your company is providing for some of that, chances are that your company is probably in the situation where they may be paying $1,200 a month.

If you leave, you need to be able to shop and say, "How am I going to cover my health insurance expense?" And it's not going to be cheap. Now, if you choose to cut your expenses, now maybe we go buy an Obamacare plan off the health insurance exchange, cut your income down, now all of a sudden you can get your subsidies up, and maybe you can get it for cheaper than $400, or maybe that number is $1,200.

But until you actually have that on your cash flow statement, you won't have it as a to-do list of something you need to research. If you look at your tax expense, and you calculate what your tax expense would be working right now at $200,000 of household income, versus what it would be if you were on a road trip, because that's one of my five, you're on a road trip and you're working at a campground, and you're bartending here and there at special events.

Well, if you get rid of your $50,000 tax expense, but you still can cover your lifestyle off your investment income, that's a major, major benefit. So that's why you need to do the cash flow statements the way that I teach to do them, instead of just with Mint. Mint is a good starting point, but it needs to go on from there.

You don't have an accurate understanding of the 4% rule. And that's okay. Most financial advisors don't have an accurate understanding of the 4% rule, and most people that write articles on the Internet about the 4% rule probably have a less than accurate understanding of the 4% rule, and I'm not even sure that I have an entirely accurate of the 4% rule.

I've read the study, and I've read a bunch of some of the other studies, but even still, you've got to keep working on it. So here's what you said. "Using the 4% rule, which is just a rough estimate for a conservative portfolio return rate as I understand, we would need $1.5 million to have $60,000 per year, which is what my family currently spends per year, including child care." That's incorrect.

I will link to the study in the show notes, and you can read the original study. It was done by three professors. It's called the Trinity Study, and the reason it's called the Trinity Study-- it was from three professors that were employed at Trinity College or Trinity University or something like that.

But what they did is they went and they back-tested. They published this article in February of 1998. The professors are Philip Cooley, Carl Hubbard, and Daniel Waltz. And they went back and they back-tested various portfolio construction rates for various periods of time--15 years, 20 years, 25 years, 30 years-- and they modeled the failure rate of a portfolio based upon what the withdrawal rate, expressed as a percentage of the initial portfolio value, was.

And they modeled this for accounts of 100% stocks, 75% stocks, 25% bonds, 50/50, 25 stocks, 75 bonds, and 100% bonds. And they modeled various distribution rates. And the reason that they did it is because when you're sitting down and you're trying to figure out, "Okay, I've got a lump sum of money, I've got $1 million invested.

Do I take out 2% of the portfolio value, 3% of the portfolio value, 4% of the portfolio value, 5%, 6%, 7%, and 8%?" In a year where the market may increase by 20%, you would say, "Well, I could go ahead and I could take out a lot more, but what about in the year where the market decreases by 20%?

How much do you take out then?" So what they did is they started with a set percentage period, and they did this over different time horizons. They did it over, again, 15, 20, 25, and 30 years. And they assumed a number of rolling periods of data from 1926 to 1995.

And so they said, "Assume a retiree retired in any one of these periods from 1926 to 1995, what was the percentage of success?" So what the data, the results that came out of it, is that it seemed like a distribution rate of about 3% to 4% was a fairly safe distribution rate at the 30-year time horizon if the portfolio construction were-- I don't remember off the top of my head-- if either were something like the 75-25 portfolio that it had-- here, I'm looking at the data.

So the 4% withdrawal rate from the portfolio that was 75% stocks and 25% bond, it had 100% success in 15, 20, 25, and 30 years. And so that was where about the 4% number came from. Now, what about the 5%? I'm cherry-picking a number from it. But that's basically what the 4% rule is.

So it is a useful rule of thumb, but there are a lot of issues with it. Number one, this is a back-looking analysis. And this is the problem with all data in the stock market. That's a fairly long period of time, 1926 to 1995. And by the way, I'm just referencing the original study.

I'm not referencing the updated study. That's a fairly long rate of time, but that's all backward-looking. Do you have any confidence or guarantee that the next 100 years are going to be like the last 100 years? Is it possible? It is. Is it likely? Eh, maybe. Probably, maybe. Are there reasons why it could be dramatically different?

Absolutely. The 4% rule is just simply a useful rule of thumb, and it's got problems a mile wide, and I'm going to quit there. I'm not going any deeper into it. It's a good rule of thumb, and I'm going to use it today even in answering your question. But don't put everything on the 4% rule, and the 4% rule is not a conservative portfolio return rate.

Here's what the problem is with that. So you could estimate that your portfolio is going to return a conservative portfolio return rate at 4%. But if you have a 4% nominal return--it's called a nominal return when your portfolio grows in value by 4% each year-- what's the real rate of return when you factor in inflation?

1%. Because if you have a 3% inflation rate, you have a 1% real rate of return. Well, now what does your portfolio do when you adjust it for that 1% real rate of return? Not much. So if you were saying, "I want a 4% real return," then you have to have 4% plus your inflation rate, and this would bring you up to a 7% to 8% return, and that's not a rough estimate for a conservative portfolio return rate, at least not when using a balanced portfolio of publicly traded securities.

So just be aware of that. Also, you asked a good question. I'm going to cover it in just a minute. How to get your money out of retirement accounts. However, "a good portion," possibly up to 2/3, "of that is tied up in retirement accounts that would have a penalty if we began drawing them out early." The two things to research for you--you can get it out.

The two ways to do it that I'm aware of right now--well, actually three ways. Number one, take it out, pay the penalty. Number two, do a Roth conversion ladder. And number three, use the rules of IRS Code section 72(t) and have a series of substantially equal payments for your life expectancy, and we'll cover those in just a minute.

So let's talk about how I would think through this situation. And I made up five plans right off the top of my head to show you all the variables that you could factor in to your financial plan. You'll notice that the five is an arbitrary number. I just said, "I'll make a list of five," and so I made a list of five.

So here are five financial plans that I made up right off the top of my head, and all five of them work for you to retire today. None of them work for you to retire today, spend $60,000 for your life expectancy, which is over 60 years, based upon a conservatively managed portfolio of mutual funds.

But hear me out. So plan number one--and again, I'm using these to kind of get your creative juices flowing and show you how all the stuff that I've talked about so far works together. Number one, you quit working, your wife continues working, and you stay at home with your kids.

You said she would like to come home with the kids, but let's just assume she doesn't hate her job as much as you do. You despise your job. You quit. Your wife continues working. You stay at home with your kids. She works four days a week. You guys spend $50,000 a year.

Your wife makes $95,000, and I took and I said $60,000, and I'm assuming you're at home so you can cut out the $14,000 of child care expenses so you could actually go from $60,000 of current expenses to $46,000 of current expenses. Let's just say you spend $50,000. Your wife earns $95,000.

Okay, so I guess I have her going back to a five-day work week. She goes back to a five-day work week, and she earns $95,000. You have $640,000 in your retirement account. Let's assume your real estate investment in the apartment complex in Memphis goes belly up and you're swindled out of all your money just for the sake of this example.

I don't think that will happen. Hopefully not. But let's say you have $640,000. So you'll keep your $75,000 of cash just either in reserve or you use it to fund your side projects that you are doing for fun. Your wife funds a 401(k) with $17,500, maxing it out each year going forward, and you spend $50,000 from her income on your expenses.

And then you lose the rest of her salary to taxes. So let's say she makes $95,000 minus $17,500 for the 401(k) contribution is $77,500 left over. You guys pay $22,500 in employment and income taxes or just miscellaneous spending, and you're left over with $50,000. Now, that's not a precise tax number.

It's actually pretty high. You could do a lot better than that. It wouldn't be nearly that much, but I'm just using this as a teaching example. So let's use the 4% rule and solve for how long it would take to achieve a lump sum of $5 million. And the reason I chose the $5 million is because that's the number that you said you would want to solve for at a 4% rule.

So $5 million--4% of $5 million is $200,000 of income. So if you had a $5 million portfolio, you would be able to take a $200,000 distribution from that. Now, for the sake of simplicity, let's ignore the necessary inflation calculations. So here's what you need to do. Punch this into a financial calculator.

Punch in future value, $5 million. Present value, $640,000. Put that in as a negative number to get your calculator to work properly. PV, $640,000. Let's make up an interest rate to use. I'm going to use a 7% interest rate. Now, is this conservative? Is this aggressive? Let's pretend that over time we're going to get a 10% average return, and I'm going to take off a 3% inflation number off of that without doing a proper inflation-adjusted calculation.

I'm just going to use 7. And let's put in 7 as our interest rate. If you want to use a number, stick another number in for your interest rate on your financial calculator. And then let's put in an annual payment of $17,500. Type in $17,500, change the sign to a negative, and then click the little "solve" button, and you're going to solve for "n" in this case.

And we're going to figure out how many years does it take us to achieve a $5 million portfolio under the scenario that I illustrated. Under this calculation, the "n," the number of years, is 26. So that would put her at age 61. And this ignores any money that you earn to live on and invest in addition to that.

So this would be one example to show you that you don't have to do one thing or the other. You would start with saying, "I want $5 million of investment capital, and that's my target goal. I don't want to work my job. My wife wants to work. She likes her job.

And so you stay home." She just put $17,500 in the 401(k), and because you already have $640,000 in retirement accounts, you've got that $5 million portfolio in 26 years when she's age 61. Now, I ignored in that example your real estate, and I ignored the equity in your house.

So is that a good thing or a bad thing? I don't know. Just showing you how some numbers can work. It's not either/or. So that's scenario one. You quit working. Your wife continues working. You stay at home with the kids. You guys spend $50,000, and you still wind up with your $5 million.

It takes you 26 years, though. What about scenario two that I made up off the top of my head? You both quit working your jobs, but you replace your bare necessities with work, and you don't save any money. So here's what I mean. Let's say that you quit working the jobs that you currently are working, but let's assume that with some kind of part-time work, maybe a bartender-- that would be a good thought if you like doing that-- you make just enough money to cover your living expenses of $50,000 a year, and you simply decide to become comfortable with the fact that you don't need to accumulate more money for retirement other than what you have and let it grow over time.

And by retirement, I'm talking about a traditional age 65 type retirement. Now, bartender, could you make $50,000 a year as a bartender, especially if some of that money is in tips? And although technically you need to declare it and pay your taxes on it, I would say 98% of bartenders don't.

I think you could. Would it be a good idea? That's up to you. Be careful about that. It's hard for me to imagine that being a healthy lifestyle, but hey, you do what's right for you. But whether that means your wife works part-time and she makes $2,000 a month and you work part-time and you make $2,000 a month, some way you come up with $50,000.

So let's do a calculation, and let's figure out how much would your current assets grow and be worth at the age of 65 without making any further contributions. So let's mix up my numbers a little bit. Let's assume now that we're going to use your $815,000 in investable assets.

So I'm going to bring in and I'm going to assume you invest your $75,000 of cash, and I'm going to assume you invest $100,000 in real estate. So you stop today. You stop working at 35, but you keep the $815,000 invested at the 7% rate of return. So pull out your financial calculator.

Go online. You can do this online. Find one for free. $815,000, stick this in as your present value. Change the sign to a minus, put it in PV. I is going to be 7. 30 is going to be the end because you're 30 years old, and you're going to do this--excuse me, you're 35, and we're going to give this to the age of 65.

And your payment is going to be zero because you're not making any further contributions to the account. Well, at age 65 under this scenario, you now have $6,203,987.86. That's a lot of money. A lot of money. So this would be a very easy scenario for you to do. You guys just decide we don't need to earn this $200,000 so we can keep saving all this money.

Let's just earn just enough to make our lifestyle, just enough to pay our bills, and let's keep this money invested. You've got $6,000,000. That's a lot of money. So you should feel okay with that. You've done an amazing job at accumulating capital at your age. That is awesome. Scenario number three.

Let's pretend that you and your wife decide that neither of you wants to work for income while your kids are young. And you just are hopelessly inept at investing, and period. In fact, you can't even do the simplest thing when it comes to investing, so you keep all your money in cash and you just spend it all little by little.

I know that this is a straw man. You just take it all in cash and you spend it little by little. Well, let's run the calculation. You have $815,000, and you spend $50,000 per year. Divide those numbers in. What do you wind up with? $16.3. So with zero investment return and also ignoring any and no inflation growth, no increase to keep pace with inflation, just a flat $50,000 a year, you have 16.3 years to spend all your money.

So you could stop today and you could spend all your money over the next 16.3 years, and then you can have that long to build up a business that will make you some money. Now, is that one a real scenario? No, obviously not. I just wanted to prove to you that if you think of this money as I've got to earn passive income off of this money for the rest of my life to cover a 60-year retirement from mutual funds, that's dangerous.

You can't do it. But if you think of the fact that you've got 16 years of buffer to build up other sources of income, whether it's, again, part-time job, consulting, something like that, then you could do that. By the way, don't worry, I am going to run a scenario where you completely quit.

Now, let's go on to scenario number four. Let's just assume as an example that you and your wife decide that you both want to go out and travel. You mentioned travel in your email, that that would be fun. You say maybe you would like to do slow travel. So let's pretend that you figure out that you can travel happily around the United States in a motor home on $3,000 of monthly income.

Well, let's make up a scenario. Let's say that you both work for the next year, just like you are now, and you save all you can. And because you're focusing on your savings, you manage to save an additional $100,000 of cash on top of the $75,000 of cash that you have right now.

So this leaves you with $175,000 in cash saved. You clean up your house, you spruce it up, you paint it, and you put in new carpet, and you get your house in Pittsburgh ready to rent out. You spend $75,000 of cash on a rig to go around the country in.

Maybe you buy a fifth wheel and a pickup truck or something like that. You spend 70--so I give you a budget of $75,000 to get a nice big fancy rig that you like spending time in. Now, I don't know what houses rent for in your area, but where I live, a house valued at $140,000 would rent out for maybe $1,500 to $1,800 a month.

It would depend a lot where I live on the neighborhood, obviously, as it does everywhere, but let's call it $1,500 to $1,800 a month. Let's assume for you that you can clear $1,200 per month in your area after expenses. So just as a--if your number is different, plug in the right number.

Let's say that your apartment investment in your shares of the apartment complex, let's assume that that is earning you $800 per month. You said it could earn between $500 to maybe as much as $1,200 in the future, so I split the difference at $800 per month. So now you have $2,000 per month of income, and you have $100,000 of cash in the bank, and you didn't have to touch any of your retirement accounts, and those can just sit there and accrue over time.

And remember the calculation that we did earlier? You have $640,000 in retirement accounts. Well, let's rerun that calculation, and let's see what that would be worth with no distributions. So let's put in $640,000, change the sign to negative, and minus $640,000 is our present value, 30 as our end, 0 as our payment, 7 as our interest, and the future value of that account at the age of 65 would be $4,871,000.

So we've got $1,200 from you renting your house out, you're living in an RV, traveling around the country, you've got $800 coming in from your investment account. You know that you're going to have, let's call it $4 million to $5 million in your retirement accounts at age 65, and you still have $100,000 in the bank, and you need to make up $1,000 a month shortfall.

So you have 100 months, which would be 8.33 years of income, sitting in that bank account to cover the additional $1,000 a month that you need. So you've got 8.33 years to figure out a way to earn $1,000 a month from your consulting or your online business or your blog, or maybe you need to set up in Mexico in 10 bar at some bar in Mexico for 4 months during the winter, and that's what funds your lifestyle.

How do you live on $3,000 a month? Well, maybe you set up residence in a no-income tax state instead of Pennsylvania. That'll save you a bunch of money. Maybe you set up your residence in a place where insurance costs are low. Maybe you go live abroad. You could go live in Spain for $3,000 a month.

You could live in Mexico. Maybe you need 4 or 5. I don't know. You can come up with ideas, and you run with them and design them for yourself. But this would be one thing that you could do. You could rent out your house. You could take that real estate and make up a little bit of the difference and keep that retirement portfolio growing for your future big-boy retirement, so to speak, when you all of a sudden start spending your $5 million at age 65.

Scenario number 5. Let's say that you just decide you do like real estate. It's okay if you don't. I personally like how it works, but I don't really want to do it every day. Let's say you do like investing in real estate. So let's say you take all of your assets, and you start buying rental houses, and let's assume that you pay cash for all of them.

It eliminates all your risk, lowers your returns because you can't take advantage of any leverage, but, man, you don't have a thing to worry about. Life is good when you're in a low-risk situation. So you buy 10 houses for $100,000 each. You take the money that's in your retirement account.

You move it into a self-directed IRA, and you use that self-directed IRA to buy real estate. It's a little bit complicated to do, but you can do it. Maybe you net--let's say that each of your houses is $100,000. Maybe at a $100,000 price level, you net--call it $800 a month for each of your houses.

I think that's pretty conservative. I think that's really conservative, by the way, but let's just say that. Well, $800 a month times 10 would be $8,000 per month of income. $8,000 of monthly income times 12 would be $96,000. So now under that magic--the magic hat that I just waved there, you now have $96,000 of income on a portfolio of rental properties that's going to be paying you income for the rest of your life, and maybe the portfolio would grow, and you can live on 50, and you can save another $40,000 a year.

Now is that accurate or realistic? I don't know. You've got to research your market. Every market is different. There are markets at which that would be low, and there are markets at which that would be high. I'm just trying to get you thinking about it. Now, obviously, some of that money is stuck in an IRA because you have a self-directed IRA, so you have to get it out.

So I'll tell you what. Let's make up plan number six, and plan number six is actually number three where I said you didn't invest any money and you had 16 years to spend all your money because it's sitting in cash. That's not really a strategy, so let's make up plan number six.

So let's say you retire now, today, and you plan on withdrawing 4% of your portfolio from mutual funds, and you are okay with cutting your expenses to that level today, and you don't worry about any future earnings or projects. You don't worry about any future money that you can have come in.

Now, is the 4% going to last you for 60 years? I'd be uncomfortable with that, but I think you've got enough of a margin of safety of the fact that you do have future earnings and you do have future projects. So let's just go through as a thought experiment, and let's just play and see how this would happen.

So let's assume that we're going to use all your money now. We're going to roll your real estate money back into mutual funds, and we're going to use this 4% rule. So now you've got $815,000 of investment capital, and you're living in a paid-off house. So let's assume that you're going to live on 4% of your asset base.

Well, $815,000 times 4%--that equals $32,600 annually. So you're currently spending $60,000, but $14,000 of that--so we've got to live on that money. You're spending $16,000, but $14,000 of that is child care, so you fire your nanny, so that drops you down to $46,000 of expenses. What else could we do?

Well, you've got three cars, and so maybe because of the fact that you and your wife are both at home, maybe you can live on one car. My wife and I do. We have one car, and it's the best thing that ever happened. I hate dealing with car repairs and fixing them and changing the oil and the stupid wiper blades, so having one is great.

If I could have zero, I would. I haven't figured that one out yet. I'm still working on it. So let's say you sell two of your cars, which probably conservatively-- let's say it drops out $6,000 of annual expenses, whether that's between car insurance, car repairs, fuel. It's hard for me to imagine that operating a vehicle is much less than $250 a month when you count in all expenses.

It's much less than $250 a month when you count in just insurance and maybe gas. But let's just say that cuts out $500 a month of expenses. Neither of you has a commute. You don't need those two cars. You can drop the insurance on your third car down to 4,000 miles a year.

Well, that cuts $6,000 out of your budget. So now we're down to $40,000 of expenses. Remember, we started with your $60,000. I dropped off your nanny and $6,000 of annual car expenses. We're down to $40,000. Well, you're both done working at this point, so maybe you could cut out-- let's say that we could lower your expenses and get rid of $10 of daily work expenses for each of you.

Now, you said in your comment that it's really not a big deal for you. You don't eat out a lot. In a part of your email that I didn't read up front, you said, "I eat at Chipotle, not at expensive places." But let's assume that whether it's the $7 burrito bowl at Chipotle, whether it's the cost of whatever clothing you need for work that you can't get at Goodwill-- you can't wear ripped jeans with paint spatters on them that you got out of the dumpster, whether it's the amortized cost of the clothing, maybe any convenience food or eating out that you and your wife do because you're just tired at the end of the day working the jobs that drain you.

Maybe it's Kindle purchases that you make because you don't have time to go to the library. Maybe it's accountant fees that you pay because you don't have time to do your own taxes or investment advisor fees that you pay because you don't have time to learn about investing. Let's just assume that you can cut $10 a day out for each of you-- $10 a day at 200 working days per year times 2.

That would be $4,000 of work-related expenses. Now, you've got to do your cash flow statement very, very carefully because you may not spend $4,000 a year on work-related expenses. You may not. But the answer, the way that you answer that charge is you go look at your actual expenses and you say, "I spent $3,423 last year." Well, guess what?

Your working is not that expensive, or it may be. So you've got to look at your actual numbers. So I cut out $4,000 of work-related expenses. Now you're down to $36K. Maybe you can get rid of--I don't know--you get rid of a cell phone. You and your wife share a cell phone, and your bills are $100 a month, so that saves you $1,200 a year.

We're down to $35,800 now. Well, I've got to get you down to $32,600, and I'm $3,200 short. Without knowing every detail of your budget--I don't know--I'm going to stop there. I don't know where to cut the $3,200, but there's probably somewhere you could cut it. Or maybe there's not, and you don't want to cut it, so we just adjust our plan.

So maybe the $46,000 of annual expenses assumes a flat spending number for the rest of our life, because that's what the 4% would say, and we're ignoring future Social Security income. So maybe I just need that $46,000 number off the portfolio from 35 to, let's say, 60--let's go 65 or 67, whatever your full retirement age--let's say 65 for easy numbers.

And then from 65 to 90, I can count on $1,500, $2,000, something like that of Social Security income. Well, now let me tweak the portfolio. Or maybe we could address that and tweak our expectations and say, "You know what? I've got an 8-month-old son. I'm going to spend more money now.

We're active. And later, I'm going to spend less money. So right now, I'm going to spend $40,000, but later, I'm going to be okay with dropping that to $2,000 a month, because I just don't want to work." Maybe you can--again, like I said, cut expenses. You can use the extra time that you have now to manage your investments or manage your own real estate and save those fees.

Or maybe you just need to work and earn an extra $3,200. So whether that's building birdhouses in your garage and selling them at a flea market or giving speeches to engineers at how to retire early based upon what you did. Maybe you rent your house out in Pennsylvania for $1,500 a month, and you move into a two-bedroom condo somewhere in Texas or in Maine or in Seattle or rural Pennsylvania for $1,000 a month.

And so now you've got an extra $6,000 of free annual cash flow from the difference there, and I hit my $3,200 number. So hopefully that helps. I know I'm throwing a lot of information at you, but this is how--in my opinion-- this is how you think. This is how you need to think, is you need to figure out what plan works for me.

And once you recognize that you could do any or all of these plans or you can mix and match and custom mix, dude, you've got a million bucks. It's a lot of money. But I still, if you're sitting in my office and saying, "I'm going to live on this million dollars and I've got to cover the $60,000 income for the rest of my life," I'm saying, "No, I can't guarantee it." I can't in good conscience face the risk of you sitting there and saying, "I don't have the money this month, this year.

It doesn't work." So if I were your financial advisor, I would say, "No, but that doesn't mean you can't retire. It just means you've got to work on the plan and you've got to know what you want." Maybe the thought of living in an RV and traveling around the country is awesome and it's your life's dream.

And maybe you say, "That is the dumbest thing I've ever heard. I want to sit at home and play in my bedroom on my computer and model computer programs." I don't know. Maybe you want to go and pack your kid up and you guys want to go backpacking in Inner Mongolia and you need $2,000 a month.

That's where you've got to get into it with a good plan or a good advisor and figure it out. Now I want to answer your question as far as how to get money out of those retirement accounts and then we're done. And I hope that this was helpful. It was a fun scenario for me to think through, and I'm hoping that the way that I'm answering it is interesting and helpful to you.

How do you get your money out of that account, of your retirement accounts, if you need it, before 65? Like I said, there are really two major ways. There is a third way. The third way, let's just say it's way number one. Way number one, just take it out.

Pay the penalty. The reality is if you're doing the early retirement thing, your tax rate is probably lower. You pay a 10% excise penalty plus the tax rate. So 10% is probably less. Let's assume that you're in a 0 or 10--let's say you're in a 10% bracket in retirement.

So basically your 10% excise tax plus your 10% effective tax rate means you're in a 20% bracket. Well, guess what? You're probably in a higher than a 20% bracket, burning $200,000. So maybe that would be--I shouldn't have said 20% bracket--20% effective rate, earning $200,000. So you could just take the money out and pay the penalty.

Nothing wrong with that. It's expensive, probably not a good idea, but guess what? You're a big boy. It's your money. If you want to do that, it's fine. Everyone who signed up for a 401(k) and IRA, you should know the rules going in. And it's not like--I hate it when financial advisors--and I've done it, so I don't like how I've done it-- sit back and it's like, "Tsk, tsk, tsk, tsk.

You can't take your money out. You're going to pay the 10% fee." Now, is it a good idea to go giving up 10% of your capital? It's a horrible idea. But you know what? It's your money. If you decide to do it, that's fine. Be a big boy, big girl.

Just do it consciously. I hate to see it happen, but I understand. I get it. The two major ways that you get it without incurring that penalty is a Roth IRA conversion ladder and then what's known as the 72(t) rule. So let's start with the Roth IRA conversion ladder.

By the way, both of these you need to research, both of these carefully, because they are intricate, they're a little bit complicated, they're actually kind of hard to do in practice. Some people say they're easy. I'm not convinced. But some people say they're easy. So a Roth IRA conversion ladder basically means this.

What you do is in any year that you want to, you can convert funds from your IRA or 401(k) into a Roth IRA. And when you convert it, you go ahead and you recognize the income. So instead of the income being in deferral, you go ahead and recognize the income and you pay the tax.

So you want to convert $30,000 out of your 401(k) or your IRA, and you want to convert that into a Roth IRA. So your taxable income in the year that you do that increases by $30,000. Now, it would be a good idea to do this in a year that you've stopped working, because if you're earning $200,000 now and you add $30,000 onto that, you're now getting taxed that additional $30,000 of income at the highest marginal bracket.

So this is not a good plan if you're working and earning a high income. But if you're pursuing the early retirement plan, which is where you pull back from work at, and let's say you go from $200,000 of income to $0 of income, and you're spending money out of your savings account, well, now you've got $0 of income, so you can pick up $30,000 of income from the transfer of the IRA to the Roth, and with your standard deduction and your personal exemptions and dependency exemptions, you're basically tax-free, essentially.

So not a lot of cost there. So you've got to manage that, and you've got to calculate those numbers to figure out what works and what doesn't. So it would be a good idea to do that in a year that you've stopped working. Now, simplifying the Roth rules, any money that you put into a Roth, because you have already paid income tax on it, you can take the contribution out of the Roth without any further excise tax penalty on the contribution.

So if I put $5,000 in a Roth, and the account grows up to, say, $5,500 at the end of the year, and I need my $5,000, I can just pull my $5,000 out. As long as I leave the $500 in there, then that'll be fine. I can get the $500 after $5,500, but I can just take the $5,000 out.

If I took all $5,500 out, then I would be taxed my 10% excise penalty on the $500 of gain. So that would be $50 in my example. So this is basically the rules that we're using, but there's a little rule that's called the 5-year rule. So if you do this conversion from an IRA into a Roth IRA, you have to leave the money in the account for at least 5 years.

And then you can take the distribution of whatever the amount was that you converted without paying the 10% penalty. So the way that you set up a Roth IRA conversion ladder is you have to arrange your financial affairs in such a way so that you have cash outside of your retirement accounts to cover your first 5 years of expenses, or you need to take them out and pay the 10% penalty, and then you can take the distributions from the Roth penalty-free.

And the ladder here basically means this. You build a ladder where each year you do another conversion and you take a distribution. So if you anticipate that your annual expenses are going to be $40,000, then this year you stop working, you pull $40,000 from your savings account, and you convert $40,000 from your IRA into your Roth.

So now you have taxable income of $40,000 because of the conversion from the IRA to the Roth. And then 5 years from now you can take that $40,000 out of the Roth and you can spend it that year. So then next year you do another $40,000, then that means that 6 years from today you have that $40,000 coming over.

Then 3 years from now you do the $40,000, then 7 years from now you've got that $40,000. And then hopefully you've got the money in savings or you're earning it from part-time work or something that gets you from today to year 5 where you can first take the distribution from the Roth penalty-free.

Is this a hassle? Definitely. Is it a pain? Yes. Does it have risk? Absolutely. You have risk that Congress could change tax rules? Unlikely, I think, but possible. I think your major risk here is you have a risk of volatility. So if you convert the money from an IRA into a Roth IRA and you're planning on using it in 5 years, you better start kind of tightening up that account because you don't want to run the risk that 4 years from now you have a 30% market correction and your 40% drops down to your $40,000 of money that you were planning to distribute.

Now that account only has, what would that be, $27,000, something like that? So you've got to make sure that you're managing your risk of volatility with your distributions. Now is this doable? Absolutely. 100%. Two resources for you. The best one, Brandon, the mad scientist, has written a lot on this.

And then there is a couple that writes a blog called GoCurryCracker. GoCurryCracker.com, just like it sounds. Both of them, well, Brandon is doing this and GoCurryCracker is doing this. And they explain it and GoCurryCracker actually puts his tax returns right online for you. So check that out. Those would be good resources if you're interested in that strategy.

Now what about the 72(t) rules? So this is -- we're getting in -- we're wading into the weeds with this one. But basically what Section 72, Subsection (t) of the Internal Revenue Code talks about is the permissible distributions from an account and how to take them out without paying that 10% penalty.

And so these 72(t) rules are taking -- is the idea that if you take them out on a lifetime schedule, then you can avoid the early distribution penalties. And so often you'll hear this referred to as a series of substantially equal payments. So if you turned 55 years old and you wanted to retire early and you wanted to start taking money from your 401(k), the IRS says, "Yes, that's fine.

You can do that." But what you have to do, if you want to take it out without any early distribution penalties, what you need to do in order to make this account work is you need to take it out in a series of payments that are going to be predicted to be essentially level over the course of your lifetime.

So if you're going to do this at age 55, then what you're going to do is you're going to calculate your life expectancy. Let's assume you have a million-dollar account. You're going to calculate your life expectancy, and then you're going to take each year a substantially equivalent amount of money.

And there are three different ways that the IRS permits you to run that calculation. There is an amortization schedule. There is an annuitization schedule. And there is a schedule that's based upon the required minimum distribution formula. Now, the problem with this approach is -- well, there are two primary problems.

Number one is that once you start the distributions from the account, you cannot change them until at least five years or 59 1/2, whichever comes later. So if you were to set up your IRA and you're going to start taking a distribution from that IRA into your checking account, you could do that.

But you've got to be confident that exactly that same amount of money is going to come in every year from now on until the age of 59 1/2 in your case because that would be longer than five years. If you did this at 57, you would have to do it up through 62.

So you have to use the same method, and you have to take the required distributions every year up until age 60, 59 1/2. I always round that to 60, so let's call it 59 1/2. If you modify the payments in any way, then the 10% penalty is imposed retroactively all the way back to the first year of distribution.

There's an exception if you die or are disabled. And then there is an exception if you make a one-time change from the amortization or annuitization methods of distribution over to the required minimum distribution calculation method. So you can make -- those are two exceptions to it. But basically -- I should just skip stuff like that in my notes, but I like to be Mr.

Complete. Basically, this is trouble because you've got to decide exactly what you're going to do for the next 30 years. Now, can this work? It can work, and it will avoid that 10% penalty. But the problem that you face with this approach is that let's say that you take those distributions for 10 years, and then you get a great job.

Well, you can't -- and you don't need the distributions anymore. You'd rather just have the money still working for you. You can't stop it. Now, the key here would -- the way that you would get around that is you would set up different accounts with different amounts. That would be one way that you would get around that.

But there's a bigger problem for early retirees. You can't set those payments at a high enough rate usually to get your income amounts. So I went and calculated -- and there will be a calculator in the show notes to do a 72(t) calculation. I went and calculated using $815,000 just for round numbers for a 35-year-old male and a 35-year-old female spouse.

And the maximum amount that you could take out under the 72(t) rules would be $26,298 because of your long remaining lifespan. So this is the other problem that confounds many people trying to use this approach is you are not able to get enough money out of the account to fund your lifestyle.

But those are the two ways that you would do it. Is it workable? Absolutely it's workable. I ignored in my answer to you -- we're not talking about investing in dividend-paying stocks. For example, that would be what you're actually trying to do when you're saying live off the interest is you're trying to live off of dividends.

So maybe you could put together a portfolio of dividend-paying stocks or a portfolio of maybe buy a mutual fund that was focused on dividend growth. And you could arrange your life to live on the dividends from that. Maybe you could make a -- by the way, I did go just real quick as a quick proxy so you'd be interested.

I went and checked Vanguard Equity Income Fund. I didn't try to look around. I was trying to see what is the yield for the Vanguard Equity Income Fund. 2.5%. So there's a 2.5% yield. So if you've got $815,000 of investment assets in that and your yield is 2.5%, that's $20,000 of income.

That could work for you. If you had $20,000 of income and then you added on another $15,000 or $20,000 of employment income or business income, then that would reach your spending goals. And then that keeps your principal intact and gives you a dividend yield off of your investments. And the nice thing about that is that generally with a dividend yield, generally the company's value of the stock is going to rise over time.

And then the value of the dividend ideally will rise over time, which will help your income stay -- keep pace with inflation. I didn't talk about any private business investments. So I didn't talk about a McDonald's franchise or a Chevrolet dealership or a Subway franchise or a Courtyard by Marriott franchise.

I don't even know if you can buy those, but, you know, that type of thing. I didn't talk about investing in a friend's business. I didn't talk about real estate strategies with leverage. For example, maybe you could go out and you could take your hundred -- let's say you work for another year.

You save $100,000. You got $175,000. Now you go out and you buy ten individual properties. You put $17,500 of down payment on each of them, and you borrow all of the remaining -- those numbers don't work. You go out and you buy real estate. You borrow a million bucks, and you let your tenants pay it off over the next 30 years while you go travel the world and make money.

I mean, there's a gazillion things that you could do. I didn't talk about strategies with annuities. I didn't talk about -- there's a ton of ways you could do this. But I didn't talk about sabbaticals. I was going to talk about sabbaticals, and I'm going to skip it. You know, frankly, I would start there.

I would start just by going to your boss and saying, "Listen, my wife and I are going to take a year off. You've got $75,000 in the bank. You don't need to make any decisions. Go take a year off, and guaranteed your job will be there when you want to get back.

Take a year off and go sit on the beach in Mexico for a year, and you'll probably gain a little bit of perspective and a lot of ideas. And in that year, you've got a whole year where you can code every day and practice, and it'll be fun for you.

And you and your wife can go and do it together, and it'll probably reinvent your whole life. I bet you when you quit, they'll offer you some sort of remote working arrangement, or the job will be there when you get back. Or if it's not, go take a year off, and you've got an entire year to find a new job that you love.

So those are my ideas, and hopefully you've benefited by thinking it through. And I would encourage you, go buy yourself a brand-new notebook. Make it an expensive one, a nice leather-bound, beautiful journal of some kind. Maybe you already do this, but I think it's -- I always used to hear Jim Rohn say, you know, "I buy expensive journals so that I can put thoughts that are worth being in them." You put a five-cent notebook and keep your journal in a five-cent notebook.

That was his little funny thing, and I thought that was a good idea. I don't buy $30 journals, but I do like them to be nicely bound. So go buy yourself a nice journal to write in, and start by just spending a lot of time with some of the activities of writing out what you would actually like.

Write out your ideal day, you know, from the beginning to the end of the day. What is my ideal day? How would it work? How would it flow? How much time working? What kind of work would I be doing? Write out lists of things you want to do. Write out your bucket list.

I know it's a cliché, but it's true. Do you want to go run with the bulls? If so, make your year's vacation in Spain so you can be in Pamplona when the running of the bulls is there. Do you want to see Victoria Falls? If so, go to South Africa and find a villa on the coast of South Africa to spend your sabbatical in, and then go travel throughout Africa.

Buy a Land Rover and go up to Victoria Falls and--where is that? I don't remember the country that Victoria Falls is in. But whatever's on that bucket list is going to make a big deal for you. Then also, spend time writing down ideas. Make a list from 1 to 30 of what are 30 different ways that I could earn $2,000 a month in a fun way that I would like to do it.

What are 30 different ways that I could earn a $200,000 salary doing the same work that I really love to do now? Who are 30 people I know that could help me with some of these ideas? My creativity is running dry on that. But the point is that if you'll start crafting ideas, you can see how you can implement any one of these things to meet your goals.

And so the disconnect is you can't just assume that a set of mutual funds with zero chance of failure is going to fund your life for the next 60 years and do it. No, that's not going to work. But you got a million bucks. You got a million bucks.

So design a plan based upon that million bucks. That's what I got. My best effort. I hope this was helpful to you. I wish I could do more, and I've intentionally stayed away from commenting on any of the more specific information that you gave me just simply because I can't give you personal financial advice.

This is an entertainment podcast. You haven't hired me as your financial advisor. So I can't give you that kind of advice. And I think that's how it should be. But this is a good example of why you need a podcast. I only have an hour and 18 minutes to answer your question, and all I did was raise some ideas that you might consider to be helpful.

This is why I think everyone needs a good, trusted financial planner. I really do because it's overwhelming. I guarantee you're going to have to listen to--John, I guarantee that you're going to have to listen to the show a few times to kind of get all these ideas. But it's overwhelming to try to figure it out.

But there is a way through this. And spend a lot of time getting clear on your goal and then ask more specific questions. And this will help when you are meeting with a financial planner, when you are talking to a financial advisor. When you have more specific questions, the computer program will run better, and the advisor will be able to give you a better answer.

Any advisor could run those numbers I gave for you. I don't know if you've ever run it. So learn how to use a financial calculator. You've got to sit down and say, "I'm starting with a present value of $815,000. If I could get a 7% real return on my investments, how much would they grow to?" There are a ton of options for you.

So I hope that this was helpful for you. I really do. And I wish you success. That's it for Friday's show. Please, if you haven't done so, come by the blog, leave a comment, leave a voicemail. I'd love to get some voicemails from you. I haven't gotten any yet.

So come on by at RadicalPersonalFinance.com and leave a voicemail that I can cover in a future Friday Q&A show. Have a great weekend, everybody. Spend it with people you love doing things that matter to you. Thank you for listening to today's show. This show is intended to provide entertainment, education, and financial enlightenment.

Your situation is unique, and I cannot deliver any actionable advice without knowing anything about your situation. Please, develop a team of professional advisors and consult them, because they are the ones who can understand your specific needs, your specific goals, and provide specific answers to your questions. I've done my absolute best to be clear and accurate in today's show, but I'm one person and I make mistakes.

If you spot a mistake in something I've said, please come by the show page and comment so that we can all learn together. Until tomorrow, thanks for being here. The holidays start here at Ralph's with a variety of options to celebrate traditions old and new. Whether you're making a traditional roasted turkey or spicy turkey tacos, your go-to shrimp cocktail, or your first Cajun risotto, Ralph's has all the freshest ingredients to embrace your traditions.

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