Early Retirement Withdrawal Strategies

How to fund your lifestyle before age 59.5

The early retirement movement, known as FIRE/CoastFIRE/Lean Fire has blown up the past decade. It took off even more during Covid, and now people seem even more burned out and pissed off with return to office 5-days-a-week mandates. In my financial planning meetings with people in their 30’s and 40’s, early retirement seems to be a goal for folks close to 100% of the time.

Early retirement can seem like a pipe dream. Especially if your assets are tied up in a primary residence and/or workplace retirement accounts that come with a 10% early withdrawal penalty before age 59.5.

So how do people retire before 59.5?¹ There are three main strategies to consider:

Taxable Brokerage Account

The “bridge” account, as the FIRE community refers to it. If you build up a substantial taxable brokerage account, there are no early withdrawal penalties for selling investments and funding your lifestyle. The flexibility this account provides allows you to invest in any way you want, contribute as much as you want and sell when you want.

Compared to a retirement account, the downsides here are that your money does not grow tax-deferred (you’ll owe tax on interest, dividends and potentially capital gains) and when you sell an investment that has grown, you’ll owe capital gains tax (either short-term or long-term). But for early retirement, the flexibility to sell without penalty makes this the most powerful account.

Potentially the best benefit to selling investments from a taxable brokerage account to fund an early retirement is something called “tax gain harvesting”.

There are three long-term capital gains tax brackets: 0%, 15% and 20%.

The 0% long-term capital gains tax bracket in 2025 is from $0-$48,351 for single tax filers and $0-$96,700 for married filing jointly couples. This means you can realize capital gains up to those thresholds and pay zero federal capital gains tax.²

It actually gets even better than that. You can add the standard deduction on top of those thresholds (in 2025, $15k for single, $30k for MFJ) and still owe no federal capital gains tax on those higher amounts ($63,351 for single, $126,700 for MFJ).

This is such a powerful strategy for those that retire before age 59.5 and have very low or no income (other sources of income count for those thresholds, so you have to be careful to count all sources) to fund their lifestyle and pay little or nothing in taxes.

Rule of 55

How about if you’re 40 years old and haven’t built up a big taxable brokerage account throughout your life and your all “investable assets” are held inside a workplace retirement account? Typically you cannot withdraw assets from a 401k plan without a 10% penalty until you are 59.5 years old (there are a few exceptions).

Luckily, there is an IRS rule called the Rule of 55, which allows you to take withdrawals penalty-free from a workplace retirement account if you separate from service in the calendar year you turn 55 or after (for public safety workers it's actually age 50!).

You can only use this rule from the plan you were contributing to when you separated from service, so if you have old 401k’s in different places this rule does not apply to those dollars. You can always consolidate 401k accounts so all your dollars are in your most recent 401k.

You’ll also owe ordinary income tax if the money you’re withdrawing is pre-tax.

You can’t use the Rule of 55 if you leave your job before the calendar year you turn 55. So no luck here if you want to retire at 49 and use this rule.

72t Distributions

If you have the bulk of your assets in retirement accounts and want to retire before age 59.5 (or 55), you can also take advantage of 72t distributions. These are a little more complicated so you want to be very careful implementing them.

These distributions need to be what’s called “substantially equal periodic payments” (SEPP) and there are three ways to calculate how much you need to take out each year. It’s also a requirement with 72t that you need to take these distributions for at least 5 years or until you turn 59.5, whichever is LONGER. So if you start them at age 50, you need to take them until age 59.5. If you start them at age 57, you need to take them for 5 years, even though you’ll be older than 59.5 for several of the distributions.

You can take 72t distributions from workplace plans like 401k’s or 403b’s AND from personal retirement accounts (IRAs). Again, you’ll owe ordinary income tax on distributions taken from accounts with pre-tax dollars in them.

Portfolio Withdrawals in Early Retirement

These are three of the most powerful early retirement strategies out there: using a taxable brokerage account for flexibility and tax gain harvesting, the Rule of 55, and 72t distributions.

The obvious downside to early retirement is you will need to live off of your assets for a longer time horizon. If you retire at 65 and live until 95, that’s 30 years of expenses to account for. If you retire at 50 and live until 95, you just increased your years of retirement expenses to 45, a 50% increase.

If you’ve heard of the 4% rule as a rule of thumb for “safe” portfolio withdrawals in retirement, that rule was originally conceived for a traditional 30-year retirement. A 45-year retirement alters the percent you can take from your portfolio by quite a bit, meaning you will need to save a much bigger lump sum than you might think.³

Morningstar published research last month on withdrawal rates for 2025. They estimate for a 40-year retirement, a 60/40 portfolio withdrawal rate with a 90% success rate is 3%.

What does this mean for what portfolio lump sum to target for an early retirement?

Simplified scenario: Using a 4% withdrawal rate and an income need of $40,000 a year from a portfolio, you would target a $1,000,000 portfolio. If you changed the withdrawal rate variable to 3%, you would now need to target a $1,333,333,33 portfolio.⁴

This bigger lump sum number might give you pause on how early you could retire.

Should you be using any or all of these strategies? I recommend consulting with a financial planner or CPA to determine if these strategies make sense for your situation and to help you understand the nuances with each.

If you want your personal finance questions answered in a future Mound Visits, comment below or send me an email at nick@nineinningfinance.com with your question/scenario.

Also please share this post with anyone you think might find it helpful.

Nothing in this email is intended to serve as financial advice. I don’t know your personal circumstances and would never provide financial advice through this medium. This newsletter is intended to be educational and entertaining. Please consult a financial professional and do your own research before making any changes to your portfolio.

1. Without inheriting money or having a big liquidity event from the sale of a business or stock options, etc.

2. You may owe state tax depending on where you live.

3. There are many other factors to consider for a “safe” withdrawal rate based on your personal situation.

4. You also need to consider other future income sources such as a pension or social security, rental income, etc. You might not need a $40,000 withdrawal from your portfolio forever.