Latest / The Financial Freedom Podcast with Fexingo: Quitting Your Job, Living Off Investments, Independence / How a Side Hustle Can Fund Your Early Retirement Gap Years
Transcript
- Lucas: So you've saved up a million two, you've got your withdrawal rate dialed in, and you hand in your notice. Feels amazing. Then year three hits and the market drops 18 percent and you start wondering if you left the corporate world just a little too early. Luna: That's the classic sequence of returns risk we've talked about before. But there's another way to buffer those early years that doesn't get as much attention. Lucas: Right — a small, deliberate side income. Not a full-blown business that demands forty hours a week. I'm talking about something that brings in maybe fifteen to twenty grand a year, enough to cover a chunk of your living expenses without triggering the tax problems that come with larger withdrawals. Luna: And the key word is 'deliberate.' You design it before you quit. You don't scramble for gigs when your portfolio is already down. Lucas: Exactly. Let me give you a concrete example. A graphic designer I know — let's call her Sarah — left her agency job at 38 with a portfolio of about $1.3 million. Her target withdrawal was 3.5 percent, so about $45,500 a year. Luna: That's tight in a lot of cities, but doable if you've got a paid-off house. Luna: So now her actual withdrawal need drops from $45,500 to about $27,500. That's a 2.1 percent withdrawal rate on a $1.3 million portfolio. Lucas: Which is extremely safe. Even in a down market, a 2.1 percent withdrawal rate has historically survived pretty much any scenario. And because the side income is earned income, it also lets her continue contributing to a Roth IRA — something you can't do if you have no earned income. Luna: That's a huge point. A lot of early retirees forget that Roth IRA contributions require earned income. If you're living entirely off investments, you can't add to your Roth. But with $18,000 in freelance income, Sarah can contribute the full $7,000 each year. Lucas: And that $7,000 grows tax-free forever. Over ten years, even at a conservative 6 percent return, that's nearly $100,000 in additional retirement savings. And it's all in a Roth, so withdrawals in her sixties are tax-free. Luna: But there's a tax trade-off. That $18,000 of self-employment income is subject to both income tax and self-employment tax — roughly 15.3 percent for Social Security and Medicare. Lucas: True, but in her case, her total income — the $27,500 withdrawal plus the $18,000 freelance income — is $45,500. For a single filer in 2026, that's well within the 12 percent federal bracket. And she can deduct half of her self-employment tax. So her effective federal rate is around 10 percent on the freelance income. Plus she's getting Social Security credits, which is actually valuable if you retire in your late thirties — you need at least 40 credits to qualify for benefits later. Luna: And those credits are based on your earned income, so by earning $18,000 a year, she earns four credits per year. Ten years of that side gig and she's fully insured for Social Security. Lucas: Exactly. So the side hustle doesn't just buffer the portfolio — it also shores up your long-term safety net. And there's another benefit I really like: it reduces the temptation to take on too much risk with your investments. When you know you have that income floor, you're less likely to chase yield or panic-sell during a downturn. Luna: You mentioned the Roth IRA ladder earlier — how does the side income interact with that? Because the ladder is a key strategy for accessing retirement funds before 59 and a half. Lucas: Great question. A Roth IRA ladder works by converting traditional IRA funds to Roth, waiting five years, then withdrawing the converted amount penalty-free. The converted amount counts as ordinary income. So if Sarah converts $20,000 from her traditional IRA to her Roth, that $20,000 is added to her income. Luna: So her total income becomes $45,500 withdrawal plus $18,000 freelance plus $20,000 conversion equals $83,500. That's pushing into the 22 percent bracket for a single filer. Lucas: Right. So she might scale back the conversion amount. Maybe convert only $10,000 instead. The side income gives her flexibility — she doesn't need to rely entirely on conversions to fund her lifestyle. That $18,000 in freelance income covers about eight months of living expenses, so she can be more strategic about when and how much to convert. Luna: It also means she can time her conversions for down years. If the market drops and her portfolio value is lower, she can convert shares at a discount and pay less tax. The side income keeps her cash flow stable while she does that. Lucas: Exactly. And here's a subtle point: the side income also helps with health insurance subsidies under the Affordable Care Act. Subsidies are based on modified adjusted gross income. If her MAGI is below 400 percent of the federal poverty level — about $51,000 for a single person in 2026 — she qualifies for premium tax credits. Without the side income, she'd need to keep her withdrawals low to stay under that threshold. With $18,000 in freelance income, she can withdraw less from her portfolio, keeping her MAGI down and preserving her subsidies. Luna: So it's almost like the side income pays for itself in tax and subsidy savings. That's a powerful combination. Lucas: It is. And it doesn't have to be graphic design. It could be tutoring, consulting, dog walking, house sitting — anything that generates earned income and doesn't require a huge time commitment. The goal is something that brings in $10,000 to $20,000 a year and takes maybe 10 to 15 hours a week. Luna: You know, we talk a lot about optimizing portfolios and withdrawal strategies, but this side hustle approach is really about optimizing your human capital. You're not fully retired — you're just retired from the grind. Lucas: Right. And that's a distinction that matters. The FIRE movement sometimes gets criticized for promoting an all-or-nothing approach. But the truth is, a lot of people find that having a small source of meaningful work — work they actually enjoy — makes early retirement more fulfilling, not less. Luna: And it makes the math work a lot better. So if you're planning to retire early, maybe don't aim for zero earned income. Aim for enough to cover your basics, and let your portfolio handle the rest. Lucas: That's a great way to put it. Before we wrap, I want to mention something that makes this kind of content possible. This show is ad-free and listener-supported. A small group of listeners chips in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making episodes like this. Luna: Yeah, it's a pretty lean operation. And we like it that way — no sponsors, no ads, just conversations that we think are genuinely useful. If you've gotten value from the show, that's the place to help keep it going. Lucas: Okay, back to the math. So the takeaway for anyone in the planning phase: model your gap years with a side income line item. Run the numbers on how it changes your withdrawal rate, your tax bracket, your subsidy eligibility, and your Roth IRA capacity. You might find that earning $15,000 a year for the first decade lets you retire five years sooner. Luna: And if you're already retired, it's never too late to start. Pick up a part-time gig that aligns with your skills and interests, and see how it shifts your financial picture. Lucas: Next episode, we're going to dig into something a lot of early retirees overlook: how to handle inflation when your portfolio is tilted toward growth stocks. It's trickier than you think. Luna: Looking forward to it. Until then, keep your side hustle small and your withdrawals smaller.