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"Prefund" retirement accounts - Good idea?
Old 02-02-2018, 06:13 AM   #1
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"Prefund" retirement accounts - Good idea?

I'm a 45 year-old professional on track for a financially secure retirement at 62. By on track I mean if I continue in my current, high income job with my current 401k/ROTH contributions and assuming a 6% average annual return, I will have met my savings goals.

That said I have been thinking about a "way out", where I would have the freedom to pursue a different career goal, work part-time etc... Fortunately, we are in a very good financial position owning our home and have few real financial obligations. Doing an analysis of what I am actually working for now, it turns out that it is largely 1) life-style creep, 2) health insurance and 3) retirement savings.

My wife and I are both comfortable trimming our lifestyle. Health insurance is a bit of a mystery still as I have only had it through an employer (and it seems very expensive otherwise). But my first question is this. Is it a bad idea to 1) downsize our home 2) buy another, less-expensive home free and clear 3) use the remaining balance to pre-fund our retirement accounts? Part three probably would have to be done over time as there are limits to what can be contributed to an IRA. So I imagine moving the money over time from a regular taxable account into an IRA.

Looking at the math, this one-time cash injection could easily take the place of 15-years of normal retirement contributions through a job.

The big idea here is to minimize my outflow so I can maximize my options.

Any thoughts?
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Old 02-02-2018, 06:25 AM   #2
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Welcome djmob7. A couple questions and some observations. Why 62? Are you planning on SS at that age? @ 62 you will still have the HI nut to crack. You do understand that you cannot fund IRA's unless you have earned income right? A good idea may to completely track your expenses for a period of time (maybe 2 years).


Good luck planning. Lots of great advice and threads to follow on this site
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Old 02-02-2018, 06:38 AM   #3
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Welcome to the forum!

You are thinking along the right lines.
1. Reduce expenses (stuff you don't care about), this will require less savings to fund retirement.
2. Downsize, same as #1, if you don't want/need a big house, why pay the extra for it.

I usually recommend to pursue tax deferred investing as most of the time, you'll be in a lower tax bracket in retirement. But I see no reason to do what you are suggesting with pre-funding your retirement accounts. It would be much better to stash the money in a taxable account at this point and keep it there. I don't see a benefit to sell in taxable to fund an IRA, locking the money up until 59.5. If you will be in the 12% tax bracket, there will be no taxable gains on this money or dividends.

Take a close look at income and expenses and your savings and figure out what you need. If you retire earlier, there will be more years to cover from your savings.
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Old 02-02-2018, 06:42 AM   #4
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Originally Posted by Bigdawg View Post
Welcome djmob7. A couple questions and some observations. Why 62? Are you planning on SS at that age? @ 62 you will still have the HI nut to crack. You do understand that you cannot fund IRA's unless you have earned income right? A good idea may to completely track your expenses for a period of time (maybe 2 years).
Thanks for the response.

I picked 62 just because it is the earliest I could take SS, whether or not that is a good idea.

I do plan to continue to work, if we were to downsize, but this would allow me the freedom to not generate a high income and still have retirement covered... The idea here is that I could explore other career opportunities, full or part-time.
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Old 02-02-2018, 11:16 AM   #5
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Hi and welcome! That's exactly what we did and it worked out great. Downsized and paid cash for a modest house we love about 5 years before retirement. Then:

1. Added the leftover proceeds to an existing after-tax account to sustain us between retirement (age 55) until deferred pensions and SS (age 62+). This taxable account grew like a weed in the market for 5 years.

2. Used the lack of a mortgage payment to max out 401k's, Roth IRA's, HSA (for me) and deferred comp (for DW) for our last 5 years of work. Love those catch-up contribution limits! Even had income left over, so plowed that into the after-tax account too.

Caveat 1: This maneuver was the icing on the cake after decades of disciplined saving and investing
Caveat 2: Our market timing turned out to be practically optimal

For us it worked like a charm.
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Old 02-02-2018, 02:07 PM   #6
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Welcome, djmob! As you can't really do anything to deal with the health insurance issue (except to avoid lifestyle choices that are known to contribute to poorer health), focus on the other two items. Once you get a handle on spending, that automatically increases your savings, which then gives lots of freedom for other choices. Downsizing sooner rather than later also helps with expenses (utilities, maintenance, insurance, etc.) so if that's something you are both interested in, I'd go for it.
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Old 02-02-2018, 04:01 PM   #7
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Quote:
Originally Posted by djmob7 View Post
1) downsize our home 2) buy another, less-expensive home free and clear 3) use the remaining balance to pre-fund our retirement accounts?...Looking at the math, this one-time cash injection could easily take the place of 15-years of normal retirement contributions through a job.
This is the key to an early (not 62, or on-time) retirement; Living within your means. If you can sell a house and are happy with the replacement less-expensive home, and don't take a huge tax hit from the sale, then why not? I agree with the others, you'll have to leave the investments in taxable accounts, unless you have earned income.

You'll save in property taxes and maintenance, as well, presumably. I would think that 15 years of your life is worth the housing 'sacrifice'...you can "You can always spend less money, but you can't make more time" (a rephrasing of a quote I found on this forum).
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Old 02-02-2018, 04:18 PM   #8
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Lifestyle creep can be a killer and is something to be wary of... using the 4% rule, each $100 of higher lifestyle requires $2,500 more in retirement savings to fund... while that doesn't sound too bad, multiply each number by 100.... each $10,000 of lifestyle expenses requires $250,000 of retirement savings.

HI is a big constraint for many since even a reasonably priced ACA policy is $1,000/month for a couple and often more depending on where you live. You can get an idea of what it currently is in the area you plan to retire by visiting healthsherpa.com.

On the last part, it somewhat dovetails with lifestyle.... we have always had modest homes and have been retired for 6 years.... meanwhile BIL has always owned McMansions and driven Mercedes and is still working despite being a couple years older and has no plans to retire.... different strokes.

One thing you might do is put you plan into Quicken Lifetime Planner and use the what-if capability to see how downsizing affects your plan (or you could do the same thing in FIRECalc comparing a run with and a run without downsizing).
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Old 02-02-2018, 06:11 PM   #9
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The Millionaire Next Door is a very good read if you aren't familiar with it. It talks about the hazards of lifestyle choices that may be very counter-intuitive.

-gauss
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