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What next after maxing retirement accounts?
Old 10-13-2012, 01:29 PM   #1
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What next after maxing retirement accounts?

Hello everyone,

I am trying to figure out what next to do in order to be financially independent and retire early.

Some details:
-- We are in our early-to-mid 40s couple.
-- Our tax bracket is 25% federal and almost 8% state
-- Have been maxing out retirement accounts for the last few years. Employee contributions of 44K (two 403bs and 2 Roth IRAs). Employer contributes a further 13K.
-- Have a minuscule taxable account (less than 2% of assets).
-- Just recently refinanced our home to a 30 year 3.5% fixed rate mortgage. With the regular mortgage payments we will be in our early 70s by the time the mortgage is paid off. We are planning to pay it off in about 20 years. It is unlikely that this will be our home in retirement and we will downsize to a different location.
-- We live reasonable frugally and save more than 50% of our after tax income.
-- Our current assets (not including home equity) are 6-8 times current expenses. It is almost all in tax advantaged accounts with an asset allocation of roughly 60% stocks/40% bonds. If the market does not do anything untoward our portfolio will reach 25-30 times expenses when we are in our mid 50s.

My questions are:
1. We have roughly 800-1000 $ left in our monthly budget after all expenses are paid and after retirement account contributions. How best to allocate this so that we can semi retire in our late 50s? -- Taxable account or mortgage.
2. Are we contributing too much to our tax advantaged accounts and too little into the taxable?

Many thanks in advance for your advice.
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Old 10-13-2012, 02:57 PM   #2
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Since you plan to move when you retire and with a 3.5% mortgage, you might just as well leave that financing in place while you accumulate. There is great security in having some resources saved outside of tax advantaged accounts. It also allows for the possibility that you live on some of your taxable funds after you early retire and use those years to convert tax-advantaged funds to Roths as low tax rates for several years. Since you are planning to retire early, you probably have opportunities to get money from tax advantaged accounts during low earning years, so you might as well keep maxing them out. If it were me, I'd use the opportunity to start building up some taxable investments in things like Total Stock Market that will have long term growth potential but probably won't throw off too much taxable income until you sell them.
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Old 10-13-2012, 03:07 PM   #3
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First off, welcome to the forum.
I'd make sure you have enough cash to cover any unexpected expenses that may come up.
I don't really feel confident recommending whether you should pay off your mortgage early - I'll let others chime in there.
When you say 2% of your assets are in taxable accounts, does that mean 98% is in tax advantaged accounts? (if so, it seems high). Or does the 98% include your mortgage?
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Old 10-13-2012, 03:19 PM   #4
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With a miniscule after tax account and planning to retire early I would advise strongly to beef this up substantially. Personaly I have found difficulty in withdrawling prior to age 591/2 with my 401k. I can take it all out after age 55 or roll it to an IRA. However the IRA will not allow withdrawals without the 10% penalty. The other option is to purchase an annuity - not going to happen.
Meanwhile I'm aggressively building my after tax while contributing to the match in the 401k, and maxing out my DW's and my Roth's.
Just something to consider.
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Old 10-13-2012, 05:08 PM   #5
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Having a 50/50 split taxable to tax advantaged let us cruise to ER at ages 54/51. It looks like we will be able to take SS benefits at 70 and not spend any deferred money. We did miss a lot of tax advantaged money early, due to income levels, and highly compensated ratios. Good luck, keep it right here, lots of good advise.
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Old 10-13-2012, 05:34 PM   #6
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Many thanks for the comments.

It is true that we have very little in taxable. Each of us can contribute upto 17k to the 403b. If we did not contribute but saved in the taxable account then it would be taxed at 33% (combined federal + state) marginal tax. I could make withdrawals after 55 from the 403b without penalty. Possibly we may be in a lower tax bracket as well.
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Old 10-13-2012, 06:09 PM   #7
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Quote:
Originally Posted by David1961
First off, welcome to the forum.
I'd make sure you have enough cash to cover any unexpected expenses that may come up.
I don't really feel confident recommending whether you should pay off your mortgage early - I'll let others chime in there.
When you say 2% of your assets are in taxable accounts, does that mean 98% is in tax advantaged accounts? (if so, it seems high). Or does the 98% include your mortgage?
Yes, 98% is in taxadvantaged accounts. We contribute 57k a year with 2 403bs + 2 Roth Iras + employer contributions. This is almost 50% of our gross income. All of the 403b xontributions fall in the 33% tax bracket (combined federal + state). To me it seems like paying an up front tax of 33% in order to save in taxable is not a good decision. This is why we have no substantial taxable account. Recently, I have started a Vanguard taxable account with VTWSX, which is the VANGUARD TOTAL WORLD STOCK INDEX FUND. I am making automatic monthly contributions.
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Old 10-13-2012, 06:15 PM   #8
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Quote:
Originally Posted by foxfirev5
With a miniscule after tax account and planning to retire early I would advise strongly to beef this up substantially. Personaly I have found difficulty in withdrawling prior to age 591/2 with my 401k. I can take it all out after age 55 or roll it to an IRA. However the IRA will not allow withdrawals without the 10% penalty. The other option is to purchase an annuity - not going to happen.
Meanwhile I'm aggressively building my after tax while contributing to the match in the 401k, and maxing out my DW's and my Roth's.
Just something to consider.
My understanding was that you can withdraw from the 403b as long as you separate from the job after the age of 55. You would lose this ability if you roll over to an IRA.
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Old 10-14-2012, 07:36 AM   #9
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I agree with others that if you want to retire before you have penalty free access to tax deferred funds that it is best to continue maxing tax deferred and begin building a taxable investment portfolio that you can rely on from retirement until you can draw on your tax deferred accounts without penalty.

Check to see if the 403b plans offered by your employers allow penalty free withdrawals if you leave after age 55 - . my understanding is that this isn;t necessarily true for all plans and varies from employer to employer.
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Old 10-14-2012, 11:35 AM   #10
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Originally Posted by pb4uski View Post
I agree with others that if you want to retire before you have penalty free access to tax deferred funds that it is best to continue maxing tax deferred and begin building a taxable investment portfolio that you can rely on from retirement until you can draw on your tax deferred accounts without penalty.
Thanks.

That's the rub as they say. We are both fortunate to work for employers with 403b plans which allow us to make the maximum employee contributions and provide a generous employer contribution as well. After all these contributions have been made we are left with about 40% of the gross income of which we spend about 33%. Part of the remaining goes into short term savings. We have recently started a taxable account at Vanguard containing Total World Stock (VTWSX) with automatic contributions of $500/month. This is a small fraction of the total savings/per month. We contribute $4750/month to tax advantaged. The only way to make decent sized contributions to a taxable account would be to cut back on tax advantaged savings.
Quote:
Check to see if the 403b plans offered by your employers allow penalty free withdrawals if you leave after age 55 - . my understanding is that this isn;t necessarily true for all plans and varies from employer to employer.
I will verify with my employer if this is true.
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Old 10-14-2012, 11:46 AM   #11
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Thanks.

That's the rub as they say. We are both fortunate to work for employers with 403b plans which allow us to make the maximum employee contributions and provide a generous employer contribution as well. After all these contributions have been made we are left with about 40% of the gross income of which we spend about 33%. Part of the remaining goes into short term savings. We have recently started a taxable account at Vanguard containing Total World Stock (VTWSX) with automatic contributions of $500/month. This is a small fraction of the total savings/per month. We contribute $4750/month to tax advantaged. The only way to make decent sized contributions to a taxable account would be to cut back on tax advantaged savings.
While you could reduce your 403b contributions to the amount needed to get the maximum match and divert any excess to taxable savings, the rub of that would be paying taxes on the additional income. But if your target to retire is after you can have penalty free access to your tax deferred nestegg, then taxable savings are a bit moot.
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Old 10-14-2012, 12:05 PM   #12
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Originally Posted by pb4uski View Post
While you could reduce your 403b contributions to the amount needed to get the maximum match and divert any excess to taxable savings, the rub of that would be paying taxes on the additional income. But if your target to retire is after you can have penalty free access to your tax deferred nestegg, then taxable savings are a bit moot.
Our employer contributes a fixed 10% of our gross income irrespective of any employee contributions. We do not need to contribute as there is no match. These employer contributions go into a separate 401A account. But as you say, it is worth contributing because of the tax deferral.

We should have a reasonable accumulation in our Roth IRA portfolio by 55. We could supplement the taxable by withdrawing the Roth contributions (no tax). At the same time we could convert the 403b to Roth IRA after rollover. This would be up in the 15% federal tax bracket.

Does that sound feasible?
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