dreamlogic
Confused about dryer sheets
Hey everyone, new guy here. Lately I've been devouring information about FI, having discovered a surprising wealth of content out there about this topic. I've been a diligent saver/investor since I started working and am in the fortunate position of considering the very real possibility of early retirement.
My biggest concern is the ratio of my savings between liquid and tax-deferred accounts, and the impact of both taxes and the early withdrawal penalty before 59.5. Of my invested assets, about 2/3 is in a Traditional IRA and the other 1/3 is liquid. Most of it is invested in a diversified set of Vanguard index funds.
Most calculators like this one seem to disregard any taxes or penalties, and I feel give an overly optimistic picture of when one can expect to retire.
I expect to hit the $1.25-1.5MM total that represents 25x of my annual spending in probably 4-8 years. I currently save about $40K a year, maxing out my Roth 401k ($18K) and Traditional IRA limits ($5.5K) and putting the rest into my Vanguard brokerage.
However, since I aim to retire well before 59.5, and I definitely don't have enough in my brokerage account to last the ~20 years before that, I'm wondering if I should change my investment strategy to divert ALL of my savings to my brokerage account and sacrifice the deferred tax benefits of the Roth 401k and Traditional IRA. My company doesn't match at all and my income level makes none of my IRA contributions tax deductible.
Of course, I'll get hit with taxes on dividends every year until then, but perhaps the savings on distributions when I do need to withdraw might make it worthwhile? (at least 25% tax + 10% penalty for the Trad IRA vs. 15% capital gains on my brokerage)
If real numbers are helpful, here's the rough breakdown:
Cash + regular brokerage: $230K
Real estate equity: $180K
Roth (401k + IRA): $55K
Traditional IRA: $500K
Would really appreciate any insight from others who are in or have dealt with a similar situation!
My biggest concern is the ratio of my savings between liquid and tax-deferred accounts, and the impact of both taxes and the early withdrawal penalty before 59.5. Of my invested assets, about 2/3 is in a Traditional IRA and the other 1/3 is liquid. Most of it is invested in a diversified set of Vanguard index funds.
Most calculators like this one seem to disregard any taxes or penalties, and I feel give an overly optimistic picture of when one can expect to retire.
I expect to hit the $1.25-1.5MM total that represents 25x of my annual spending in probably 4-8 years. I currently save about $40K a year, maxing out my Roth 401k ($18K) and Traditional IRA limits ($5.5K) and putting the rest into my Vanguard brokerage.
However, since I aim to retire well before 59.5, and I definitely don't have enough in my brokerage account to last the ~20 years before that, I'm wondering if I should change my investment strategy to divert ALL of my savings to my brokerage account and sacrifice the deferred tax benefits of the Roth 401k and Traditional IRA. My company doesn't match at all and my income level makes none of my IRA contributions tax deductible.
Of course, I'll get hit with taxes on dividends every year until then, but perhaps the savings on distributions when I do need to withdraw might make it worthwhile? (at least 25% tax + 10% penalty for the Trad IRA vs. 15% capital gains on my brokerage)
If real numbers are helpful, here's the rough breakdown:
Cash + regular brokerage: $230K
Real estate equity: $180K
Roth (401k + IRA): $55K
Traditional IRA: $500K
Would really appreciate any insight from others who are in or have dealt with a similar situation!