How is it "early" if you can't get your money?

[Joshua]

Hello,

I've been reading lots of interesting things on this board, and some of the debates I've seen about different kinds of retirement accounts (IRA, TSP, 401k, etc.) have puzzled me.

If a normal retirement account doesn't actually let you access any of its contents (with exceptions for education, 1st home purchase, or withdrawing principal from a ROTH IRA) until you're more or less at the traditional retirement age of 60+/-, then how are they useful to someone who wants to retire earlier than that? I mean, yes, obviously being able to reinvest your profits tax-free (or tax deferred) will earn you more than doing the same thing in a taxable account, but how is a non-taxable account I can't touch until I'm 60 going to help me if I want to retire at 45?

I feel like I'm missing a vital part of this equation. Perhaps some of you helpful folks can point me in the right direction?

Josh

 

[Chelhxi]

I suspect almost everyone also has taxable accounts that they plan to use prior to whatever the age restriction is.

I'm in Canada so it's a bit different, but the limits on tax deferred accounts pretty much makes it impossible to reach FI using these alone. It's just not enough money especially if you want to retire as early as you mention.

 

[chris2008]

Obviously maxuing out non-taxable accounts is not enough if you want to retire early. You also need other investments.
These are the missing part of your equation.

 

[rescueme]

And there is nothing to keep you from tapping your tax-deferred funds at an earlier age; however you will have to pay the piper (e.g. tax man) to do so with current tax rates and the 10% surcharge. You also have the 72T option to consider:

http://www.calculatorplus.com/retirement/early_distribute.html

 

[audreyh1]

Early retirees counting on their tax deferred accounts for retirement usually use the 72T method.

But it has been difficult to put enough away into those accounts as there are often severe restrictions on how much can be saved per year. Of course if you made some great investments, then it could grow to meet early retirement needs.

Very early retirees (<50) often have substantial taxable accounts as well.

Audrey

 

[Joshua]

Ah, ok. That clears up a lot, actually.

I guess people spend time discussing traditional retirement accounts because those are what typically have unexpected drawbacks, rules, and consequences that might not be obvious to someone who is new to financial planning, whereas a normal taxable account is exactly that - a normal account that you can manipulate as you please.

Josh

 

[scrabbler1]

Joshua, as one here in this forum who retired at 45 (in 2008), I can give you a good answer, similar to those of others above.

In my final days of working, I had about $300k in my company's 401(k) plan, another $300k in my company's ESOP (stock) within the same savings plan, and another $300k in my own taxable investment accounts.

When I left the company, I had one chance to liquidate the ESOP at favorable tax rates (mostly long-term cap gains with nearly no tax penalties) so I did that while I rolled the rest of the 401(k) into an IRA penalty-free. This gave me about $600k in taxable accounts generating more than enough dividends to pay my bills. Meanwhile, the $300k in the IRA is one my "reinforcements" growing until I am ready to tap into it when I turn 60. SS and my frozen company pension are additional reinforcements awaiting me later in my 60s.

The point here is that I do not need access to all of assets right now as long as I have access to enough of them to be able to pay my bills between the time I retired (age 45) and later. Even if I am running deficits (expenses exceeding dividends) in my late 50s that is okay because help will soon arrive with those reinforcements.

 

[HsiaoChu]

My opinion on getting together the cash for ER:

The bottom line that everyone should realize is that to retire early you have to have made what is for most normal americans an obscene amount of salary or income. You have to have a huge amount of disposable income to put into investments.

While some people are willing to try to make it on stock market income, the recent downturn has taken people back to the basic principle that in retirement YOU CANNOT LOSE PRINCIPLE.

Many people cannot live comfortably in most places with less than about $45,000 a year in income, and to live reasonably well and be able to travel and do things you really need somewhere between 60-70K total. To do this, you need to have no installment bills, own your own home, and have only regualr living expenses such as food, utilities, gas and taxes, and the gorilla in the room: healthcare.

So the bottom line is that you have to have enough cash to sustain a $60,000 income on something that can't take your principle, such as CD's or Treasuries. Get out your calculator. Current CD rates are about 3% in a best case scenario for a lot of money. To get 60K you need 2 million in cash reserves at the present no loss principle rates.

The only people who can save 2 million bucks by the time they are 45-50 are people whose working incomes allowed them to put away $60,000 a year for 25 years. If the interest rates are higher, or they do well in the market, and don't lose any principle, it can be faster.

For most of the working people in the USA, who have children, a house, cars, and expenses, saving $60K a year would mean that they would have to be making in excess of $140K for many of those early years.

This is not even possible for 99 % of the American workers. Heck, its only in the last 8 years of a 40 year career that I've actually made a total amount altogether of more than $60K.

So reality has to set in here. For most of us who are not planning on moving to a third world country to retire, or who are not planning on living in a shack in Alaska, a comfortable retirement early means making a very very very big salary or business income very early for a very good percentage of one's worklife. It also means working for 12-14 hour days during most one's work life.

And, its hard to pull this off in a normal working life of 40 years unless you lucked out into one of the few remaining DB ponzi pension schemes(all DB pension schemes are some kind of ponzi scheme, IMO) and add SS.

Just my opinion.

 

[travelover]

prin·ci·pal

Finance. a capital sum, as distinguished from interest or profit.


prin·ci·ple


an adopted rule or method for application in action: a working principle for general use

 

 

[RunningBum]

That's a very narrow view. There are plenty of other ways to amass wealth. Some hit it big with company stock options. Some invested well in the stock market. Some saved enough to tide them through until a nice pension kicks in. Some built their own business up and were able to sell at a nice price. Some invested in real estate and watched it appreciate as they collected rent. And so on. And how much one needs is very much up to the individual.

Going 100% or close to it in CDs for the future just because it would have been a great strategy for the last 10 years is a very questionable plan, especially if inflation kicks up.

 

[HsiaoChu]

prin·ci·pal

Finance. a capital sum, as distinguished from interest or profit.


prin·ci·ple


an adopted rule or method for application in action: a working principle for general use

 

Picky picky picky. Is there any intelligent human being on this forum who didn't know what I was talking about? I think not.

 

[HsiaoChu]

That's a very narrow view. There are plenty of other ways to amass wealth. Some hit it big with company stock options. Some invested well in the stock market. Some saved enough to tide them through until a nice pension kicks in. Some built their own business up and were able to sell at a nice price. Some invested in real estate and watched it appreciate as they collected rent. And so on. And how much one needs is very much up to the individual.

Going 100% or close to it in CDs for the future just because it would have been a great strategy for the last 10 years is a very questionable plan, especially if inflation kicks up.

Sure..... but if you think this is attainable by more than a very very small percentage of the population, then you are living in a dream world bubble and should try to do it with all the normal stuff of living: buying a house, living on a salary or wages, having any children, paying healthcare, etc.

Get out your calculator. Figure the numbers you need. I don't know anybody in MY WORLD who has this kind of money. I'm sure many do, and maybe many on this very narrow framework forum, but for 99% of the population this is really only the territory of the Lottery.

 

[scrabbler1]

HsiaoChu, I will let those who have children respond for themselves. However, as one of the many here who are childfree (and for me, single), I did not need anywhere near the amounts you indicated to retire at age 45. My wage income never exceeded $80k. I bought a studio apartment in a well-run co-op 21 years ago so when I paid off the mortgage in 1998, my expenses took a big drop.

Yes, I did benefit from a rising stock market in the 1990s even though the value of my stock holdings have dropped in the last 2 years. And I did benefit from my company's ESOP but I left behind many coworkers who did not retire early even though many of them had more in their ESOP accounts than I did.

In my 23 years of working, my personal savings rate was usually between 30% and 60%, depending on my working status (part-time or full-time, I worked only 16 years F/T) and if I had made any major purchases or debt repayments.

I don't live in a low-cost area of the US. In fact, I live on Long Island (NY), notorious for its high CoL, especially its property taxes. But my expenses, including HI and a rather new car paid for with cash, are only about $1,800 a month. I need less than $400k of my $650k in the taxable accounts to generate the dividends needed to pay those expenses.

This is my reality, HsiaoChu, of being able to retire in 2008 at age 45. Please remember that not everyone is married and not everyone has children.

 

[travelover]

I'm so grateful for that ignore function. It is time.

 

[friar1610]

That's a very narrow view. There are plenty of other ways to amass wealth. Some hit it big with company stock options. Some invested well in the stock market. Some saved enough to tide them through until a nice pension kicks in. Some built their own business up and were able to sell at a nice price. Some invested in real estate and watched it appreciate as they collected rent. And so on. And how much one needs is very much up to the individual.

And still others choose occupations which, while not paying extraordinarily high salaries, offer reasonably good lifetime pensions after 20 - 25 years. I refer to occupations such as law enforcement, fire fighting, the military, etc. Some people in these occupations are able to retire for good at the conclusion of those careers; others work in a "second career" for a while but still retire for good relatively early.

friar1610

 

[HsiaoChu]

Going 100% or close to it in CDs for the future just because it would have been a great strategy for the last 10 years is a very questionable plan, especially if inflation kicks up.

Of course any intelligent human being is going to have to maximize their numbers, but doing what every they do, also means that during the time that they were saving for 25 years, they cannot lose anything. So they have to be reaosnably conservative, or very very lucky. My aunt saved 10% of her income from 1933 to the time she died in 1995. I inherited the bulk of it. And most of it went into college expenses for my kids(did I tell you that you can't have kids, and that you can't have college expenses of $30K a year for each of them?). It was only during the 80's that her tiny little nest egg blossomed and only because she lucked out. The stupid banks were offering 30 year term CD's at 15% interest. She took a large percentage of her money out of the market and put it into these CD's. From 1982 -1995 when she died, she was making a steady 15% on her money. Her funds balance took off like a rocket. The bank was so so so very very happy that she died.
They were losing money hand over fist to her.

 

[HsiaoChu]

This is my reality, HsiaoChu, of being able to retire in 2008 at age 45. Please remember that not everyone is married and not everyone has children.

You've made my point for me. Thanks. To do it, you have to make really good money, have no expensive hobbies, no wife, no children, etc. Some people can do this. My best friend from high school has done this. Its not my style of life, or that of most Americans.

I'm not saying it can't be done, I'm saying that most Americans can't do it, either because of the fund balance, or because of the sacrifice in having children, spouses, house, and free time for something other than work for a good percentage of early life.

If you are driven to do it, you can. Most people cannot for many reasons.

 

[HsiaoChu]

And still others choose occupations which, while not paying extraordinarily high salaries, offer reasonably good lifetime pensions after 20 - 25 years. I refer to occupations such as law enforcement, fire fighting, the military, etc. Some people in these occupations are able to retire for good at the conclusion of those careers; others work in a "second career" for a while but still retire for good relatively early.

friar1610

These DB ponzi schemes are coming to an end soon. Sure I lucked out on one in education(though I could not retire until I had at least 30 years in and was at least 59.5 year of age), but that not ER.

Those in the military need to be officers to get the really decent money at the end of 20 years. And the same exists for the others. There are really only limited positions for advancement to the serious money for a quick 20 years out and ER. Very very few don't take some other job.

Yeah, it can be done, but the sacrifice in doing it has to be recognized. 99+% of Americans either cannot make that sacrifice either due to not enough income or not willing to constrict their lives in that way.

Money is not everything, but it almost has to be to make these numbers early.

 

[HsiaoChu]

I'm so grateful for that ignore function. It is time.

Absolutely. I've put anyone who doesn't agree with me on my Ignore List. Its the only way that works. Who wants to talk with people who disagree with us.
Not me, Babes!

On the City Data forum, I have 41 people who are on my Ignore list. All of them disagree with me.

ROTFLMAO!!!!

 

[scrabbler1]

You've made my point for me. Thanks. To do it, you have to make really good money, have no expensive hobbies, no wife, no children, etc. Some people can do this. My best friend from high school has done this. Its not my style of life, or that of most Americans.

I'm not saying it can't be done, I'm saying that most Americans can't do it, either because of the fund balance, or because of the sacrifice in having children, spouses, house, and free time for something other than work for a good percentage of early life.

If you are driven to do it, you can. Most people cannot for many reasons.

Make really good money? My wage income never exceeded $80k and my average annual wage income in my 23 years of working was $45k.

I don't think being married is necessarily an obstacle to retiring early, as two incomes being pooled can take advantage of economies of scale not available to single people. But being childfree definitely helps, a lifestyle choice which is growing in popularity in the last 20 years. Being debt-free helped a lot, too.

I agree that retiring early is very tough. You need to make certain lifestyle choices but also have the financial resources to fund an ER. I have childfree friends who can't retire early even though they live rather frugally. I know wealthier people who can't retire early because they have made costlier lifestyle decisions (i.e. having kids, having higher housing expenses, or having expensive hobbies, to name a few). A lot of things have to fall into place, for sure.

 

[rescueme]

I'm so grateful for that ignore function. It is time.

...

But he be so funny in his statements ...

And yes, that's my opinion.

 

[Joshua]

And still others choose occupations which, while not paying extraordinarily high salaries, offer reasonably good lifetime pensions after 20 - 25 years. I refer to occupations such as law enforcement, fire fighting, the military, etc.

*raises hand*

Yep, that's kind of what I'm looking at. I figure that the Army may not offer the highest paid retirement out there, but it does provide a pension I won't have to wait until 60 for, and being a veteran will mean I don't have to worry about where my health care is coming from.

In theory, I could settle down with only my pension check and still be able to get by, but there's nothing that says I can't pack away a solid chunk of self-growing change to pad out my income when it's time to hang up the boots. Based on how low a person's expenses are while on active service, I could potentially save a lot of money even though I don't necessarily make a whole lot compared to other folks in other lines of work.

Also, the feasibility of early retirement is heavily dependent on what you consider necessary for the "good life." When someone says you need 60k a year income as a bare minimum to retire with and enjoy yourself, well, that's based on one set of standards. I used to live on much less than half of that, and I didn't think it was too unusual. When you're raised in a poor rural area on a few hundred dollars a week, anything that pays you money on a regular basis but doesn't require you to show up to work sounds like pure magic.

It reminds me of a conversation from the Dilbert comic:
Boss: "I can't afford to fire you, so I'm going to reduce your working conditions until you're forced to quit."
Wally: "Ha! I'd like to see you try. My standards are lower than you can possibly imagine!"

Josh

 

[dex]

401k Withdrawal

No penalty

"You stop working and begin taking out regular payments based on a schedule that will make equal payments for the rest of your expected life; these must last for 5 years or until you turn 59 1/2, whichever is longer "

 

[kyounge1956]

(snip)
And, its hard to pull this off in a normal working life of 40 years unless you lucked out into one of the few remaining DB ponzi pension schemes(all DB pension schemes are some kind of ponzi scheme, IMO) and add SS.

Just my opinion.

Here's another definition you appear to have missed.
Pension: a fixed sum paid regularly to a person: a (archaic): wage b : a gratuity granted (as by a government) as a favor or reward c : one paid under given conditions to a person following retirement from service or to surviving dependents. (italics added)

Ponzi scheme: an investment swindle in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks.

The fact that some pension funds have been mismanaged doesn't make all DB pensions a swindle.

 

[ronocnikral]

to answer the op, it's what everyone has said so far. taxable accounts and 72t. oh, and i have a [-]ponzi[/-] pension. and while i don't save $60k/year, i do save about $50k. that's my plan.

i had a roommate who volunteered at a homeless shelter. one day, he was doing his volunteer work and a homeless guy came in and said, "you're young. let me give you some advice, you need to invest in commodities! that's the only way you'll ever make it!"