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Need help making savings choices
Old 02-13-2013, 11:54 AM   #1
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Need help making savings choices

As DW and I sock away money for a very early retirement, we wonder if we have already put too much into tax sheltered accounts. At what point do you decide that you need more money in non sheltered accounts? Here is our situation.

Ages 27 and 28.
Expected retirement age 37 and 38.
Yearly expenses 30k (will be higher in retirement because of health insurance)
AA 90% equities (15% international) 10% bonds + pensions. Thinking of doing away with bonds as we have the pensions as stable growth.

Annual retirement contributions...
17.5k Roth 403b
17.5k trad 403b
11000 Roth IRAs (for both)
3.5k for pension
4.2k for pension
Pensions are 2.5% x years worked x final average salary (46k each). Should have 17 years and 10 years for each person.

Emergency fund 47k
Roth 403b 56k
Trad 403b 8k
Roth IRA 90k
Trad IRA 52k
Pension 22k
Taxable investments (stocks) 11k

Everything is in low ER Vanguard Index funds

I would think those accounts could grow a great amount untouched until 59.5 years of age. More important seems to be accessible money in our younger years before we can touch these accounts. We will have over 20 years to cover from taxable accounts.

Lots of questions ahead, lookout!

We can't afford to put any more away than we are now. Should we stop contributing to our 403bs, and start putting it into taxable investing accounts?

The Roth IRAs should continue as we can access the money contributed any how, right?

Taking a pension at a young age incurs early withdraw penalties from the IRS, is that correct? I know the pension will be reduced based upon age, and we will have income taxes on it.

We intend to take the pensions early, just in case they go away or benefits are reduced down the road because of budget cuts. It is better to take it early than not at all. Is that a bad way to think about the pensions? Should we wait until 65 to collect?

I also know about the 72t for taking money early for the 403bs and IRAs, but I would like to push that off as long as possible because it's not flexible. Once you start a 72t, does it have to continue until the account is depleted, or until you reach retirement conditions or the account?

Are there any good books on planning for such an early retirement? We have all the concepts of saving and LBYM, but need help in figuring out how much to put where.
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Old 02-13-2013, 12:59 PM   #2
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Are you sure you can claim the pension benefit before 20 years of service and or 60 years of age? Some don't allow that until you hit 65 or 20+ years of service. I'm not sure about a tax penalty but there is a discount from your pension if you take out before "full retirement age". You need to read the handbook and verify nothing has changed with your HR.

You should keep funding Roth and ease up 403b. You want to make sure you have enough money in your taxable space. You should also keep an eye out on the health insurance costs once the states are require to offer them later this year. Your current expenses are 30k now but can be 50k if you factor insurance.

Depend on your pension situation, you may also want to be a little less aggressive with the allocation since you are looking to retire in 10 years. What if the stock market is down 50% a year or two before your retirement? You may need to defer a few years until you rebuild the nest eggs.
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Old 02-13-2013, 02:11 PM   #3
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I think you are heading in the right directions. Keep up the max Roth contributions since you can withdraw your contributions early. I think I'd stop any pre-tax contributions if you are staying below the 15% or lower tax bracket. Start building up the taxable accounts. Try to model your taxes through retirement to see if there is a way to stay withing the 10% or 15% tax bracket. That's the main thing you need to do.

My DW's pension increases a whopping 3% a year if she delays taking it past the earliest age of 55, and there's no COLA. It's pretty much a no-brainer to take it as early as possible. SS is more like 8% and has a COLA so taking it late looks way better. So look at your pension terms and see what you get by delaying. It could go either way.
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Old 02-13-2013, 04:03 PM   #4
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How secure are your pensions? When my company did away with the pension plan for employees under 40 I just made it by a year. A few years later they "froze" all remaining pensions - no more increases based on continued earnings. You should take the potential loss/reduction of pension into account.
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Old 02-13-2013, 05:21 PM   #5
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How secure are your pensions? When my company did away with the pension plan for employees under 40 I just made it by a year. A few years later they "froze" all remaining pensions - no more increases based on continued earnings. You should take the potential loss/reduction of pension into account.
Pensions seem secure. They just had a meeting in Harrisburg about pension reform. They said they want to change the plan for new employees and potentially current employees going forward. They wanted to make it into a 401k like program. They said all earned benefits would remain untouched. Seems there will be union lawsuits if they try to change current employees benefits going forward. So it will be interesting to see. At this point I have almost 8 years of service that should be kept the way it is. The proposed changes wouldn't take effect for two more years, so I would have 10 total before changes would be made to future contributions. Oh, and pensions do have a COLA. I'm pretty sure you can withdraw at any age provided your vested and no longer working. I guess I should double and triple check that.

If the market tanked right before retiring, we would intend to keep working to part time to cover all expenses until there was a recovery. We might even stay full time a bit longer to buy while stocks are low.

So you're saying keep going with Roth IRAs but not the Roth or traditional 403b? The Roth 403b essentially follows the same early withdraw rules as the traditional correct?
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Old 02-13-2013, 06:14 PM   #6
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Since you are planning to retire so young, you are onto a critical issue - access to your stash without penalty. Think of it this way, if you really retire at 37/38 then you will need to draw on other sources for about 20 years before you get penalty free access to your tax-deferred accounts - that's about $600k.

You need to double check on your pension - I know with mine even though I left the company a long time ago, I could not begin to receive benefits until I was age 55 - and even then the benefits were discounted - the sweet spot for beginning to draw from that plan seems to be age 60. I suspect that this may blow up you plan to retire at 37/38.

One suggestion would be to model out your situation and plans on Quicken Lifetime Planner.
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Old 02-13-2013, 08:08 PM   #7
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I was thinking of where I got the notion that I could collect early, and it was actually from the pensions benefit calculator. It pulls numbers from my statements (the calc is specific to me) and I can plug in numbers like final average salary, year of retirement, what survivorship option I want, and total years worked. When I plug in everything to retire in 10 years it gives me an estimate of (don't remember off the top of my head) 4,700 a year if I don't withdraw all my contributions, and roughly 3,100 if I do withdraw. It does specifically show that it would be considered an early retirement at age 37.

So I don't know if that is built in on purpose because its an option or not. I will dig to find the details.

It seems at 600k I need to start plugging away at taxable investing right away.

So, is there something wrong with a 72t on just one of the 403b accounts to help make up for the shortfall? Or that I should still put away into the 403b any way?
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Old 02-13-2013, 08:12 PM   #8
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One suggestion would be to model out your situation and plans on Quicken Lifetime Planner.
Is there something special that quicken does that firecalc or any other online planners can't do? I don't know anything about quicken or it's products to be honest.

At this point the only material book wise that I've read is the bogleheads guide to investing, and the four pillars. I knew how important saving was, but haven't gotten deeply into diversifying or strategies for withdraw because I did not realize how soon of a possibility that this could become. I definitely have some homework to do.
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Old 02-16-2013, 11:08 AM   #9
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After doing a bit of reading I did confirm that I can collect my pension immediately upon termination of employment. I can take the lump some of my contributions and interest, or leave it in the account to collect the full monthly benefit.

It seems that the 72t rule is not a terrible option as upon termination from employment our 403bs could be rolled over to IRAs. If I was reading correctly, the 72t can only be done on IRAs, not 403bs or 401ks. However, it seems I should delay this as long as possible with the Roth IRAs and part time work as once they're started you can't stop until 59 and a half.
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