Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 05-23-2007, 10:00 AM   #21
Thinks s/he gets paid by the post
jIMOh's Avatar
 
Join Date: Apr 2007
Location: Milford, OH
Posts: 2,085
Quote:
Originally Posted by FIREdreamer View Post
When I started thinking about early retirement 2 years ago, I had a pretty clear idea about the way to get there. Assess my annual expenses, accumulate about 25 times that number, retire, and take out 4% of my portfolio the first year.

But the more I think about it and the more I am getting confused because by the time I retire (hopefully at age 50 or before; I am currently 33), there is a good probability that about 1/2 my portfolio will be in taxable accounts and about 1/2 will be tax-deferred accounts if I don't make any changes to the way I currently invest my money. Right now I would need an annual income of 60K in retirement which would require a nest egg of 1.5M (in 2007 $). I have thought of 3 options:

1) I don't change anything. Let's imagine that I have 700K in taxable accounts and 800K in tax-deferred accounts when I get ready to retire. The 700K in taxable accounts alone can only provide about 28K a year at 4%. For me to be able to get an income of 60K at age 50, it means that I would have to withdraw about 8.6% from my taxable accounts the first year. Eventhough, it would still represent only 4% of my total portfolio, it makes me cringe because I am worried that I could run out of money in my taxable accounts before reaching 59.5 at which time I could start digging in my tax-deferred accounts.

2) I start shifting more savings towards taxable accounts so that by the time I reach 50 I have a higher percentage of my portfolio in taxable accounts. The problem with that approach is that my current tax bill would go up and that it will take longer to reach the 1.5M mark, but when I do I will have more money in taxable accounts and would be able to withdraw a safer percentage (maybe 5-6%) of my taxable portfolio until I can start accessing money in my tax-deferred accounts.

3) The 3rd option is to build a sustainable portfolio in my taxable accounts, meaning a portfolio of 1.5M that could generate every year the 60K needed for my annual expenses (at 4% SWR). That way for the 10 years prior to age 60 I would not deplete my taxable portfolio and when I turn 59.5 I could continue living off of my taxable portfolio and I would have the tax-deferred accounts as cushion. That's the scenario I would prefer because it offers a lot of security, but at the same time I will require me to probably save about 35 times my annual expenses before I can pull the trigger and retire. Again, it will postpone my retirement date by a few years and will increase my current tax bill as I may have to cut contributuons to tax-deferred accounts to achieve that plan.

All these options are doable financially, but which one do you think is best? Or do you think I am overthinking the all thing? Becoming FI ASAP is my top priority, early retirement is too but not as the expense of financial security down the road.
I think the others have the right advice- save, diversify account types and keep saving.

The 60k expenses... have you analyzed this? How much is mortgage payment (for example)... how much is car payment (for example)...

some of these costs might go away.

In addition, does the 60k expenses include the "estimated taxes"? If so, consider 60k in a 401k is less than 60k in a taxable account... because the taxed you would likely pay on the taxable account are much lower (currently 5% or 15%...)
__________________

__________________
Light travels faster than sound. That is why some people appear bright until you hear them speak. One person's stupidity is another person's job security.
jIMOh is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 05-23-2007, 10:28 AM   #22
Moderator Emeritus
 
Join Date: May 2007
Posts: 11,044
jIMoh,

Actually we are currently living on 60K. Of that 60K, 20K is discretionary (entertainment, travel, dining out...), and 40K is mandatory. Of that 40K we spend about 15K on mortgage payments and 25K on other bills (food, utilities, insurance...). By retirement, the plan is to pay off the mortgage. Plus once we are retired other expenses which are mandatory right now (like disability insurance) will go away. So as of right now, in retirement, our mandatory expenses could be as low as 20K (in 2007 $) + health insurance premiums. But the wife wants to keep at least 20-25K a year for discretionary and so once you add taxes I figure you get back to about 60K a year.
__________________

__________________
FIREd is offline   Reply With Quote
Old 05-28-2007, 07:34 AM   #23
Recycles dryer sheets
 
Join Date: Dec 2006
Posts: 162
It can be a good thing to withdraw from tax-deferred before 59.5. If you figure you will be only receiving dividends and interest then, which is taxed at the lower rate, any ordinary income you will have will come from withdrawing from the retirement plans with the 72t. If you total income is 60k, as married folks, you will never get out of the 15% bracket, which goes up to 61.3k even on the ordinary income. Remember your taxable income will be lower, as you will have personal exemptions and standard deduction, which add up to 17k, so your gross income could be almost 80k and still be in the 15% bracket. (You could even take out more than you need any convert it to a Roth.)

If you wind up taking big IRA distributions in later years, coupled with social security, this will likely make it taxable and increase your overall taxable income. Remember, when you take 10k out of a taxable account, only a portion of that is taxable (the gain) and that is currently taxed at a favorable rate, whereas the whole 10k is taxable from the tax deferred and at ordinary rates.

Save as much as you can in both buckets, and when the time comes, I suggest using the 72t which will lighten the tax deferred pool while you are paying very little taxes anyway.
__________________
firewhen is offline   Reply With Quote
Old 05-28-2007, 11:00 AM   #24
Moderator Emeritus
 
Join Date: May 2007
Posts: 11,044
Firewhen,

you are making an excellent point.

I am definitely starting to see the light thanks to you guys.
__________________
FIREd is offline   Reply With Quote
Old 06-02-2007, 12:02 PM   #25
Confused about dryer sheets
 
Join Date: Jun 2007
Posts: 5
Interesting thread. I wonder how many others on this board intend to retire this early (early 40's). I'm on a path to retire around age 40 and would like to see more discussion around early-early retirement like this.

Btw, I'm a long time lurker here and now, first time poster.
__________________
fin_indie is offline   Reply With Quote
Old 06-02-2007, 01:45 PM   #26
Recycles dryer sheets
 
Join Date: May 2005
Posts: 130
Quote:
Originally Posted by FIREdreamer View Post
...
1) I don't change anything. Let's imagine that I have 700K in taxable accounts and 800K in tax-deferred accounts when I get ready to retire. The 700K in taxable accounts alone can only provide about 28K a year at 4%. For me to be able to get an income of 60K at age 50, it means that I would have to withdraw about 8.6% from my taxable accounts the first year. Eventhough, it would still represent only 4% of my total portfolio, it makes me cringe because I am worried that I could run out of money in my taxable accounts before reaching 59.5 at which time I could start digging in my tax-deferred accounts.
...

I have that problem too, it's common for young retirees. 50% of my portfolio is in tax-deferred accounts that I can't use until I'm 59.5. It means I have a big chunk of bonds in taxable to avoid selling stocks while they're down in case of a bear market. 1/2 of my portfolio is unavailable for spending, so I'm letting it grow. I've read about 72t withdrawals but I don't understand it, and I don't like it.
__________________
Free_at_49 is offline   Reply With Quote
Old 06-02-2007, 04:50 PM   #27
Thinks s/he gets paid by the post
teejayevans's Avatar
 
Join Date: Sep 2006
Posts: 1,222
Quote:
Originally Posted by Free_at_49 View Post
I have that problem too, it's common for young retirees. 50% of my portfolio is in tax-deferred accounts that I can't use until I'm 59.5. It means I have a big chunk of bonds in taxable to avoid selling stocks while they're down in case of a bear market. 1/2 of my portfolio is unavailable for spending, so I'm letting it grow. I've read about 72t withdrawals but I don't understand it, and I don't like it.
If you only have 50% in tax-deferred, you probably won't be needing to
use 72t Make 72t plan B, plan A is to have enough money
in taxable accounts to get you to 60. Its a relatively simple problem, for
example if you retire at 45, and you need 50K/year, you will need 500,000
earning about 6% to live off of. (I used a annuity calculator to figure that
out, ignoring inflation).
TJ
__________________
teejayevans is online now   Reply With Quote
Old 06-02-2007, 04:56 PM   #28
Thinks s/he gets paid by the post
teejayevans's Avatar
 
Join Date: Sep 2006
Posts: 1,222
Quote:
Originally Posted by firewhen View Post
Save as much as you can in both buckets, and when the time comes, I suggest using the 72t which will lighten the tax deferred pool while you are paying very little taxes anyway.
If you are just trying to lighten your tax load, I would transfer money
over to Roth instead as you alluded to.
I would only use 72t if you need the money to spend, mainly because
of the restrictions (can't change amount, must take out till 59.5, etc)
TJ
__________________

__________________
teejayevans is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Phoenix Chapter of Early Retirement Forum sgeeeee Other topics 23 03-30-2007 09:25 PM
Retirement Accounts and Early Retirement heebygeeby Young Dreamers 9 03-14-2007 04:56 PM
Early Retirement Forum Cookbook is Ready! TromboneAl Other topics 32 02-18-2007 11:56 AM
500 search phrases for 2006 dory36 Other topics 2 01-16-2007 08:00 AM
Getting Serious about Early Retirement bookman51 Hi, I am... 28 05-22-2006 06:17 PM

 

 
All times are GMT -6. The time now is 01:17 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.