FIRE & Retirement Accounts

[Chris918]

Hello,

I’m 29 and married with no debt besides my mortgage. My wife and I are interested in retiring early and have been working towards this goal for a few years now. I began contributing heavily to my 401k account but quickly realized that this may not be the best retirement vehicle if I want to leave the workforce early.

Both of us max out our ROTH IRA and HSA each year. But where should we go from here? Would it be correct to continue 401k contributions to a certain point and then invest the rest in a brokerage for flexibility? What is the path someone retiring early normally takes since the traditional 401k route means your money is inaccessible until 59.5?

Do people in the fire community normally prioritize a taxable brokerage instead? Do they contribute to each one for flexibility?

Thank you very much for any advice you have for us

 

[Bigdawg]

Hello,

I’m 29 and married with no debt besides my mortgage. My wife and I are interested in retiring early and have been working towards this goal for a few years now. I began contributing heavily to my 401k account but quickly realized that this may not be the best retirement vehicle if I want to leave the workforce early.

Both of us max out our ROTH IRA and HSA each year. But where should we go from here? Would it be correct to continue 401k contributions to a certain point and then invest the rest in a brokerage for flexibility? What is the path someone retiring early normally takes since the traditional 401k route means your money is inaccessible until 59.5?

Do people in the fire community normally prioritize a taxable brokerage instead? Do they contribute to each one for flexibility?

Thank you very much for any advice you have for us

My DS and DDIL are both 29. Here is my advice to them: 401K up to company match, max HSA, max ROTH IRA, then some into a brokerage account (S&P 500 index funds(low cost)). Without knowing more about your situation this is all I can offer at this time. You will/may get more advice like this on here. Some will be slightly different based on who we all are. Keep up the LBYM and you should be fine. Good like and congrats on thinking about this so early in your lives/careers.

 

[SevenUp]

Two similar lists can be found at Investment Order and Prioritizing investments.

 

[VanWinkle]

I agree with Bigdawg on the 401K to match, max HSA and Roth, brokerage account in low cost Total Market fund(tax loss harvest when available). I believe in the 1/3 401K/IRA/HSA-1/3 Roth-1/3 brokerage taxable account. Even if you retire after 59 1/2, it will give you options to control taxable income. Best of luck to you and keep up the LBYM.

VW

 

[Chris918]

My DS and DDIL are both 29. Here is my advice to them: 401K up to company match, max HSA, max ROTH IRA, then some into a brokerage account (S&P 500 index funds(low cost)). Without knowing more about your situation this is all I can offer at this time. You will/may get more advice like this on here. Some will be slightly different based on who we all are. Keep up the LBYM and you should be fine. Good like and congrats on thinking about this so early in your lives/careers.

Thank you for taking the time to respond. I’m definitely excited moving forward and being a part of this journey. I’m putting around 25% into my 401k and when it hit me that I couldn’t touch this money I became concerned. I have no idea why but I also thought 401k distributions fell under capital gains rates which is obviously incorrect. I have no idea why that didn’t click in my head. That’s why I thought maybe the brokerage was better for early retirees. Yes I don’t get a tax break now but capital gains rates will be lower than ordinary income rates and I have more control.

 

[Chris918]

I agree with Bigdawg on the 401K to match, max HSA and Roth, brokerage account in low cost Total Market fund(tax loss harvest when available). I believe in the 1/3 401K/IRA/HSA-1/3 Roth-1/3 brokerage taxable account. Even if you retire after 59 1/2, it will give you options to control taxable income. Best of luck to you and keep up the LBYM.

VW

That’s a great way to look at it. 1/3 in each place is a really neat idea.

Thank you for sharing

 

[Koolau]

Not sure how to advise. I believe I put too much in 401(k) and am paying the tax price now.

Here is what I recall being a good approach:

1) Invest in 401(k) up to the point of getting all the company match.
2) Invest max in ROTH IRA
3) Decide which is better for you (more 401(K) or taxable accounts)

Hope others have more ideas. Good on you for starting young and doing your research!

 

[Bigdawg]

One thing to add, enjoy the ride. I know I did but many posters talk about save, save, save and they ended up not having any fun along the way. Life is a balancing act. I would also add that most of us on here were not even thinking about ER when we were 29. I know I wasn't. U r way ahead of the crowd. Good luck.

 

[Chris918]

Thanks for your input Koolau and thank you again Bigdawg. I definitely have the problem of save save save invest invest invest and it does take away from now. I’m making a big point to do better at that.

 

[scrabbler1]

Hello,

I’m 29 and married with no debt besides my mortgage. My wife and I are interested in retiring early and have been working towards this goal for a few years now. I began contributing heavily to my 401k account but quickly realized that this may not be the best retirement vehicle if I want to leave the workforce early.

Both of us max out our ROTH IRA and HSA each year. But where should we go from here? Would it be correct to continue 401k contributions to a certain point and then invest the rest in a brokerage for flexibility? What is the path someone retiring early normally takes since the traditional 401k route means your money is inaccessible until 59.5?

Do people in the fire community normally prioritize a taxable brokerage instead? Do they contribute to each one for flexibility?

Thank you very much for any advice you have for us

Chris, how early do you want to retire? Are you looking at 59-60, 55, or something before 55? You will gain access to various retirement accounts in your late 50s if you separate from service at those ages. Those can hopefully carry you forward to at least age 62 when you will gain access to Social Security.

But if your goal is to retire before age 55, then you will need money in non-retirement (taxable) accounts to pay the bills for at least a few years. This could include cashing out some retirement holdings after paying taxes and penalties. There are some exceptions to this, such as something called 72t.

When I retired at 45, 13.5 years ago, I cashed out company stock which tilted my portfolio from 1/3 taxable, 2/3 retirement to 2/3 taxable, 1/3 retirement. I was able to cash out the company stock at fairly low tax rates and very small penalties, something I knew beforehand (although it turned out to be even lower). This was part of splitting my overall ER plan into two parts - getting from age 45 to age ~60 intact using only my taxable account, the tougher part, then getting passed age ~60, the easier part. I suggest you split up your overall ER plan in a similar way.

 

[pb4uski]

Chris,

A lot depends on when you plan to retire and what tax bracket you are in. As you probably know after 59-1/2 you can have penaty free access to IRAs. Many 401k plans allow penalty free withdrawals for employees who leave service after age 55. If you retire before 55 then broakrage accounts are good to carry you from when you retire until you are 59-1/2.

There is also an option called SEPP/72t to access tax-deferred money before you are 59-1/2 but it gets complicated.

 

[SnowballCamper]

Your IRA money isn't completely inaccessible until 59.5. Keep good records on contributions made, and you can take them out later on.

Read up on the Section 72t Substantially Equal Periodic Payment (SEPP) plans. A few of us here use that, but it is not very flexible.

The simpler way is just to use the regular brokerage, but then you get taxed along the way for capital gains and some dividends. The best option really depends on your tax situation, and what you think it will be in the future. Good luck!

 

[Dash man]

I agree with everything above, but don’t forget to have a funded emergency fund too.
I also second the thought of having fun along the way. You never know what bumps in life will affect you.

 

[Chris918]

Thank you all so much for continuing to interact with the thread and offer your experiences.

Scrabbler:
I’m not entirely sure when I want to retire. I told myself I’d reevaluate when my mortgage is paid off and I have no debt. That’s around 12 years from now. My plan during this phase is to invest as much as possible. With no debt I could then decide whether to continue with my current job if I’m happy or perhaps pursue something more enjoyable even if the pay is lower. I love your plan for having ER split up into phases with traceable goals. Thanks for sharing!

Pb4uski:
Yeah that’s the plan I think. I’m going to fund a brokerage to act as a bridge between early retirement and when my 401k and Roth become available for distributions. That way I have the option to retire earlier if I want or I can continue working if there is a hiccup along the way. Great advice.

Thanks to everyone else for chiming in too.

 

[Love This Community]

Welcome Chris. I agree with scramblers plan. I started my brokerage account in early 30’s however did not start contributing seriously until 3 years ago. I am currently maxing my 401k contributions. If I were to do it again for your age, I would start loading more in after tax brokerage account. To start with, 1/3 approach might work well and you can adjust the weightage in a couple of years. Life happens and lifestyle creep is real. Have fun along the way while keeping your eyes on the prize.

 

[scrabbler1]

Thank you all so much for continuing to interact with the thread and offer your experiences.

Scrabbler:
I’m not entirely sure when I want to retire. I told myself I’d reevaluate when my mortgage is paid off and I have no debt. That’s around 12 years from now. My plan during this phase is to invest as much as possible. With no debt I could then decide whether to continue with my current job if I’m happy or perhaps pursue something more enjoyable even if the pay is lower. I love your plan for having ER split up into phases with traceable goals. Thanks for sharing!

Pb4uski:
Yeah that’s the plan I think. I’m going to fund a brokerage to act as a bridge between early retirement and when my 401k and Roth become available for distributions. That way I have the option to retire earlier if I want or I can continue working if there is a hiccup along the way. Great advice.

Thanks to everyone else for chiming in too.

Chris, paying off my mortgage was a big step toward my eventual retirement. I paid it off in 1998 when I was 35. I kept working full-time the next 3 years. Those 3 years were my highest for earnings and lowest for expenses (without the mortgage). Once I learned I could basically live on one biweekly paycheck (and still have room to spare), I switched to working part-time (for the same company). I did that for 7 more years before I fully retired. It was in those 7 years where I changed my life a lot outside of work because I could do things during the day on some weekdays and more on some weeknights.

 

[skyking1]

I scanned through and did not see a mention of I-bonds, but they are yielding a good rate and will add up.

 

[pb4uski]

I scanned through and did not see a mention of I-bonds, but they are yielding a good rate and will add up.

Yes, that is a great option for taxable savings... can't beat 9.62% government guaranteed. And don't be disuaded by the $10k annual allowance... you can buy gifts for each other for your 2023 $10k allowance and have the interest earnings and minimum one-year hold clock start now.. so if you have $40k kicking around not doing much and don't mind locking up the money for a year then that is a great option.

 

[Chris918]

Chris, paying off my mortgage was a big step toward my eventual retirement. I paid it off in 1998 when I was 35. I kept working full-time the next 3 years. Those 3 years were my highest for earnings and lowest for expenses (without the mortgage). Once I learned I could basically live on one biweekly paycheck (and still have room to spare), I switched to working part-time (for the same company). I did that for 7 more years before I fully retired. It was in those 7 years where I changed my life a lot outside of work because I could do things during the way on some weekdays and more on some weeknights.

Great story. Thanks for sharing
Really inspiring

 

[Koolau]

Yes, that is a great option for taxable savings... can't beat 9.62% government guaranteed. And don't be disuaded by the $10k annual allowance... you can buy gifts for each other for your 2023 $10k allowance and have the interest earnings and minimum one-year hold clock start now.. so if you have $40k kicking around not doing much and don't mind locking up the money for a year then that is a great option.

How is the gifting to each other actually accomplished? Whose name is listed as "owner" or "beneficiary" or whatever? Thanks

 

[EastWest Gal]

Start a taxable investment account. The tax savings when you need to tap into your investments are significant. You only pay tax on capital gains , which varies from 0-20%, when the time comes to sell.

Never forget that the whole point of saving and investing is to use that stash to fund your (hopefully early) retirement. Don’t be afraid to spend it when the time comes.

My retirement stash is 2/3 from after tax and 1/3 from my IRA (401K rollover). It is a blessing to have that much control. I am 62, worked part time from age 55 to 59. I will not need to touch the IRA until forced to do so.

 

[pb4uski]

How is the gifting to each other actually accomplished? Whose name is listed as "owner" or "beneficiary" or whatever? Thanks

In my TD account, I buy a gift with DW as the owner and with me as the POD. It shows in my TD account as:

Mrs. pb4uski ***-**-2222
POD
pb4uski ***-**-3333

The gift sits in a gift box in my TD account until I deliver the gift to DW in a future year that she has unutiized allowance ($10k annually). Importantly however, the one year minimum ownership lock and interest start when I buy the gift, not when it is delivered to DW.

So if I buy an i-bond today for future delivery in 2023 and the interest rate is 9.62% for the first 6 months and 0% for the second six months, I can deliver it to DW on 1/1/2023 and she could redeem it on 5/31/2023 and the annualized yield would be 4.82%... not bad for a 1 year CD. If I buy today for future delivery on 1/1/24 the yield would be a minimum of 3.01%... not bad for an 19 month CD.

And of course, being a good DW, she buys me gifts in her TD account... so that is $40k that is earning 9.62% for the first 6 months and who knows what after that, but even if the who knows what ends up being 0% it is still a pretty good opportunity.

 

[Koolau]

In my TD account, I buy a gift with DW as the owner and with me as the POD. It shows in my TD account as:

Mrs. pb4uski ***-**-2222
POD
pb4uski ***-**-3333

The gift sits in a gift box in my TD account until I deliver the gift to DW in a future year that she has unutiized allowance ($10k annually). Importantly however, the one year minimum ownership lock and interest start when I buy the gift, not when it is delivered to DW.

So if I buy an i-bond today for future delivery in 2023 and the interest rate is 9.62% for the first 6 months and 0% for the second six months, I can deliver it to DW on 1/1/2023 and she could redeem it on 5/31/2023 and the annualized yield would be 4.82%... not bad for a 1 year CD. If I buy today for future delivery on 1/1/24 the yield would be a minimum of 3.01%... not bad for an 19 month CD.

And of course, being a good DW, she buys me gifts in her TD account... so that is $40k that is earning 9.62% for the first 6 months and who knows what after that, but even if the who knows what ends up being 0% it is still a pretty good opportunity.

Thanks. I've never set up a TD account. My I-bonds are all in paper. I will look into this as it seems the only (good) game in town for extra cash. Aloha

 

[CRLLS]

It sounds like you are well on your way to FI at an early age. Congratulations to you both.

I would suggest you start planning your withdrawal stage now. That will help to advise how much to save pretax vs taxable. This is what caught us. It seems that many financial things that will affect you in the future are based on AGI or MAGI. For instance, you will need some base taxable income to qualify for ACA insurance. Too much and you won't qualify for subsidies. Too much AGI and Medicare will cost you more (IRMMA). Roth conversions of any pretax savings such as IRAs and 401Ks may be in your future while you have lower AGI, saving some on income taxes.

The "best answer" has to do with your personal situations. Only you can decide which is appropriate. But future planning, 20-30 years out and well beyond.

 

[kbw61]

How is the gifting to each other actually accomplished? Whose name is listed as "owner" or "beneficiary" or whatever? Thanks

Try this for gifting I-bonds: https://thefinancebuff.com/buy-i-bonds-as-gift.html