Thanks for all the responses. BTW, I'm 34 and am not nearing any retirement yet.
The reason for the question are really 2 things:
1. If I remember the book YMOYL correctly, I think it is mainly referring to the point when you become FI which seems to imply you get there on taxable funds. I then make the assumption that once you're FI and continue to keep your expenses as low as possible (yet it seems expenses rising with inflation must also be assumed, which is unpredictable), then you will not need tax-deferred savings.
It's possible I'm misinterpreting the author and/or just missing something.
2. I am glad to have built up a 401k and have no intention of tapping it early (although I'm learning from you that it may be possible without penalty under certain conditions) but in my spreadsheet I have a projection of how much income could be generated from my taxable savings assuming some growth rate of say 5%, where the growth itself may pay for my expenses while the principal is still preserved.
(hmm... no inflation assumption though...)
So the income number goes up faster if I were to decide to put future savings into taxable accounts instead of 401k, at least until I can tap the 401k.
GTM said:
What about inflation and protection of principle?
Inflation is unpredictable I agree, I guess it's assumed that a conservative rate of return can still cover inflation and live off the growth, therefore protecting principal.
This is probably not a good assumption however. (is that an understatement?)
uncledrz said:
The problem (I prefer this over error) in paying a 10% penalty to have funds available for early retirement is that it:
1. pays tax not required to be paid;
2. loses continued tax deferral;
3. is not necessary.
If you are at a point where the numbers are going to work, and you don't want to continue working past when the numbers work, then as you approach, stop funding deferred options and leave those funds available for near term expenses, then tap the deferred funds once the penalty doesn't apply (at 59.5 years, or when rule 72t can be use).
Right, I was leaving out the 72t as an option because I'm not near enough to retirment to consider using it. However, it does allow another option that my question didn't mention - my question was too much "either/or" to transfer the 401k money to taxable and pay the penalty.
Perhaps a better question is: how to know when to stop funding deferred options?
That depends on the goal, which for sake of the original question is: how early can I achieve FI?
Maybe the book YMOYL defines FI differently than most people here do? (maybe it doesn't
consider inflation for example?)
Maybe the answer is to keep funding tax-deferred accounts as long as possible anyway.
flipstress said:
So putting your money in tax-deferred accounts like a 401K plan during the accumulation period is not delaying your FI date. As ex-Jarhead explained, it will most likely even accelerate your FI date because of the tax deferral benefits.
Then it seems I can have the cake and eat it too and didn't know it?
(well, someday...) because so far, I have both taxable and 401k (and Roth).
ex-Jarhead said:
JustHatched: First off, I'll make a comment on the failure of the new generation (my kids are age 38, and age 32) not appreciating or understanding what a gift towards retirement they've been handed, by the various tax deferral possibilities that are available today.
Incidentally, they have stretched out the MWD at 70.5 to 26 years. (The previous was about 16 years, so if you can get by on the lower required amount, it is quite an improvement).
I think most people over, say, 50 have DB pension plans that should make retirement planning easier for them, but I am glad that 30-somethings have access to tax-deferred plans and I do use it. I have no plans to touch it at all yet, and plan to continue contributing at least to get the match, if not more.
I knew about 401ks having mandatory withdrawals, but 70.5 still seems pretty far away to me at the moment so I never really considered it much. Although, even if they have improved it for 401ks, the fact that it's there seems like a good reason to put the savings either in Roth or taxable accounts so no need to worry about mandatory withdrawals.
I apologize if it seems I'm going in circles. I will most likely continue to contribute to taxable and tax-deferred accounts. But I wanted to know if anyone started ramping down their contributions to tax-deferred accounts simply because it no longer became necessary? (i.e. acheived FI)
I suppose by that point, you still contribute so you can reduce taxes, or you retire and no longer have the option to contribute anyway.