rule of 55 bridge using brokerage link

[chad.sfds]

I am 49 and have a Fidelity 401k and it provides alot of options and flexibility. If I retired at 55, I have heard the strategy of rolling over the 401k to an IRA where you have many more investments options and leaving enough in the 401k to "bridge" you for those 4.5 years with the rule of 55.

My thinking (that I am just now beginning to research) is that I will obviously be looking to invest in dividend generating investments for income vs growth investments as I have been doing for my career in my 401k.

So, instead of rolling most of the 401k over to an IRA and then having to draw down the remaining 401k principal for 4.5 years, has anyone used brokerage link within the 401k to facilitate the dividend earning income to bridge those 4.5 years with the idea of then not having to touch any/as much of the 401k principal? My plan allows me to put 95% of my 401k into brokerage link. I could then invest that 95% in dividend investments and move the dividends back into my 401k for living income. Then, at 59.5, roll it all into an IRA.

Is that a strategy that has been used before?

Also, I plan to begin picking investments now in a fantasy investment account and track how that would have performed over the next 5 years giving me confidence in my choices (hopefully). My other option is to pay a CFA. Obviously I am here because I am interested in doing this on my own.

Love any feedback.

 

[tulak]

I'm in the same boat. I'm planning on rule 55/401k to bridge to 59.5.

I haven't thought much about how I'll invest, so I'm glad you brought this up. I don't see any issues with your strategy and I might do something similar. Since I'll need the money to last a guaranteed 4.5 years, I'll probably leave that amount in fixed incoming/safe investments, which might be most (or all of) of my fixed income allocation.

Normally I'd use one of the funds offered, a bond or stable value fund, but I've changed how I invest fixed income. So I'll look into doing the same: establish a brokerage link account and within that account I'll buy cds/bonds/treasuries depending on the return. Maybe setup a 4.5-5 year ladder and then withdraw the balance once a year.

Since I'm a total return investor, I'l make sure to buy fixed income in another account, likely an IRA, in order to stay at my AA.

Btw, you might already know this, but you can apply rule 55 in the year you turn 55. I'm lucky to have an end of year birthdate, so I'll be able to retire shortly after I turn 54. Not sure if I'll actually do that, since I still have a few years before I'm 54, but it's nice to have that option.

 

[Jimonlimon]

Similar boat- planning to retire at 58 and draw using "rule of 55". My 401k is through Nationwide and I just requested the optional self-directed brokerage account with Schwab.

 

[Out-to-Lunch]

I use Brokerage Link (at Fido) because I prefer some investments better than the "normal lineup" available in my 403(b). Keeping the funds in your 401(k) for more withdrawal flexibility seems like a fine idea.* But I do not think it is at all "obvious" that you should switch to dividend-generating investments. There is no free lunch with dividends. Why do you want to switch your market strategy?

*I did move a chunk of change (~1/4 of deferred assets) out of retirement accounts that we had access to into an IRA that we won't have access to until 59.5. I figured that was fine -- we still had access to the other 3/4, right? Well, I am currently seeking a mortgage, and those 1/4 assets don't "count" for that reason. Oh well. So, yes, there can be unanticipated reasons to want to keep them in your 401(k).

 

[chad.sfds]

I use Brokerage Link (at Fido) because I prefer some investments better than the "normal lineup" available in my 403(b). Keeping the funds in your 401(k) for more withdrawal flexibility seems like a fine idea.* But I do not think it is at all "obvious" that you should switch to dividend-generating investments. There is no free lunch with dividends. Why do you want to switch your market strategy?

I am here to learn. First, this has been my father's strategy and he retired at 48 and is 80 now and I have seen his quality of life and watched him be successful. It makes sense to me to invest aggressively when you are younger and can ignore the big down market swings in a 401k. However, as I am approaching looking at living from the money I have saved and had grow, it just seems to me that trying to preserve the principal and live off interest that it can generate is a good strategy.

 

[Alex The Great]

With current employer, I do have 401K at Empower Retirement and a brokerage link into Schwab. I'm 56 and my plan is drawing down it according to the rule of 55 if I need money in addition to after tax earnings & savings once I retire but before I turn 59.5. I established brokerage link just because I wanted to have a CD ladder and 401K itself obviously would not allow it.

 

[money4wells]

Hmm, I didn't know you could rollover part of the 401k, and leave the rest for Rule of 55. I was leaving the whole 401k, take some withdrawals at year end to make it to 59.5, then rolling over the whole thing to Fidelity where all my other IRA's are. I'll have to think about if it is worth the hassle to partly rollover, or just wait the 1.5 years till I can roll the whole thing to Fido.

I know as soon as you rollover from 401k to Rollover IRA, you can't use Rule of 55. And I thought I saw somewhere that you couldn't partially rollover or it disqualified Rule of 55, but I may have just made an assumption. Does anyone know for sure?

 

[chad.sfds]

With current employer, I do have 401K at Empower Retirement and a brokerage link into Schwab. I'm 56 and my plan is drawing down it according to the rule of 55 if I need money in addition to after tax earnings & savings once I retire but before I turn 59.5. I established brokerage link just because I wanted to have a CD ladder and 401K itself obviously would not allow it.

What are you drawing the after tax and savings from?

 

[Out-to-Lunch]

Hmm, I didn't know you could rollover part of the 401k, and leave the rest for Rule of 55. I was leaving the whole 401k, take some withdrawals at year end to make it to 59.5, then rolling over the whole thing to Fidelity where all my other IRA's are. I'll have to think about if it is worth the hassle to partly rollover, or just wait the 1.5 years till I can roll the whole thing to Fido.

I know as soon as you rollover from 401k to Rollover IRA, you can't use Rule of 55. And I thought I saw somewhere that you couldn't partially rollover or it disqualified Rule of 55, but I may have just made an assumption. Does anyone know for sure?

The rules of the IRS allow, but do not require, 401(k) custodians to permit partial distributions. So, some plans allow partial distributions, and others do not. Ask your custodian!

 

[Alex The Great]

What are you drawing the after tax and savings from?

After tax money are all in saving account, CDs and dividend stock. Not drawing yet but reinvesting interest and dividends: plan is to retire later this year.

 

[Out-to-Lunch]

I am here to learn. First, this has been my father's strategy and he retired at 48 and is 80 now and I have seen his quality of life and watched him be successful. It makes sense to me to invest aggressively when you are younger and can ignore the big down market swings in a 401k. However, as I am approaching looking at living from the money I have saved and had grow, it just seems to me that trying to preserve the principal and live off interest that it can generate is a good strategy.

This is an oft-discussed topic. Note that some conditions that were true when your father was 48 are not true now; back in the day, you had to sell whole lots of stocks, and pay a hefty commission on that sale. Now, you can sell fractions of a share for essentially free (to more or less create your own dividend). Dividends could be viewed (back then) as a way to extract value from your stocks without the pain of selling them, but selling is not painful now.

I will not try to rehash all of the arguments nor refute your intuitive (but likely not true) notions about preserving principal. (Dividend-paying stocks are ALSO volatile.) Instead, I will point you to some relevant sources and threads:
https://famafrench.dimensional.com/videos/homemade-dividends.aspx
https://www.bogleheads.org/forum/viewtopic.php?t=319010
https://www.early-retirement.org/forums/f28/how-are-dividends-for-retirement-115275.html

 

[runchman]

I also had fidelity and retired and used the rule of 55 to start withdrawing; I had a scheduled monthly draw, worked fine for a few months... then I also decided I'd use brokerage link for access to some additional investments, and transferred all my funds to it. I'd called fidelity and they'd said that should have no effect on my scheduled withdrawals.

Of course the next month came, and no withdrawal hit my checking account. Called, and oh, yes, you can't do a withdrawal from brokerage link directly, need to transfer the money back to your 403(b) account first. AND, I'd have to submit a newly notarized form with my wife's signature to re-establish the ongoing withdrawals. Wished I'd never heard of brokerage link at that point!

 

[Flyfish1]

Similar boat- planning to retire at 58 and draw using "rule of 55". My 401k is through Nationwide and I just requested the optional self-directed brokerage account with Schwab.

I am doing this already and plan to retire with the Rule of 55 in a couple of months. Dividends in the self directed account at TD Ameritrade will provide the majority of income I need. The hassle is I have to manually send it to Nationwide every month, and then instruct Nationwide to send me the money. I also believe that at least at Nationwide when they distribute income they do it equally across all holdings at Nationwide. I have to check that. If true that means they would liquidate some of my buy and hold assets to send me the money. Not ideal ...but beats working!

At 59 1/2 I'll move everything to an IRA.

 

[Jimonlimon]

…I also believe that at least at Nationwide when they distribute income they do it equally across all holdings at Nationwide. I have to check that. If true that means they would liquidate some of my buy and hold assets to send me the money. Not ideal ...but beats working!
….

My Nationwide account is for a State of California Savings Plus 401k. Under our plan you can specify which funds are used for distributions. I you don’t specify it’s spread across all funds.

 

[chad.sfds]

I also had fidelity and retired and used the rule of 55 to start withdrawing; I had a scheduled monthly draw, worked fine for a few months... then I also decided I'd use brokerage link for access to some additional investments, and transferred all my funds to it. I'd called fidelity and they'd said that should have no effect on my scheduled withdrawals.

Of course the next month came, and no withdrawal hit my checking account. Called, and oh, yes, you can't do a withdrawal from brokerage link directly, need to transfer the money back to your 403(b) account first. AND, I'd have to submit a newly notarized form with my wife's signature to re-establish the ongoing withdrawals. Wished I'd never heard of brokerage link at that point!

OK what I am taking away from this thread is that people are doing this or some form of this successfully.

I did check with fidelity and I think its as you stated...if you received the dividends in the BL, you have to transfer them back into the 401k into a fund (like the stable value fund) then request that as a sale transaction from the 401k. Maybe not ideal, but I should have the time to do that if I am retired


Now - has anyone used a fantasy investment account? I really like the idea of creating one now that would exactly mirror how I would set up my BL account at 55 and monitor that account over the next 5 years to gain some confidence in my strategy. Or, find out I am clueless and find a CFP. Might be worth a thread on its own.

 

[chad.sfds]

This is an oft-discussed topic. Note that some conditions that were true when your father was 48 are not true now; back in the day, you had to sell whole lots of stocks, and pay a hefty commission on that sale. Now, you can sell fractions of a share for essentially free (to more or less create your own dividend). Dividends could be viewed (back then) as a way to extract value from your stocks without the pain of selling them, but selling is not painful now.

I will not try to rehash all of the arguments nor refute your intuitive (but likely not true) notions about preserving principal. (Dividend-paying stocks are ALSO volatile.) Instead, I will point you to some relevant sources and threads:
https://famafrench.dimensional.com/videos/homemade-dividends.aspx
https://www.bogleheads.org/forum/viewtopic.php?t=319010
https://www.early-retirement.org/forums/f28/how-are-dividends-for-retirement-115275.html

I agree there were alot of differences from then and now. In addition to what you said, healthcare and pensions are two other big differences.

I appreciate the links and am here to mop up as much knowledge as possible. Its interesting to learn there is no "right" way to do all of this (I am sure there's some wrong ways ha). There's so many different, yet effective strategies. I am an engineer so I want things to be solvable and trying to get your head around all the various ways to "skin the cat" are, frankly, overwhelming.

 

[Out-to-Lunch]

Its interesting to learn there is no "right" way to do all of this (I am sure there's some wrong ways ha).

Truth!

There's so many different, yet effective strategies. I am an engineer so I want things to be solvable and trying to get your head around all the various ways to "skin the cat" are, frankly, overwhelming.

I hear you! I certainly tend that way. I spent a lot of effort trying to optimize my plan. I do not regret that effort, and am comfortable with my plan. However, from time to time, I find it helpful to reread this:
https://www.bogleheads.org/forum/viewtopic.php?p=5967698#p5967698

 

[GravitySucks]

The rules of the IRS allow, but do not require, 401(k) custodians to permit partial distributions. So, some plans allow partial distributions, and others do not. Ask your custodian!

And read the SPD! I remember getting conflicting responses from different HR reps.

I used the rule of 55 and moved all but 5 years worth of funds to an IRA. I didn’t have a brokerage link option and probably wouldn’t have used it anyway. My only regret was the 401k added a Stable Value fund after I pulled everything. It would have been nice during the bad days of trash bond / MM yields.