Enough to Retire, but not old enough to touch it....

A

armor99

Full time employment: Posting here.
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Feb 24, 2007
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This is something I have been thinking about for a while now, and I thought I would ask the forum. There might be others here who were in the same situation.
I think I have done a pretty good job so far in saving and investing. So much so, that there is a very good change in my early 50’s. I can retire easily. However, most of that money is tied up in retirement mutual funds, that I cannot tap without penalties till I am 59.5.
I currently have around 700k in all of my retirement accounts, and I recently turned 45. I have another 50k or so in cash. And I am projecting to be able to pay off my house in the next few years. That will make me debt free.
I have been toying with a few ideas of what to do in this situation. Retirement for me does not nessisarily mean never working again. But it does mean I never have to work again if I choose not to, and that means I need to be able to touch my savings.

What if I stop contributing to my 401k completely, and take the money that usually goes there into a standard brokerage account? I miss the 401k match, but I can touch it whenever. Or maybe invest in my Roth 401k up to the match, max out my personal Roth IRA. And then any extra into a brokerage account. I understand that I can touch all of my personal Roth contributions (what I put in) at any time and without penalties...

I have read up on Roth Conversion ladders, but that is a lot of taxes to have to pay every year for the conversions.

Just thinking for now. Wondering what others might have done in my situation... thanks....
 
There's ways to get to your retirement savings pre-59.5 without paying the penalty. You'll still owe tax.

There's an IRS regulation called the rule of 55. Basically if your 55 or older and separated from service you can do it. Couple of gotchas, it has to be specified in the plans SPD and the custodian has to be able to do partial withdrawals, some don't.

Otherwise there's a 72t that allows you to do the same with no real restrictions. I'm not familiar with them other than they require more planning. I'm sure someone else can give you a place to start.
 
Are you making extra payments to pay off the house? If so, stop that. If you are cash strapped for a few years, don't bury it in the house. Of course you could get at much of that equity with a HELOC.
 
Couple of questions..

- What are your annual expenses?

- Have you done any projections on expected total value of your Portfolio at RE?

Sounds like you're on the right track, but $700K + $50K cash seems somewhat light in terms of total assets if you're planning to RE early 50s unless you have super low expenses and/or pension, retiree healthcare, etc.
 
RetireSoon said:
Couple of questions..

- What are your annual expenses?

- Have you done any projections on expected total value of your Portfolio at RE?

Sounds like you're on the right track, but $700K + $50K cash seems somewhat light in terms of total assets if you're planning to RE early 50s unless you have super low expenses and/or pension, retiree healthcare, etc.
Click to expand...



I am thinking around 55 maybe? That is 10 years away. Lots of stuff can happen in that amount of time. Just thinking about things I can do or might want to do to have more cash available. I like options... at 55 my working situation might be great!!! But it might not be, so I am looking for ways to stack the deck in my favor...
 
I had same concern at around the same age. I was off researching 72t, rule of 55, and even SPIAs. Turns out, DW and I never stopped maxing out our 401K contributions (even increased at 50). But being so close to ER provided the extra motivation to save even more. So the taxable account grew quite rapidly. This was also enabled by increased *capacity* to save, driven mainly by peak earnings and flattening expenses as the kids moved out.

We went from basically 0/100 to 40/60 taxable/tax-deferred in a fairly short period of time. We also have two small pensions that cover about 60% of spend. But the taxable account should cover the gap all the way to 70, which provides many years to spread out Roth conversions and build the SS benefit.
 
armor99 said:
I have read up on Roth Conversion ladders, but that is a lot of taxes to have to pay every year for the conversions.
Click to expand...

Emphasis added. I don't understand the above. Can you clarify?
 
SecondCor521 said:
Emphasis added. I don't understand the above. Can you clarify?
Click to expand...



So say I need 50k a year for the ladder to work. While I am working I believe I am in the 28% tax bracket. So that would mean a 14k tax bill? Or am I not thinking about this correctly. Might not be....
 
I would continue to max out the 401K and just focus more on the after tax savings. Once your house is paid off, you can put that cash into a taxed account. As was mentioned, if you're making extra payments on your house, consider scaling back there and save more. Personally, I wouldn't worry about it. Once we paid off our house, the taxed accounts grew rather quickly.

The main thing I would focus on is expenses. Going into an early retirement situation already living below your means will do you quite well. Also, living below your means now will mean that the after tax account will grow even faster.

And yes, there's no requirement that you actually retire, but when you become financially able to do so, your outlook on work and even life will change. Best wishes on your journey.
 
I am going the 72t route. I wish I would have saved more in a taxable account. The 72t rules are fairly rigid. Having the ability to take less 72t and then make adjustments up and down with the taxable funds would have been handy
 
Conundrum said:
I am going the 72t route. I wish I would have saved more in a taxable account. The 72t rules are fairly rigid. Having the ability to take less 72t and then make adjustments up and down with the taxable funds would have been handy
Click to expand...



Thanks for the info.... not really possible to do the calculation, but I have always wondered what things would look like ( investment wise) if when I started at 28, I only invested in a standard brokerage account. Obviously I would have missed the match for two decades, but I could touch any of it at any time. I wonder how much less it really would have been...
 
I started my 401k in 1987 at age 20. Maxed it out for 15 years. Then came the kids and all the family stuff so I cut back. The magic of compounding saved me big time
 
armor99 said:
So say I need 50k a year for the ladder to work. While I am working I believe I am in the 28% tax bracket. So that would mean a 14k tax bill? Or am I not thinking about this correctly. Might not be....
Click to expand...

Ah, I see.

You are correct in that Roth conversions create ordinary taxable income.

I retired two years ago at the age of 46 and am utilizing a Roth conversion ladder.

The way I did it was to save a bunch first in 401(k)'s and IRA's.

I then started saving in a taxable account as my income and savings rate grew.

I reasonably quickly saved up 5 years worth of expenses in a combination of taxable accounts and Roth IRA contribution amounts.

Then I retired and started my Roth conversion ladder.

In general, each year I Roth convert what I expect my expenses to be 5 years down the road. I then spend one year's expenses from my 5 years of after-tax savings.

After five years, I'll have my Roth pipeline full and can continue on that indefinitely.

Doing it this way does require saving up that 5 year taxable nut before retiring.

On the other hand, it also means that those Roth conversions are done at a time when one's taxable income is quite low, so the taxes on the Roth conversions are negligible.

As a real world example, last year I Roth converted a modest five-figure sum and paid federal taxes of $0 and state taxes of $10. In fact, after a few refundable credits, I received a small four-figure sum back from the federal and state taxing authorities, so I actually had a negative tax rate on my Roth conversion last year.

I expect that situation to continue over the next several years. In fact, my biggest tax problem is realizing enough income to take advantage of all of the nonrefundable credits I'll be entitled to over the next several years as my kids go through college.

...

As an aside, I've been interested in early retirement since the late 1990s, and until a few years ago I was planning on doing the 72(t) route. I recently learned about the Roth conversion ladder and for my situation I like it better. A previous poster mentioned the lack of flexibility with 72(t), which is a relatively big drawback for retirees around 50 years old, because you'll have to stay with the program for almost 20 years. Yes, there are ways around this, but they require extra steps and complexity I'd rather avoid. With the Roth conversion ladder, one can vary the conversion amounts annually as needed. But again, I think the biggest trick to the Roth ladder is getting that initial 5 year nut saved up so you can prime the ladder when you're retired.
 
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Tax diversification is important, especially for an early retiree. I was putting a huge fraction of my savings into tax deferred accounts for most of my career, and when ER became a reality I realized that I overdid it by a little bit. For example, I was putting after tax money into my 401(k), for which I now need to bite the bullet and convert to Roth 401(k). I would be more comfortable right now if I had a little more in taxable compared to tax deferred. I retired at 55 and was about 75% tax deferred (with the house paid off).

My suggestion:

1. Cut your 401(k) contribution back to make sure you get the match, but no more. Never give up a match for tax purposes - you can't beat the return.
2. Put whatever you are eligible for into Roth 401(k)/IRA.
3. Put the rest into taxable accounts - low cost index funds recommended.

Ideally at ER in your early-50s you will have a good mix of taxable, tax-deferred, and tax-free accounts so you can actively manage your AGI for tax bracket, 0% capital gains, and ACA purposes. Then you will have a choice on Rule of 55/72t withdrawals, regular taxable account withdrawlas (much of which is return of principal and tax free), tax-free Roth withdrawals.
 
Is any of your retirement account money in company stock? If so, you might be able to cash it out using NUA, or Net Unrealized Appreciation. I had a large chunk of company stock in my 401k, so when I left the company 10 years ago at age 45, I cashed it out at the lower tax rates of Long-Term Cap Gains (15%), not as ordinary income. This basically reversed my ratio from 2/3 retirement money to 2/3 taxable account money.
 
I have voiced my opinion several times on the drawbacks of having your funds tied up in retirement accounts and basically having to work until withdrawal age and I’ve been chastised for it, viewed as some kind of simpleton or even a troll by golly.

My stance remains the same and I asked myself the question: why would you want a fund to dictate when I retire, sure “there are ways“ to get at your money but I asked again: why do I need to jump through hoops to get my money.

Would I have retired at 39 if my funds were tied up in retirement accounts, I can definitely say no!
 
We currently maximize the 12% bracket. This includes 0% LTCG. Single filer should be around 50k in income. (50k-12k std deduction, - LTCG = amt to Roth convert costing 12% fed + state).

Some people skip the roth conversion and pay the 12% + 10% penalty which can be slightly lower than your marginal rate when working.

Read the Mad Fientist for many analysis articles.
 
USGrant1962 said:
Tax diversification is important, especially for an early retiree. I was putting a huge fraction of my savings into tax deferred accounts for most of my career, and when ER became a reality I realized that I overdid it by a little bit. For example, I was putting after tax money into my 401(k), for which I now need to bite the bullet and convert to Roth 401(k). I would be more comfortable right now if I had a little more in taxable compared to tax deferred. I retired at 55 and was about 75% tax deferred (with the house paid off).

My suggestion:

1. Cut your 401(k) contribution back to make sure you get the match, but no more. Never give up a match for tax purposes - you can't beat the return.
2. Put whatever you are eligible for into Roth 401(k)/IRA.
3. Put the rest into taxable accounts - low cost index funds recommended.

Ideally at ER in your early-50s you will have a good mix of taxable, tax-deferred, and tax-free accounts so you can actively manage your AGI for tax bracket, 0% capital gains, and ACA purposes. Then you will have a choice on Rule of 55/72t withdrawals, regular taxable account withdrawlas (much of which is return of principal and tax free), tax-free Roth withdrawals.
Click to expand...

Well put.
 
If you get desperate to retire and still do not have enough after tax money, you could sell the house and get to the equity. No, I am not saying you should do this, as there are too many variables at play. Maybe you like it where you are and plan to stay long term. Still, selling the house is another option for you, although admittedly, maybe an unattractive one.

FWIW , I sold my condo to get more after tax money to be able to quit my job. But I was more than willing to relocate.
 
SecondCor521 said:
Ah, I see.

You are correct in that Roth conversions create ordinary taxable income.

I retired two years ago at the age of 46 and am utilizing a Roth conversion ladder.

The way I did it was to save a bunch first in 401(k)'s and IRA's.

I then started saving in a taxable account as my income and savings rate grew.

I reasonably quickly saved up 5 years worth of expenses in a combination of taxable accounts and Roth IRA contribution amounts.

Then I retired and started my Roth conversion ladder.

In general, each year I Roth convert what I expect my expenses to be 5 years down the road. I then spend one year's expenses from my 5 years of after-tax savings.

After five years, I'll have my Roth pipeline full and can continue on that indefinitely.

Doing it this way does require saving up that 5 year taxable nut before retiring.

On the other hand, it also means that those Roth conversions are done at a time when one's taxable income is quite low, so the taxes on the Roth conversions are negligible.

As a real world example, last year I Roth converted a modest five-figure sum and paid federal taxes of $0 and state taxes of $10. In fact, after a few refundable credits, I received a small four-figure sum back from the federal and state taxing authorities, so I actually had a negative tax rate on my Roth conversion last year.

I expect that situation to continue over the next several years. In fact, my biggest tax problem is realizing enough income to take advantage of all of the nonrefundable credits I'll be entitled to over the next several years as my kids go through college.

...

As an aside, I've been interested in early retirement since the late 1990s, and until a few years ago I was planning on doing the 72(t) route. I recently learned about the Roth conversion ladder and for my situation I like it better. A previous poster mentioned the lack of flexibility with 72(t), which is a relatively big drawback for retirees around 50 years old, because you'll have to stay with the program for almost 20 years. Yes, there are ways around this, but they require extra steps and complexity I'd rather avoid. With the Roth conversion ladder, one can vary the conversion amounts annually as needed. But again, I think the biggest trick to the Roth ladder is getting that initial 5 year nut saved up so you can prime the ladder when you're retired.
Click to expand...



Thanks for your insight. I have looked at this. And I can see the advantages. But I would have to save a really large sum of money. Guessing around 250k for that five years to live on. I am assuming the way it works is to stop working once you have the 250k saved up, and then Roth convert 50k from your IRA (assuming you have at least 250k in there as well) each year. That should have little to no taxes at that time, as you have little to no income( you stopped working) In five years, you can now take back what you put in tax and penalty free. Am I thinking about this correctly?
 
armor99 said:
Thanks for your insight. I have looked at this. And I can see the advantages. But I would have to save a really large sum of money. Guessing around 250k for that five years to live on. I am assuming the way it works is to stop working once you have the 250k saved up, and then Roth convert 50k from your IRA (assuming you have at least 250k in there as well) each year. That should have little to no taxes at that time, as you have little to no income( you stopped working) In five years, you can now take back what you put in tax and penalty free. Am I thinking about this correctly?
Click to expand...

Yup, that's the basic idea.

I'll just point out that if you're spending $50K per year, you should have ~25 times that in savings, or ~$1.25M. If you have $250K in cash, that would imply 401(k)'s and IRA's of ~$1M.

In that scenario, I'm not sure why you say $250K is a lot of money - you'd have 4x that in your IRA's...
 
97guns said:
I have voiced my opinion several times on the drawbacks of having your funds tied up in retirement accounts and basically having to work until withdrawal age and I’ve been chastised for it, viewed as some kind of simpleton or even a troll by golly.

My stance remains the same and I asked myself the question: why would you want a fund to dictate when I retire, sure “there are ways“ to get at your money but I asked again: why do I need to jump through hoops to get my money.

Would I have retired at 39 if my funds were tied up in retirement accounts, I can definitely say no!
Click to expand...

You are trolling. You didnt even attempt to answer OP's question. You're simply looking for a response.

If I were OP...I would back off 401k (at least get the match) and start hammering taxable accounts. Like others said...72t is an option when you reach 55.
 
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