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

[RunningBum]

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....

There is no 28% tax bracket under the current system, so I guess you mean 24% now.

EDIT: removed the rest. I was using MFJ tax tables, but maybe you are single as I see no ref to a spouse. In that case the numbers probably make sense.

 

[ncbill]

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!

You're ignoring the creditor protection that comes with tax-deferred accounts, e.g. 401k, traditional IRA.

Taxable accounts are more flexible but usually have no protection from creditor claims.

Asset exposure is a huge area of discussion over on bogleheads, with many favoring irrevocable asset protection trusts over multi-million dollar umbrella policies.

 

[NgineER]

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.

+1

This is my plan as well.

Look into after-tax 401k contributions. Some companies allows these and they can be rolled over into a Roth IRA. This allows me to contribute $14k a year and on top of that I could contribute $5.5k into a Roth IRA. In ten years that is about $200k of contributions that can be withdrawn tax free.
All these contributions will server as a basis for my Roth rollover ladder.

 

[SecondCor521]

72t is an option when you reach 55.

72(t) programs can be started at any age. One does not have to wait until age 55.

 

[97guns]

You're ignoring the creditor protection that comes with tax-deferred accounts, e.g. 401k, traditional IRA.

Taxable accounts are more flexible but usually have no protection from creditor claims.

Asset exposure is a huge area of discussion over on bogleheads, with many favoring irrevocable asset protection trusts over multi-million dollar umbrella policies.

I don’t really care about creditor protection, I care about liquidity of my own money, money that’s useable before they tell me when I can start drawing on it.

I do like the company matching with 401k’s but I’ve always made the minimum contribution to get the full match, tax savings I could care less.

 

[exnavynuke]

I don’t really care about creditor protection, I care about liquidity of my own money, money that’s useable before they tell me when I can start drawing on it.

I do like the company matching with 401k’s but I’ve always made the minimum contribution to get the full match, tax savings I could care less.

To each their own. Keeping more of my money was/is important to me so tax savings are something I care a great deal about. Though everyone gets to have their own opinions in life.

 

[armor99]

+1



This is my plan as well.



Look into after-tax 401k contributions. Some companies allows these and they can be rolled over into a Roth IRA. This allows me to contribute $14k a year and on top of that I could contribute $5.5k into a Roth IRA. In ten years that is about $200k of contributions that can be withdrawn tax free.

All these contributions will server as a basis for my Roth rollover ladder.

I was actually thinking about it this morning. I currently invest in a Roth 401k at work. And I have a personal Roth IRA with my contributions over the years, including other rolled over Roth 401ks. So really if I want to punch out by 55... or younger. I just need to make sure I have enough money that I have personally contributed into my Roth IRA, and Roth 401k. ( in theory when I retire, I would roll over the Roth 401k into my Roth IRA). I am thinking that by the time I get there in approx 10 years, I should have enough of my own personal contributions in there to tide me over till 59.5. I am putting in 17.5k a year into my Roth 401k and 5500 into my Roth IRA. So that would mean in 10 years I would have 230k that I can take out tax and penalty free. So all of the 72t or Roth IRA ladder gyrations might not be needed.

 

[seabourne]

Yes, I think that you have it correct, though you might consider looking at where you fall on the tax bracket bubble. With everything going into Roth accounts, you are paying the marginal rate on some of that. While I wouldn't suggest putting everything into a refular 401k or IRA, you may look at putting the highest tax bracket portion in. It makes it easier to arbitrage your tax conversions and withdrawals when you have options, and it's the most efficient for you today as well.

 

[NgineER]

I was actually thinking about it this morning. I currently invest in a Roth 401k at work. And I have a personal Roth IRA with my contributions over the years, including other rolled over Roth 401ks. So really if I want to punch out by 55... or younger. I just need to make sure I have enough money that I have personally contributed into my Roth IRA, and Roth 401k. ( in theory when I retire, I would roll over the Roth 401k into my Roth IRA). I am thinking that by the time I get there in approx 10 years, I should have enough of my own personal contributions in there to tide me over till 59.5. I am putting in 17.5k a year into my Roth 401k and 5500 into my Roth IRA. So that would mean in 10 years I would have 230k that I can take out tax and penalty free. So all of the 72t or Roth IRA ladder gyrations might not be needed.

I think you are on the right track here... Add up all your rollovers and contributions to date and see how much you have saved up, you might already have enough to bridge the gap.

Yes, I think that you have it correct, though you might consider looking at where you fall on the tax bracket bubble. With everything going into Roth accounts, you are paying the marginal rate on some of that. While I wouldn't suggest putting everything into a refular 401k or IRA, you may look at putting the highest tax bracket portion in. It makes it easier to arbitrage your tax conversions and withdrawals when you have options, and it's the most efficient for you today as well.

Some very good points here as well. You want to look at your total tax picture. Socking away Roth 401k while working would most likely put you in a higher tax bracket now that when you are retired. It might be wiser to contribute to a regular 401k and deduct some taxes now and when you are retired and pulling out tax free contributions, convert your traditional 401k and pay less in taxes than you do now. I contribute to a traditional 401k and do after tax contributions on top of that.

 

[armor99]

I think you are on the right track here... Add up all your rollovers and contributions to date and see how much you have saved up, you might already have enough to bridge the gap.







Some very good points here as well. You want to look at your total tax picture. Socking away Roth 401k while working would most likely put you in a higher tax bracket now that when you are retired. It might be wiser to contribute to a regular 401k and deduct some taxes now and when you are retired and pulling out tax free contributions, convert your traditional 401k and pay less in taxes than you do now. I contribute to a traditional 401k and do after tax contributions on top of that.

One more little wrinkle here.... the Roth 401K roll over into my Roth IRA is not just my personal contribution. Vanguard does not have this info. I called to check. I will have to go back to the previous companies Roth 401k plan admin to get the documentation. Strange.... you would think one 401k plan admin would send on this info to the next admin. But I guess not...

 

[HI Bill]

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.

My understanding is that if you start using 72(t) before 59.5, you have to use it for either AT LEAST 5 years, or until you turn 59.5, whichever is later. So, if you start at age 50, you'd only be locked in for 9.5 years. Is this correct, or am I missing something?

 

[seabourne]

HNL Bill, that agrees with my understanding. I think that the larger issue is being locked in at a fixed rate that is very low for an early retiree. It's based on prevailing interest rates at the time you start, life expectancy or amotization rate, all of which are (or at least ahve been recent years) lower than might be a SWR, and leaves someone with very little flexibility until 59.5 years old

 

[armor99]

HNL Bill, that agrees with my understanding. I think that the larger issue is being locked in at a fixed rate that is very low for an early retiree. It's based on prevailing interest rates at the time you start, life expectancy or amotization rate, all of which are (or at least ahve been recent years) lower than might be a SWR, and leaves someone with very little flexibility until 59.5 years old

That matches up with what I saw... you would have to have a really enormous nest egg to get enough out of it each year....from the calculations I was seeing.

 

[HI Bill]

That matches up with what I saw... you would have to have a really enormous nest egg to get enough out of it each year....from the calculations I was seeing.

Yes, that is true...

A SEPP for a 401(k) at $750K for a 52-year old, would throw out about $37K annually, if using the Amortization or Annuity calculation methods, and only about $22K if using the Minimum Distribution Method. Assuming you're following the 4% 'rule', this is not too far out of line. If you are planning to take more than this, and you have no other taxable assets, you'll likely run out of money eventually.

 

[SecondCor521]

My understanding is that if you start using 72(t) before 59.5, you have to use it for either AT LEAST 5 years, or until you turn 59.5, whichever is later. So, if you start at age 50, you'd only be locked in for 9.5 years. Is this correct, or am I missing something?

You are correct. For some reason when I typed that my brain was thinking about age 70.5, which is for starting RMD's, not for ending 72(t)'s. My bad.

 

[seabourne]

I'm 39, which impacts the rate of payout, but also, I don't believe that it can increase to account for inflation. Depending on your time frame, that could be a significant factor over time.

 

[armor99]

Thank you all for your thoughts.... definitely a lot to think about.....

 

[Montecfo]

.

 

[UnrealizedPotential]

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!

I can relate to your post quite a bit. I am not going to say that one shouldn't have a 401K or Roth Ira or any tax deferred vehicle that has age requirements. Just to be clear as I understand it, the 401k is tax deferred with money going in, but taxes are paid on distributions after age 59.5. They are important for a lot of investors since ease of use and access is available, plus it's tax deferred along the way , well the 401k is, and the Roth IRA is tax free after 59.5 on distributions but you pay taxes on the money you put in them,and a lot of investors use these through their employer and that is quite beneficial.

On the other hand , IMO you are quite right to suggest the drawbacks of such investment vehicles IF one wants to retire early or is considering it. It's a PITA if one wants to retire early and all or most of their investment vehicles are in investments that might be tax beneficial on the front or back end, but access to them is limited due to age.

I like a mix of approaches regarding this. Why not do both? Of course the problem is a lot of investors, myself included simply do not see in time the importance of having taxable accounts that are not age restricted until it is late in the game. So I kind of have my foot in both camps on this issue. But I certainly understand your opinion, as without having enough in my taxable accounts I could never have retired.

 

[NgineER]

As I mentioned earlier, there are quite a few strategies to access these retirement accounts early, way before 59.5. However, it does take more effort and planning to get to the money. I rather plan and prevent the taxman from getting more of my hard earned money than paying more than I need to in taxes.

The only drawback that I have encountered is that I do not have as much money accessible for a big lump sum purchase while still working as that draw would be taxable on top of my income. But I have enough money put away to gradually draw in a low tax bracket when not working.

 

[kimcdougc]

DH retired in Feb. 2015. I didn't start really looking at retirement until one year out. After much research, when we retired we did an NUA - Net Unrealized Appreciation of company stock.

DH was 57 when he retired. We took enough company stock and sold it (paid only long term capital gains on it) and have been living on that cash for 3 1/2 years now. Paid Uncle Sam a bunch of tax money when we first did it. Haven't paid Uncle Sam anymore since then.

We have picked up a small job (which we weren't expecting) on the side therefore not having to use as much of this cash as we thought.

Haven't had to touch IRA at all as of yet.

I would put dollars in the 401K up to the company match, then fund your Roth IRA to the max.

Just what has worked for us.

Good luck with your decisions.

 

[kimcdougc]

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.

Company stock has to have been purchased and held on to for at least 1 year to qualify for the NUA. So you do have to plan in advance.

 

[Sojourner]

I like a mix of approaches regarding this. Why not do both? Of course the problem is a lot of investors, myself included simply do not see in time the importance of having taxable accounts that are not age restricted until it is late in the game. So I kind of have my foot in both camps on this issue. But I certainly understand your opinion, as without having enough in my taxable accounts I could never have retired.

This is how I've always thought of it, too. I started contributing to my first 401k as soon as I could in my mid 20s, and I continued consistently up until last year using a solo 401k. I almost always contributed the max every year, and got decent employer matching most years, too. But had I not started investing heavily in non-retirement taxable accounts starting around 15 years ago, I would never have amassed enough to have taken the ER plunge in my mid 40s. Even right now, today, my retirement accounts (401k plus IRAs) have substantially less than $750K. It's always puzzled me a bit how people can amass enough in just their retirement accounts to be able to seriously consider ER in, say, their early 50s. I definitely couldn't, and I was (as I mentioned) a consistently heavy 401k investor throughout my career.

 

[exnavynuke]

This is how I've always thought of it, too. I started contributing to my first 401k as soon as I could in my mid 20s, and I continued consistently up until last year using a solo 401k. I almost always contributed the max every year, and got decent employer matching most years, too. But had I not started investing heavily in non-retirement taxable accounts starting around 15 years ago, I would never have amassed enough to have taken the ER plunge in my mid 40s. Even right now, today, my retirement accounts (401k plus IRAs) have substantially less than $750K. It's always puzzled me a bit how people can amass enough in just their retirement accounts to be able to seriously consider ER in, say, their early 50s. I definitely couldn't, and I was (as I mentioned) a consistently heavy 401k investor throughout my career.

Starting in their 20's with maxing as soon as possible on both your 401k and IRA contributions and a person would be ~$1.5-2 million by the time they reached 50 pretty easily with average 7% returns.

 

[Sojourner]

Starting in their 20's with maxing as soon as possible on both your 401k and IRA contributions and a person would be ~$1.5-2 million by the time they reached 50 pretty easily with average 7% returns.

This certainly could be true for today's twenty-somethings, but it's not at all the case for someone like me who started contributing to my 401k in the early '90s. The max employee contribution when I first started was only $8,900/year. And, as I mentioned, I contributed the max almost every year, consistently, for nearly 25 years. I also got a pretty good employer match for a large chunk of those years, yet my current 401k / IRA balance isn't even half of your $1.5MM estimate.