Author Topic: 401k or early retirement?  (Read 2468 times)

01-Gandalf

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401k or early retirement?
« on: February 25, 2015, 09:23:10 PM »
Does one focus on the 401k or “non-retirement” index funds for early retirement?


I find myself asking, “What option would Mr. Money Mustache do?” I’m 30 and all debt is paid off. And though my wife and I make a very meager living, I still believe a case can be made for early retirement (early 40’s) based upon the life style we hold and the amount of living expenses we have per year.

Let me paint a picture for you.

Current Investments:

$50,000 in 59 ½ retirement plans (401k, ROTH IRA, Trad. IRA, etc.)
$50,000 in “non-retirement”/Early Retirement Plan (mutual funds, etc.)

Current Annual Contributions:

$4,500 for employer 401k plan
$11,000 for 2 ROTH IRA Accounts (wife and I)
$27,600 now freed up due to paying off all loans

TOTAL: $43,100

Current Annual Living Expenditures:

Without going into the details…

TOTAL:  $19,600


So the dilemma:

[Option 1 – the Old Man Money Option]
I could max out the $17,000 401k-retirement plan, and continue to max out the ROTH IR funds, which would leave only $10,600 annually that could be invested in the “early retirement”, index funds. At 59 ½ I would have a substantial amount of money, but I will not have the option of alternative work or “Early Retirement”—I will have had to wait until retirement age.

[Option 2 – The Early Retirement Option ]
I take the $11,000 that was dedicated to the ROTH IRA and take the $27,600 “freed up” money and invest both sums into “Early Retirement”, namely a variety of Vanguard Index funds. In 10 years that’s roughly $556,483. But then add in the 50k that’s now 100k (50k doubled in that same 10 years time), which makes that $656,483. At 4% annual withdrawal that’s $26,259. That’s more than enough for us to retire and live like kings. The $4,500 for employer 401k plan is still being added each year as well as a safety net.

[Option 3 – The Hybrid: Old Man Money & Retire Early]
I could leave the ROTH IRA annual contribution of $11,000 and just focus the $27,600 annually, with 7% annual return, in “Early Retirement”, Vanguard index funds. At 10 years investing, that would roughly end up being $400,000. Then add in the $50k that’s now $100k, giving a total of $500,000. Add in another 3-5 years for good measure, and that’s enough to retire on, withdrawing 4% annually and allowing 3% for inflation. The $4,500 for employer 401k plan is still being added each year as well as a safety net.

Do I follow suit with what most people do and max out “old man money” (401k & ROTH IRAs) [Option 1].

Or do I carpe diem and take all of the possible investment money and go with a variety of Vanguard index funds to try and retire in 10 years [Option 2]? 

Or still yet, do I take a hybrid approach, maxing out ROTH IRAs and taking the “Freed Up” money and invest with a variety of Vanguard index funds, thereby retiring in 15 years instead of 10?

So, what option would MMM make?



seattlecyclone

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Re: 401k or early retirement?
« Reply #1 on: February 25, 2015, 09:31:03 PM »
Option 1. Max out the tax-advantaged accounts. This doesn't have to delay your retirement; in fact, it can accelerate it due to lower tax payments while you're working. There are ways to access your 401(k) before age 59½. Search for "Roth Pipeline" or "72(t)" or "SEPP" for more information about the options.

johnny847

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Re: 401k or early retirement?
« Reply #2 on: February 25, 2015, 10:36:29 PM »
Option 1. Max out the tax-advantaged accounts. This doesn't have to delay your retirement; in fact, it can accelerate it due to lower tax payments while you're working. There are ways to access your 401(k) before age 59½. Search for "Roth Pipeline" or "72(t)" or "SEPP" for more information about the options.
Do you ever get tired of these "I don't want to lock up my money until 59.5" posts? I mean, no offense to the OP, but this topic comes up so often on this forum that it's almost like oh, another "I don't want to lock up my money until 59.5" thread? It must be Thursday.
« Last Edit: February 25, 2015, 11:15:06 PM by johnny847 »

Eric

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Re: 401k or early retirement?
« Reply #3 on: February 25, 2015, 10:54:59 PM »
Gandalf, can't you just cast a spell and get that money out of your 401k penalty free?  :)

If not, read this:

http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/


Also, FYI, the 401k max for 2015 is $18k.  Do it!
« Last Edit: February 25, 2015, 10:56:33 PM by Eric »

MDM

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Re: 401k or early retirement?
« Reply #4 on: February 25, 2015, 11:05:53 PM »
Do you ever get tired of these "I don't want to lock up my money until 59.5" posts? I mean, no offense to the OP, but this topic comes up so often on this thread that it's almost like oh, another "I don't want to lock up my money until 59.5" thread? It must be Thursday.
One could always keep http://forum.mrmoneymustache.com/forum-information-faqs/frequently-asked-questions/msg415140/#msg415140 in a paste buffer somewhere.... :)