Author Topic: Silly Question about 401k  (Read 3590 times)

Zarakava

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Silly Question about 401k
« on: March 30, 2017, 09:04:37 AM »
So, I'm still in the early stages of financial literacy, and I had a 401k question.

Because you can't/shouldn't take out until 59.5, does this just become extra income if you FIRE? Wouldn't that add up to a lot, assuming you'd maxed your input for a while?


Zarakava

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Re: Silly Question about 401k
« Reply #2 on: March 30, 2017, 09:11:58 AM »
Cool - lemme rephrase slightly.

Should you count your 401k in what you have to FIRE on?

dandarc

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Re: Silly Question about 401k
« Reply #3 on: March 30, 2017, 09:12:27 AM »
Yes.

caracarn

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Re: Silly Question about 401k
« Reply #4 on: March 30, 2017, 09:13:02 AM »
If you do not want to withdraw early (the link above explains how if you set withdrawals to a fixed amount you can do so without penalty), which is what I think you are asking, then yes, if your FIRE before 59.5 when you get to that age you would have extra inflows from your 401k balance that you could pull.

The biggest benefit of the 401k is many times the free employer match.  Mine provides 3% even if you contribute nothing and then usually provides an additional 8% a year in what they call profit sharing, but is really just a discretionary addition to your 401k.  That's a lot richer than most, but my last employer provided up to 3.5% on a 6% contribution (100% for your first 1% and 50% for each 1% thereafter).  As you'll see all over the forum this is a benefit you want to avail yourself of without question the moment you are eligible versus many youngsters who say "I'll wait until I'm 35 before I join the 401(k).  Why would I want to save for retirement before that?"

Frankies Girl

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Re: Silly Question about 401k
« Reply #5 on: March 30, 2017, 09:14:34 AM »
Cool - lemme rephrase slightly.

Should you count your 401k in what you have to FIRE on?

Well, yeah. It's part of your portfolio, so why wouldn't you? You could think of it as "old man/lady money" and your taxable and Roth accounts as your "early retirement money" or you could just lump it into the total amount. Even if you did have to take money out of it for some reason before you set up the Roth pipeline or some other trick, the penalty for doing so is only 10%. It is your money and you can access if you really wanted/needed it at any time.

caracarn

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Re: Silly Question about 401k
« Reply #6 on: March 30, 2017, 09:15:31 AM »
Yes.

Since these replies are short maybe I'm misreading, but given that this OP wants to learn, this can be a dangerous answer.

If you are planning to FIRE at 40 and do not want to touch your 401k until 59.5 or later then NO you should not include it in your original FIRE number.  If you need $500K ($20K at 4% SWR) and $300K of that is in your 401k, you'll be very unhappy to have only $8K with you FIRE because you prefer to leave the rest alone.

Zarakava

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Re: Silly Question about 401k
« Reply #7 on: March 30, 2017, 09:21:41 AM »
How easy/hard is that 401k trick? I'm maxing my 401k currently, and maybe because of that I'm having trouble getting my saving rate over 50% (though I do have 10% of my net income going to charity, for personal/moral reasons)

dandarc

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Re: Silly Question about 401k
« Reply #8 on: March 30, 2017, 09:26:47 AM »
If you're going to cling to a pointless "not gonna touch the 401K till 59.5 no matter what" rule, then there's no reason to be on this forum.  The answer to "should you count 401K for FIRE purposes?" is "yes".

In your scenario, you should do this in years 1-5 of FIRE:

Take all living expenses out of taxable portfolio and convert at least another $21K or $22K to Roth.  May do more depending on your tax situation.

Then if you still have money in your taxable account, continue taking expenses from there and continue converting to Roth.  Once you run out of taxable account money, you start using your now properly-aged roth conversion basis for living expenses.  Eventually you're old enough to take qualified distributions from the Roth, and you don't have to worry about the conversion being 5 years old.

dandarc

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Re: Silly Question about 401k
« Reply #9 on: March 30, 2017, 09:30:09 AM »
How easy/hard is that 401k trick? I'm maxing my 401k currently, and maybe because of that I'm having trouble getting my saving rate over 50% (though I do have 10% of my net income going to charity, for personal/moral reasons)
That doesn't compute.  Your 401K contributions are included in your savings rate.  The basic formula for a standard employee is:

(Income - Expenses) / Income

Income = take-home-pay + things like your 401K that were excluded from income to get to take-home-pay.  You should count any match in income too with this version of the formula.  Yeah yeah, this isn't perfect, but it gives you a pretty good idea.  Your savings rate is just there to give you a rough estimate of "how long till FIRE?" anyway - as long as you're not way off, your estimate will be reasonable.

ysette9

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Re: Silly Question about 401k
« Reply #10 on: March 30, 2017, 09:35:42 AM »
Quote
If you are planning to FIRE at 40 and do not want to touch your 401k until 59.5 or later then NO you should not include it in your original FIRE number.  If you need $500K ($20K at 4% SWR) and $300K of that is in your 401k, you'll be very unhappy to have only $8K with you FIRE because you prefer to leave the rest alone.

I'm sorry to be blunt, but this just isn't correct. What you're advocating is essentially double saving for retirement if you imply that you use the 4% rule for your "young person money" and the 4% for your "old person money" and never the two shall mix.

If you are married to the idea of buckets (which I am not), then the $200K bucket that is not in the 401(k) needs to last for 19.5 years and at the end of that time period it can be completely depleted. This leads to a very different withdrawal rate than 4%. Just playing around quickly with a withdrawal calculator (assuming $200K and 7% rate of return, you can withdrawal somewhere just shy of $18K a year and lead you to a depleted "young person money" stash.

This, of course, ignores the other ways of accessing your 401(k) money early such as a ROTH conversion pipeline. With that in play you really only need to have 5 years' living expenses saved in a taxable account to hold you over while your pipeline marinates.

Zarakava

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Re: Silly Question about 401k
« Reply #11 on: March 30, 2017, 09:37:03 AM »
Oh I misunderstood that. I think my savings rate is 62% then... and I think I can cut a bit to maybe get closer to 65%

caracarn

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Re: Silly Question about 401k
« Reply #12 on: March 30, 2017, 09:42:33 AM »
Quote
If you are planning to FIRE at 40 and do not want to touch your 401k until 59.5 or later then NO you should not include it in your original FIRE number.  If you need $500K ($20K at 4% SWR) and $300K of that is in your 401k, you'll be very unhappy to have only $8K with you FIRE because you prefer to leave the rest alone.

I'm sorry to be blunt, but this just isn't correct. What you're advocating is essentially double saving for retirement if you imply that you use the 4% rule for your "young person money" and the 4% for your "old person money" and never the two shall mix.

If you are married to the idea of buckets (which I am not), then the $200K bucket that is not in the 401(k) needs to last for 19.5 years and at the end of that time period it can be completely depleted. This leads to a very different withdrawal rate than 4%. Just playing around quickly with a withdrawal calculator (assuming $200K and 7% rate of return, you can withdrawal somewhere just shy of $18K a year and lead you to a depleted "young person money" stash.

This, of course, ignores the other ways of accessing your 401(k) money early such as a ROTH conversion pipeline. With that in play you really only need to have 5 years' living expenses saved in a taxable account to hold you over while your pipeline marinates.

Agree with all above.  I just wanted to be clear that I did not feel like the OP did not provide enough information about what his assumptions were and firing off one word answers based on one's own assumptions could be a problem is the two did not align.

Every scenario you mention above is of course accurate, but it may not have been what OP was thinking of. 

Zarakava

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Re: Silly Question about 401k
« Reply #13 on: March 30, 2017, 09:45:27 AM »
Quote
If you are planning to FIRE at 40 and do not want to touch your 401k until 59.5 or later then NO you should not include it in your original FIRE number.  If you need $500K ($20K at 4% SWR) and $300K of that is in your 401k, you'll be very unhappy to have only $8K with you FIRE because you prefer to leave the rest alone.

I'm sorry to be blunt, but this just isn't correct. What you're advocating is essentially double saving for retirement if you imply that you use the 4% rule for your "young person money" and the 4% for your "old person money" and never the two shall mix.

If you are married to the idea of buckets (which I am not), then the $200K bucket that is not in the 401(k) needs to last for 19.5 years and at the end of that time period it can be completely depleted. This leads to a very different withdrawal rate than 4%. Just playing around quickly with a withdrawal calculator (assuming $200K and 7% rate of return, you can withdrawal somewhere just shy of $18K a year and lead you to a depleted "young person money" stash.

This, of course, ignores the other ways of accessing your 401(k) money early such as a ROTH conversion pipeline. With that in play you really only need to have 5 years' living expenses saved in a taxable account to hold you over while your pipeline marinates.

Agree with all above.  I just wanted to be clear that I did not feel like the OP did not provide enough information about what his assumptions were and firing off one word answers based on one's own assumptions could be a problem is the two did not align.

Every scenario you mention above is of course accurate, but it may not have been what OP was thinking of.

I think my original assumptions were that you FIREd ignoring the 401k balance. Which, in hindsight and clarification... was probably silly.

dandarc

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Re: Silly Question about 401k
« Reply #14 on: March 30, 2017, 09:53:30 AM »
The "I can withdraw from my 401K 'early', without paying 10% additional tax!" lightbulb is probably the most important one in terms of tax planning for this FIRE thing.

Suddenly what to do today becomes obvious - just invest as much as you possibly can - traditional accounts, by saving you taxes today often will help you get to your number faster vs Roth or taxable.

Zarakava

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Re: Silly Question about 401k
« Reply #15 on: March 30, 2017, 09:56:30 AM »
Honestly all of this is lightbulbs. Until about 2 weeks ago I knew jack shit about money or finances. All I knew is I was putting 10% into a 401k, that did magical stuff later on in my life, and I was putting a bit to savings with a little debt and not caring about my spending at all.

I decided to get serious about losing weight, which lead to getting serious about money. Then I discovered that no, I don't actually have to work more than about 15 years of my life. (Though I enjoy working, so it's more about giving me career options instead)

ysette9

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Re: Silly Question about 401k
« Reply #16 on: March 30, 2017, 10:21:21 AM »
Congratulations! Isn't that a wonderful feeling when that light bulb goes off? I can remember when I read the MMM blog post about savings rate vs. time to FIRE and it was like the heavens opened and angels sang. I found it really inspiring.

It's a long path of getting yourself educated so don't stress about trying to cram it all in at once. Once you get the basics down (save/invest as much as possible, low-fee broad index funds, have sufficient insurance in place) then you can take your time figuring out the nuances of tax strategy and mega backdoor ROTHs and all of the other fun tricks people here use. :)

NoStacheOhio

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Re: Silly Question about 401k
« Reply #17 on: March 30, 2017, 10:57:49 AM »
Honestly all of this is lightbulbs. Until about 2 weeks ago I knew jack shit about money or finances. All I knew is I was putting 10% into a 401k, that did magical stuff later on in my life, and I was putting a bit to savings with a little debt and not caring about my spending at all.

I decided to get serious about losing weight, which lead to getting serious about money. Then I discovered that no, I don't actually have to work more than about 15 years of my life. (Though I enjoy working, so it's more about giving me career options instead)

Plenty of people keep working. I'm told having a big pile of money does magical things for your relationship with employers.

MillieLincoln

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Re: Silly Question about 401k
« Reply #18 on: April 01, 2017, 10:29:05 AM »
It's a long path of getting yourself educated so don't stress about trying to cram it all in at once. Once you get the basics down (save/invest as much as possible, low-fee broad index funds, have sufficient insurance in place) then you can take your time figuring out the nuances of tax strategy and mega backdoor ROTHs and all of the other fun tricks people here use. :)

As a fellow newbie just working on learning all of this- what do you mean by "have sufficient insurance in place"? As in a safety net of funds?

NoStacheOhio

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Re: Silly Question about 401k
« Reply #19 on: April 01, 2017, 11:01:09 AM »
It's a long path of getting yourself educated so don't stress about trying to cram it all in at once. Once you get the basics down (save/invest as much as possible, low-fee broad index funds, have sufficient insurance in place) then you can take your time figuring out the nuances of tax strategy and mega backdoor ROTHs and all of the other fun tricks people here use. :)

As a fellow newbie just working on learning all of this- what do you mean by "have sufficient insurance in place"? As in a safety net of funds?

Whatever insurance policies make sense for your situation. If you have a family, sufficient life insurance to replace your income while you're building your stache. Disability insurance is another big one. Adequate homeowner/renter and auto liability coverage.

ysette9

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Re: Silly Question about 401k
« Reply #20 on: April 01, 2017, 06:03:06 PM »
Quote
Whatever insurance policies make sense for your situation. If you have a family, sufficient life insurance to replace your income while you're building your stache. Disability insurance is another big one. Adequate homeowner/renter and auto liability coverage.

Agreed. Personally I get 60% of my salary long-term disability through work. I get something like 3x my salary life insurance through work and I also carry a $500K term life insurance policy on my own (my husband does the same). We have $500k limits on our auto policies and carry a $2M umbrella policy. This may seem like a lot, but our net worth is around $1.6M right now, so I personally like the feeling of covering enough insurance to cover all of our net worth and maybe a bit more. You'll need to assess your own needs. If you died tomorrow, what does your family need to maintain their lifestyle? As we reach FIRE we'll probably re-evaulate the need to carry life insurance but the high auto limits and umbrella will stay in place.

FrugalFisherman10

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Re: Silly Question about 401k
« Reply #21 on: April 03, 2017, 09:56:48 AM »
I'm maxing my 401k currently...
All I knew is I was putting 10% into a 401k, that did magical stuff later on in my life

Hi Zarakava,
Not sure if I'm reading this right, but just want to make sure you are clear on something that I see a lot of people misunderstand.

When you say you are 'maxing your 401k', but you are only putting in 10%, it sets off an alarm to me.

To 'max your 401k', you need to put $18,000 in it in 2017. That is the maximum that the government will allow you to save in that type of account each year. Unless you make about $180k, you will not 'max your 401k' on a 10% contribution from your paycheck.
Oftentimes when self-proclaimed 'newbie' types like yourself say that they are 'maxing their 401k' they mean that they are 'putting in the maximum amount that my employer will match'. Again, this is not the same as maxing your 401k.

 In my case for example, my employer would only match 6% of my salary that I put in there. But to 'max my 401k', it would take around 25% of my income to reach the full $18k I am allowed to save in that account.

Hope this is stated clearly - if not let me know!

And if you are making $180k or so, awesome! By all means, congrats, you are maxing your 401k!

Aggie1999

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Re: Silly Question about 401k
« Reply #22 on: April 04, 2017, 09:42:05 AM »
I'm maxing my 401k currently...
All I knew is I was putting 10% into a 401k, that did magical stuff later on in my life

Hi Zarakava,
Not sure if I'm reading this right, but just want to make sure you are clear on something that I see a lot of people misunderstand.

When you say you are 'maxing your 401k', but you are only putting in 10%, it sets off an alarm to me.

To 'max your 401k', you need to put $18,000 in it in 2017. That is the maximum that the government will allow you to save in that type of account each year. Unless you make about $180k, you will not 'max your 401k' on a 10% contribution from your paycheck.
Oftentimes when self-proclaimed 'newbie' types like yourself say that they are 'maxing their 401k' they mean that they are 'putting in the maximum amount that my employer will match'. Again, this is not the same as maxing your 401k.

 In my case for example, my employer would only match 6% of my salary that I put in there. But to 'max my 401k', it would take around 25% of my income to reach the full $18k I am allowed to save in that account.

Hope this is stated clearly - if not let me know!

And if you are making $180k or so, awesome! By all means, congrats, you are maxing your 401k!

To further that point, the true max the gov't will allow is $54k for 2017 when after tax contributions are considered. This is for those less than 50 years old. Some don't have the option for after tax contributions. A lot do though and don't know about it.

Zarakava

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Re: Silly Question about 401k
« Reply #23 on: April 04, 2017, 10:37:20 AM »
I'm maxing my 401k currently...
All I knew is I was putting 10% into a 401k, that did magical stuff later on in my life

Hi Zarakava,
Not sure if I'm reading this right, but just want to make sure you are clear on something that I see a lot of people misunderstand.

When you say you are 'maxing your 401k', but you are only putting in 10%, it sets off an alarm to me.

To 'max your 401k', you need to put $18,000 in it in 2017. That is the maximum that the government will allow you to save in that type of account each year. Unless you make about $180k, you will not 'max your 401k' on a 10% contribution from your paycheck.
Oftentimes when self-proclaimed 'newbie' types like yourself say that they are 'maxing their 401k' they mean that they are 'putting in the maximum amount that my employer will match'. Again, this is not the same as maxing your 401k.

 In my case for example, my employer would only match 6% of my salary that I put in there. But to 'max my 401k', it would take around 25% of my income to reach the full $18k I am allowed to save in that account.

Hope this is stated clearly - if not let me know!

And if you are making $180k or so, awesome! By all means, congrats, you are maxing your 401k!

I'm maxing it now - the quote about 10% was what I was doing before I started learning about finance stuff.