Author Topic: Should I stop contributing to my retirement accounts?  (Read 2634 times)

Mola

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Should I stop contributing to my retirement accounts?
« on: December 21, 2012, 08:37:03 AM »
For several years we have been piling money into our 401(k)s and Roths based on some calculations I did in excel years back.  Then after reading an MMM post I came across firecalc.  If I plug in my age, 38, and tell it I will retire in 2035 and live 43 years past that (actually I wont but my wife has an 8% chance) and give it my lazy portfolio and what I have today it shows that there are zero historical scenarios in which I would fail.

So that basically says I have enough in my retirement accounts and could direct all my savings to my FI accounts and get there faster.  Should I?

I imagine others in this community have had the same decision to make.  What are your collective thoughts?

(And FYI, even if I did turn the firehouse from retirement accounts to FI accounts, I would still contribute just enough to get my company match.  Free money after all.)

mushroom

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Re: Should I stop contributing to my retirement accounts?
« Reply #1 on: December 21, 2012, 09:14:55 AM »
I think people may want to see some specific numbers (how much you have in the accounts, what sort of savings/assets you have, what your annual expenses are, at what age you think you want to retire) before they advise you.

But if there's a decent chance that you will retire early, it may be harder to access some of that 401K money until later (although there's the option of converting to a Roth a little at a time and waiting 5 years). I would probably continue contributing to the Roths at least since you can withdraw the principal at any time. Otherwise I would start thinking about other income sources for the gap between when you might retire and when you can start taking money out of our retirement accounts without a penalty. Do you already have non-retirement investment accounts? Have you thought about getting into real estate and managing rental properties?

And you probably want to look at: http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

Mola

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Re: Should I stop contributing to my retirement accounts?
« Reply #2 on: December 21, 2012, 08:49:05 PM »
Mushroom, from that MMM blog post we are on strategy 1 "Old Man Money".  Here are the details fresh from mint and spreadsheets.

I am 37.  My wife is 32. 

Our combined Old Man savings are:
  • 401(k) = $34,000 (currently planning $35,000 next year) + 6% match for me of $4560 and reliable +5% bonus match of $3800
  • ROTH IRA = $10,000 (currently planning $11,000 next year)
  • approx $4530 per month in savings for 2013 including match and bonus

Our combined Old Man assets are:
  • ROTH = $62,000
  • 457 = $68,000
  • 401(k) = $80,000
  • Current total = $210,000

Our combined FI savings are $4,000/month
Our combined FI assets at this time are $41,000 cash and $10,000 vanguard portfolio

Our current monthly expenditures are:
  • Food, Household items, Restaurants, Entertainment $700
  • Mortgage with escrow = $1300
  • Utilities & Internet = $175
  • Car Insurance, maintenance, gas, commuter vanpool fee = $400 (I know, I know)
  • Budgeted savings for things like vet, gifts, etc = $200
  • Total Monthly expenses = $2775 (74% savings)
  • We have future plans to move closer to work and downsize the mortgage

Post FI target yearly amount = $30,000 in 2012 dollars

Please Note:
Our FI savings is very recent.  We have very little in Vanguard because I have experience flipping houses from when I was younger and our plan right now is to go real estate heavy while the cash-on-cash opportunities from rentals in our city are good.  Our real estate strategy is also why we have a lot in the cash account.  Its the opportunity account.

The question:
So as you can see our Old Man account is much more mature than our FI account.  So I plunk into firecalc these figures:
  • Retire in 2035, when I am 60
  • $30,000 in income desired
  • 60% stock and 40% bond portfolio
  • $210,000 in current assets
  • Live 43 more years. 8% chance my wife will succeed in that. I will not :(

Firecalc tells me if I stop now I have a 0% chance of failing those conditions.  So I could stop now. 

Some opportunities I recognize are first that I would keep contributing enough to get the match regardless.  Second that my 457 account is now a tax deferred bank account that I could withdraw from at any time without penalty since I no longer work for the gov't.  Consequently, my thought is to dump in another $68k into the 401(k) and then reconceive the 457 from an Old Man mental account into a FI mental account.  Third, that there are other opportunities with principal withdrawals from the IRA and 72t withdrawals from the 401(k).

The fourth opportunity would be to minimize the Old Man savings and direct it instead to the FI savings.  That is what I am seeking some thoughts on.

arebelspy

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Re: Should I stop contributing to my retirement accounts?
« Reply #3 on: December 21, 2012, 09:28:56 PM »
Sounds like you can't contribute anymore to the 457?  If you can, keep maxing both the Roth and 457, as those take no hoops to access early (post FIRE, pre-59.5). 

After that you can debate between taxable and more in the 401k for "old man money." Probably wouldn't hurt to strike a balance.  I wouldn't be too afraid of a 72t.  What is your plan for FIRE currently?  (I.e. not 2035, or you could just go to a 0% savings rate now, let what is have build up, and retire then... Since ou have a 74% savings rate, what is your plan for FIRE.. Amounts, dates, etc.)
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Another Reader

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Re: Should I stop contributing to my retirement accounts?
« Reply #4 on: December 21, 2012, 09:37:23 PM »
What type of real estate opportunities are you anticipating?  Are you going to flip or buy and hold rentals?

I would consider temporarily reducing my 401(k) savings if I could purchase long term rentals with good cash flow yields.  Leverage is your friend right now and the tax shelter will be a big help now and later.  I would use savings and cash flow from the various income sources to do flips.  You will need the tax deferral of maximum 401(k) contributions to soften the tax blow of the short term capital gains on the flips.

I would also be sure to max out the Roths while I could.  If you really get going with the real estate, you could find yourself beyond the income limits for the Roths.  The Roths have a lot of flexibility, as does that 457 plan. 

FIREcalc is useful, but I personally wouldn't bet the farm on it.  Too many unknowns 30 years into the future.

Mola

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Re: Should I stop contributing to my retirement accounts?
« Reply #5 on: December 21, 2012, 11:00:43 PM »
Thanks for the replies so far.

So going further down the rabbit hole of my thinking.  The plan so far is:
1) Keep maxing the 401(k) and Roth (Arebelspy I have always assumed I can not contribute to my 457 after my state employment ended.  Since you asked though I realized that is an assumption...Ill look into that unless you know more).

2) Buy rentals.  I have done quite a bit of analysis and I am fairly confident I can get a 10% return in this area, probably better once I have some more experience.  So at about $30,000 invested per house if I had 10 houses that should cashflow my targeted 30k a year even with all the conservativeness of biggerpockets.com included.

So bare minimum its the time it will take us to get to $300,000 invested.  Less if we do better than 10%.  At $50k per year in FI savings that's six years.  But my goal is 3 years.  40 years old just seems the right age.  To squeeze that 6 years down its a matter of increasing frugality and pay raises. 

On the payraise front my wife was first out of the gate with a significant promotion and so now I am playing catchup with job apps to opportunities in my company.

On the frugal front we've cut our grocery budget a lot, got rid of our truck, increased deductibles to statistically reasonable amounts, slashed out our old friends hulu and netflix, and every other idea I have so far found.  For Xmas I am measuring everything with the kill a watt.  The big albatross is the house but our rate is super low so we put about 700 in equity and 300 in interest each month.  Home values have stabilized here and started to increase in some neighborhoods so I think of it as a 0% savings account growing by 700/month.  I figure we will hold it to the 2014 selling season and then unload it and probably start to leap frog through investment properties to get owner occupied rates or just buy a small thing with cash.

If I dialed back the old man savings I would probably direct that additional money into my taxable vanguard funds.  I could use it to accelerate real estate purchases but I am already planning 3 for 2013.  While more money in that direction could allow more purchases I think 3 is the max with full time jobs and absorbing the lessons learned in the process.

If I did get to $300k in RE in 3 years I would probably still go another year just to build another stream through stocks/bonds so my FI is not entirely RE based.  (I'd just have to stop the day before my 41st birthday so I don't violate the cosmic righteousness of FI at 40) To that end the idea of continuing to contribute to the 401k and Roth while blurring the FI and Old Man lines through strategies like principal withdrawals at 72t is appealing.  I just have not made the requisite 50 excel spreadsheets to think it through until its well and over-analyzed.

Johnny Aloha

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Re: Should I stop contributing to my retirement accounts?
« Reply #6 on: May 18, 2013, 11:44:00 AM »
Would love to see an update on this!  Did you pick up any rentals?  Change your contributions?

foobar

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Re: Should I stop contributing to my retirement accounts?
« Reply #7 on: May 18, 2013, 07:12:31 PM »
The only reason not to contribute to the 401(k) is because you need the money for your real estate. Think about it. Right now you are paying 25%+ in taxes given your income. When you retire you will be in the 15% (or less) tax bracket. Even if you have to pay the 10% penalty you will still come out a head. In reality you would be able to  draw out a lot of the money in either the 0% (i.e you standard deduction) or 10%.  And if you need money for your real estate empire, you might look at if you can use your 457 or roth ira (I know you can hold real estate in IRAs. Not sure about roth).

Frankly I think you are cutting it a bit too close for a stupid reason (i.e. having a birthday that ends in a 0). Work one or two more years and your risk drops significantly. Of course if you wife wants to work til 40 and she makes half your income, then your risk is pretty low.

Dynasty

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Re: Should I stop contributing to my retirement accounts?
« Reply #8 on: May 18, 2013, 08:41:22 PM »
  And if you need money for your real estate empire, you might look at if you can use your 457 or roth ira (I know you can hold real estate in IRAs. Not sure about roth).

How does this work?

arebelspy

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Re: Should I stop contributing to my retirement accounts?
« Reply #9 on: May 18, 2013, 09:21:46 PM »
  And if you need money for your real estate empire, you might look at if you can use your 457 or roth ira (I know you can hold real estate in IRAs. Not sure about roth).

How does this work?

Look into "self directed IRA."  There are lots of restrictions, but it's doable.
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