Author Topic: What should I do with my 401k in my FIRE model?  (Read 4754 times)

little_owl

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What should I do with my 401k in my FIRE model?
« on: July 02, 2014, 03:12:19 AM »
Hi Mustachians!

I have a little quandry with my FIRE model that I would love your advice on.

Today, I am modeling our FIRE date based solely on our "regular" investment holdings, and "ignoring" the 401k balances for H and myself by putting them in a separate tab.

I am doing thiis because I am a conservative modeler by nature (always want to "beat" the model versus underperform against it), and frankly because I am not 100 percent sure what we plan to do with our 401k balances.

Today, we are 120 months away from FIRE based on our non-tax advantaged investments (a Vanguard account outside of our 401ks.)

My current hypothesis is that one of us might take advantage of SEPP to access some 401k funds, while the other 401k just continues to grow as a cushion against some future unexpected issues, like a big change in our currently great health.

My guess is I will get facepunches for being too conservative, but please bring me advice along with punches!

deragun

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Re: What should I do with my 401k in my FIRE model?
« Reply #1 on: July 02, 2014, 10:02:11 AM »
To me it seems like you largely answered your own question.  Depends on the size of the 401ks, but in my view completely excluding both from your overall view is a bit too conservative (but right now the largest chunk of my future FIRE money is in my 401k, so I may be a bit biased).

Plan at least the one via SEPP as you mention and hopefully you'll see that 120 months go down as you should reach FIRE sooner factoring in the additional money.  Don't forget SS serves as another safety net (at possibly reduced amount from what current levels are depending on how it's stabilized long term, but it won't be nothing).

shuffler

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Re: What should I do with my 401k in my FIRE model?
« Reply #2 on: July 02, 2014, 10:03:56 AM »
So the question is "What should I do?"

You should do whatever helps you to sleep at night.  If that's counting/not your 401k, then so be it.

If it were me, I would certainly include the 401k in my accounting.  If I wanted to be conservative, I would do it by under-estimating investment growth, or over-estimating my retirement expenses, or over-estimating my future tax burden (which is really just part of expenses).  IOW, I'd be conservative in my estimations of the unknowable-future parts of the FIRE calculus.

I wouldn't just ignore an asset for which I know the exact present-value.  There's a difference between being conservative and being willfully blind, and I feel like ignoring the 401k is closer to the latter of the two.

I'm also a believer that we improve on the things that we measure (and don't improve on the things that we don't measure).  If I didn't include the 401k in my accounting, I'd be afraid that I'd be less inclined to contribute to it.  And that (at least for the way I'm planning my FIRE), would be a mistake.

SnackDog

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Re: What should I do with my 401k in my FIRE model?
« Reply #3 on: July 02, 2014, 10:08:38 AM »
The same logic could be applied to your non-401K account. Why not exclude it as well?

matchewed

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Re: What should I do with my 401k in my FIRE model?
« Reply #4 on: July 02, 2014, 10:30:03 AM »
You won't get face-punches for your specific plan unless it is costing you more. Your plan will be what level of risk your willing to take.

That being said there are several options. Generally step one would be to roll over the 401k's to an IRA. Then you'd go from there for all the options.

1) If your expenses are low enough you could just withdraw money as needed. If the withdrawal is low enough you may be able to pay 0 tax on the money but only pay the 10% penalty. Not many people have expenses this low. You could also game it a bit with pulling down from other accounts with different tax treatments. Essentially a tax minimization strategy while pulling from an after tax account.

2) The Roth Pipeline method. This is where you'd rely on taxable investments, income streams, and Roth accounts to keep you afloat while you convert the traditional IRA to a Roth IRA and let it season for 5 years. This is similar to 1) in that you'll need to practice tax minimization strategies so you don't get too high of a tax bill as the conversions are taxable as income.

3) Have enough money until you are much much closer to traditional retirement age and use the SEPP route.

4) Have enough money until you hit 59.5.

Cheddar Stacker

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Re: What should I do with my 401k in my FIRE model?
« Reply #5 on: July 02, 2014, 10:49:04 AM »
Today, we are 120 months away from FIRE based on our non-tax advantaged investments (a Vanguard account outside of our 401ks.)

First, I like the way you worded this. I think I'm about 9-10 years out which seems like a LOOOOONG time. When I think about it in months (108-120 months) it seems more manageable for some reason, so thanks for that.

How many months away are you from FIRE with the 401k's included? If it's still north of 84-96 months, then I think you are fine being conservative. If including 401k's get you down to 36-60 months, you need a facepunch unless you really love your jobs. Don't waste your time being too conservative if you already have enough.

FrugalZony

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Re: What should I do with my 401k in my FIRE model?
« Reply #6 on: July 02, 2014, 10:49:48 AM »
I understand your reasoning!
Not too long ago I was in a similar spot. I always counted the 401k as if it were not there.
This made time to fire look FAAAAAAAR away ;)

After doing a lot of reading on the boards and various FIRE website (my favourite financial one being Jim Collins),
I have come around (a friendly nudge from Jfer on this Forum that not counting the 401k is "crazy speak" helped a bit too, LOL!)

I always liked the thought of having something "extra tucked away".

Now I am comfortable, accounting for everything I have in one spot and I do include the 401k in my overall picture, because it is necessary for asset allocation etc.

So if you are asking what you should do, the answer is, do what you feel comfortable with.
Give yourself permission to change your mind after doing some more reading and educating yourself.
Viewpoints change! I am still at awe, how different my views are today compared to only a year ago ;)

I run different scenarios in my models and have different milestones, which certainly helps increase the comfort level.

sirdoug007

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Re: What should I do with my 401k in my FIRE model?
« Reply #7 on: July 02, 2014, 10:55:13 AM »
I think you should count the 401(k) or risk working much longer than you really need to.  The whole point of this early retirement idea is to take control of your time, so why do it with one hand tied behind your back?

Plug some numbers into this calculator (the current 120% midterm rate is 2.18%) and see what you SEPP withdrawal could be. 

http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx

Depending on your age it is likely between a 3.3 and 4+% withdrawal rate.  This is probably in the neighborhood of what you want to withdrawal anyways.  And if it is more you can always take the extra money which you have liberated from your IRA and put it in your taxable account. 

In any case, you will likely be paying a lot less tax than in your working years.  For 2014 a married couple can earn/withdrawal from 401(k)/IRA up to $94,100 while remaining in the 15% tax bracket!  And in the 15% bracket you also pay no capital gains taxes from the taxable account!  Even right at $94,100 your overall federal tax rate would be about 10%.  Beats the hell out of paying 25%+ on your investment dollars during your working years!

little_owl

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Re: What should I do with my 401k in my FIRE model?
« Reply #8 on: July 02, 2014, 03:18:55 PM »
Plan at least the one via SEPP as you mention and hopefully you'll see that 120 months go down as you should reach FIRE sooner factoring in the additional money.  Don't forget SS serves as another safety net (at possibly reduced amount from what current levels are depending on how it's stabilized long term, but it won't be nothing).

I am really leaning towards the "include one of the 401ks" option now, and you are right, there is that mythical Social Security thing out there!  I will completely ignore that but you are right, it could absolutely turn into something.  My H has a very tiny pension, too, which we also ignore.  Maybe we are ignoring too many things.....hmmm....

little_owl

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Re: What should I do with my 401k in my FIRE model?
« Reply #9 on: July 02, 2014, 03:20:33 PM »
The same logic could be applied to your non-401K account. Why not exclude it as well?
Fair point, though if I ignored both  I would have to work forever according to the model and that is a terrible fate. I get your point, though!

little_owl

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Re: What should I do with my 401k in my FIRE model?
« Reply #10 on: July 02, 2014, 03:27:41 PM »
Today, we are 120 months away from FIRE based on our non-tax advantaged investments (a Vanguard account outside of our 401ks.)

First, I like the way you worded this. I think I'm about 9-10 years out which seems like a LOOOOONG time. When I think about it in months (108-120 months) it seems more manageable for some reason, so thanks for that.

How many months away are you from FIRE with the 401k's included? If it's still north of 84-96 months, then I think you are fine being conservative. If including 401k's get you down to 36-60 months, you need a facepunch unless you really love your jobs. Don't waste your time being too conservative if you already have enough.

Cheddar, the fun thing about using months as a countdown is you get a new number....wait for it....every month!  It makes the counting down more fun and also (of course) every now and then we do really well on extra savings / market growth and we get to cut 2 months!  But, I digress.

You know what....I am embarrassed to say I have never added in my 401ks to the  model and recalculated.  That will happen soon and per your advice I will potentially change the model if I am much closer than I think.

little_owl

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Re: What should I do with my 401k in my FIRE model?
« Reply #11 on: July 02, 2014, 03:31:56 PM »
@frugalzony - a scenario-based model sounds like a great idea.  Today, I have one scenario and that could limit my thinking.  What happened to your model when you included your 401ks?  I'm sure you saw an earlier time horizon, but curious if it cut your time to FIRE down massively?  So fun to have forum buddies to think this stuff through with.

@sirdoug007 - wow, I really appreciate the detailed SEPP thoughts and link.  I've just been getting familiar with the details of that option, and it has really made me open my eyes to the possibility of an even shorter FIRE horizon.  Super motivating stuff, that.

Thanks to everyone for the replies, this has been really good advice!