Author Topic: What to do when all of your money is tied up in home equity/401(k)/college savin  (Read 7973 times)

iwannaretire

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My husband and I have been very diligent about saving for retirement and college and living debt free, but that has resulted in large sums being inaccessible to live on in an early retirement.

We have:
(1)  a paid for home, worth about $950,000
(2)  401(k) savings  of around $825,000 ($675,000 in mine and $150,000 in my husband's)
(3)  An IRA of $19,000
(4)  College savings for our 2 children (12 and 8) worth about $110,000 (of which $60,000 is in 529 plans)

We don't wish to sell the house for another 10 years (once the kids get into college) and we feel strongly about paying for college for our kids, though we have informed them we will only pay for room and board at a state university, which still could be roughly $100,000 each.

As a result of these savings, we are not flush with other assets.  We have about $95,000 total in a brokerage account and $30,000 in savings.  Our expenses are roughly $4,500 per month (we live in Southern California).

We would love to retire as soon as possible, but it's frustrating with all the money tied up.  We understand that we're making certain choices that could keep us from retiring, such as paying for college and not selling the house.  But within the realm of those choices, is there anything we can do to speed up the process?

For example, given the amount already in our retirement plans, does it make sense to stop contributing to the 401(k)?  Are we contributing too much for college and should we scale it back?  In case it's relevant, I'm 47 and my husband is 50.


arebelspy

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Look up rule 72t to help you tap those 401ks without an penalty.

Something to get you started: http://www.moneymanagment.info/72T.htm

Also: Well done on saving all that.  Good for you.
Also: $4500/mo expenses without a housing payment? (I understand there is still taxes and insurance.) Yikes.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
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sol

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Your expenses are currently $54,000/year, which seems very high but I'll run with it.  If you intend to keep up that level of spending, you would need 1.35mil in total assets, assuming a 4% initial withdrawal rate.  This rate may be high or low for your comfort level, but I'll stick with it to run the following numbers.

Your total assets are 969k, excluding the college account.  This means you can't retire yet regardless of how your money is allocated into tax shelters.  You could retire today if you could cut your monthly expenses from $4500 to $3200.  I'd take a hard look at your budget and decide if every item in there is worth continuing to work for that many more years.

Alternately, you might consider downgrading from your paid off current 950k house to a half million dollar house, and using the surplus to reach your 1.35 million target amount and retiring immediately.  If not, keep in mind that you are only continuing to work in order to keep that current house instead of one that costs $500k.  You could keep your current expense level if you made that one housing move.

If you wanted to do this immediately, your 401k money is accessible through rule 72(t) withdrawals.  Go to http://www.dinkytown.net/java/Retire72T.html and plug in your own numbers, but it looks to me like a 47 year old with 675k in her 401k can withdraw 23.4k/year using 72t, penalty free.  Your 50 year old husband with 150k can withdraw another 5.5k/year, giving you a total of about $29k/year from your 401k right now, without paying the 10% early withdrawal penalty.

In order to hit the $3200/month expense limit that your current assets might reasonably support, you need to come up with another $800/per month.  This can you easily do with the 95k in your brokerage account, depleting it by 800*12*5=48k over five years.

Why 5 years?  Because that is the amount of time you would need to build the famed 5 year pipeline of rollovers from your 401k to your IRA, at which point that money can then be withdrawn penalty free as well.  This is a second avenue of tapping your 401k before age 59.5.

If you instead were to downsize to a 500k house and pocket the difference to hit your 1.35mil target needed to maintain your current 5400/mo expenses, you will take a bit of a hit because the capital gains on that purchase will eat some of the profit.  You would probably have to move to an even cheaper house, say a $400,000 rickety shack in a slum somewhere, in order to have enough money to pay the taxes.

Alternately, you can just continue to work and build towards that 1.35mil number and then not worry about it.  I think that with 90k in a brokerage account and rule 72(t) withdrawals, you'll be fine.  I'd consider continuing to pump the 401k, on the thought that 72t will pay a significant portion of your expenses (and an ever larger portion as you get older) and doing a five year IRA rollover will allow you access to the rest of your 401k before normal retirement age.

Wow, that was long and rambling.  Sorry.





arebelspy

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Brilliant analysis Sol.

I particularly liked this insight:
keep in mind that you are only continuing to work in order to keep that current house instead of one that costs $500k.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (occasionally) blog at AdventuringAlong.com.
You can also read my forum "Journal."

AJ

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Without selling the house, I would think your options for speeding up retirement are the same as everyone else's: earn more or spend less.

The only different might be that, since your house is paid for, you could take a loan against it at a low rate, and invest it at a higher rate. I don't know what your cash flow situation is like, but if you have some money free each month for a payment you could borrow some of your equity from PenFed at 1.99 (no closing costs) for 5 years and put that money into rentals, stocks, or bonds depending on your preference and risk tolerance.

iwannaretire

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Thanks everyone for the ideas.  I agree our expenses are high and we're working on getting them down.  I don't know how close we can get to $3200.  Property taxes and insurance here costs $935/month alone.   But I'll look into the early distributions further.  It's comforting to know there are some options, even if they may be a few years away.

sol

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It's comforting to know there are some options, even if they may be a few years away.

Tons of options.

I'd work on lowering your expenses while increasing your total savings until savings are 25 times expenses.  Then you're home free.

I'd redo your 72t estimates every year to see what it can provide from your 401k.  Then keep in mind that you just need enough money in your brokerage account or as withdrawable funds in your IRA to bridge the five year gap before your 401k rollover dollars become available.  It should be a pretty simple math problem. 

Also keep in mind that your tax rate is going to drop dramatically when you both retire.   Remember a married filing jointly couple only pays 5.8% tax on the first 28,600 of income, assuming no dependents.  If that amount can be supplemented with any old Roth IRA principle or earnings in your brokerage account that are taxed as long term capital gains, then you can get away with a pretty tiny tax bite. 

The tax advantages of the 401k for high earning couples are dramatic enough, and the ways around the 59.5 age restriction are easy enough, that I don't think anybody with a healthy savings rate benefits much from contributing to a taxable account until after they have hit the IRS limit on the 401k.  I vote to keep contributing the max to your 401k.

Scratch that.  I vote you retire immediately, lower your expenses a little, start 72t distributions, and supplement with your 125k in savings until your 5 year 401k rollover pipeline is in place.

jdchmiel

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you have assets very close to 2 million dollars and you cannot figure out how to retire? 
Seriously, get in touch with the rest of the country/world.

arebelspy

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you have assets very close to 2 million dollars and you cannot figure out how to retire? 
Seriously, get in touch with the rest of the country/world.

Comments like this don't help anyone.  Everyone has a different circumstance. 

Do you have something constructive to offer?
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (occasionally) blog at AdventuringAlong.com.
You can also read my forum "Journal."

tannybrown

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Agreed.  The point of the community is to provide insight and support.

Chemistay

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Could one of you retired (or possibly both of you semi-retire/cut your hours/work from home)? I would assume that at least some of your monthly costs come from work-related expenses (gas? monthly parking permits? eating out for lunch if you both work and have kids and life is busy? etc. etc.).

If one of you retires now, you might end up lowering your monthly expenses enough that you don't need quite as much extra income. Additionally, if you make significantly different salaries then there might be tax advantages to having only one income earner that provide even more incentive. As everyone says around here: run the numbers! Once you've done that, it's much easier to see the various possibilities.

iwannaretire

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Could one of you retired (or possibly both of you semi-retire/cut your hours/work from home)? I would assume that at least some of your monthly costs come from work-related expenses (gas? monthly parking permits? eating out for lunch if you both work and have kids and life is busy? etc. etc.).

If one of you retires now, you might end up lowering your monthly expenses enough that you don't need quite as much extra income. Additionally, if you make significantly different salaries then there might be tax advantages to having only one income earner that provide even more incentive. As everyone says around here: run the numbers! Once you've done that, it's much easier to see the various possibilities.

Thanks.  I already telecommute and work part-time, and my husband is only  a few miles from work, so I don't think that's where the leak is.  I think we just need to work on lowering the expenses, as others have suggested, and then consider the 72t distributions.  We can probably get our monthly recurring expenses to $3500 or so, but it's the constant surprise expenses that makes me think we need to assume a bigger number.