Adding 401(k)/IRA into FI calculations

[jdoolin]

I started a new job last August and have a 401(k) (6% matching, mandatory... it's technically a 401(a)).  So far I'm contributing 6% because my wife and I have been paying off debt, followed by saving for a mortgage.

Once that's all done, however, I suspect it would be in my best interest to begin contributing more to the 401(k) and possibly to IRAs as well. 

My question is, how do I factor this into FI calculations?  I can calculate how much the account will be worth in 25 years (how long before I'd be able to withdraw) based on my contributions, but where does it fit in my calculation for when I can FIRE?  I plan on being able to do so within 10-12 years.  That also gives an estimate of how long I'll even be contributing to these accounts (at least from my full time job... I suppose I could still contribute with future income sources as well).

Just say I can contribute enough for all tax advantaged accounts to be valued at $200k in 10 years(that would be a fair guess if I started maxing things out).  But my current estimated retirement expenses are $25k per year?  (I may fall much less than this, I'm just using it as an example).

[yolfer]

Have you read this MMM article?

http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

I think it should answer most of your questions (and/or get you asking yourself different questions)

[jdoolin]

Whoah, OK.  Big game changer today.

Forget everything else I said in my first post.  It turns out my wife's retirement plan is pretty sweet.  We THOUGHT it was a contribution type plan where you eventually get back what you put in plus employer matching, but that nothing gets invested.

Wrong.

It's a pension plan.  She contributes the same percentage everyone else does and nothing more.  Employer contributes same percentage and nothing more.  After 20 years of service and at age 60, you can collect full benefits.  The benefits are:

(average of last 5/highest years of salary) * (years of service) * 0.02

We have been planning to FIRE in 10 years.  And guess how many total years that makes for my wife:  you got it.  20 years.  Just enough to collect the full benefits starting at age 60.  And for us, those benefits end up being very close to being enough to cover our expenses.

So now I'm at a point where I would be putting too much in my 401(k) if I maxed it out for the next 10 years.

Which means we just need to get from about 45 to 60.

[DoubleDown]

I didn't quite follow your ages or planned years in your post. But if you're talking about your wife leaving at age 45 with 20 years of service and not collecting until she's 60, better make sure she can in fact defer her pension payments or if the employer will force her to take a lump sum up front. And find out if there are any other potential gotchas or penalties involved. Are payments indexed for inflation? Can you also collect SS? What if she (or your marriage) doesn't make it to 20 years of service for whatever reason?

Also, that's quite a way into the future, how certain do you feel about the ability to collect the pension at the stated benefits? Many pension plans have sadly gone under or failed to pay out as promised, and if you're banking on that, there could be a sad realization later.

If it was me, I would max out my 401k contributions and other savings regardless, both to have enough savings without the pension, and to take advantage of all the tax savings right now. Then when you get closer to FI, you will likely have a better idea just how much you can rely on that pension in your plans.

[jdoolin]

I didn't quite follow your ages or planned years in your post. But if you're talking about your wife leaving at age 45 with 20 years of service and not collecting until she's 60, better make sure she can in fact defer her pension payments or if the employer will force her to take a lump sum up front. And find out if there are any other potential gotchas or penalties involved. Are payments indexed for inflation? Can you also collect SS? What if she (or your marriage) doesn't make it to 20 years of service for whatever reason?

Also, that's quite a way into the future, how certain do you feel about the ability to collect the pension at the stated benefits? Many pension plans have sadly gone under or failed to pay out as promised, and if you're banking on that, there could be a sad realization later.

If it was me, I would max out my 401k contributions and other savings regardless, both to have enough savings without the pension, and to take advantage of all the tax savings right now. Then when you get closer to FI, you will likely have a better idea just how much you can rely on that pension in your plans.

Every single bit of that is now basically just a safety margin.  I still plan to have enough saved and invested in 10 years to live off dividends for the rest of our lives.  It's basically the same situation MMM describes in the Safety Margin article, MINUS the rental property (though I've not ruled that out yet). 

We read the regulations on the plan, and she *has* to defer until 60.  That's the only way there aren't any penalties or gotchas.  I have no idea if it's indexed for inflation, but I took that into consideration when I did the math.  We'll both be able to collect SS.  Our marriage is about as awesome as one gets, so I've no doubt about that, and she's pretty healthy.  The odds of her making it another 10 years are excellent, barring a total crazy accident or something.

if the pension plan goes under, oh well.  We've still got the primary investments and my tax deferred plan(s).