Author Topic: Confused about cross-over point  (Read 2642 times)

onestonerecording

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Confused about cross-over point
« on: April 06, 2017, 03:45:08 PM »
Hi all, first post - just came across the MMM site a few weeks ago, and love everything the community stands for. I've read a ton of MMM posts, as well as "Your Money Or Your Life" and still don't quite understand - when you hit the cross-over point, and are able to live off your monthly investment income... How do you actually use that money? Isn't it tied up in your investment account?

I understand that once you have enough money invested into either a 401k, IRA, taxable account, etc that it generates thousands a month - but how do you access that money without penalty? Apologies if this question has been answered, but I couldn't find it anywhere, and whenever I read a MMM it's all I can think about.

Frankies Girl

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Re: Confused about cross-over point
« Reply #1 on: April 06, 2017, 04:15:14 PM »
https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

And don't forget: taxable doesn't have a penalty for selling or withdrawing, and neither does a Roth IRA. And if you really needed to, you can pull from a 401k or traditional IRA and just pay the 10% penalty. It's not optimal, but it's your money and even with a penalty it's still accessible.


The basics without taking any of the "which account at what point in your life" sort of thing is: you invest enough money in low cost index funds across all your available types of accounts for X amount of years, until your total portfolio (not net worth - your investments) equal 25 times your annual expenses.

At that point, you could retire (early or not - whenever you hit that point).

You sell off funds to get cash for expenses in whichever account makes the most sense for your situation (got lots in the Roth and it's properly seasoned? Then pull from there. Got tons in the taxable? Maybe that's the answer... it varies according to individual situations).

And if you have a taxable, then you could also take the dividends and cap gains (if any) when they are generated instead of reinvesting them. Again, personal situation and how all this shakes out for taxes and such.

As to how often? I personally do it about every quarter. Some folks do it once a year and take their entire year's worth out in one shot and throw it into a high yield savings account. Some do it monthly.


This is based off of a study of the "4% rule" - which is a 30 year test to see if withdrawing just 4% of your investments per year will last out a typical 30 year retirement (it did). BUT there are some things that sort of end up making it possible to bend this setpoint, discussed here: https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/

« Last Edit: April 06, 2017, 04:17:09 PM by Frankies Girl »
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onestonerecording

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Re: Confused about cross-over point
« Reply #2 on: April 06, 2017, 04:27:48 PM »
This is great, and definitely cleared up a ton of confusion - thanks so much!

Frankies Girl

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Re: Confused about cross-over point
« Reply #3 on: April 06, 2017, 04:47:52 PM »
You're welcome. :)

It's going to be a mind-blowing ride down the rabbit hole once you start really digesting all this stuff. I remember learning about it and just being blown away at the ramifications and now... well it's been fabulous so far! :D

Forgot to note the whole paying taxes thing in there too.

There are some great ways to reduce the tax hit and in some cases, eliminate it altogether.

http://www.gocurrycracker.com/never-pay-taxes-again/

I personally have low expenses in retirement, and that coupled with keeping my income* below the 15% taxable bracket means I don't have to pay taxes on dividends and cap gains generated in my taxable brokerage account. So I use those when they show up for some of my yearly expenses, and the rest is funded out of a inherited IRA (which I am required to take a yearly distribution from anyway, but as it allows me to draw from it without a penalty, I use it as my secondary expense account). Those two accounts combined mean I can pay my yearly expenses and stay under the 15% bracket and owe zero taxes so far. I also am one of those that has about 1 year's worth of expenses in a high yield savings account. Some choose to do laddered CDs for their stable cash holdings.

* this is not earned income, but cap gains, divdends and distributions from IRAs are still counted as reportable income for the IRS. So I can adjust my actual income on my taxes by decreasing the draw from the iIRA if needed.


« Last Edit: April 06, 2017, 04:49:56 PM by Frankies Girl »
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Larsg

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Re: Confused about cross-over point
« Reply #4 on: November 05, 2017, 05:10:30 PM »
This is great, and definitely cleared up a ton of confusion - thanks so much!

Also, no penalty for withdrawing from 401K/IRA's if you use the rule 72t. There are some restrictions so study up for when the time comes.

soccerluvof4

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Re: Confused about cross-over point
« Reply #5 on: November 06, 2017, 03:01:37 AM »
https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

And don't forget: taxable doesn't have a penalty for selling or withdrawing, and neither does a Roth IRA. And if you really needed to, you can pull from a 401k or traditional IRA and just pay the 10% penalty. It's not optimal, but it's your money and even with a penalty it's still accessible.


The basics without taking any of the "which account at what point in your life" sort of thing is: you invest enough money in low cost index funds across all your available types of accounts for X amount of years, until your total portfolio (not net worth - your investments) equal 25 times your annual expenses.

At that point, you could retire (early or not - whenever you hit that point).

You sell off funds to get cash for expenses in whichever account makes the most sense for your situation (got lots in the Roth and it's properly seasoned? Then pull from there. Got tons in the taxable? Maybe that's the answer... it varies according to individual situations).

And if you have a taxable, then you could also take the dividends and cap gains (if any) when they are generated instead of reinvesting them. Again, personal situation and how all this shakes out for taxes and such.

As to how often? I personally do it about every quarter. Some folks do it once a year and take their entire year's worth out in one shot and throw it into a high yield savings account. Some do it monthly.


This is based off of a study of the "4% rule" - which is a 30 year test to see if withdrawing just 4% of your investments per year will last out a typical 30 year retirement (it did). BUT there are some things that sort of end up making it possible to bend this setpoint, discussed here: https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/



This ^

For me i have a yearly withdrawal amount from my taxable accounts that I divided by 12 and take once a month. My percentage of withdrawal with the market rising is about 1% higher than initially planned in which i use for projects I know I would need to get done, college stuff for kids and the rest I have been building up my cash position.
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