Does one focus on the 401k or “non-retirement” index funds for early retirement?
I find myself asking, “What option would Mr. Money Mustache do?” I’m 30 and all debt is paid off. And though my wife and I make a very meager living, I still believe a case can be made for early retirement (early 40’s) based upon the life style we hold and the amount of living expenses we have per year.
Let me paint a picture for you.
Current Investments:
$50,000 in 59 ½ retirement plans (401k, ROTH IRA, Trad. IRA, etc.)
$50,000 in “non-retirement”/Early Retirement Plan (mutual funds, etc.)
Current Annual Contributions:
$4,500 for employer 401k plan
$11,000 for 2 ROTH IRA Accounts (wife and I)
$27,600 now freed up due to paying off all loans
TOTAL: $43,100
Current Annual Living Expenditures:
Without going into the details…
TOTAL: $19,600
So the dilemma:
[Option 1 – the Old Man Money Option]
I could max out the $17,000 401k-retirement plan, and continue to max out the ROTH IR funds, which would leave only $10,600 annually that could be invested in the “early retirement”, index funds. At 59 ½ I would have a substantial amount of money, but I will not have the option of alternative work or “Early Retirement”—I will have had to wait until retirement age.
[Option 2 – The Early Retirement Option ]
I take the $11,000 that was dedicated to the ROTH IRA and take the $27,600 “freed up” money and invest both sums into “Early Retirement”, namely a variety of Vanguard Index funds. In 10 years that’s roughly $556,483. But then add in the 50k that’s now 100k (50k doubled in that same 10 years time), which makes that $656,483. At 4% annual withdrawal that’s $26,259. That’s more than enough for us to retire and live like kings. The $4,500 for employer 401k plan is still being added each year as well as a safety net.
[Option 3 – The Hybrid: Old Man Money & Retire Early]
I could leave the ROTH IRA annual contribution of $11,000 and just focus the $27,600 annually, with 7% annual return, in “Early Retirement”, Vanguard index funds. At 10 years investing, that would roughly end up being $400,000. Then add in the $50k that’s now $100k, giving a total of $500,000. Add in another 3-5 years for good measure, and that’s enough to retire on, withdrawing 4% annually and allowing 3% for inflation. The $4,500 for employer 401k plan is still being added each year as well as a safety net.
Do I follow suit with what most people do and max out “old man money” (401k & ROTH IRAs) [Option 1].
Or do I carpe diem and take all of the possible investment money and go with a variety of Vanguard index funds to try and retire in 10 years [Option 2]?
Or still yet, do I take a hybrid approach, maxing out ROTH IRAs and taking the “Freed Up” money and invest with a variety of Vanguard index funds, thereby retiring in 15 years instead of 10?
So, what option would MMM make?