Author Topic: Avoiding early retirement penalty - how did Mr. Mustache do it?  (Read 7698 times)

decessus

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Hi all,

Pleased to meet you..I'm a fairly new reader of the mustache blog and am liking it so far.  Does anyone know how Mr. Mustache (or if) avoided the early withdrawal penalty on his 401K's?  I think this Forbes article may answer it: (http://www.forbes.com/sites/janetnovack/2013/01/15/11-ways-to-tap-retirement-cash-early-without-a-10-penalty/) "Another less well-known option: You can avoid the withdrawal penalty at any age, and for any reason, by beginning “substantially equal periodic payments” from an IRA. The catch here is you must continue taking these payments for five years or until you are 59 1/2 (the age you can normally start taking from an IRA penalty free), whichever comes later–even if you no longer need the cash."

But reading various articles it's unclear to me.  Mostly I'm trying to plot strategy - is it better to max out the 401K's or to avoid the early withdrawal is it better to just put the savings in a regular index fund?  (although I think there is a 15% capital gains tax, so there may not be a win there either). 

shuffler

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Re: Avoiding early retirement penalty - how did Mr. Mustache do it?
« Reply #1 on: July 06, 2014, 11:58:42 PM »

marty998

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Re: Avoiding early retirement penalty - how did Mr. Mustache do it?
« Reply #2 on: July 07, 2014, 06:09:23 AM »
Don't think he needed to touch his 401k? He just saved up enough in normal investments....

matchewed

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Re: Avoiding early retirement penalty - how did Mr. Mustache do it?
« Reply #3 on: July 07, 2014, 06:14:13 AM »
More to the point it doesn't matter how MMM specifically did it. It is how do you avoid it at all.

1) Roth Conversion Pipeline. This is where your 401k gets rolled over to an IRA. Then over the course of many years you convert your IRA to a Roth IRA paying income tax at each conversion. Five years after a conversion occurs you're allowed to access the converted money penalty free.

2) SEPP, this is for people closer to traditional retirement age. It essentially pays out a specific amount annually based on calculations for your time to 59.5.

3) Really low taxes and not avoiding the penalty. If you can get your taxes low enough that 10% penalty may be all you'd need to pay.

Cheddar Stacker

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Re: Avoiding early retirement penalty - how did Mr. Mustache do it?
« Reply #4 on: July 07, 2014, 09:16:13 AM »
Don't think he needed to touch his 401k? He just saved up enough in normal investments....

Agree with everyone, but this ^ answers the question. According to what he's written he hasn't touched the 401k/IRA yet. His expenses are low and he has rental properties that can fund the majority of them. He also still works a bit, and so does his wife. Plus other investments outside the 401K.

Welcome to the forum.

MandyM

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Re: Avoiding early retirement penalty - how did Mr. Mustache do it?
« Reply #5 on: July 07, 2014, 01:31:24 PM »
MMM lists his 401K as the fourth level of safety here: http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/

Gin1984

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Re: Avoiding early retirement penalty - how did Mr. Mustache do it?
« Reply #6 on: July 07, 2014, 01:40:58 PM »
MMM lists his 401K as the fourth level of safety here: http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/
I sometimes think people are here are not enough safety margin aware as I "need' to be.  I like that article.
« Last Edit: July 08, 2014, 02:20:49 PM by Gin1984 »

arebelspy

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Re: Avoiding early retirement penalty - how did Mr. Mustache do it?
« Reply #7 on: July 08, 2014, 02:19:33 PM »
MMM lists his 401K as the fourth level of safety here: http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/
I sometimes think people are here are not enough safety margin aware as I "need' to be.  I think that article.

Huh?  I think you accidentally that post.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Gin1984

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Re: Avoiding early retirement penalty - how did Mr. Mustache do it?
« Reply #8 on: July 08, 2014, 02:21:33 PM »
MMM lists his 401K as the fourth level of safety here: http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/
I sometimes think people are here are not enough safety margin aware as I "need' to be.  I think that article.

Huh?  I think you accidentally that post.
Lol, I am blaming the iPad for that one.  I LIKE that article.  Thanks for pointing that out.  :D

arebelspy

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Re: Avoiding early retirement penalty - how did Mr. Mustache do it?
« Reply #9 on: July 08, 2014, 05:28:17 PM »
MMM lists his 401K as the fourth level of safety here: http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/
I sometimes think people are here are not enough safety margin aware as I "need' to be.  I think that article.

Huh?  I think you accidentally that post.
Lol, I am blaming the iPad for that one.  I LIKE that article.  Thanks for pointing that out.  :D

Okay, now I understand the second sentence.  Help me out with the first.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Gin1984

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Re: Avoiding early retirement penalty - how did Mr. Mustache do it?
« Reply #10 on: July 08, 2014, 06:46:25 PM »
MMM lists his 401K as the fourth level of safety here: http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/
I sometimes think people are here are not enough safety margin aware as I "need' to be.  I think that article.

Huh?  I think you accidentally that post.
Lol, I am blaming the iPad for that one.  I LIKE that article.  Thanks for pointing that out.  :D

Okay, now I understand the second sentence.  Help me out with the first.  :)
Sometimes people seem to want to FIRE right when 4% covers their basic expenses, not accounting for major expenses like increase health costs or that there have not been, IMO, enough time to be "safe" using 4% withdrawal for 50-60 years. 
Basically, IMO, people here don't seem to keep enough "fat" to account for issues.

arebelspy

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Re: Avoiding early retirement penalty - how did Mr. Mustache do it?
« Reply #11 on: July 08, 2014, 06:54:41 PM »
I'm not sure I agree with that broad generalization, but okay.  Maybe.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Nords

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Re: Avoiding early retirement penalty - how did Mr. Mustache do it?
« Reply #12 on: July 14, 2014, 06:36:47 PM »
Sometimes people seem to want to FIRE right when 4% covers their basic expenses, not accounting for major expenses like increase health costs or that there have not been, IMO, enough time to be "safe" using 4% withdrawal for 50-60 years. 
Basically, IMO, people here don't seem to keep enough "fat" to account for issues.
Most people here aren't willing to work at their occupation (or employer) a moment longer than the statistics say that they're "good enough", and they're not willing to collect another century of historical data when Monte Carlo can give then a roughly similar answer.

The 4% SWR already has a lot of "fat" in its approximations, especially the assumption of constant inflation-adjusted spending.  We already know that people don't spend like that, and we know that most people (even those with health issues) tend to spend less overall as they age.  We also know that new retirees will completely overhaul their budget to optimize their spending, and that includes having the flexibility & time for DIY and finding bargains.

In my opinion, the longevity risk you're assessing is best handled with an annuity (to support part of the spending) instead of by working longer.  Maybe Social Security is all the annuity that's needed (and SS is not part of the 4% SWR either).  But you have to be comfortable with your retirement finances during retirement too, and if "just one more year" makes you more comfortable then you should be willing to work for that.