Author Topic: Early retirement funding gap  (Read 13373 times)

rocketman48097

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Early retirement funding gap
« on: February 11, 2015, 12:18:30 PM »
My family has encountered a significant problem with early retirement.  Before I load on the details, the crux of my problem is this:  the wife and I have been too aggressive and successful in tax deferred accounts, so in order to retire prior to age 55 or 59.5, without penalty, we will need more funds outside of our 401k's, IRA and dual Roth IRA's.

Details:  Married 38, wife is 37, two kids, one income (used to be two, which is why we've amassed a nice egg).

Nest Egg:
Approximate combined 401k values:  520k
Traditional IRA:  88k
Two Roth IRA's combined:  162k
Stocks in taxable accounts:  71k
Savings Account:  6k

Illiquid house equity (net of closing costs and mortgage, conservative value)
157k

I have posted in the "comments" section of MR Money mustache before, and the author of this blog (MMM himself) did give some very good advice, convert your IRA's to Roth IRA's and withdraw the principal after the five year holding period.  Do this continuously to fund early retirement.  OK, not bad advice. 

What do I live off of during the five year "bridge" period?  This question was not fully answered.  My ultimate goal is to withdraw my funds without a 10% penalty, while also staying within the 15% federal tax bracket.  Here is how I currently could fund the gap:

77k-  taxable investments plus cash
65k-  Locked up, but accessible, Roth IRA principal

Still, that leaves a funding gap.  I estimate I have about two years worth of living expenses (I also have no debt other than my $1100 per month mortgage).
How do I fund the other three years (five years total)?

Here are my thoughts that I have for myself, but wanted to see if anyone else had other creative ideas?

1.  Withdraw Roth Principle immediately and invest in taxable investments.  This provides future funding for early retirement at 0% cap gain and dividend rates.
2.  Take out a 50k 401k loan through work, and invest in taxable accounts.  Loan would be repaid through payroll deduction, and if I got fired or quit, I would pay off immediately.  This would also provide additional capital.
3.  Continue to invest 17k per year in taxable investments.  I plan on doing this regardless.
4.  Take out a home equity loan or line of credit, invest in taxable investments.  Loan interest would also be tax deductible, if I am able to itemize. 

Any other thoughts from this brilliant and sophisticated community?  Thanks for your help. 
« Last Edit: February 11, 2015, 12:34:39 PM by rocketman48097 »

dude

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Re: Early retirement funding gap
« Reply #1 on: February 11, 2015, 12:23:10 PM »
72t/SEPP withdrawals.  You can access your money penalty-free under these provisions, prior to age 59 1/2.  Google it.

rocketman48097

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Re: Early retirement funding gap
« Reply #2 on: February 11, 2015, 12:28:03 PM »
I have considered rule 72t withdrawals.  However, the problem I continuously run into is the amount allowed is so low, about 3.7% withdrawal at age 43, that I would still have a continuous funding gap until age 55.  I have enough funds to partially fund the difference without 72t, but it's not enough.  I would live to retire in five years, at age 43. 

One other thing, and this may be minor, but I do not like that if you do this calculation wrong, you can get taxed and penalized on the entire amount of withdrawals.  Seems like a huge penalty for making an innocent mistake in math.  I would intend to do this correctly, but I am human and therefore flawed and not always perfect. 

sheepstache

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Re: Early retirement funding gap
« Reply #3 on: February 11, 2015, 12:30:24 PM »
I'm a bit confused. You say you have $142k to fill the gap but then say you still have a 5-year gap and then say you have 2 years of living expenses.

Even the $142 (combined taxable accounts and roth principle) would give you $28k/yr over 5 years. How much do you need?

dude

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Re: Early retirement funding gap
« Reply #4 on: February 11, 2015, 12:31:51 PM »
You can also withdraw your Roth contributions (not the investment gains) at any time penalty-free and tax-free -- just make sure you've kept accurate records of your contributions.

rocketman48097

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Re: Early retirement funding gap
« Reply #5 on: February 11, 2015, 12:32:41 PM »
I estimate about 65k, after tax, per year.  That includes continuing to make payments on our mortgage, does that make sense.  What I meant was there is a five year funding gap until I can tap converted Roth Principle.  Of this five year gap, I have two years funded with current funds, but still need three more years of funding.

When you include our home equity, we are millionaires that aren't retired.  It's a great problem to have, but it's also sad at the same time (I also like my job, but would still rather be retired). 

DoubleDown

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Re: Early retirement funding gap
« Reply #6 on: February 11, 2015, 12:34:52 PM »
How are you going to retire with just under $1 million and $65k annual expenses? A 6.5% withdrawal rate is not likely sustainable.

rocketman48097

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Re: Early retirement funding gap
« Reply #7 on: February 11, 2015, 12:47:38 PM »
I have done the math on my master spreadsheet and I disagree.  The average return on the SP 500, with dividend reinvestments, since 1965 is 9.8%.  A 6.5% withdrawal rate allows for inflation adjustments upward, as well.  You can't die with your money, so you may as well manage it in a manner where you are both comfortable, and have enough to live off of, without working, forever.  I do not plan to fund "above and beyond" what is necessary.

Also, I do not plan on retiring today.  I plan on retiring in five years, which is what my spreadsheet states that I can do, assuming returns are "average."  Since I always have the option of continuing my employment as an indentured servant, if the stock market has a large decline, I will simply work a bit longer until it recovers.  We also have the option of the wifey going back to work, but we find life is much easier with two kids, with one person staying at home.  We also have zero daycare expenses. 

ZiziPB

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Re: Early retirement funding gap
« Reply #8 on: February 11, 2015, 12:58:03 PM »
Quote
I plan on retiring in five years, which is what my spreadsheet states that I can do, assuming returns are "average."

How much can you save in the next 5 years?  Any ways to reduce your anticipated retirement budget?

TN_Steve

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Re: Early retirement funding gap
« Reply #9 on: February 11, 2015, 01:02:55 PM »
I have done the math on my master spreadsheet and I disagree.  The average return on the SP 500, with dividend reinvestments, since 1965 is 9.8%.  A 6.5% withdrawal rate allows for inflation adjustments upward, as well.  You can't die with your money, so you may as well manage it in a manner where you are both comfortable, and have enough to live off of, without working, forever.  I do not plan to fund "above and beyond" what is necessary.

....

Be careful of Sequence of Return risks.  Wade Pfau has published intensively on this topic and it has been beaten to death, revivified, and beaten to death again at the Boglehead boards.  I believe that the last "comfortable" number Dr. Pfau was willing to state had risen to about 2.5%, particularly for younger retirees....  Granted, he may be seen as a bit of a doom and gloomer, but the charts showing returns in other countries over time, as well as present valuations in the US market are not comforting for even the traditional 4% SWR.  I wish I could embrace 4%; if so, I'd be investigating crevices in a tropical reef right now....

Leanthree

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Re: Early retirement funding gap
« Reply #10 on: February 11, 2015, 01:03:29 PM »
I have done the math on my master spreadsheet and I disagree.  The average return on the SP 500, with dividend reinvestments, since 1965 is 9.8%.  A 6.5% withdrawal rate allows for inflation adjustments upward, as well.  You can't die with your money, so you may as well manage it in a manner where you are both comfortable, and have enough to live off of, without working, forever.  I do not plan to fund "above and beyond" what is necessary.


https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementNestEggCalc.jsf says it is 50% (I ran it @ $1MM for 50 years at 6.5% withdrawal 100% stock). That seems good enough for your situation but it wouldn't be my suggestion for the vast majority of people as there is even money you or the wife head back to work.

sirdoug007

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Re: Early retirement funding gap
« Reply #11 on: February 11, 2015, 01:08:17 PM »
Does your master spreadsheet model sequence of returns risk?  https://www.kitces.com/blog/understanding-sequence-of-return-risk-safe-withdrawal-rates-bear-market-crashes-and-bad-decades/

I understand you plan to be flexible in your work but make sure you actually have a viable plan for returning to work should you retire immediately before the shit hits the fan and everyone is unemployed again.

Or reduce your spending to about $40k/year.  If I were you this is where I would aim my focus.

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Re: Early retirement funding gap
« Reply #12 on: February 11, 2015, 01:08:59 PM »
rocketman: The plan is certainly risky especially since withdrawals have to be sustained over a 50+ year period. I also assume that if you stop working this early, your anticipated SS benefit at age 62 will be quite low as well. You said that you are ready to go back to work just in case. Will you make 65k+ if you go back?  What if you run out of stash at age 70? Can you get a 65k+ job at that age?


skyrefuge

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Re: Early retirement funding gap
« Reply #13 on: February 11, 2015, 01:15:49 PM »
I have done the math on my master spreadsheet and I disagree.

Have you really created a whole financial life-cycle spreadsheet, and never heard of the 4% Safe Withdrawal Rate rule-of-thumb? Remarkable!

Go enter your 6.5% WR into cFIREsim. It failed in 72% of the past 105 40-year periods in history.

Anyway, if you're still going to work 5 more years, you'll have a bunch more money at that point, a lower withdrawal rate, and more accessible money, so I think all your "problems" are likely to just solve themselves.

The average return on the SP 500, with dividend reinvestments, since 1965 is 9.8%.  A 6.5% withdrawal rate allows for inflation adjustments upward, as well.

Where do you get that number from? I get an annualized, inflation-adjusted rate-of-return (the number that you should care about for this comparison) of only 5.58%.

http://www.moneychimp.com/features/market_cagr.htm
« Last Edit: February 11, 2015, 01:21:34 PM by skyrefuge »

rocketman48097

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Re: Early retirement funding gap
« Reply #14 on: February 11, 2015, 01:18:05 PM »
I understand your concerns.  I agree that they are all valid.  I have had an IRA since I was 18, before my friends were even out of pull ups yet.  It's safe to say I have been thinking about retirement FOREVER, err, as long or more than most. 

We would not need to make 65k per year, we would still have plenty of money.  Also, the likelihood of neither of us working for cash, somewhere, at sometime, is probably about 5%.  We would only need to fund a shortfall.

We ABSOLUTELY could reduce our expenses, no doubt about it.  I am trying to be conservative though.  However, waking up in the morning and going to work is risky.  We all still do it even though we could be fired everyday.  We drive cars (well I bike, but most drive cars) even though 35k per year are killed doing this in the US each year.  Everything is risky.  Past experience tells me that:

1.  My forecasts have always undershot my actual returns/assumptions.
2.  My understanding of the tax code is deep enough where, I am always able to calculate my refund within a few dollars before I even file.  It helps that I have an accounting degree and CPA certification (though I don't do taxes for a living). 

I am comfortable with the risk.  Otherwise, I wouldn't have posted.  We have endless ways to make ends meet, and my guess is, we will grow our egg while we are both retired, it won't go down in value OVER TIME. 

sirdoug007

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Re: Early retirement funding gap
« Reply #15 on: February 11, 2015, 01:24:13 PM »
Anyway, if you're still going to work 5 more years, you'll have a bunch more money at that point, a lower withdrawal rate, and more accessible money, so I think all your "problems" are likely to just solve themselves.

Yeah I think 5 more years will close this hole you have in accessible money.

5 years of $17k at 7% gets you about $100k.  Your $142k available now turns into $200k at this rate.  So you'll have $300k available which is 4.6 years at $65k.  Make it 8% and you'll be there.

Then you just have to avoid retiring before a recession and you'll be golden.

rocketman48097

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Re: Early retirement funding gap
« Reply #16 on: February 11, 2015, 01:26:17 PM »
Of COURSE I have heard of the safe 4% withdrawal rate.  I have, like everything else in life, questioned if it's valid.  My answer is no, it's not necessary.  There are numerous ways to mitigate market risk.  I read additional early retirement websites as well, and simply "cashing out" while the going is good, say two years of living expenses into a bond fund, significantly reduces your risk of cashing out while the market is low.  Look over stock market returns over a 40 year period, and there is only one three year period, which I was invested in, 2000-2001-2002, where the SP500 went down 3 years in a row.  Most of the time, like 2008, it only goes down for one year, then recovers, goes up for a whole bunch more years, then tanks for one or two years, then repeats cycle in an eratic fashion.

Beware of cherry picked data.  "if you had invested 1m in 2000..." Who invests ALL of their money at the VERY PEAK of the market?  I know no one, I had money invested in 2000, and continued to dollar cost average during the downtown, and dollar cost average into the recover, as I got paid.  There is no rule saying you would have to take ANY money out during a down turn.  In fact, you could fund a down turn with a home equity line of credit.   No big deal, easy peasy. 

My in-law's, retired since 55, were advised to take out car loans in 2009, because the market was low and interest rates were also.  I found this odd, until I realized that this was a brilliant strategy to "get through" a decline.  The market rebounded sharply, and they kept their investments and eventually paid off their low interest car loan, via home equity, which is also tax deductible IF you itemize. 

mxt0133

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Re: Early retirement funding gap
« Reply #17 on: February 11, 2015, 01:38:25 PM »
Are you interested in living abroad to lower your cost of living to like 40k and live like a king?  That should help you with your funding gap.

clifp

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Re: Early retirement funding gap
« Reply #18 on: February 11, 2015, 02:36:07 PM »
I have considered rule 72t withdrawals.  However, the problem I continuously run into is the amount allowed is so low, about 3.7% withdrawal at age 43, that I would still have a continuous funding gap until age 55.  I have enough funds to partially fund the difference without 72t, but it's not enough.  I would live to retire in five years, at age 43. 

One other thing, and this may be minor, but I do not like that if you do this calculation wrong, you can get taxed and penalized on the entire amount of withdrawals.  Seems like a huge penalty for making an innocent mistake in math.  I would intend to do this correctly, but I am human and therefore flawed and not always perfect.

3.7% for 43 year old seems like perfectly reasonable withdrawal rate.  The really bad penalty for a 72(t) are running out of money before age 59.5, you really don't want to do this. It is certainly worth sitting down with a CPA and making sure you have down all the calculations.  I'd also triple check with the folks on 72t.net.

But if you are going to withdrawal all of your ROTH contributions, exhaust your taxable accounts,and use a 72(t) to tap into your 401K, and you still have a funding gap. I think you are risking running on fumes by the time you are eligible for a social security. One of the best investment you can make is delay SS until 70 for the older/higher earning spouse, it doesn't sound like you'll be able to do this. What the numbers and the forum is saying is that is a risky plan, and your are getting the yellow caution light from multiple sources.    Probably a million people/day run orange lights every day with no harm, and probably only a several thousand get hit.

skyrefuge

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Re: Early retirement funding gap
« Reply #19 on: February 11, 2015, 02:37:39 PM »
Of COURSE I have heard of the safe 4% withdrawal rate.  I have, like everything else in life, questioned if it's valid.

Well that's good at least. I can think of a couple reasons to think that it's not valid:

1. The future will be significantly different from the past.
2. The past's SWR does not apply to me because I will achieve market-beating returns

Neither of those seem particularly likely to be true, particularly if, like in your case, you think in #1 that future market returns will be significantly better than the past.

There are numerous ways to mitigate market risk.  I read additional early retirement websites as well, and simply "cashing out" while the going is good, say two years of living expenses into a bond fund, significantly reduces your risk of cashing out while the market is low.

Ah, yes, market-timing! Sounds simple, and it is, except that it's impossible to do correctly in practice, and actually hurts your chance of success rather than helping.

Look over stock market returns over a 40 year period, and there is only one three year period, which I was invested in, 2000-2001-2002, where the SP500 went down 3 years in a row.  Most of the time, like 2008, it only goes down for one year, then recovers, goes up for a whole bunch more years, then tanks for one or two years, then repeats cycle in an eratic fashion.

I'm not sure why a nominal, greater-than-0% yearly return is a valuable cutoff metric. Between 1965 and 1982, the S&P 500 returned an inflation-adjusted 0%. You're right, there were no 3-year-periods of nominal, less-than-0% returns in there, but so what? You would have run out of your two years of living expenses in bonds by 1967, and then watched your nest-egg get decimated through 15 more years of withdrawals that far exceeded market gains. Even if you had reduced your withdrawals to 4% in 1967, you would have run out of money before 1994. But I guess we'll never see a period like 1965-1982 again, because...?

Beware of cherry picked data.  "if you had invested 1m in 2000..." Who invests ALL of their money at the VERY PEAK of the market?  I know no one

Of course no one does that, but so what? In terms of withdrawal rates, it doesn't matter when you accumulated $1M. If you start 6.5% withdrawals with $1M, the future cares not one whit about how far in the past you started accumulating that amount. It assumes you invested it on that day. Yes, 2000 would have been one of the worst years in history to start 6.5% withdrawals, but some 70% of all other years also would have resulted in the failure of your plan.

I love seeing the relatively-rare optimists push back against the trendy mob of "4% is no longer safe" pessimists, so if that's what you're doing, great. I'm just concerned that your beliefs seem to be coming more out of a place of ignorance rather than optimism.

If you're really just saying that 6.5% is your upper-limit, and you'll actually adjust based on portfolio-size/market-conditions, then cFIREsim has a bunch of different options to show the results with various different variable-withdrawal methods. I encourage you to check them out.

rocketman48097

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Re: Early retirement funding gap
« Reply #20 on: February 11, 2015, 02:55:08 PM »
Well that's good at least. I can think of a couple reasons to think that it's not valid:

1. The future will be significantly different from the past.
2. The past's SWR does not apply to me because I will achieve market-beating returns


I must not have written my response well. 

1.  The future will be a lot like the past.  That's why I have a variable rate ARM on my house and have fared much better than a 30 year fixed mortgage.
2.  I have no plans to achieve market beating returns.  Actually, I plan on "making the market."  This can be done, without thought, with an SP500 index fund or ETF.  Easy Peasy. 

Ah, yes, market-timing! Sounds simple, and it is, except that it's impossible to do correctly in practice, and actually hurts your chance of success rather than helping.

No market timing is involved at all, simply cash out investments, over time (over months, not all at once), as the market INCLINES into a safer bond or money market vehicle.  Always have two years of cash equivalents on hand.  Why is this market timing?  The only market timing involved is, as there will be more BIG market declines, you simply deplete your cash position and wait for the inevitable recovery.  Why is this hard to understand? 

I'm not sure why a nominal, greater-than-0% yearly return is a valuable cutoff metric. Between 1965 and 1982, the S&P 500 returned an inflation-adjusted 0%. You're right, there were no 3-year-periods of nominal, less-than-0% returns in there, but so what? You would have run out of your two years of living expenses in bonds by 1967, and then watched your nest-egg get decimated through 15 more years of withdrawals that far exceeded market gains. Even if you had reduced your withdrawals to 4% in 1967, you would have run out of money before 1994. But I guess we'll never see a period like 1965-1982 again, because...?

Hold your horses sparky, you are not dealing with an uninformed amateur here.  You CHERRY PICKED 1982, a year of severe recession when my father's bonus plan at work was SIGNIFICANTLY reduced.  A year when his sales declined considerably and my mother feared his losing a job and not being able to find another.  Where do you want me to start?  Let's pick a REAL year, like 1985?  Let's include the PHENOMENAL bull market that took place RIGHT AFTER 1982.  Come on, this is silly stupid.

The dow is an index that ignores dividend reinvestment.  Dividend reinvestment makes up 50% of market returns over time.  How can you ignore 50% of a gain?  Fact is, you WILL see a period like 1965-1982 again, and I will be reinvesting my dividends the whole time, keeping two years in cash, and riding down the downturns.  You act as if this was a STRAIGHT LINE return.  NO, there were significant up years and down years during this time.  Also, I am starting out with a TON of cash, this is a position of strength, NOT a position of weakness. 



sirdoug007

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Re: Early retirement funding gap
« Reply #21 on: February 11, 2015, 03:57:11 PM »
The 4% rule is based on MAXIMUM inflation adjusted withdrawal you could make in the WORST 30 year period since 1926 and not run out of money at the end of that period with no adjustments.

Contrary to what most people think, the worst period was not the Great Depression, but it was 1966-1996 (see chart below).  Picking 1982 doesn't really matter.  Even going forward into one the best bull markets ever to 1996 leaves you running out of money before you get there!

If you want to play with flexible withdrawal strategies and cash reserves some of the calculators can do that.  6.5% may work in the short term as the markets are good, but it is exceptionally hard to determine where you are on the chart below.  Is this year like 1980 where I can take out 9% or like 1966 where I can only take out ~4%??

Here are the returns of the S&P500 from 1966 to 1996 with dividends adjusted for inflation (from http://www.moneychimp.com/features/market_cagr.htm).   No more than a two year downturn in there like you mention yet your results starting from 1966 would not have been pretty!

I think this is a very interesting conversation so thanks to all that are contributing!

1996    19.10
1995    34.60
1994    -1.45
1993     7.22
1992     4.57
1991    27.06
1990    -8.98
1989    26.14
1988    11.70
1987     1.20
1986    17.77
1985    27.40
1984     1.93
1983    18.63
1982    16.75
1981   -13.08
1980    17.99
1979     4.76
1978    -2.39
1977   -13.57

1976    18.44
1975    29.48
1974   -34.97
1973   -21.83

1972    15.23
1971    10.92
1970    -1.87
1969   -13.96

1968     6.03
1967    20.78
1966   -13.36

skyrefuge

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Re: Early retirement funding gap
« Reply #22 on: February 11, 2015, 03:57:43 PM »
No market timing is involved at all, simply cash out investments, over time (over months, not all at once), as the market INCLINES into a safer bond or money market vehicle.  Always have two years of cash equivalents on hand.

Ok, if you always have two years of cash-equivalents on hand, that's 2*6.5% = 13% of your portfolio that's always in cash-equivalents, which means 87% in stocks, and you regularly rebalance into that asset allocation. This is not some secret trick that you learned on some other early-retirement website. It's what all SWR research already assumes!

According to cFIREsim, such a strategy actually slightly increases your chance of failure. A 40-year period with a 6.5% WR and an 87%/13% stock/bond allocation failed 65% of the time, while a 100%/0% allocation failed "only" 63% of the time. This is because by holding that 13% in lower-returning bonds, you're giving up the higher returns you would get if you kept it in stocks (not that I advise against such an allocation, because I think your real-world success rate actually increases with some bond-exposure, because they make it psychologically easier to stay-the-course).

You CHERRY PICKED 1982, a year of severe recession when my father's bonus plan at work was SIGNIFICANTLY reduced.  A year when his sales declined considerably and my mother feared his losing a job and not being able to find another.  Where do you want me to start?  Let's pick a REAL year, like 1985?  Let's include the PHENOMENAL bull market that took place RIGHT AFTER 1982.

No, the date I cherry-picked was 1965. 1982, despite your memories, actually brought a huge 25% return (21% real) to the S&P 500. The point is that even that phenomenal bull market that followed was still not enough to save your portfolio even if you had been withdrawing at 4% the whole time! The period from 1965 to 1982 had beaten your portfolio down past the point-of-no-return where nothing could save it. If you had actually been withdrawing at your 6.5% rate, you wouldn't have even made it to 1982; your portfolio would have died in 1979, in less than 15 years.

The dow is an index that ignores dividend reinvestment.

And Dirk Nowitzki is a basketball player that speaks German. Both of those are true statements, but what do they have to do with anything? I never mentioned the dow. I've been using the S&P 500 total return, which includes dividend reinvestment. Which is what all SWR research does. You're right that it would be idiotic to ignore it.

Fact is, you WILL see a period like 1965-1982 again, and I will be reinvesting my dividends the whole time, keeping two years in cash, and riding down the downturns.  You act as if this was a STRAIGHT LINE return.  NO, there were significant up years and down years during this time.  Also, I am starting out with a TON of cash, this is a position of strength, NOT a position of weakness.

I've already described what would have happened to you if you had done this exact thing, so re-read it now that you know your assumption about dividend reinvestment was incorrect. You would have run out of money by 1994. If you didn't reinvest dividends, you would have run out of money much earlier than that. (not that there would have been many dividends to reinvest, since nearly all of them would have been going towards your expenses anyway).

I encourage you to check out IndexView to visualize the S&P 500 total real returns yourself.
« Last Edit: February 11, 2015, 04:04:40 PM by skyrefuge »

SMCx3

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Re: Early retirement funding gap
« Reply #23 on: February 11, 2015, 04:17:43 PM »
Someone pass the popcorn, this thread is getting good.

mak1277

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Re: Early retirement funding gap
« Reply #24 on: February 11, 2015, 04:48:52 PM »
Why does anyone give a crap if rocketman thinks 6.5% WR is safe enough for him?  He didn't ask a question about his WR.

arebelspy

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Re: Early retirement funding gap
« Reply #25 on: February 11, 2015, 04:50:17 PM »
The dow is an index that ignores dividend reinvestment.

And Dirk Nowitzki is a basketball player that speaks German. Both of those are true statements, but what do they have to do with anything?

I laughed.

Thanks for taking the time to educate skyrefuge.  Even if rocketman doesn't end up agreeing, I'm sure others will learn from this thread.
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.
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iamlindoro

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Re: Early retirement funding gap
« Reply #26 on: February 11, 2015, 04:54:49 PM »
Why does anyone give a crap if rocketman thinks 6.5% WR is safe enough for him?  He didn't ask a question about his WR.

This is a forum for discussion.  Most people here are interested in discussion, not simply responding to the questions the OP designates as open for discussion.  If the assumptions a question is based on are flawed and people say so, they're doing it because they are trying to help a poster, not simply for the sake of argument.  The OP can take or leave that advice/response and he or she pleases.

Eric

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Re: Early retirement funding gap
« Reply #27 on: February 11, 2015, 04:58:51 PM »
Why does anyone give a crap if rocketman thinks 6.5% WR is safe enough for him?  He didn't ask a question about his WR.

I think it's a good idea for everyone who is thinking about retiring to post their strategy here and have people critique it, or even skewer it.  Then the OP defends it to see if they're still comfortable.  Kind of like defending a dissertation to get your PhD.  Only in this case, if you can do it successfully, you'll be a retirement doctor.

mozar

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Re: Early retirement funding gap
« Reply #28 on: February 11, 2015, 08:38:20 PM »
Maybe I missed this, but can't the OP start the roth ladder now, which will be ready when he retires in 5 years?

iamlindoro

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Re: Early retirement funding gap
« Reply #29 on: February 11, 2015, 08:41:43 PM »
Maybe I missed this, but can't the OP start the roth ladder now, which will be ready when he retires in 5 years?

The goal on the Roth ladder is to be paying taxes at your retired tax rate.  Since you pay the taxes when you roll money from the 401K into the IRA, it should be done after retirement to minimize or even eliminate the tax bill on the rollover.  If you start a Roth ladder while still working, you'll end up paying the taxes at your working rate, which would suck.  Thus, it's best to have 5 years worth of living expenses in after-tax accounts to survive the first five post-retirement years of rollovers.

skyrefuge

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Re: Early retirement funding gap
« Reply #30 on: February 11, 2015, 09:07:31 PM »
If the assumptions a question is based on are flawed and people say so, they're doing it because they are trying to help a poster, not simply for the sake of argument.  The OP can take or leave that advice/response and he or she pleases.
I think it's a good idea for everyone who is thinking about retiring to post their strategy here and have people critique it, or even skewer it.  Then the OP defends it to see if they're still comfortable.  Kind of like defending a dissertation to get your PhD.  Only in this case, if you can do it successfully, you'll be a retirement doctor.

Right on. In addition to these two excellent responses, I have a particularly concrete and selfish reason:

Fear of ending up with too much sheltered, inaccessible money is a common topic on these forums that is frequently raised by new investors. I tend to believe, without a lot of real basis or calculation, that it's fairly difficult to actually end up with such a problem at the time you've reached FI. If you make enough money to make ER easy, you'll likely exhaust your tax-sheltered space and be "forced" to have plenty of unsheltered savings. If you make so little money that you can't fill up your tax-sheltered space, you'll have a hard time retiring early. So it would be nice to say to such young investors "eh, don't worry much about it, it's not likely to be an issue".

But now we have an actual, real-life person near FI who has this problem! Shit, I guess it's more possible than I lazily thought! Or, wait, maybe it's not, now that a little digging shows the OP isn't nearly as FI as he thinks he is... (or at least not "FI" in the way that most people at this forum think of it).

sol

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Re: Early retirement funding gap
« Reply #31 on: February 11, 2015, 09:10:14 PM »
I'll sidestep the 6.5% discussion because that wasn't the question.  Though to be honest I like a man who plans his future based on average expectations rather than 95% expectations, so I'm down with it.

The question was about funding the 5 year gap, and some of the strategies have already been mentioned:

1.  Empty your taxable accounts.

2.  All of your Roth IRA principal can be withdrawn without taxes or penalties at any age.

3.  You can set up 72t SEPPs from your 401k, though this can interfere with your 401k->tIRA->Roth ladder.

Additional strategies:

4.  Tap real estate.  Sell a rental property, or take out a home equity loan to be repaid with your eventual 401k surplus.

5.  Get a job and/or reduce your expenses for a few years. 

6.  Just pay the damn penalty.  In my case, the taxes plus penalty on making an early withdrawal aren't any worse than if I had paid taxes at my current marginal rate.  If you're currently in the 28% bracket and can drop to the 15% bracket in retirement plus pay the 10% penalty, you're still at only 25% and so you're still coming out 3% ahead over putting that money in your taxable account while working.  This is the primary reason why I think most everyone should be maxing out their 401k regardless of their 5 year gap problems.  The penalty just isn't that bad, in the context of current tax brackets.

If you make so little money that you can't fill up your tax-sheltered space, you'll have a hard time retiring early.

This point is only true for people with big ER budgets.  There are people here planning on retiring with less than $15k/year, and for those folks the available tax-advantaged space is sufficient to totally eclipse any taxable savings unless they're deliberate about it.

RWD

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Re: Early retirement funding gap
« Reply #32 on: February 11, 2015, 09:13:43 PM »
No market timing is involved at all, simply cash out investments, over time (over months, not all at once), as the market INCLINES into a safer bond or money market vehicle.  Always have two years of cash equivalents on hand.  Why is this market timing?  The only market timing involved is, as there will be more BIG market declines, you simply deplete your cash position and wait for the inevitable recovery.  Why is this hard to understand?

This sounds a lot like rebalancing, which can be accounted for in cFIREsim.

skyrefuge

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Re: Early retirement funding gap
« Reply #33 on: February 11, 2015, 09:49:59 PM »
6.  Just pay the damn penalty.

Yep, I think we've agreed before that people (even smart Mustachians) irrationally overweight the effect of the 10% "penalty" in their minds, largely because it's called a "penalty". Though I guess the IRS generally calls it an "additional tax", so maybe it's the financial advisers we have to thank for that branding that's really helped make the "hands off!" message stick.

This point is only true for people with big ER budgets.  There are people here planning on retiring with less than $15k/year, and for those folks the available tax-advantaged space is sufficient to totally eclipse any taxable savings unless they're deliberate about it.

Yep, so I try to keep an eye out for them when the question gets raised, but given that neither me nor MMM fit that profile, I might say "fuck 'em, that's No True Mustachian!" (yeah yeah, they're apparently 29% of the forum, so it's not actually a minority that I can ignore.)

deborah

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Re: Early retirement funding gap
« Reply #34 on: February 11, 2015, 10:16:31 PM »
I am not from the US, but if the tax is an issue, could his wife set up the ROTH pipeline, as she is a SAHM and if they did that, would their tax bill be less?

iamlindoro

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Re: Early retirement funding gap
« Reply #35 on: February 11, 2015, 10:23:23 PM »
I am not from the US, but if the tax is an issue, could his wife set up the ROTH pipeline, as she is a SAHM and if they did that, would their tax bill be less?

The tax burden is (in most cases) shared by the couple based on their total income, so this probably would not help them.
« Last Edit: February 11, 2015, 10:29:26 PM by iamlindoro »

sol

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Re: Early retirement funding gap
« Reply #36 on: February 11, 2015, 10:54:14 PM »
There may be cases where married filing separately actually achieves better tax results than married filing jointly.

That's pretty unlikely, though I guess I can't rule it out complete.  MFS folks get hammered in all sorts of ugly ways.

Much better is to just file two individual returns and not get married.  I know two couples who claim they "can't afford" to get married for tax reasons.  In these cases, I think those reasons are related to benefits offered to low income single mothers that would not be available to a couple with their combined income.

brooklynguy

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Re: Early retirement funding gap
« Reply #37 on: February 12, 2015, 08:07:51 AM »
6.  Just pay the damn penalty.  In my case, the taxes plus penalty on making an early withdrawal aren't any worse than if I had paid taxes at my current marginal rate.  If you're currently in the 28% bracket and can drop to the 15% bracket in retirement plus pay the 10% penalty, you're still at only 25% and so you're still coming out 3% ahead over putting that money in your taxable account while working.  This is the primary reason why I think most everyone should be maxing out their 401k regardless of their 5 year gap problems.  The penalty just isn't that bad, in the context of current tax brackets.

It's even better than that, because you're also getting the equivalent of an interest-free loan by deferring the payment of those taxes during your working years.

But if you're relying on the gains on those investments to get you through the 5 year gap, you need to weigh the tax benefits of 401(k) investing against the loss of the more favorable tax treatment of capital gains in taxable accounts.  (I doubt many (or any) aspiring early retirees will fall into that boat, but I felt compelled to point it out for the benefit of our hyper-anal readers (like me).)
« Last Edit: February 12, 2015, 08:09:57 AM by brooklynguy »

Numbers Man

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Re: Early retirement funding gap
« Reply #38 on: February 12, 2015, 08:22:40 AM »
Why does anyone give a crap if rocketman thinks 6.5% WR is safe enough for him?  He didn't ask a question about his WR.

I think it's a good idea for everyone who is thinking about retiring to post their strategy here and have people critique it, or even skewer it.  Then the OP defends it to see if they're still comfortable.  Kind of like defending a dissertation to get your PhD.  Only in this case, if you can do it successfully, you'll be a retirement doctor.

+ 1 - I like that retirement doctor quip and the PhD reference.

Retire-Canada

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Re: Early retirement funding gap
« Reply #39 on: February 12, 2015, 08:56:50 AM »
I've got a potential 5 year gap in my plans as well as I need my investments to grow a bit more before I am truly FI.

My own strategy is to reduce my working hours from 40/wk to ~20/wk.

I don't love my work at 40hrs/wk, but I think it would be pretty fun at 20hrs/wk.

This also lets me ease into ER/FI and get my bearings.

If my investments grow faster than expected this period may be shorter than 5yrs and/or I may still work part-time after FI if I enjoy it.

For planning I'm using the 4% SWR and 7% inflation adjusted growth in my investments. So far my results are better than that, but I like a safety factor in my plans to soften the blow of the inevitable challenges.

If things go much better than expected in the long run I'll take out $$ for luxuries like travel and a fancy mountain bike. If they don't I'll stick with my lower base cost of living.

Good luck Rocket Man I hope you are successful! :)

If you think about it drop back into this thread in 5yrs and let us know how it went.

-- Vik

DoNorth

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Re: Early retirement funding gap
« Reply #40 on: February 12, 2015, 11:16:05 AM »
I'll do mine since my FIRE date is this Fall--We're pretty good with it and I doubt anyone will have any major objections.

I'm 36, wife is 34; 2 kids 6 and 3.

Projected income FIRE (wife will still do part-time free-lancing ~20 hours per week; about 3-4 hours in the afternoons/evenings)


$59500K inflation adjusted pension (40K tax free; $19.5K federally taxable, but not taxable in state)
$6800/year rental income
$40K-wife free lance
$1500/year dividends and interest
---------------
~$107800/year

Assets--

House-$150K (will renovate for about $40K) otherwise mortgage free
Retirement accounts-- (Roth/Traditional/401K/529s--~$450K)
Rental/land equity--150K
Savings $15K

No other significant liabilities.

Projected expenses in FIRE--about $35K/year.  We have a few big advantages.  Since we will fall under $46K AGI/year, we should be eligible for the EITC (about $5600) which will probably wipe out any taxes we would have owed and result in a decent refund.  My wife maxes her solo 401k which reduces the overall taxable amount of her income to $15K so for awhile we'll continue to make the max contribution ($18K + employer contribution + $11000 for her individual and spousal contribution for me).  Based on year to year AGI, we'll continue to slowly convert the solo 401k  contributions to traditional IRA and then to Roth IRA.  We'll also do the same with the existing traditional IRA contributions.  Kids tuition will be mostly, if not all covered by Chapter 35 VA benefits, Michigan tuition for veterans, 529s etc.  Our house is exempt from property taxes.  SWR is not really an issue, since we don't intend to touch our investments for a very long time.  I'll set up a HELOC for any emergencies.  Both kids will go to private school, but it's only $2300/year (my Mom teaches at the local school and strongly recommended against it).  What else....water comes from a well, most heat from a wood stove, electric is pretty reasonable and we're installing those hardwired electric heaters that have really low output and don't use much electricity.  We use Ooma, Republic, basic internet etc.    We can use the Coast Guard station gym in town for free (retired military).  Health care is covered via Tricare.  Parents are two doors down and sister, her husband and 4 kids are three doors down seasonally.  Countless other family members nearby.  We're on Lake Superior so while it does get very cold, summers are incredible and there are endless outdoor things to do in all seasons.  Just over six months until we can leave DC forever!