Author Topic: Early retirement - Now until 59 1/2?  (Read 1074 times)

JamOn

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Early retirement - Now until 59 1/2?
« on: December 29, 2017, 10:37:30 AM »
I want to check my logic and see if this makes sense for early retirement planning....

I'm currently 29 and looking at planning an early retirement sometime in the not to distant future (hopefully). My 401K should be about $2M (today's dollars) @ 59.5 if I made no more contributions and assume 7% returns. If I'm comfortable living on that lump some once I hit 59.5 then does my early retirement plan only really need to account for the time until I am able to start making withdrawals on my 401k? If so the math suggests I would only need to invest 400k (@7% returns) to withdraw $30K per year until I'm 60.

FIRE 20/20

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Re: Early retirement - Now until 59 1/2?
« Reply #1 on: December 29, 2017, 01:24:03 PM »
I think you're making this more complicated (and less accurate) than it needs to be.  A good rough estimate is that you need 25x your planned spending:  https://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/
https://www.madfientist.com/safe-withdrawal-rate/

If you're asking about how to access funds before you're 59 1/2, read these:
https://www.madfientist.com/how-to-access-retirement-funds-early/
http://rootofgood.com/roth-ira-conversion-ladder-early-retirement/

The reason I think your approach is less accurate is that there isn't any good way to figure out how much you need to get to 59 1/2.  You said you're 29 so you have 30 years in front of you.  You need about 25x your annual expenses to be extremely confident that your money will last that long.  However, there is a very high likelihood that you'll end up with far, far more than you need (double or more your starting amount) rather than running out.  That's part of the reason that 4% not only works for a 30 year time horizon but it also is pretty close to what you need for forever.  There isn't all that much of a difference between 30 years and forever in terms of the amount you need to have saved.  If you save enough to get you to 30 years from retirement *and* you have the full amount you need being added to that (your 401(k)) then you will basically have saved double and worked a lot longer than necessary to do so.

Just get to 25x your annual expenses in your 'stache and make sure 5 years of that money is accessible to get you to the bottom rung of the Roth ladder.  Once you start to get close - say 15-20x annual expenses - you probably should start to run through scenarios at CFireSim or FIRECalc.  Then you can add in things like pensions or social security, additional medical expenses late in life, long term care expenses, consulting or side-gig income, etc. to get a more customized estimate than just the straight 25x. 


FIRE 20/20

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Re: Early retirement - Now until 59 1/2?
« Reply #2 on: December 29, 2017, 01:25:29 PM »
One other thing -

Assuming 7% returns is extremely dangerous.  Look into the sequence of returns risk to see why.  That's another reason why your approach is both more complex and less accurate than the work that's already been done. 

NaturallyHappier

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Re: Early retirement - Now until 59 1/2?
« Reply #3 on: December 29, 2017, 06:35:33 PM »
I agree the 7% rate is way too high.  You don't seem to be considering that your costs will grow as well.  The average long term inflation rate is 3.2%.  Long term historical returns for a 60/40 portfolio is 8.7%.

https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations

Also consider there is a drag due to sequence of returns as mentioned by others.

8.7 % - 3.2 % = 4.5%

I use 4% to inflate dollars into the future.

What you may want to do is start saving some after tax money now and let that grow.  You can do roth laddering to convert some money from pretax to aftertax but you'll likely need at least 5 years of aftertax money to get your through until the roth conversions can be accessed.