Newb Question

[gtsirose]

Hello Mustachians,

I have a beginner question for everyone.
To preface, I've done the hard part of crunching numbers to see how much money I'll need to fit my lifestyle post retirement.

However, I am really confused on the type of account I should create to invest my money in. (Brokerage, IRA etc.)

With most retirement accounts, it sounds like I can't touch anything until I'm in my 60s.
If I invest and hit my retirement number, and live off the 4%, how am I supposed to get money month to month? Am I just missing something?

In summary:

1) What type of account do I invest in?
2) After hitting my target number (IE 1,000,000) how do I get the annual 4%? I thought I couldn't touch any money in my account until my 60s?

Thanks all - I'm a newb and am trying to learn.

[Laura33]

First, almost everyone should invest in a tax-deferred retirement plan, such as your 401(k) and/or a traditional IRA.  These plans allow you to save more now and have more money invested sooner to grow tax-deferred.

Second, there are ways to access your money from those accounts -- you can look through the site for ways to do that, or Bogleheads tends to have very good writeups.  My plan is to use the Roth pipeline -- basically, you convert some of your money every year to a Roth IRA, and after five years you can access that money with no problems, so you really need only @5 years of expenses in accessible funds.  But there are other ways as well, depending on the type of account.

But you don't actually need to know everything about those options now -- just know that they're there, and throw as much as you can into those tax-deferred accounts while you are learning the details.

[gtsirose]

^

First, almost everyone should invest in a tax-deferred retirement plan, such as your 401(k) and/or a traditional IRA.  These plans allow you to save more now and have more money invested sooner to grow tax-deferred.

Second, there are ways to access your money from those accounts -- you can look through the site for ways to do that, or Bogleheads tends to have very good writeups.  My plan is to use the Roth pipeline -- basically, you convert some of your money every year to a Roth IRA, and after five years you can access that money with no problems, so you really need only @5 years of expenses in accessible funds.  But there are other ways as well, depending on the type of account.

But you don't actually need to know everything about those options now -- just know that they're there, and throw as much as you can into those tax-deferred accounts while you are learning the details.

^ So helpful.

Thank you!

I didn't know that saving 5 years worth of expenses is a part of the early retirement process.

So in short: 
1) dump as much as we can into our 401k accounts.
(we're currently putting in 18% of our annual income)

2) Save for 5 years worth of expenses.

3) As we approach our target retirement number, start looking into ways to access our retirement funds to get our annual 4%.

Another question - right now, both of our company 401k accounts are "target date based". Does that matter? Or should I start another IRA account through Vanguards Market Index Fund account?

Thanks!

[letired]

Target date funds are usually fine, but it depends on what the expense ratio of the target date fund is compared to other available funds in your 401k. If you post the fund names + expense ratios, folks can chime in. I look for anything with an expense ratio under 1%, and preferably under 0.5%. Most index funds should be less. As an example, my current 401k plan offers target dates funds with an expense ratio of 0.75% and a s&p500 index with an expense ratio of 0.035% and an international index fund with an expense ratio of .06%. Since I don't mind keeping an eye on my asset allocation, I picked the index funds since it has a lower expense ratio.

Personally, I wouldn't worry too much about an IRA unless you are already maxing out your 401k contributions, but it you don't have good investment options in your 401k, it can be an alternate way to minimize investment costs.

Depending on how long it will take you to save up the 5 years of expenses, it's ok to not worry about that part too much now.

[gtsirose]

Thank you all!!