Author Topic: How do you retire early with only 401k?  (Read 11064 times)

Raislin

  • 5 O'Clock Shadow
  • *
  • Posts: 31
How do you retire early with only 401k?
« on: April 09, 2015, 05:16:24 PM »
I see a lot of recommendations about maxing out 401k, but what if that takes your entire savings ability to do?  Do you max it out until you hit a certain amount and then stop to invest in something that you can access before traditional retirement age?

I just interviewed for a newer and slightly higher paying job that doesn't have a 401k option, and I'm feeling particularly confident about the job, so 401k goes out the window for me for the time being.  But even so, I won't be considered a high income earner, and my current savings rate with the new job would, at most, allow me to max a 401k and a roth.  Maybe.  So how would I hope to retire early if I couldn't access that money until traditional retirement age?

This is all hypothetical.  I expect to be in an entirely different situation five years from now.

Valhalla

  • Bristles
  • ***
  • Posts: 443
  • Location: Initech employee
Re: How do you retire early with only 401k?
« Reply #1 on: April 09, 2015, 05:34:09 PM »
I don't believe it's possible to retire early, or even on time, with just a 401k, if you want a comfortable lifestyle that isn't a miserly lifestyle.

You can only contribute $15k - $18k (over the course of last few years) into a 401k pre-tax.  So unless you're doing after-tax funding (which I have done in the past), your 401k can only grow so much given the limited contribution.

You really need Roth IRA's, IRA's, and other investment vehicles to boost that nest egg.

If all you have is a 401k, you're probably better off than most people.  But if you have a 401k, IRA, Roth IRA, post-tax investments, you'd be in far better shape.

The problem is most people don't even contribute to the 401k.  Their greatest asset is that shiny new depreciating cars sitting on the driveway, and maybe the house that they're paying on.

To retire early, means you need investments to draw on. You can't draw on a 401k until retirement age, so RE is out of the question with just a 401k.

caliq

  • Pencil Stache
  • ****
  • Posts: 675
Re: How do you retire early with only 401k?
« Reply #2 on: April 09, 2015, 05:40:08 PM »
Valhalla is incorrect -- the max contribution to a 401k in 2015 is $18k.  The catch-up contribution for older people is on top of that, as is employer contributions.

You can access a 401k prior to normal retirement age (65?) through conversions to a Roth IRA.  Look up 'Roth conversion ladder.'

Valhalla

  • Bristles
  • ***
  • Posts: 443
  • Location: Initech employee
Re: How do you retire early with only 401k?
« Reply #3 on: April 09, 2015, 05:44:13 PM »
Valhalla is incorrect -- the max contribution to a 401k in 2015 is $18k.  The catch-up contribution for older people is on top of that, as is employer contributions.

You can access a 401k prior to normal retirement age (65?) through conversions to a Roth IRA.  Look up 'Roth conversion ladder.'
If you do convert you'll have to pay taxes on that though, but not penalties, correct?

I was studying funding traditional IRA's and then converting them to Roth but (un)fortunately my income has not become high enough to be disqualified for the Roth IRA.

I still don't see it as a good idea though to convert 401k to Roth IRA even if you avoid penalties.  You'd be giving up the time value of the growth, and possibly drain the 401k down before you even hit the legal retirement age.  At which point one would have to go back to work...

So kindly explain how one can retire early on just a 401k... I just can't see it.

PS - when I said $15k - $18k I was referring to putting money into a 401k over the last decade, not just in 2014 / 2015.  Looking forward that will no doubt go up over time but it's going to be limited by law, so you can still only put so much into a 401k pre-tax, which will limit the ultimate value of the 401k if one follows the strategy of index investing.
« Last Edit: April 09, 2015, 05:47:14 PM by Valhalla »

Frankies Girl

  • Magnum Stache
  • ******
  • Posts: 2994
  • Age: 81
  • Location: The laboratory
  • Typical Ghoul Next Door
Re: How do you retire early with only 401k?
« Reply #4 on: April 09, 2015, 05:48:33 PM »
You would need more than a 401k to retire early I would think, but a 401k is a great way to save tax deferred and reduce your taxable income at the same time. It's unfortunate that you don't have access to one, but you can still take advantage of other avenues and be able to retire early if you're determined.


http://forum.mrmoneymustache.com/forum-information-faqs/question-about-retiring-early-with-a-401k/

You can access retirement accounts before traditional retirement age without penalties. Look up Roth pipeline and/or SEPP (72t).

And if you earn under 50k, then it's all the more important to get started investing early - investment growth and compound interest are both maximized over time, and as long as you're living below your means and save/invest aggressively, you should still be able to have a shot at early retirement. Of course it's easier to LBYM and have a 50% or more saving rate with big salaries, but still very possible to have a good savings rate even if you're making much less than 6 figures. You have to be very vigilant about not succumbing to lifestyle inflation - the majority of every raise should be going into funding your financial independence.

« Last Edit: April 09, 2015, 05:51:14 PM by Frankies Girl »

neil

  • Stubble
  • **
  • Posts: 215
Re: How do you retire early with only 401k?
« Reply #5 on: April 09, 2015, 05:50:15 PM »
You can not officially FIRE (assuming no incoming cash flow) if you have no withdrawal plan on your investments.  This part doesn't get much discussion, but it is absolutely required.  You can make all different kinds of scenarios work, but it is no different than choosing an AA that makes you the most comfortable.

On paper, someone taking home 30K/year that can max out their 401K can easily retire by 35.  If returns are typical, this should create a $400K nest egg.  You may even have some way of making some kind of 72(t) work for you so that you don't need a 5 year buffer (a calculator spat out $14K/year) but from my perspective, this approach has no backup plan for emergency expenses.  The only real choice is to take out the 401K and add 10% penalty.  Dividend tax is also very favorable for this person even while he is working (though it might affect ACA subsidies if needed).  I would rather accept some increased tax bill and have some amount in a taxable account.  Maybe aim for $100K or something.  But then you might only have $350K total and may need a couple more years.  You may consider those years more important than the risks.

I think if you are willing to test the bleeding edge of FIRE capability, you might have to entertain the idea of engaging in temporary side gigs on occasion to keep your account in a safe range.  This doesn't necessarily violate the idea that you achieved FIRE, because you can scope out any kind of work you would be willing to do (and enjoy) and do it for as long as you feel like doing it.

Raislin

  • 5 O'Clock Shadow
  • *
  • Posts: 31
Re: How do you retire early with only 401k?
« Reply #6 on: April 09, 2015, 05:55:52 PM »
And if you earn under 50k, then it's all the more important to get started investing early - investment growth and compound interest are both maximized over time, and as long as you're living below your means and save/invest aggressively, you should still be able to have a shot at early retirement.

My wife and I will have a combined income of about 60k if I get the new job.  We also won't have access to 401k with our current job, so this question was mostly hypothetical.  Our current living situation has us living somewhat comfortably with a savings rate over 50%, so I'm still very hopeful about FIRE.

I think if you are willing to test the bleeding edge of FIRE capability, you might have to entertain the idea of engaging in temporary side gigs on occasion to keep your account in a safe range.  This doesn't necessarily violate the idea that you achieved FIRE, because you can scope out any kind of work you would be willing to do (and enjoy) and do it for as long as you feel like doing it.

I can't say I understood everything you talked about [72(t), ACA subsidies, "10% penalty"] but I'm fairly new to all of this and realize I have a lot to learn.  That being said, the overall point of your post seems encouraging to me.

Regarding the quoted bit, our actual goal may or may not be FIRE, but early semi-retirement.  I very much enjoy working, and having a part time job appears to allow semi-retirement much earlier than full retirement.  We don't want to wait terribly long to have kids, but would like to maximize the time we'll be able to spend with them.  Working only while they're in school, once they're that age, seems viable.  Then we can consider full on FIRE after they're older.

Regardless of what we settle on, we're currently getting rid of debts aggressively and will be changing to aggressive saving by this time next year at the latest.  Depends on if we decide to pay off the school loans aggressively or over time -- I'm leaning toward doing it asap.
« Last Edit: April 09, 2015, 06:05:44 PM by Raislin »

kpd905

  • Handlebar Stache
  • *****
  • Posts: 1732
Re: How do you retire early with only 401k?
« Reply #7 on: April 09, 2015, 06:06:44 PM »
I don't believe it's possible to retire early, or even on time, with just a 401k, if you want a comfortable lifestyle that isn't a miserly lifestyle.

Definitely possible with a couple maxing out two 401k's.

robbyho

  • 5 O'Clock Shadow
  • *
  • Posts: 71
Re: How do you retire early with only 401k?
« Reply #8 on: April 09, 2015, 06:09:35 PM »
everything you need to know about how to access your 401k early penalty free:


http://www.madfientist.com/retire-even-earlier/

Valhalla

  • Bristles
  • ***
  • Posts: 443
  • Location: Initech employee
Re: How do you retire early with only 401k?
« Reply #9 on: April 09, 2015, 06:11:09 PM »
I don't believe it's possible to retire early, or even on time, with just a 401k, if you want a comfortable lifestyle that isn't a miserly lifestyle.

Definitely possible with a couple maxing out two 401k's.
retire how early? Some calculations and numbers?

Valhalla

  • Bristles
  • ***
  • Posts: 443
  • Location: Initech employee
Re: How do you retire early with only 401k?
« Reply #10 on: April 09, 2015, 06:14:55 PM »
everything you need to know about how to access your 401k early penalty free:


http://www.madfientist.com/retire-even-earlier/
Interesting article.  One thing that was not mentioned there is how the money is invested.

By withdrawing much earlier, it can't be aggressively allocated as usual, so I assume the returns would be lower because you'd have to have a less aggressive portfolio.  Does that have any impact on total return vs keeping the money aggressively invested over a longer period of time?

kpd905

  • Handlebar Stache
  • *****
  • Posts: 1732
Re: How do you retire early with only 401k?
« Reply #11 on: April 09, 2015, 06:18:39 PM »
I don't believe it's possible to retire early, or even on time, with just a 401k, if you want a comfortable lifestyle that isn't a miserly lifestyle.

Definitely possible with a couple maxing out two 401k's.
retire how early? Some calculations and numbers?

Starting at zero, putting in $3000 a month (this assumes zero match on both), with 5% real return, you have $1.2 million after 20 years.

I used this calculator: http://www.investor.gov/tools/calculators/compound-interest-calculator

If you assume you get a bit of a match ($3300 a month) and you get a 7% real return, you'll have a million dollars in under 15 years.
« Last Edit: April 09, 2015, 06:21:20 PM by kpd905 »

Valhalla

  • Bristles
  • ***
  • Posts: 443
  • Location: Initech employee
Re: How do you retire early with only 401k?
« Reply #12 on: April 09, 2015, 06:31:03 PM »

Starting at zero, putting in $3000 a month (this assumes zero match on both), with 5% real return, you have $1.2 million after 20 years.

I used this calculator: http://www.investor.gov/tools/calculators/compound-interest-calculator

If you assume you get a bit of a match ($3300 a month) and you get a 7% real return, you'll have a million dollars in under 15 years.
I see... this assumes that the wife (or husband) does not take a break for children, which is pretty unlikely.

I was the main breadwinner and only contributor to our 401k for many years, while my SAHW took care of home duties.  I guess it's possible if you have family close by who are willing to take care of the kid(s), or have super cheap day care, or don't have kids period.  For most folks life gets in the way and this scenario usually does not pan out though.

And even if you could, I wouldn't want this scenario where you're giving up the most precious years of your kids' lives to continue to work full time and contribute to a 401k.  I'd much rather have at least one parent stay home most of the time with the precious little ones until they are old enough to go to school full time.

Tax laws need to be changed so one parent who is working full time can contribute on behalf of the SAHSpouse's 401k as well.  I was fortunate to amass a nice net worth in spite of the tax laws working against this.
« Last Edit: April 09, 2015, 06:34:21 PM by Valhalla »

kpd905

  • Handlebar Stache
  • *****
  • Posts: 1732
Re: How do you retire early with only 401k?
« Reply #13 on: April 09, 2015, 06:47:20 PM »
I'm only talking about the math.  Every case is going to be unique, but it is definitely possible.

If it takes 15 years of two people maxing out 401ks, a couple can start working at 22, the wife stays home with kids for 6 years and earns zero income, they can still retire at 43.  Otherwise by 50 is definitely possible.

Pigeon

  • Handlebar Stache
  • *****
  • Posts: 1197
Re: How do you retire early with only 401k?
« Reply #14 on: April 09, 2015, 06:48:55 PM »
Plenty of families have kids without one of the parents dropping out of the workforce.

Valhalla

  • Bristles
  • ***
  • Posts: 443
  • Location: Initech employee
Re: How do you retire early with only 401k?
« Reply #15 on: April 09, 2015, 06:50:31 PM »
Plenty of families have kids without one of the parents dropping out of the workforce.
Sure it's possible, but imho hardly ideal if you can avoid that. I think MMM did FIRE so he could spend more time with family while they grow up.

I'd rather retire later and spend time with the kiddo's than miss the critical younger years and retire early when the kiddos are off to college.

Valhalla

  • Bristles
  • ***
  • Posts: 443
  • Location: Initech employee
Re: How do you retire early with only 401k?
« Reply #16 on: April 09, 2015, 06:53:48 PM »
I'm only talking about the math.  Every case is going to be unique, but it is definitely possible.

If it takes 15 years of two people maxing out 401ks, a couple can start working at 22, the wife stays home with kids for 6 years and earns zero income, they can still retire at 43.  Otherwise by 50 is definitely possible.
yes that would be ideal.  For this to happen a couple would have to meet in college, marry during or after graduation, and start working full time right away, have kids, and retire at 43 - 50. Pretty rare these days.  Everything would have to fall into place perfectly, good degrees, good jobs, etc.

kpd905

  • Handlebar Stache
  • *****
  • Posts: 1732
Re: How do you retire early with only 401k?
« Reply #17 on: April 09, 2015, 06:57:41 PM »
You asked for calculations, I provided them.  It is possible to retire early using dual 401k's.

This is MMM and you are trying to convince me that every star needs to align for a couple to retire at 50?

robbyho

  • 5 O'Clock Shadow
  • *
  • Posts: 71
Re: How do you retire early with only 401k?
« Reply #18 on: April 09, 2015, 06:58:25 PM »
I'm only talking about the math.  Every case is going to be unique, but it is definitely possible.

If it takes 15 years of two people maxing out 401ks, a couple can start working at 22, the wife stays home with kids for 6 years and earns zero income, they can still retire at 43.  Otherwise by 50 is definitely possible.
yes that would be ideal.  For this to happen a couple would have to meet in college, marry during or after graduation, and start working full time right away, have kids, and retire at 43 - 50. Pretty rare these days.  Everything would have to fall into place perfectly, good degrees, good jobs, etc.

15 years? a million dollars? what website am I on?

How bout 7 or 8 years? That's what I'm interested in!

kpd905

  • Handlebar Stache
  • *****
  • Posts: 1732
Re: How do you retire early with only 401k?
« Reply #19 on: April 09, 2015, 07:02:34 PM »

15 years? a million dollars? what website am I on?

How bout 7 or 8 years? That's what I'm interested in!

Save 75% of your income, you're done in 7 years.  Not sure what you mean by pointing out the million dollar thing.  Do you think that is high?

Valhalla

  • Bristles
  • ***
  • Posts: 443
  • Location: Initech employee
Re: How do you retire early with only 401k?
« Reply #20 on: April 09, 2015, 07:03:34 PM »

15 years? a million dollars? what website am I on?

How bout 7 or 8 years? That's what I'm interested in!
I'd love to see how a couple could make a million net worth in 7 or 8 years of working, while having kids, etc.  MMM has done it (was it 7 or 8 years?), let's see who else has done it.

If it's something consistently repeatable, it needs to be shared.  Unfortunately I married a partner who does not have the earning power I have, which has been a drag on our journey.  But that's ok, you can't judge on money alone for that.

Valhalla

  • Bristles
  • ***
  • Posts: 443
  • Location: Initech employee
Re: How do you retire early with only 401k?
« Reply #21 on: April 09, 2015, 07:06:08 PM »
You asked for calculations, I provided them.  It is possible to retire early using dual 401k's.

This is MMM and you are trying to convince me that every star needs to align for a couple to retire at 50?
Not necessarily, but there are certain requirements for this to happen.

For me personally I could retire now in my early 40's, but my case is abnormal because I have been an unusually high saver and earner. I think the average family making far less than I do would have a harder time shooting for this.

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: How do you retire early with only 401k?
« Reply #22 on: April 09, 2015, 07:17:06 PM »
everything you need to know about how to access your 401k early penalty free:


http://www.madfientist.com/retire-even-earlier/
Interesting article.  One thing that was not mentioned there is how the money is invested.

By withdrawing much earlier, it can't be aggressively allocated as usual, so I assume the returns would be lower because you'd have to have a less aggressive portfolio.  Does that have any impact on total return vs keeping the money aggressively invested over a longer period of time?

Ummm, what?  Why would the investment bucket have any bearing on the asset allocation?  Hint -- it doesn't.  The returns should be the same as any other portfolio with the same chosen asset allocation.

Valhalla

  • Bristles
  • ***
  • Posts: 443
  • Location: Initech employee
Re: How do you retire early with only 401k?
« Reply #23 on: April 09, 2015, 07:20:22 PM »


Ummm, what?  Why would the investment bucket have any bearing on the asset allocation?  Hint -- it doesn't.  The returns should be the same as any other portfolio with the same chosen asset allocation.
I don't think I made myself clear.

If your time horizon is 5 years for cash withdraw, your asset allocation will be less aggressive than a longer time horizon.  So in one scenario, you retire earlier thanks to tax savings...but no mention of the more conservative asset allocation and thus lower potential return, compared to a longer retirement horizon with a more aggressive asset allocation.

So the example given doesn't seem to address this particular issue, and what impact it has ultimately on the financial results of both options.

Frankies Girl

  • Magnum Stache
  • ******
  • Posts: 2994
  • Age: 81
  • Location: The laboratory
  • Typical Ghoul Next Door
Re: How do you retire early with only 401k?
« Reply #24 on: April 09, 2015, 08:26:14 PM »


Ummm, what?  Why would the investment bucket have any bearing on the asset allocation?  Hint -- it doesn't.  The returns should be the same as any other portfolio with the same chosen asset allocation.
I don't think I made myself clear.

If your time horizon is 5 years for cash withdraw, your asset allocation will be less aggressive than a longer time horizon.  So in one scenario, you retire earlier thanks to tax savings...but no mention of the more conservative asset allocation and thus lower potential return, compared to a longer retirement horizon with a more aggressive asset allocation.

So the example given doesn't seem to address this particular issue, and what impact it has ultimately on the financial results of both options.

I may be misunderstanding you, but I don't think you'd necessarily need a conservative AA just because you're an early retiree. On the contrary, I'd say you want to stay reasonably aggressive to make up for you needing your portfolio last over a longer period than traditional retirement. You would not be withdrawing the entire amount of your portfolio within a 5 year time period, just what is need for yearly expenses for each of those years, so growth would still be reasonably important.



 

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: How do you retire early with only 401k?
« Reply #25 on: April 09, 2015, 08:27:16 PM »


Ummm, what?  Why would the investment bucket have any bearing on the asset allocation?  Hint -- it doesn't.  The returns should be the same as any other portfolio with the same chosen asset allocation.
I don't think I made myself clear.

If your time horizon is 5 years for cash withdraw, your asset allocation will be less aggressive than a longer time horizon.  So in one scenario, you retire earlier thanks to tax savings...but no mention of the more conservative asset allocation and thus lower potential return, compared to a longer retirement horizon with a more aggressive asset allocation.

So the example given doesn't seem to address this particular issue, and what impact it has ultimately on the financial results of both options.

Okay, that's more clear, but I don't think you're thinking about it correctly.  Consider that your asset allocation (AA) is comprised of all your investments.  So if your current investments consisted of 80/20 stock/bond split, you're going to want to keep that ratio across all accounts.  It doesn't matter where you hold the bonds or stocks, as long as you maintain your AA.  If you wanted to be conservative and hold all bonds in your Roth IRA conversion in order to spend that money in 5 years, you would still hold the same AA throughout all your accounts.  In other words, you wouldn't be invested more conservatively overall, just that the Roth conversion amount would hold the conservative portion of your portfolio. 

Your actual investment time horizon is still 40-50 years, even if you're going to start spending some of that money now (or in 5 years or whatever).


Valhalla

  • Bristles
  • ***
  • Posts: 443
  • Location: Initech employee
Re: How do you retire early with only 401k?
« Reply #26 on: April 10, 2015, 01:05:10 AM »

I may be misunderstanding you, but I don't think you'd necessarily need a conservative AA just because you're an early retiree. On the contrary, I'd say you want to stay reasonably aggressive to make up for you needing your portfolio last over a longer period than traditional retirement. You would not be withdrawing the entire amount of your portfolio within a 5 year time period, just what is need for yearly expenses for each of those years, so growth would still be reasonably important.
I don't think I'm quite following this... MMM has made good income after FIRE so he is able to invest even more aggressively.  But for someone who just wants to retire and not work, it is quite risky to be that aggressive after FIRE.  The fluctuations in the account balances may induce some sleepless nights because of lack of additional income to stabilize any short falls.

So even though you may need the money to last a long time, doesn't mean you can try to time it by being aggressive as usual. You would want a more conservative portfolio for emergencies, and so you can sleep at night knowing that a significant portion of your nest egg is not going to vaporize overnight at any given time.

This is no different than a retiree at a normal age, they can't afford to be very aggressive with their nest egg because they want a stable portfolio as they begin to use some of it.

Valhalla

  • Bristles
  • ***
  • Posts: 443
  • Location: Initech employee
Re: How do you retire early with only 401k?
« Reply #27 on: April 10, 2015, 01:07:40 AM »


Okay, that's more clear, but I don't think you're thinking about it correctly.  Consider that your asset allocation (AA) is comprised of all your investments.  So if your current investments consisted of 80/20 stock/bond split, you're going to want to keep that ratio across all accounts.  It doesn't matter where you hold the bonds or stocks, as long as you maintain your AA.  If you wanted to be conservative and hold all bonds in your Roth IRA conversion in order to spend that money in 5 years, you would still hold the same AA throughout all your accounts.  In other words, you wouldn't be invested more conservatively overall, just that the Roth conversion amount would hold the conservative portion of your portfolio. 

Your actual investment time horizon is still 40-50 years, even if you're going to start spending some of that money now (or in 5 years or whatever).
I think for someone who is going to be using some of the funds (depending on withdrawal rate, ability to stomach fluctuations on your now sole source of income), the allocation will have to be more conservative.  One won't be able to predict if a down-swing will last a couple of years, or 10 years, so it needs to be necessarily more conservative for peace of mind and stability.

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: How do you retire early with only 401k?
« Reply #28 on: April 10, 2015, 01:50:45 AM »


Okay, that's more clear, but I don't think you're thinking about it correctly.  Consider that your asset allocation (AA) is comprised of all your investments.  So if your current investments consisted of 80/20 stock/bond split, you're going to want to keep that ratio across all accounts.  It doesn't matter where you hold the bonds or stocks, as long as you maintain your AA.  If you wanted to be conservative and hold all bonds in your Roth IRA conversion in order to spend that money in 5 years, you would still hold the same AA throughout all your accounts.  In other words, you wouldn't be invested more conservatively overall, just that the Roth conversion amount would hold the conservative portion of your portfolio. 

Your actual investment time horizon is still 40-50 years, even if you're going to start spending some of that money now (or in 5 years or whatever).
I think for someone who is going to be using some of the funds (depending on withdrawal rate, ability to stomach fluctuations on your now sole source of income), the allocation will have to be more conservative.  One won't be able to predict if a down-swing will last a couple of years, or 10 years, so it needs to be necessarily more conservative for peace of mind and stability.

Your hypothetical "someone" should do some more research then.  Unless by peace of mind and stability you actually mean setting yourself up to have a greater chance of running out of money.  With any scenario you run on cFIREsim, the larger the stock allocation, the greater the success rate.  There's pretty much no one that would recommend getting conservative with your asset allocation on a portfolio that needs to last and grow for 50 years or more.

Also, please stop conflating risk and volatility.  It's not risky to be heavy in stocks.  It's risky to not be considering the time frames involved.  Your money needs to grow to last.  A downturn is not risk.  That's volatility.  That can be offset by temporary safety margins.

If volatility really bothers you, then the choice is yours to work many extra years so that you can support a 40 year retirement on a 40/60 stock/bond AA.  (or whatever conservative AA you're comfortable with)  But don't assume anyone else, let alone everyone else, would make the same choice.

Frankies Girl

  • Magnum Stache
  • ******
  • Posts: 2994
  • Age: 81
  • Location: The laboratory
  • Typical Ghoul Next Door
Re: How do you retire early with only 401k?
« Reply #29 on: April 10, 2015, 02:37:37 AM »

I may be misunderstanding you, but I don't think you'd necessarily need a conservative AA just because you're an early retiree. On the contrary, I'd say you want to stay reasonably aggressive to make up for you needing your portfolio last over a longer period than traditional retirement. You would not be withdrawing the entire amount of your portfolio within a 5 year time period, just what is need for yearly expenses for each of those years, so growth would still be reasonably important.
I don't think I'm quite following this... MMM has made good income after FIRE so he is able to invest even more aggressively.  But for someone who just wants to retire and not work, it is quite risky to be that aggressive after FIRE.  The fluctuations in the account balances may induce some sleepless nights because of lack of additional income to stabilize any short falls.

So even though you may need the money to last a long time, doesn't mean you can try to time it by being aggressive as usual. You would want a more conservative portfolio for emergencies, and so you can sleep at night knowing that a significant portion of your nest egg is not going to vaporize overnight at any given time.

This is no different than a retiree at a normal age, they can't afford to be very aggressive with their nest egg because they want a stable portfolio as they begin to use some of it.

(Eric said it better than I did, but I already typed all this out, so I'm gonna post the following anyway).

I actually am someone that is retired and doesn't want to work ever again, so I've done lots and lots of research on AAs and investing and the like. ;)

I don't believe in going ultra-conservative with your AA, especially for an early retirement. I currently hold an AA in my portfolio of 75% stock index, 10% REIT index, 10% bond index and 5% cash. I'm retired as of this year and I'll be expecting my portfolio to last well over 45 years. According to all of the simulators and calcs I've run, I've got a 95%-100% success rate of my portfolio lasting well over 45 years. If I change that to be more conservative, my success rate drops sharply.

http://jlcollinsnh.com/2014/05/27/stocks-part-xxii-stepping-away-from-reits/
My personal investing hero, Jim Collins, has his AA set up as 75% stocks/25% bonds, and he's been retired for many years and is in his late 50s/early 60s and so far hasn't changed his allocation to be more conservative.

http://www.gocurrycracker.com/path-100-equities/
Go Curry Cracker seems to agree as well. Another guy that I'd listen VERY carefully to as he knows what he's talking about.

Root of Good also commented in that same article agreeing with the premise. And I'm betting that MMM's portfolio is more aggressive than conservative, but I can't find any specifics to support that claim at the moment.

Risk is not the same as volatility. Early retirees should be able to weather the short term static for the long term rewards.




Raislin

  • 5 O'Clock Shadow
  • *
  • Posts: 31
Re: How do you retire early with only 401k?
« Reply #30 on: April 10, 2015, 10:07:59 AM »
I'm seeing a million dollars thrown around as something that sounds typical. Is it really necessary to have that much or something anywhere near it? We currently live comfortably on less than 25k in expenses. And that will drop sharply as we eliminate debts and gain more experience with our food budget and saving electricity.

It seems to me they even if my expenses were to rise to 30k per year that a million would be overkill.

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: How do you retire early with only 401k?
« Reply #31 on: April 10, 2015, 10:20:58 AM »
I'm seeing a million dollars thrown around as something that sounds typical. Is it really necessary to have that much or something anywhere near it? We currently live comfortably on less than 25k in expenses. And that will drop sharply as we eliminate debts and gain more experience with our food budget and saving electricity.

It seems to me they even if my expenses were to rise to 30k per year that a million would be overkill.

It's all based on your own expenses.  There's no one correct amount.  The general guideline to start with is 25 times your annual expenses.  And then you can make adjustments from there based on your own risk tolerance.  Don't forget to add in things like health insurance or other benefits that may be covered by your employer, or a larger travel budget if that's something you'll be doing more of.  Here are a couple of good articles.

http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/
http://jlcollinsnh.com/2012/12/07/stocks-part-xiii-withdrawal-rates-how-much-can-i-spend-anyway/

robbyho

  • 5 O'Clock Shadow
  • *
  • Posts: 71
Re: How do you retire early with only 401k?
« Reply #32 on: April 10, 2015, 10:28:01 AM »
I'm seeing a million dollars thrown around as something that sounds typical. Is it really necessary to have that much or something anywhere near it? We currently live comfortably on less than 25k in expenses. And that will drop sharply as we eliminate debts and gain more experience with our food budget and saving electricity.

It seems to me they even if my expenses were to rise to 30k per year that a million would be overkill.

That's exactly what I'm saying! who needs $40k+ a year to live off of?

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: How do you retire early with only 401k?
« Reply #33 on: April 10, 2015, 10:31:29 AM »
I'm seeing a million dollars thrown around as something that sounds typical. Is it really necessary to have that much or something anywhere near it? We currently live comfortably on less than 25k in expenses. And that will drop sharply as we eliminate debts and gain more experience with our food budget and saving electricity.

It seems to me they even if my expenses were to rise to 30k per year that a million would be overkill.

That's exactly what I'm saying! who needs $40k+ a year to live off of?

*raises hand*

But my non-housing expenses are about $25k/yr, so I don't feel that's all that much.  (Edit -- that's for 2 of us)
« Last Edit: April 10, 2015, 01:34:53 PM by Eric »

sirdoug007

  • Pencil Stache
  • ****
  • Posts: 587
  • Age: 39
  • Location: Houston, TX
Re: How do you retire early with only 401k?
« Reply #34 on: April 10, 2015, 10:43:43 AM »

Starting at zero, putting in $3000 a month (this assumes zero match on both), with 5% real return, you have $1.2 million after 20 years.

I used this calculator: http://www.investor.gov/tools/calculators/compound-interest-calculator

If you assume you get a bit of a match ($3300 a month) and you get a 7% real return, you'll have a million dollars in under 15 years.
I see... this assumes that the wife (or husband) does not take a break for children, which is pretty unlikely.

I was the main breadwinner and only contributor to our 401k for many years, while my SAHW took care of home duties.  I guess it's possible if you have family close by who are willing to take care of the kid(s), or have super cheap day care, or don't have kids period.  For most folks life gets in the way and this scenario usually does not pan out though.

And even if you could, I wouldn't want this scenario where you're giving up the most precious years of your kids' lives to continue to work full time and contribute to a 401k.  I'd much rather have at least one parent stay home most of the time with the precious little ones until they are old enough to go to school full time.

Tax laws need to be changed so one parent who is working full time can contribute on behalf of the SAHSpouse's 401k as well.  I was fortunate to amass a nice net worth in spite of the tax laws working against this.

You keep using your own personal situation to "prove" this can't be done. 

Not everyone has kids.  Not everyone has a parent stay at home with the kids (some have family help, many use daycare).

A couple maximizing 401(k) contributions ($36,000/year right now) would have $1MM in about 16 years at 8% returns (which is about what we have had over the last 10 years).  If you start working right out of college at 22 you would be FIREd on a very large budget by 38!

Even if one spouse doesn't have a 401(k) you could start contributing to IRAs or taxable accounts. It's not the end of the world and doesn't mean you have to stop saving.

Personally I have 98% of my investable assets in my 401(k) (over $300k currently).  I am very fortunate and my employer puts in an average of 9% of my earnings every year.  I put in only 10% for a long time so I could be even further ahead if I had found MMM earlier.  It is basically inevitable at this point that I will FIRE with more than 75% of my assets in a 401(k). 

ash7962

  • Bristles
  • ***
  • Posts: 258
  • Age: 30
  • Location: Chicago
Re: How do you retire early with only 401k?
« Reply #35 on: April 10, 2015, 11:38:00 AM »
OP, I think it is possible to retire on only a 401k, and I think as others have stated using the Roth IRA conversion ladder strategy (the mad fientist post linked upthread explains it super well so I won't).  You do need to keep some of the following in mind:
  • You need a way to bridge the 5 year gap while waiting for the converted funds to be able to be withdrawn penalty free from the Roth.
  • If you can't wait 5 years then you just keep the money in an IRA and account for withdrawing and pay the 10% penalty.  You will have to factor the 10% penalty into your magic FIRE number
  • If your yearly expenses are high enough you may have to pay tax on the conversions/withdrawals so you need to take that into account when figuring out your magic FIRE number.

So an example, you're spending 25k/year.  You're sourcing the money from a 401k that you are converting into a Roth IRA.  For the moment, assume you have a non income way to bridge the 5 year gap and thus avoid the 10% penalty on withdrawing these funds from your Roth.  So, if we assume you're a single person and only using the standard deduction, you need 27077.78$ converted every year.  That way you will be taxed 10%: (27077.78-6300) * .10 = 2077.78 tax bill, which means after taking tax out of 27077.78 you'll be left with 25000$ a year.  Therefore, you roughly need 27077.78*25 = 676,944.5$ to retire. If you can't bridge the gap to avoid the 10% penalty on the Roth withdrawals then you need to apply similar logic and ensure you can cover the extra 10% while still bringing home 25k/year.  Hopefully someone checks my math on this :)

P.S. In order to get to the magic number I'd just contribute to the 401k until I reached it, then stop contributions and put after tax money in a taxable investment or even a bank account (125k$ to get through the 5 year conversion wait), then retire and live off the money in the bank/taxable account while converting 27,077.78$/year, and finally once the conversions are 5 years in I'd start living off the money in the roth account.
« Last Edit: April 10, 2015, 11:43:02 AM by ash7962 »

sirdoug007

  • Pencil Stache
  • ****
  • Posts: 587
  • Age: 39
  • Location: Houston, TX
Re: How do you retire early with only 401k?
« Reply #36 on: April 10, 2015, 12:38:27 PM »
That is basically correct ash.  The standard deduction and personal exemption for a single person in 2014 are a total of $10,150.  The amount from $10,150 to $19,225 would be taxed at 10% ($907.50 tax) and then the amount over $19,225 would be taxed at 15%.  To net $25k you would need to withdrawal $27,085 and pay $2,085 in federal tax.

This tool from turbotax makes these federal tax hypotheticals easy: https://turbotax.intuit.com/tax-tools/calculators/taxcaster/#

Note that $2,085 on $27,085 is an effective tax rate of 7.7%.  Paying so little in taxes during withdrawals vs. paying 25%+ in your working years is what makes the 401(k) so powerful!

Even if you paid a 10% penalty, the effective tax rate would be 17.7%.  Still a tax win if you make more than $50k!

Raislin

  • 5 O'Clock Shadow
  • *
  • Posts: 31
Re: How do you retire early with only 401k?
« Reply #37 on: April 13, 2015, 05:06:26 PM »
Thanks for all of the replies, everyone!  I got the new job I was hoping to get so I will no longer have access to a 401k.  Even so, that could very well change in the future and I feel a lot more comfortable knowing all of this.

JustGettingStarted1980

  • Bristles
  • ***
  • Posts: 377
Re: How do you retire early with only 401k?
« Reply #38 on: April 29, 2015, 12:09:06 PM »
Very nice thread, and I appreciate the well thought out replies as well as Valhalla's "but you can't do that" comments as well. Challenge everything, and perhaps some of us learned something here.