"How Rich are You" article questions

[Mt Tahoe]

So I was reading the "How Rich are You" article MMM posted and had a few questions.

He states that you reach financial independence when "your investments reaches 25-30 times your annual spending". But adding up our assets and retirement funds etc, much of that is not accessible. 401k, IRAs... can not be touched until you are a certain age. Your home may be an asset, but is not worth anything unless you sell.

Once you have accumulated great wealth, the idea is to live mostly off interest and dividends right? 

[AJ]

A paid-for house can "pay you" by eliminating rent expense. Or, you could borrow against it and use the funds for investments, depending on your risk and debt tolerance(s).

You can access IRAs and 401ks via Roth pipeline or 72t (if you're not familiar with these, run a forum search, there's loads of discussions on them).

[seattlecyclone]

The idea that your retirement accounts "cannot be touched until you are a certain age" is a common misconception, but completely false. We should really have a thread with a short summary of the options pinned for quick reference.

[dandarc]

The idea that your retirement accounts "cannot be touched until you are a certain age" is a common misconception, but completely false. We should really have a thread with a short summary of the options pinned for quick reference.

Word.

Short list:
1.  Roth IRA contributions can be withdrawn at any time without tax or penalty
2.  If you have a governmental 457, no early withdrawal penalty
3.  Roth Conversion Ladder - convert from traditional to Roth, wait 5 years and the conversion amount can be withdrawn tax / penalty free, just as if it was a regular contribution.
4.  72T (SEPP) - take out substantially equal periodic payments from traditional accounts for the later of 5 years or reaching 59.5, and it is penalty free

[Kaspian]

I don't think homes should be seen as "investments".  A lot of Americans learned how badly having a one-asset strategy turned out in 2009.  Sure, a home is part of your net worth, but I'd never put it as part of an investment portfolio.  ...Unless of course I was a landlord and renting units.

[Retired To Win]

... Once you have accumulated great wealth, the idea is to live mostly off interest and dividends right?

That's one way to go (and it is my way), but it is not the only way.  That magic FI figure of 25 times your annual expenses that you referred to is based on the assumption that you are going to withdraw/cash out 4% of the market value of your investments annually to cover those expenses.  And that cash withdrawal could come from dividends, sales of shares, or a combination of both.

[Mt Tahoe]

thank you all for the responses. I knew about Roth and I need to do more reading on traditional IRAs. We are saving like crazy and i estimated we are at 60% Savings Rate. From preliminary calcs, we should already be able to be FI; a great surprise. I will sit down and try to do some more in depth and precise calcs.

 

[Retire-Canada]

Once you have accumulated great wealth, the idea is to live mostly off interest and dividends right?

Dividends or sale of stocks. While maintaining the integrity of your principal.

I don't count my house towards my FI target of 25 x annual cost of living. I consider it a safety mechanism should my plan not work.

-- Vik

[boarder42]

dont count your house.   An IRA can be rolled to a ROTH IRA and then the principal accessed in 5 years.  This is how you get money out of your retirement accounts penalty free.