How to figure in 401k's an IRA's in "the plan"?

[lauren_knows]

Hello mustachians,

I've been a lurker on the blog for quite a while, and while I am not nearly as mustache-like as many of you, I do take away a lot from this site... and I appreciate it.

I've always had a question in the back of my mind when I think about ER, and I have never seen it directly answered here.  Everyone always gives the advice "Contribute to your 401k at least up till the employer match, and always fund your IRA".  Well, the good news is that my wife and I do just that.  My question is:  If these funds can't be touched until 55 or 62 (I'm not 100% on the rules), how do they figure in to someone who wants to retire in their 40's?

Most people on these forums talk about some "magic number" of money that they require to jump into ER.  That doesn't ever seem to include 401k or IRA disbursements. Do you just go about your lives until you're allowed to withdrawal, and simply take it as a windfall?  It almost seems to me like it'd be more prudent to put that money toward getting that "magic number" of passive income going, rather than dumping it into an account that you won't be able to touch.

Long first post. Sheesh. :)

[lauren_knows]

I realize that some financial context might be required for such a question, so here goes.

30/m/married, just had first child 1 month ago (he's a cute little guy)
Combined income: $175k (this will drop in 2 months to $145k, as my wife is dropping to 60% as part of an intricate plan to have 0 childcare expenses)

Monthly Expenses
Mortgage: 30yr loan @ 4.75%, currently at about $285k on a house worth about $400k - $1550 + $400(private parental loan, hardly any interest, to be paid off in 5 years)
Property Taxes: ~ $275
Utilities: ~$150
Car Loans: None
Insurance: Not totally sure on this number. Paying for 2 cars + house. Redid the insurance 6 months ago.
Student Loans: I've been aggressively hitting these for so long, I have no idea what the minimum is.  They will be paid off in 4 months, and I've been hitting them with $1200/mo.
Gas: $150 (it's already been less with my wife at home)
Food: $600 (typically it is this much, but having the wee one at home has successfully reduced "eating out" to zero. I'd say it's around $450 now)
Cable: Cutting the cord next month
Internet:  TBD, depending on how I haggle when cutting the cord
Home Phone: Free - I set up a sweet Obi110 with Google Voice. Free calls from a normal phone. Seemless.
Cell Phones: $100 - One of our main tech vices. At least I get 25% off through work.

Investments
Combined 401k balance: $140k
Combined IRA Balance: $70k
Emergency Fund (some in cash, some in balanced mutual funds): $35k

As I said, we fully fund our IRA now, and contribute to our 401k up to our employer match.

Not sure if this helps with the original question. I just hope to maximize our potential for ER in the future.

[MrSaturday]

There are a couple of ways to get money out of retirement accounts early without paying a penalty, and since a mustachian will probably have lower income in retirement than while working full time you can use a 401k to defer paying taxes until you're in a lower bracket.

What to do with the retirement accounts before 59.5:

A) Take 72(t) distributions
B) Rollovers to a Roth IRA, available for penalty-free withdrawal 5 years later

[grantmeaname]

Also, any principal in a Roth IRA can be withdrawn tax free at any point. The other rules are just for withdrawing earnings in addition to the principal.

[lauren_knows]

There are a couple of ways to get money out of retirement accounts early without paying a penalty, and since a mustachian will probably have lower income in retirement than while working full time you can use a 401k to defer paying taxes until you're in a lower bracket.

What to do with the retirement accounts before 59.5:

A) Take 72(t) distributions
B) Rollovers to a Roth IRA, available for penalty-free withdrawal 5 years later

Right.  I've been reading a lot about the 72(t) distributions.  I suppose that the crux of my question is all a matter of preference.  Do you want to live off of carefully planned distributions or use that money post-tax to create another stream of income.  It boggles the mind with so many options.

[MrSaturday]

I'd actually prefer not to have to plan 72(t) distributions, but for the difference in taxes I think it'll be worth the effort.

Also, I have a little different strategy than most, in that instead of trying to live off dividends and interest on the taxable portion, my plan involves depleting most of the taxable principle between retirement and age 59.5.

[lauren_knows]

Also, I have a little different strategy than most, in that instead of trying to live off dividends and interest on the taxable portion, my plan involves depleting most of the taxable principle between retirement and age 59.5.

Ah. Seems a little bit riskier, but would allow you to retire earlier.

[MrSaturday]

Ah. Seems a little bit riskier, but would allow you to retire earlier.

I'm already old, so I'm only looking at 10-12 years to cover.