Author Topic: How to Retire Early?  (Read 3132 times)

skidlystache

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How to Retire Early?
« on: September 01, 2013, 09:12:12 AM »
I've read dozens of MMM's posts but am still slightly confused on one aspect of early retirement.  The bulk of my savings are in retirement accounts (Roth IRA's, 401(k)s, TSP, etc.).  Since you can't access those funds without penalty until you're 59.5 what is an early retiree supposed to live off until reaching that age?  Other savings, part time work?  What am I missing?

arebelspy

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Re: How to Retire Early?
« Reply #1 on: September 01, 2013, 09:16:22 AM »
You are missing the 72t rule, aka Substantially Equal Periodic Payments‎.

Roth pipeline is another great method.  Google it or search the forums.

MMM post with ideas (including taxable, if you start early enough, using 401k as "old man money").
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pbkmaine

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Re: How to Retire Early?
« Reply #2 on: September 01, 2013, 09:45:49 AM »
You can access funds from your employer plan without penalty if you separate from service in or after the year you turn 55. One of those strange little exceptions in the Internal Revenue Code. Do not then roll the money over into an IRA though. Then the age is 59.5.  If you plan to retire much earlier, then Rule 72t. 

sol

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Re: How to Retire Early?
« Reply #3 on: September 01, 2013, 11:39:02 AM »
72t payments aren't going to help very much unless you are already very near retirement age, have a truly enormous nest egg with low expenses, or the interest rates spike dramatically.  I wouldn't count on them.

One good option:  your Roth IRA principal contributions are accessible without paying taxes or penalties.  If you've been putting in 5k/year for 10 years, that's 50k in (pre-retirement age) expenses you already have covered.

Since you mentioned the TSP you must be a fed, and the Roth pipeline method is a bit more complicated for feds because the TSP only allows two withdrawals prior to retirement age.  The first can be a partial withdrawal of any amount, and includes any in-service withdrawals you may have already made.  The second must be a full withdrawal that liquidates your TSP account with some combination of rollover funds, cash payout, or annuity purchase.

So the general strategy for a fed is to retire from federal service, then in the following year when you have zero income take roughly half of your TSP balance and convert it to a traditional IRA.  This is a tax-free event, you pay no penalty and no taxes for doing so.  Then convert part of that traditional IRA balance to a Roth IRA every year, which is a taxable event so you will pay taxes on the conversion in the year you make it.  The amount you convert should be 1/5 of the traditional IRA balance, or one year's worth of expenses, depending on the numbers involved in your scenario.

Every year you convert another chunk of the trad IRA to a Roth IRA.  After doing this for five years, the conversion amount from year one is now classified as a contribution and can be withdrawn from the Roth IRA without taxes or penalties, just like your regular $5k/yr Roth IRA contributions can.

Eventually, you'll need to convert the second half of your TSP to the trad IRA in order to have enough funds in the trad IRA to continue making annual rollovers to the Roth IRA.

If you annually convert an amount from your traditional IRA to the Roth IRA that is low enough to avoid taxation (about $50k/year for a typical family, up to 100k/year for families with kids in college or good tax loss harvesting), then you shouldn't have to pay any taxes.

Done correctly, this allows you to make tax-free contributions to the TSP, get the match and tax free growth while in the TSP, convert TSP funds to Roth IRA funds without paying any taxes, then get tax free growth and free access to the funds before retirement age.  And no RMDs and the better inheritance rules of the Roth, when the time comes.  It's a win all around, if you can handle the paperwork.

The other good option for early-retirement is to have some funds stashed away in a taxable account.  That money is available to you at any time, and there are ways to minimize the tax bite with clever asset allocation.

BoulderTC

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Re: How to Retire Early?
« Reply #4 on: September 01, 2013, 01:26:21 PM »
I had the same question a few months back. Here is a quote from MMM's article on the topic that arebelspy linked to above, which helped it make sense to me:

"Overall, any of these strategies will work, but the issue remains the same for early retirees – because of contribution limits, your 401k will probably not be large enough to retire on until you’ve made at least 20 years of maximum contributions and seen some investment gains as well. So while I still advise maxing out any tax-deferred savings accounts like the 401k, you’ll also need to invest elsewhere simultaneously. My own strategy was in Vanguard index funds, a paid-off house, and some rental properties, but you will surely find other places depending on your own interests."