Author Topic: Ignoring 401k in FIRE calculations  (Read 4459 times)

Spiliph

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Ignoring 401k in FIRE calculations
« on: October 10, 2014, 04:23:33 AM »
It seems to be that it makes sense to ignore your 401k when calculating your FI especially when you are looking to RE. Typically there are limited ways to touch your 401k early in a manner truly useful to folk that I want RE. I have read about some tricks that MMM blogged about, but practically I think that the 401k should be considered an emergency buffer, or additional income that can be used to enjoy later life or, or cover additional medical expenses.

Only looking at investments certainly increases time to FIRE but in a more realistic way in my opinion. Thoughts?

boarder42

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Re: Ignoring 401k in FIRE calculations
« Reply #1 on: October 10, 2014, 05:27:27 AM »
This is the wrong way to look at it. The money is quite easily accessible from your 401k via sepp or conversion ladder. And if you're outside the 15% bracket it greatly reduces the taxes you will pay in your lifetime.

VirginiaBob

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Re: Ignoring 401k in FIRE calculations
« Reply #2 on: October 10, 2014, 05:47:15 AM »
Depends on your income and expenses.  If you make enough (and spend low enough) to save $17,500 in 401K, $5.5K in a Roth or traditional IRA, and still save $600K-$1M in a taxable account, sure, ignore the 401k/IRA.   But, if including the 401k/IRA allows you to retire an extra 5-10 years earlier... isn't that like the whole point of the retire early movement?

Spiliph

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Re: Ignoring 401k in FIRE calculations
« Reply #3 on: October 10, 2014, 05:54:01 AM »
Absolutely agree on the purpose of the RE movement. It seems like I don't fully grasp the full extent of drawing from your 401k then. The main thing that I do not want to happen is to draw more than a sustainable amount from any single source, otherwise the concept of an infinite supply of money starts to break down.

MandyM

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Re: Ignoring 401k in FIRE calculations
« Reply #4 on: October 10, 2014, 06:12:06 AM »
I wouldn't say that I ignore it, but the 401K I have at my current job (previous 401Ks were rolled into an IRA) will conveniently grow to approximately the amount of money I need when I turn 60. So I have started to view it as my "old lady money." Knowing that I have enough money set aside for that part of my life makes it easier to take risks in the present. Basically, the money I have in my IRA, Roth IRA, and taxable accounts is what needs to take me from FIRE to age 60.

Before I starting thinking about my money in these buckets, my main concern was running low on money well into the future. This mindset has allowed me to drop my buffer number so that I can FIRE quite a bit sooner. I know I'll be just fine picking up a paid gig here and there.

BooksAreNerdy

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Re: Ignoring 401k in FIRE calculations
« Reply #5 on: October 10, 2014, 06:17:33 AM »
I think of our retirement money in two 'piles'- young money and old money. Old money is 401k and IRAs. Young money is taxable investments and rental properties. We need enough young money to put down payments on 3-4 houses, plus live off of for 10-20 years. The more young money we have, the longer we can go without tapping old money. The longer until you tap old money, the more it grows.

So, for us to retire, we need roughly $400k in old money and $300-400k of young money. We will spend the young money until it is gone and the old money should have time to grow e rough that we will never spend it all. The tax advantage of a 401k (plus match) should not be over looked.

hdatontodo

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Re: Ignoring 401k in FIRE calculations
« Reply #6 on: October 10, 2014, 06:31:05 AM »
There's an age 55 rule for 401K's in addition to the age 59-1/2 rule.

If you are 55 or older and quit/retire/get fired/leave in the calendar year you turn 55 or later, you can withdraw from your 401K of THAT employer (not prior ones) without the 10% penalty.

Given that I'm 54, I consider my 401K balances in my calculations.

boarder42

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Re: Ignoring 401k in FIRE calculations
« Reply #7 on: October 10, 2014, 07:18:42 AM »
I would need over 800k in taxable to bridge my gap. I'll just use my 401k

SharpM

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Re: Ignoring 401k in FIRE calculations
« Reply #8 on: October 10, 2014, 07:20:30 AM »
401k is usually a pretty critical portion of your RE funds, if you have one.  It is rather easy to access these funds, penalty free, five years after "retirement" with a Roth conversion ladder.  So really what you need is enough extra funds to get by for at least 5 years before the 401k funds kick in.

I've maxed out my 401k since around 1998 so there are significant funds available that I surely count towards my retire early funds.  Once I retire, the calendar year after, I will start slowly converting this money to start using in 5 years.  This concept needs to be well understood as part of any RE plan.

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matchewed

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Re: Ignoring 401k in FIRE calculations
« Reply #9 on: October 10, 2014, 09:23:00 AM »
It may make sense depending on a person's particular circumstances, however there are many methods to access your funds prior to 59.5 and the worry about later expenses is relatively easy to account for. Accounting for later expenses rising due to medical costs can be done by increasing your withdrawal rate when you get older, generally with a 4% SWR it has been historically shown that you will have more growth than you will have withdrawal allowing you to increase your withdrawals when you get older. You can also mitigate that risk of expenses rising when you get older by exercising (more resilient to disease and the like), eating right (same as previous), flexing your frugality muscles (this gives you more fudge factor with your budgeting), and/or the most simple of the methods, account for the costs right in your FIRE number, as in save more money.

So since we know that the money can be accessed earlier than 59.5, you can FIRE earlier because of it, and there are several methods to mitigate a risk in increased expenses later in life there is no reason for ignoring the 401k in FIRE calculations. Just account for the risks you see.

Gone Fishing

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Re: Ignoring 401k in FIRE calculations
« Reply #10 on: October 10, 2014, 09:46:07 AM »
The first link in my signature below is a well laid out plan on how to use your 401(k) (in the form of an IRA rollover) for early retirement without penalty and possibly without taxes. See the second link for an example of what your tax return should look like if you execute this plan properly. 

Cheddar Stacker

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Re: Ignoring 401k in FIRE calculations
« Reply #11 on: October 10, 2014, 09:48:05 AM »
One thing about MMM's "how much is too much in your 401K" post that bugs me, and that Spiliph and possibly others might not be considering:

-If you just leave it in a traditional 401K, or move it to a traditional IRA, then let it sit idle until 60 you are not planning properly. You will end up with massive amounts of RMD's, and a big tax bill every year. Even if you have absolutely no intention to spend the money at least make a plan to slowly withdraw it or roll it into a Roth. Spreading the tax liability over many years while drawing down the traditional funds is one of the single biggest advantages to retiring early because you have a lot of years to get it out before 70 when the RMD's kick in. The tax savings simply can't be understated, they are immense.

Spiliph

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Re: Ignoring 401k in FIRE calculations
« Reply #12 on: October 10, 2014, 09:50:44 AM »
Beautiful. Thanks everyone!

ender

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Re: Ignoring 401k in FIRE calculations
« Reply #13 on: October 10, 2014, 10:33:21 AM »
One thing about MMM's "how much is too much in your 401K" post that bugs me, and that Spiliph and possibly others might not be considering:

-If you just leave it in a traditional 401K, or move it to a traditional IRA, then let it sit idle until 60 you are not planning properly. You will end up with massive amounts of RMD's, and a big tax bill every year. Even if you have absolutely no intention to spend the money at least make a plan to slowly withdraw it or roll it into a Roth. Spreading the tax liability over many years while drawing down the traditional funds is one of the single biggest advantages to retiring early because you have a lot of years to get it out before 70 when the RMD's kick in. The tax savings simply can't be understated, they are immense.

This is why 401k is such a great plan for people looking to retire early.

It's entirely possible you will pay no income tax on any 401k deduction, ever. If you defer the tax and then slowly convert it at 0% tax rates you effectively got a Roth 401k -- for free!

Of course this requires you plan on retiring early...