Author Topic: Question about ER 'stache percentages  (Read 5303 times)

Jed

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Question about ER 'stache percentages
« on: March 28, 2013, 12:13:44 PM »
Iím a relative newcomer to MMM and this is my first post.  What a great community!

I have a question for those of you who have ERíd or are approaching ER.  Approximately what percentage of your stash (or is it 'stache?) resides in retirement accounts (IRAs and the like that cannot be touched without penalty until age 59.5) versus traditional savings and investments?

I ask because while my wife and I have always been on the path to ER in in our late 40ís, this blog has really inspired us to bump that goal up to our early 40ís (weíre both 38).  I think we may realistically be able to do this by upping our savings percentage by generally being more mustachian.  Our biggest obstacle may be that we have too much saved in IRAs (been maxing out since the get-go) and not enough to live on from an ER age in our early 40ís until that magic number of 59.5.

Any general guidelines that people are using?  I havenít yet had a chance to read all of MMMís archived posts and am wondering if he has addressed this topic.
« Last Edit: January 22, 2015, 02:30:56 AM by Jed »

Spork

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Re: Question about ER 'stache percentages
« Reply #1 on: March 28, 2013, 12:21:55 PM »

My retirement vs non-retirement stashe is approximately equal (within a few percentage points of each other).  I'm not entirely sure that is 'the right way to go'.  But it's what I've done.  My initial thoughts were to have non-retirement funds to draw from before the age of legal retirement.... but I'm pretty sure there are better ways to juggle tax laws than my oversimplified approach.

Bigote

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Re: Question about ER 'stache percentages
« Reply #2 on: March 28, 2013, 03:43:29 PM »
I retired this year at 44, and am 70/30 investment/retirement account (roughly).  I always maxed out 401k and IRA, but saved far more post-tax.

Nords

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Re: Question about ER 'stache percentages
« Reply #3 on: March 28, 2013, 09:03:52 PM »
I have a question for those of you who have ERíd or are approaching ER.  Approximately what percentage of your stash (or is it 'stache?) resides in retirement accounts (IRAs and the like that cannot be touched without penalty until age 59.5) versus traditional savings and investments?
I ask because while my wife and I have always been on the path to ER in in our late 40ís, this blog has really inspired us to bump that goal up to our early 40ís (weíre both 38).  I think we may realistically be able to do this by upping our savings percentage by generally being more mustachian.  Our biggest obstacle may be that we have too much saved in IRAs (been maxing out since the get-go) and not enough to live on from an ER age in our early 40ís until that magic number of 59.5.
Any general guidelines that people are using?  I havenít yet had a chance to read all of MMMís archived posts and am wondering if he has addressed this topic.
Welcome!

I'm not aware of any ratios for this question, and I don't think there's a thumbrule.  Your best bet is to forecast a decade of cash flow and to start putting your new savings into taxable accounts. 

Other options include:
- Roth IRA contributions (which can be withdrawn at anytime without penalty).
- Checking your 401(k) provider's rules.  Some allow for withdrawals to start at age 55 (not so helpful for you) or may allow a large one-time withdrawal when you retire. 
- Converting conventional IRAs to Roth IRAs, waiting five years, and then withdrawing the contributions.
- Rolling 401(k)s to conventional IRAs and then to Roth IRAs and then...
- 72(t) "substantially equal periodic payments" from your conventional IRA, which is sort of like playing hot potato with the IRS using hand grenades.  However it may provide the jolt of cash you need to put your plan over the top.  It's tedious and complex to set up, fairly straightforward to execute, and well within your abilities to figure out:  http://72t.net/ 

Jed

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Re: Question about ER 'stache percentages
« Reply #4 on: March 29, 2013, 09:31:18 AM »
Thanks for your replies.

While I'd love to be in a position of 70/30 investment/retirement by any ER date, I think a more realistic goal for us is 50/50.  To get there, our focus has definitely shifted from retirement savings to taxable savings.  We've paired down our 401K contributions to the smallest amount to still get the employer match and are considering reducing 529 plan contributions a bit too for the same reason (we've been contributing to that pretty hard since our kids' birth).

Thanks for the list of 'other options', Nords.  My initial reaction is that I'd really like to be able to let our retirement savings ride untouched until our 60's and beyond.  I guess we'll have to see how our regular savings go over the upcoming years to see if this is possible.

cats

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Re: Question about ER 'stache percentages
« Reply #5 on: March 29, 2013, 11:05:46 AM »
It's true, there is no one-size-fits-all.  In my case, for the moment I've opted to max out my tax-sheltered accounts, because the tax savings constitutes (to me) a significant portion of my income that I can then plow into taxable accounts.  Right now I'm about 40/60 between taxed and non-taxed in terms of what's where, since my income is going up faster than the limits on taxable accounts I expect that ratio is going to shift to something more even and eventually to a larger share being in taxed accounts.

I have a couple of thoughts on putting money into tax-sheltered but age restricted accounts.  First, assuming you're healthy and planning to live to your mid-70's, your post-60 life is likely going to last as long (or maybe longer) than your pre-60 ER life.  Second, although we're all superhuman superhealthy wunderbeings who plan on simply dropping peacefully dead of old age at 95, the fact is that as you get older, you are more likely to need help (and the money to pay for it).  i.e., you will likely not be as mobile at 85 as you were at 40, and so hiring someone to come in and help you with a few things once or twice a week may become a necessity rather than a luxury.  You may develop a medical condition that is expensive to treat.  And so on.  Also, while I don't think social security is going away completely, I do believe the benefits for people currently in their 30s will be less generous than they are at present, so I have my ER "requirements" excluding any expectation of SS, which does mean needing a larger nest egg for later in life.  Finally, it's harder to go out and get a job in your 70s or 80s than it is in your 40s, so you need to have a better set of alternative safety margins than you might in your 40s or 50s, when returning to the traditional workforce is a more feasible "backup" option if your savings start falling short. For these reasons, I think it's not such a bad thing to have a good chunk of money tied up in accounts that can't readily be accessed before age 60. 

Ozstache

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Re: Question about ER 'stache percentages
« Reply #6 on: March 29, 2013, 05:01:44 PM »
I have a question for those of you who have ERíd or are approaching ER.  Approximately what percentage of your stash (or is it 'stache?) resides in retirement accounts (IRAs and the like that cannot be touched without penalty until age 59.5) versus traditional savings and investments?

Excluding the COLA pension I will receive when I ER, my mix will be roughly 35% retirement accounts, 65% traditional savings/investments. If I convert my pension to a Present Value equivalent (with an assumed life expectancy of 80) and count that as traditional savings/investments, that mix changes to about 8% retirement accounts and 92% traditional savings/investments.

Just to add, I don't know much about how much the US government tinkers with retirement savings contribution amount caps, tax treatment of contributions and withdrawals and ages at which you can access these funds. However, here in Australia it is a moving feast and IMO gradually deteriorating the worth of such a savings vehicle to the point where you won't be much better off than investing that money traditionally. I am extremely fortunate to not have to be relying on retirement savings very much at all with my ER plans.
« Last Edit: March 29, 2013, 05:27:00 PM by Ozstache »

Prob8

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Re: Question about ER 'stache percentages
« Reply #7 on: March 30, 2013, 08:15:29 PM »
I've got about 15% in my retirement accounts.  The balance is in taxable accounts.  I don't plan to put another cent in retirement accounts due to a goal retirement right around the OP's (I'm 38 and planning to be FIRE by 41). 

lagniappe

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Re: Question about ER 'stache percentages
« Reply #8 on: April 02, 2013, 09:53:32 PM »
I am 75/25 taxable vs tax sheltered.  It is nice to have so much available for living until I am older, but it is much harder to control your income to stay under caps for subsidized health care and other benefits.  75% of my portfolio is throwing off taxable dividends and capital gains.  I'm not complaining, just pointing out an issue I rarely see anyone mention.

mm31

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Re: Question about ER 'stache percentages
« Reply #9 on: April 02, 2013, 11:03:12 PM »
I put 80%  in retirement accounts. It lowers my taxes today, it will get taxed at 15% when I retire (not 25%), and I can do a 72(t) or backdoor roth conversion later when I retire early. It really is a win-win.

Matt F

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Re: Question about ER 'stache percentages
« Reply #10 on: April 05, 2013, 06:51:12 AM »
I think a lot of the decision is based on your current tax rate.  I try to contribute enough every year to pre-tax accounts to knock my marginal tax rate down to 15%.  That saves at least the 10% difference from the 25% bracket (depends on your state tax setup if you will save more). 

In retirement I plan to do annual Roth conversions (if you are going to do this, plan out your 5 year cash flow since you have a delay in being able to access the money).  The safety net is that an early withdrawal penalty of 10% is still only about my tax savings on that amount assuming I continue to live post retirement on the 15% tax bracket (continued current cost of living plus Roth money comes out without tax).

Just my two cents.  I am definitely NOT a tax expert, so would love to hear if anyone else has tried this approach.

jrhampt

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Re: Question about ER 'stache percentages
« Reply #11 on: April 05, 2013, 08:58:48 AM »
I'm currently at 60/40 tax deferred/taxable, like one of the other posters above.  I contribute the maximum to tax deferred accounts to lower my taxable income, but I also see this ratio tipping eventually more to the taxable side as I ramp up my income and savings.

My husband is more like 75/25 and he has more assets since he's a bit older, so I guess if you look at our overall invested assets, we're about 70/30.