Author Topic: 401k and early retirement  (Read 3079 times)

doneby35

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401k and early retirement
« on: October 19, 2016, 02:14:01 PM »
Hello everyone,

I've been reading MMM articles for a few months now and just recently decided to take action, sold a bigger house with a big mortgage and moved to a smaller house and I will be mortgage-independent in 2 years.
I'm currently 30 years old and i'm planning to retire by 35 if possible, or at least be in a pretty good state financially and not worry too much about losing my job, however i'm a little confused on what to do when it comes to 401k. My employer's 401k only offers a match of 0.25 for each dollar up to 6% and it vests in 5 years, i feel like it's not as good as what other companies offer.

Should I sign up for it if i'm planning to retire early or is there a better investment route? I have about $1500/month to contribute towards investments.

Thanks!

nereo

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Re: 401k and early retirement
« Reply #1 on: October 19, 2016, 03:14:43 PM »
Unless your choices are truly wretched I would definitely contribute to your company's 401(k) enough to get the match.  It's an instant 25% return, which you aren't likely ot get anywhere else (except at a better company).

Once you leave your job you can do a rollover and move the money into your IRA.  There are also ways of accessing that money penalty free before 59.5

MDM

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Re: 401k and early retirement
« Reply #2 on: October 19, 2016, 04:30:26 PM »
Should I sign up for it if i'm planning to retire early or is there a better investment route? I have about $1500/month to contribute towards investments.
You should sign up for it because you plan to retire early but still after vesting occurs.

E.g., see To 401k or not to 401k? That is the question. and the 'Investment Order' tab in the case study spreadsheet.

Dezrah

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Re: 401k and early retirement
« Reply #3 on: October 20, 2016, 07:51:33 AM »
I've seen worse matching.  I had an employer who matched 100% on the first $100 contributed and then 10% after that up to $500 match.  I did it because hey, it's an instant 12% return on my $4100.  It wasn't great, but it got me in the market early.

doneby35

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Re: 401k and early retirement
« Reply #4 on: October 20, 2016, 10:32:21 AM »
Thanks guys. I appreciate the responses. I'm going to go for it.

Axecleaver

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Re: 401k and early retirement
« Reply #5 on: October 20, 2016, 12:47:57 PM »
18k of your money is tax exempt when you contribute to a 401k, no matter how bad the matching is. You want to participate in the 401k for the tax-deferred treatment. Matching is just a nice bonus to saving that you would have done, anyway.

When you retire, you can move the 401k into an IRA, then use SEPP to access the money before 59 1/2.

doneby35

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Re: 401k and early retirement
« Reply #6 on: October 20, 2016, 09:28:48 PM »
This may sound silly and I'm hoping you don't think i'm a total idiot but I don't quite understand 401k even though I read many articles about it.

If i were to save 18k a year for 5 years, that would be 90,000.
If I were to contribute 18k a year for 5 years to 401k, how much more would that be?

And then after 5 years, I can rollover to an IRA and then access the money when I'm 35?

Shane

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Re: 401k and early retirement
« Reply #7 on: October 20, 2016, 09:48:34 PM »
@db35, you might benefit from reading Jim Collins' Stock Series. It will answer many of your basic investing questions about stocks, bonds, IRA's, 401K's, 403B's, taxes, early retirement, etc.

The Stock Series has tons of useful information and is easy and fun to read. You can read it for free on Jim's website. Jim also published basically the same information in a prettier, more complete book form. It's called, The Simple Path to Wealth: Your roadmap to financial independence and a rich, free life. Even though I had already read the stock series, I bought the ebook anyway, just to support Jim, and enjoyed reading it.

MoonLiteNite

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Re: 401k and early retirement
« Reply #8 on: October 21, 2016, 02:22:29 AM »
If i were to save 18k a year for 5 years, that would be 90,000.
If I were to contribute 18k a year for 5 years to 401k, how much more would that be?

When you have 100$ in you pocket, you actually paid around 110$-125$ for it, depending how much get robbed from each paycheck.
When you invest in a trad 401k, the 100$ you wish to invest is removed, BEFORE you get robbed. So you actually end up with MORE money, take away the normal taxes.

Say you make 100$ in a paycheck and are taxed at 10%. That means you only take home 90$ and pay 10$ into taxes.
If you invest 10% into a trad 401k, your earned income is only 90$, which means that is taxed at 10% for total taxed amount of 9$, and your take home pay is 81$. and 10$ is saved.

So your takehome pay is 9$ less than normal, but you put 10$ into your 401k, thus a 1$ in tax savings, or 1$ more total to your net worth since it wasn't taken away from you.


The idea is when you retire early you keep your taxes low now, and when you pull your money out, you pull it out slowly enough there is little to no taxes.