Early Retirement and Should I Stop Putting Money In 401K

[riverotter]

So, the wife and I are both 32, two kids.  She has a good job making $90K and I am self employed with a highly variable income, but it usually averages $150K.  We started saving into a 401K early on and there is about $250K in it now. 

I was running the numbers this weekend and realized that if I didn't put another nickel into the 401K then by the time we are 60 there would be $1.5M based on 7% return.  I figure that would be enough to see me from 60 on.

Of course I can't really touch that money until I am 60 so I need to generate income between now and then if I wanted to retire early.  I was calculating that if I banked $500k (approximately) in taxable accounts then around 40 this could be used to essentially "buy an income stream". (I would plan on this in addition to having a home paid for.)  Thankfully, that money would not have to last our whole lives, but would just need to get us to 60. 

I plan on contributing to my wife's 401k to the extent of any match, but I am not sure if going beyond that would make as much sense if this were the goal.  Thoughts? Am I missing something? What would Mustachians recommend as a way to secure an income stream from that money from 40 to 60? Thanks

[Eric]

Contribute the max to your 401ks to reduce your taxable income.  Fund the first 5 years of your retirement through your taxable accounts and the remaining will be accessible penalty free via the Roth Pipeline rollover.

Read:

http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

[dandarc]

+1 to Eric - at that high of an income, save taxes now.

And you're self employed - individual 401K at your income level.  You can defer taxes on something like $60K by maxing your soloK and your wife's 401K.

[wtjbatman]

You actually can touch the money before 59 1/2. Look up Roth Conversion Ladder and SEPP/72t.

Whether you want to of course is up to you. But don't go forward thinking it's not an option.

[thedayisbrave]

I vote we make this topic a sticky.... there has to be at least one a day!

[Exflyboy]

Well with a $240k a year income you'll want to hide as much of it away as possible from the Tax man.. So max out those 401k contributions... There are ways to pull from your 401k without penalty in any case.

Also with $240k you should EASILY be able of live on WAAY less than that, so you should be saving outside your 401k in addition. Or to put it somewhat more bluntly, what makes you think you can live on $1.5M ($60k a year at 4%) if your not doing that right now?

Maybe you currently have a huge mortgage, high COL or something that prevents you from saving more (a LOT more), but the sooner you learn to spend less, the more you will eventually have and then (if you want to) you could maybe retire at 45.

Those incomes might not always be there.. so maximising your saving while you can makes a lot of sense.

Frank

[dandarc]

I vote we make this topic a sticky.... there has to be at least one a day!

Maybe MMM will add it to the banner - "No, you don't have to wait till 59.5 to get to your 401K!"

[riverotter]

Thanks for that link Eric. That is exactly the type of info I was looking for.

I certainly have some work to do on COL, but I am already putting back a lot of money in other areas (rental property, taxable accounts, etc.)  We have a lot of home equity and various other investments. If everything was liquidated then we would be sitting on about $500k or thereabouts.  (Frankly, neither me or my spouse want to stop working at what we are doing at the moment, but at the same time I know I won't enjoy it for the next 20+ years either.) 

Basically, I am nowhere near as bad ass as most of the people on this board, but we have been pretty good about saving even when I was still in grad school.

[MacBury]

First point 7% return assumption too high in my opinion.

Lets assume correct. You have to discount the 1.5m back into today's dollars at 2.5% inflation.

In today's money = 1.5m/(1.025)^28 = 750k

Could you live on 750/25 = 30k in your retirement?

[boarder42]

7% is a perfectly acceptable ROI.  and that would be a factor without inflation.  The market avgs 10-11% YOY.  so 7% allows for about 3+% inflation. 

[JustPlainBill]

In my retirement projections, I use a 7% nominal return less 3% inflation = 4% real return to get numbers in today's dollars.  Best to err on the conservative side, IMO.

[waltworks]

You make $240k/year and only have a NW of $500k?

Dude, you need to post a case study. You have got to just be hemorrhaging money somewhere.

-W

Thanks for that link Eric. That is exactly the type of info I was looking for.

I certainly have some work to do on COL, but I am already putting back a lot of money in other areas (rental property, taxable accounts, etc.)  We have a lot of home equity and various other investments. If everything was liquidated then we would be sitting on about $500k or thereabouts.  (Frankly, neither me or my spouse want to stop working at what we are doing at the moment, but at the same time I know I won't enjoy it for the next 20+ years either.) 

Basically, I am nowhere near as bad ass as most of the people on this board, but we have been pretty good about saving even when I was still in grad school.

[wtjbatman]

In my retirement projections, I use a 7% nominal return less 3% inflation = 4% real return to get numbers in today's dollars.  Best to err on the conservative side, IMO.

That's probably waaaaaaay too conservative. You're going to work a lot longer than you have to.

[MacBury]

"The city relies on an overly optimistic forecast of 7.75% annual returns for its pension fund, causing the gap between available assets and obligations to widen, according to the report by the L.A. 2020 Commission. Under Mr. Buffett, Berkshire counts on annual returns of 6% for its pension funds and uses a 4% discount rate."

[kpd905]

Whether 7% is optimistic or conservative is going to depend on the asset allocation in the 401k, which wasn't mentioned.  The stock market has returned 7% after inflation historically.  Like some others, I normally use a smaller return when running projections, I usually use 5% real return.