Author Topic: Early Retirement and Retirement Accounts  (Read 1193 times)

doc40

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Early Retirement and Retirement Accounts
« on: October 25, 2018, 01:50:47 PM »
Hi, everyone. I've been reading the blog for about a year now, and have recently started reading from the beginning. I have a question regarding early retirement and the types of accounts used to fund retirement. The typical advice is to max out tax deferred accounts while saving (e.g. 401k, IRA, etc.) before investing in taxable accounts. However, in order to "retire" from 9-5 wage paying work at say, age 35-40, I would need to be living off of dividends/withdrawal from accounts that allow me to do so before reaching "retirement age." So, from my understanding, this means a combination of taxable accounts/IRA contributions(/401k -> IRA conversions?).

At my current job, I am part of an optional retirement program (which I believe operates as a 403b), but due to contribution limits in the PLAN, I am not able to reach the IRS limit. I can also contribute voluntarily to an actual 403b (or roth 403b) AND a 457 (which has separate IRS limits?). Additionally, my HDHP gives me an HSA to contribute to as well.

Am I supposed to try to max out ALL of these tax deferred options before using a taxable account if my goal is to leave 9-5 wage paying work at age 40? Will I have enough accessible funds if I do that, or should I calculate my own limit where I should start using taxable funds so that I have some liquidity at age 40.

Thanks.

lhamo

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Re: Early Retirement and Retirement Accounts
« Reply #1 on: October 25, 2018, 02:20:59 PM »
Contributions to a Roth 403b can be withdrawn at any time, tax free (since you already paid the taxes on that money).

Typically 457 contributions can also be withdrawn, at least once you leave employment -- you'll need to consult the plan documents to be sure.  There are certain risks with deferred comp plans, but as long as your employer is pretty big/stable (e.g. a large educational institution or solidly funded local government) that is a good option for additional FIRE stashing.

Both Go Curry Cracker and MadFientist have posts on how to set up a Roth conversion ladder using the money you put in tax deductible accounts --really you only need to have your first 5 years of living expenses in the Roth/457, and then you can ladder everything you need over, typically at a much lower tax hit than whe you were working.


doc40

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Re: Early Retirement and Retirement Accounts
« Reply #2 on: October 25, 2018, 02:26:21 PM »
Awesome, thank you. So, currently to max out ALL of my "retirement" options, it will be about 60% of my gross salary (which is a lot for me as I attempt to mustachify my life). It seems like it is okay to just shoot for that goal initially then with little drawback. I don't really have to worry about a taxable brokerage account until I am able to increase my savings and I'll still be fine, even if I manage to save enough to "retire" at 45.

terran

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Re: Early Retirement and Retirement Accounts
« Reply #3 on: October 25, 2018, 03:20:25 PM »
Have you seen https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

Do you work for a government employer? Governmental 457(b)s are great -- basically like a 401(k) but without the early withdrawal penalties. Non-governmental plans aren't as good because they're subject to the employers creditors and they often have more restrictive withdrawal requirements.

BeardedMustache

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Re: Early Retirement and Retirement Accounts
« Reply #4 on: October 25, 2018, 03:32:06 PM »
Try thinking about the time periods separately.

-First, you've got to bridge the gap between your RE age (35-40) and when you can start withdrawing from tax-deferred accounts penalty-free (59 1/2). This will also require you to spend on health care out of pocket, since you will not be on an employer plan.
-Second, you'll need to ensure that you have sufficient assets/income (taxable and/or tax-deferred) after retirement age.

I would look to diversify (taxable/tax-deferred) as much as you can to cover both phases. Based on your RE goal, I think you should max out the HSA and weight your contributions 60-40 or 70-30 to taxable accounts.

Hopefully other members can weight in

Eric

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Re: Early Retirement and Retirement Accounts
« Reply #5 on: October 25, 2018, 03:37:09 PM »
Don't be fooled by the "retirement age" restrictions.  They are easy to work around.

https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

the_gastropod

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Re: Early Retirement and Retirement Accounts
« Reply #6 on: October 25, 2018, 03:37:20 PM »
You can access you retirement accounts before retirement age. Check out this excellent blog post that explains the various options you have: https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/

[Edit] Whoops! Looks like Eric beat my by a few seconds ;-)

MDM

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Re: Early Retirement and Retirement Accounts
« Reply #7 on: October 25, 2018, 05:29:55 PM »
Hi, everyone. I've been reading the blog for about a year now, and have recently started reading from the beginning.
Enjoy!

See also the stickied threads in the various forum sections, particularly How to withdraw funds from your IRA and 401k without penalty before age 59.5

doc40

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Re: Early Retirement and Retirement Accounts
« Reply #8 on: October 25, 2018, 06:51:14 PM »
So in order of priority, I want to hit employer match in state plan (ORP) (3% mandatory from me to get 5.14% from them), then max my IRA (lower fees), then actually max a 457? (just checked, can withdraw w/o penalty after I stop working there), THEN max my state plan (ORP) with voluntary contributions up to another 5.14%, then finish off the IRS limit in another 403b, and then finally my HSA...exhausting.

letired

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Re: Early Retirement and Retirement Accounts
« Reply #9 on: October 25, 2018, 07:07:23 PM »
To be clear, I don't think that order is intended to be chronological, so much as bucket-based, if that makes sense. At the beginning of the year (or whenever), figure out how much you can afford to/want to save, and then go down the buckets. Then, set your monthly/per pay period contribution to whatever you've calculated, and forget about it until next year. I max out my hsa, 401k, and ira every year, and contribute 1/12 of the max amount each month.

and per the Investment Order, you might consider prioritizing your HSA since it's the best tax-deal, assuming you can't max out all the accounts on your current income.

ETA: also don't worry too much if it's all a bit much to take in at once. it's a stage everyone goes through as they learn the in's and out's of maximizing these savings accounts. it'll be second-nature in no time.
« Last Edit: October 25, 2018, 07:09:00 PM by letired »