Author Topic: Simple but fundamental question  (Read 4095 times)

ejann1

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Simple but fundamental question
« on: October 19, 2013, 07:50:52 PM »
Hey all,

I'm new to the financial independence world and I'm enthralled!  I'm a 24 year old woman entering my second year of full time work.  I love my job, but I don't want to be tied to one forever...

I save over 50% of what I earn.  I've invested in VTSMX per MMM's suggestion (which I'm considering adding to and exchanging for VTSAX, per jlcollinsnh's suggestion).  I just maxed out a Roth IRA for this year.  I also started my 401(k) through work and intend to max that out. 

Here's my simple question: how do I live off my investments?  I don't mean that in a complainypants way!  I mean logistically, how do I put money I've invested back into my checking account so I can live off of it? 

Of all I've learned I've missed this practical step.  I recently realized (to my chagrin) that 401(k) money has a penalty for withdrawal before age 59.5.  I realize I can withdraw Roth IRA initial investments, but not gains.  It's starting to feel like any money I invest is off-limits until my hair is completely gray.  How do I GET the money I've invested when I retire before my almost-60s?  What parts of it, exactly, will I be living off of?

Thanks for your help!  If you have any suggestions lifestyle or investment wise for someone my age, I'd love to hear that too.

Zaga

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Re: Simple but fundamental question
« Reply #1 on: October 19, 2013, 08:07:51 PM »
There are a few options, but the one that's likely in your situation is the Roth Pipeline.  To do this each year you roll over 1 year's expenses to a Roth IRA (and pay the taxes on the rollover).  After 5 years you will be able to take out what you rolled over penalty free.  Keep this up and each year you will have the ability to take out one year's expenses, repeat until age 59.5!

geekette

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Re: Simple but fundamental question
« Reply #2 on: October 19, 2013, 08:27:30 PM »
Also, all your money doesn't have to be invested in a retirement account.

ejann1

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Re: Simple but fundamental question
« Reply #3 on: October 19, 2013, 08:43:23 PM »
@ Zaga: can you explain that rollover?  I thought the Roth IRA could only hold $5,500 per year, which isn't much.  How does the rollover you describe work?

@ geekette - good point!  What I have invested in the VTSMX is personal investment, not tied to retirement.  Perhaps I should pursue that avenue further?


Reepekg

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Re: Simple but fundamental question
« Reply #4 on: October 19, 2013, 08:47:33 PM »
Once you have maxed out your retirement accounts, invest whatever is left in a non-retirement 'taxable account'. Owning VTSAX, for example, will pay dividends and therefore deposit 2% in cash into your account every year. Right now you should use that money to buy more VTSAX, but after FI, you can withdraw it to a bank account and pay your bills with it.

You can plan it so you live off taxable money from FI age to the retirement age and then live off retirement account money once you're old enough.

Also spend the time to read up on Roth pipelines, not just what we say on a forum. You're a professional capitalist now and should gain that skill. Good luck!
« Last Edit: October 19, 2013, 08:52:07 PM by Reepekg »

dadof4

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Re: Simple but fundamental question
« Reply #5 on: October 19, 2013, 09:00:35 PM »
There are a few situations where you will need money, which one are you thinking of?

If it's a withdrawal strategy after FIRE, there are lots of options. That is pretty far away, so I wouldn't worry about it too much just yet.

But there many other cases - need money for a mortgage down payment, lost job and need emergency cash, medical emergency, etc. Maxing out a 401k isn't always the best strategy. If your income isn't very high, it will mean you have very little in the way of post tax cash flow. If you give us more specific numbers to your situation, we might give you more specific advice :)

secondcor521

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Re: Simple but fundamental question
« Reply #6 on: October 19, 2013, 09:46:10 PM »
A common thing to do is to roll the 401(k) into a traditional IRA once you leave that job.  Then you can either do (a) a Roth pipeline - at least people say you can; I'm still investigating it - by rolling $$$ from the traditional IRA to the Roth IRA every year, (b) what's called a 72(t) or SEPP plan which allows you to withdraw $$$ from the traditional IRA penalty free, but you must keep up the withdrawals until you're 59.5, or (c) withdraw from the traditional IRA and pay income tax plus the 10% penalty, which sounds bad but can actually be a pretty low rate depending on how much you live on.  You can also invest in taxable accounts as well.

Good luck!

Zaga

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Re: Simple but fundamental question
« Reply #7 on: October 20, 2013, 08:02:21 AM »
@ Zaga: can you explain that rollover?  I thought the Roth IRA could only hold $5,500 per year, which isn't much.  How does the rollover you describe work?

@ geekette - good point!  What I have invested in the VTSMX is personal investment, not tied to retirement.  Perhaps I should pursue that avenue further?
Sorry, I didn't give more specifics because I have not investigated it myself in depth yet.

In general, you take your 401-K money and roll it to a traditional IRA.  Then each year you roll over (and pay taxes on) what you will need for 1 year's expenses, after 5 years that money is available for your use.

The $5,500 per year is the contribution limit, there is no rollover limit.  You could in theory roll over your entire 401-K to an IRA, then to a Roth all in one year.  I wouldn't do that though because the taxes would be WAY too high and you would send the government more money than you should.  Better to do this just a bit at a time over the years so you can fill up the lowest tax brackets each year.

Zamboni

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Re: Simple but fundamental question
« Reply #8 on: October 20, 2013, 09:34:40 AM »
thank you for posting about this, and good luck!