tie up savings in 401k/IRA?

[brybot]

Hello everyone,

I'm new to MMM. If someone has already asked this, could someone kindly point me to the right thread? In June, I'll start my first job out of grad school. Salary is great, so I'll be able to save a lot. I've been biking for a few years and car free for about a year now. The biking is actually how I ended up hearing of MMM about 2 weeks ago.

Anyway, I was planning to max my 401k and IRA. If I do this, won't my savings be tied up until I hit 59.5? Would I be better off putting all savings elsewhere if I want to try to retire early?


Thanks!

[matchewed]

Search 72t and Roth pipeline.

See this link for a good run down on the (possibly) more popular path.

https://forum.mrmoneymustache.com/continue-the-blog-conversation/getting-rich-from-zero-to-hero-in-one-blog-post/

But look around and see what other people are planning on doing. This is just one of many ways.

[sdp]

Max the retirement accounts AND save the rest in a taxable account.  Don't worry about tying up your money!  fill the tax advantaged coffers first, THEN the taxable accounts for things like down payment, rental property purchases and other large investment actions before retirement.  Sounds like you are young, but don't worry, that is where only a portion of your wealth will accumulate for decades, tax free.  once you have that cash stashed, and you are thinking about early retirement, then divert your saving to a taxable account that will be your funding source between your early retirement age and 59.5.  Once you start saving a shitload of money because you are only living on 20-30% of your income, you will realize that the retirement account contribution limitations still leaves you with a shitload of money to invest in a taxable account or rental property, or whatever!  Focus your time and energy on minimizing your expenses and establishing a lifestyle that allows you to 'stash the cash' and you will have so much in a taxable account, that the retirement accounts will just be gravy anyway.
Cheers,
Scott

[brybot]

Thanks for the tips! I've been living like a king on a grad student stipend and I hope to keep up that low spending on a normal salary. Unfortunately, work is taking me to SF which is rather expensive. Apartment rent will kill me, and I can't afford to make a down payment on a house yet. Otherwise, I'll just work to minimize all other expenses. Maxing 401k and IRA should be easy, and I should still have plenty left over for extra savings.

If I have the option, should I do a Roth 401k, or stick to standard? My IRA is currently Roth. If I get a raise, I'm may no longer have the option for Roth.

[matchewed]

Stick with traditional 401k then. It will help reduce your income to keep you eligible for a Roth IRA.

[somekindofnick]

MMM talks about this http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/.

Using similar math to MMM in his post, I figured that my current tax-advantaged savings will grow and provide  enough to cover my expenses without anymore contributions. As such, instead of maxing these accounts, I decreased my 401k contribution to maximize my employer match. The rest of my savings after funding my HSA and Roths goes into post-tax accounts. My thinking is it would be a bummer to have enough saved for financial independence but have it tied up in accounts you can't touch for 10+ years.

Roth vs. Traditional 401k: all else being equal, they're mathematically the same. However, if you expect to have a higher tax rate in the future, then you should use the Roth. If you expect a lower tax rate in the future (e.g. because you expect to be "retired" with lower income), you should use the traditional.

[little_owl]

Just wanted to say that this is a great question, thanks for asking.  I forgot about the MMM post, so will go back and read that.  Funny that I am worried about losing out by maxing my 401k, which most of my peers do not even do - most contribute but few max out.

I was also concerned about locking that money up for too long.

[Megatron]

I've been stashing away in my 401k right out of college. maxing it out every year. a few years ago right before I turned 30, I decided to quit my job do a round the world trip for a year and cash out a bit of my 401k and took the penalty plus the tax hit. (self punch to the face!) (I stayed in hostels / couchsurfed / slept on the beaches for free in Thailand and ate like a local everywhere I went, I even learned  spear fishing Bear Grylls style to get free food, I traveled by bus and only fly when it's across continents, I worked in a hostel in Peru and Bolivia for free room and food) it turns out that I didn't need nearly 1/4 of the money I thought I did(self punch to the face again!). Did I do a stupid thing? maybe, but it was probably the best year of my life. So technically my money wasn't tied up if I was willing to take a hit for it. Once I got back, I got right back to working and started maxing out my 401k again and my Roth IRAs again. Currently about to get married and buy a house together. If I've waited a few years I wouldn't be able to do the Round the World trip or don't want to with all the attachments. I was young and I wanted to experience life the way I wanted to, not when I'm 65. In hindsight, I would do it again in a heartbeat. So yeah, that was basically my take.