What do I need to FIRE?

[gergg]

Hi Guys - I'm having some trouble putting together a FIRE plan and looking for some advice.  I'm shooting for 40 which would be 12 years from now.  If I continue what I'm doing right now, I figure (assuming 7% return) I should have a 401k worth roughly $425k and a Roth IRA worth roughly $150k with $90k being contributions.

Now, let's assume I want $30k income after tax.  The 4% withdrawal rule says I need $750k.  So need to save at least $150k more.

I am thinking I could probably fit $50k more into my 401k to max it out.  This gives me the $750k I need:

401k - $510k
Roth IRA - $150k ($90k are contributions)
Taxable - $90k

So say you are 40 years old and have the assets described above.  You check your accounts one morning, notice you've hit the magic number and immediately put in your 2 weeks notice.  What is the most efficient way to get my $30,000 after tax "salary"?  Would you pull the trigger with the bare minimum to satisfy the 4% rule or would you wait longer?

[PowerMustache]

What is the most efficient way to get my $30,000 after tax "salary"?

I'm not sure about the most efficient, but I've seen a lot of people planning on the Roth conversion pipeline. More information on that here: http://forum.mrmoneymustache.com/ask-a-mustachian/help-me-understand-the-roth-conversion-pipeline-idea-and-its-benefits/

You would have 90k taxable and 90k Roth contributions, so that means 6 years of living expenses already accessible without penalty, before you even need to use the Roth conversion pipeline. That's nice because you wouldn't have to start converting your 401k to Roth until after you FIRE.

Would you pull the trigger with the bare minimum to satisfy the 4% rule or would you wait longer?

It depends on your life plans in retirement and your appetite for risk.  MMM likes to talk about all of his safety factors: ability to go back to work any time, making money from the 'fun' things he chooses to do with his time, ability to live on less if the market doesn't do as well as hoped. If you have plenty of safety factors, then it's not so risky to FIRE when you hit the bare minimum. If you don't have those safety factors in your life, I would be inclined to wait longer before pulling the trigger.

[MDM]

Now, let's assume I want $30k income after tax.  The 4% withdrawal rule says I need $750k.  So need to save at least $150k more.

gergg, welcome to the forums.

The 4% Safe Withdrawal Rate guideline includes all expenses, including taxes, so you will need more than $750K unless all that is in a Roth.

[gergg]

Thanks guys - So assuming pipeline idea, in theory I could do something like this correct?

• Year 1 - Live off of 30k from Roth IRA, rollover 20k from 401k into Roth IRA (no taxes)
• Year 2 - Live off of 30k from Roth IRA, rollover 20k from 401k into Roth IRA (no taxes)
• Year 3 - Live off of 30k from Roth IRA, rollover 20k from 401k into Roth IRA (no taxes)
• Year 4 - Live off of 30k from Taxable, rollover 20k from 401k into Roth IRA (capital gains tax on 30k, no income tax)
• Year 5 - Live off of 30k from Taxable, rollover 20k from 401k into Roth IRA (capital gains tax on 30k, no income tax)
• Year 6 - Live off of 20k from Roth IRA and 10k from Taxable, rollover 20k from 401k into Roth IRA (capital gains tax on 10k, no income tax)

Then I could just continue the year 6 pattern, taking more from the Taxable account as needed.
So then it sounds like I probably need to have more money in the taxable account, or plan on moving more from the 401k each year (and therefore paying some income tax).

[Thegoblinchief]

I would draw off of the taxable first, then the ROTH.

Depending on how good the options in your 401(k) are, consider skipping the pipeline altogether and just use SEPP via the 72(t) rule. IIRC, spoonman just finished setting up SEPP withdrawals to complement his dividend income in taxable account, so you could PM him or read through his journal a bit. Dr. Doom hasn't pulled the plug yet, but I believe that is part of his plan as well.

[MDM]

Thanks guys - So assuming pipeline idea, in theory I could do something like this correct?

• Year 1 - Live off of 30k from Roth IRA, rollover 20k from 401k into Roth IRA (no taxes)
• Year 2 - Live off of 30k from Roth IRA, rollover 20k from 401k into Roth IRA (no taxes)
• Year 3 - Live off of 30k from Roth IRA, rollover 20k from 401k into Roth IRA (no taxes)
• Year 4 - Live off of 30k from Taxable, rollover 20k from 401k into Roth IRA (capital gains tax on 30k, no income tax)
• Year 5 - Live off of 30k from Taxable, rollover 20k from 401k into Roth IRA (capital gains tax on 30k, no income tax)
• Year 6 - Live off of 20k from Roth IRA and 10k from Taxable, rollover 20k from 401k into Roth IRA (capital gains tax on 10k, no income tax)

Then I could just continue the year 6 pattern, taking more from the Taxable account as needed.
So then it sounds like I probably need to have more money in the taxable account, or plan on moving more from the 401k each year (and therefore paying some income tax).

You'll need the intermediate step of "401k into traditional IRA," after which you can do "traditional IRA into Roth IRA," but the table above may have assumed that.

And the "no tax" items assume that your taxable income, including those rollovers, is at or below $0.  Good assumption?

[gergg]

I would draw off of the taxable first, then the ROTH.

Depending on how good the options in your 401(k) are, consider skipping the pipeline altogether and just use SEPP via the 72(t) rule. IIRC, spoonman just finished setting up SEPP withdrawals to complement his dividend income in taxable account, so you could PM him or read through his journal a bit. Dr. Doom hasn't pulled the plug yet, but I believe that is part of his plan as well.

Thanks for the suggestion, I will look into that as well.  I just figured the payment would be too low to do any good, but I didn't actually calculate it.

[gergg]

You'll need the intermediate step of "401k into traditional IRA," after which you can do "traditional IRA into Roth IRA," but the table above may have assumed that.

And the "no tax" items assume that your taxable income, including those rollovers, is at or below $0.  Good assumption?

I didn't consider that extra rollover.  Is there any waiting period with that or is it just another step?

As for that tax, I'm assuming that the only taxable income I would owe would come from the Roth conversion...and if I keep that below roughly 20k (whatever the exact number is) then I wouldn't owe anything.

[MDM]

I didn't consider that extra rollover.  Is there any waiting period with that or is it just another step?

As for that tax, I'm assuming that the only taxable income I would owe would come from the Roth conversion...and if I keep that below roughly 20k (whatever the exact number is) then I wouldn't owe anything.

Rollover contributions from a traditional to a Roth are subject to a 5 year waiting period.  See http://www.investopedia.com/ask/answers/05/waitingperiodroth.asp and https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/ for two similar articles on this topic.

As long as your Adjusted Gross Income (AGI) is less than the deduction plus exemption amounts (in 2014 for singles, $6200+$3950=$10,150) you will pay $0 federal tax.  If the income is all dividend and long term capital gains then you get deduction+exemption+"top of the 15% bracket", or $6200+$3950+$36900 = $47,050, before paying federal tax.

State taxes vary...by state.