Author Topic: Where should I put my retirement money if I want to retire earl(y/ier)  (Read 5275 times)

cgc007

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Hi!

Currently I'm maxing out two ROTH IRAs for my wife and I and adding a little more to our ROTH TSP account I have access to.

Because I have the ROTH TSP available, my maximum ROTH bucket for 2013 was $28,500.

I'm currently planning to vastly ramp up our retirement contributions once our house is paid off, but not before then (we're currently doing 15% pretax towards retirement).

My question is, where should I be putting my money so that I can access it without penalties before I hit 59.5yo?

Are the penalties big enough that I should put some of the money elsewhere? As it stands, if I continue to solely use my ROTH options, it'll be a while before I can completely max all of them. We basically need to pay the house off before I can do that.

As it stands, my retirement plan with the ramp ups I'm expecting from paying the house off and being promoted throughout the years I will retire at 45 (I'm 31) and begin harvesting a gigantic income stream from my investments once I hit 59.5.

The only issue I have with my current plan is, I do NOT need all of that money that I'll get if I follow this plan. I mean, the numbers I'm coming up with are ludicrous. We're currently living off of about $44k a year, and once the house gets paid off that'll drop to about $30k/year. The current estimations are that once I hit 59.5 I'll end up with approximately $450k/year.

Any help on what/where I should prioritize putting my money so I can retire much earlier instead of super wealthier?

Thoughts? Ideas? Comments? Questions?

Thanks for the help guys!

Gray Matter

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Re: Where should I put my retirement money if I want to retire earl(y/ier)
« Reply #1 on: January 28, 2014, 05:19:40 AM »
I an not particularly investment-vehicle savvy, but my understanding is that you can access your contributions to a ROTH and withdraw them with penalty, since you already paid taxes on them.  The returns cannot be accessed until 59 1/2 without penalty.  However, I believe there is a way to draw down retirement assets starting before 59 1/2 -- not sure what the stipulations are.

Without knowing your actual numbers, it's hard to comment, but you would need a whack of money saved to have a 450K income at 4% annual withdrawal.  What assumptions are you making in terms of inflation, return rate, withdrawal rate, etc.?

cgc007

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Re: Where should I put my retirement money if I want to retire earl(y/ier)
« Reply #2 on: January 28, 2014, 10:03:21 AM »
I'm assuming  12% interest, with an 8% withdrawal rate, leaving 4% each year to grow to compensate for inflation.

Those numbers end me at $5.2M at 59.5, which frankly, is a lot of money.

Even if I assume 7% interest, which, by my calculations is all but guaranteed in the long run, with a 3% withdrawal rate (leaving the 4% difference to cover inflation) I'll have $1.5M which leaves me with a $102k/y (w/ my pension included which is $57k of that).

Reality is likely to be somewhere in between, which is still a lot $250k/y (w/pension of $57k).

I suppose I could just eat the penalties but, it seems extremely foolish to do so if I could invest elsewhere that wouldn't cost as much.

Nothlit

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Re: Where should I put my retirement money if I want to retire earl(y/ier)
« Reply #3 on: January 28, 2014, 10:27:59 AM »
"Roth" is not an acronym so there is no reason to write it in all-caps. :-) The name comes from Senator William Roth, who was the original legislative sponsor of these kinds of accounts back in the 90s.

I'm not familiar with Roth TSPs, but because Roth IRA contributions are after-tax, you are able to withdraw them at any time with no taxes or penalties imposed. I would assume the same holds true for Roth TSPs. It's only when you start to withdraw earnings (i.e., when your total withdrawals have exceeded your total contributions) that you have to consider possible taxes and penalties.

You mention your pre-tax savings as well, which I assume is in a traditional IRA, TSP, or 401k-type account? Even in that case, you can access those savings before age 59.5 if you use the Roth conversion-pipeline strategy, or the SEPP strategy.

MustachianAccountant

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Re: Where should I put my retirement money if I want to retire earl(y/ier)
« Reply #4 on: January 28, 2014, 10:58:07 AM »
Attend one of the retirement seminars that your federal employer inevitably holds, and ask the presenter what your options are for early withdrawal. There may be (I think there is) some option where you can withdraw early in even increments.
Might also want to check with them on what your pension payment will be based on years of service. The formula is a bit archaic in my experience. Also, when it kicks in is also based on years of service I believe.

At some point, you may want to consider just using taxable Vanguard accounts - yes, you'll pay tax on the dividends, but they'll have maximum liquidity and minimum withdrawal rules.

cgc007

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Re: Where should I put my retirement money if I want to retire earl(y/ier)
« Reply #5 on: January 28, 2014, 11:06:52 AM »
The pension payouts I've nitpicked into a science. I have el-gigantor excel sheet for that telling me what the initial payouts will be (anything much beyond that is uncertain, as they can change how it operates after the fact, as they recently did in the 2014 FY Budget approval).

I'll see if anyone from Finance can give me an idea of what I can do with my TSP account after I retire.

I have a feeling I may end up doing Vanguard accounts though, if the taxes are less than the penalties I'd pay.

cgc007

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Re: Where should I put my retirement money if I want to retire earl(y/ier)
« Reply #6 on: January 28, 2014, 11:36:26 AM »
According to my financial adviser, I can take out the principle of ROTH IRA accounts without penalty at any time. That would allow me to at least subsidize finding a different job if something happens to my current one (if needed, we have an emergency fund outside of that) without too much fuss.

However, if anyone has any great ideas I'd love to hear about them.

jexy103

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Re: Where should I put my retirement money if I want to retire earl(y/ier)
« Reply #7 on: January 29, 2014, 06:36:48 PM »
...
I'm not familiar with Roth TSPs, but because Roth IRA contributions are after-tax, you are able to withdraw them at any time with no taxes or penalties imposed. I would assume the same holds true for Roth TSPs. It's only when you start to withdraw earnings (i.e., when your total withdrawals have exceeded your total contributions) that you have to consider possible taxes and penalties.
...

This TSP pamphlet (https://www.tsp.gov/PDF/formspubs/tspbk08.pdf) should answer most of your questions. See page 22 on for withdrawal information. When you separate from employment, you can take your balance as an annuity, monthly payments, or lump sum. Since your TSP is all Roth, there shouldn't be any tax implications on your contributions. You'd have to do some more research to see about earnings and when you can withdraw those, etc. Another option is to transfer your TSP balance to your IRA when you separate from federal service, and you'll have more flexibility and all your funds will be more consolidated.

jexy103

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Re: Where should I put my retirement money if I want to retire earl(y/ier)
« Reply #8 on: January 29, 2014, 06:58:31 PM »
See also: http://www.tsp.gov/PDF/formspubs/tsp-583.pdf. This is the TSP's Tax Notice .

the fixer

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Re: Where should I put my retirement money if I want to retire earl(y/ier)
« Reply #9 on: January 29, 2014, 07:10:46 PM »
I'm assuming  12% interest, with an 8% withdrawal rate, leaving 4% each year to grow to compensate for inflation.

Those numbers end me at $5.2M at 59.5, which frankly, is a lot of money.

Even if I assume 7% interest, which, by my calculations is all but guaranteed in the long run, with a 3% withdrawal rate (leaving the 4% difference to cover inflation) I'll have $1.5M which leaves me with a $102k/y (w/ my pension included which is $57k of that).

Reality is likely to be somewhere in between, which is still a lot $250k/y (w/pension of $57k).
You should read up on the 4% rule and the studies on it. Your math isn't wildly off but it's a bit more complex than you're making it (mainly due to sequence of returns risk)
http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

Researcher

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Re: Where should I put my retirement money if I want to retire earl(y/ier)
« Reply #10 on: January 30, 2014, 09:51:51 AM »
This is my favorite article to look at when I think about this: http://www.madfientist.com/traditional-ira-vs-roth-ira/

It also includes how to convert a 401K.