Author Topic: Post retirement Income for years before 59 1/2  (Read 3889 times)

Doulos

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Post retirement Income for years before 59 1/2
« on: March 05, 2015, 05:59:44 PM »
I read through many of the articles.
The part I am having trouble with is how to fund the multitude of years between retiring early (financial independence) and the age of 59 1/2 when I am allowed to start getting money out of the 401k, IRA, Roth IRAs, etc.  (I live in USA, I am sure other countries have different rules.)
I am really hoping this subject could be covered on the blog.

By my calculations, if I stop putting money into retirement accounts today, even at pessimistic 5% gains (after tax, tip, inflation) I should have a ridiculously high income post 59 1/2. 
180K in retirement accounts now. 
4k in HSA
7k in non-retirement accounts.

People here seem to have the answer, and speak as though you should max out all this retirement stuff 1st. 
I am 36 now.  In theory, conservatively, I reach financial independence by 44.
How do you survive the years between age 44 and 59 1/2 if near 100% of my money is tied up in retirement accounts?
Is there a different plan I should follow for storing up money in non-retirement accounts instead?

My details for the world to help you answer this question.  A rough, non-exact numbers.  Wimpier than mustacheian spending.
Income $133,000 (yearly combined household)
Taxes: $27,000 (includes fed, state, medicare, etc)
Giving:  $20,000
Savings: $38,000 (19.5k 401k, 11k RothIRA, 1.5k HSA, 6k regular investment)
Spending: $40,500 (putting wife through nursing school, this goes down by $10k in 1 year)
Cash: $7500

Note: I rent, I have $0 capital items.  1 used smart car if you want to call that capital.

kpd905

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Re: Post retirement Income for years before 59 1/2
« Reply #1 on: March 05, 2015, 06:13:42 PM »
Look up the Roth Conversion ladder.  You roll your 401k to an IRA, then convert chunks of it to a Roth IRA each year.  You pay tax on the amount converted.  You can then withdraw that money from the Roth IRA after 5 years.

So it allows you to access your 401k before 59.5 penalty free.  There is also the 72t method but you can't control your tax rate with that method.

Keep maxing out your tax deferred accounts to save on taxes now.

Here is a good article about it: http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
« Last Edit: March 05, 2015, 06:17:19 PM by kpd905 »

MDM

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Re: Post retirement Income for years before 59 1/2
« Reply #2 on: March 05, 2015, 08:42:51 PM »

ClaycordJCA

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Re: Post retirement Income for years before 59 1/2
« Reply #3 on: March 05, 2015, 09:54:59 PM »
Please correct me if I am wrong, but doesn't the Roth conversion ladder assume that one has enough in taxable accounts to cover the expenses for the first five years of early retirement?

MDM

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Re: Post retirement Income for years before 59 1/2
« Reply #4 on: March 05, 2015, 10:18:03 PM »
Please correct me if I am wrong, but doesn't the Roth conversion ladder assume that one has enough in taxable accounts to cover the expenses for the first five years of early retirement?
You are not wrong.

rpr

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Re: Post retirement Income for years before 59 1/2
« Reply #5 on: March 05, 2015, 11:17:48 PM »
You can also withdraw existing Roth IRA contributions. That plus taxable should cover your spending for 5 years as you are setting up the Roth conversion pipeline. From your estimate you need 30k per year in living expenses so a total of 150k is needed in Roth IRA contributions and taxable savings.


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Doulos

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Re: Post retirement Income for years before 59 1/2
« Reply #6 on: March 06, 2015, 09:49:13 AM »
So, what I think I have learned here is.
You need enough Taxable investments + Roth Principle to finance 5 years.
Which for me is really lower than our current budget.

We do not actually plan on retiring, but we want to take the leap.   So we have discussed, and are comfortable with a $24k year spending.
  • Really looking to hit $600k at the safe 4%.
  • and $120K available for the 1st 5.

Thus you are telling me, I need $120k in Cash+Taxable+RothPrinciple.
We do have $20k Cash on hand.  (We like to keep our balance high to never worry about when a paycheck clears or bill hits.  And we have the Dave Ramsey emergency fund at $12k.)

  • So if we assume we keep roughly $20K cash.
  • RothPrinciple is at $20k now.  And +$10k per year.  7yr = $90k
  • Taxable at $7k now.  And +$6k per year.  7yr = $49k
Total: $159k

Even if I never earn any interest at all, I would be done in 7 years by these estimates.

We have that $7500 cash per year I 'should' put somewhere.  Any suggestions?
And the extra $10k next year and following.
- the advice I was seeing in those links are saying max out the HSA 1st.
- is 15% the 401k max?  should I put more in there?
- If I should put some more in Taxable, how much more would you suggest?
« Last Edit: March 06, 2015, 10:22:49 AM by Doulos »

seattlecyclone

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Re: Post retirement Income for years before 59 1/2
« Reply #7 on: March 06, 2015, 10:30:46 AM »
Don't forget to take inflation into account when setting up your Roth pipeline. If you expect 5% inflation each year (a bit on the high side, but not impossible by any means), you would need to have about $30k available in five years to cover a $24k budget in today's dollars. When you have some taxable money, that is always accessible so you have some wiggle room in the amounts. If you run out of taxable funds and are planning to live only on Roth principal at some point, you'll need to convert a bit extra each year to cover inflation in the five-year waiting period.

Dulcimina

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Re: Post retirement Income for years before 59 1/2
« Reply #8 on: March 06, 2015, 12:49:22 PM »
I'm confused about a couple of things. You are putting $19.5k into your 401(k).  Is some of that from your wife's contribution or are you making after tax contributions?
- is 15% the 401k max?  should I put more in there?
This makes me nervous that you are overcontributing.

How much do you contribute to your Roths? In your OP, you wrote that you were contributing $11k into roths, then in the last post, you wrote only $10k.  Why do you need $20k cash in addition to your emergency fund? Wouldn't your EF cover paychecks not clearing etc? And why isn't that $32k included in your net worth?

Do you even need the Roth pipeline? You have $6k/yr + $7.5k/yr then in one year, another $10k/yr that can go into taxable.  Presumably your wife will get a job in a  year or two, and since you don't need her salary to survive, all of that can go into a combination of her 401(k), and the taxable account and HSA. 


Doulos

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Re: Post retirement Income for years before 59 1/2
« Reply #9 on: March 06, 2015, 04:17:27 PM »
These numbers are our total combined income.  There are two people. 
My wife already has a job, but is doing on-line school also.  Our income is not expected go up suddenly.

Roth IRA recently went from 5k to 5.5k. per year.  So it was 10k a year, but going forward that should be 11k per year.
401k is both of us at 15%.  She gets a match or 3.5% i think, maybe 4%; which is roughly $2k a year.
- We both get roughly the same income.  So ~$66.5k each @15%.  Roughly $10k each in 401k.  Probably more like $22k total a year since she gets that match.
We only have 1 combined HSA, with my company, which gives us a $1k match.  So that is really more like $2.5k a year.

The cash on hand is $20k total.  ~6k in one bank, another ~2k in a debit account for expenses and school bills, and 12k for emergency.

rpr

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Re: Post retirement Income for years before 59 1/2
« Reply #10 on: March 06, 2015, 05:08:18 PM »

- is 15% the 401k max?  should I put more in there?

The normal IRS maximum limits on employee contributions for 401k/403b are 18K if less than 50 years old and 24K if older than 50. However, your specific 401k plan may restrict contributions. You need to read your plan documents to determine if there are limits.