Using 72(t)

[sloof70]

Hi guys.  New here, but a blog follower of a couple years.  I searched a little while and didn't easily find an answer to this question (though I'm sure someone has posted it), so I'll start it fresh.

I'm 25 and dutifully contributing the max to my SIMPLE IRA and Roth IRA, and along with company matching 3%, I'll dump $19k into retirement accounts in 2013.  I have a pretty decent financial adviser, and doing the math, I can see myself retiring in 15 years.  However, what I'll be able to take off of this at 40 using SEPP would be only a little more than what I currently spend (inflation adjusted, of course), assuming that the reasonable percentage will be similar to the 1.3% it is today.  I currently spend around $20k/annually, so the adjusted amount for a different lifestyle with similar spending should be fine.  Yet I would much rather pull in the 4% withdrawal, especially if I'm bringing in a 7-10% (after inflation) gain annually.  Retirement, for me, means (cheap) travel and pursuing hobbies, and once the money is there, I'm not feeling MMM enough to not use it just to prove a point.

What I'm wondering is, for the early retiree, is it more sensible?

• Pump primary investments into IRAs and then hope that the ~1.3% granted by 72(t) exemption will be enough
• Max the SIMPLE for the lower tax bracket and company match, but ditch the Roth for unrestricted assets
• Avoid both and invest all post-tax in order to have complete control (but eat the capital gains)
• Other options...

Thoughts, gents?  I want to figure this out before I spend over a decade investing incorrectly.

[matchewed]

Several topics brush on this. You seem to be asking whether it is worth it to invest in tax deferred accounts for a person who wants to FIRE.

The answer is yes with caveats. One caveat being that we cannot predict the future. But it is the option which lends you to the most flexibility in the future. It is most sensible to do what you are doing and when your income increases or you hit the caps on your contributions for you to move on to other investment vehicles such as post tax investments.

Also if I were in your shoes I'd be a bit more conservative with your gains predictions. 7-10 after inflation is really good. 7-10 prior to inflation is much more realistic over a long time frame.

[Apocalyptica602]

Obligatory MMM post that touches in the realm of what you're thinking about: http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

For what it's worth: I'm in essentially the same boat as you. I'm 24, turning 25 in June, I'm looking to retire early, and have been saving 23k/year in retirement accounts (17.5k 401k 5.5k Roth IRA)

Personally I'm going to keep funneling the max into my retirement accounts for now for at least 5 years. However currently (at 24) I still have an extra ~500-1000/month which I'm going to begin investing in a taxable brokerage as a hedge.

Once I'm 30 I'll see where I'm at in my career and personal life and adjust as necessary.

What's best for me might not necessarily be what you feel is best for you, but that's what I'm going with.

Also, realistically, as long as you're living well below your means and found you funneled WAY too much money into retirement accounts, you can still withdraw from your IRA's but pay a penalty (10%?) on top of any required taxes if you find you need more than SEPP allows.

... it's not the most efficient way to go about things, but if you find you have too much money in retirement accounts anyway, it's a nice problem to have.

[sloof70]

Several topics brush on this. You seem to be asking whether it is worth it to invest in tax deferred accounts for a person who wants to FIRE.

The answer is yes with caveats. One caveat being that we cannot predict the future. But it is the option which lends you to the most flexibility in the future. It is most sensible to do what you are doing and when your income increases or you hit the caps on your contributions for you to move on to other investment vehicles such as post tax investments.

Also if I were in your shoes I'd be a bit more conservative with your gains predictions. 7-10 after inflation is really good. 7-10 prior to inflation is much more realistic over a long time frame.

I figured as much.  Use the tax-advantageous methods first.  I won't be a 25 year-old making $50k for much longer (hopefully it's the money that increases first!).

And as for the gains, in the first couple years I'm going to make myself as optimistic as possible to prove I'm doing a good thing (even if they may not be the most realistic).  Keeps me saving aggressively.

[matchewed]

Several topics brush on this. You seem to be asking whether it is worth it to invest in tax deferred accounts for a person who wants to FIRE.

The answer is yes with caveats. One caveat being that we cannot predict the future. But it is the option which lends you to the most flexibility in the future. It is most sensible to do what you are doing and when your income increases or you hit the caps on your contributions for you to move on to other investment vehicles such as post tax investments.

Also if I were in your shoes I'd be a bit more conservative with your gains predictions. 7-10 after inflation is really good. 7-10 prior to inflation is much more realistic over a long time frame.

I figured as much.  Use the tax-advantageous methods first.  I won't be a 25 year-old making $50k for much longer (hopefully it's the money that increases first!).

And as for the gains, in the first couple years I'm going to make myself as optimistic as possible to prove I'm doing a good thing (even if they may not be the most realistic).  Keeps me saving aggressively.

Interesting. I'm much the opposite. My very conservative estimates drive me to save aggressively to compensate for crappy returns (plus I look like I'm doing awesome compared to projections).

[brewer12345]

Before you totally discount the 72T option, fool with the calculators here: http://72t.net/Default.aspx

Plugging in withdrawals starting at age 40, I get a starting withdrawal rate of about 3% even at today's appallingly low interest rates.

[grantmeaname]

Yet I would much rather pull in the 4% withdrawal, especially if I'm bringing in a 7-10% (after inflation) gain annually.  Retirement, for me, means (cheap) travel and pursuing hobbies, and once the money is there, I'm not feeling MMM enough to not use it just to prove a point.

You want to be able to count on a 7-10% real return for the forty or more years you're retired?

[sloof70]

Yet I would much rather pull in the 4% withdrawal, especially if I'm bringing in a 7-10% (after inflation) gain annually.  Retirement, for me, means (cheap) travel and pursuing hobbies, and once the money is there, I'm not feeling MMM enough to not use it just to prove a point.

You want to be able to count on a 7-10% real return for the forty or more years you're retired?

Alright!  I get it!  Should've never added "-10" on that.  Was basing off various investments and my uncle's history with this adviser.  So let's be realistic.

I get 7% after inflation (we're cool with this, right?), of which 4% in 15 years is what it takes to operate today's lifestyle.  Along the way, I will make more money at a faster rate than inflation, and I would hope that the increase goes to further investing and buying a house.  Stuck again with this pathetic 1.3%.

[grantmeaname]

Sorry, I missed matchewed's post -- didn't mean to beat a dead horse. The 4% SWR is based on a 7% nominal return, or a 4-4.5% real return. The idea is that you're only withdrawing 4% a year because you're only really making 4% a year, not that you withdraw less than you earned out of stoicism or something.

[brewer12345]

Yet I would much rather pull in the 4% withdrawal, especially if I'm bringing in a 7-10% (after inflation) gain annually.  Retirement, for me, means (cheap) travel and pursuing hobbies, and once the money is there, I'm not feeling MMM enough to not use it just to prove a point.

You want to be able to count on a 7-10% real return for the forty or more years you're retired?

Alright!  I get it!  Should've never added "-10" on that.  Was basing off various investments and my uncle's history with this adviser.  So let's be realistic.

I get 7% after inflation (we're cool with this, right?), of which 4% in 15 years is what it takes to operate today's lifestyle.  Along the way, I will make more money at a faster rate than inflation, and I would hope that the increase goes to further investing and buying a house.  Stuck again with this pathetic 1.3%.

Where are you getting 1.3%?  Did you go play with the 72T calculators I linked to?

[sloof70]

Where are you getting 1.3%?  Did you go play with the 72T calculators I linked to?

I started to, but I got confused and distracted.  Just went back and I'm still confused as to what many of these fields are.

[brewer12345]

Where are you getting 1.3%?  Did you go play with the 72T calculators I linked to?

I started to, but I got confused and distracted.  Just went back and I'm still confused as to what many of these fields are.

OK, then I will simplify it: I plugged in the particulars for setting up a 72T on an IRA assuming that you start it when you are 40 and leaving in today's extremely low interest rates.  It spits out a withdrawal of slightly over 3% a year.  The age you are when you start makes a big difference in what your allowable % withdrawal is under 72T.  Most likely, we will see interest rates rise somewhat over time, which would mean you could withdraw an even greater percentage.

[sloof70]

Where are you getting 1.3%?  Did you go play with the 72T calculators I linked to?

I started to, but I got confused and distracted.  Just went back and I'm still confused as to what many of these fields are.

OK, then I will simplify it: I plugged in the particulars for setting up a 72T on an IRA assuming that you start it when you are 40 and leaving in today's extremely low interest rates.  It spits out a withdrawal of slightly over 3% a year.  The age you are when you start makes a big difference in what your allowable % withdrawal is under 72T.  Most likely, we will see interest rates rise somewhat over time, which would mean you could withdraw an even greater percentage.

Screwed around with it a bit more and I think I'm seeing it now.  Thanks.  Still means I should probably invest amply outside of retirement accounts.  Once I start making more, that is.

[brewer12345]

Where are you getting 1.3%?  Did you go play with the 72T calculators I linked to?

I started to, but I got confused and distracted.  Just went back and I'm still confused as to what many of these fields are.

OK, then I will simplify it: I plugged in the particulars for setting up a 72T on an IRA assuming that you start it when you are 40 and leaving in today's extremely low interest rates.  It spits out a withdrawal of slightly over 3% a year.  The age you are when you start makes a big difference in what your allowable % withdrawal is under 72T.  Most likely, we will see interest rates rise somewhat over time, which would mean you could withdraw an even greater percentage.

Screwed around with it a bit more and I think I'm seeing it now.  Thanks.  Still means I should probably invest amply outside of retirement accounts.  Once I start making more, that is.

It is always good to have more flexibility, so a taxable account should be in your plans.  But 72T plans are not horrendous with today's interest rates and ifrates go up would would be able to withdraw a fair amount more.

[velocistar237]

I plugged in the particulars for setting up a 72T on an IRA assuming that you start it when you are 40 and leaving in today's extremely low interest rates.  It spits out a withdrawal of slightly over 3% a year.

I get that under the Amortization or Annuity options, but aren't those are fixed dollar amounts that do not change over time, even with inflation and interest? Under the Minimum Distribution option, it's more like 2.3% initially.

Most likely, we will see interest rates rise somewhat over time, which would mean you could withdraw an even greater percentage.

But only if you start the withdrawals after the interest rate rises, right? Once you lock it in, you can't change your withdrawal percentage without "busting" the plan and paying big penalties.

[brewer12345]

I plugged in the particulars for setting up a 72T on an IRA assuming that you start it when you are 40 and leaving in today's extremely low interest rates.  It spits out a withdrawal of slightly over 3% a year.

I get that under the Amortization or Annuity options, but aren't those are fixed dollar amounts that do not change over time, even with inflation and interest? Under the Minimum Distribution option, it's more like 2.3% initially.

Most likely, we will see interest rates rise somewhat over time, which would mean you could withdraw an even greater percentage.

But only if you start the withdrawals after the interest rate rises, right? Once you lock it in, you can't change your withdrawal percentage without "busting" the plan and paying big penalties.

Yep, 3% is fixed annnual withdrawal amount not adjusted for inflation.

Once you start withdrawals, you are committed to your plan for at least 5 years and age 55 as I recall.  As such, 72Ts should be very carefully planned out before you pull teh trigger and probably make the most sense for people 45+ years of age.  As I said, having a taxable account to go with it is a good idea.