ER strategy - gap years before drawing 401k, IRA's, etc

[tn3sport]

I'm working to retire early at let's say 56 or 57 yrs old. However, I can't draw on my 401k or IRA's until I'm 59.5 yrs old.
I will have no pension. Therefore, I'll have to live on cash for the gap years between early retirement (56) and 59.5 yrs old.

My questions:
1) Should I stop putting cash into the 401k for the last couple of years of work and instead hoard it in cash so that I can use it to live off of during my gap years?
2) If I'm living off cash for those gap years, I will show zero effective income. Will I qualify for Obamacare subsidies?  (Even though I might actually be a 401k millionaire in my 401k???)

Is this a viable strategy?

Example:
Age 54 - work and put away $35k in 401k, IRA, etc
Age 55 - work and put $35k into cash, instead of 401k.
Age 56 - work and put $35k into cash, instead of 401k.
Age 57 - Quit working and live off of the cash I have. Get Obamacare and full subsidy since I have zero income.
Age 58- Continue to live off cash and nearly free healthcare.
Age 59 - same. Live off cash and get early free healthcare. Then, at age 59.5 begin drawing off my 401k and IRA's, but limit it to be able to continue getting healthcare subsidies.

Its basically a strategy where a 401k millionaire, who has zero income, is able to get affordable healthcare.

[Cheddar Stacker]

I'm working to retire early at let's say 56 or 57 yrs old. However, I can't draw on my 401k or IRA's until I'm 59.5 yrs old.

Not true. There are many, many ways.

http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

1) Don't stop contributing for the gap year, since it doesn't exist. If it makes sense for other reasons to stop contributing, then maybe, but not for that reason.
2) You might. Although you'll want to create some income via the Roth conversion ladder or some other means. Don't let that exemption/deduction/10% bracket go to waste.

[Eric]

You can draw off your 401k at age 55.  If you roll it over to an IRA, it's 59.5, but if you leave it with your company it's 55.  Check with them to make sure that you can keep your funds in your 401k after retiring.

http://www.forbes.com/sites/advisor/2012/05/09/did-you-know-you-can-access-your-401k-penalty-free-at-age-55/

[tn3sport]

Thanks for feedback.
I need to add one element of clarity that I thought would confuse issues in my original post...

I dont want to draw from my 401k or IRA's until I'm 60. I'm aware of the 55 yr old exception rule.
However, my overall retirement plan assumes I let my 401k/IRA's continue to grow until I'm 60 in hopes they will mature to a value that I have targeted.
So, assume me 401k/IRA's are not avail until I'm 60.

I'm trying to find a way to fund the gap years. (ER at 57 through 60.)
I will not have a pension or healthcare once I quit working at 57.
Healthcare for two peeps at age 57 is about $16,000 in the ACA exchange.
I can't afford that.
So, my strategy is to hoard cash, in lieu of 401k investing, for a couple years, before I quit working.
Then, live off the cash, and showing no effective income. Hopefully, that zero income would bring my ACA healthcare costs down to about $2400/yr.

Is this a viable strategy?

[Cheddar Stacker]

It's viable, but maybe not optimal. It depends on the rest of your situation.

Also, what are you going to do for healthcare costs between 60 and 65 or whatever age medicare kicks in? If you can't afford $16K in premiums at 57 years old, why can you afford that at 60 years old once you begin to drawdown your 401k/IRA?

Also also, showing $0 income during these 3 years would likely mean you are missing an opportunity. You don't need to actually spend your 401K/IRA money, but at least convert it to Roth or draw it down a bit to create some income. You have $20K in tax free space for 2 peeps with the standard deduction and personal exemptions. You can still get a 100% subsidy for healthcare with some income. It's been discussed around here at great length, but I don't know the exact details and it depends on where you live. In any case, if you show $0 income, you are missing an opportunity. You are passing up tax savings for healthcare savings. Find the balance.

[Eric]

If your income drops too low, then you'll qualify for Medicaid instead of the ACA.  From everything I've read, you want to stay at least at the minimum income level for the ACA.  (Medicaid is not a desirable outcome) Of course, this is easy to fix by doing a t-IRA to Roth IRA conversion (for instance).

Use the ACA calculators for your state (or at healthcare.gov) to figure out where this cutoff is and what your subsidies would be for various income levels.

Also, since Cheddar Stacker just posted too, I'll note that I agree with him as well.  $0 income is a wasted opportunity.  You may pay a little more for health insurance, but that's offset by greater tax savings.

[forummm]

Medicaid is essentially equivalent to private insurance. It's hard to make blanket statements about it because each state is different and each private plan is different. Medicaid is typically better than private coverage in some respects, and less good in others. Health outcomes (adjusted for priors) are generally similar. I would personally be fine with Medicaid coverage.

But it sounds like the OP may be trying to retire a bit too early (not enough saved), or is planning to spend too much in retirement. Instead of trying to monkey around with things, perhaps just adjust one or the other (or both) of those 2 variables.

[tn3sport]

Great points. Thanks.
And I agree, it would benefit me to have some level of income during the gap years. Where that number ends up will take some spreadsheet work.

60 to 65? I'll use my 401k/IRA's for income. Assume I'm a 401k millionaire. I wanted to minimize that point as I didn't want the context of this discussion to be about the morality of a (401k) millionaire taking advantage of a government subsidy...  Other than my home and cars, I have very few assets of value and would likely qualify for most entitlement programs. During my gap years (ER to 60), I'll likely pursue as many government entitlements as I can.