Remember that time I wrote a post about why I hate my Roth IRA and why I would probably never contribute to it ever again.
But then, like a week later, I wrote a follow-up post saying I still hate my Roth IRA, but I’ll probably keep contributing to it for the foreseeable future.
Or how about that time, a few weeks ago, when I wrote a post about having a ton of money available to me at retirement, maybe even too much?
But then my most recent post talked about how I was going to add even more to my retirement accounts, specifically my 401k.
This personal finance stuff can be confusing
What might sound good one week, may not be my cup of tea the following week.
With a government pension waiting for me on my 57th birthday, and social security kicking in shortly after, I’ve always just kind of resigned to the fact that I would work in to my late 50’s.
I mean, I’ll never make a huge salary in my line of work, so the idea of retiring early seemed like a foreign concept.
A Changed Perpective
But after reading J Money’s recent post on Early Retirement, and poking around with the spreadsheet he made, I found myself wanting to dig deeper.
According to J’s spreadsheet, if I change nothing about our spending (or saving) habits, I’m looking at being able to retire when I’m 45 years old. Check it…
Basically, the early retirement rule of thumb is you need to have 25 times annual expenses banked before you can retire.
Since our plan is to spend about $48,000 per year, we need $1.2 million stored away before I can call it quits. As soon as I hit that number, I can work my last day with reasonable certainty that I wont have to work ever again.
So the question remains, even if I had $1.2 million invested in my 401k right now, how could I possibly access those funds without paying the an IRS mandated 10% penalty for early withdrawal?
Introducing the IRS 72t withdrawal program.
Without boring you to death, the 72t program allows an individual to withdraw an “equally substantial distribution” each year without paying a penalty.
Basically, if I have $1,200,000 in my retirement accounts by the time I turn 35 years old, I could take advantage of the 72t program and withdraw $56,420 from my 401k each year without paying a penalty.
There are, of course, a few catches to the 72t program. One of the most important being that you are required to continue making withdrawals until age 59 1/2 or for five years, whichever time period is longer. So no withdrawing some years, and not withdrawing others. It’s definitely a long term commitment for those that choose to retire early.
But hey, how bad can retiring early really be?
Another big whopper for the program, is that if you modify your series of payments in any way, the 10% early distribution penalty is retroactively imposed on all money you’ve withdrawn. Ever. Yikes! That would be a very costly mistake.
Basically, once you pick an amount to withdraw each year (in this example $56,000), you have no wiggle room to withdraw any amount other than that from your 401k.
If you want to learn more about the 72t rule you can do so here.
Some other things worth noting
So far I’ve only been talking about withdrawals from my 401k, but as you all know, I’ve also been an avid contributor to my Roth IRA and most recently, a taxable investment account.
Having my retirement portfolio diversified across a number of avenues sweetens the pot. With the 72t rule and my example above, I was only allowed to take out $56,000 a year.
No more, no less.
But what if I have Girl Ninja and I decide to buy a new car, or pay for Baby Ninja’s first year of college, or a potential future daughter’s wedding. Where is the money for those types of things going to come from?
My Roth IRA. Duh.
I’ll be able to use my Roth as a means to buffer any abnormal spending requirements. Because, as I’m sure you already know, Roth contributions can be withdrawn at any time.
Or in other words, I’d have about $75,000 of tax-free/penalty-free money accessible to me at any given time by my 35th birthday.
But wait there’s more.
As you might recall from my post on Home Equity Lines of Credit, Girl Ninja and I have decided to stop keeping so much darn cash in the bank and begin throwing all our discretionary income in to our taxable investment account.
That’s right. Screw our savings account!
As our taxable investment account continues to grow, I can take advantage of all sorts of tax loop holes to to minimize my tax obligation on withdrawals, possibly even completely eliminating taxes altogether. Tax loss harvesting anyone? Or how about dividend investing? The loop hole list goes on and on.
Don’t believe it’s possible?
You’re wrong. Check out this inspirational blog post from a couple that paid NO TAXES in 2013.
It’s time you start drinking the kool-aid!
Like I said before, I’d always assumed early retirement was for two types of people.
Either the mega wealthy for obvious reasons.
Or
People like Mr Money Mustache, who live such a frugal lifestyle that they spend less than $25,000 per year. (editor’s note: Nothing wrong with the frugal and resourceful lifestyle, I personally am just not as interested in giving up my vehicle, moving to a cheaper cost of living area, growing my own food outback, etc. I’m lazy in that respect and am willing to pay the premium for it I suppose.)
Now that I’m digging deeper and getting in to some of the nitty gritty aspects of personal finance, my eyes are open to a whole new way of thinking. While I might not be retiring at 35 like the examples above, I could see 45, or maybe even 40 being a real possibility. And I don’t know about you, but that sounds a heck of a lot better than retiring at 57 like I’d always planned on.
P.S. I’m aware the future will obviously have some expensive seasons ahead (multiple children in high school, potential house projects, big family vacations, etc), but we will also have seasons of reduced expenses or greater income(paying off our mortgage, kids moving out and becoming self-sufficient, Girl Ninja going back to work, pension, social security, etc).
