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Author: CMcDaniel Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75402  
Subject: Unconventional Approach? Date: 2/20/2000 11:44 PM
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I was discussing my financial situation with someone that has given me good advice in the past and an unconventional approach to retirement investing was brought up. I would be interested to see if anyone is doing this and how it worked out.

First, some background. My wife and I are both in our mid 30's and have in our combined IRA's/401K's around $425K. We are both maxed out on our 401K's and put another $1K/month in a regular investment account. We are shooting for retirement (or maybe just changing to less-well-paying jobs more in line with our hobbies/interests) when we get to our early to mid 50's.

It was suggested that the money currently in retirement accounts is a reasonable base to let grow for the time when we are past 59 1/2 and that our focus should now be on financing the years between retirement and 59 1/2. Specifically, we should be investing in stocks that are to be held for a long time frame (paying taxes at the long term capital gains rate). This, perhaps, should be done to the point of reducing or eliminating our 401K contributions over the course of the next 5 years. The arguement was that it would be better to pay long term capital gains than income tax + 10% penalties on money withdrawn from our retirement accounts before the age of 59 1/2.

I ran a couple of scenarios in excel to compare the strategies (stay in 401K vs outside) and, in my calculations, staying in the 401K and just paying the penalties worked out better. Of course, my calculations were crude and didn't take into consideration any possible changes in income tax rates or changes in capital gain rates.

Any thoughts?

Craig M.
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Author: Gglass555 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19347 of 75402
Subject: Re: Unconventional Approach? Date: 2/21/2000 3:04 AM
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I was discussing my financial situation with someone that has given me good advice in the past and an unconventional approach to retirement investing was brought up. I would be interested to see if anyone is doing this and how it worked out.

First, some background. My wife and I are both in our mid 30's and have in our combined IRA's/401K's around $425K. We are both maxed out on our 401K's and put another $1K/month in a regular investment account. We are shooting for retirement (or maybe just changing to less-well-paying jobs more in line with our hobbies/interests) when we get to our early to mid 50's.

It was suggested that the money currently in retirement accounts is a reasonable base to let grow for the time when we are past 59 1/2 and that our focus should now be on financing the years between retirement and 59 1/2. Specifically, we should be investing in stocks that are to be held for a long time frame (paying taxes at the long term capital gains rate). This, perhaps, should be done to the point of reducing or eliminating our 401K contributions over the course of the next 5 years. The arguement was that it would be better to pay long term capital gains than income tax + 10% penalties on money withdrawn from our retirement accounts before the age of 59 1/2.

I ran a couple of scenarios in excel to compare the strategies (stay in 401K vs outside) and, in my calculations, staying in the 401K and just paying the penalties worked out better. Of course, my calculations were crude and didn't take into consideration any possible changes in income tax rates or changes in capital gain rates.

Any thoughts?

Craig M.



I can't think of one good reason for someone to NOT participate in their company 401(k) plan. There are exceptions to the 10% early withdrawal penalty. If you are maxed out in your 401(k) plans as you say you are, and you still have surplus cash at the end of each month, I suggest investing in tax efficient, low cost index mutual funds, the kind that mirror the performance of the S&P 500 index. You can "hold" this money in an after-tax account and essentially use it as a savings account. Some even offer check writing priveleges. Don't let that 10% early withdrawal penalty discourage your investing strategy. You guys have a hell of start and assuming average market returns for the next 15 years or so, you should have about $2.4 million in accumulated wealth! And that's just the value of the 401(k) plans, without ANY further contributions! Did you say something about a 10% penalty fee?

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19349 of 75402
Subject: Re: Unconventional Approach? Date: 2/21/2000 3:40 AM
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The advice you recieved is not as unconventional as you believe. Also, there are exceptions tot he 10% penalty - SEPP pursuant to 72(t), IIRC, of th Tax Code. SEPPs are discussed ad infinitum on The Retire Early board in Speakers' Corner. You might also follow the the link to "intercst"'s Retire Early Home Page.

Hope this helps. Regards, JAFO

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Author: nampa45 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19351 of 75402
Subject: Re: Unconventional Approach? Date: 2/21/2000 7:45 AM
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Another option you might consider if you want to mirror index funds instead of a low cost index mutual fund would be investing in SPY which follows the
S&P 500 and QQQ which follows the Nasdaq-100. They could be held for the long term and no capitol gains would be owed until they are sold. They can be traded and bought the same as stocks and can be even bought at a discount broker such as BUYandHOLD.com for a specific dollar amount and fractional shares. It sounds like you have a great start to early retirement and by using SEPP to avoid the 10% penalty for early withdrawal of your funds from your 401k, you should have no problems.

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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19358 of 75402
Subject: Re: Unconventional Approach? Date: 2/21/2000 10:15 AM
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You guys are fortunate in that your nest egg is large enough, early enough that we are now in the realm of opinion. As an example; your 425K 401k will easily grow to $4mm plus by you mid-fifties. At age 59 1/2 you are probably going to facing the equivalent of a min, mandatory distribution around $150k to $175k per year. Wait until 70 1/2 & that min. distribution will jump to some number in excess of $500k per year.

YOU HAVE A TAX BRACKET PROBLEM

If you believe that our federal tax system of graduated brackets will more-or-less still be in place in 15 - 20 years; the time when you might first start tapping some of these assets; you should be running multiple scenarios on an after tax basis. Doing so will immediately lead to several conclusions:

1. It is better to put the money in an after tax account using a LTBH strategy such that the max. tax you pay is 20% versus 39.6%.

2. You will become more and more desirious to make investments outside the stock markets for several reasons:

a. The stock market is only one place to invest.

b. Other investments in real estate & natural resources will start to look much more advantageous particularly from a taxation (reduction as well as credits) basis.

I am by no means suggesting that you abandon your current positioning and leap elsewhere; rather I am suggesting that you run more models and start on a long term program of re-orienting yourselves towards (1) and (2) above. There is no rush right now but here will be 10 - 15 years from now.

TheBadger


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Author: Suvarov454 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19361 of 75402
Subject: Re: Unconventional Approach? Date: 2/21/2000 12:35 PM
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Gglass555 wrote: I can't think of one good reason for someone to NOT participate in their company 401(k) plan.

Here's three:
1) If the company does not match the employee's contributions.
2) If the company matches the contributions at a low rate, and only has sub-standard fund choices (i.e. funds whose after-fee returns are far below an index fund).
3) If the employee is suffering from some terminal (but non-debilitating) illness.

Granted, these three reasons do not hold for the majority of investors, but all are valid reasons. Like all thing here at The Motley Fool, 401(k) advice should be taken with a grain of salt, and investors should always make decisions for themselves, based upon analysis of their own needs.

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Author: jeffy3 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19368 of 75402
Subject: Re: Unconventional Approach? Date: 2/21/2000 3:24 PM
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>>>I am in a similar situation. My wife and I are both in our mid-thirties. We are in the 39.6% bracket so I have been very tax conscious on all my investments and investment planning. We both work for a firm that has a profit sharing plan that contributes 15% of our gross pay (Up to $30,000.00/yr. each). We can not contribute anything to that plan, it is funded entirely by the firm. We do not qualify for Roth IRA's and any money we would contribute to a traditional IRA is not tax deductible. I decided not to contribute to the IRA and instead invest in a taxable account to take advantage of the 20% LTCG tax rate. I suggest you use a retirement calculator to see what your retirement needs will be. Based on our retirement needs our retirement accounts already have enough in them so further funding is not necessary. (But since my firm keeps giving me this damn money I may as well take it:). You might want to contribute to the 401k's only to the extent of matching funds. If you qualify for a Roth, (although I recognize you probably don't) contribute to that. Otherwise LTBH is probably the best way to go.

You only need to hold an investment for a year and a day to get the Long term capital gains rate. To take full advantage of the 20% LTCG rate and the magic of compounding, you only want to sell one time (when you intend to take the money). If you turn over your portfolio every 5-10 years you will be getting taxed on your gains at 20% every time you sell. Skimming that 20% off every few years really does add up.

In my taxable account I employ a LTBH Index investing strategy. I like indexing over individual issues primarily because it is hard to project what any individual company might do over 30+ years. With an index, you only need to believe that the market (or your chosen indices) will go up in value over time. This way you can realistically employ a LTBH strategy without the uncertainty that accompanies holding a single stock. Indexing is especially powerful in taxable accounts due to their relative "tax-friendliness". Indexing is far more than the S&P 500, although it does not necessarily have to be. I recommend reading up on indexing as an investment strategy (pay a visit to the Index Fund message board)and explore index investment vehicles. FWIW, I use the retirement account for all investment strategies that will require sales of equities sometime in the next 30+ years.

I also agree with the post that recommended investments other than equities. Real estate can be fun (vacation homes not rentals).

Remember, most investors are investing to create wealth. Investing to maintain wealth is different. I tend to be a conservative investor, but I have the luxury of being able to afford to be conservative. For me that is a comfortable place to be. It really wasn't difficult for me to be a real risk taker when my portfolio was $5,000.00. A 20% drop in the market is only $1,000.00. No biggie right? Well, that same 20% drop in a $500,000.00 portfolio is $100,000.00. Now that hurts! I know its all relative, but it still hurts.

Good luck,
jeffy3


P.S. If you are at risk for personal liability (e.g., doctor or lawyer), your taxable accounts could be reachable via a judgment or by other creditors (determined by state law), and accordingly you may want to protect your assets in a retirement account or even a variable annuity. They cost you more in terms of dollars, but the protection and peace of mind might be worth it.


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Author: CMcDaniel Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19375 of 75402
Subject: Re: Unconventional Approach? Date: 2/21/2000 5:19 PM
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Thanks to all that replied, this is what makes these boards such a valuable place for all of us.

I certainly have some homework to do. I appreciate the leads on areas to research and the input on things to consider.

Craig M.




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