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I plan to retire at 55 with a 401K worth approx. 1.2 million, all in equities. I have significant other income, but would like to count on 6 - 7% per year from my 401K. I have been a buy and keep investor in the market for many years and have little knowledge of other types of investments. How can I get this type of income from my 401K without drawing down the principle too much? I understand there may be early withdrawal penalties involved.

Thanks for your help.

Jim
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You can avail yourself of IRC §72(t)(2)(A)(4) "substantially equal periodic payments" exception. The rules are complex & the uninitiated should hire a qualified CPA/Tax lawyer to make sure you perform this process correctly. This exception avoids the 10% surtax on early distributions (before age 59 1/2) but regular federal & state income tax is still due.

If you would like to learn more, drop me a note at wstecker@msn.com

TheBadger
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jims440 asks,

I plan to retire at 55 with a 401K worth approx. 1.2 million, all in equities. I have significant other income, but would like to count on 6 - 7% per year from my 401K. I have been a buy and keep investor in the market for many years and have little knowledge of other types of investments. How can I get this type of income from my 401K without drawing down the principle too much? I understand there may be early withdrawal penalties involved.

An annual withdrawal of 6% to 7% may be OK if you just need 5 or 10 years to "get over the hump" until Social Security or a pension kicks in. But the 30 year "survivability" of a 7% withdrawal is much less than "100% safe." See link:

http://www.geocities.com/WallStreet/8257/restud1.html

If you leave your employer after age 55, you can withdraw any amount money from your 401k without incurring the 10% penalty.

If for some reason your previous employer makes it inconvenient to withdraw funds from your 401k, then rolling over to an IRA may make sense. You would need to use the "72(t) exception" in that case to withdraw funds before age 55 and avoid the 10% penalty. There's a free online calculator at the following link that will allow you to determine the amount of a penalty-free early withdrawal:

http://www.geocities.com/WallStreet/8257/wdraw59.html

intercst

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Yes, you can do SEPP, but it may be more Foolish to sell off some of your taxable investments and pay taxes at capital gain rates to cover your needs until age 59-1/2 when you are free to do 401K withdrawals.
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pauleckler wrote,

Yes, you can do SEPP, but it may be more Foolish to sell off some of your taxable investments and pay taxes at capital gain rates to cover your needs until age 59-1/2 when you are free to do 401K withdrawals.

Unless your former employer makes it inconvenient to do so, you can make penalty-free withdrawals from a 401k after you turn age 55.

intercst
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Good point, intercst. I believe the fine print says you must be working for your employer after age 55 to qualify for penalty-free withdrawal at age 55. If you left the employer before age 55, you must wait til age 59-1/2. It may also depend on individual plan rules.
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Jims440 posted:
"I plan to retire at 55 with a 401K worth approx. 1.2 million, all in equities. I have significant other income, but would like to count on 6 - 7% per year from my 401K. I have been a buy and keep investor in the market for many years and have little knowledge of other types of investments. How can I get this type of income from my 401K without drawing down the principle too much? I understand there may be early withdrawal penalties involved."

I hope to retire when I am 56. One thing that may make you smile is that if you quit the firm that holds the 401K after you turn 55, you can take distribution(s)from the 401K without penalty - you will have to pay income tax. This assume that the plan holder will cooperate. There are limitation on withdrawals that are placed on ex-employees by the planholder.

I plan on also needing 6 or 7% when I am 56 but 6 or 7% will equate to 120% of my present income or at 56 very close to 100% of my 2005 income. I have been preparing for a 3% inflation so overall the years I am living my investments need to return 10% or more.

I am not yet into much individual stock investing like the FF4 or RP4 or whatever. For me, the major investing vehicle is some sort of Index Fund. I am also prepared to not increase my living allowance in those years the fund doe not exceed 10%.

This is higher risk approach but I think it will work for me. Thats may be more hope than ability.

BGP

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: jims440 wrote,
I have significant other income, but would like to count on 6 - 7% per year from my 401K

I suggest you read message 14631 by TMFPixy. It is a prerelease of an article he is preparing to publish soon. His analysis demonstrates that with a Foolish Four stratagy, you probably be able to withdraw 6% per year without using up your funds.

Note this is based on historical results, as are other analysis and depends on the trends of the past 38 years. Some people feel that this is not a long enough time period and prefer to evaluate results over 125 years or so. So you need to judge if results measured in conditions over the past 38 years (1961 through 1998) provides enough confidence for you.

IMHO 38 years that covers the most recent past three bull markets, is enough for me. I also believe that the "New Deal" brought about enough changes-- establishment of the SEC, Expansion of the Federal Reserve, Completely going off the Gold standard, FDIC, Social Security, unemployment insurance, etc.-- to make S&P history prior to about 1940 irrevelant. I also believe that the science of Economics has improved a lot since 1940 -- Keynesian economics, Milton Freedman and the Chicago School of economics-- and that we have learned a lot about managing the economy so that a repeat of the Great Depression and that type of bear market is highly unlikely.

I do believe that conditions of high inflation and interest rates that occured in the 1960's and 70's are very relevant and much more likely to reoccur.

But you decide for yourself which strategy you want to follow.

I would like to recommend the Motley Fool school and their books. Specifically, "The Motley Fool Investment Guide" and "Rule Breakers, Rule makers". If you have substaintial other income, you may feel like taking more risk. So some investment in Foolish 8, or Rule Breakers might be interesting to you.

Regardless of what you decide to do, I strongly recommend the books. You will learn and possibly profit from them.

Chuck

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