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Subject:  Re: Unconventional Approach? Date:  2/21/2000  3:04 AM
Author:  Gglass555 Number:  19347 of 102725

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 The arguement was that it would be better to pay long term capital gains than income tax + 10% penalties on money withdrawn from our retirement accounts before the age of 59 1/2.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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