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Warning! Long Post!

I was doing some retirement planning (primarily to see if I could retire early) and noticed something interesting.

Because I have been Foolish with my 401k, and contributed early and often, I project my 401k balance to be over $2.5 million by the time I'm 65 (I'm 37 now). This is based upon a conservative 10% interest rate. 75% of my 401k is in a fund indexed to the S&P 500, the remaining is in company stock that I can't touch.

Now, assuming that I would need 80% of my current salary adjusted for an inflation rate of 3%, the amount that I will be withdrawing when I retire will be less than the return on investments, therefore by the time I'm likely to kick the bucket (82.4 according to the IRS tables) the 401k will have grown to 7.5 million. And this is not including income from the company retirement plan, Social Security, or my investments.

I'm not against leaving money to my heirs, but currently I'm single without kids, and leaving $7.5 million to the state just does not thrill me. I'm not trying to be at absolute zero when I croak, but this seems excessive. Moving inflation to 5% and 100% of current income finally brings the 401k to exhasution 1-2 years before 82.

Therefore, would it not make some sense to reduce the amount I'm saving towards the 401k and put that with my other investments which I could use to retire earlier than 65. Currently the earliest I could retire is 55, but that means every has to go according to predictions.

Other than the obvious income tax advantage provied by the 401k, what am I forgetting about here?

Joel
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OK,

A few things you are forgetting.

1. 8% - do your math again - maybe you won't do 10% :)

2. Look for a response from intercst - on his web page - there is some discussion about 72t or something which is a way to take money out of an IRA without penalty as long as you don't stop doing it. There are different calculation methods and things - he'll probably post a link - or look in his profile.

The gist is - you quit at 55, roll the 401k into an IRA - then start taking equal payments out every year - don't stop taking them - and no 10% penalty.

Someone please correct me if I've misunderstood this option.

Helter
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Joel,

TMF has some great retirement planning articles that deal with these issues. See that "Retirement Planning" link down at the bottom of this message? Click on it, then read step 10. I think that will give you some ideas.

Here's a quote from step 10:

Retire at age 55 or older, but younger than age 59 ½, and two factors come into play. At age 55, you may retire and receive qualified retirement plan proceeds without penalty. You will pay ordinary income taxes on any sum you keep. Put that money in an IRA, though, and now you must play by those rules. Take money out of the IRA, and you'll pay ordinary taxes plus a 10% early withdrawal penalty because you are under age 59 ½. Bummer!

Cheers,
GW
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Helter wrote,

2. Look for a response from intercst - on his web page - there is some discussion about 72t or something which is a way to take money out of an IRA without penalty as long as you don't stop doing it. There are different calculation methods and things - he'll probably post a link - or look in his profile.

The gist is - you quit at 55, roll the 401k into an IRA - then start taking equal payments out every year - don't stop taking them - and no 10% penalty.

Someone please correct me if I've misunderstood this option.


You've got it right, but you don't have to wait until age 55 -- you can do it at age 25 if you want.

For more on 72(t) withdrawals see:

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

intercst

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I'm not against leaving money to my heirs, but currently I'm single without kids, and leaving $7.5 million to the state just does not thrill me. I'm not trying to be at absolute zero when I croak, but this seems excessive>>

You might find food for thought in the book "Die Broke". Not necessarily recommending all of its ideas, but it's certainly a new way to look at things.

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Joel wrote..

"Therefore, would it not make some sense to reduce the amount I'm saving towards the 401k and put that with my other investments which I could use to retire earlier than 65. Currently the earliest I could retire is 55, but that means every has to go according to predictions.

Other than the obvious income tax advantage provided by the 401k, what am I forgetting about here"

I am assuming that you are talking about investing outside your 401K after you have max'd your employer's 401K matching.

Once the matching has been max'd there are a couple of consideration for investing outside the 401K.

1. The company 401K does not offer the variety of funds that match your risks.

2. Your AGI is below Roth limits (single is $90,000 I think and $150,000 AGI married file jointly), then you might consider putting $2,000/yr in a Roth IRA and then whatever is left back into the 401K.

3. You want to buy stocks or other investments within a self directed IRA.


The advantage of building the 401K is that if you leave the company after turning 55, you can begin taking funds from the 401K without penalty. If you could roll them over to a traditional IRA, you could do 72t distribution setup to get the funds from the IRA sooner than 55 or 59 1/2 without penalty.

There is also the idea that you aren't real sure that the firm's 401K or the firm you work for is on stable financial ground - then it's best to be handling the funds yourself.

BGP
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