How quickly would you draw down a 457(b) account?

[PhysicianOnFIRE]

If I were to leave my employer in 2018 (and perhaps never look for another), I expect to be holding a non-governmental 457(b) worth something in the neighborhood of $150,000. The employer is a regional health system that has performed well financially in recent years.

Once separated from the employer, I need to set up a withdrawal strategy from the account. I believe it is rather flexible in terms of how much you decide to draw annually, but becomes inflexible once established. I could take a lump sum the following year, but that would shoot me up into the 28% tax bracket, which is not where I want to be as an early retiree. A better option is to take a set dollar amount per year to remain in a lower tax bracket (15% ideally or 25%).

Since the money in the account is deferred compensation that could be wiped out if the employer went bankrupt, would you be tempted to take an aggressive amount over a shorter time frame? For example, I could empty it in four years taking about $40,000 a year (depending on returns) or I could potentially stretch it out over a couple decades by taking less than $10,000 a year.

For context, let's assume I have passive income of $30,000 a year from qualified dividends in a taxable account and no other earned income. Additional money to support our annual spending could come from selling funds in the taxable account or withdrawing Roth contributions if needed. We'll ignore the possibility of continued online income, and yes, this could become a blog post.

How much would you draw each year in this situation, and why? Thanks!

 

[jfoxcpacfp]

What are the average returns over the past 10 years? And what would you do with the withdrawals?

[PhysicianOnFIRE]

Good question -- I've got access to a variety of institutional Vanguard funds in the account. I could go 100% stocks, 100% bonds (just to rile you, Johanna) or any allocation in between.

I would use the money for living expenses, but wouldn't be relying on that 457(B) money as I'll have access to a 7-figure taxable account.

[Zaphod]

Does it count as earned income when it comes out? Why wouldnt you at least withdrawal as much as possible until you reach the point where taxes on dividends are still zero and let the taxable compound for a couple years more?

[TheGipper]

I've mulled the same question. We will likely have about 1mil in a non-govt 457b at this rate if we retire at age 60, less if we retire early.

There is an option to delay and extend withdrawals over a ten year period, so we had planned to stretch it out from age 60-70, while delaying SS/RMDs till 70, even if we retire early.

However, complexities such as higher Medicare premiums and the non-zero chance of forfeiture make me wonder if accelerating this would be smarter.

But every dollar I accelerate out of the 457b makes less room for early retirement Roth conversions and TGH.

I will be interested in responses.

[jfoxcpacfp]

Zaphod wrote:

Does it count as earned income when it comes out?

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No

[jfoxcpacfp]

PhysicianOnFIRE wrote:

Good question — I’ve got access to a variety of institutional Vanguard funds in the account. I could go 100% stocks, 100% bonds (just to rile you, Johanna) or any allocation in between.

I would use the money for living expenses, but wouldn’t be relying on that 457(B) money as I’ll have access to a 7-figure taxable account.

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lol, it's your funeral, not mine.

I guess this is the appropriate time for me to say that a retirement date is not a plan, and neither is a portfolio. There are too many other factors and assumptions I'm not privy to. I asked about the ROR only to make the point that you needed to take the quality of the funds available into account.

Taxes are a consideration but hopefully not the financial stability of your employer. Since you don't need the $$, I suppose it gets down to good tax planning, at least on a very basic level.

[pulmdoc]

457 withdrawals are earned income. One of the challenges with 457 plans is that the withdrawal rate is usually not flexible, and many times there is no option to rollover into an IRA (unless governmental). Because of this, my plan is to use the 457 money first, drawing it out in as few years as feasible to avoid creating a big tax bill.

[jfoxcpacfp]

pulmdoc wrote:

457 withdrawals are earned income. One of the challenges with 457 plans is that the withdrawal rate is usually not flexible, and many times there is no option to rollover into an IRA (unless governmental). Because of this, my plan is to use the 457 money first, drawing it out in as few years as feasible to avoid creating a big tax bill.

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You are correct, @pulmdoc, reported on W2, but not subject to FICA tax, which is what I was thinking of. Not a good excuse, though. Sorry, @Zaphod!

[childay]

I would probably take it out sooner rather than later.  The financial health of your hospital probably won't change dramatically in a year or five, but if you start talking decades..

My own hospital I am not electing to contribute to, as they seem much shakier than yours.

[spiritrider]

pulmdoc wrote:

457 withdrawals are earned income.

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A small correction, 457b withdrawals are taxable income, but they are not taxable compensation. For example, they can not be used as a basis for IRA contributions.

[Raddoc123]

I would stretch distributions out because the tax deferred growth is very valuable, while the risk of default of your hospital is tiny if it is not in junk rating territory.

[nachos31]

Other than the sting of losing money, how significantly would losing the $150k balance negatively impact your retirement plans?

If the amount is critical to the "success" of your retirement, then it would probably not be worth taking the risk of forfeiture should your employer go belly up. In that case, I think it would be worth taking a one-time lump sum distribution or distribution over a short time-frame (<5 years) and using as much as you need to cover your expenses and investing any surplus in a taxable account where you have full control.

If the amount is not critical to your retirement "success" (as you stated above that you would not be relying on it), then I think it is reasonable to spread it out over a longer timeframe to minimize taxes paid.

[Hatton]

You are probably very connected and aware of your hospitals financial situation since you go there daily.  I would be worried about say in ten years with you living in New Zealand if you will be keeping up with this.  Just a thought.  I think it is very hard to figure out how to totally minimize taxes.

[TheHappyPhilosopher]

I would try and draw down the 457 as soon as feasible without incurring excess unreasonable taxes of course. The 457 is basically an unsecured loan from you to your employer. Additionally it is not protected by ERISA. Risk of default is very low, but not zero. I would try and drain it within 5 years.