Question about FIRE and asset allocation

[hightower]

SO for those of you guys who are or are planning to becoming financially independent and retire early, I have a question.  What kind of accounts will you be withdrawing from once you reach your number and retire?  If you're 45 years old you don't want to be withdrawing from your 401k or Roths due to the early withdraw penalties, right?

If that's the case, does that mean you have enough money in your taxable account to still be considered FI?

Hope that's not a dumb question, but I was just thinking if I want to retire early it seems like I'll need to have a lot of money in places other than my 401k and Roth.

[WealthyDoc]

This is not a dumb question.  Actually there is a lot to know about withdrawals that gets glossed over in planning.  There are a lot of smart and experienced people on this forum who will -I hope- comment for you.

I don't have much time to type all this out right now... but suffice it to say there are a lot of ways depending on the funds.  Most doctors max out there retirement funds and have a lot more to invest so they end up with more in taxable accounts.  457 are basically deferred compensation that you already earned if you have that option there shouldn't be a penalty.  If you have an employer 401 K and you leave in the year that you will turn 55 you can withdrawal those funds.  With a ROTH IRA you can withdrawal the amount up to your total contributions (the issue there is only on the earnings).  With an IRA you can set up SEPP (a series of "substantially equal payments").  The sequence of these withdrawals can make a difference though (e.g. should you take out Roth IRA funds last, etc.).  As you get close it would be good to meet with a knowledgeable financial planner.

[The White Coat Investor]

https://www.whitecoatinvestor.com/how-to-get-to-your-money-before-age-59-12/

 

[PhysicianOnFIRE]

You bring up an excellent point, hightower. If your goal is to retire at 45, you want to have enough money available to last the 14 to 15 years until you're 59 1/2 at which point your 401(k) and IRA monies can be withdrawn penalty free.

You don't necessarily need to be financially independent based on the value of the taxable account alone, but if you've got enough between taxable and perhaps a 457(b) or pension to get you from 45 to 59.5, you should be in good shape. You can also take out Roth contributions (but not earnings) at any time without penalty. It's best to leave Roth money alone to grow tax free if you can afford not to touch it, but it's good to know that money is available as well.

These are the $$ goals I have set for us, and if the market holds steady, we could achieve them all by the end of the calendar year.

• $1,500,000 between a taxable account and 457(b)


• $1,000,000 between Roth IRAs and 401(k)


• $250,000 in our Donor Advised Fund


• $200,000 between two 529 Plans

 

[Zaphod]

Great question and one I think about a lot. I do plan to have a formidable taxable account, and hope to just let the deferred accounts grow slowly over time while doing some conversions to roth at a lower income. Which is also why I dont necessarily want a very large balance deferred account. Could grow large.

WCI is going to have mammoth RMDs, but he'll figure something out.

[The White Coat Investor]

You guys need to worry less about tax-deferred accounts. Just SEPP it. Retire at 52? SEPP for 8 years. No big deal. I wouldn't pass up a good tax-deferred account due to concern about this.

PoF has enough that he can get from his age to 59 1/2 without touching the tax-deferred money. But if his money was 90% tax-deferred, he couldn't. In that scenario, the best thing to do would be burn the taxable and 457 money first, then SEPP the tax-deferred money.

Some people think you can't get to your money before 59 1/2. That's not true.

Some people think you can get to it but have to pay a penalty. That's not true either.

Some people think you can get to it but have to pay tax. Thats may not even be true if the SEPP withdrawals are small enough and that's your only taxable income.

[Zaphod]

That I know about, but havent looked into in a while so should brush  on it. My goal was to live off taxable stuff, convert as much as possible and to just let it compound. I dont want to have to touch it. I fully max it out as well and wouldnt miss the chance to defer taxes, but I certainly think about it.

[VagabondMD]

My nest egg is split about 50:50 between taxable and pre-tax. In taxable, I have my five year emergency fund.

One of my partners, early in my career, told me that eventually my taxable account would likely overtake my workplace retirement fund. I thought that this was impossible and ridiculous. He was right.

[janettebournes]

hightower wrote:

SO for those of you guys who are or are planning to becoming financially independent and retire early, I have a question.  What kind of accounts will you be withdrawing from once you reach your number and retire?  If you’re 45 years old you don’t want to be withdrawing from your 401k or Roths due to the early withdraw penalties, right?

If that’s the case, does that mean you have enough money in your taxable account to still be considered FI?

Hope that’s not a dumb question, but I was just thinking if I want to retire early it seems like I’ll need to have a lot of money in places other than my 401k and Roth.

Click to expand...

I don't plan on retiring early for now. But in the event the healthcare landscape changes and I wanted to, I was planning on withdrawing from my taxable account.

I suspect as more physicians become employees ($18000 limit for me, no employer match), the taxable account like @Vagabond MD mentioned rapidly becomes the largest account for supersavers.

For me,

Roth 401k = 5% of investable assets

Roth IRA = 5% of investable assets

Taxable = 90% of investable assets

Hoping to never touch the 401k + Roth and leave it for the next generation

[Hatton]

In my peak earning years I really did not have time for a side business or never thought of one.  I maxed out a sep Ira every year.  I am a super saver so I have a taxable account that is 3x the value of my retirement accounts. I have now reached 59.5 so I can raid my retirement account any time but I am living off my part time job letting it continue to compound.