How to plan for early retirement?
Thursday, December 31st, 2009 at
9:57 pm
I want to retire in 20 years at age 55. I contribute 25% of my salary to company 401(k). What strategy should I employ to save enough to cover the 4 1/2 years so I do not have to withdraw early from IRAs. Reduce contr. to 401 and invest in taxable mutual funds? Assume I do not have money available above and beyond the 25% of salary.
Filed under: Early Retirement
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Congratulations for getting started on a great plan! Saving 25% in the 401(k) is a great start. How is it invested? What is the employer match?
I would think putting funds into a Roth IRA would be your best bet. You could start taking tax-free distributions when you retire as long as it’s been in the plan for 5 years – it’s supposed to be at 59 1/2, but you could start early if you take "substantially equal periodic payments" for those 5 years, ie, $20,000 each year.
I would definitely continue doing the 401(k) up to the match, then fund IRA and then if you still have $, put into taxable account so that you’re paying capital gains taxes, not income taxes at retirement. Of course, who knows if capital gains taxes will still have a preferrential rate at that point – it may go back to the same as income tax.
Do you have a financial planner? Find someone to run a retirement plan for you with lots of different scenarios (various amounts of money in taxable accounts, roths, 401(k)) to see what the likelihood of outcomes would be.
Finally, great job! Saving early and often is the best way to retire early.
You have a good start – a goal of retiring at the age 55. And you are contributing to your 401k – great. I would suggest reading or asking about the age for withdrawal because typically you can withdraw from a 401k at early retirement without penalty – so ask 401k administrator or HR. Age 59 1/2 applies to IRAs which is different than 401K.
If you seperate from service after age 55 you can take a distribution from a 401k without facing the 10% penalty. So, what you do is figure out how much you need to live on for those 4 years…take that in cash and roll over the rest into an IRA. That’s if you’re focused solely on avoiding that 10% penalty. But there are other ways to avoid it to…72t payments do it too…so you can roll it over into an IRA and take 72t payments (substantial and equal periodic payments) from the IRA. Talk to a financial advisor…unfortunately for you this is advice that you should be paying for because the implications should you make a mistake are catastrophic.
You’ll also need to think about when to start taking Social Security payments, the later you wait the greater the monthly payment so taking it at the right time can have a big impact on your retirement plans
I work on a team at MetLife that created this tool for people that needed help in planning their retirement with their Social Security benefit – I thought you might find it helpful
http://www.metlife.com/Applications/Corporate/WPS/CDA/PageGenerator/0,4773,P17259,00.html
Good luck!