Author Topic: Plan for unexpected early retirement  (Read 176 times)

Singrae

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Plan for unexpected early retirement
« on: October 30, 2019, 12:14:05 PM »
What are the best strategies to plan an early retirement in 1-2 years for someone whose most investments are locked in 403(b)? Is it to stash away income as much as I can in cash and/or in my taxable account so that I will have easier access to money for expenses but lose the opportunity to maximize tax saving?  Or is it to keep contributing to tax-deferred accounts (maximize 457 plan first and then 403(b); 25,000 to each with the 6,000 catch up contribution) to maximize tax saving, and after retirement, withdraw what I can from the taxable accounts and Roth IRA contributions (while doing yearly IRA conversion) and find part-time jobs to cover expenses until I reach 59 1/2?

Thanks in advance for any idea, suggestion, thought, or experience you may care to share!
« Last Edit: November 09, 2019, 08:59:33 AM by Singrae »

gocurrycracker

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Assuming your 403b is large? 25x+ cost of living... and assuming you need an ACA health insurance policy?

Without the 72t, roughly...

After working one more year, you have 7.5 years to get to 59.5.

With 166k in Roth contributions and taxable account value, you have ~6.5 years of funding. (166k/25k = 6.6)

It sounds like the current 457 value is zero? 1 year of contributions (25k) gets you to ~7.5 years of funding. The mortgage is paid off in 7.

Any reasonable return greater than inflation and you have enough. Add some Roth conversions in year 1-3 and you have extra funds in year 6-8.

So, you are there?



but if you map out how you plan to fund life year by year, within 5 years or so you would have trouble showing taxable income, which would put you on Medicaid for health insurance purposes (pros/cons)

I'd map out how I planned to fund life by year:

Year 1, 2, 3
- 21.5k from taxable (maybe 10k of this is a capital gain?)
- 3.5k from 457
- 8.5k Roth conversion (for spending in year 6)

Tax - $0
Income - 22k, ~175% FPL

Year 4
- 13k from taxable
- 12k from 457

Tax - $0
Income = ~$20k? ~175% FPL

Year 5, 6, 7
- most income from Roth (no taxable income) - can do Roth conversions, but might struggle to hit 100% / 133/8% FPL each year

Or, withdraw 12k from 403b, pay 0% federal tax but 10% penalty.

Or 10% penalty plus a little in the 10% tax bracket (22% total.) Plus 15% ACA subsidy reduction (37% effective tax rate)
(Calculating this tax rate is how you decide if it is better to contribute more to 457/403 now or not.)


So...

I would probably go the 72t route. Roll enough of the 403b into a separate IRA to fund at least part of your cost of living. Use the amoritization method and you only need to do the math 1 time, and then withdraw the same amount every year.

With $250k you could withdraw about 10k/year, which would eliminate any concern of making it to age 59.5, at which point the SEPP stops



gocurrycracker

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OK, let's drop back to fundamentals:

25x is rule of thumb for what you need in investments to think about retirement, early or otherwise. But some things that could require less:
- you will pay off the mortgage, so you only need 25x your core expenses plus whatever it takes to pay off the mortgage, or:
(25 * (25k-8k)) + 8k*7 years = $425k + 56k = 481k+/-
https://www.gocurrycracker.com/what-is-your-retirement-number-the-4-rule/

You can subtract from this due to Social Security - If SS income is 16k per year, you only need enough $ to get you to SS age, not enough to fund a 30+ year retirement. So only about 15 years' worth. Or let's say SS is 8k per year, then you need enough to reliably fund the other half of your core cost of living.
https://www.gocurrycracker.com/social-security-and-early-retirement/

re: 20% tax withholding - withholding is not the same as tax paid. You'll get most/all of this back at tax time. It does affect cash flow.

Your questions:

1) yes, you could use the 72t to provide only a portion of your total annual spending. The rest would come from whichever source was best.

2) That's now how a 72t works. The amount you withdraw annually is based on your life expectancy. Using current interest rates, you need $250k to get $10k/year.

3) Should you contribute more to 403b/457 today? You decide this based on comparing your current tax rate to your rate in retirement.

If your current federal tax rate is 22%, and you can pay lower later, then it is best to contribute now for tax savings at 22%. If your current tax rate is 12%, and you expect to pay at a higher rate in retirement (say 25-37%) then it is best to NOT contribute to 457 and do Roth or taxable account.

In Retirement, you could choose to do just withdraw from your 403b and pay the 10% penalty. Maybe 10% is a lower tax + penalty than you pay now, in which case this is a fine way to go.

You'll also might pay some income tax on that withdrawal. It could be 0%. But it might be 10% or 12%. So now your effective tax + penalty rate is 20-22%.

Those withdrawals will also reduce ACA subsidies at a rate of 15%. $1 in income loses 15 cents in subsidy. This could push the effective tax rate up as high as 37%.
https://www.gocurrycracker.com/obamacare-optimization-early-retirement/

In short, compare current marginal rate to retirement marginal rate.


new 1) this is the same as question 3 above - if you pay a higher tax rate now than in retirement, contribute to retirement accounts. If you don't, then don't. Then you do a 72t or Roth conversion ladder to access those funds. It wouldn't make sense to choose to pay more tax now just to have some dollars outside the retirement account.

new 2) this isn't how capital gain harvesting works. If all you are doing is harvesting gains you have the same number of shares before and after harvesting. You sell at the current market price and buy at the current market price.
https://www.gocurrycracker.com/long-term-long-term-capital-gains/

Higher basis means lower potential future taxes (say 10 years from now.)
An example: https://www.gocurrycracker.com/harvesting-massive-capital-gains/



In the original comment you suggested putting 50k into retirement accounts, so I assumed your income was $100k+. If income is $50k as you outline here, then your highest Federal tax rate on income is going to be 12%.

When you consider that the ACA tax is 15% up to 300% FPL, then tax now (12%) is less than tax in retirement (15%+.) In that case, NOT contributing to retirement accounts beyond the amount that gets a 401k match is the winner mathematically.




gocurrycracker

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I just did a cursory overview, but looks reasonable.

If you save 12% on Traditional IRA contribution and pay 12% later on withdrawals, it is the same mathematically. If you pay 12% now on Roth contribution and don't pay / save 12% later on withdrawal, it is the same. But you also need to consider State taxes (if applicable) and ACA which will add 9.5-15% "tax" at the margin.

gocurrycracker

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For every $1 in income, your ACA subsidy will go down by 9.5c to 15c

This is mathematically equivalent to saying you make $1 and pay 9.5c to 15c in tax. Same same

https://www.gocurrycracker.com/obamacare-optimization-early-retirement/
https://www.gocurrycracker.com/obamacare-optimization-vs-tax-minimization/