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I want to retire early (am 40 - want to retire by 50). For those who have done it in and around that time (without inheriting a ton of money from someone) what steps or things can I do to help make this a reality.

Every article I read talks differently about what amount I may need. I will tell you what I have done so far:

  • Maxed out 401k - right now I have around 400k in my 401k. My old company matched at 8%, the new company I am at unfortunately does not match but I am still putting in around 6% of my salary.
  • I max out my roth ira...now I will say I started this guy real late, its only around 3 years old and I only have around 18k in it.
  • My kids (I have 3 of them) its been difficult to save for them too much, but for now I have around 40k saved up in a MESP account (college savings account). My oldest is 11 and I have two others behind her (3,4). I think I will try to save around 100k total for all three of them then they are on there own! I know it doesn't cover the cost of college education nowadays but it will help.
  • I have a small emergency fund (not too much around 30k).
  • I have a CD with a little bit of money in it as well (< 20k).

In terms of debt I only have a house mortgage which will be paid off by the time I am around 47, provided I maintain my job, salary, etc. No other debt.

Are there things I should focus more on - I wish I had started my roth ira years and years ago but I didn't. My workplace does not have any other plans besides a 401k and a roth.

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    You can't plan for retirement without planning for your expenses. – chepner May 6 at 19:19
  • @chepner - Very true - I don't plan on doing too much mainly just relaxing, gardening, modest trip or two, but I guess I want to know in comparison with my age base am I reasonably saving correctly for retirement or am I way off - if the latter what can I do to improve - am I missing any secrets ? – JonH May 6 at 19:22
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    @chepner, the 4% rule is supposed to allow withdrawals at that rate indefinitely. It certainly will last more than 25 years, except in an extraordinarily dire economic situation. (It makes no sense to talk about the 4% rule in conjunction with no gains.) – prl May 6 at 20:37
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    You say you’re maxing your 401k by putting in 6%—that implies you’re making over $260,000; is that right? – prl May 6 at 20:41
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    @prl More like $308,000 for 2018! – Glen Yates May 6 at 22:08
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I "retired" at 50. In no particular order, here are my thoughts in response to your question:

You offer a mix of numbers ($$) saved and percent moving forward. There are a few issues with this. Few FIRE savers are saving so little. My minimum goal was always to maximize the 401(k) along with 5% company match. This meant at least 20% of gross was saved. More when the company made an extra profit sharing deposit. The number wasn't higher, as we also were saving 8%+ for the kid's college account. For what it's worth, we agreed that the last thing we wanted to do was to saddle our one child with student loan debt, so part of the retire early plan was to have that set aside first.

The 4% rule. Not the right place to debate the rule itself, I'd just point out, we don't have any clue what your spending is. 4% means you need 25X your desired withdrawal each year, gross, including taxes, etc. This goes back to the percents saved. If we were saving 23% off the top, and 7% went to FICA, we were living on 70% of our income. The best advice I can give to this point is to suggest you spend 2 years and track every dollar you spend. This will give you your bottom up budget. i.e. not a constrained budget you must adhere to, but a reflection on where the money actually goes. Nice to own your home outright. How much will the roof cost to replace? (mine was $24K last year, thx for asking) The HVAC system? (4 years ago, 'only' $12K). It's easy to think "we don't do too much" but once retired, you'll have time on your hands, and it would be awful to have to turn down some nice vacations, or home redecorating. TL;DR - 25X your final real budget.

Roth is overrated. There. I said it. In 2019, the standard deduction for a couple is $24,400. The 10% tax bracket ends at $19,400. This alone is $43,800. Multiply by 25 and you have $1.1M. Now, tell me why you'd want to pay tax to deposit to Roth (either 401(k) or IRA) at today's bracket of 12/22%. Worst case, you save 'too much' pre-tax and you'll pay 12% on withdrawal. Most of my working time was spent in the 28% bracket, lower early on, and a few good years higher, but now my withdrawals are 22% tops. Some times I wish I had access to a Roth earlier (by the time they were introduced, I was already in a higher bracket), but all in all, no regrets.

Social Security Benefits - check the government website for your forecast benefit. Don't use it to calculate your retirement, just consider it a safety net. I am now 56, and my wife 63. Her SS benefit is about 1/4 of our annual budget. A bad market or a few unplanned emergencies, and I don't need to worry about breaking my 4% plan. Because in 7 years, the withdrawals drop to 3%, and 7 after that, to 2% when my SS kicks in. Also, mortgage ends in the same 7 years, that’s 15% of spending that goes away. Had I really gone crazy with the spreadsheets, retirement would have been earlier, but far riskier.

Sec 72(t) - I wrote about this on my own PF blog, it's a rule that permits early withdrawals. Tax, but no 10% penalty. It's the easy (well, paperwork) way out for the early retiree. No need to be paranoid about that 10% threat.

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I have the exact same goal as you so I have been thinking about this problem a lot.

The biggest issue I have (and you seem to be missing in your plan) is when your retirement funds will be available to withdraw. If you plan to retire at 50 you have 9.5 years before you can touch your traditional 401K (or IRA) funds without tax penalties. and 12 years before you can even start collecting Social Security.

As they say in London, you need to "Mind the Gap" and figure out how to fund your living expenses those years without incurring big penalties for early withdrawals.

It may make sense (if your company offers it) to shift a significant portion of your retirement Savings into the ROTH plans (401k/IRA) because you can withdraw your contributions at any age penalty free.

The other part of my plan is learning to live on less income. Given that I am needing to save a LOT more, that goes hand in hand. As others have said in the comments, the absolute first thing you have to do is estimate how much cash you need annually to live in retirement, that will drive all of the other numbers. Take that annual amount and multiply it by 25 to approximate a safe nest egg to retire without worrying about outliving your money, and leaving something behind for your kids.

Another strategy would be to consider what you will do in those ~10 gap years. Maybe take a part time job or a lower stress job that doesn't pay as much, so you are semi-retired and have some income coming in.

  • Excellent advice thank you – JonH May 7 at 12:45
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    You can withdraw from a 401k before age 59-1/2 without penalty, so long as you do so in "substantially equal periodic payments". See this IRS publication for details and examples: irs.gov/retirement-plans/… – Nobody May 7 at 22:01
  • @Nobody, good point. Also, those are the 72(t) payments Joe mentioned. – T. M. May 7 at 23:36
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There are a lot of topics here but I'll just try to touch on the main ones.

Figure out what your expenses will be when you retire--look at your current expenses and determine what will change if you stop working. A major issue is how you will get health insurance (if it is currently subsidized by your employer) until Medicare kicks in. If you will need to buy your own, check on HealthCare.gov to get an idea what it will cost (after premium subsidies).

Use the 4% rule (you can spend 4% of your portfolio in the first year, adjusted for inflation in subsequent years, and not exhaust your funds in about 95% of historic 30-year periods) to determine roughly how much you'll need to save to sustain that spending level. Do some calculations to see how much more you can save, and how much your investments will grow, over the next 10 years. You can probably safely factor in 75% of your Social Security payments. Predict how much you'll get at various retirement ages with this calculator, using your earnings record from my Social Security.

Research strategies for accessing retirement funds before age 59.5. It doesn't sound like you have a ton of taxable savings, so this will likely be important. This article is a great resource: your basic options are a Roth conversion ladder, substantially equal periodic payments, or just taking the 10% early withdrawal penalty. Roth 401(k) contributions could help since they can be withdrawn immediately without tax or penalty (after rolling over to a Roth IRA), but if your income is high it's suboptimal, and even just taking the penalty could work out better. Continuing to max a Roth IRA annually is a good idea if deductible Traditional IRA is not an option, as those contributions can also be withdrawn immediately without tax or penalty.

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    Took me over 30 minutes to compose my own answer. Saw yours on refresh. Interesting how many different issues we've addressed, overlapped, of course, but you went 'Roth ladder' vs my Sec 72(t). – JoeTaxpayer May 7 at 12:16
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    @JoeTaxpayer Great answer, I upvoted. I didn't really take a position on Roth ladder versus 72(t), though I would prefer the former as I think it's more flexible, though it depends on having at least 5 years of spending in a taxable account. – Craig W May 7 at 12:41
  • Ugh good answer - I forgot entirely about health insurance :-|. Looks like I will be working more than 50 lol! – JonH May 7 at 17:01
  • @JonH Yep, that's a big one for many people. In addition to the high cost (although make sure you look into the premium subsidies), it has high and volatile inflation, which makes planning difficult. Instead of fully retiring, you could consider a part-time job where you qualify for subsidized health insurance. – Craig W May 7 at 17:47
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Most common way I've heard of around my parts is to take your current investments, and, where possible, dump them into the down payments of some real estate.

In 10 years the mortgages on your investment properties will be "less compared to rent" and you'll have some passive income that doesn't eat into itself. Might even make sense to refi them at that point to reduce monthly mortgage payments or combine some mortgages. Even if a recession hits, rents don't tend to go down in recession. You also don't have to wait for social security age to get it, you even get some return between then and now.

Another thing in your favor is that most states you can get "free" medicaid healthcare if you "earn" less than poverty level, if you have dependents that's sometimes not hard. And there is no asset limit, if you can believe that.

Just some ideas, I personally haven't retired, so ideas from somebody who hasn't even walked the walk :)

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