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I have received a windfall of 300K dollars. I am 23, have no debt, college educated. I want to have a mini retirement when I am ~40 years old. I plan on managing a diversified portfolio of index funds as I read about in the book I Will Teach You To Be Rich.

But once my investments are made, when is it OK to withdraw money?

I want to be able to use some of this for occasional vacations and business ventures. I've read that you shouldn't withdraw stock investments for at least 5 years. But what if I want to start a business 2 years from now? Should I keep some of it in cash?

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"shouldn't withdraw stock investments for at least 5 years" would be better re-phrased as: "don't invest money in stocks if you (really) need it within next few years".

The underlying principle is: stocks are one of the higher-risk investment classes out there. While that's exactly what you want over a long time horizon (longer than the ebb and flow of the broader economy); if you know you'll definitely have to withdraw $50k (or any large chunk) of it within just a few years, it's possible that a great long-term vehicle like stocks, could actually rob you of money on a shorter time horizon.

So if you want to start a business 2 years from now, you'll probably want to retain some of that $300k initial pile in lower-risk investment vehicles (e.g. bonds, CDs, certain ETFs and mutual funds aimed at "capital preservation", etc).

That said, interest rates are so low, that if you're flexible with how much money you'll need to start that business, I'd probably keep as much as you can stomach in diversified stocks (per your original plan).

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To summarize your starting situation:

  • Age: 23
  • Debts: No car loan, no mortgage, no school loans, no credit card debt.
  • Money to invest:$300,000 lump sum.

You want to:

  • Every year go on a vacation.
  • In ~2 years start/invest in a small business
  • In ~17 years go into semi-retirement

Possible paths:

No small business Get a job. Invest the 300K in safe liquid investments then move the maximum amount each year into your retirement accounts. Depending on which company you work for that could include 401K (Regular or Roth), deductible IRA, Roth IRA. The amount of money you can transfer is a function of the options they give you, how much they match, and the amount of income you earn. For the 401K you will invest from your paycheck, but pull an equal amount from the remainder of the 300K. If you are married you can use the same procedure for your spouse's account.

You current income funds any vacations or splurges, because you will not need to put additional funds into your retirement plan. By your late 30's the 300K will now be fully invested in retirement account. Unfortunately you can't touch much of it without paying penalties until you are closer to age 60. Each year before semi-retirement, you will have to invest some of your salary into non-retirement accounts to cushion you between age 40 and age 60.

Invest/start a business: Take a chunk of the 300K, and decide that in X years you will use it to start a small business. This chunk of money must be liquid and invested safely so that you can use it when you want to. You also don't want to invest it in investments that have a risk of loss.

Take the remaining funds and invest it as described in the no small business section. You will completely convert funds to retirement funds earlier because of a smaller starting amount.

Hopefully the small business creates enough income to allow you to continue to fund retirement or semi-retirement. But it might not.

Comment regarding 5 year "rules":

  • Roth IRA: you have to remain invested in the Roth IRA for 5 years otherwise your withdrawal is penalized.

  • Investing in stocks: If your time horizon is short, then stocks are too volatile. If it drops just before you need the money, it might not recover in time.

Final Advice: Get a financial adviser that will lay out a complete plan for a fixed fee. They will discuss investment options, types not particular funds. They will also explain the tax implications of investing in various retirement accounts, and how that will impact your semi-retirement plans. Review the plan every few years as tax laws change.

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  • Why would you want to move after tax money into a 401k...
    – user4127
    Aug 17, 2012 at 13:25
  • You won't move after tax money. You will put X dollars of money from your paycheck into the 401K (Roth or regular), and get the match. Then you will take Y dollars from the 300K and live off it or put it into the semi-retirement account.
    – mhoran_psprep
    Aug 17, 2012 at 13:30
  • For the 401K you will invest from your paycheck, but pull an equal amount from the remainder of the 300K. That is after tax money you are putting in.. bad idea.
    – user4127
    Aug 17, 2012 at 13:38
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    A Roth 401K is after tax money.
    – mhoran_psprep
    Aug 17, 2012 at 13:46
  • The only good reason for the 401k is tax deferrment and company match. Since the OP is unlikely to get match on his lump sum(I know of no major employers that do this) a 401k is far more restrictive than a standard Roth. Also if the OP wants to tap any of that money before he is 65(probably 68 by the time he gets there) then a 401k is the wrong vehicle.
    – user4127
    Aug 17, 2012 at 19:11

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