Mar 9, 2017

How Much is Enough to Retire Early and How Do I Access Retirement Money Before 59.5?

Earlier this week, I promised I'd share specifics on how much is enough to retire, and how to go about doing it early... or in other words, how do I access money before the IRS approved age of 59.5?

How Much is Enough

"So, if I spend 30k/year for my family of 3, and I have 750k saved in index funds... yep, I'm financially independent."

You're probably thinking "yeah, good for you, you've managed to save 25x your annual expenses in index funds... but how do I execute retiring early?"  I'd imagine the bulk of readers haven't accrued $750,000 in investments, but hopefully this will still be useful information.  If you're anything like me and have a mix of taxable (non-401k or IRA money) and retirement accounts (401k, IRA), the best approach for planning is to determine 4% of a principle amount ($30k is 4% of $750k), then strategize how you will spend it.  The IRS restricts access to 401k and traditional IRA funds, but an excellent strategy is available to you you may have never heard about.  One of the best descriptions I've found comes from Root of Good's Climbing the Roth IRA Conversion Ladder post.  Give it a gander and hurry back.

So, does that give you some food for thought?  Save 5 years (at least) in taxable accounts, and make an annual roth conversion that you can use in 5 years time, while assuring you account for inflation with the amounts you convert?

Great!

Allocation

As far as allocation, what funds to put it in, etc., I'll share what I personally do (note this is not a recommendation--I'm not licensed to do that, but hopefully my plan gives useful information).

Under 40 years old: 100% Vanguard Total Stock Market Index/Total Int'l Index (70%/30%)
40-60: 75/25 Stocks (70/30 above)/25% bonds
60+: 60/40 Stocks

That's it!  I can't really add much more to it.  Yes other methods for withdrawing funds from taxable accounts exist (72t, 55 years old+ authorized to withdraw from 401k), but I just wanted to share the most useful method in my opinion.  Like my signature at the top of the site suggests, the winning strategy is simple, BUT NOT EASY.  Now, if you have annual expenses of 30k*--get busy saving 750k so you can retire!

*For my personal scenario, I have a paid off house so this reduces the annual expenses I need to save.  For folks with a mortgage, on average this adds around 10k-12k/year, so your target index fund investment portfolio balance may be closer to $1,000,000.

How much do you have saved?  What is your latest net worth milestone (ours is 600k).  What percentage are you to Financial Independence (FI)?

If you haven't already seen my updates post, give it a look.  Lots of great resources I discovered that you may find useful as well.

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