Gyroscopic Investing

I was looking over my current rates of spending vs. saving and I should be able to retire long before a traditional retirement age (65+). I mean retire in the financially independent way.

I currently have about a 50/50 mix of tax advantaged contributions vs taxable accounts in my planned savings, but around 2x that amount coming in that I have no specific plans for (this is beyond expenses). Last year I ended up dumping all the excess in a taxable account. All accounts make up my PP. I could add more in tax advantaged accounts

The tax advantages of a 401k and IRA are obvious, but you sacrifice the ability to access it in the short term. Can anyone who is currently or soon to be financially independent at a young age comment on how much should be inside vs outside IRAs/401ks? The tax savings aren't savings if I have to pay the taxes and a 10% penalty for taking it out too early. I'm aware that I can withdraw substantially equal periodic payments, but I'd rather not force my hand either.

In a similar line of thinking, what are some thoughts in keeping with a 4% annual withdraw rate vs. using the capital for business endeavors?

Mr. Money Mustache addressed this in one of his columns:

http://www.mrmoneymustache.com/2011/11/ ... your-401k/

However there's a critical error in the column.  IRS sez that you can't withdraw contributions after 5 years unless an exception applies (first house, disabled, age >59.5).  Admittedly the wording is confusing.  His solution was to leave the money in the 401K and save it for the added expenses that you're likely to incur when you get older.

You might instead consider that paying the 10% penalty on top of income tax due could still be a bargain.  Let's say you're in the 28% tax bracket for federal and 5% state.  Post retirement, you're at 15% federal, 0% state - and you may even have room in your 0% bracket.  Clearly you are better off paying the penalty than you would have been not putting the money in the 401K to begin with.  Not to mention that there's a bonus to allowing the money to grow tax-free prior to withdrawal.

Put it another way:  would you delay retiring early purely for the sake of avoiding that 10% penalty some years down the road?

You might instead consider that paying the 10% penalty on top of income tax due could still be a bargain.  Let's say you're in the 28% tax bracket for federal and 5% state.  Post retirement, you're at 15% federal, 0% state - and you may even have room in your 0% bracket.   Clearly you are better off paying the penalty than you would have been not putting the money in the 401K to begin with.  Not to mention that there's a bonus to allowing the money to grow tax-free prior to withdrawal.

This is my strategy....I plan on living so cheap that I never get dinged by taxes. I think once a house is paid off living on 15,000 a year would be a cakewalk.

nwagers wrote: I was looking over my current rates of spending vs. saving and I should be able to retire long before a traditional retirement age (65+). I mean retire in the financially independent way.

I currently have about a 50/50 mix of tax advantaged contributions vs taxable accounts in my planned savings, but around 2x that amount coming in that I have no specific plans for (this is beyond expenses). Last year I ended up dumping all the excess in a taxable account. All accounts make up my PP. I could add more in tax advantaged accounts

The tax advantages of a 401k and IRA are obvious, but you sacrifice the ability to access it in the short term. Can anyone who is currently or soon to be financially independent at a young age comment on how much should be inside vs outside IRAs/401ks? The tax savings aren't savings if I have to pay the taxes and a 10% penalty for taking it out too early. I'm aware that I can withdraw substantially equal periodic payments, but I'd rather not force my hand either.

In a similar line of thinking, what are some thoughts in keeping with a 4% annual withdraw rate vs. using the capital for business endeavors?

Your taxable account could actually be more tax-advantaged than your 401k if you have a high income, especially if you are withdrawing from it with an additional 10% penalty. This is because the long term capital gains rate is currently capped at a lower percentage than ordinary income.

If I have my druthers, I'd rather have my accounts arranged in descending order of Amount contributed of Roth > Taxable > 401k/IRA and then spend them down in the opposite order (assuming no 10% penalty since I'm already > 59 1/2).

Unfortunately, contribution limits and amount available to contribute over the years has resulted in the opposite of my druthers so far but I'm working to rectify that as much as I can before I retire.

I struggle with this same question, but not because of the early retirement/paying penalty question. I ask myself this from the re-balancing point of view:

Re-balancing can be difficult if each retirement account isn't its own PP island. For example, I can't go into my 403b and sell some of the stock to then buy bonds or gold. That would trigger a penalty and taxes, both I want to avoid and why I chose to use the 403b in the first place.

With all your PP investments in retirement accounts (IRA, 401k/3b, 457, etc) the only way I'm finding to re-balance during the accumulation phase is to re-direct my contributions. This isn't always easy when contributions come out of paychecks automatically. In fact its down right frustrating at times. If I'm auto pay 25% to each asset class, a winning asset is going to pull ahead and trigger the need to re-balance.

If you hold physical gold and gold is the winning asset class - easy. Sell, use the funds, buy the losing asset. But the current market conditions make it difficult for someone who has all investments in a non-taxable retirement account. Only so much room to wiggle. I keep in mind that "perfect is the enemy of the good", but at some point - if things get too out of sorts from the 4x25 - you're not really investing in the PP anymore.

It's unfortunate that your 403(b) is not very flexible. Do they typically offer a brokerage window? Maybe you can ask your employer for better options (maybe through your union if you have one).

I guess I'm lucky in that my 401(k) options are excellent. I can directly purchase and sell bonds commission free, trading fees (for IAU) are only $8 and I can get an S&P 500 index with an E/R of 0.02 (FXAIX). With that I can easily look at it from only a macro level and try to tax plan for capital gains vs dividends across various accounts.

What are the rules about leaving your 403(b) contributions in the plan? Are there any options to roll these over into an IRA? I don't really know much about 403(b) plans.

ns3 wrote: Your taxable account could actually be more tax-advantaged than your 401k if you have a high income, especially if you are withdrawing from it with an additional 10% penalty. This is because the long term capital gains rate is currently capped at a lower percentage than ordinary income.

For the gains, yes.  But you paid taxes at your high income rate on that money before putting in that taxable account.  It is true that PFG would have to pay full income tax rates on the gains when withdrawn, but the idea is that when he's ready to withdraw, he'd be in a low tax bracket anyway.  I get that it feels awful to pay penalties though.

PFG - if your 403g is with TIAA CREF, then you have the same problem I do.  I gave up trying to integrate it into the PP - in addition to the excellent reasons you pointed out, your investments there are actually annuities.  Some other forum members (AdamA I think) have suggested setting these accounts up with a simple stock/bond mix (e.g. 60/40) and adding a small (10%) physical gold stake in taxable (thus, 55/35/10).

PFG - if your 403g is with TIAA CREF, then you have the same problem I do.  I gave up trying to integrate it into the PP - in addition to the excellent reasons you pointed out, your investments there are actually annuities.

Not with TIAA CREF. Have access to a good stock index, but no brokerage window where I can buy bonds from the bond desk. So I'm using a decent bond index as the second best option.

It would feel silly putting any of my PP in a taxable account when I have enough room and enough non-taxable account access to hold the % of income I am currently investing. Lack of flexibility aside, any downside to keeping a large percentage of your PP in non-taxable accounts? I always keep the tax hierachy in mind:

-Bonds
-Cash
-Stocks
-Gold

The VAST majority of those top three I hold in a retirement account. The bottom one sits in the bottom of an ocean somehwere:)
I often wonder if I should take the least taxable of those top three - the stock portion - and have a brokerage account with the low fee custodian of my choice and keep a little "re-balancing kitty" of stock to help when needed.

I'm trying to recall if the PP book address how to go about re-balancing during your accumulation phase with big chunks sitting in retirement accounts. I can't be the only one who faces these problems. Only $5500 a year going into the IRA, but much bigger chunks in these rigid 401k/403b/457 accounts that don't allow brokerage windows.

If I had to guess, the recommendation for accumulation phase rebalancers would be (in this order):

• Do your best
• Continue to hold all 4 asset classes
• Buy the best of each asset class possible
• Don't let the search for perfect be the enemy of the good

Things are going to get a bit out of sorts at times. Not by a ton, but by enough that you want to re-balance. You might not be able to re-balance over night, it might take a few months of resorting the routes your accumulations are taking. Take it in stride.