a two-part retirement

retiring early (or planning to, as we are) comes with some added complications. of course it’s a given that this plan requires some serious attention to spending, as well as diligent saving and investing. u.s. laws provide tax advantages for retirement savings, but only if you retire at the so-called “retirement age,” meaning after age 60. who wants to wait that long?! we’d rather retire when we’re still able bodied, mentally sharp and have many, many years ahead of us. the reality is that retiring before age 60 in the u.s. requires some more complicated math and planning.

we touched on this briefly in our post on the cost of time, and outlined that we have a two-part system: the money that’s growing tax-free right now, but that we can’t touch until age 59 1/2 (our 401(k) savings), and the taxable investments that will get us from retirement day to the day we can access our 401(k) without penalty.

in our case, we both got serious about investing in our 401(k)s way before we got serious about other saving and investing, so we actually have a nice bit socked away in those retirement-age retirement funds. we’ll keep contributing to them until we quit our jobs in a few years, and then they should continue to grow along with the markets for nearly 20 years. on the other hand, our taxable investments are currently smaller than our 401(k)s, though we’re focused on adding to them pretty aggressively, and their balance is increasing nicely. but as soon as we quit our jobs, those funds will be what we draw most of our income from. so though we hope that the market will support continued growth of those taxable funds, we know that the balance will decrease because we’ll be drawing off more each year than the fund can grow, even in a good year.

in our case, what all of this means is essentially this: we’re going to live like cheapskates for the first 18 years of our retirement, and then if the markets cooperate, we’ll live a little larger in our later years, once we can tap our 401(k)s. but we actually think this plan is perfect. when would you rather travel on the cheap versus be able to splurge a little more? live cheaply when you’re young and resilient, right? it’s hard to imagine us ever getting into, say, cruises, and they for sure won’t be in the budget for retirement part 1, but who knows? maybe we’ll be into that kinda thing when we’re older, and retirement part 2 has a good chance of being able to fund some extravagances. and for now, we don’t mind camping for extended periods, sleeping on crummy mattresses, or taking overnight trains.

another potential benefit: by having more funds to look forward to in the future, it may take the sting out of getting older. we’re building in something to get excited about as we age, instead of looking at nothing but downside.

are you thinking about early retirement, or even just thinking about saving more? how are you structuring your savings to work for you down the road?

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Categories: goals

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16 replies »

  1. Hi,

    I’m reading your blog posts in order, so perhaps you discuss this later and I just haven’t read it yet. But, are you aware of Substantially Equal Periodic Payments (SEPP), sometimes referred to as 72t rules? You can access your 401k funds before age 59.5 with no penalty if you follow those rules. You will have to run the numbers, but doing so can keep your overall tax bill down. Because of our marginal tax bracket system, it is less costly to fill up your 0% and 10% brackets each year, rather than put it off and end up withdrawing money which pushes you into the 25% and 28%(or higher!) brackets later. If your nest egg is large, eventually RMDs will force you to do just that.

    Bankrate has a great calculator for SEPP withdrawals. http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx

    Love your blog. Best of luck to the two of you with your goals.

    • Hi Petunia — Thanks for making sure we know about this rule… we do! We didn’t write this out clearly enough when we wrote this post, but a huge consideration for us is Obamacare, and we’re determined to stay under the caps for the larger subsidies until we can qualify for Medicare, at least so long as the ACA law remains close to what it is now, and recognizing that it could change. But certainly it will be an ongoing calculation to balance tax bracket and health insurance subsidy “bracket” for many years to come! Thanks for commenting, and for the well wishes! :-)

    • Hi Mike — We’ve stopped sharing our savings rate, but we funnel most of what we’re saving into taxable these days. And yes, we still max our 401ks even though we don’t need to bolster those funds anymore… we’re lucky that we can afford to, so we do it just because. ;-)

  2. I don’t include my social security, that will be extra (hopefully something) Also by then my house will be paid off (most likely before I retire though) I also haven’t included my hsa account into my calculations (I plan to max and hopefully not spend every year) so I won’t have to worry about medical expenses as much, if I am able to stay healthy I can eventually use my hsa for income (luckily my family has good genes- I have an autoimmune disorder but usually decreases after 45)

    • I’m so curious which autoimmune disease *decreases* rather than worsening! I’ve never heard of such a thing! (But also, yay for that!) I love that you’re being so conservative in your planning and not factoring in those assets and likely income streams. All of that increases your chances of not running out, which is worth a ton of peace of mind!