How to use and fund a 457 for early retirement (and other techniques)?

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fortfun
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How to use and fund a 457 for early retirement (and other techniques)?

Post by fortfun » Thu Jul 30, 2020 7:06 pm

BHs,
DW and I are about 4 years out from an early retirement. We will be age 51 and 53. That means about six years until we can tap 401k, 403b, and traditional IRAs. I'm getting ready to write my IPS and would like some assistance around the 457.

Here's where I need some advice:
I plan to have us use the special 3 year catch-up provision of the 457 and double our contributions that last 3 years (roughly 40k/yr each). Since we need this money the first 6 years of retirement, it seems prudent to fill those mostly with bonds. However, what if stock prices are way down during that 3 year period. Seems like it would be stupid to buy bonds if stocks are way down, especially, if we are doubling our contributions to our 457s during that period. How does one deal with this situation in his IPS? What am I missing? Currently, our 457s are on the smallish side, which is why we would need to double our contributions to them the last 3 years.

Our living expenses will be covered by my pension. The 457 will just cover travel, etc.

Thanks in advance!

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fortfun
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Re: How to use and fund a 457 for early retirement (and other techniques)?

Post by fortfun » Fri Jul 31, 2020 9:07 am

Bump.

Colorado13
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Re: How to use and fund a 457 for early retirement (and other techniques)?

Post by Colorado13 » Fri Jul 31, 2020 10:30 am

Congratulations on your excellent progress so far!

Keep in mind that if you need/want to access 403(b) or 401(k) funds prior to age 59.5, rule 72(t) is an option.

A conservative asset allocation in your 457 seems reasonable while a more aggressive allocation is likely appropriate for your 403(b) account. Doubling contributions to the 457 is an excellent idea since you can very easily withdraw contributions at any time/at any age.

Without knowing details of your account balances and expenses, it's difficult to provide more specific recommendations. Having the pension cover living expenses gives you flexibility for a more aggressive asset allocation in your other accounts, if that is ypur preference.

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fortfun
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Re: How to use and fund a 457 for early retirement (and other techniques)?

Post by fortfun » Fri Jul 31, 2020 10:47 am

Colorado13 wrote:
Fri Jul 31, 2020 10:30 am
Congratulations on your excellent progress so far!

Keep in mind that if you need/want to access 403(b) or 401(k) funds prior to age 59.5, rule 72(t) is an option.

A conservative asset allocation in your 457 seems reasonable while a more aggressive allocation is likely appropriate for your 403(b) account. Doubling contributions to the 457 is an excellent idea since you can very easily withdraw contributions at any time/at any age.

Without knowing details of your account balances and expenses, it's difficult to provide more specific recommendations. Having the pension cover living expenses gives you flexibility for a more aggressive asset allocation in your other accounts, if that is ypur preference.
Thanks Colorado13! Just afraid that we could miss out on some less expensive stocks (in our 403b and 401k) while we are doubling up on bonds in our 457s. When we we double up on our 457s, it will probably only leave 20k to put into stocks. I was hoping someone would have a creative idea to deal with this dilemma. Maybe your 72t suggestion is that creative way. In any case, I have one year to figure this out. Thanks!

02nz
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Re: How to use and fund a 457 for early retirement (and other techniques)?

Post by 02nz » Fri Jul 31, 2020 11:29 am

Read this for ways of accessing retirement accounts before age 59.5: https://www.madfientist.com/how-to-acce ... nds-early/. Pay particular attention to the Roth conversion ladder. Also, you can withdraw funds without penalty from the employer plan (401k) if you retire in the year in which you turn 55 or later. Apparently not all plans make this possible, but the law does allow it.
Colorado13 wrote:
Fri Jul 31, 2020 10:30 am
Keep in mind that if you need/want to access 403(b) or 401(k) funds prior to age 59.5, rule 72(t) is an option.
I'm assuming you mean SEPP (substantially equal periodic payments). This is one way to access 401k/IRA funds early, but it's extremely inflexible, once started you have to do it until age 59.5 or for 5 years, whichever is longer. The penalties for "breaking" the SEPP are very stiff and cannot be waived by the IRS. A Roth conversion ladder or accessing using the "rule of 55" are better choices in most cases.

ExitStageLeft
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Re: How to use and fund a 457 for early retirement (and other techniques)?

Post by ExitStageLeft » Fri Jul 31, 2020 12:35 pm

Depending on the funds available in the 457b plan there may be a cost difference that influences your decision.

What you buy now in the 457 doesn't really matter because one can sell within a tax-advantaged account and not have to worry about capital gains or other taxes. So it isn't until you are preparing to draw from the 457 that its asset allocation is critical.

I would at this stage select and locate assets where they have the lowest fees. In the year prior to retirement make the moves that put everything where you want it to be at retirement.

If you haven't yet, go over the details of the 457 plan to make sure you know what your options are at retirement. There are likely restrictions on how frequently funds can be withdrawn.

02nz
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Re: How to use and fund a 457 for early retirement (and other techniques)?

Post by 02nz » Fri Jul 31, 2020 1:13 pm

fortfun wrote:
Thu Jul 30, 2020 7:06 pm
I plan to have us use the special 3 year catch-up provision of the 457 and double our contributions that last 3 years (roughly 40k/yr each).
Look closely at your 457b plan docs to see what the normal retirement age is. My understanding is that the catch-up only applies in the 3 years before normal retirement age (as defined by the plan), so if you retire early you may not be able to make that catchup contribution (of 2x the normal annual limit) or not for all 3 years, but then you could do the age-based catchup, currently an extra $6500 per year, just like with a 401k/403b. (You can do the 2x catchup for 3 years or age-based catchup, not both.)

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fortfun
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Re: How to use and fund a 457 for early retirement (and other techniques)?

Post by fortfun » Fri Jul 31, 2020 2:26 pm

02nz wrote:
Fri Jul 31, 2020 1:13 pm
fortfun wrote:
Thu Jul 30, 2020 7:06 pm
I plan to have us use the special 3 year catch-up provision of the 457 and double our contributions that last 3 years (roughly 40k/yr each).
Look closely at your 457b plan docs to see what the normal retirement age is. My understanding is that the catch-up only applies in the 3 years before normal retirement age (as defined by the plan), so if you retire early you may not be able to make that catchup contribution (of 2x the normal annual limit) or not for all 3 years, but then you could do the age-based catchup, currently an extra $6500 per year, just like with a 401k/403b. (You can do the 2x catchup for 3 years or age-based catchup, not both.)
Thanks 02nz. I've been sent the documentation that indicates I can do what I plan. 50 is the age we can begin collecting our pension, so I believe that's how the date is set. I will double check this to confirm. Many thanks!

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fortfun
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Re: How to use and fund a 457 for early retirement (and other techniques)?

Post by fortfun » Fri Jul 31, 2020 2:27 pm

02nz wrote:
Fri Jul 31, 2020 11:29 am
Read this for ways of accessing retirement accounts before age 59.5: https://www.madfientist.com/how-to-acce ... nds-early/. Pay particular attention to the Roth conversion ladder. Also, you can withdraw funds without penalty from the employer plan (401k) if you retire in the year in which you turn 55 or later. Apparently not all plans make this possible, but the law does allow it.
Colorado13 wrote:
Fri Jul 31, 2020 10:30 am
Keep in mind that if you need/want to access 403(b) or 401(k) funds prior to age 59.5, rule 72(t) is an option.
I'm assuming you mean SEPP (substantially equal periodic payments). This is one way to access 401k/IRA funds early, but it's extremely inflexible, once started you have to do it until age 59.5 or for 5 years, whichever is longer. The penalties for "breaking" the SEPP are very stiff and cannot be waived by the IRS. A Roth conversion ladder or accessing using the "rule of 55" are better choices in most cases.
Thanks for this link. Very helpful information. Yes, our backup plan is to have my wife work half time until the year she turns 55, which wouldn't add too much time. Very helpful info here!
Thanks!

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fortfun
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Re: How to use and fund a 457 for early retirement (and other techniques)?

Post by fortfun » Fri Jul 31, 2020 2:31 pm

ExitStageLeft wrote:
Fri Jul 31, 2020 12:35 pm
Depending on the funds available in the 457b plan there may be a cost difference that influences your decision.

What you buy now in the 457 doesn't really matter because one can sell within a tax-advantaged account and not have to worry about capital gains or other taxes. So it isn't until you are preparing to draw from the 457 that its asset allocation is critical.

I would at this stage select and locate assets where they have the lowest fees. In the year prior to retirement make the moves that put everything where you want it to be at retirement.

If you haven't yet, go over the details of the 457 plan to make sure you know what your options are at retirement. There are likely restrictions on how frequently funds can be withdrawn.
Thanks ExitStage. I was able to get all of the Vanguard funds, necessary to build a 3 fund portfolio, to our lineup. Currently, I'm 100% VTSAX but will need to start dialing that down over the next 4 years. I will check about the withdraw rate. I was not familiar with that rule.

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