Positioning for retirement at 55

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Topic Author
wilked
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Positioning for retirement at 55

Post by wilked »

I am 40 years old and just old enough to realistically look ahead to retirement. What I am wondering is how to position myself best for a possible retirement as early as 55 (likely by 60).

$1MM in 401k
$400k in house equity
$40k in 529s
$70k in Roth
Efund, but no significant savings in taxable

As you can see most of my non-house net worth is in 401k.

I understand that I may be able to pull 401k funds at 55 if plan allows. And I understand the 72t rule.

What I am debating - should I start focusing on building a taxable account as a bridge to 60? I was thinking a good goal would be $250k or so by 55 (start putting at least $1000 away per month). Short term I may have to give up a little on 401k to do so, but hope within a couple years that wouldn’t be necessary. We have ramped up our 529 savings in the last couple years. That could be reduced also but my spouse would likely oppose. Our spending has been higher than usual as we are renovating with cash, but that will end next year.

I welcome feedback. We were musing on it the other day and my spouse asked me exactly where the money would come from if we retired at 55, and I realized I wasn’t exactly sure (I always focused on the numbers, and not the mechanics / account rules).

Assume a number of $60k/yr if you need it for retirement spending. And my spouse’s employer will provide health care for us for a low sum upon retirement, so that is already accounted.
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JoeRetire
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Re: Positioning for retirement at 55

Post by JoeRetire »

wilked wrote: Tue Sep 15, 2020 5:36 am I am 40 years old and just old enough to realistically look ahead to retirement. What I am wondering is how to position myself best for a possible retirement as early as 55 (likely by 60).

$1MM in 401k
$400k in house equity
$40k in 529s
$20k in Roth
Efund, but no significant savings in taxable

As you can see most of my non-house net worth is in 401k.

I understand that I may be able to pull 401k funds at 55 if plan allows. And I understand the 72t rule.

What I am debating - should I start focusing on building a taxable account as a bridge to 60? I was thinking a good goal would be $250k or so by 55 (start putting at least $1000 away per month). Short term I may have to give up a little on 401k to do so, but hope within a couple years that wouldn’t be necessary. We have ramped up our 529 savings in the last couple years. That could be reduced also but my spouse would likely oppose. Our spending has been higher than usual as we are renovating with cash, but that will end next year.

I welcome feedback. We were musing on it the other day and my spouse asked me exactly where the money would come from if we retired at 55, and I realized I wasn’t exactly sure (I always focused on the numbers, and not the mechanics / account rules).

Assume a number of $60k/yr if you need it for retirement spending. And my spouse’s employer will provide health care for us for a low sum upon retirement, so that is already accounted.
If you really want to retire that early, and if other income isn't available at 55 (such as from your spouse or from a part-time job), then you should build up a source of funds that you can tap as a bridge to age 59.

Will you be receiving Social Security benefits? If so, check out https://opensocialsecurity.com/ , take a stab at when you should start your benefits, and assess your ability to draw funds from your accounts until that time.

Most likely you'll be fine, if $60k is all you'll need in retirement, assuming you continue to save aggressively until 55.
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z3r0c00l
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Re: Positioning for retirement at 55

Post by z3r0c00l »

We are in similar age groups and have similar goals for retirement; on the early side. In my case there is a strong workplace pension option starting as young as 55 (rule of 85). I plan to consider retirement at 55 due to pension, and have a healthy taxable to use between then and drawing from the 401K at 59 or older. However there are huge incentives to keep working through early 60's so we could always take that option down the road if we change our minds. Maybe a lower paying but more enjoyable job with benefits.

I am dubious on 529 plans to some extent; do your children a favor by making yourself financially secure first. They can always go to a state school which is, frankly, a better deal.
toocold
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Re: Positioning for retirement at 55

Post by toocold »

I would approach it similarly, bifurcating the buckets of money into two:
- Make sure your "traditional" retirement is secured. You can choose that age to be either 59 1/2 or 65. You should include your plans for SS on when you plan to take it.
- Then, create a bridge between when you stop working and that period, so for you it would be 55 to 59 1/2 or 65.

For the second bridge bucket, I would use either a Roth (in which you can take out the contribution free) or a normal brokerage account. I personally would not plan to use the 72t rule just in case you want to retire early. If you find your bridge fund can help you stop working earlier (e.g. 50) then that gives you even more flexibility, while knowing you'll always be okay with your traditional retirement.
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galawdawg
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Re: Positioning for retirement at 55

Post by galawdawg »

You should be fine for retirement at 55 if you receive medical coverage as stated and if you continue investing in the same manner as you have been doing.

As far as bridging the gap before you can withdraw from your 401k, don't forget that you can withdraw all contributions to your Roth IRA tax and penalty free. Even earnings can be withdrawn tax and penalty free before age 59½ under certain circumstances, including using the withdrawal to pay for unreimbursed medical expenses or health insurance if you're unemployed or if the distribution is made in substantially equal periodic payments.

So if you and your wife invest the maximum possible each year in your Roth IRA (currently $6,000 each) between now and age 55, you should have enough by age 55 to be able to withdraw what you need from your Roth IRA for the gap years between ages 55 and 59½. You can also build up your taxable account as much as possible between now and then as well which gives you some additional diversification between taxable and tax-advantaged accounts.
sailaway
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Re: Positioning for retirement at 55

Post by sailaway »

Do you have access to after tax 401k contributions (mega backdoor Roth)?

Does your plan allow for partial withdrawals after separation that would let you take advantage of the rule of 55?

Is your wife's income low enough to allow you to do Roth conversions in a reasonable tax bracket?

Will your tax bracket change significantly when you retire?

The time for taxable accounts is when you want to save more money than you can find space for in tax sheltered accounts or when you have shorter term goals. Early retirement is rarely a reason to forego tax sheltered space.
Topic Author
wilked
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Joined: Thu Mar 24, 2011 1:50 pm

Re: Positioning for retirement at 55

Post by wilked »

Thanks for the replies

Some good feedback. Some notes on my end:

-At 55 my youngest will be ~20 years old. I understand not risking retirement for 529s, and don't believe I am. I may risk retiring at 55 but I consider that a bit of a luxury. I wouldn't retire unless we were able to comfortably help the kids with some portion of schooling. I think for these reasons I will leave our 529 contribution alone.
-We haven't contributed to the Roth in years since we went over the $$ limit. I never attempted the backdoor Roth, but that's a good suggestion and we will start doing that. I can see this money as a good potential way to bridge the late 50s.
-We will both receive SS. I've given some loose thought to ages, but won't analyze it closely until I get closer to my 50s.
-The post about looking into details on my 401k plan. I can say with some likelihood that I will switch jobs at least once in the next 10 years so that's not probably going to matter. I am on job #6 I think in my career and have carried my 401k forward as I went.

What I am taking away then:
-Utilize backdoor Roth, fill that every year for me + spouse
-Fill up tax advantaged before going taxable
-Keep being aggressive on saving

I think the first point is the one I need to take immediate action on. I had an old IRA that was preventing me from doing the backdoor roth (pro rata rule) but I rolled that into my 401k within last year, so no good reason why not to start now.

Thanks
nix4me
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Re: Positioning for retirement at 55

Post by nix4me »

Yes. I think you should build a taxable account. Much better tax rates on capital gains. Also, you want to make sure you don’t end up with a tax bomb in your 401k when RMDs kick in. Try to balance going forward between 401k, Roth and taxable.
terran
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Re: Positioning for retirement at 55

Post by terran »

You're employer's 401(k) plan can't prohibit you from penalty free withdrawals if you leave employment in or after the year you turn 55, what it can do is limit your withdrawal options, which limits the usefulness of these withdrawals since once you rollover to IRA you lose the penalty free withdrawals. Worst case, they only allow full withdrawal, in which case you could keep some of the money out for a year or two worth of expenses and roll the rest over to an IRA. Even if you count on some form of these withdrawals, you might consider what happens if you're able to retire even a little sooner and plan with that in mind too.

In addition to 72(t) withdrawals, Roth conversions can be another good options. Basically, you can withdraw conversions 5 years after you make them, so you need to to have enough in taxable accounts, Roth contributions, and post age 55 401(k) withdrawals to last 5 years. Of course, if you're retiring at 55, this gets you penalty free IRA withdrawals anyway, so it's really only useful if you end up retiring earlier. You can find more info about Roth conversion and 72(t) here: https://www.madfientist.com/how-to-acce ... nds-early/
Katietsu
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Re: Positioning for retirement at 55

Post by Katietsu »

wilked wrote: Tue Sep 15, 2020 9:41 am Thanks for the replies

Some good feedback. Some notes on my end:

-At 55 my youngest will be ~20 years old. I understand not risking retirement for 529s, and don't believe I am. I may risk retiring at 55 but I consider that a bit of a luxury. I wouldn't retire unless we were able to comfortably help the kids with some portion of schooling. I think for these reasons I will leave our 529 contribution alone.
-We haven't contributed to the Roth in years since we went over the $$ limit. I never attempted the backdoor Roth, but that's a good suggestion and we will start doing that. I can see this money as a good potential way to bridge the late 50s.
-We will both receive SS. I've given some loose thought to ages, but won't analyze it closely until I get closer to my 50s.
-The post about looking into details on my 401k plan. I can say with some likelihood that I will switch jobs at least once in the next 10 years so that's not probably going to matter. I am on job #6 I think in my career and have carried my 401k forward as I went.

What I am taking away then:
-Utilize backdoor Roth, fill that every year for me + spouse
-Fill up tax advantaged before going taxable
-Keep being aggressive on saving

I think the first point is the one I need to take immediate action on. I had an old IRA that was preventing me from doing the backdoor roth (pro rata rule) but I rolled that into my 401k within last year, so no good reason why not to start now.

Thanks

This is the plan I would have. You have your room in the Roth to save an additional $12,000. It sounds like this will cover your current ability to save.

Do look out for all those things like a mega back door Roth and workplace plan withdrawals at 55 if you later have the ability to save more. And remember, you can withdraw from the retirement accounts, if retired, before age 59.5 if all other routes fail. Worse case would be paying a 10% penalty. I am not suggesting that as a plan but it is a back stop.
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gwe67
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Re: Positioning for retirement at 55

Post by gwe67 »

You already have way more than most people retire on.
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Normchad
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Re: Positioning for retirement at 55

Post by Normchad »

I was in the same boat 40. Actually you’re a bit better than I was at 40. I’m 51 now.

I shifted my focus to building a taxable account. My 40s were great earnings years, so I still maxes the 401K while building up taxable.

A key benefit to doing this, is you will have a lot of years from 55 to SS, with very low taxable income. (Since you’re spending money that’s already been taxed). This allows lots of time to cheaply move money from your 401K to a Roth IRA, thus saving lots of taxes. And if you do it right, you can also get some fat ACA subsidies for healthcare. Also reducing future RMDs.
Topic Author
wilked
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Joined: Thu Mar 24, 2011 1:50 pm

Re: Positioning for retirement at 55

Post by wilked »

Normchad wrote: Tue Sep 15, 2020 1:10 pm I was in the same boat 40. Actually you’re a bit better than I was at 40. I’m 51 now.

I shifted my focus to building a taxable account. My 40s were great earnings years, so I still maxes the 401K while building up taxable.

A key benefit to doing this, is you will have a lot of years from 55 to SS, with very low taxable income. (Since you’re spending money that’s already been taxed). This allows lots of time to cheaply move money from your 401K to a Roth IRA, thus saving lots of taxes. And if you do it right, you can also get some fat ACA subsidies for healthcare. Also reducing future RMDs.
good points!
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dwickenh
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Re: Positioning for retirement at 55

Post by dwickenh »

Normchad wrote: Tue Sep 15, 2020 1:10 pm I was in the same boat 40. Actually you’re a bit better than I was at 40. I’m 51 now.

I shifted my focus to building a taxable account. My 40s were great earnings years, so I still maxes the 401K while building up taxable.

A key benefit to doing this, is you will have a lot of years from 55 to SS, with very low taxable income. (Since you’re spending money that’s already been taxed). This allows lots of time to cheaply move money from your 401K to a Roth IRA, thus saving lots of taxes. And if you do it right, you can also get some fat ACA subsidies for healthcare. Also reducing future RMDs.
^^^^This is the plan I used, and it worked great!! Just hit Medicare this year but the ACA subsidies were great while I lived off
a small pension and my taxable account. Roth conversions along the way. No SS yet, but getting close.
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Soul.in.Progress
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Re: Positioning for retirement at 55

Post by Soul.in.Progress »

The answer to this goal (for me anyway) was definitely a taxable account. You’re doing wonderfully with 401k, home equity, and are on your way with 529s. And I agree with the comments above about backdoor Roth. Above and beyond these, considerable savings in taxable enabled my retirement by 45, and you obviously have savings habits that will enable you to build up taxable over the next 15 years.

This will also allow you to read and act upon all the tax loss harvesting advice from Livesoft :D
Last edited by Soul.in.Progress on Tue Sep 15, 2020 6:08 pm, edited 1 time in total.
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Tingting1013
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Re: Positioning for retirement at 55

Post by Tingting1013 »

gwe67 wrote: Tue Sep 15, 2020 12:38 pm You already have way more than most people retire on.
Agreed.

OP with annual spend of $60k you can probably retire at 45 if you wanted to. If you retire at 45 you only need 25 years of savings to tide you over to Social Security, which I’m guessing will cover half of your $60k real spending at age 70.
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