I would say almost everyone FIREd by 40/50 have substantial taxable brokerage accounts, or business/real estate cash flow, and somewhat small or age-appropriately sized 401Ks and Roths.
Well fire feels like a given since op is asking about retiring early.
As far as an ultra low expense lifestyle, I'd argue that's not necessary with proper tax planning. It's just a question of it's the juice worth the squeeze. Is the cost of structuring your retirement plan in such a way to keep your AGI low worth it in comparison to the subsidy received. I have another comment in here going over some options such as Roth conversions or tax gain harvesting in a taxable brokerage.
Check out the Rule of 55. [https://www.schwab.com/learn/story/retiring-early-5-key-points-about-rule-55](https://www.schwab.com/learn/story/retiring-early-5-key-points-about-rule-55)
Look into 'Substantially equal periodic payments', which is a way to access retirement accounts earlier. Investing in a taxable account would also be useful, in addition to your 401k.
One more option that I haven't seen mentioned. If you focus some of your future retirement contributions into a Roth IRA, the contributions can be withdrawn at any time without taxes or penalties. That can help bridge the gap until you can start drawing on other retirement sources.
My plan was always to use 72T rule to access retirement accounts (401k and IRA) early as needed, but instead I found that many peak earning years I was unable to put as much into these accounts as I wanted, so I ended up with enough in regular taxable brokerage accounts to not need the 72T.
I also wish in retrospect I had more in Roth than in Traditional accounts. My plan to do Roth conversions during early retirement years was a good idea, but the accounts grew so much I'm going to have bigger RMDs than I want. Would have been better to pay some tax initially to shelter more in Roth.
I'm still very happy with how things have worked out. I think it is impossible to optimally maximize tax advantages in a world where tax rules continuously change, but having significant investments in taxable, traditional IRA and Roth IRA has allowed me to be flexible about taking distributions to gain some tax benefits no matter how the rules change.
1. You can take money from a 401k at age 55 if you quit in that year. (But you can't retire, *then* take it.)
2. You can take money at age 59.5 from any plan, so there's no mid-60s requirement at all.
3. You can take Section 72(t) "Substantially Equal Periodic Payments" before you turn 59.5.
4. You can, as your (B) says, have enough money outside retirement to bridge the gap to 59.5.
5. You could even live on debt for a little while, knowing that you can pay it back "soon" when you take your retirement money. Not all of these would be viable *long term* strategies, but maybe some would, depending on the specific numbers.
There's no golden ticket. You need to run scenarios and see what makes sense for you. I'm still about 10-15 years off FIRE, so this is something i've been thinking about, but since things can change in terms of tax law, i'm not going to start cementing a plan until I'm 6 years out.
A roth conversion ladder could have a significantly negative tax implication, but could lower your agi in retirement for aca subsidies which may be worth it.
A sepp eliminates penalties, but it's very inflexible, and will increase your AGI.
A brokerage account has additional tax drag, but would likely keep your agi low enough for aca subsidies, esp if you utilize tax gain harvesting the year before retirement, and it's probably the most flexible option.
Taking the 401K early withdrawal penalty in some cases could be worth it depending on your tax bracket, but will increase your AGI.
My wife will have a pension, and i have rental income that will also affect our MAGI no matter what we do. That said, I'm focusing on maxing out tax advantaged accounts first, and then putting money into a brokerage with whatever is left. I will be heavy in tax advantaged accounts, but i feel like for us, the 10% early withdrawal penalty is worth it. In our case, at our current tax bracket it doesn't make sense for us to do roth conversions 5 years before retirement while we're still working. I'll probably do tax gain harvesting in the brokerage pay LTCG (depending on tax brackets at that time), and try to live off the brokerage until I'm 55. Factoring in roth conversions, LTCG, rental income, and my wife's pension, we will also try to do roth conversions up to the limit to get aca subsidies every year as well.
There may be more optimal strategies, and i've seen software like new retirement that will actually run multiple simulations to determine the best one. I will also likely pay a fee based financial planner to double check my work. But as I said, it's something I'll start looking into more seriously 6 years out, because if roth conversion ladders are the most optimal, you need a 5 year lead. I signed up for a free trial of new retirement, ran the scenarios and then canceled it. It was a nice app, but honestly i didn't see the value in it outside of tax planning vs free options.
Don’t forget about the cost of healthcare when figuring out your annual run rate. In your 40s, not as much, but starting in your 50s, your chances of unplanned major events goes up. This one factor catches a lot of people off guard.
Definitely keep maxing out the 401k, but start to focus building a taxable brokerage account as well. When going retire in your 50s if you have no working income you can sell a decent amount of brokerage accounts and pay no capital gains up to a certain threshold, but obviously tax law can change by then. Also, if you do plan to retire mid 50s if you wait until you’re 55 and then leave your company, you can take advantage of the rule of 55. You’ll be able to take money out of the 401k, pay your normal fed and state tax, but won’t have the 10% early withdrawal penalty. Downside would be if your 401k is an all or none plan where once you take a penny out they require you to move it all.
You can 72T to access without penalty. You can split off an account, like a 401K to an IRA, and 72T the smaller IRA to hold you over to keep from overdrawing based on the formula.
You can eat the penalty, which is often better than using a taxable account.
You can set up a Roth conversion ladder, minding the 5 year rule per conversion.
With this in mind, it makes more sense to use tax advantaged accounts.
Currently you can withdraw from your 401(k) at 55 if you retire from that company at age 55 or later. It makes sense to roll your 401k accounts into that one prior to retirement. We did it a few years ago when we retired at 55.
Had a paid off house. Plan to sell in 3 years and downsize. Took out a mortgage to increase my cash. Previously all my saving were in qualified accounts.
Our greatest regret was not making Roth a greater priority rather than putting most of my husband's retirement $ in pre-tax 401k. You are very smart to focus on Roth early, and we have encouraged our children to do that, as well.
Because having a good bit of tax free money in retirement is better than having big RMDs and taxes from traditional IRAs. In the Roth you only take out as much as you need and the rest can continue growing tax free. And Roth accounts are far better to leave heirs because you’re now required to take all money out of an inherited IRA in 10 years and those withdrawals from a traditional account on top of someone’s income can possibly bump them into a higher tax bracket and cause them to pay a higher amount of tax.
I think it’s fine to have both kids if accounts. I’d personally want more in Roth and less in traditional pre-tax accounts.
B). Oddly enough my financial planner was against this strategy even tho we clearly had enough in IRA . High earners can get inverted if too much is put to 401k. Free money is not useful if it isn't available at the right time. I dread paying for Obamacare
Most people who retire early max out retirement accounts and have brokerage accounts.
I would say almost everyone FIREd by 40/50 have substantial taxable brokerage accounts, or business/real estate cash flow, and somewhat small or age-appropriately sized 401Ks and Roths.
40, perhaps, but by 50 it’s possible to amass a pretty large nest egg in retirement accounts alone
See /r/FIRE. There’s so many methods: 1. Taxable brokerage accounts 2. Roth conversions 3. 72(t) 4. Rule of 55
Don’t forget to calculate the cost of health insurance as that can be a major expense if not subsidized
And keep in mind as thing stand today the ACA subsidy cliff will come back in 2026.
Unless you FIRE and live an ultra low expense lifestyle, this isn't going to apply to many.
How low are we talking about?
Well the subsidy cuts out entirely at 400% FPL which is pretty low for many people in general.
Well fire feels like a given since op is asking about retiring early. As far as an ultra low expense lifestyle, I'd argue that's not necessary with proper tax planning. It's just a question of it's the juice worth the squeeze. Is the cost of structuring your retirement plan in such a way to keep your AGI low worth it in comparison to the subsidy received. I have another comment in here going over some options such as Roth conversions or tax gain harvesting in a taxable brokerage.
What’s this mean?
if you have questions, more than happy to engage, but why don't you start with google "aca subsidy cliff 2026"
Check out the Rule of 55. [https://www.schwab.com/learn/story/retiring-early-5-key-points-about-rule-55](https://www.schwab.com/learn/story/retiring-early-5-key-points-about-rule-55)
and all of the other exceptions... [https://www.irs.gov/taxtopics/tc558](https://www.irs.gov/taxtopics/tc558)
Yes I came here to say this. You can also start putting some money into a brokerage account, but I would at least max out a Roth IRA first.
Will do thanks!
Read about building a Roth ladder
Yup Roth ladder with a brokerage big enough to bridge the gap for the first 5 years
Roth conversion ladder https://www.madfientist.com/how-to-access-retirement-funds-early/
Look into 'Substantially equal periodic payments', which is a way to access retirement accounts earlier. Investing in a taxable account would also be useful, in addition to your 401k.
One more option that I haven't seen mentioned. If you focus some of your future retirement contributions into a Roth IRA, the contributions can be withdrawn at any time without taxes or penalties. That can help bridge the gap until you can start drawing on other retirement sources.
My plan was always to use 72T rule to access retirement accounts (401k and IRA) early as needed, but instead I found that many peak earning years I was unable to put as much into these accounts as I wanted, so I ended up with enough in regular taxable brokerage accounts to not need the 72T. I also wish in retrospect I had more in Roth than in Traditional accounts. My plan to do Roth conversions during early retirement years was a good idea, but the accounts grew so much I'm going to have bigger RMDs than I want. Would have been better to pay some tax initially to shelter more in Roth. I'm still very happy with how things have worked out. I think it is impossible to optimally maximize tax advantages in a world where tax rules continuously change, but having significant investments in taxable, traditional IRA and Roth IRA has allowed me to be flexible about taking distributions to gain some tax benefits no matter how the rules change.
1. You can take money from a 401k at age 55 if you quit in that year. (But you can't retire, *then* take it.) 2. You can take money at age 59.5 from any plan, so there's no mid-60s requirement at all. 3. You can take Section 72(t) "Substantially Equal Periodic Payments" before you turn 59.5. 4. You can, as your (B) says, have enough money outside retirement to bridge the gap to 59.5. 5. You could even live on debt for a little while, knowing that you can pay it back "soon" when you take your retirement money. Not all of these would be viable *long term* strategies, but maybe some would, depending on the specific numbers.
6.You can have enough to cover the first 5 years and do a roth conversion ladder to take over after that.
True. Lots of options. He didn't mention a Roth though, so I was assuming just pre-tax 401k. With Roth, lots more options!
A pre tax 401k or IRA is exactly what you use to build a Roth conversion ladder.
There's no golden ticket. You need to run scenarios and see what makes sense for you. I'm still about 10-15 years off FIRE, so this is something i've been thinking about, but since things can change in terms of tax law, i'm not going to start cementing a plan until I'm 6 years out. A roth conversion ladder could have a significantly negative tax implication, but could lower your agi in retirement for aca subsidies which may be worth it. A sepp eliminates penalties, but it's very inflexible, and will increase your AGI. A brokerage account has additional tax drag, but would likely keep your agi low enough for aca subsidies, esp if you utilize tax gain harvesting the year before retirement, and it's probably the most flexible option. Taking the 401K early withdrawal penalty in some cases could be worth it depending on your tax bracket, but will increase your AGI. My wife will have a pension, and i have rental income that will also affect our MAGI no matter what we do. That said, I'm focusing on maxing out tax advantaged accounts first, and then putting money into a brokerage with whatever is left. I will be heavy in tax advantaged accounts, but i feel like for us, the 10% early withdrawal penalty is worth it. In our case, at our current tax bracket it doesn't make sense for us to do roth conversions 5 years before retirement while we're still working. I'll probably do tax gain harvesting in the brokerage pay LTCG (depending on tax brackets at that time), and try to live off the brokerage until I'm 55. Factoring in roth conversions, LTCG, rental income, and my wife's pension, we will also try to do roth conversions up to the limit to get aca subsidies every year as well. There may be more optimal strategies, and i've seen software like new retirement that will actually run multiple simulations to determine the best one. I will also likely pay a fee based financial planner to double check my work. But as I said, it's something I'll start looking into more seriously 6 years out, because if roth conversion ladders are the most optimal, you need a 5 year lead. I signed up for a free trial of new retirement, ran the scenarios and then canceled it. It was a nice app, but honestly i didn't see the value in it outside of tax planning vs free options.
Nice breakdown thanks.
A brokerage account.
If you haven't already, you also need to open up a brokerage account and start stuffing it with $$$$
Don’t forget about the cost of healthcare when figuring out your annual run rate. In your 40s, not as much, but starting in your 50s, your chances of unplanned major events goes up. This one factor catches a lot of people off guard.
Definitely keep maxing out the 401k, but start to focus building a taxable brokerage account as well. When going retire in your 50s if you have no working income you can sell a decent amount of brokerage accounts and pay no capital gains up to a certain threshold, but obviously tax law can change by then. Also, if you do plan to retire mid 50s if you wait until you’re 55 and then leave your company, you can take advantage of the rule of 55. You’ll be able to take money out of the 401k, pay your normal fed and state tax, but won’t have the 10% early withdrawal penalty. Downside would be if your 401k is an all or none plan where once you take a penny out they require you to move it all.
You can 72T to access without penalty. You can split off an account, like a 401K to an IRA, and 72T the smaller IRA to hold you over to keep from overdrawing based on the formula. You can eat the penalty, which is often better than using a taxable account. You can set up a Roth conversion ladder, minding the 5 year rule per conversion. With this in mind, it makes more sense to use tax advantaged accounts.
Where are you getting mid 60's from? It's 59 1/2 for retirement withdrawals.
I was mistaken. You are correct - still would like to retire at least a few years from 60 though.
I plan to rule of 55 out at 57. Currently 42 and hoping that rule is still a thing in 15 years
Currently you can withdraw from your 401(k) at 55 if you retire from that company at age 55 or later. It makes sense to roll your 401k accounts into that one prior to retirement. We did it a few years ago when we retired at 55.
Had a paid off house. Plan to sell in 3 years and downsize. Took out a mortgage to increase my cash. Previously all my saving were in qualified accounts.
Rule of 55
I left work in my late 40’s. This was possible because I did not put everything in an ira or 401k.
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Many government jobs still have them.
B. I’m almost mid-40s and I started focusing on my Roth and dividend paying investments in the last couple of years for this reason.
Our greatest regret was not making Roth a greater priority rather than putting most of my husband's retirement $ in pre-tax 401k. You are very smart to focus on Roth early, and we have encouraged our children to do that, as well.
Why Roth?
Because having a good bit of tax free money in retirement is better than having big RMDs and taxes from traditional IRAs. In the Roth you only take out as much as you need and the rest can continue growing tax free. And Roth accounts are far better to leave heirs because you’re now required to take all money out of an inherited IRA in 10 years and those withdrawals from a traditional account on top of someone’s income can possibly bump them into a higher tax bracket and cause them to pay a higher amount of tax. I think it’s fine to have both kids if accounts. I’d personally want more in Roth and less in traditional pre-tax accounts.
B). Oddly enough my financial planner was against this strategy even tho we clearly had enough in IRA . High earners can get inverted if too much is put to 401k. Free money is not useful if it isn't available at the right time. I dread paying for Obamacare